Jun 19, 2024 | Change, Governance, Leadership
Many years ago, I worked for Dairy Farmers Ltd. It was a large dairy co-operative operating in the dying days of milk regulation in NSW. The business had two divisions, reporting at EBIT. The first and biggest by a very large margin was the regulated milk business.
All milk produced in NSW at that time was by regulation vested in a statutory authority, which then ‘sold’ the milk to processors to be processed and distributed as fresh milk. It was a highly regulated and price-controlled industry from the cow to the consumers fridge.
Milk in excess of the requirements for fresh milk was termed ‘manufacturing’ milk. The farmers were paid directly by processors at a market rate.
At the time, the price paid by the diary corporation for fresh milk was roughly 2.2 times the price the co-operative paid for manufacturing milk by the second division, the Dairy Foods division that produced all dairy products beyond fresh milk.
Manufacturing milk was unregulated in any way beyond food safety.
The commercial imperative for the dairy farmers was clear, albeit not viable long term.
After 8 years of struggle, the Dairy Foods division had recovered from being a commercial basket case, one step from the corporate mortician to a significant and profitable player in the national market. The culture that supported that huge improvement was highly competitive, productivity focused, and financially disciplined. By contrast the milk division was a cost-plus business operating as a regulated monopoly, and so had become fat and lazy.
A newly arrived Managing Director decided to merge the two divisions. His reason, supported by a report by a highly paid consultant, was that the commercial culture of the dairy foods division was needed to be patched onto the milk division, facing the reality of deregulation at some point.
As a newly appointed GM of the dairy foods division after those 8 long years of struggle, I resisted this change as strongly as I knew how. I argued that culture could not be ‘copied and pasted’ from one organisation to another, even those working under a common ownership and centralised head office structure that allocated capital. It seemed to me that the much larger still regulated business would reject the completely different culture of the smaller unit, which would in turn erode the competitive culture of the dairy foods division they were trying to spread.
That is what happened, resulting in Dairy farmers becoming another sovereign corporate casualty.
- Processes that ordered, allocated and paid for milk for the regulated fresh market dominated the cash flow of the merged divisions. The Dairy Foods division cash flow processes and management became lost in the quagmire of the regulated cash flow of the much larger former milk division. Focus and discipline went out the window.
- The board of the business, was made up of farmers with 2 exceptions, the chairman and MD. The rest of the board were dairy farmers who unanimously rejected the notion of deregulation. It was clearly in their short-term financial interests to retain the existing regulated system. There was simply no formal recognition that the regulated system was an economic basket case. Privately, several of the board members did recognise that fact, but the power of the status quo prevailed formally.
- Major customers, the supermarket retailers were able to bring significant pressure onto trading terms given the previously completely separated divisions were now one. This pressure seemed to me to be a catalyst that brought forward the date of deregulation. The retailers started to bring fresh milk across the border from deregulated Victoria, and discounting in NSW in defiance of the state regulations, citing Section 92 of the Australian constitution, which bans constraints on interstate trade.
- The financial discipline beyond managing cash flow exercised by the former Dairy Foods division was lost as the reporting was merged. It was further complicated as Dairy Farmers set about ‘merging’ (Co-Operative speak for taking over) other Co-ops in NSW, QLD and SA. These co-ops were all different, but all were afflicted by lack of commercial and competitive focus on customers and consumers.
All of these point to the fact that culture is organic, and like all organic systems requires time, investment, alignment across the broad stakeholder population, and nurturing.
What should have happened but did not.
- There was no attention paid to the differing cultures that existed. Little useful thought was given to the practical challenges of merging them. The merger came via announcement, and a revision of the organisation chart. The two were simply incompatible. While a sensible review would have highlighted that fact, it was ignored.
- There was no integration plan that ranged from the strategic to the tactical and operational. Again, it was driven by the revised organisation chart, with little effort made to successfully articulate the reasons for the merger to anyone, including senior management.
- Any attempt to articulate a ‘vision’ for the merged entity was missing in action. The justification was all about the imagined financial benefits that would flow, and the risk mitigation coming from the probable deregulation of the fresh milk business at some future point. Both were reasonable expectations, but there was no thought about how to turn reasonable expectations into cash. Somehow, by some unknown osmotic process, it was supposed to just happen.
- There were no objectives for the integration that reflected the strengths of both, the holes that needed filling, and the resources necessary to achieve the restructured strategic objectives.
- There were no financial or operational objectives beyond budgets generated by spreadsheet aiming at an EBIT that was by decree, rather than by any disciplined process. The budgets of the two separate divisions were just merged, with the mythical improvement index applied.
