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Thursday, January 19, 2017

And now: President CEO : An opnion from Harvard Business School Faculty. 01-20


Donald John Trump, the 45th U.S. president, will be the first to go straight from the boardroom to the Oval Office without any political experience or military service.

During the 2016 campaign, Trump parlayed his fame as a celebrity real estate developer into a winning pitch to voters as a Washington outsider. Emphasizing his decades of experience as a wheeler-dealer building luxury hotels, casinos, and golf courses around the world, Trump pledged to use his business savvy and hard-charging leadership style to “drain the swamp” of the Washington bureaucracy and deliver results for the American people.

The United States is not a company, of course, and its citizens are not employees, but voters still were drawn to his promises of a fresh approach to governing. So what skills and perspectives might the wealthy businessman draw on as he transitions from CEO to commander in chief?
To get a better sense of the months ahead, The Gazette asked Harvard Business School (HBS) faculty members how Trump’s nearly 50 years of experience in building a global corporate empire might shape his approach to the presidency. Their insights follow.

Real estate rarely a zero-sum game

John D. MacomberSenior lecturer of business administration

You have to start by distinguishing between a branding operation that’s supported by other activities, like Disney Hotels, and pure real estate [companies], like Boston Properties and Vornado. Trump is primarily a branding operation.

There are many sectors in real estate. Hospitality is one of them. In hotels, there are usually three parts to every deal. Usually, there’s one entity that owns the land and owns the building. There’s a different entity that likes to do operations like housekeeping and food and beverage. And there’s a third entity that has the brand. Companies like the Four Seasons or Ritz Carlton, we say they “flag” a hotel. They don’t manage it; they “flag” it. Trump has a few hotels, but mostly the properties are owned by other investors and he’s the “flag,” the name.

Given that case, that would inform a world view that has a high sensitivity to perceptions in what we call in real estate “the real economy.” Are the rooms full, and in which locations? Hotel people have a high sensitivity to what they perceive as “the financial economy.” They don’t know the inner workings, but “what are the interest rates?” They have high sensitivity to transactions and to partners, because everything’s a bespoke, one-off transaction. Typically, people like this also see the shared value. They seldom get into a zero-sum negotiation. They think, “How can we help each other?”
You’d expect someone like this to be very transactional, with a very high sensitivity to perception of current events, with a very high sensitivity to perceived financial prices, if not the inner workings of the financial market, and extremely high sensitivity to brand: What are people thinking? And you’d expect a much lower sensitivity to administration, to structure, to organizational dynamics, to long-term view, and to capital spending.

The incoming president has a really good sense for what people want to buy in that demographic. But going forward, one would expect that the temptation would be to continue to play your strong suit and try and express your own taste and your ideas because it’s worked for you for 50 years.
The second issue you’d expect of anybody in this situation would be that they’re probably quite confident in their own judgment. Having a very long record of reinforcement in making good decisions, for anybody, that would make them think they’ll be expert in other areas, whether it’s aviation or welfare or defense.

I think an early indicator will be: Can he persuade a different group of people? He’s so good at persuading the people he knows, but can he persuade Congress to act? If he’s a good communicator and good negotiator and good creator of shared value, he’ll figure out something that works for House Speaker Paul Ryan and for Senate Minority Leader Chuck Schumer. A second thing to look for is how much leeway does he really give to someone like Secretary of State nominee Rex Tillerson or to Wilbur Ross, the Commerce Department nominee, or to Vice President Mike Pence? It looks like he’s a person who hasn’t delegated a lot in the past. So those would be early things to see. And then there’s what he’d do in a crisis. From what’s been reported by the press, the crises in the past, he’s been able to bluster through. There may be different crises here, where it’s not a question of, say, talking firmly to your bankers.

For the most part, it looks like he’s always had the choice to walk away. In most of these project negotiations, he’s had a chance to do that. In the presidency, there will probably be negotiations — with Congress, with other nations, or with agencies or with all the people a president deals with — where you have to make a deal, and walking away is not a choice. It’ll be interesting to see how well he can create shared value in that context.

A lot of negotiations are also about leverage, and for the most part, he’s gotten himself in a very favorable position where he usually has the negotiating leverage. He may not have the leverage going forward. It’ll be interesting to see how he handles that. And can he use those negotiating skills and those communication skills and create shared value skills in a situation where there’s no walk-away option and he doesn’t have the leverage.

 “Command and control” management model

Nancy F. KoehnJames E. Robison Professor of Business Administration

I study business leaders, government leaders, religious leaders, social activists, and other individuals — past and present — who exercise real, worthy impact. As a historian, I don’t see huge differences among political and business leaders in terms of what makes them effective. Courageous, serious leaders are men and women who are animated by a big, honorable mission, who get things done to achieve that mission, who demonstrate consistent emotional awareness as they do this, who motivate others to try to be better and bolder in pursuit of this purpose, and who work (tirelessly) to become better leaders themselves while they are doing all these other things.

Thus far, we have not seen much evidence — either along the campaign trail or since the election — that Mr. Trump meets most of these criteria. But I think many voters perceived him as being successful in getting things done. Some of this perception was likely a result of his public confidence. Some may have resulted from his bluntness and his stated intent to cut through the red tape of Washington, along with its perceived stagnation, dominance by big money, and the sense that so many Americans have that the federal government is run by a small number of people calling all the shots.

I think his hard-charging tone, coupled with his willingness to single out certain groups — from the media to Muslims to women to Hispanics — as responsible for many of the nation’s problems unleashed reservoirs of frustration, anger, and fear among certain groups of Americans. History makes it clear that all leaders have to be able to understand and respond to emotional currents among the people they influence. And I think Trump did that on the campaign trail in ways that served his political purposes very well. It is much less clear that inciting such animosity — and indeed hatred — among certain groups of Americans toward their fellow citizens will serve our country well. Certainly, history offers no such assurances. In fact, leaders who have risen to power by relying heavily on collective anger and discrimination toward other groups have proven to be despots, tyrants, and men who destroy the values and institutions that lie at the heart of democracies.

Homing in on Trump’s reputation as a hard-charging man of action, we can perhaps think about his management style as one of “command and control.” This is a description in which the company, organization, or enterprise runs as a kind of military operation in which everyone lines up and falls in line. Although in the early 20th century many businesses were structured along such lines, “command and control” organizations have become much less common — outside of the military — in the last 40 or 50 years.

Today, businesses and other enterprises are flatter, much less hierarchical, and much more diverse than the companies that first grew to great scale and came to define the modern

industrial economy. This evolution is partly a result of globalization and the fact that many large organizations have become much more interdependent and complex; one-size-fits-all no longer works so well. This development is also a function of social, economic, and political change. Leaders now have to deal with a much broader set of stakeholders, including citizens, consumers, and labor around the world in a way that they simply didn’t half a century ago.

At the same time, business has become responsible for much more than simply “selling high and buying low” and “delivering a healthy return for shareholders.” Today, companies are being held accountable for a whole host of social and political issues, from labor practices to environmental policies. In this context, hard charging and “command and control” are perhaps overly blunt instruments.

I write and teach about individual leaders concerned with an honorable purpose, men and women who succeed against great odds. The people I study — from the explorer Ernest Shackleton to Abraham Lincoln to the environmentalist Rachel Carson — all have a great deal of deftness, meaning they understand the precept: “In this particular situation, what do I need to do to move my mission forward?” They also have great reserves of emotional awareness, which they apply to themselves and the people they are trying to influence. From this perspective, it seems to me that if you’re always on a hard-charging default drive, then it’s very difficult to pause and summon up the suppleness, care, and emotional acuity that leaders need in high-stakes situations.

I think the incoming president has been very successful in terms of how he’s managed the American media to his ends. I can count on two hands the number of leaders I have seen in my lifetime who could walk into a room, take the measure of a large crowd so quickly, and then move into that energy and bring them along to embrace his agenda at a given moment. He has done this over and over, not only among his political supporters, but also among reporters and other members of the press.

Despite these skills, which require some foresight, he appears to be extraordinarily reactive in his emotions, in his declarations, in the very heavy hammer that he wields across the board on different subjects as they come up, in real time, using social media. This is unprecedented. There is nothing in American history that compares with this aspect of his behavior: a public candidate and now president-elect, who is not only willing but eager to raise the public temperature so significantly, so often, and on such a widespread basis.

