Doing Business Boldly

Doing Business Boldly by Daniel Kehrer

In one line: Businesses must be willing to take risks and capitalize on new opportunities to survive and grow in the ever-changing modern business environment.

The Heart of Business Risk

Creative Destruction
Capitalism is about change, not just creation, and requires active risk-taking. Often the biggest risks with the greatest opportunities require drastic change to old products or practices. Resisting change can be a bigger risk to a company's survival than trying something new.

Risk-Taking Reconnaissance
Having the right information is crucial to taking smart risks, but there is never perfect information. It is easy to fall into the trap of analysis-paralysis, and decision-makers must realize when they have enough information. "One lesson of risk dynamics is that risks are most treacherous when decision makers act as if they're not taking risks, when they really are" (p18).

High-Flex
Active Risk-takers (ARTists) must be flexible and adapt to changing situations. A flexible ARTist can adapt and take advantage of new information or situations, and things rarely go according to plan.

Championing Change
Change is constant, and ARTists must embrace and push for change when it is needed or advantageous. Neither products nor markets have infinite lives, and what is hot today may be obsolete tomorrow.

Paying the Price

Active, Not Passive
Risk tends to be seen as universally bad and to be avoided. Risks often represent opportunities, but should be perused intelligently. Companies that take more risks innovate more, because they are willing to do and try what others are not.

Seeing Rewards over Dangers
Danger or risk can represent an opportunity, but the mind perceives gains and losses differently (Prospect Theory). Risks should be evaluated based on reality, not perception.

Taking Responsibiltiy
Successful ARTists must and do take on responsibility. Most people avoid responsibility, because they prefer freedom from choice over freedom of choice.

Risk is Contrarian
Innovation is inherently new, which means being contrarian and bucking a trend or going against the crowd. Its success is very hard to predict. This means that taking a risk to capture a new opportunity often means going against the crowd.

Seeing Through the Risk Mind

Thnking and Perceiving Differently
ARTists perceive risk as opportunity, and see risks from multiple angles, and different angles than most other people and make connections that others don't. They also have a strong desire for competence and making an impact

The Spirit of Wealth Creation
Wealth is created by taking risks. An individual or company must choose the right risks for themselves. Companies often fail because the try to do too much instead of focusing on doing a few things very well. Taking too many risks, or taking unwise risks, can be worse than taking no risks.

Grasping Risk's Geometry

Perception of Control: An ARTist's Paradox
ARTists have the confidence that they have influence over the risks they take. They don't always have any control at all, but the perception of control is more important psychologically than reality. People generally have a self-perceived internal or external locus of control. Those with an internal locus of control believe that they can influence the outcome, and tend to take frequent but calculated risks. Those with an external locus of control believe that outcomes are out of their hands and up to fate. They take fewer risks, but those that they do take can be very large.

Sharing Risk: "Other People's Money" and "Other People's Brains"
Reducing risk is different from reducing a risk's effects. There are several ways to mitigate a risk's effects:

• Pursuing the risk as a joint venture with partners
• Constantly reviewing the situation to make course corrections
• Having the flexibility to respond to changing circumstances
• Acquiring information to better inform decision-making

Confidence is crucial for intelligent risk taking, but self-reliance to the point of believing that one can do it all can stifle intelligent risk-taking and lead to narrow-mindedness. Use other people's money or brains to complement your own resources.

The Flip side of flops
Risk-taking is a process of trial and error, and failures are inevitable. As the adage goes, you learn more from failure than success. Perfectionists who strive for an impossible goal make poor risk takers, because they are terrified of failing to meet a goal they cannot accomplish.

Risk-Taking Tactics

Quick on the OODA Loop
The OODA loop is a decision-making framework from the US Air Force composed of four basic steps: Observe, Orient, Decide, and Act. These steps must be taken to make a decision, and to respond quickly to a situation, one must take these steps quickly. Some companies have created cultures of "intrapreneurship," or entrpreneurship within a company. This pushes decisions down the chain of command so that the company can respond more quickly, and requires a healthy appetite for risk taking by lower level managers.

Risking from Strength
ARTists should play to their strengths when taking intelligent risks, to take advantage of their natural edges.

Follow Trough
Comfort and overconfidence destroy risk takers. Taking the right risk is insufficient for success by itself; intelligent risk taking requires good execution and follow through.

Revolutionary Risk

Making Mental Measurements
Entrepreneurs have to know how to take the right risk, and when to abandon an idea (know when to hold 'em and when to hold 'em).

Freedom: Concomitant of Control
Management is shifting from control to experimentation, risk taking, and providing the freedom to act. Fast action is necessary to take advantage of new opportunities as well as having the freedom to do so.

Seeing the Big Picture
Risk-taking is active; risks must be sought out to make investments. Risk-taking is continuous; ARTists constantly face new risks and decisions, even throughout a single "risk" taken by pursuing a particular idea. Bigger risks don't necessarily mean better ideas. Risks can become opportunities when you broaden your scope and look at the big picture.

