Continuous transformation or a transitional approach, which path do you prefer?


Janet Yellen Testifies House Fniancial Services Committee

Earlier this week, Janet Yellen told the House Financial Services Committee that no decision has been made, but shared the Federal Reserve Bank‘s expectations via the Wall Street Journal.   “The economy will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2% target over the medium term, and if the incoming information supports that expectation, then…December would be a live possibility. ”

Wow, lot’s of room in those statements.  Both US Stocks and bonds slipped following her remarks. It’s become commonplace to link Fed Chairpersons’ remarks to the rise and fall of the markets.  I’m not so willing.

Maybe because my thoughts of late were influenced by a conversation hosted by the Becker Friedman Institute I attended last week.  Entitled The Role and Impact of Monetary Policy in an Uncertain Economy  and included Charles Plosser of the Philadelphia Federal Reserve  and nobel laureate Lars Peter Hansen.

First, I’m with Plosser in sensing that it’s foolish to expect that  the Federal Reserve’s control of the money supply and interest rates can be used to effect both inflation and domestic employment.   Second, we need to be cognizant, as Hansen advises, that models can be very helpful but are not exactly the same as direct relationships.  Politico made a similar point. “The Fed and its staff, like any good economists, rely on past patterns as a guide to future outcomes. And now, those patterns are no longer working…:

In fact, it’s the latter thought the differentiation between modeled certainty and certainty deserves more attention.  I’ve been unpacking and exploring this in a variety of ways .  Here’s one:

I know with certainty the relationship between the gas pedal and the degree of pressure applied by my foot and the acceleration of my car.  Janet Yellen and the Fed no matter how experienced and accurate the input data, the econometric models relationship to the economy remain uncertain.  It’s why changes in pressure they apply to expand or contract interest rates have a fuzzier relationship to the economy, and the measurable results more complicated and less consistently understood when compared to my car’s observed speed when I hit the or lighten up on the gas.

Modeled certainty when it fails produces uncertainty but doesn’t mean stop, or does it?

I only watch the dashboard in my car.  I used to have a ticker list of stocks I followed, but no more.  I also rely on the weather app on my phone even though it’s not very accurate. Why? Well it’s useful to be prepared for forecasted conditions, even though several are beyond my control. Yes the weather is uncertain inspite of models who do their best to assure us.

I’m not alone in my struggle to understand and interpret the signals around us, especially the indicators of the health of the American economy and the global economy.  For one, its more complicated than the working of my car, which I also don’t fully understand. The dashboard guides me, it reminds me that the gas tank needs refilling or that in a particular area I may need to reduce my speed, or if the other lights go on I should get a mechanic to take a look.

Today the growing interconnections between sensors, and communications technology make makes it possible to funnel more information to me in real time than ever before.  So, what value do additional indicator really offer? What does knowing more change? The answer is it changes everything, but not necessarily in a predictable way.

Experience, does affect how we process information. Our brain uses experience to filter out commonplace or the “usual” details in our midst. Organizationally, experience used to model and plan the allocation of resources and assure us with forecasts based on different decisions.  The bigger the organization, the more careful and challenging the coordination and planning activities.

When I was a kid, I heard the expression “As goes General Motors, so goes the country.” I didn’t know the first thing about economic indicators, or inflation rates.  My family bought GM cars, so when my grandpa bought a new Buick, things were going well. Conversely, things were going less well when my father continued to drive his Pontiac long after a small hole in the floor board  appeared spurting water when we’d hit a puddle.

GM of course was until recently not just one of the world’s automakers, it’s activities were deeply embedded into the economy.  A report by US Auto Alliance , quantified the importance of the automotive industry in the U.S. economy  claiming:

  • more than seven million private sector jobs and $500 billion in compensation,
  • drew foreign direct investment (FDI) currently valued at $74 billion—approximately 3 percent of all FDI in the United States.
  • And collective investments of almost $46 billion that expanded and retooled U.S.‐based facilities since 2010.