When I reflect on strong leaders, I usually see an important connection between a given individual’s decisions and his or her respect for the organization for which that person is responsible. Government leaders make choices affected by laws and the founding documents of a nation; judges issue decisions anchored in precedent; CEOs consider the values and mission of their companies; even disruptive entrepreneurs struggle to build an organization that will execute a larger end and then endure. This connection is critical because a worthy leader wants the people whom he or she motivates to respect the organization and to serve that enterprise from such a place. This means a leader is always working to deepen the sense of integrity that his or her followers accord the organization, including its values, its charter, and those charged with serving as stewards of these critical aspects. We have yet to see Mr. Trump evidence such respect or incite it among his fellow Americans.

Anyone we would say was an effective leader had the respect of his or her organization and toggled always back and forth between “what does this mean for the trajectory and the integrity and the character and the identity and the stability of my organization?” and “how is that related to my actions?” And that critical umbilical cord is, from my vantage point, not in sight here. I don’t see it. And I’m most troubled by that.

“Push” and “pull’ marketing to build public support

John A. QuelchCharles Edward Wilson Professor of Business Administration and professor in health policy and management at the Harvard T.H. Chan School of Public Health

Marketing is important in campaigning. It is equally important in governing. In 2008, Barack Obama won the presidency with an uplifting call for hope and change. He leveraged online media to attract volunteers and donors, building a swell of grassroots support. In 2016, Donald Trump also leveraged new media, notably Twitter, to generate grassroots support around his call to make America great again. Effective communications and wise targeting of resources against key voter segments, notably in swing states, were equally important in both cases.

Marketing in the world of politics is different from marketing in the world of commerce. In politics, you need majority support or at least a plurality to be successful. In commerce, you can be highly profitable as a niche brand appealing to a narrow segment of the population. In fact, being all things to all people is a recipe for disaster. The other noteworthy distinction is that the presidential marketer needs to win the vote on one day every four years, whereas the commercial marketer needs the cash register to ring every day.

Nevertheless, public opinion is important to any president, and President Trump enters office with a low popular approval rating. That will require him to hone his communications skills and to win over many people who remain skeptical of his motives and competency. He must consciously set out to escape the Washington bubble and stay in touch with the ordinary voters from whom he draws much of his energy and confidence. Their continued enthusiasm to lobby their senators and representatives will be important to his ability to legislate his campaign promises.

Governing as president therefore requires a combination of “push” and “pull” marketing. Coca–Cola pushes its products through retail distribution and at the same time advertises directly to consumers to generate demand that pulls the product off retail shelves. In the same way, President Trump must push his agenda through Congress, but strong popular support backing the agenda will help persuade legislators to vote accordingly.

A likely force benefiting small business

Karen MillsFormer administrator of the U.S. Small Business Administration (SBA) and now a senior fellow at HBS and at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School 

Having a businessman in the White House has the potential to change the conversation in America around small business. Indeed, President Trump’s business background, if applied in the right way, could help him understand the needs of American small business. There are certainly thousands of small businesses that hope this will be the case.

However, to do this right, President Trump needs to step up the focus on small business and ensure this critical part of our economy is part of every economic discussion his team has. So far, his attention seems to be on big business — aside from his nomination of Linda McMahon as SBA administrator. Big business often has significantly different needs from small business. Small businesses have a more difficult time accessing capital, providing health care to their employees, navigating complex regulations at every level of government, and much more. His promises to cut taxes and reduce burdensome regulation for small businesses could be a good start. But on both of these fronts, the policy details will matter when it comes to what small businesses need to grow and succeed.

On the regulatory front, as I have written in a recent working paper, small business lending falls through the cracks of our current oversight framework. Small businesses and lenders should push President Trump to streamline the current “spaghetti soup” of regulation that is supposed to ensure greater access to capital, transparency, and borrower protections. Small businesses could also benefit from more incentives for large companies, which stand to get significant tax breaks under a Trump administration, to give more of their supply chain contracts to U.S.-based small businesses. In addition, National Federation of Independent Business surveys show that access to affordable health care is a top small business priority. Obamacare began to address this issue through the SHOP [Small Business Health Options Program] exchanges, but “Trumpcare” could go further in ensuring affordable rates for small businesses.

Small businesses should advocate for President Trump to treat them like the customer, something that can be done by leveraging technology and innovation in ways that streamline interactions with federal agencies, like online form filing.

Stars align to fix a broken tax system

Mihir DesaiMizuho Financial Group Professor of Finance and professor of law at Harvard Law School

The stars are in alignment for a major tax reform under President Trump. Thirty years of inaction on tax reform, along with significant changes in the economy and other countries’ tax policies, has made the U.S. tax system unwieldy and problematic in many ways. Most obviously, the corporate tax has become a dominant factor in the market for corporate control (i.e., so-called inversions), financing patterns (i.e., cash holdings), and profit-shifting activities (i.e., transfer pricing of profits).
In short, it’s broken and we have the worst of all worlds relative to the rest of the world. We have high marginal rates that distort incentives, especially on profit-shifting, and only middle-of-the-pack average tax rates. The ratio of tax-induced distortions to revenue is creeping higher every year.
The individual tax side of things is not quite as broken, but is overgrown and not serving our needs.

We have numerous overlapping and confusing incentives on education, health, and child care expenses that ultimately limit the uptake of these programs. We have enacted several stealth tax increases that are quite large by phasing out deductions and exemptions. And, broadly speaking, the tax system may not reflect the apparent current support for more redistribution. One reason for that is the top bracket used to contain 0.1 percent of the taxpayers and now has 1 percent of the population. This creates resistance to increased top marginal rates.

Finally, the usual guiding lights of equity and efficiency in tax policy now have to be complemented with a third concern: complexity. In the globalized world, there are ever-more margins on which economic agents can respond to complexities through planning. The overly complex system, especially on the international corporate side, is becoming a planner’s paradise.

What will President Trump do? His plan during the campaign was admirable in some ways. The simplicity of the rate structure for individuals, the expansion of the standard deduction, the limitation on deductions, and the reduced corporate rate were broadly sensible. But, there were critical mistakes, including repeal of international deferral and a minimum tax for corporate foreign source income. It was fiscally irresponsible and not attuned to current tastes for redistribution.

Given the relative inexperience of most of the current Trump economic team on these issues, I would expect that House Speaker Paul Ryan will dictate the broad outlines of any proposed legislation. His proposal, also known as the Ryan-Brady plan, is not just a renovation or a gut-rehab, it’s a teardown. It shifts the base of taxation to consumption from income through a “destination-based cash flow tax.” In effect, it is a form of value-added tax (VAT). Corporations will face a considerably lower rate, will not be allowed to deduct interest payments, and will be allowed to expense investments.

The easiest way to understand that is: Because all business-to-business transactions are effectively deductible, the tax base becomes business-to-consumers transactions. In other words, consumption.
One of the most important wrinkles in this system is that export revenue would be exempt from taxation, and the costs of imports would not be deductible under what is known as “border tax adjustments.” This has the potential for being incredibly redistributive across sectors, as exporters would have tax losses as far as the eye can see and importers would have much larger taxes due, unless exchange rates adjust to neutralize these changes in taxation, as economic theory would suggest.

Will they? It’s hard to say because nothing on this scale has ever been attempted. Moreover, the plan has numerous question marks over how it would work. How would financial institutions get taxed? Would pass-through entities have their current treatment? Most importantly, it’s not clear it would pass muster with the World Trade Organization.

The key advantage to Trump of the Ryan-Brady plan may well be the ability to characterize the border tax adjustments as tariffs. The box he put himself in regarding protectionist measures can be escaped by implementing the plan and labeling those adjustments as tariffs even though they’re not really functioning in that way. From an economic perspective, that deceit is preferable to the realities of tariffs. In recent tweets on auto companies, he’s already changed his language to a “border tax,” from tariffs.

I think the risks of such a dramatic tax change are too great to justify the teardown. I’d prefer to see corporate tax reform proceed in a revenue-neutral way, with reduced rates and a shift to territoriality funded by changing the treatment of pass-throughs and by aligning the characterization of profits to tax authorities and capital markets. On the individual side, I think a significant expansion of the earned-income tax credit, unification and simplification of various credits and deductions, and a new top bracket for individuals making more than $1 million would help enormously.

How does Trump’s business background condition his policy preferences and methods? It’s critical to realize that real estate development is quite unique in business, and the traits that allow you to succeed, to the degree he’s succeeded, in that field are not necessarily representative of the traits required elsewhere in business.