- There was always going to be considerable resistance from both sides of the merger. Almost universally, (most certainly by me) the merger was seen as a retrograde step, ignoring the very different challenges faced by the two entities.
The great irony I see from the perspective of 30 years, is that Bega Co-operative virtually broke on the back of cheese factory expansion that had run significantly over budget, was saved by a cash injection by Dairy Farmers. Bega has since evolved into a major producer of branded packaged goods to supermarkets. Dairy Farmers has disappeared as a commercial entity.
The lesson: Cultural change is complex, messy, and potentially terminal in the absence of skilled leadership, complete transparency, and what at the time would seem to be significant over-communication.
Header cartoon credit: www.Gapingvoid.com
Jun 14, 2024 | Communication, Governance
You cannot expect the right answer to come from the wrong question.
Too often we spend inordinate amounts of time trying to answer those questions before we understand the context or the ‘frame’ from which the answer will come.
Before anything else, to ensure the best answer possible, consider all the ‘frames’ through which the situation in front of you could be seen. Hypothesise what alternatives to the immediately obvious could be possible that might drive the situation you are examining.
Several months ago, early on a summer Saturday evening, I was walking my dog. As I passed the church at the end of my street, I saw a vague acquaintance crying.
There were a few other people milling around, so I just made an assumption without realising that is what I had done, and offered to help if I could. Her response was that she was Ok, crying for joy, her first grandchild had just been baptised.
Clearly the question that popped into my head led to an entirely to the wrong conclusion that her crying was from distress.
The frame through which I observed the woman crying led to making an automatic, but incorrect conclusion.
How often in our commercial lives do we ask questions which just assume the presence of some factor, when in fact that assumption is wrong?
The lesson here is make sure you have the context right before you start coming up with answers.
Header credit: Tom Gauld at www.tomgauld.com
Jun 11, 2024 | Analytics, Governance
Goodhart’s law is a much quoted adage that states: When a measure becomes a target, it ceases to be a good measure’.
When we see numbers cited as evidence, we tend to instinctively give them more credibility than they may deserve. Without an examination of the source and scope of the numbers, just believing them on face value can lead to very bad choices.
Charles Goodhart is a prominent British monetary economist. His public profile started as a footnote to a 1975 article and read: ‘any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes’. It took on its now well-known form, above, when restated by an anthropologist seeking to link the idea to a much wider context than economics.
In almost every business I visit, I see examples of Goodhart’s law. The most common is the use of EBIT as a measure of success. The reality however, is that it is simply a financial measure of the outcome on the myriads of smaller actions and decisions that have been taken in the deployment of resources.
Two of the most public failures of measurement should make us all wary of using quantitative targets as a measure of performance.
The 2010 Volkswagen software scam. VW installed software in a range of cars with their turbocharged direct injection diesel engines that ensured that when being tested, the cars made the emissions standard of the US EPA.
The Vietnam War body count. The US defence department sought to justify the billions of dollars and thousands of lives expended in the defence of a corrupt government in South Vietnam. The measure became the body count of VC fighters and North Vietnamese regulars, which led to wholesale slaughter. These imaginary and bloody numbers were used for years as the basis for increasing commitment. It finally became obvious that they did not in any way reflect the ability or willingness of much of the population to fight what they saw as aggression by the US.
There are thousands of examples. If you looked, you would see them every day, especially when politicians open their mouths and quote numbers.
Header Photo: Charles Goodhart. Professor Emeritus at the London School of economics.
PS. When you look at the header, Dr. Goodhart is looking directly into your eyes. You will tend to believe anything he tells you.
Jun 5, 2024 | Governance, Leadership, Management
The word ‘argument’ has many meanings, depending on the context. It can mean a friendly difference of opinion, a negotiation point, a statement of reasoning a lawyer might use, to an expression in a mathematical formula.
A quarrel is far more specific, requiring a disagreement, the cause of which is often lost in the chaos of emotion a quarrel elicits. The only other meanings of the word I can think of is as a collective noun for a group of energetic and opinionated mammals noisily exchanging insults, such as monkeys, squirrels, cooks, and lawyers. It also refers to the tip of a crossbow bolt.
There is a standard three step formula for making an argument stick in the minds of the receiver. It is evident in every news cast you ever heard, the ‘newsreaders secret formula.’
- Tell them what you’re going to tell them. This is always called ‘the headline’.
- Tell them. The story, or series of stories.
- Tell them what you told them. Restate the headline, and any conclusion or resulting actions that emerged.