It take a reasonably long time to build a car, but people don’t buy them very often, so supply can generally keep up with demand. If we use GM as a litmus test for the economy there’s some wise and prudent parallels becasue there’s a lot of interdependencies between larger sentiments and people’s financial capabilities.  In contrast, fast food offers a set of alternative indicators to measure the pulse of the economy. In May of 2015, US news speculated about the inverse relationship between the two in an article entitled “McDonald’s earnings slide could be a function of economics. Besides, McDonald’s is the 2nd  largest employer in the country, trailing WalMart. Not surprising given its 14,300 restaurants –4.6 outlets per county.  (I plan to explore this idea more fully in a post I’ve drafted called  McDonald’s a truly American Story).McDonald's Workforce, 2005-2014

See http://fortune.com/2015/06/13/fortune-500-most-employees/

I only point to these two companies becasue I think it’s important to notice the difference between government actions and companies responses to changes in external conditions.

BCG put it this way:

“To compound matters, the diversity of the business environments—in terms of growth, rate of change, and harshness—that global companies face is expanding in a multispeed world. So it is not surprising that many companies find their strategies and business models increasingly out of step with their environments.

Many companies get caught in a “boiling-frog trap,” where they fail to recognize the problem and delay efforts to remedy it, thus necessitating a painful and risky step-change transformation.”

Is that what you want the Federal Reserve Governors to do?  I hope not.  It’s why I don’t envy them nor am I ready to second guess them.  In reality no one should let uncertainty about monetary policy and interest rate hikes hold up your planning, I would encourage you to take a harder look at the relationship between the micro as well as the macro trends in your industry. You don’t need a data scientist per se to create an elaborate model, but it can’t hurt.  The trick is to merely face the realities.    Try to imagine how your customers adjust and see if these factors are included in your own models, you might fill in a few more gaps..a sustainable path is up to you.

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Understanding ain’t believing and yes there are economic consequences!


This is a "thought bubble". It is an...

Recently, I came across this academic article differentiating belief and understanding and it triggered an explosion of thoughts.   When I teach, I  often encounter students who fail to grasp the topic and naturally their puzzled looks make me try to explain the idea again, differently.  I  never considered the possibility it wasn’t  my explanation that confused them, but maybe the ideas themselves.

Lost in Space

Our brains are wired to discard irrelevant information and to some degree if the new information doesn’t jive with what we know or believe–the ultimate cognitive dissonance occurs. Or as the Lost in Space robot would say: “That does not compute!”

As a teacher, I found the article unsettling on multiple levels.  First, because I never considered the potential conflict when preparing my lessons.  Second, what I confirmed talking to a High school math teacher in a large public school in Berwyn, IL:  Teaching helps students meet standards not to understand.

Personally, my limited experience as a public school teacher proved deeply challenging. In choosing to help students understand  not merely to pass.  I taught a vastly diverse population of 4th graders in a suburban Chicago classroom.  Student  IQs ranged from 5-95% on the chart, and the socio economic status of their families were equally diverse with many receiving subsidized breakfast and lunch. One student was severely ADHD, had lost his mother and his medication was constantly being adjusted. I had my hands full and could never figure out how to insure that every kid understood.