Real estate development requires much more sharp-elbowed negotiating, coalition building between organizations, and marketing savvy than most types of business. It also tends toward monumental efforts rather than incremental change. Those skills might help him quite a bit in the Washington of today. Unfortunately, they could also result in a tweet-driven assemblage of hollow gestures (saving jobs via jawboning) without any real substance.

These interviews have been edited for length and clarity.

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Wednesday, January 18, 2017

IMF says demonetisation a big dampener, cuts India's growth to 6.6% from 7.6% 01-18

The IMF today cut India's growth rate for the current fiscal year to 6.6 per cent from its previous estimate of 7.6 per cent due to the "temporary negative consumption shock" of demonetisation, days after the World Bank also decelerated India's growth estimates.

"In India, the growth forecast for the current (2016-17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative," the International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO) update released today.

The IMF said that after a lacklustre outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies.

The global growth for 2016 is now estimated at 3.1 per cent, in line with the October 2016 forecast.
Economic activity in both advanced economies and emerging market and developing economies (EMDEs) is forecast to accelerate in 2017-18, with global growth projected to be 3.4 per cent and 3.6 per cent, respectively, again unchanged from the October forecasts, it said.

As per new IMF projections, India's growth in 2016 is now estimated to be 6.6 per cent as against 7.6 per cent earlier forecast.

In 2017, IMF has projected a growth rate of 7.2 per cent as against its previous forecast of 7.6 per cent.

The Indian economy is likely to revive to go back to its previously estimated growth rate of 7.7 per cent in 2018, according to the WEO update.

The cut in India's growth rates comes days after the World Bank decelerated India's GDP growth for 2016-17 fiscal to 7 per cent from its previous estimate of 7.6 per cent citing the impact of demonetisation. But forecast issued on January 11 said that India would regain momentum in the following years with a growth of 7.6 per cent and 7.8 per cent due to a reform initiatives.
Despite IMF's downward revision of India's growth rate and a slight upward revision of China's growth projections, India continues to be the fastest growing countries among emerging economies.
But in 2016, China with 6.7 per cent has edged past India (6.6) with 0.1 percentage point.
The growth forecast for 2017 was revised up for China (to 6.5 per cent, 0.3 percentage point above the October forecast) on expectations of continued policy support, the IMF said. India's growth rate in 2017 as per the latest IMG projections is 7.2 per cent.

In 2018, China's growth rate is projected to be 6 per cent against India's 7.7 per cent.
IMF said, in China, continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment.

These risks can be exacerbated by capital outflow pressures especially in a more unsettled external environment, the IMF said.

IMF said global activity could accelerate more strongly if policy stimulus turns out to be larger than currently projected in the US or China.

Notable negative risks to activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and in some emerging market economies, increased geopolitical tensions, and a more severe slowdown in China, it said.

Maurice Obstfeld, Economic Counsellor and IMF Research Department Director, at a news conference here, said among emerging economies, China remains a major driver of world economic developments.

"Our China growth upgrade for 2017 is a key factor underpinning the coming year's expected faster global recovery. This change reflects an expectation of continuing policy support; but a sharp or disruptive slowdown in the future remains a risk given continuing rapid credit expansion, impaired corporate debts, and persistent government support for inefficient state-owned firms," he said.

In light of the US economy's momentum coming into 2017 and the likely shift in policy mix, IMF has moderately raised its two-year projections for US growth.

"At this early stage, however, the specifics of future fiscal legislation remain unclear, as do the degree of net increase in government spending and the resulting impacts on aggregate demand, potential output, the Federal deficit, and the dollar," Obstfeld said.

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Friday, January 13, 2017

"Humiliated" by post-note ban events, RBI staff write to Urjit Patel 01-14

Feeling "humiliated" by events since demonetisation, RBI employees today wrote to Governor Urjit Patel protesting against operational "mismanagement" in the exercise and Government impinging its autonomy by appointing an official for currency coordination.

In a letter, they said autonomy and image of RBI has been "dented beyond repair" due to mismanagement and termed appointment of a senior Finance Ministry official as a "blatant encroachment" of its exclusive turf of currency management.

"An image of efficiency and independence that RBI assiduously built up over decades by the strenuous efforts of its staff and judicious policy making has gone into smithereens in no time. We feel extremely pained," the United Forum of Reserve Bank Officers and Employees said in the letter addressed to Patel.

Commenting on "mismanagement" since November 8, when note ban was announced, and the criticism from different quarters, the letter said, "It's (RBI's) autonomy and image have been dented beyond repair."

At least two of the four signatories --- Samir Ghosh of All India Reserve Bank Employees Association and Suryakant Mahadik of All India Reserve Bank Workers Federation --- confirmed the letter. The other signatories are C M Paulsil of All India Reserve Bank Officers Association and R N Vatsa of RBI Officers Association.

The forum represents over 18,000 employees of the RBI across the ranks, Ghosh said.
The letter said appointment of an officer to coordinate currency management is a "blatant encroachment" on the exclusive jurisdiction of the RBI on currency and accused the Government of "impinging on RBI autonomy".

"May we request that as the Governor of RBI, its highest functionary and protector of its autonomy and prestige, you will please do the needful urgently to do away with this unwarranted interference from the Ministry of Finance, and assure the staff accordingly, as the staff feel humiliated," it said, soliciting "urgent action".

The RBI has been discharging the role of currency management for over eight decades since 1935, it said, adding the central bank does not need "any assistance" and the interference from FinMin is "absolutely unacceptable and deplorable".

The letter comes days after concerns about RBI's functioning being raised by at least three former Governors -- Manmohan Singh (former PM), Y V Reddy and Bimal Jalan. Former Deputy Governors, including Usha Thorat and K C Chakrabarty, have also voiced their concerns.

The letter said the RBI staff has carried out its job excellently following the move to ban 87 per cent of the outstanding currency by the government.

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Wednesday, January 11, 2017

No More Blueprints, Visions or Plans....We Need Liberty 01-11

Shyam's take on this article....

Poverty is an essential bane of democracy. Poverty alleviation is a constant unfulfilled promise of various political parties and politicians in all the democracies of the world.

It is not something unique to any one country.The day the poverty is really conquered, the relevance of the politicians and political parties comes to an end, or it gets substantially diminished.

While the poverty is a curse and suffering for people, it keeps the politicians relevant and affluent.

America has been debating the poverty and liberty for the last 240 years, and India for almost 70 years.

Now please read Ron Paul's Liberty report

It appears that Obamacare is going to be one of the early issues addressed by the incoming Trump Administration. There's a lot of back-and-forth about "repeal and replace" and "repeal and wait." It's all nonsense.

Politicians think of themselves as high and mighty architects, running around with their magnificent blueprints that they're going to force on society. However, (without exception) life and reality smack the pompous politicians down. The sought after results almost never come to pass.

Unfortunately, like dogs that chase their own tails, politicians bounce back with a new set of blueprints every single time...And around-and-around we go. 

No matter what type of society we are to live in, there will always be the poor, the uneducated, the hungry, and the unemployed. They would exist in an anarchist society. They would exist in a society with a limited or small government. They would even exist with free markets, sound money and rock-solid private property rights.

Poverty is not to be abolished. That's not an easy pill for many (most?) to swallow. As a result, people come up with the craziest ideas in order to fight this reality. Every idea has failed.

Take a look at America's current government. It's the biggest and most intrusive that the world has ever seen. 

Has it abolished poverty? On the contrary, it's a poverty manufacturer. 

Is it from lack of funds? Of course not! 

The U.S. government parasitically drains American citizens to the tune of trillions of dollars per year. And it doesn't stop there. The gang has buried itself in debt that can't possibly be paid...ever! 

And yet...

There are poor people everywhere. The uneducated (thanks to government schools) are growing exponentially and millions of people are still hungry and unemployed.

So what's missing? Does the federal government need another trillion dollars? Does it need more credit from foolish creditors? Does it need another professor to concoct another blueprint?

The answer is a resounding NO to all of the above.

A serious advocate for a society of liberty, sound money, voluntary interactions, and rock-solid private property rights understands that there is no getting rid of poverty. For it is a built-in part of life. 

But it's not as bad as it sounds. There's a very big upside, and here it is: In a free society, poverty may only be a temporary situation for each individual. As long as you have the freedom to think, to create, to serve, and to keep the fruits of your labor, you can raise yourself to unbelievable heights. That is the promise of freedom.

Unfortunately, that scares a lot of people. So instead of taking the peaceful route, most will choose to snuggle into the arms of the violent blueprint makers. "Let the politicians draw up plans to raise me out of poverty," becomes the belief. 

