As mentioned in my last post, I think the most interesting news going on in business is getting burried in the press.  Burried on page 73 of Business Week in an article titled $1.6 Trillion. Now We’re Talking Stimulus, to be precise.
 
Here are some select quotes:

• “But before you get stoked over just $150 billion in tax aid, forget not the huddled, cuff-linked masses, those with millions of fiduciary mouths to feed but who are too scared to spend. American CEOs, with hundreds of billions at their disposal, could make more of a stimulative difference than all of our shopping sprees combined.”
• “According to Moody’s Investors Service, a record $1.6 trillion in cash sits on the books of nonfinancial U.S. companies, $600 billion more than was there five years ago.”
• “”Management is admitting that they just see no opportunities,” says Ivan Feinseth, chief investment officer of AlphaWorks, a Manhattan hedge fund that screens investments for how efficiently they use capital.”
• “Prediction: This passivity will not stand. In a hyperglobalized, weak-dollar economy, U.S. balance sheets have never been so prone to international scrutiny. Cash is fungible and speaks all languages. It appeals to every constituency, from employees and shareholders to lawmakers and creditors, from Wall Street analysts to labor unions. Leave too much of it out there, and you will be told what to do with it.”

What does this mean in the short term?  I consider it a huge insurance policy against a crash in the market.  Companies who see their stocks dips are very likely to buy back their own stock at discounted prices.
 
What does it mean in a historical sense though?  This is the real question that interests me.  It’s alarming to hear this surplus has grown 60% in 5 years.  I wish I could dive deaper into the Moody’s report, but their website doesn’t list much stuff that you can get for free.  That aside, the numbers in the BW article tell me that companies don’t have great ideas on where to put their new found profits.
 
I will go out on a limb and guess they also don’t have the staff to charter new endeavors.  And if that’s right it means we have billions of dollars of opportunity cost queued up behind finding a class of workers that can seize working capital and launch into new businesses, even create whole new industries.  It’s ironic that at this very time Republicans are hell bent on selecting a presidential candidate that will close down our borders and want to spend billions upwards of $80 billion on fencing and law enforcement.  What if we spent just $100 million in ads around the world attracting college graduates to come to the U.S. to work?
 
I think this is also an indicment on MBA programs.  While Gross National Income is certainly one measure of their success, this $1.6 trillion is a measure of opportunities management and leadership could not harness.
 
It’s a great time to be a manager and leader, because there are more than a billion people from Brazil, Russia, India and China coming into the world marketplace.  This has been well reported by Thomas Friedman.  And now we find their is hundreds of billions of dollars waiting to be spent sitting in the pockets of corporate America.

I just got through reading this weeks Business Week and wanted to make sure to capture some things I thought were interesting so I can chew on them.
 
The splashy cover story “Credit on the Edge” details what BW thinks is a coming crisis in consumer credit.  The most interesting stat to me is the mean household credit card balance–$7,000.  That would be a lot for me to carry even on my salary.  I can’t imagine that on the median income in the U.S. of $44,389 where more than half of those homes support 1 kid (based on a median household size is 2.57)–see Wikipedia for details.
 
I was curious what the total dollar figure of consumer debt is.  The BW article didn’t include this so far as I could tell.  The Motley Fool takes a crack at this.  Their numbers don’t add up though if you  assume there are 114 million households in the U.S.  The Motley Fool number would get you a mean debt of $14,912–a full 86% more than both the BW number and Motley’s own $8,562 number.  So I think folks are either counting what constitutes “consumer credit debt” differently or are using spurious numbers for the number of households.
 
In any event, if you take the low number of $8,562 that’s really high.  In the short term I would invest in companies like Pay Day Loans and Money Tree, because they will make a fortune trying to provide liquidity for families.  Interestingly, the BW article points out these same companies are now building stores in more affluent neighborhoods they wouldn’t have touched 5 years ago.  In the medium term, I am sadly resigned that congress will step in trying to solve the problem and of course end up making it a bigger mess.  I would not want to be in the banking industry, because there’s so much uncertainty what regulation will do.  And certainty is exactly what the industry needs, since it’s the only way investors will get back in the game.  And that’s why I am sad about what our politicians will likely do.
 
