Jan 8, 2024 | Leadership, Strategy
2023 was a difficult year for everyone. Uncertain economic conditions, war, dodgy deals, politicians cuckolded by their own weasel words, and the emergence of AI.
The last one is the only one over which any of us working to pay the bills can have some level of control.
AI has emerged from a long gestation since Alan Turing first made it a topic of conversation 72 years ago. It is now firmly on the plate of every person in business.
Like any tool, it is in the hands of the user, and cannot do any job without being directed. The cookies in 2024 will be awarded to those that best direct AI capabilities in their businesses.
It will not happen by itself, but is one of the secrets of competitive success.
The world is filled with noise and distraction. To cut through and resonate with an audience you need clarity.
Clarity of strategy, and clarity of all your messaging from the advertising and marketing collateral, the stories of the salespeople, to the colour of your delivery trucks, and the greeting of your receptionist.
Clarity.
AI will not give you that clarity in the absence of instruction from you, the user. Lack of such user clarity will deliver generic burble that will be unnoticed wallpaper.
Clarity Wins.
What AI will deliver in spades is the killer tool to leverage that clarity.
Header illustration courtesy DALL-E in about 20 seconds and two sets of instructions.
Dec 18, 2023 | Leadership, Management
At this time of the year, there is much thinking going on in relation to the manner in which incentives will be applied in the coming year, for which you are preparing the budget.
There are many and varied schemes, most of which are geared in one way or another to a threshold, above which the incentive kicks in.
It can be anything from a sliding commission, to share allocations, holidays, and goodies from the local store.
99% of those I see have one common characteristics: they are known, the thresholds are clear, as they are seen as the motivating factor. They can also be gamed in all sorts of ways, particularly by those in sales. When the commission is based on revenue alone, that can be achieved by giving big discounts, the timing of invoices can be varied, ‘channel stacking’ becomes common.
These sorts of incentives are usually ineffective, because they become taken for granted, and are always ‘gamed’ by staff.
In the early 50’s psychologist B.F. Skinner did a series of experiments, using rats and pigeons as subjects, since validated widely. He used a box that became known as a ‘Skinner box’ in which he placed the hungry subjects, and a lever. The rats and pigeons pushed the lever, and could gain an intermittent reward of food. They soon learned that pushing the lever sometimes delivered a reward, so they pushed it more and more, each intermittent reward reinforcing the behaviour. The variability of the reward when it is intermittent tends to increase the speed with which the subjects pushed the lever, a few will keep pushing despite the calorific value of the intermittent rewards being less than the calories required for life.
This behaviour can be seen in any room containing poker machines. Some players will, despite knowing the odds are against them, keep pushing money into the machines, hanging out for the intermittent reward of the clatter of coins in the tray, and the psychological reassurance that goes with it.
Why not use the same sort of thinking to manage your incentive programs?
Dec 5, 2023 | Change, Leadership
One of Charlie Mungers better known quips was: ‘All I want is to know where I am going to die, so I’ll never go there’. He avoided that place assiduously, but last week, after 99 years, Charlie went there.
Perhaps by mistake, perhaps because even he recognised it was time, a very long innings behind him. However, he leaves a mountain of wisdom accumulated over that extended period, most of it as ‘wingman’ to Warren Buffett. While it was a partnership with Buffett as Chairman and Charlie as Vice chairman, Buffett credited Charlie as being the brains behind the strategic insights and wisdom that made Berkshire Hathaway such a profit powerhouse.
So, what can a local SME, struggling for visibility, relevance, and cash in an increasingly homogeneous and competitive market where size really does matter, learn from him?
Simplicity. We humans tend to complicate things. It is not usually deliberate, rather it is a function of our limited perspectives, reliance on others, uncertainty, risk management, and a host of other drivers we all feel. Charlie advocated simplicity. Break a problem or situation down into its component parts, and deal with them one at a time. Others might call it managing by first principles. Einstein noted that things should be ‘made as simple as possible, no simpler.’
Over the weekend I was reading through the updated Australian building codes trying to understand the complexities of the recent changes. One of my clients must ensure the products he sells into the building trade not only comply, but he needs to explain to his builder customers the application of the codes to his products. The codes are so complex, differing across state jurisdictions, that builders who are bound by them often knowingly ignore them, relying on their suppliers. The codes are simply too complex for a small builder to ensure currency is maintained, amongst the other tasks necessary to keep their businesses nose above water.