The blueprint makers love taking on this most impossible task. They get praise (and sometimes worship). But they live and breathe on mostly one thing: Dependency

Take a look at the arguments that are being presented in the Obamacare "debate." The left seems to brag about the numbers of dependents that they've created. What is to be done about the tens of millions who signed up for Obamacare? What are you going to do, rip their insurance away? 

The dependents have become political bargaining chips. 

Obamacare is just a small slice of the dependency web too. Factor in the unsustainable Medicare and Social Security scams and you've got a whole society of dependents (who believe they're entitled to what the government promised them).

Instead of a move towards liberty and free markets, the blueprint makers will bark at each other and settle on either keeping the monstrosity as it is, or "replace" it with another monstrosity that will inevitably fail.

A new philosophy must be embraced. Instead of trying to see how much poverty the U.S. government is able to create. Let's scrap the belief that stealing from (A) to give to (B) is a solution to any problem.

There's no way to make theft work.

There's no blueprint that will turn a wrong into a right.

Liberty is always the best option.

Perhaps someday it'll catch on.

Tuesday, January 10, 2017

Customer Loyalty Is Overrated 01-10

Marketers spend a lot of time—and money—trying to delight consumers with ever-fresher, ever-more-appealing products. But their customers, it turns out, make most purchase decisions almost automatically. They look for what’s familiar and easy to buy. This package explores that idea and the science behind it, offers a counterpoint, and includes conversations with the cochairman of the LEGO Brand Group and the chairman of Intuit. 

Late in the spring of 2016 Facebook’s category-leading photo-sharing application, Instagram, abandoned its original icon, a retro camera familiar to the app’s 400- million-plus users, and replaced it with a flat modernist design that, as the head of design explained, “suggests a camera.” At a time when Instagram was under a growing threat from its rival Snapchat, he offered this rationale for the switch: The icon “was beginning to feel…not reflective of the community, and we thought we could make it better.”

The assessment of AdWeek, the marketing industry bible, was clear from its headline: “Instagram’s New Logo Is a Travesty. Can We Change it Back? Please?” In GQ’s article “Logo Change No One Wanted Just Came to Instagram,” the magazine’s panel of designers called the new icon “honestly horrible,” “so ugly,” and “trash,” and summarized the change thus: “Instagram spent YEARS building up visual brand equity with its existing logo, training users where to tap, and now instead of iterating on that, it’s flushing it all down the toilet for the homescreen equivalent of a Starburst.”
It’s too soon to tell whether the design change will actually have commercial consequences for Instagram, but this is not the first time a company has experienced such a reaction to a rebranding or a relaunch. PepsiCo’s introduction of its aspartame-free Diet Pepsi was—like the infamous New Coke debacle—a botched attempt at reinvention that resulted in serious revenue losses and had to be reversed. The interesting question, therefore, is: Why do well-performing companies routinely succumb to the lure of radical rebranding? One could understand the temptation to adopt such a strategy in the face of disaster, but Instagram, PepsiCo, and Coke were hardly staring into the abyss. (It’s worth noting that Snapchat, whose market share among young users is now particularly strong, has assiduously stuck to its familiar ghost icon. Full disclosure: A.G. Lafley serves on the board of Snap Inc.)

The answer, we believe, is rooted in some serious misperceptions about the nature of competitive advantage. Much new thinking in strategy argues that the fast pace of change in modern business (perhaps nowhere more obvious than in the app world) means no competitive advantage is sustainable, so companies must continually update their business models, strategies, and communications to respond in real time to the explosion of choice that ever more sophisticated consumers now face. To keep your customers—and to attract new ones—you need to remain relevant and superior. Hence Instagram was doing exactly what it was supposed to do: changing proactively

That’s an edgy thought, to be sure; but a lot of evidence contradicts it. Consider Southwest Airlines, Vanguard, and IKEA, all featured in Michael Porter’s classic 1996 HBR article “What Is Strategy?” as exemplars of long-lived competitive advantage. A full two decades later those companies are still at the top of their respective industries, pursuing largely unchanged strategies and branding. And although Google, Facebook, or Amazon might stumble and be crushed by some upstart, the competitive positions of those giants hardly look fleeting. Closer to home (one author of this article is part of the P&G family), it would strike the Tide or Head & Shoulders brand managers of the past 50 years as rather odd to hear that their half-century advantages have not been or are not sustainable. (No doubt the Unilever managers of long-standing consumer favorites such as Dove soap and Hellmann’s mayonnaise would feel the same.)

In this article we draw on modern behavioral research to offer a theory about what makes competitive advantage last. It explains both missteps like Instagram’s and success stories like Tide’s. We argue that performance is sustained not by offering customers the perfect choice but by offering them the easy one. So even if a value proposition is what first attracted them, it is not necessarily what keeps them coming.

In this alternative worldview, holding on to customers is not a matter of continually adapting to changing needs in order to remain the rational or emotional best fit. It’s about helping customers avoid having to make yet another choice. To do that, you have to create what we call cumulative advantage.

Let’s begin by exploring what our brains actually do when we shop.

Creatures of Habit

The conventional wisdom about competitive advantage is that successful companies pick a position, target a set of consumers, and configure activities to serve them better. The goal is to make customers repeat their purchases by matching the value proposition to their needs. By fending off competitors through ever-evolving uniqueness and personalization, the company can achieve sustainable competitive advantage

An assumption implicit in that definition is that consumers are making deliberate, perhaps even rational, decisions. Their reasons for buying products and services may be emotional, but they always result from somewhat conscious logic. Therefore a good strategy figures out and responds to that logic.

But the idea that purchase decisions arise from conscious choice flies in the face of much research in behavioral psychology. The brain, it turns out, is not so much an analytical machine as a gap-filling machine: It takes noisy, incomplete information from the world and quickly fills in the missing pieces on the basis of past experience. Intuition—thoughts, opinions, and preferences that come to mind quickly and without reflection but are strong enough to act on—is the product of this process. It’s not just what gets filled in that determines our intuitive judgments, however. They are heavily influenced by the speed and ease of the filling-in process itself, a phenomenon psychologists call processing fluency. When we describe making a decision because it “just feels right,” the processing leading to the decision has been fluent.

Processing fluency is itself the product of repeated experience, and it increases relentlessly with the number of times we have the experience. Prior exposure to an object improves the ability to perceive and identify that object. As an object is presented repeatedly, the neurons that code features not essential for recognizing the object dampen their responses, and the neural network becomes more selective and efficient at object identification. In other words, repeated stimuli have lower perceptual-identification thresholds, require less attention to be noticed, and are faster and more accurately named or read. What’s more, consumers tend to prefer them to new stimuli.

In short, research into the workings of the human brain suggests that the mind loves automaticity more than just about anything else—certainly more than engaging in conscious consideration. Given a choice, it would like to do the same things over and over again. If the mind develops a view over time that Tide gets clothes cleaner, and Tide is available and accessible on the store shelf or the web page, the easy, familiar thing to do is to buy Tide yet another time.

A driving reason to choose the leading product in the market, therefore, is simply that it is the easiest thing to do: In whatever distribution channel you shop, it will be the most prominent offering. In the supermarket, the mass merchandiser, or the drugstore, it will dominate the shelf. In addition, you have probably bought it before from that very shelf. Doing so again is the easiest possible action you can take. Not only that, but every time you buy another unit of the brand in question, you make it easier to do—for which the mind applauds you.

Each time you choose a product, it gains advantage over those you didn’t choose.

Meanwhile, it becomes ever so slightly harder to buy the products you didn’t choose, and that gap widens with every purchase—as long, of course, as the chosen product consistently fulfills your expectations. This logic holds as much in the new economy as in the old. If you make Facebook your home page, every aspect of that page will be totally familiar to you, and the impact will be as powerful as facing a wall of Tide in a store—or more so.

Buying the biggest, easiest brand creates a cycle in which share leadership is continually increased over time. Each time you select and use a given product or service, its advantage over the products or services you didn’t choose cumulates.

The growth of cumulative advantage—absent changes that force conscious reappraisal—is nearly inexorable. Thirty years ago Tide enjoyed a small lead of 33% to 28% over Unilever’s Surf in the lucrative U.S. laundry detergent market. Consumers at the time slowly but surely formed habits that put Tide further ahead of Surf. Every year, the habit differential increased and the share gap widened. In 2008 Unilever exited the business and sold its brands to what was then a private-label detergent manufacturer. Now Tide enjoys a greater than 40% market share, making it the runaway leader in the U.S. detergent market. Its largest branded competitor has a share of less than 10%. (For a discussion of why small brands even survive in this environment, see the sidebar “The Perverse Upside of Customer Disloyalty.”)