So does this mean the U.S. is horribly unhealthy and in deep danger?  Part of me instinctively says no, because I know what’s really happening here: companies like Citi, Capital One and Chase in exchange for providing liquidity to consumers reap large profits.  They don’t stuff that money in their mattress, but instead either invest in new business by handing out loans or return that money to shareholders in dividends and stock buy backs.  So far America is doing just fine.  The one problem I see though is that we’re tying up a lot of human energy (and probably capital assets) spining our money around  in ways that could be easily avoided if we all just spent our money more wisely and saved enough so that we didn’t cary credit card balances month to month.  How much energy is spent on this?  It’s hard to say, but I’ll take a very crude stab.  Capital One employes 31,000 people.  They certainly do more than credit cards, but this is easily the bulk of their business providing about 75% of their net income.  That’s 31,000 people that could have been employed building other cool products or delivering fantastic service.  Those 31,000 people are put in probably dozens if not hundreds of office buildings; space tied up that could be used for something better.
 
On the balance, I think the macro economy is just fine.  I am very happy to have those 31,000 people at Capital One, because it means I don’t have to make extra trips to the cash machine.  I just plunk down my Visa and get a cup of coffee at Starbucks.  And I pay one single bill for the whole thing at the end of the money.  It’s a huge time saver for me and no doubt thousands of other people. 
 
The real news in BW was burried on page 73.  I think it’s so important I am going to give that news its own blog entry.

Part of my goal with this blog is to keep better track of ideas I have on businesses I could start down the road.
 
One of the huge opportunities is personal finance.  Here are some observations:

• The national savings rate is getting a lot more attention, and I think people are paying more attention to consumer credit debt
• I meet a lot of people who don’t understand how to make their money work for them and truly appreciate what it’s doing
  • One friend owns a condo and is reluctant to take out a home equity loan to pay for improvements in their kitchen
  • One friend thinks they should pay down their home loan faster
  • Another follows the news in the stock market and feels powerless amidst all the bad news in the press
• Internationally lots of new people are coming onto the playing field of capitalism with little training from their parents who grew up in a totally different political situation
• Lots of boomers are going to start cashing out their 401k and pensions
• It’s hard to see the forest from the trees, a lot of the tools out there today are for paying bills and managing the tactics of finance–not helping me see the big picture
  • Apps like Money and Quicken make it seem like the goal is to get things balanaced and accurately account for everything–that’s basically a giant waste of time!
• I have to log into Fidelity, Bank of America, Amex, and Chase all separately to make transactions.  Money or Quicken will aggregate data in a one-way approach, but that doesn’t really help me take action
• Whenever I listen to the radio, there is a deluge of ads for refis.  This has got to be artificial.  There really cannot be that much human value in this.  We’ve started to see a correction in this, and we’ll see more I think.

Some companies I want to explore more: Geezeo, Yodlee, Mint, Voyant, BoulevardR, Quicken, Wesabe.

Another way to think of it: what would it mean to “zillow”-ify the finance space.

Finally, and perhaps most interestingly, the advertising industry is going to grow hugely.  No one seems to be really cashing in on the notion of pay-per-spend advertising.  It’s all about pay-per-click.  There are clearly privacy issues, but utlimately their is a HUGE goldmine of information in people’s spending habits.

The Seattle Times published a version of my Exxon write up from last week today.  You can see it at http://seattletimes.nwsource.com/html/opinion/2004163444_tuelets05.html

With Exxon reporting record profits, count me as one of the few that thinks this is a good thing.  If you have a 401k, chances are you own shares of Exxon’s stock and have benefited.  The company’s largest shareholders are companies like Barclays, Vanguard and Fidelity that manage mutual funds owned by you and me.  Last year alone, Exxon returned $35.6 billion to investors.  If you wrote that as a check to each of the 113 million household in the U.S. it would be $314–talk about a real economic stimulus package!  Meanwhile our government is causing rampant inflation, with its funny money backed stimulus package.  Blame our government, not Exxon, for higher gas prices.  For those paying with U.S. Dollars, oil has quadrupled in price over the past four years.  Four years ago an ounce of gold would buy you roughly 12 barrels of oil; an ounce today would get you roughly 10.

