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Why Succession Planning is bad for your health

October 14, 2010 Leave a comment

The Economist is facetiously comparing the disciplined succession-planning process in North Korea with the shambolic one found in many corporations. The cause, of course, is not a lack of focus by Boards as they claim: the real reason CEOs don’t like to designate successors is if you do so, you immediately create someone with a vested interest in seeing you fail.

Every time you vest a lucrative stock option, your successor shifts uncomfortably in his seat, thinking ‘that should have been me.’ Each time you make a strategic gaffe, his darkly plotting heart leaps in the hope that you drive the company over a cliff so he can step in and cover himself in glory by rescuing the mothership from your geriatric incompetence.

As a CEO, make no mistake: your designated successor spends his evening patiently sharpening the knife he shall someday plunge gleefully into your back. Don’t be fooled by the polite deference he displays in public: he would love nothing more than to lace your coffee with arsenic. He has nothing to lose and all to gain by your destruction.

So the next time your Board suggests you nominate a successor, point at North Korea and say to them: The Economist suggests that nominating my son is best practice. May I? That should put an end to that tiresome initiative.

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The Winner’s Curse is Upon HP and Dell

August 30, 2010 Leave a comment

The world of finance likes to pretend that big deals are driven by rigorous analysis, spreadsheets and efficient negotiations. The truth however is, most deals aren’t any more sophisticated than the frenetic haggling in any Turkish Souk.

Take the ridiculous bidding war between HP and Dell for some obscure pipsqueak of a software company that hasn’t ever made a profit. The ludicrous valuations on offer clearly are not and will never be supported by any objective measurement of value like free cash flow. The prices are going so high simply because neither HP nor Dell wants to back down and lose the bidding war.

This is the primary reason most M&A deals end in failure: buyers pay too much. And when there is a rival bidder, the premium is even more preposterous. The long-suffering analysts who have to keep churning out increasingly implausible post-merger ‘synergy’ scenarios to justify the huge final price are simply the supporting cast in a testosterone-fueled game of ‘my budget is bigger than yours.’

The price paid in any M&A deal is the result of negotiation, and the balance of leverage and desperation between buyers and sellers. Rival bids put the seller in the position of choosy suitor. Like with all things in business, the social psychology of the deal trumps the numbers any day. This is why the winner of the bid has time aplenty to rue their rash enthusiasm.

Why You Shouldn’t Innovate Too Much

May 14, 2010 Leave a comment

No innovation, please.

Many businesses adopt the canard that process or product innovation is key to stealing a march on the competition. They therefore aspire to deliver stuff to customers in new and innovative ways. Fortunately for themselves, they usually don’t succeed.

That’s because people are a rather conservative breed of animal. They like things to be familiar and predictable, and often find change confusing and disconcerting. More subtly, the ‘normal’ way of doing things can be deemed to have resulted from millions of consumers voting for a particular business model until it became mainstream. Ignore the peoples’ vote at your peril.

Google learned this the hard way when it ventured into the mobile phone business with its ill-fated Nexus One phone. Being an Internet company, Google revealed a bias for the Internet way of buying stuff when devising its distribution strategy. It decided that the Nexus One would only be sold online via a web store.

Failure and low sales ensued. Google is now retreating from that ‘innovative’ way of selling mobile phones, and adopting the more traditional route of selling through mobile phone retailers. It turns out people like to see and touch phones before they buy them, and their considered set of potential purchases is the phones they see at retail.

Lesson? Don’t try to get customers to change their behavior. Your product is unlikely to be great enough for them to go to the trouble. Instead, find out how they like to buy stuff, and offer it to them through their preferred channels. It’s possible to be a little too innovative for your own good.

Iceland and The Calculus of Risk

April 19, 2010 Leave a comment

Corporate risk management is supposed to be an exact science: a bespectacled number-cruncher generates risk scenarios, assigns probabilities and impact assessments to them, and then based on its risk appetite, the firm decides which risks to accept, which to reject and which to mitigate or transfer via say insurance or other contracts.

Or so we’d like to think. The current calculus of risk of flying over Europe after Iceland belched a cloud of noxious anger into the air to protest its treatment during the credit crunch, illustrates how we REALLY deal with risk. We never do it rationally. We start with our emotional or self-interested positions, then look for data to support our views. Basically, we do what we feel like, then justify it by rationalisation and tendentious data.

