Do you ever shout at the TV, radio or newspaper when a reporter or vested interest representative quotes some superficial statistics and draws completely wrong conclusions. With increasing age, I seem to be doing this more often! This problem isn’t confined to the media. Misinterpreting simplistic numbers because of poor qualitative knowledge is a common business mistake.
I’ve often warned people about this risk, but I often wished I had a simple example to illustrate the problem. Thanks to Tim Harford I’ve now got one. Britain’s Daily Mail shouted this headline:
Cracked it! Woman finds six double yolk eggs in one box beating trillion-to-one odds
The Daily Mail reported a woman’s astonishment at cracking six eggs to find them all double-yolked. If the odds of a hen laying an egg with a double yolk is 1 in 1000, the Mail argues, superficially correct, then the chance of two consecutive eggs being double-yolked is 1 in a thousand thousand, and so on, meaning the odds of all six eggs in the carton being double-yoked is 1 in 1 trillion in traditional British nomenclature (quintillion if you use the more prevalent American scale). The report sparked a flurry of paid media and social media comment on the phenomenon. Some people argued that the statistics must be wrong, because they’d also, and more than once, bought cartons full of double-yolk eggs. This kicked off speculation on a variety of causes, eg. flock genetics - extremely unlikely given the way the egg industry operates (high volume hatcheries are separate from production farms).
The answer is more prosaic. Egg industry workers can spot double-yolk eggs by handling, and put them aside for themselves. If, due to normal statistical variation, they collect too many, the excess eggs tend to be put back into the packing process together.
Good designers don’t just rely on statistics. They observe what really goes on. Toyota uses a technique called “standing in the circle” - literally drawing a circle on the ground and standing in it for hours, silently observing what goes on during a production process and then asking the workers why they did what they did. (That requires mutual trust and shared desire for knowledge and improvement). Before and after designing a new visitor experience, Click Suite’s interactive media designers watch what people do without comment, and then seek explanations.
Too many people use superficial statistics without knowledge of the underlying situation. They make business decisions based on false premises. As Alexander Pope once wrote in “An Essay on Criticism” (1709):
“A little learning is a dangerous thing; drink deep, or taste not the Pierian spring: there shallow draughts intoxicate the brain, and drinking largely sobers us again.”
But remember, in business as in life, you can’t make an omelette without cracking some eggs!
Bear with me; this will make sense soon, I hope. Nearly 2 years ago, we put our stuff into storage and, with 2 suitcases each, we set off for the first of several extended trips to Europe. Having spent the time living in 5 different rented apartments in London and Wellington, last weekend we finally moved into our new (100 year old) permanent home. You’d think that in 21 months we hadn’t time nor space to accumulate much detritus, but no; it still took several car trips to transport our peripatetic selves to the new place. At the same time, the household movers delivered our possessions from storage.
Unpacking and putting everything in a sensible (at least for now) place is a chore, lightened by good and bad surprises - “I’d forgotten we had that,” and ” Why on earth did we bother to pack this?” However, one thing was no surprise. As we unpacked our clothes from the storage boxes and hung them with our clothes we had kept or acquired since, the pile of unneeded cheap wire and plastic clothes-hangers grew and grew.
Now I know we had a purge of such things before we put everything into storage, so how come we’d acquired so many since, and in such a short time? The answer is of course that virtually every garment you buy comes on a hanger, and every time you send something to the dry-cleaners or laundry, it comes back on a hanger. It’s a wonder we ever need to buy hangers at all. Inevitably you end up with far more hangers than you can possibly need. So where do all the surplus hangers go?
There’s much comment about unnecessary plastic and paper packaging, but at least there’s a recycling industry which can use it again. So what about all these metal and plastic hangers. Opportunity for some smart thinking, perhaps?
Another of my good summertime reads was Paul Krugman’s updated work “The Return of Depression Economics“, subtitled “and the Crisis of 2008″. Sombre stuff, you might think, but 2008 Nobel Laureate Krugman, a Professor at Princeton, successfully explains global financial problems in an easy-to-comprehend style.