Some observations worth pointing out and concretizing:

• Exxon reported net income of $40.6 billion over the past year.  In the past year alone, they have grown profits by $900 million.  To put just the $900 million of income growth in perspective, that’s the entire profit from a company like Safeway that operates more than 1,700 stores and works all year to make that much.
• Over the past 5 years, the company has more than doubled its overall value (i.e. market capitalization), creating over $200 billion in value to investors.  Discounting PetroChina, which is a nationalized company, Exxon is the most valuable company in the world.
• The company produces on average 6.5 million barrels of oil daily.  After refining, this is enough gas to fuel the average daily driving of some 63 million people.
• 5 years ago, the company was already one of the world’s largest.  In the past 5 years, they have managed to take an incredibly large company and double its revenue.  During the same time, profits have quadrupled.  Words alone could not convey how difficult it is to take a mega cap business like this and grow it.  General Electric, another mega cap, has tried and grown revenues just 25% and income 56%–fantastic numbers, but pale in comparison.
• Exxon is also fantastically efficient, employing 106,100 people.  This sounds like a lot, but let’s put that in perspective.  McDonalds employs more than 4 times as many people, yet has less than a 10th the profit to show for it.  Comparing inside the petroleum refining industry, it operates at a higher profit margin than most of its competitors–including BP, Chevron, Conoco, and Shell.  Average revenue per employee is a staggering $3.8 million.  Again to put this in perspective, Google–now famous for hiring geniuses–harnesses just 25% as much revenue from each employee.

There is an excellent speech by their CEO, Rex Tillerson, from a few years ago that crystallizes how their business works and the role they play in the industry.  Some of my favorite quotes:

• “By the year 2030 – less than twenty-five years from now – the world’s energy needs will be almost 50 percent greater than they were last year, driven mostly by growth in developing countries.”
• “Such growing demand for energy reflects a growing demand worldwide for escaping poverty, attaining higher standards of living and achieving greater prosperity. Energy use correlates directly with economic development, and in the hierarchy of human needs, energy ranks high.”
• “So the real question is not whether we will soon reach peak oil, but whether we can reach peak performance in the responsible production and use of oil and other fossil fuels.”
• “Every day, consumers around the globe use 230 million barrels of energy, measured in terms of ‘oil equivalent’, from all sources. Oil alone is consumed at a rate of 40,000 gallons a second. Put another way, in the time it takes me to deliver these remarks, people worldwide will have used over 50 million gallons of oil.”
• “About 55 percent of U.S. oil supplies originate in North America. No other region – including the Middle East – meets more than 15 percent of U.S. oil needs. It may surprise some to learn that the United States imports more oil from Mexico than we do Saudi Arabia.”
• “Federal and state governments in this country have ruled off-limits an estimated 31 billion barrels of recoverable oil and 105 trillion cubic feet of natural gas. And the majority of those amounts are not found in the Arctic National Wildlife Refuge. They are found in the Rockies and off many of the coasts of the continental United States.”

Forbes has publised a list of the most and least profitable business to start.

“Of the winners, little surprise that professional services–accounting, law, design and medical-related firms–accounted for eight of the top 10. Two big perks here: constant demand (no matter what the economy is doing, people will still get sick and still sue each other) and relatively low overhead. Bean counters trumped all, with a 25% average pretax margin. Next came the legal-service firms, at 21.6%, followed by dental offices (20.9%) and specialty design shops (17.6%).

Looking for causes behind low and high profits, the unstated concept of moat comes up:

Another nice thing about professional services is all the repeat customers. “If someone’s been doing my taxes for 20 years, why would I switch?” says John Czepiel, professor of marketing at New York University’s Stern School of Business. “There’s a perceived cost of switching that keeps customers coming back.”

As for those bleeding red ink, the reasons are myriad. Low barriers to entry, huge fixed and variable costs, lack of product differentiation, and little or no pricing power with buyers and suppliers are but a few.

The most interesting to me: Specialized Design Services (e.g. interior designers, industrial designers, graphic designers).  As far as the rest, I was surprised to see banking, accounting and medical care so heavily represented.  I don’t think of them as being high margin things.  I think it would be interesting to see someon take one of the less profitable ones, especially Amusement and Recreation Services (e.g. golf clubs, ski resorts, marinas, fitness centers and bowling alleys) and make it profitable.  The people I meet day-to-day are craving something fun and unique to do.  I imagine part of the difficulty there is creating something high value, but also having a margin left over.  People have high expectations when it comes to entertainment, and are none the less very frugle.