A Complement to Choice

We don’t claim that consumer choice is never conscious, or that the quality of a value proposition is irrelevant. To the contrary: People must have a reason to buy a product in the first place. And sometimes a new technology or a new regulation enables a company to radically lower a product’s price or to offer new features or a wholly new solution to a customer need in a way that demands consumers’ consideration.

Robust where-to-play and how-to-win choices, therefore, are still essential to strategy. Without a value proposition superior to those of other companies that are attempting to appeal to the same customers, a company has nothing to build on.

But if it is to extend that initial competitive advantage, the company must invest in turning its proposition into a habit rather than a choice. Hence we can formally define cumulative advantage as the layer that a company builds on its initial competitive advantage by making its product or service an ever more instinctively comfortable choice for the customer.

Companies that don’t build cumulative advantage are likely to be overtaken by competitors that succeed in doing so. A good example is Myspace, whose failure is often cited as proof that competitive advantage is inherently unsustainable. Our interpretation is somewhat different.
Launched in August 2003, Myspace became America’s number one social networking site within two years and in 2006 overtook Google to become the most visited site of any kind in the United States. Nevertheless, a mere two years later it was outstripped by Facebook, which demolished it competitively—to the extent that Myspace was sold in 2011 for $35 million, a fraction of the $580 million that News Corp had paid for it in 2005.

Why did Myspace fail? Our answer is that it didn’t even try to achieve cumulative advantage. To begin with, it allowed users to create web pages that expressed their own personal style, so individual pages looked very different to visitors. It also placed advertising in jarring ways—and included ads for indecent services, which riled regulators. When News Corp bought Myspace, it ramped up ad density, further cluttering the site. To entice more users, Myspace rolled out what Bloomberg Businessweek referred to as “a dizzying number of features: communication tools such as instant messaging, a classifieds program, a video player, a music player, a virtual karaoke machine, a self-serve advertising platform, profile-editing tools, security systems, privacy filters, Myspace book lists, and on and on.” So instead of making its site an ever more comfortable and instinctive choice, Myspace kept its users off balance, wondering (if not subconsciously worrying) what was coming next.

Compare that with Facebook. From day one, Facebook has been building cumulative advantage. Initially it had some attractive features that Myspace lacked, making it a good value proposition, but more important to its success has been the consistency of its look and feel. Users conform to its rigid standards, and Facebook conforms to nothing or no one else. When it made its now-famous extension from desktop to mobile, the company ensured that users’ mobile experience was highly consistent with their desktop experience.

To be sure, Facebook has from time to time introduced design changes in order to better leverage its functionality, and it has endured severe criticism in consequence. But in the main, new service introductions don’t jeopardize comfort and familiarity, and the company has often made the changes optional in their initial stages. Even its name conjures up a familiar artifact, the college facebook, whereas Myspace gives the user no familiar reference at all.

Bottom line: By building on familiarity, Facebook has used cumulative advantage to become the most addictive social networking site in the world. That makes its subsidiary Instagram’s decision to change its icon all the more baffling.

The Cumulative Advantage Imperatives

Myspace and Facebook nicely illustrate the twin realities that sustainable advantage is both possible and not assured. How, then, might the next Myspace enhance and extend its competitive edge by building a protective layer of cumulative advantage? Here are four basic rules to follow:

1. Become popular early.

This idea is far from new—it is implicit in many of the best and earliest works on strategy, and we can see it in the thinking of Bruce Henderson, the founder of Boston Consulting Group. Henderson’s particular focus was on the beneficial impact of cumulative output on costs—the now-famous experience curve, which suggests that as a company’s experience in making something increases, its cost management becomes more efficient. He argued that companies should price aggressively early on—“ahead of the experience curve,” in his parlance—and thus win sufficient market share to give the company lower costs, higher relative share, and higher profitability. The implication was clear: Early share advantage matters—a lot.

Marketers have long understood the importance of winning early. Launched specifically to serve the fast-growing automatic washing machine market, Tide is one of P&G’s most revered, successful, and profitable brands. When it was introduced, in 1946, it immediately had the heaviest advertising weight in the category. P&G also made sure that no washing machine was sold in America without a free box of Tide to get consumers’ habits started. Tide quickly won the early popularity contest and has never looked back.

BlackBerry may be the best example of a conscious design for addiction.

Free new-product samples to gain trial have always been a popular tactic with marketers. Aggressive pricing, the tactic favored by Henderson, is similarly popular. Samsung has emerged as the market share leader in the smartphone industry worldwide by providing very affordable Android-based phones that carriers can offer free with service contracts. For internet businesses, free is the core tactic for establishing habits. Virtually all the large-scale internet success stories—eBay, Google, Twitter, Instagram, Uber, Airbnb—make their services free so that users will grow and deepen their habits; then providers or advertisers will be willing to pay for access to them.

2. Design for habit.

As we’ve seen, the best outcome is when choosing your offering becomes an automatic consumer response. So design for that—don’t leave the outcome entirely to chance. We’ve seen how Facebook profits from its attention to consistent, habit-forming design, which has made use of its platform go beyond what we think of as habit: Checking for updates has become a real compulsion for a billion people. Of course Facebook benefits from increasingly huge network effects. But the real advantage is that to switch from Facebook also entails breaking a powerful addiction.

The smartphone pioneer BlackBerry is perhaps the best example of a company that consciously designed for addiction. Its founder, Mike Lazaridis, explicitly created the device to make the cycle of feeling a buzz in the holster, slipping out the BlackBerry, checking the message, and thumbing a response on the miniature keyboard as addictive as possible. He succeeded: The device earned the nickname CrackBerry. The habit was so strong that even after BlackBerry had been brought down by the move to app-based and touch-screen smartphones, a core group of BlackBerry customers—who had staunchly refused to adapt—successfully implored the company’s management to bring back a BlackBerry that resembled their previous-generation devices. It was given the comforting name Classic.

As Art Markman, a psychologist at the University of Texas, has pointed out to us, certain rules should be respected in designing for habit. To begin with, you must keep consistent those elements of the product design that can be seen from a distance so that buyers can find your product quickly. Distinctive colors and shapes like Tide’s bright orange and the Doritos logo accomplish this. 

And you should find ways to make products fit in people’s environments to encourage use. When P&G introduced Febreze, consumers liked the way it worked but did not use it often. Part of the problem, it turned out, was that the container was shaped like a glass-cleaner bottle, signaling that it should be kept under the sink. The bottle was ultimately redesigned to be kept on a counter or in a more visible cabinet, and use after purchase increased.
Unfortunately, the design changes that companies make all too often end up disrupting habits rather than strengthening them. Look for changes that will reinforce habits and encourage repurchase. The Amazon Dash Button provides an excellent example: By creating a simple way for people to reorder products they use often, Amazon helps them develop habits and locks them into a particular distribution channel.

3. Innovate inside the brand.

As we’ve already noted, companies engage in initiatives to “relaunch,” “repackage,” or “replatform” at some peril: Such efforts can require customers to break their habits. Of course companies have to keep their products up-to-date, but changes in technology or other features should ideally be introduced in a manner that allows the new version of a product or service to retain the cumulative advantage of the old.
Even the most successful builders of cumulative advantage sometimes forget this rule. P&G, for example, which has increased Tide’s cumulative advantage over 70 years through huge changes, has had to learn some painful lessons along the way. Arguably the first great detergent innovation after Tide’s launch was the development of liquid detergents. P&G’s first response was to launch a new brand, called Era, in 1975. With no cumulative advantage behind it, Era failed to become a major brand despite consumers’ increasing substitution of liquid for powdered detergent.
Recognizing that as the number one brand in the category, Tide had a strong connection with consumers and a powerful cumulative advantage, P&G decided to launch Liquid Tide in 1984, in familiar packaging and with consistent branding. It went on to become the dominant liquid detergent despite its late entry. After that experience, P&G was careful to ensure that further innovations were consistent with the Tide brand. When its scientists figured out how to incorporate bleach into detergent, the product was called Tide Plus Bleach. The breakthrough cold-cleaning technology appeared in Tide Coldwater, and the revolutionary three-in-one pod form was launched as Tide Pods. The branding could not have been simpler or clearer: This is your beloved Tide, with bleach added, for cold water, in pod form. These comfort- and familiarity-laden innovations reinforced rather than diminished the brand’s cumulative advantage. The new products all preserved the look of Tide’s traditional packaging—the brilliant orange and the bull’s-eye logo. The few times in Tide history when that look was altered—such as with blue packaging for the Tide Coldwater launch—the effect on consumers was significantly negative, and the change was quickly reversed.
Of course, sometimes change is absolutely necessary to maintain relevance and advantage. In such situations smart companies succeed by helping customers transition from the old habit to the new one. Netflix began as a service that delivered DVDs to customers by mail. It would be out of business today if it had attempted to maximize continuity by refusing to change. Instead, it has successfully transformed itself into a video streaming service.
Although the new Netflix markets a completely different platform for digital entertainment, involving a new set of activities, Netflix found ways to help its customers by accentuating what did not have to change. It has the same look and feel and is still a subscription service that gives people access to the latest entertainment without leaving their homes. Thus its customers can deal with the necessary aspects of change while maintaining as much of the habit as possible. For customers, “improved” is much more comfortable and less scary than “new,” however awesome “new” sounds to brand managers and advertising agencies.