After the Great Depression of the 1930s, the world’s economists and central bankers thought they had the financial system under control. Yes, there would still be dramas, but they wouldn’t break the system because the system’s managers knew what interventions to make. Yet, time and time again, well-meaning interventions often had unintended consequences. For example, Krugman explains how currency boards (currently advocated in some quarters here in NZ) seem to solve one problem but create the seeds of other, far more damaging problems. He also shows how regulatory and intervention mechanisms failed to keep up with the rapidly evolving nature of sophisticated financial mechanisms, the increased linkages within the system, and the hazardous distancing between risk and reward. The term “moral hazard” is explained by example, and occurs frequently. And Krugman argues that, contrary to popular opinion, the system is not as predictable and manageable as many people believe. Perhaps the biggest factor is the mood of the market (that’s you and me), which frequently defies logic and common sense, both on the way up and the way down.
Krugman finishes off with some broad-brush suggestions for financial system reform; in summary, anything “too big to fail” or likely to cause the system to fail should be regulated. Beyond keeping main-street banking separate from investment banking, I’m sceptical. If markets had been allowed to operate properly in the 1990s and 2000s, the system would probably have had some shocks but not as bad as those consequent to well-meaning interventions. Also, more regulation implies a degree of foresight and political/regulatory strong-mindedness noticeably absent in recent years. Krugman also doesn’t address any alternatives, eg. whether anything too big to fail should be broken up. However, I do agree that risk and reward (eg. borrower and ultimate lender) need to be closely coupled. The iterative repackaging of housing loans that enabled the sub-prime crisis broke that coupling.
My only other serious criticism of this very interesting book is that the updated version was written a year (or two) too early. Originally published in 1999 in the aftermath of the Asian and Latin American financial crises, the new edition brings in the most recent cataclysm affecting the world financial system, and explains how multiple linked failures brought the world’s financial system close to collapse, but the $700 billion US TARP package was only just being implemented at the time of writing. Krugman really needs to bring into account the events and interventions of 2009 (such as the auto industry bailout), and the way the world system coped. No doubt a further edition will address this problem.
Despite that, it’s well worth the time to read it. The Economist described Krugman’s book as “essential reading”. I agree.
One of my best reads this summertime had the somewhat dry title “The British Industrial Revolution in Global Perspective.“ Don’t be put off. Written by Robert Allen, Professor of Economic History at Oxford University, it’s a very readable* and convincing account of why the Industrial Revolution happened in 18th-century Britain, rather than anywhere else. Allen discounts any notions that Britons were superior entrepreneurs or innovators; indeed, other countries enjoyed similar advances in science, education, institutions and commerce. Instead, after setting the scene with societal and economic developments in the 16th and 17th centuries, Allen points to some primary factors which came together only in Britain and nowhere else:
The highest wages in the world (thanks to the Black Death and its effects on British society).
An abundance of cheap energy from coal (albeit not very useful initially, but developed to supply growing city populations).
Ample supplies of iron ore close to that coal.
Those factor conditions did not come together anywhere else, and so there were not the incentives and rewards for creating the wave of technological and business innovation that transformed Britain (and later the world). Allen also shows that the state played very little distinctive role in the British transformation. It was the cumulative efforts of individual entrepreneurs, engineers and other innovators addressing real business problems and opportunities which, because they were common in Britain, also generated classic cluster effects.
While interesting in its own right, Allen’s book reinforced for me much of what is wrong with current economic development thinking. All we seem to hear is more education, more science, more infrastructure, less regulation, less tax, and so on. All well and good (at least up to a point) but these are me-too strategies. Everyone else is following them, more or less. Me-too economies can’t make the step-change that Britain achieved in the 18th century (and sustained for 200 years).