I stumbled across the book Think! by Michael R. LeGault today at Barnes and Noble.  The book caught my eye because it’s cover was an obvious play on the book Blink by Malcolm Gladwell.  I am about a fifth into the book and can’t help but nod my head furiously as I read it. 

LeGault aptly points out that there is no problem with intuition, in other words quickly summing up lots of information to make a decision.  He is careful to point out that you can only do that standing on the back of careful inspection and analysis.  It’s refreshing to hear someone who gets the integration of the two instead of trashing one and championing the other.

I am also pleased that he doesn’t talk in pure abstractions, but grounds the impact of both poor in good thinking with real consequences.  It’s so important to concretize the practicality in every day life of critical thinking.  This is really the companion book the The World Is Flat in the sense that in a world where globalization exists, we each have to figure out how to be smarter and add value.  It’s not enough to just keep doing what works, because it gets commoditized so quickly–which is a wonderful benefit to us as consumers.  All of this rings especially true to me in software development, where really understanding what you’re working with is imperative.  I can’t count the number of times where I’ve made a 10x better decision by just doing the simple analysis to look at how things work.  That settles so many design arguments that are stuck talking about floating abstractions and personal opinions.

Being an admirer of great architecture, I was interested to read LeGault’s apply his point to the rebuilding on the World Trade Center site:

A brilliant case study of egalitarian intelligence in action is the design plans for Ground Zero.  The plans have changed and shifted countless times as more people and organizations have delivered their input to the committee overseeing the plans.  The striking, twisting wedge-shaped tower originally approved for the Freedom Tower has now apparently been scrapped, a victim of security concerns.  Instead, a new design being favored for the tower is one built on a concrete pedestal, giving the building a fortresslike appearance.  The building’s design has been scorned by critics, who have called it a “nightmare.”  The fallacy in this decision is that, on the basis of one major terrorist attach in the city’s history, security should be made the main concern in the design of a new tower.  Yet, by far, the greatest risk, from a security or financial standpoint, is building a new tower in the first place.  Letting the security issue override all logic, however, the committee is seriously considering approving a building that will mark Lower Manhattan, in perpetuity, with a horrid monument to fear.

It is sad, but true.  Frank Lloyd Wright would be making the same point.  The purpose isn’t to be secure.  That is but a means to an end.  The end is a working space for humans–a temple human productive accomplishment!

I am in the midst of reading Thomas Friedman’s book The World Is Flat.  I should have read it months ago when it first came out.  It’s the rare book that I can go for long stretches reading, but this is one.  I was up until 5 AM last night and into this morning read it.

I have never felt so optimistic about where the world is going.  There is unprecedented development in East Asia where literally another 1.5 billion people are coming onto the free market playing field the west has been enjoying for decades.  Furthermore, they’re joining at a point where there are a whole new host of tools that Friedman so aptly details–not the least of which is the Internet, workflow and supply chain innovation, new devices and skyrocketing computing power and storage capability.  This isn’t just new technology; it’s a shift where people are no longer constrained by the nation/state they happen to be born in (or at least less and less so).  Individuals drive economic development with their own ideas and innovations.

That is really the great story behind this, and also one of the disappointments of Friedman’s book.  He makes all these great observations, and then almost completely ignores them in his next chapter “America and the Flat World” where he gives policy advice for the United States.  In one breath he’s saying you have all these new tools and opportunities and then in the next he’s saying George Bush needs to champion energy independence.  Well to some extent he already has, but regardless: don’t wait for him to do it!  Anyone who wants to make a difference and enjoy wealth has to make their own choice to get in the game, engage and add value.  Waiting for congress or the president to act is a waste of time.  If anything, their focus should be on getting out of the way.

Anyway, Friedman is redeeming himself in my mind now, because in the next chapter he talks about how simply advocating capitalism wholesale isn’t enough, as a country you have to create the stability and environment where people can succeed.  If it takes 6 months to start a business in your country and 2 weeks in China, guess who’s going to win.  If it takes 2 years to recoup losses from a breach of contract in your country and 3 months in America, guess who’s going to be more competitive.  This is so dead on, and why it’s more than just lip service to free markets that is needed.  Ironically, I took a break from reading to see an interview with Milton Friedman on Charlie Rose from last night, and he was saying the very same thing: that for all of America’s problems, this is still a great place to do business because of the stability of an investment here.