My own preference for immersive learning as a young student, in which my students allowed us to  play it out and learn by doing made school fun.  An approach, I actively sought to replicate in my teaching.  Returning to study education later in life, I was first dumbfounded to learn that so little was understood about effective teaching methods.  This isn’t really as mysterious a problem as I pose.  One of the oldest professions remains mysterious becasue the  purpose or objectives of education continue to evolve.  Sure there is wide agreement that everyone should have a command of the basics, the three Rs–Reading wRiting and aRithmetic.  How do you measure competency in these subjects?  what methods make it possible for students to gain competency or even mastery? If you have had a child in school, then you are familiar that new methods continue to be introduced.  Similarly, schools are held accountable to new standards and competency measurements.  Yes, the rules for private and charter schools differ from those demanded by the public.
Surprise, understanding information and knowing something are not the same thing. There are somethings you understand but could never articulate and vice versa some things you know but don’t necessarily understand.  For example, we know or learn how to drive without ever understanding how the car we drive actually works.  We may understand what someone else may be feeling without knowing precisely.
The areas where our understanding and knowledge most align come from ideas that involve multi-sensory learning experiences. It’s one thing to watch someone do something or find the results and another to reproduce them.  I can watch Tiger Woods, study his swing, stance and then when I attempt to hit the ball I discover just how much I don’t know.
This post won’t be able to address the issues fully.  I’m wondering where and how we might be able to resolve some of these contradictions and do it to help more people achieve. Sure high scores matter, but don’t we also want higher understanding that makes it possible for more people to solve more problems  when and where ever they encounter them? Teaching for understanding should count, in fact it’s a great book too!  But I’m also making a quick case for multi-sensory learning that allows more of us to connect what we know to things we understand.
Take history.  The recent Steven Spielberg movie on Abraham Lincoln attempted to show us more of the reality of the politics during the Civil War, but it also brought to life the words Americans are frequently taught.  We know about the civil war, we know that it was about slavery and we may know the Gettysburg address too.  But how does knowing that help me understand the world I encounter today?  How does learning history help me?
Imagine  learning history by role play? Being asked to study and recite the lines of Gettysberg address makes it easier for us to recall them and ponder them. Playing out the issues allows us to wire our brain to make our own meaning, personalize the lessons to connect to our pre-existing experiences.  The challenge may be that owning and personalizing the results takes time but it also complicates the  expectation of a singular correct answer or take on history.  Personalized meaning may prove more useful, stickier and authentic but it makes passing a standardized test much more difficult.
In fact, the accumulation of specific representations of  ideas and details are the only measures of learning that society at large respects and values. Today we value a passing grade and top performance measurable on a singular dimension.  Daniel Goleman‘s work on multiple intelligences increased the appreciation of talents beyond traditional accumulation of facts, but don’t celebrate them as equal achievements. High scoring SAT,  ACT and GPA scores open doors to further academic study and elite higher education opportunities.
This little monograph published in 2006 warrants more attention. In part, our system reflects the consequences of  the larger failure by the education system to differentiate student responses based on their belief and understanding versus answering according to the expectation of the testers.  The consequences of teachers teaching students to pass the test  may help some students further their schooling and many of them may gain understanding in the process.  But what about the others , where school material doesn’t match their knowledge of what matters  outside of school?   Teaching without understanding fails them and represents a failure of the investments to realize the returns of a capable society.
But there’s more.  Personally, this piece opened two divergent avenues of thought.  One,  given the growing research into the workings of the human brain how might cognitive processes  guide our behavior in the face of two truths. Two, findings by the economist James Heckmann whose work focuses on the development of human skills, abilities and health capacities for example demonstrate  the different values of those who graduate highschool and those that pass the GRE.

Two truths

T​he concept of holding two truths at once parallels the paradox of knowing what is right and yet believing it wrong​.

The FMRI of psychopaths who suffer from false delusions or paranoia, found their brain processes to differ from the general population. Interestingly, FMRI scans of democrats and republicans show each population to process information differently.  Both research illustrates the power and influence of different beliefs and explain the differences in our thinking and actions.  The reconciliation or rationalization process literally works differently based on early wiring of beliefs.
Carol Dweck, a noted childhood development scholar’s research explores the opportunities that emerge to rewire in adolescence.  Writing a response for the Boston review to research by James Heckmann that emphasized the value of larger emphasis on interventions to foster huma skills ad capacities, she writes:
“The success of the adolescent interventions derives from their laser-like focus on particular non-cognitive factors and the beliefs that underlie them—knowledge stemming from psychological theory.”
I often explain that my life changed when I began graduate work at the University of Chicago​.  I discovered what thinking felt like relative to merely learning.  I experienced integration of knowledge I was accumulating, the adding to and reconciling of my previous understandings with new, deeper understanding  of how things worked.
Many things I believe don’t require me to defend or explain.The best explanation I can muster extends from the recognition by the researchers on the primacy of self-centered meaning making.  My truth, what I know and what I believe begins with discovery.  The child who asks incessantly why seeks to make more sense of what they encounter.  The information they receive forms a foundation that like the sand on the beach slowly gets replaced with each new wave of information.  The emotional issues that cloud our thinking
 I’m sharing this article with the hope that you may have some additional insight into the topic or further my own knowledge surrounding  the significance of reconciling belief and understanding.