4. Keep communication simple.

One of the fathers of behavioral science, Daniel Kahneman, characterized subconscious, habit-driven decision making as “thinking fast” and conscious decision making as “thinking slow.” Marketers and advertisers often seem to live in thinking-slow mode. They are rewarded with industry kudos for the cleverness with which they weave together and highlight the multiple benefits of a new product or service. True, ads that are clever and memorable sometimes move customers to change their habits. The slow-thinking conscious mind, if it decides to pay attention, may well say, “Wow, that is impressive. I can’t wait!”

But if viewers aren’t paying attention (as in the vast majority of cases), an artful communication may backfire. Consider the ad that came out a couple of years ago for the Samsung Galaxy S5. It began by showing successive vignettes of generic-looking smartphones failing to (a) demonstrate water resistance; (b) protect against a young child’s accidentally sending an embarrassing message; and (c) enable an easy change of battery. It then triumphantly pointed out that the Samsung S5, which looked pretty much like the three previous phones, overcame all these flaws. Conscious, slow-thinking viewers, if they watched the whole ad, may have been persuaded that the S5 was different from and superior to other phones.

But an arguably greater likelihood was that fast-thinking viewers would subconsciously associate the S5 with the three shortcomings. When making a purchase decision, they might be swayed by a subconscious plea: “Don’t buy the one with the water-resistance, rogue-message, and battery-change problems.” In fact, the ad might even induce them to buy a competitor’s product—such as the iPhone 7—whose message about water resistance is simpler to take in.

Remember: The mind is lazy. It doesn’t want to ramp up attention to absorb a message with a high level of complexity. Simply showing the water resistance of the Samsung S5—or better yet, showing a customer buying an S5 and being told by the sales rep that it was fully water-resistant—would have been much more powerful. The latter would tell fast thinkers what you wanted them to do: go to a store and buy the Samsung S5. Of course, neither of those ads would be likely to win any awards from marketers focused on the cleverness of advertising copy.


The death of sustainable competitive advantage has been greatly exaggerated. Competitive advantage is as sustainable as it has always been. What is different today is that in a world of infinite communication and innovation, many strategists seem convinced that sustainability can be delivered only by constantly making a company’s value proposition the conscious consumer’s rational or emotional first choice. They have forgotten, or they never understood, the dominance of the subconscious mind in decision making. For fast thinkers, products and services that are easy to access and that reinforce comfortable buying habits will over time trump innovative but unfamiliar alternatives that may be harder to find and require forming new habits.

So beware of falling into the trap of constantly updating your value proposition and branding. And any company, whether it is a large established player, a niche player, or a new entrant, can sustain the initial advantage provided by a superior value proposition by understanding and following the four rules of cumulative advantage.

Reproduced From Harvard Business Reveiw

Monday, January 9, 2017

Bringing up the children. can we just shift from praise for achievement, effort,To, a learning reaction...It helps.... 01-010

The Stanford professor who pioneered praising kids for effort says we’ve totally missed the point.

It is well known that telling a kid she is smart is wading into seriously dangerous territory.
Reams of research show that kids who are praised for being smart fixate on performance, shying away from taking risks and meeting potential failure. Kids who are praised for their efforts try harder and persist with tasks longer. These “effort” kids have a “growth mindset” marked by resilience and a thirst for mastery; the “smart” ones have a “fixed mindset” believing intelligence to be innate and not malleable.

But now, Carol Dweck, the Stanford professor of psychology who spent 40 years researching, introducing and explaining the growth mindset, is calling a big timeout.

It seems the growth mindset has run amok. Kids are being offered empty praise for just trying. Effort itself has become praise-worthy without the goal it was meant to unleash: learning. Parents tell her that they have a growth mindset, but then they react with anxiety or false affect to a child’s struggle or setback. “They need a learning reaction – ‘what did you do?’, ‘what can we do next?’” Dweck says.

Teachers say they have a “growth mindset” because not to have one would be silly. But then they fail to teach in such a way that kids can actually develop growth mindset muscles. “It was never just effort in the abstract,” Dweck tells Quartz. “Some educators are using it as a consolation play, saying things like ‘I tell all my kids to try hard’ or ‘you can do anything if you try’.”
“That’s nagging, not a growth mindset,” she says.

The key to instilling a growth mindset is teaching kids that their brains are like muscles that can be strengthened through hard work and persistence. So rather than saying “Not everybody is a good at math. Just do your best,” a teacher or parent should say “When you learn how to do a new math problem, it grows your brain.” Or instead of saying “Maybe math is not one of your strengths,” a better approach is adding “yet” to the end of the sentence: “Maybe math is not one of your strengths yet.”

The exciting part of Dweck’s mindset research is that it shows intelligence is malleable and anyone can change their mindset. She did: growing up, she was seated by IQ in her classroom (at the front) and spent most of her time trying to look smart.

“I was very invested in being smart and thought to be smart was more important than accomplishing anything in life,” she says. But her research made her realize she could take some risks and push herself to reach her potential, or she could spend all her time trying to look smart.

She and other researchers are discovering new things about mindsets. Adults with growth mindsets don’t just innately pass those on to their kids, or students, she says, something they had assumed they would. She’s also noticed that people may have a growth mindset, but a trigger that transports them to a fixed-mindset mode. For example, criticism may make a person defensive and shut down how he or she approaches learning. It turns out all of us have a bit of both mindsets, and harnessing the growth one takes work.

Researchers are also discovering just how early a fixed and growth mindset forms. Research Dweck is doing in collaboration with a longitudinal study at the University of Chicago looked at how mothers praised their babies at one, two, and three years old. They checked back with them five years later. “We found that process praise predicted the child’s mindset and desire for challenge five years later,” she says.

In a follow-up, the kids who had more early process praise—relative to person praise—sought more challenges and did better in school. “The more they had a growth mindset in 2nd grade the better they did in 4th grade and the relationship was significant,” Dweck wrote in an email. “It’s powerful.”
Dweck was alerted to things going awry when a colleague in Australia reported seeing the growth mindset being misunderstood and poorly implemented. “When she put a label on it, I saw it everywhere,” Dweck recalls.

But it didn’t deflate her (how could it, with a growth mindset?). It energized her:
I know how powerful it can be when implemented and understood correctly. Education can be very faddish but this is not a fad. It’s a basic scientific finding, I want it to be part of what we know and what we use.

Resisting The Lure Of Short-Termism: Kill 'The World's Dumbest Idea' 01-09

There is only one valid definition of a business purpose: to create a customer.

– Peter Drucker, The Practice of Management (1954)

When pressures are mounting to deliver short-term results, how do successful CEOs resist those pressures and achieve long-term growth? The issue is pressing: low global economic growth is putting stress on the political and social fabric in Europe and the Americas and populist leaders are mobilizing widespread unrest. “By succumbing to false solutions, born of disillusion and rage,” writes Martin Wolf in the Financial Times this week, “the west might even destroy the intellectual and institutional pillars on which the postwar global economic and political order has rested.”

The first step in resisting the pressures of short-termism is to correctly identify their source. The root cause is remarkably simple—the view, which is widely held both inside and outside the firm, that the very purpose of a corporation is to maximize shareholder value as reflected in the current stock price (MSV). This notion, which even Jack Welch has called “the dumbest idea in the world,” got going in the 1980s, particularly in the U.S., and is now regarded in much of the business world, the stock market and government as an almost-immutable truth of the universe. As The Economist even declared in March 2016, MSV is now “the biggest idea in business.”