When the cloud of ashy anger first grounded flights, we were ok with it. We could live with not travelling for a couple of days as long as the reason was to keep us safe. Then the costs of not flying mounted up. Airlines were losing millions by the day, corporations couldn’t do business, travellers were stuck at airports. Suddenly, rather than being the prudent saviours of peoples’ lives, air traffic controllers became ‘over-reacting’ bureaucrats.

Emotionally, we were fed up, and just wanted to fly. So KLM, Air France and other airlines sent up ‘test flights’, which proved- surprise, surprise- that it was safe to fly. We’d found the data to support the risk we wanted to take. So the lobbying began– let us fly, the airlines pleaded. Now, it looks like the authorities will cave in to the pressure and let the airlines loose to profit.

We have no idea what the real risks are. Because we present data to support our a priori positions, which are always biased by our incentives, data is meaningless. For decision-makers in business, this is just a high-profile case study on why risk management- like most systematic decision-making- is really a farcical comedy of errors. Let’s just hope nobody dies.

Differentiation and the Power to Price

March 17, 2010 Leave a comment

It’s something of a canard, the saying that people don’t want to pay for stuff on the Internet. Information wants to be free, they say. This Utopian view of an anti-economic world of free love and produce, of course belies the hard fact that e-commerce is surging at a blistering rate ($155bn in the US alone in 2009) as more of our lives revolve around the Interwebs.

In the content world of newspapers and magazines though, there is much hand-wringing and anxious perspiration. This is, because right now, people don’t pay for most news, and as this new Pew Study shows, most people are not loyal to individual sites. Most would also switch to other sites if their preferred site started charging for news.

But of course. That is hardly unique to the Internet. If a new coffee shop opened across the street from your favorite one, and offered the same coffee for free, of course you would switch. You’re economically rational. The problem therefore is the bland sameness of news websites.

Scarcity (or the perception of same) creates price, where a thing has value. This is as true for news websites as it is for lattes. The power to price comes from having a product both deeply beneficial to your target consumer, and on which you have a perceived monopoly.

The Internet is merely a harsher taskmaster than the old economy. But the survival imperative is the same. Be good. Be different. With nowhere else to go for your juicy goodness, your customers will shell out the cash.

Good Mother, or Good Manager?

March 8, 2010 Leave a comment

Why is this slacker not running a company?

If you’re a woman, and you prefer being a devoted mother to being a CEO, there must be something wrong with you. Or at least, that’s the subtext of the current woeful lamentation of the lack of women in senior management. 

This is getting a tad tiresome. The entire argument is anchored on the presumption that gender equality at all levels of business is a universally desirable- and indeed desired- goal. But we ask- says whom? 

The world of work is hardly, at the best of times, a font of joy and good cheer. Most people have to be paid to work, which suggests food for thought. If work were fun, no-one would have to be paid to do it. 

Compare cubicle slavery with helping your kids with homework, dressing them for school, sharing their jokes, foibles, pain and pleasure as their personalities unfurl into adulthood. Such is the joy of motherhood. And the desire to feel it is the primary reason many women choose not to engage in the soulless cut and thrust of corporate ladder-climbing. 

If women have been granted equal opportunity, perhaps those that choose to be good mothers rather than good managers are smarter than the activists assume. There are no immortal poems to business leadership.

Marketing Genius: How to Sell Poop for Profit

December 23, 2009 1 comment

Production facility.

Why do you buy what you buy? You probably like to think you have perfectly rational reasons. In that case, how do you explain this guy becoming a multimillionaire by selling ordinary rocks to people, in one of the greatest product fads of all time?

The answer is, we’re not rational. We just like to think we are. If we were, people like Jean-Claude Biver would be unable to sell watches for $100k simply by creating an artificial scarcity and and a thoroughly synthetic sense of prestige.

Both cases prove why brands are valuable, and why successful marketing is more than emphasising product attributes.  It is understanding the social, psychological, emotional and downright schizophrenic reasons why we whip out our credit cards. Whether it’s because we want to be seen as a good mother, fashionista, rake or rebel, we buy products for what they mean, not what they do.

This is why a good salesman can sell snow to Eskimos. And if you think that’s an exaggeration, how about this Illinois zoo doing big business selling spray-painted reindeer poop? Yes, they have indeed repackaged excrement, and people are buying it. Lesson? Never underestimate the irrationality of your customers.

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