 

Seeing the Iceberg, Strategic responses to Business Disruptors


  Titanic image

By the time we see the iceberg, is it always too late to change our course? Business model disruptions often blind  fast growing companies,  shareholder  darlings, and result in their precipitous decline.  The impact is rarely limited, as the wake of the disruption ripples across the globe creating  great uncertainty in the capital markets. 

Last week Borders Group Inc appears to be the latest casualty.  WSJ.com – Borders Hires Restructuring Lawyers On January 18, the WSJ  reported  management’s decision to suspend book order payments and hired restructuring lawyers.  The resignation of top c-suite executives followed.  At this point, it appears collapse is their only alternative.   But last January, on the 27th their CEO resigned and the interim CEO announced in April a turnaround plan, that in retrospect  failed to keep them afloat. Is this case a failure of strategy, leadership or execution?  A full analysis isn’t necessary to realize that the larger cause was the absence of a timely response to their industry disruptors. 

I wouldn’t have paid much attention to this story, or been that drawn into the analysis had I not sat with Chicago Booth alumni last Friday and focused exclusively on this issue of business model disruptors.  The Border’s story was coincidental, and though none of us had the facts or details, we recognized that the leadership team could not have merely been asleep or unaware that trouble was looming. 

Mckinzie happened to publish a survey on the value of corporate strategy. Their findings were not surprising and merely confirmed the experience of the Booth and Kellogg  discussion participants. 

Strategy is hard

Defining the nature of your business is also challenging. Borders was first and foremost a bookseller. Their megastore concept, in  itself an industry disruptor, enjoyed great success until someone else ushered in additional  disruptors that took the lessons of the megastore online -switching mass in store sales and square footage overhead online.  I leave the case write-up to others.  The question is whether the disruption is inevitable and what if anything can a company facing similar game-changing disruptions do?  

It was precisely this question that the monthly discussion of Chicago Booth Alumni considered last Freday.  To frame the short conversation, attendees reviewed in advance three articles with strategic advice and  listed at the end of this post. 

Unlike the predictability and regularity of a ticking mechanical clock, the future rarely repeats or duplicates the past.  Our circumstances are always shifting, some subtly, occurring  as imperceptibly  as the orbital passage of the earth around the sun.  Business disruptors are successful because they are rarely taken seriously early enough. 

A single customer may be fickle; but consumers  rarely act  enmass, abruptly taking their business to the emergent competitor. The reality is that often the best customers remain loyal and the ongoing revenue stream, masks the departure and slow growth of the exodus into a massive iceberg  whose top once visible, is dismissed as small and inconsequential.

Most successful business leaders  monitor and report business metrics and then review them with interested stakeholders , e.g. senior management, share- holders,  board of directors. Rarely do these metrics reflect the full organization’s capabilities and/or its resilience to withstand disruptive threats.  Clayton Christenson studies of corporations facing change found  them missing any focus on  changes in demand as they occur in their marketplace. Resilient companies direct their attention to insuring existing resources can successfully meet the evolving needs of their customers.  The review process is not retrospective, but rather a future focused assessment. Examining the steps necessary to propel, not impede their processes and values toward  innovation.  In a race with a motorboat, paddling faster, or cutting dead weight won’t help you win. 

Strategic suggestions

Business model disruptions are rarely welcomed or predictable.  There are several tactical strategies that make it possible to bounce back to position. 