I just finished reading Frank Lloyd Wright’s autobiography.  This was an awesome book, and I kept having moments along there way where I would cheer one of his brilliant statements.  Some of my favorite quotes…

“But whom are you goign to build homes for?  If you go against their wishes and try to give them what you think right and not what they thing they want?”

“That’s just where a wise creator comes in, Cecil.  I won’t need but one man in ten thousand to work for–even one man in a hundred thousand would keep me more than busy all my life, because that man will need me as much as I need him and he will be looking for me.”

…

Nine pounds where three are sufficient is obesity.  But to eliminate expressive words in speaking or writing–words that intensify or vivify meaning is not simplicity.  Nor is similar eliminations in architecture simplicity.  It may be, or usually is, stupidity.

…

Only where culture is based upon the building of character by freedom-of-choice will we ever have a culture of true democracy.

…

First came the philosophy of the thing in the little story repeated to the trustees.  All artistic creation has its own.  The first condition of creation.  However, some would smile and say, ‘the restulf of it.’

Second there was the general purpose of the whole to consider in each part: a matter of reasoned arrangement.  This arrangement must be made iwth a sense of the yet-unborn-whoel in the mind, to be blocked out as appropriate to concrete masses case in wooden boxes.  Holding all this diversity together in a preconceived direction is really no light matter but is the condition of creation.  Imagination conceives here the PLAN suitable to the material and the purpose–seeing the probable–possible form.

Imagination reigns supreme, when now the form the whole will naturally take, must be seen.

Wow, I’ve been really latent in posting blogs, but I guess I have to get started again one way or another.  I am actually at a conference this week, so I am getting a chance to lift my nose up from the work immediately in front of me.  I wrote a mail to my team about the conference, and thought it would be fun to share it more broadly.  Here are my notes…

I am attending the Front-end of Innovation Conference here in Boston as a training exercise this week, and thought I’d share some of the thoughts from today with the PM team in case anyone was interested.

Interestingly, the conference started with a quick presentation from Lego.  Everyone got a free set of building blocks and was encouraged to “fiddle” with them while presenters talked.  Their theory being that since the hands are connected with 70-80% of your brain this must be a good thing to use your hands while learning (hmmm, non-sequitor perhaps?).  Anyway, I did think it was poignant that as kids it is easy to just start building whereas we kill a lot of that spontaneity in business by assuming there must be immediate results with a clear plan of action.  It’s also interesting to think what would happen if we brought Legos to our next design meeting… hmmm J

The first in-depth presentation was given by the CEO of Clorox, Jerry Johnston.  He walked through how Clorox has used innovation to go from a $60 million revenue company in 1969 to $4.3 billion in 2004.  These results are all the more impressive, because Clorox is relatively small compared to some of the companies it competes with such as Gillette or Proctor & Gamble, spending far less on R&D.  The presentation went on to focus on how three myths are really not true:

Not surprising, this starts with identifying a company’s purpose, and then developing a product portfolio that aligns to that purpose (i.e. don’t innovate where you’re company isn’t setup for success) and then lastly a set of strategies to engage in those areas.  It was interesting to hear just how much he emphasized staying close to customers, not only in the beginning of the design phase but throughout and not only with marketing but with the developers of the product.  It sounded like I was listening to Soma for a minute.  The product team used their touch with customers to come up with insights (e.g. want a way to control application of bleach) and then turns those into requirements for the product.  In the case of bleach pens, they took a product that sells in bulk for ~$2 and marked it up to $4.  Not only that, but they created a whole new category of products.

Johnston also combated the myth that you have to throw lots of ideas up against the wall and see what sticks.  By cutting the number of projects the company invests in, Clorox is able to focus 50% more resources on the remaining projects and derive 50% more value out of them.  They recognized that in several categories they didn’t need whole new products or platforms, but rather just needed to innovate in their marketing or partnerships.  This was an eye opening point, because I often think of innovation being about developing a whole new product or at least adding features to it, where as in actuality you can milk more value sometimes by simply targeting a new area for marketing (e.g. get people excited about BBQ’ing during football season, in addition to just the summer boosted the bottom line for their charcoal business).  This is actually a great example of why our effort with aftermarket solutions is so critical.  While we’re heads down building new products for 18+ month cycles, there are significant things we can do to enhance the value of products that are already on the shelf.