The Birth Of A Bad Idea

Why did the idea arise? MSV was a well-intended effort by firms to survive in a “VUCA” world, namely, a world that is increasingly volatile, uncertain, complex and ambiguous. In this more difficult context, in which power in the marketplace has steadily shifted from firms to customers, firms focused more sharply on what is immediately profitable. This was presented as a better approach than the then-prevailing view that a firm should seek to meet the needs of an array of stakeholders—customers, employees, shareholders and society. The misguided hope, articulated by Milton Friedman in September 1970, was that if a firm focused on solely on shareholders, everyone would be better off through the supposed “magic of the marketplace.”

The result has been the opposite. MSV led to a vicious cycle of value extraction and economic decline.

To be sure, companies often said that their goal is long-term shareholder value. Indeed, esteemed business school professors defend shareholder value in this way, as in an article in Harvard Business Review in August 2016. The professors seek to reclaim MSV by suggesting that shareholder value has been “hijacked by those who incorrectly believe that the goal is to maximize short-term earnings to boost today’s stock price. Properly understood, maximizing shareholder value means allocating resources so as to maximize long-term cash flow.”

But since calculating the long-term cash flow of any particular action is an impractical guide for day-to-day decision-making in a firm, once shareholder value of any kind becomes the firm’s goal, it’s the impact on the current stock price that in practice becomes the basis for day-to-day decision-making. This in turn leads inexorably to a focus on the short-term.

Short-term Incentives Are Larger Than Previously Understood

Inside the firm, enhancing short-term shareholder value is what most CEOs are currently paid to do. Stock-based compensation is the main reason why the “hijacked version” of MSV—that the goal of a firm is shareholder value as reflected in the current stock price—has become so pervasive. By focusing CEO attention on the current stock price, stock-based compensation is often at odds with long-term growth.

CEO stock-based compensation is even more massive than previously understood. Research published in 2016 in The Atlantic and Harvard Business Review by Professor William Lazonick, shows that the CEO–to-median-worker pay ratio is not, as commonly estimated, in the order of 300:1, with average CEO compensation in the order of $10-15 million, which is already shocking.
Lazonick’s new research shows that the actual CEO–to-median-worker-pay ratio of the 500 highest paid executives is almost 1000:1 or $33 million, with 82% from stock-based pay. Over several decades, executive compensation has increased more than 1000%. 

Creating long-term sustainable value through investment in market-creating innovation can have huge payoffs both for the shareholders and for the economy. But it usually takes years of hard work and is full of risk, with possibly no payoff during the tenure of the current chief executive. There are two much easier avenues available to the CEO to boost the stock price. One is cutting costs. The other is boosting the share price through share buybacks. Both are relatively easy and the results in terms of an enhanced share price are immediate, with practically no short-term risk. It is done in private with the stroke of a pen. Is it any wonder that CEOs give more attention to cost-cutting and share buybacks than to investment in risky slow-gestating innovation?

Massive share buybacks are a relatively recent phenomenon. Prior to 1982, large stock buybacks were illegal because they constituted obvious stock price manipulation. But the SEC in the Reagan administration introduced a new rule—Rule 10b-18—which creates “a safe harbor” for firms to buy back as many shares as they like. This effectively opened the floodgates. The Economist has called the practice “a resort to corporate cocaine”. Reuters has called it “corporate self-cannibalization.”

The SEC seems to consider itself powerless to do anything about the ensuing stock price manipulation. Thus in July 2015, when Senator Tammy Baldwin (D-WI) directly asked the SEC head in the Obama administration, Mary Jo White, to look into the issue of stock price manipulation resulting from share buybacks, White replied in effect that the SEC could not consider the issue because the protection offered by Rule 10b-18 was absolute. The prospects of changing that ruling in the investor-friendly Trump administration seem even more remote.

Lazonick’s recent research also shows how SEC rules currently enable executives to time the granting and vesting of their own shares so as to maximize their own compensation, despite the blatant conflict of interest.

As a result, CEOs have pursued lavish share buybacks with abandon, despite disastrous financial, economic and social consequences. As Upton Sinclair pointed out long ago, “it is difficult to get a man to understand something when his salary depends on not understanding it.”

Share Buybacks Are Gargantuan In Scale

The current scale of share buybacks is breath-taking. Over the years 2006-2015, Lazonick’s latest research shows that the 459 companies in the S&P 500 Index that were publicly listed over the ten-year period expended $3.9 trillion on stock buybacks, representing 54% of net income, plus another 37% of net income on dividends. Much of the remaining 10% of profits was held abroad, sheltered from U.S. taxes.

The total of share buybacks for all US, Canadian, and European firms, for the decade 2004-2013 was $6.9 trillion. The total share buybacks for all public companies in just the U.S. for that decade was around $5 trillion.

Buybacks might make some sense when a stock is undervalued, but Lazonick’s research shows that most buybacks occur when the stock is overvalued, thus enabling firms to mask other business problems. Contrary to the stated goal of enhancing shareholder value, the net result of share buybacks executed at the top of the market is to systematically destroy real shareholder value.

As Robin Harding in the Financial Times concludes, it is “time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.”

‘The Stock Market Made Us Do It’

Outside the firm, it is the stock market that acts as the enforcer of the MSV religion. As Dennis Berman in the Wall Street Journal points out, decisions are often driven by the C-suite’s perception that they are under “the threat from shareholder activists, who now patrol the market like prison guards with billy clubs. Overspend and get whacked.”

These perceptions are not far from reality. Take the case of Timken Steel, a company in Canton Ohio which has been making steel and bearings for almost a hundred years. It’s the kind of firm where “making things still matters.” Unlike other companies in the region, like Goodyear Tire & Rubber or the Hoover Company, Timken has not tried to cut costs by moving production to other countries where labor is cheaper. Instead Timken has made huge capital and social investments in Canton Ohio. Over the last decade, its share price had kept pace with the stock market, but that was no protection against “activist shareholders,” formerly known more accurately as “corporate raiders.”

In 2013, Timken was attacked by Relational Investors, in partnership with the California State Teachers’ Retirement System, (CalSTRS), which represents some 236,000 teachers and other retirees in California. Relational applied its usual modus operandi: acquiring stakes in the company, pressuring it to make changes to “unlock value”, insisting that the firm load itself up with debt, buy back their own shares, return assets to shareholders and drive their share prices higher. Relational then cashes in its profits with no thought for the financially fragile state in which it leaves the company it has attacked or the jobs that it might have destroyed.

Using CalSTRS as a PR shield to deflect criticism, Relational was successful in its raid on Timken. All told, Relational acquired its stake at about $40 a share and sold it at around $70, reaping a 75% gain — $188 million — in just over two years. Relational sold all its shares after the quick profit and moved on to the next victim.

Since then, the results for Timken have been less happy. Loaded with debt and split into two firms, its share price has declined by more than 60% and its long-term viability is uncertain.

In making its profit, Relational created no jobs and generated no products or services for any real people. It simply extracted money that had been created over years by the hard work of Timken’s management and workers and left Timken in a weakened state.

Timken is just one example of the noxious effects of the doctrine of MSV by which activist shareholders extract value and disturb the creation of long-term value. The Timken case is part of a broader pattern of attacks by activist shareholders on public firms that depress investment in innovation.

In fact, it looks like another record breaking year for shareholder activism activity, “both in the number of campaigns (more than 230 campaigns in the United States alone in 2015) to the size and iconic nature of the companies targeted (e.g., AIG, DuPont, General Electric and General Motors).” While some long-term investors are having second thoughts about shareholder activism, since “it cannot be the case that 'divest and distribute' is the right strategy for shareholder value as often as is advocated by activist funds relative to other ideas,” nevertheless the raids continue to increase with ever bigger and bolder campaigns. 2016 is also on track to be a record year for activism outside the United States.

The Cost Of Shareholder Activism

What is the cost of shareholder activism? The impact of the stock market on investment has been quantified in a brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle.“ The study compared the investment patterns of public companies and privately held firms.

The study found that “keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”

In other words, public firms invest roughly half as much as those private firms that are relatively free from the pressures of MSV. As Matthew Yglesias at Slate concluded: “We are reaping the bitter fruits of the ‘shareholder value’ revolution.”

Double Whammy: The Link To Bureaucracy

But wait, it’s not just shareholder value alone. MSV is a double whammy. Shareholder value forms a sinister partnership with top-down bureaucracy—a devastating constraint in a world in which a motivated workforce producing continuous innovation is a necessity for survival.