Fixing the Game

Fixing the Game: Bubbles, Crashes, and What Capitalism can Learn From the NFL by Roger L. Martin

In one line: Misalignment of management incentives has caused many corporate executives to manage the financial markets' short-sighted expectation of share performance, rather than focusing on customer satisfaction.

Incentivizing managers with stock options leads them to manage a company's share price. If company performance falls below market expectations, sunken share prices hurt them financially. If performance exceeds expectations, share price rises, but the bar of expectations is raised and harder to achieve, making future under-performance more likely. As a result, managers try to match expectations, sometimes to the detriment of corporate health and long-term growth.

Using a sports analogy (specifically, from the NFL), this is akin to professional coaches being compensated on whether they covered the point spread, instead of whether they won the game. The point spread arises from the expectations of bettors. Regulations prevent players and coaches from betting on games, to remove any incentive connected to the point spread, allowing them to focus solely on quality performances to win games; i.e., give the fans (customers) a good show (product).

Five things can be done to fix this problem:

1) Shift companies' focus from shareholder value to customer satisfaction.

2) Restore authenticity to the lives of executives.

3) Address board governance.

4) Regulate and manage expectations markets more efficiently.

5) Business executives need to take a more expansive and positive view on the role of for-profit companies on society.

My comments:
Companies exist to make money for their owners (shareholders). Companies cannot exist very long without profits, and profits cannot exist without customers. The best way to ensure long-term profits is to build an adequate base of happy and loyal customers. A view of shareholder value that depends only on short-term results and the next quarter's earnings is myopic at best. Instead of ignore shareholder value to focus on customers, companies should focus on customers to maximize shareholder value. It is easy to maximize customer satisfaction with no eye on shareholder value: give the product or service away for free. Just as with a myopic view on shareholder value, this does not work very long.

The book poses an intelligence issue is as a moral issue. To increase long-term shareholder value (the purpose of stock options for executives and employees), a company needs happy customers to keep returning and spending money. While some executives are surely greedy and parasitic (as are many politicians), this is not the overall problem. The myopic incentives of playing to short-term expectations come from market participants and analysts dramatizing corporate performance (think any TV financial news programs).

The NFL analogy is apt, but not for the reasons given in the book. NFL regulations on betting prevent a game from being treated as a gambling business, but dramatization of markets and business performance (especially under the guise of giving an edge to the average investor) treats business like a betting game.

The Rational Optimist

The Rational Optimist by Matt Ridley

In one line: The progress of human civilization is largely due to specialization (division of labor) and exchange (of goods, services, and ideas).

Specialization and trade
When a person specializes in a certain task, they can get better and more efficient at it. Exchange allows them to trade their good or service for other goods or services he or she needs. Through specialization, two people can together produce more in less time than if they each worked independently. Prosperity is increasing the amount of goods and services one can acquire with the same amount of work. "Self-sufficiency is poverty" (p 41) because it greatly limits the amount of goods or services you can consume. Moving from self-sufficiency to interdependence through specialization and trade leads to prosperity.

Human civilization has become vastly more prosperous than our ancestors, and will continue to increase in prosperity for the foreseeable future.
The four basic human needs (food, clothing, shelter, and fuel) have become much cheaper in the past two centuries. Cost is better measured as the time or amount of work required to afford something, rather than monetary value. Not only do we earn more today than ever before, but we also have many more goods and services available to us.

Human civilization evolved through trade.
"More than any other animal, human beings borrow against their future capabilities by depending on others in their early years." (p 29). Hunter gatherers specialize in food that needs to be extracted and processed, and tools of sharpened rocks and bones and cooking techniques made this more efficient. Being able to more efficiently fuel the brain, allowed it to grow larger in proportion to stomach size. The increasing ability to specialize gave rise to what Friedrich Hayek called the catallaxy, "the ever expanding possibility generated by a growing division of labor" (p 56). Trade enables "collective brains" - collectively, a society with specialization (and hence trade) can learn and contain vastly more knowledge than a group of individuals who all know the same things, but live independently.

Morals from trade.
Trade requires trust, which goes hand in hand with reputation. The claims of products of a company with a reputation to protect can be trusted because it is in the company's self interest to produce a quality product. When people grew dependent on the market in the 19th century, was when slavery, child labor, and many forms of cruelty became unacceptable. Mechanizing housework allowed housewives to spend less time on the same work, giving them more free time, helping give rise to the feminist movement. Without institutional restraints on violence between people, it is normal for it to happen. There is a lot of evidence that primitive societies throughout history were often at war with each other. In developed societies, violence makes the news precisely because it is so rare.

"Trade comes first, not last." p128
Trade made agriculture possible because it encouraged the specialization of farming. Cities grow around centers of trade. Exchange of ideas leads to technological advancement. Trade enables all of the benefits of civilization.