Peter Senge, who authored The Fifth Discipline, gave the next talk.  He focused on how companies create learning organization, which in turn unleashes increased potential for innovation.  Senge touched on several subjects, so there wasn’t necessarily a consistent thread.  He posited early on that most challenges are not technical ones, but rather social.  The more interesting point he made is analyzing Peter Drucker’s take on innovation management, and why people fall short so often.  Drucker broke down innovation management being a process of:

• Have a clear mission
• Define significant results to achieve
• Continually assess progress

This sounds brain dead simple, but surprisingly often key parts of this are missed.

Senge started by focusing on how many companies start with great missions and values, but when you really talk to people on the ground floor the company moves to a different beat.  One enlightening example was a t-shirt he saw: on the back it outlined the company’s key values such as honesty, integrity, focus on the customer, etc; on the front was the Enron logo.  So often the focus is on “just make money anyway you can and go from there”.  I thought it quip back was interesting: “Money is like oxygen.  Companies need money to survive, but likewise no one lives just to breathe.”  While he’s creating a bit of a false dichotomy, my take away is that you have to appreciate both the path and the destination—they are both connected.  If all you appreciate is the destination, you’re going to be really bored and frustrated on the long journey.  Conversely if all you enjoy is walking on paths, but don’t have a direction (i.e. profitable business) you’re not going to go anywhere either.  This makes me glad one of the key things we focus on at MS in our interview loops is fundamental passion for software and technology.  It’s amazing how so many things will just take care of themselves when you bring in people who are intrinsically motivated rather than extrinsically motivated.  Senge suggested asking yourself a question to reconnect with your company’s core mission, “Who would miss you if you were gone tomorrow?”  This is pretty illuminated for MS, since so many people run their business on our software.  And this is also why managing the product across it’s lifecycle and servicing it is so important for MS.

He spent the rest of the talk focusing on how people mess up the feedback loop between choosing results to go after and measuring progress against them.  Assessment is about objective information that is taken and internal judgment that is applied to it.  So often we come up with a pre-canned judgment and find the data that justifies it.  For example, I desperately want to lock down my spec, so I’ll argue with anyone who says I need to explore a whole new area.  Meetings then become an exercise in arguments where “listening” is “that time where I am waiting to talk” rather than really processing what’s being put on the table.  This boils down to the difference between “discussion” and “dialogue”.  If you really study the etymology of those words, you see that “discussion” is about “breaking apart” and not surprisingly results in arguments.  “Dialogue” comes from the Greek words dia and logos, taken literally it means meaning coming through—letting the dialogue be about getting to a heightened understanding rather than proving a preconceived notion.  He cited the book Car Launch, which looked like an interesting place for more depth on the topic.  The example he cited from there is two teams in the same auto company that at first tried short term fixes without talking to each other; each fix caused ripple effects that hosed the other’s business model.  When the teams looked for more fundamental solutions, the re-work was reduced.  This is sooooooo evident in the work that we do where we are constantly affected by other teams that make short sighted decisions without engaging to see what partners they’ll affect.  I am curious how other companies are able to tighten the loop here while still maintaining a bottom-line efficiency.  There weren’t obvious lessons from the talk, so the book might be insightful.

The highlight of the day was getting to hear a Q&A session which Jack Welch, which really had little to do with innovation I thought and more just a great primer on how leadership works.  Welch is of course the former CEO of General Electric who oversaw the company as it rose to the most valuable publicly traded company in the world with something like a $400 billion market cap (MSFT is #2).  He talked a bit about how he strived to make GE a boundary-less organization where compensation was changed from bonuses to be stock option focused.  This was teams would be willing to give up stars so that the bottom-line paid off.  Interestingly, even though MS employs a stock award model, I really wonder if we get all of the result we should in terms of motivating teams to make the right calls for the company rather than their team.  While I think we hire people that try to do the right thing, there’s really not a tightly matched reward system.  Interesting food for thought….  Welch was all over the place given the question, but a quote I jotted down that I really liked comes to mind: “gut instinct is really just pattern recognition”.  I thought that was a great distillation of something that many people get confused and wrapped up in.  In fact the #1 thing that impressed me about him is how he took complex things and made them simple.  I think it’s no surprise why he was so successful as a CEO when you see this in action.  I thought this was shown even better when he cited another anecdote: while talking to heads of Human Resource departments he asked how many got more time with the CEOs than their CFO peers.  Of course none of them raised their hands, which really didn’t surprise me given the focus on financial results.  Welch pronounced this is “nuts”.  He used the analogy of a sports team, ‘no one in their right mind would you so much time talking to the score keeper when they could be developing their team and acquiring better talent.’  When left in the domain of corporate strategy it’s hard to see this, but Welch’s analogy to sports makes it so clear why developing people is vastly more important.  My other final enjoyment came when an audience member cited a report speculating how America will need more innovation in the 21st century to compete globally and then asked who Welch thought is responsible for this, as if it was some centrally appointed person or a government agency that needed to be formed.  Welch said simply: “you!”  Everyone in America is responsible for innovating.  He pointed out that the only job security is customers, not companies—something that’s so true, yet so under appreciated in America.