The questions I think business innovators should examine are not only “What do we do to sustain and grow the industries we already have?” but also “What unique un-addressed problems and opportunities do we have which, if resolved, will enable us to build new unique and sustainable global competitive advantage?” And for policy-makers, “Will you adjust your economic development mechanisms to support those new initiatives?”
I can think of at least a couple of significant problem/opportunity combinations where New Zealand could build global leadership. Know anyone with some serious spare investment dollars?
*For those wanting data and/or academic references, Allen provides plenty, but they don’t get in the way.
Having enjoyed a fabulous warm, sunny Christmas and New Year at the beach, I’m back in Wellington with a severe gale warning on the radio. 2010 will be like that - swinging between awful and fantastic.
On the awful side, I expect to still be involved in helping companies cope with the continuing economic downturn. Globally, things are definitely looking up, but the usual post-Christmas cashflow stress will have to be survived in 2010 without a 2009 cash cushion. While good companies have done well to survive 2009, some will struggle to make it through to the upturn, and I expect more company failures.
On the other hand, I’ve already seen several promising new businesses - too many to be involved in personally, but still great to see. And some existing businesses have survived in very good shape, ready to take full advantage of the upturn when it arrives.
What’s the difference between the failures, the strugglers and the fliers? Putting aside differences in market sector, scale, and life cycle stage, not a lot. The businesses I worked with in 2009 all typically have smart market offers, with good systems, people and leadership. But some will still fall by the wayside in 2010. While I usually say you make your own luck, sometimes you’re just in the wrong place at the wrong time. This recession is one such wrong time.
Tough times are an opportunity for buyers to get a good deal - I certainly expect to get some bargains this year. But you ultimately lose if you squeeze your key suppliers out of business, whether it be through overly-aggressive bargaining, slow payments, delayed decision-making or unthinking internal sloppiness. As a customer, you may want to be kinder to vendors this year. You’ll want good suppliers to survive this recession, to be ready to support you in the upturn.
So why not make 2010 the year that you look after your key suppliers? I don’t mean go soft, I mean get smart.
I apologise to regular readers for my lack of blog activity this week. I have indulged in a sustained attack on my waistline and liver, lunching four days out of five and early evening drinks every day. Isn’t the run-up to Christmas fun? Blogging will not get any better any time soon; I’m off to the beach tomorrow and won’t be back until early January. I am not alone in being very glad to see the back of 2009. Let’s make 2010 a much better year. Merry Christmas, everyone.
Users of mobile devices enabled with data capability: answer a Victoria University survey and be in to win $200:
Eusebio Scornavacca from the School of Information Management, Victoria University of Wellington is conducting a research project on New Zealanders’ use of mobile information systems in the workplace.
If you are currently using a mobile device enabled with data capability (e.g. mobile e-mail, mobile Internet, mobile business applications etc) for work purposes, he invites you to complete a survey questionnaire. It should take you approximately 12 minutes to complete the survey, which is anonymous and will be available until the 25th of December 2009. By completing the questionnaire you will be entered in draw to win a prize of $200. Please use the following link to access the survey: http://vuw.qualtrics.com/SE?SID=SV_cBko9uZySNCz9Zi&SVID=Prod
Your participation is important and will help to improve the understanding of the adoption and use of mobile technology. Should you require any further information about this project, please contact Eusebio Scornavacca at +64 4 463 6697 or e-mail eusebio.scornavacca@vuw.ac.nz or Professor Sid Huff at +64 4 463 5819 or e-mail sid.huff@vuw.ac.nz.
Paul Quickenden sent me a link to a fascinating analysis of Google’s “cheaper than free” strategy, sharing its advertising revenue with companies (including telcos) building products using Google’s various tools and services. (This approach may also resolve the content vs search revenue debate, as well). In effect, through Google search, maps, the Android phone system and Chrome operating systems, not to mention the growing richness of Google’s mail, calendar, office applications. Google sites, etc., etc., etc., why would anyone build their products and services using Microsoft et al, for which they have to pay?