"Merchants make wealth - chiefs nationalize it." p160
Trade doesn't arise from central planning - it emerged from the interactions of individuals and evolves to fit the needs and the products of the time. Monopolies are not good for the economy - it promotes stagnation rather than innovation and a defensive hold on the monopoly. Strong governments are essentially monopolies and stagnate innovation. Political fragmentation of market participants can actually be more helpful than harmful, because it prevents the takeover of a central power. "According to Angus Maddison's estimates, [China] was the only region in the world with a lower GDP per capita in 1950 than in 1000. The blame for this lies squarely with China's governments" (p180). China was generally more prosperous during times of political instability or fragmentation. united strong governments tended to be highly restrictive.

Markets can fail, but so can governments. 
Markets work well for goods and services for immediate consumption, but not for assets, which are prone to bubbles. Governments, by being monopolies, do not have interests aligned with their citizens. They stifle innovation and seek their own self gain. When population boom forces down the price of manual labor, people replace animals or machines for certain jobs, leading to a reversal of economic progress. Restrictions on immigration and emigration prevent overcrowded people from moving to places where they could better contribute, leading to both populations being more self-sufficient than they otherwise would need to be.

Economic progress and lower mortality is leading the world to lower birth rates, slowing population growth.
There have long been fears of overpopulating the world to unsustainable levels, but declining birth rates are making this risk more remote. The exact reasons for this decline in birthrates is largely not understood, although there are theories on the contributing factors (health, wealth, education, urbanization, and emancipation). Lower mortality means women can have fewer children knowing they are more likely to survive. Increased wealth affords other distractions from making and raising children. Population stabilizes when we become more well off and it appears that birth rates settle around 2 children per woman in highly developed countries

Energy fuels society and its progress.
Before industrialization, societies used mostly renewable resources as fuel (wind, water, sun, trees) but their energy capacities were too low. It wasn't until the use of nonrenewable coal and petroleum that energy sources had the capacity to fuel large economic and technological advances. Renewables produce less energy but don't run out; petroleum is finite (but vast) and produces much more energy. "By 1870, the burning of coal in Britain was generating as many calories as would have been expended by 850 million laborers" (p 231). This energy allowed people to do even more with less effort, increasing propserity, and raising the income across all classes during the industrial revolution. Factory workers in the early industrial revolution had horrible conditions, but people still flocked to factories because their prospects were better than in rural farming communities.

What about environmental impacts?
There is no doubt that fossil fuels harm the environment, but they have vastly increased the prosperity of most people on earth. Fossil fuels also reduced the amount of land required to produce the same amount of energy, sparing deforestation and farmland. 'Green' energies require vastly more landscape to produce. The potential for climate change is the only argument for "green" energies actually being better for the environment than fossil fuels

Innovation: "The more you prosper, the more you can prosper. The more you invent, the more inventions become possible." (p248).
Science does not drive invention, but rather the other way around. "A large study by the Organisation for Economic Co-operation and Development concluded that government spending on R&D has no observable effect on economic growth, despite what governments fondly believe" (p 269). Innovation responds to needs and opportunities, and thus requires exchange - of ideas, and goods/services with demands/opportunities. "Ptolemaic astronomy was ingenious and precise, if not quite accurate, but it was never used for navigation, because astronomers and sailors did not meet" (p 270). Great minds (scientists, engineers) don't magically appear in the same place - they are drawn there by the ripe conditions for discovery and progress (Britain of the industrial revolution, silicon valley of modern day). Knowledge is not bounded, but can restrict prosperity growth if it stops growing.

Africa and climate change
Warnings of impending doom often result from a simple extrapolation of the current situation, but the world is ever-changing. Climate change has real and impending consequences, but is unlikely to be the cataclysm that many make it out to be. Both global cooling and warming were claimed to be disastrous, implying that the current temperature, which has constantly changed through history, is perfect. A small risk of catastrophic climate change does not warrant the disproportionate attention that it receives over other rare, but large disasters, such as asteroid collision. The deaths caused by pessimistic predictions of global warming are dwarfed by the current deaths from every day causes (traffic death, obesity) and undeveloped societies (malaria).

Much of Africa is in a serious position, caught between poor development and climate change. The poor are hit hardest by natural disasters, but also by high energy prices. Reducing emissions raises energy prices, but the increase in energy consumption required by an increasingly prosperous African economy raises the risk of climate change effects. Foreign aid does not solve the issue, as it encourages corruption within governments rather than entrepreneurship. "Aid to Africa doubled in the 1980s as a percentage of the continent's GDP; growth simultaneously dropped from 2 percent to zero" (p 317). Governments need to change to create the conditions for prosperity. Protected property rights explains much of the economic growth throughout the world, when people can work to build their property rather than protect it from theft. Effective laws that promote growth are not mandated from the top down, but evolve from the bottom up, transforming productive customs into laws.

"The bottom-up world is to be the great theme of this century" p355
People are more informed, have more choices, share and collaborate more, and acquire and disseminate information on demand.