James Ogilvy, writing for Strategy +Business, offered metaphors from philosophy to exemplify how easily management and leadership can miss critical cues .  If however they create a culture that is more resilient amidst the ever present uncertainties of our world employees  emboldened  to speak and act early can help avert the looming disasterier.  Acknowledging our inability to predict the future we must decide how to operate in the present and still plan for changes we may not understand, measure or foresee.

Markides and Oyon writing for MIT Sloan review pushes past the work Clayton Christenson, Michael Porter and others on innovation challanges by narrowing them down to five key questions.  Asking these, management can better assess the potential damage caused by a disruption to its business or industry; and correspondingly, respond to the new competitive threat.  These questions don't produce the next actions plan, but for companies who recognize their current products, services or basic business model is time limited, it's the basis by which strategy should be revisited. Once again, the restructuring and committments will require great strength to meet the management challenges and incongruencies attached to creating something new while managing existing revenue opportunities.

Finally, another article from Strategy and Business (Leinwand and Mainardi) posits  merely being the game changer requires companies execute an effective capabilities driven strategy.  Outward facing, the strategic focus starts and ends with your customers.  This piece written before the phenomenon of Facebook and direct engagement utilizing social media tools was a great prescription.  The suggestion to build a portfolio of ideas, skills and competencies that can be put together coherently and mutually reinforce the organization’s overall capabilities is long on theory but hard to execute.  [note, an older article by Christenson and Ovendov in HBR 2000, outlines how to assess and find your core capabilities.]

Closing discussion take-aways

Discussants summarized their thoughts at closing as follows:

  • Where are the lessons on how to create culture transformations?  The prescription needs more details to be meaningful or effective.
  • Organizations and their leadership are not as dumb as they seem; rather inertia may be to blame, or more specifically its absence, which inevitably rolls up into a leadership problem.
  • If you can stop the bleeding, act sooner and change the management team it may help, but critically need to change what management is and has been doing to navigate a better course.
  • “Viewing your death”, an Ogilve tip, is only as helpful as how you perceive the future and the significance of the outside possibilities painted in a future scenario.
  • Remember who your ultimate customers are, not your board, not your leadership, only the shifting nature of your customers should be the rationale and focal point for business redirection.
  • Keep track of your fundamentals, the organization capabilities.
  • Be wary of the situational leadership conundrum…their path to the top shaped how they read the signposts and drive the organization forward. 
  • Best to take a long-term look, overcome the protective instincts that may ultimately undermine your ability to move the product along a more realistic and vibrant future. 
  • CEOs are ultimately responsible for strategy and any changes have to come from the top. 

The best insurance an organization can carry is regular consideration of outsider’s perspectives,  reality checks on their planning.  In theory, this should be a board of directors comprised of individuals whose own context and operating environment is in sharp contrast to your industry and culture.  The more divergent their views of the future, the greater the value of their contribution to your survival and success. 

Source Readings

 These  articles  were the basis of the Chicago Booth Alumni Discussion January 21, 2011

 What Strategists Can Learn from Sartre
http://www.strategy-business.com/article/03405
By James Ogilvy, Strategy +Business, Winter 2003
Strategic thinking can benefit from philosophy. In this reflective piece, the author explained why in an uncertain world where competitive advantage is insecure, setting strategy must become an existential exercise.
 
How to Win by Changing the Game
http://www.strategy-business.com/article/08401
By Cesare Mainardi, Paul Leinwand, and Steffen Lauster,
Strategy +Business, Winter 2008
This was the magazine’s first major piece on capabilities-driven strategy, laying the groundwork for Leinwand and Mainardi’s book The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Press, 2010).

What to Do Against Disruptive Business Models (When and How to Play Two Games at Once)

http://sloanreview.mit.edu/the-magazine/articles/2010/summer/51413/what-to-do-against-disruptive-business-models/
By Constantinos C. Markides and Daniel Oyon,  June 26, 2010
Fighting against a disruptive business model by rolling out a second business model is one option for companies to consider. But to make that work, you need to avoid the trap of getting stuck in the middle.