Naysayers of these assertions will likely have the same retort – quality is key. They will argue that Google’s turn-by-turn apps are inferior to their well honed market leading products. With regard to Android, Google will lack the user interface or embedded software expertise necessary and will deliver a subpar product. Plus, because the Android OS will be so splintered, QA testing will be difficult and incompatibility issues will abound. In the short run, these issues will exist.
Despite these challenges, it would be a dangerous strategy for any of the many threatened players in these markets to hang on to this “quality” rationalization for very long. First, Google’s products will get better over time. The sheer volume of the Android phones in the market will give them new data feeds to complement their own mapping effort. Also, they can create UGC hooks for users to embellish their own maps (like in Google Earth), offering themselves further differentiation. With regard to Android, version 3 will be better than version 2 will be better than version 1. Microsoft knows this game well.
Another perhaps even more important factor is that when a product is completely free, consumer expectations are low and consumer patience is high. Customers seem to really like free as a price point. I suspect they will love “less than free.”
I suggest you read the whole article before bursting into comment mode. This isn’t so much about the changes for the end-user. This is more about the impact on makers and purveyors of products and services, and the platforms upon which those products and services are built. Google’s growing dominance will make Microsoft’s near-monopoly look trivial. I can hear the anti-trust lawyers sharpening their knives already.
PS. MS still has very powerful offerings in other areas (eg. .Net), not to mention huge familiarity and comfort within its installed customer base, so don’t write it off yet.
Disclosure: My family trust owns Google and Microsoft shares.
I was an early investor in Surveylab, which makes the ikeGPS range of professional hand-held data-capture devices. Their point of difference is that they capture the image and location of an object from a distance, unlike most GPS devices which only tell you where you are. Applications are manifold, in network industries like electricity and telecommunications, in environmental agencies like the US Parks Services, and in military applications such as UN post-war reconstruction. Sales are primarily B2B, either direct or via their major distribution partner in the US. Founder Leon Toorenburg is looking for someone to take on the global marketing role, with a particular emphasis on internet-enabled sales. The business is VC-funded, with another funding round being completed as I write. So if you or someone you know is interested in the job, take at look at the ad on Seek or TradeMe.
Mainstream telecommunications companies needs brands that relate to people as individuals; literally, everyone is a potential customer in their own right, even when they’re acting on behalf of their employer. New Zealand’s largest telco recently changed its very corporate look to this sketched asterisk logo and colour palette. I like it; it’s simple, light and human. Corporate rebadging always attracts critics complaining of waste, insincerity, “a child could have done better”, and so on. Rebadging is also a heaven-sent opportunity for those who hate a particular organisation (or large corporations in general) to replay all their historical grievances. Sometimes they’re justified, sometimes they’re not. However, I’m not commenting today on Telecom in general. I just think their rebadging is a good decision, and I look forward to seeing if and how they apply this lighter personality throughout their business.
The NZ Herald has assembled a montage of recent quotes from Treasury Secretary John Whitehead. He’s a public servant, not a politician, and it’s been many years since I can recall one in this country making such bold utterances, rather than discreet ministerial advice.