Thus when a firm embraces the goal of making money for the shareholders and its executives, it can’t inspire its staff to pursue that goal with any commitment or passion. Making money for the boss at the expense of the customer doesn’t put a spring in anyone’s step or excite anyone to give his or her very best. The goal is inherently dispiriting.

So once a firm commits to MSV, it has little choice but to manage itself with strict command-and-control to force employees to pursue a goal that they don’t really believe in. So MSV and top-down bureaucracy fit together in a perfect interlocking relationship, like a hand and a glove. If a firm tries to move away from bureaucracy, for instance by introducing Agile team practices, then the goals, prescriptions and metrics of MSV kick in to undermine the change and force a reversion to bureaucracy. So once firms embrace MSV, they are doomed to a state of suboptimal equilibrium with lackluster bureaucratic management.

The sorry current state of the work force has been measured by Gallup. It found that only 33% of U.S. corporate employees are engaged in their work, while 17% are disengaged and actively involved disrupting the firm. Deloitte’s studies show that only 11% of the workforce is passionate about what they do. The result is a workforce that is ill-adapted to producing the market-creating innovation that is urgently needed, thus making cost-cutting and share buybacks ever more attractive to the CEO.

Macroeconomic Impact

The impact of these management practices are now everywhere apparent. For instance, as shown in Deloitte’s Shift Index the rates of return on assets of U.S. firms continue their half-century decline that has been independent of political parties, recessions, bubbles, and major world events.

 Work done by the Kauffman Foundation and the Institute for Competitiveness & Prosperity shows that over the last twenty five years, companies more than five years old were net destroyers of jobs, not job creators.

Meanwhile workers wages have stagnated for decades. Since the advent of MSV in the 1980s, the benefits of productivity gains have flowed to shareholders, including the executives, not to workers who created those gains.

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The stock-price manipulation involved in massive buybacks—and the resulting exorbitant executive pay—are thus not just moral or legal problems. The consequences of MSV and share buybacks are a macro-economic and social disaster: net disinvestment, loss of shareholder value, diminished investment in innovation, destruction of jobs, exploitation of workers, windfall gains for activist insiders, rapidly increasing inequality and sustained economic stagnation. Stock buybacks are thus a financial bonanza for stockholders and senior managers, but they destroy economic value for society.

Meanwhile, since the U.S. presidential election in November 2016, the stock market has been on a tear. Investors seem to believe that by releasing resources that are currently “bottled up” by bad tax policy, business will get an automatic stimulus for investment. The case is plausible to the extent that the stash of cash overseas is massive. U.S. firms are currently holding almost $2 trillion in assets overseas, pending some kind of tax reform. But what will happen if the cash is repatriated? But where will it go?

The answer was unhappily apparent in an interview with Cisco Systems CEO, Chuck Robbins, on CNBC’s Squawkbox in December 2016. He was asked what Cisco would do if it could repatriate overseas capital. Cisco has more than $60 billion abroad, and it stands to gain a great deal if the repatriation measures currently being considered are implemented.

Robbins’ answer was frank. As he had outlined in an earlier call with Cisco's investors, Cisco would, he said, use the money for “a combination of dividends, share buybacks and M&A activity.” In other words, If this pattern is replicated, there will be more of the short-term financial engineering that has kept the U.S. economy in a seemingly endless state of secular economic stagnation.

There Is Another Way

There is of course another way to run a corporation. Firms pursuing this way start from the opposite premise from MSV. Instead of the firm being focused on extracting value for shareholders, the firm aims primarily at creating value for customers. The aspiration isn’t new. It’s Peter Drucker’s foundational insight of 1954: “There is only one valid purpose of a firm is to create a customer.” It’s through providing value to customers that firms justify their existence. Profits and share price increases are the result, not the goal of a firm’s activities.

The most prominent example is Amazon. Amazon never focused on short-term shareholder value. At Amazon, shareholder value is the result, not the operational goal. Amazon’s operational goal is market leadership. Although short-term profits have been very variable, the stock market has handsomely rewarded Amazon’s long term strategy.

“We first measure ourselves,” says CEO Jeff Bezos, “in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.”

Amazon obsesses over customers, not shareholders. “From the beginning, our focus has been on offering our customers compelling value."  Long-term shareholder value, says Bezos, “will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.”

Amazon Is Not Alone

Amazon is not alone in rejecting the doctine of MSV .

Thus Vinci Group Chairman and CEO Xavier Huillard has called MSV “totally
Alibaba CEO Jack Ma has declared that “customers are number one; employees are number two and shareholders are number three.”

Paul Polman, CEO of Unilever has denounced “the cult of shareholder value.”

John Mackey at Whole Foods has condemned businesses that “view their purpose as profit maximization and treat all participants in the system as means to that end.”

Marc Benioff, Chairman and CEO of Salesforce declared that MSV is “wrong. The business of business isn't just about creating profits for shareholders -- it's also about improving the state of the world and driving stakeholder value.”

In a 2014 report from the Aspen Institute, which convened a cross-section of business thought leaders, including both executives and academics, the most important finding is that a majority of the thought leaders who participated in the study, particularly corporate executives, agreed that “the primary purpose of the corporation is to serve customers’ interests.” In effect, the best way to serve shareholders’ interests is to deliver value to customers.

Len Sherman’s new book, If You're in a Dogfight, Become a Cat! (January 2017) offers many further examples, including Costco and JetBlue.

The report of the SD Learning Consortium (November 2016) also gives examples, including Barclays, Cerner, C.H.Robinson, Ericsson, Microsoft, Riot Games and Spotify.

The management journal, Strategy & Leadership, has courageously championed and elaborated the principles of this better way over a number of years.

Firms pursuing this different approach include young firms and old firms, big firms and small firms, US and non-US firms, those in software and those outside software. In effect, the discussion isn’t about a type of firm, but rather a different set of leadership and managerial practices.

The argument offered by executives that “Wall Street made us do it” thus has the same legitimacy as “the dog ate my homework.” A significant set of public companies have already been successfully pursuing customer value, with broad applause from Wall Street and strong support from discerning thought leaders.

The result is a virtuous circle of value creation.

A Wider Set Of Issues For Society

Thus we know how to resist the lure of short-termism. The question is: when will firms get on and do it?

It is of course theoretically possible that CEOs and their boards of directors will awaken tomorrow morning and commit themselves to creating value for customers rather than extracting value for shareholders.

It’s theoretically possible that investors will awaken tomorrow and refocus their attentions on firms that create real long-term value.

It is theoretically possible that the new head of the SEC will remove Rule 10b-18 which enables massive stock price manipulation.

Realistically though, these things won’t happen unless and until there is a sea change in the wider political, social and organizational context. Thus the current situation is one of fundamental institutional failure across the whole of society. The behavioral breakdown is mutually reinforcing.

CEOs are extracting value from their firms, rather than creating it. CFOs are systematically enforcing earnings-per-share thinking in decisions throughout their organizations. Business schools are teaching their students how to do it. Hedge funds and activist shareholders are gambling risk-free with other people’s money to take advantage of it. Institutional shareholders are complicit in what the CEOs and CFOs are doing.

Regulators remain indifferent to systemic failure. Rating agencies reward malfeasance. Financial analysts applaud short-term gains and ignore obvious long-term rot. Politicians stand by and watch. In a great betrayal, the very leaders who should be fixing the system are complicit in its continuance. Unless our society as a whole reverses course, it is heading for a cataclysm.

Thus change in behavior is needed in a whole set of institutions and actors: CEOs, CFOs, investors, legislators, regulators, rating agencies, analysts, management journals, thought leaders, business schools and politicians—all need to think and act differently.

A Moment Of Truth Has Arrived

We are thus at a critical point in a vast societal drama. We have reached that key moment, which Aristotle famously called “anagnorisis” or “recognition.” This is the theatrical moment in a drama when ignorance shifts to knowledge. Just as King Lear in Shakespeare’s play eventually recognized that his apparently virtuous daughters, Goneril and Regan, were a really bad lot, and that his apparently disrespectful daughter, Cordelia, truly loved him, so society is learning that much of ‘the talent’ it thought were adding value have in fact been extracting value for themselves.

As usual with anagnorisis and the shock of recognition at a disturbing, previously-hidden truth, there is a disquieting sense that the accepted coordinates of knowledge have somehow gone awry and the universe has come out of whack. This can lead to denial and a delay in action, even though the facts are staring us in the face.

If the recognition of our error comes too late, as in Shakespeare’s Lear, the result will be terrible tragedy. If the recognition comes soon enough, the drama can still have a happy ending. We are about to find out in our case which it is to be.

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