Speaking of America, over lunch we listened to Sir Harold Evans talk about his book They Made America.  He started by noting how many critical inventions originated in England, yet only became commercially successful when they were spun up in America.  Throughout the talk Evans focused on the difference between invention and innovation.  The former is useless until the idea is taken into the marketplace (i.e. until innovation happens).  It was fascinating to listen to someone with such great conviction and recognition of this, since Microsoft is really one of the greatest examples of this.  We are infamous for not inventing, but in truth I think our greatest inventions are about realizing how to make software fit into the marketplace and what customers really value.  The key distinguishing characteristic that Evans identifies is the ability innovators have to be system builders.  They don’t just have a great idea in singularity, but rather figure out how to fit it into the broader fabric of society.  I can’t remember the exact invention, but he cited the notion of the innovator who during the nineteenth century gave farmers his harvesting tool for free initially with a promise that they would pay after their harvest, recognizing that farmers would never be able to afford it until after they reaped the benefits.  This seems obvious in retrospect, but in truth was the first time an installment plan was ever used in business.  One of the surprising points is that innovation is not black magic, it’s right in front of you.  The installment plan idea is really not so amazing, so much as it is a careful attention to reality and the current needs of the moment—you just have to open your eyes wide enough to see it.  After lunch, I snagged the opportunity to meet Jack Welch who was sitting right in front of me.  It was cool to shake his hand and say “hi”.  He was very gracious.

The last talk of the day I sat in on was given the by VP of product development at Visa USA.  Reiterating the theme throughout the day, she focused on how she took front-end product development which was black box or “the cloud” at Visa and turned it into a more predictable process.  Her first point was to focus on what the competition really is, not just in terms of obvious competitors for them (e.g. Mastercard, American Express) but other forms that compete (e.g. writing checks, paying with cash).  For software this is obviously critical, since we’re often supplanting something that has no direct competitors in the marketplace.  She went on to discuss various strategies for choosing where to introduce innovation:

Pain Point Analysis: this is what it sounds like.  You figure out what the pain points are for the customer and identify possible solution.  However, you have to focus on the root problem, not just the symptom.  If the root problem is outside the domain of your product (e.g. it’s the banks issue or government regulation), you might not want to go after solving the symptom since the value generated is limited.

Lever analysis: this boils down to recognizing that there are several layers in the stack where you can introduce innovation…

Promote existing product
 Could be a change in messaging or going into new channels.
 
Modify existing product
 Could be a change to the fees or enhancements to the structure
 
New platform
 Could be a whole new product platform or technology
 

Often people jump to the conclusion of going after a whole new platform, when it might suffice to simply promote a product that already exists in a new way.  I was thinking how in the acquisitions space, you can align the acquisition to one of these categories.  Pointcast, which was acquired in the dot com boom for ~$1 billion, is arguably just a new feature in IE, not a whole new platform.  When you reconcile it in those terms, it’s easy to see that’ s a ludicrous amount of money to spend.

FRCP: this system postulates that customers decide which product to buy in a hierarchical fashion, first on function, then reliability, then convenience and finally on price.  If you’re losing to competitors you have to figure out where in the stack you’re losing.  If you’re losing on reliability, you’re wasting your time trying to make your product cheaper.  It’s also worth noting that function and price are easier to clone since they are externally visible, whereas reliability and convenience are harder for competitors to clone.

That was all for the day.  Time for me to get some sleep and get ready for tomorrow.