To win an argument, as you would a negotiation, debate, or in court, you need to modify the news readers trick by adding a step.
That step is analysis of a guiding fact, or set of facts.
This enables you to analyse those facts in a way that leads you to the conclusion you are arguing for.
For the sake of ease of use you can break this into a pneumonic ‘CRAC’
- Conclusion. State your conclusion.
- Rule. Identify the fact or facts upon which your conclusion is based.
- Analysis. Provide an analysis of how that rule makes any conclusion other the one you’ve reached invalid.
- Conclusion. Restate the conclusion.
This CRAC process was used very effectively recently by an acquaintance chairing a community group that was protesting a pending building approval decision of their local council.
She stated that the approval, if it was to proceed, was in defiance of the councils own regulations.
She then cited the specific regulations.
She then pointed out the specific parts of the pending approval that was in breach of the regulations, and why they breached them.
For good measure she also pointed out 2 other proposals similar to the one that appeared to be about to be approved, that had been rejected on the basis of the specific parts of the regulations stated previously.
She then repeated the conclusion that the project was in defiance of the council’s own regulations, and therefore should not proceed.
It was an impressive performance, well planned, well executed, and ultimately successful after some embarrassing back downs by several councillors.
With a bit of practise, it is easy to use, and always better than resorting to a quarrel.
Header cartoon credit: Scott Adams and his mate Dilbert.
May 29, 2024 | AI, Governance
Most BBQ conversations about the future of AI end up as a discussion about jobs being replaced, new jobs created the balance between the two, and the pain of those being replaced by machine.
It is difficult to forecast what those new jobs will be, we have not seen them before, the circumstances by which they will be created are still evolving.
18 months ago, a new job emerged that now appears to be everywhere.
‘Prompt engineer’.
Yesterday it seems, there was no such thing as a ‘prompt engineer’. Nobody envisaged such a job, nobody considered the capabilities or training necessary to become an effective prompt engineer. Now, if you put the term into a search engine there are millions of responses, thousands of websites, guides, and courses have popped up from nowhere. They promise riches for those who are skilled ‘prompt engineers’ and training for those who hop onto the gravy train.
What is the skill set required to be a prompt engineer?
There are no traditional education courses available, do you need to be an engineer, a copywriter, marketer, mathematician?
This uncertainty makes recruiting extremely difficult. The usual guardrails of qualifications and past experience necessary to fill a role are useless.
How do you know if the 20-year-old with no life experience and limited formal education might be an effective and productive prompt engineer?
How many job descriptions will emerge over the next couple of years that are currently not even under any sort of consideration?
Recruiting rules no longer play a role. We need to hire for curiosity, intellectual agility, and some form of conceptual capability that I have no word for.
The challenging task faced by businesses is how they adjust the mix of capabilities to accommodate this new reality.
Do they proactively seek to build the skills of existing employees which requires investment? Do they clean house and start again, losing corporate memory and costing a fortune? Do they try and find some middle path?
Where and how do you find the personnel capable of building for a future that is undefined?
May 27, 2024 | AI, Governance
Nvidia 2 years ago was a stock nobody had heard of. Now, it has a market valuation of $US2.7 trillion. Google, Amazon, and Microsoft from the beginning of this year have invested $30 billion in AI infrastructure, seen their market valuations accelerate, and there are hundreds of AI start-ups every week.
Everybody is barking up the same tree: AI, AI, AI…..
Warren Buffett, the most successful investor ever, is famous for saying he would not invest in anything he did not understand.
He conceded many opportunities have passed him by, but he gets many right. Berkshire is the single biggest investor in Apple, a $200 billion investment at current market value that cost a small fraction of that amount.
Does anyone really understand AI?
Are we able to forecast its impact on communities and society?
We failed miserably with Social media, why should AI be any different?
Even the experts cannot agree on some simple parameters. Should there be regulatory controls? Should the infrastructure be considered a ‘public utility’? when, and even if, will sentience be achieved?
Bubbles burst, and many investors get cleaned out, but when you look in detail, there are always elements of the bubble that remain, and prosper.
The 2000 dot com bubble burst, and many lost fortunes. However, there are a number of businesses that at the time looked wildly overvalued, that are now dominating the leaderboards: Apple, Amazon, and Google for example.
The tech was transformative, and at any transformative point, there are cracks that many do not see, so stumble. From the rubble, there always emerges some winners, often unexpected and unforecastable.
Is AI just another bubble, or is it as transformative as the printing press, steam, electricity, and the internet?
Header cartoon courtesy of an AI tool.