John Whitehead himself:
Fiscal sustainability:
“As an erstwhile motorcyclist, I know that when your skull has been saved by your crash helmet, the first thing you should do is replace your helmet.” - speech to Russell McVeagh, Dec 08
Capital gains tax:
“At the risk of being chased down by an angry crowd with pitchforks and flaming torches, yes this should include consideration of moving the boundaries to tax more capital gains - for example on investment property - and shifting more of the tax base towards consumption.” - speech to Institute of Directors, June 09
Being frank:
“We have a Government which by and large welcomes free, frank and imaginative advice: let’s take advantage of that.” - speech to policy leaders, June 09
Seizing the day:
“It is very important … we don’t lose sight of our medium and longer-term goals. As Hillary Clinton has famously said, ‘Don’t waste a good crisis’.” - speech to policy leaders, June 09
Being unpopular:
“We face tough decisions and can’t afford to be sidetracked or avoid decisions, even though some of them will be unpopular and painful.” - NZ Herald column, Aug 09
Being bold:
“The tough spending decisions have not yet been made… and the longer we leave it, the harder it will get. Your support in helping frame the debate and argue the case for bold change will be essential.” - speech to Institute of Directors, Oct 09
And from his department’s papers:
Tax reform:
“We see reform of the variable rates of tax on different incomes/investments, and the reduction of the top personal income tax rate, all to 30 per cent, as having greatest impact.” - Medium Term Tax Policy Challenges, Feb 09Capital gains tax:
“The extension of the income tax base to include capital gains would be a second priority.” - Medium Term Tax Policy Challenges, Feb 09
Government debt:
“No other country in modern times has (yet) seen its NIIP [net international investment position] stabilise with such a high level of reliance on foreign capital.” - Closing the Income Gaps, Aug 09
Government spending:
“The case for earlier and more substantial fiscal consolidation is much stronger than it was earlier this year… Having dealt with that initial situation, some more significant adjustment is now warranted.” - Closing the Income Gaps, Aug 09
Closing the gaps:
“There is nothing in the current projections or set of policies that suggests material progress is likely in reversing the large per capita income gap that exists between Australia and New Zealand and the average of its OECD peers.” - Closing the Income Gaps, Aug 09
Now vs 1987: “The New Zealand shake-out following 1987 was also a painful multi-year period of deleveraging - and the imbalances then were, in most respects, less severe than those New Zealand now faces.”
- Closing the Income Gaps, Aug 09
Balancing the books: “The Budget projections were finalised in April… As things stand today, the prospects for any sort of successful rebalancing seem much less favourable.” - Closing the Income Gaps, Aug 09
“We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking… The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials”…
“Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output,” said Mohamed Adam, the town’s deputy security officer. “The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools”…
Piracy investor Sahra Ibrahim, a 22-year-old divorcee, was lined up with others waiting for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel. “I am waiting for my share after I contributed a rocket-propelled grenade for the operation,” she said, adding that she got the weapon from her ex-husband in alimony. “I am really happy and lucky. I have made $75,000 in only 38 days since I joined the ‘company’.”
I wonder how long it will take for investors in guaranteed-rental investment properties, high-yield finance companies and other such exciting opportunities to jump in.
The 2025 Commission has released its long-awaited report. I’m presenting a paper at a conference on competitive advantage next week, so I’ll hold my fire until then. However, for other comment:
I’m still waiting for commentary from the leading economist bloggers (although they may have said it all before). Meanwhile here’s one seriously scary statistic:
Economics writer Tim Harford (aka. The Undercover Economist) gets asked many unusual questions, and now seems to have morphed into The Financial Times‘ agony agony columnist:
Dear Economist: Should I stay single in Italy – or come home?
I’m a 32-year-old American woman; I moved to Italy about five years ago and later applied for a master’s programme at an Italian university. Average earnings for my BA in political science are low, so I wasn’t missing out on much.
My problems are two-fold: first, dating. Italy has the second-oldest population in the world. Seeing a single thirtysomething is like finding a unicorn. Eliminate men who live with their mothers, are chain-smokers, or are shorter than me, and I’m in a convent. Second, my Italian university has decided to reverse its previous decision to accept my American degree. I am being forced to re-earn an Italian BA, which could take a further year.
I’d hate to turn down another degree, but can I handle another year’s worth of pasta and enforced singledom? My current plan includes going to San Francisco upon my return, though I do have the choice of a semi-permanent job with Nike in the middle of nowhere. Or I could stay in Italy; but if I spend another year single, according to my mother, I will die alone.
Crying in my cappuccino
Dear Crying,
You appear to be committed to staying in a country whose food, bureaucracy and dating scene do not suit you. Your judgment has been clouded by the sunk-cost fallacy: you hoped to get a master’s degree, great food and an Italian paramour. Things didn’t work out and you have wasted five years. You’re only human if you want to waste another year or two, but you’re making a mistake. Go home.
As for your career, forget cash: the happiness literature suggests that a happy relationship and secure job are far more important. San Francisco is not famed for its excess of single straight men, but the demographics of the middle of nowhere are excellent, with many eligible bachelors. Your new life awaits.
I normally give this kind of advice only after the 2nd bottle of red!
Josh Forde asked a good question in his comment on “Setting the tone“. For those of you who rely on news feeds or Twitter to follow this blog, here it is, with my response:
Question for you Jim : What do you think gave you the authority to do that with other people? We all have situations of seeing behaviour that we disagree with but don’t always feel we can effectively confront it or that we carry the respect to do so. It can’t be just about being the boss, it has to resonate with something larger than that?
Good question, Josh. Actually being the boss does give you positional authority, but you use it carefully, and it only works well if it is backed up by personal authority - being assertive rather than authoritative, having confidence and conviction, and having earned respect for your past actions, knowledge and demonstrated behaviour. That’s something you build over time. Even if you don’t have it yet, it’s never too late to start. Most people recognise valid thinking when they see it, and although you may not persuade them this time, you’re building a personal ethos and reputation which will evolve into personal authority as a formal leader or as an important and respected influencer. And sometimes, all it takes is for you to speak out; you’ll be surprised at how often someone else jumps in to support you - the world is full of good people who want to do the right thing.
Some staff have an unfortunate sense of what’s appropriate. How you react will set the tone of your organisation. Your people will watch you closely to pick up that tone.
A customer mailing list file called “ratbags” (or somesuch). As soon as I saw it, I insisted the name be changed. There was some shame-faced bluster about it just being someone’s silly sense of humour, but a glowering look stopped that. The word went out - always treat customers respectfully.
Walking past some staff drinking wine at their desks in the middle of the afternoon, I came back. simply said “That’s not appropriate” and walked off. The wine was gone in a minute and the staff later apologised.
On hearing that I wanted a more effective approach to late payment for electricity supply rather than simply cutting off customers’ power, the team leader responsible for credit control and payments proclaimed that “they’re all liars, and it’s the only thing that works”. I said I doubted that, and asked him to produce an analysis of the past year’s late payers and their frequency. Out of 40,00 customers, approximately 10% had been referred for late payment - most only once, and only 200 were chronic bad payers. He acknowledged he was wrong, but didn’t change his approach. He didn’t stay long and we made credit control part of a new customer service approach under a team leader who saw her job very differently, looking for ways to help customers not fall behind.
On hearing a product manager suggest that we make unsubstantiated claims in our product specifications, I respond “We don’t lie to customers.” On hearing the justification that “everyone else does it,” I reply “I doubt that, and in any case I don’t care. We don’t lie to customers.” That product manager didn’t last long either.
A product development team, given the challenge of designing a new antenna product platform at half the cost of the existing platform, started calling itself the CNA team which, on hearing for the first time, I learnt stood for “Cheap and Nasty Antenna”. My instant reaction: “You will drop that name immediately. I never want to hear it again. From now on, you are the EYE team - Elegant Yet Economic”. It not only set a different expectation for the new product platform; that name became a badge of honour and they still called themselves the EYE team years after that particular project had successfully finished.
You don’t always have to be quick on your feet; sometimes, a measured reaction is appropriate. Sometimes you’ll want to take a more consultative approach; asking people to think about the matter and decide what’s appropriate. But an instant reaction sends a very powerful message, as does a direct order, especially if you don’t usually act that way. Importantly, be consistent. And always remember, who you hire or fire, who you give an important project, who gets promoted, rewarded or praised - these all send important and closely-watched signals. What you do sets the tone.