Simplifying decision making processes by ensuring that the boundaries of authority, responsibility and accountability are clearly delineated through the business, is a goal to which we should all aspire.
Focus. Competing priorities means nothing gets optimised, and often many tasks do not get completed. Focussing attention on the things that really matter and giving them undivided attention for as long as the problem or opportunity warrants is a key lesson from Charlie.
Focussing also frees up our most valuable resource: time. By deliberately ignoring distractions, and leaving the lesser issues to others, or ignoring them completely, frees time to concentrate on the most important things, those that in the long term will deliver the greatest return.
No SME client I have ever worked with has been able to clear their desk sufficiently to devote the time and energy they should to the long term strategic foundations and health of their business. They simply wear too many hats, and often have difficulty delegating, assuming there is someone to whom they can delegate. The smaller the business, the harder it is, as those to whom delegation can be made, and the cash to pay for it, are in short supply.
The discipline required, both personal and in the business culture nurtured is enormously challenging.
Think and act for the long term. When you think and act short term you inevitably find yourself whipping around like the end of a bullwhip. Logistics managers understand the ‘Bullwhip effect’ better than most, as they see it every day in their supply chains. However, it is just as potent in the management of every other facet of a business. Seeing and responding primarily to the short-term fluctuations usually just compromises your ability to adjust strategically to the long term drivers of success.
Circle of competence. Many consultants have made a business out of advising clients to ‘stick to their knitting.’ It has been so prevalent it has become a management cliché. A circle of competence as Charlie saw it is a wider concept. While you are sticking to what you know, you are also seeing opportunities to leverage what you know in other domains.
This idea also applies to those stakeholders with whom you engage. By ensuring there is overlap in the circle of competence each brings to the table, you widen your own. This is at its core a strategy for successful collaboration.
Incentives. Understanding the power and application of incentives to shape behaviour enables individuals and groups to optimise the outcomes for which they are responsible.
For years we have seen research report after research report articulating the reality that after the basic needs of life, food, shelter, and companionship are satisfied, individuals start to respond to a range of other incentives. Some will sacrifice money for free time, others seek public acknowledgement of effort, security of what they have becomes more important than risking it for some possible future benefit. The list of drivers of individual behaviour goes on, and it is never just about money.
A friend who runs a successful bookkeeping business has recently gone to a four day working week. Several of her staff were against it, and subsequently left. The significant majority were happy to do their hours in four days, with Friday off. Productivity has jumped, as there is several hours each day when the phones are not ringing, causing distractions, so tasks are completed quicker, and with less processing errors. Contrary to the expectations of some, clients have also embraced the change, and remaining staff love having Fridays free to get on with their lives.
Understand probabilities. Success requires that we have a picture of what we believe the future will dish up, and we are able to respond today to put ourselves in a position to leverage those future events in our favour better than competitors. Given the only thing we know for sure about the future is that we will not be completely right about it, we need to understand probabilities. The better you can articulate the odds of some future state, the better able you will be to respond positively to it. Charlie was a great believer in what he called ‘Mental Models’. Being a voracious reader, he was able to see situations through a range of perspectives, and equate them to previous known outcomes, thereby giving him the opportunity to shorten the odds of an outcome he felt sufficiently confident to predict, and invest in to leverage.
Understanding your odds offers the opportunity to give yourself an appropriate margin for error for the investment you are contemplating. This applies equally to how you will spend your time today, to a major strategic choice.
Continuous learning. Charlie never stopped learning, until last week. Much of the time freed up by his focus and personal discipline was spent reading and interacting with those he considered smarter than him in some domain, and satisfying his voracious curiosity. Every situation he saw was considered as a learning opportunity, particularly those that did not go as predicted. They enabled him to add to his wardrobe of mental models with another model through which he could see a situation to understand better the odds, and shape them in his favour.
Every owner of an SME I have ever dealt with understands the implications of the phrase: ‘work on your business not in it.’ Few achieve what they would see as the optimum mix, and it is always the ‘on their business’ that suffers. They are depriving themselves of the opportunity to learn by looking around, compiling mental models, seeing opportunities in other domains, and leading their employees and stakeholders.
Rationality over emotion. Successfully doing all of the above allowed Charlie to make rational decisions, avoiding the attraction of the emotions. He has been the living embodiment of what Daniel Kahneman would call ‘System 2’ thinking. He takes his time, removes the pull of emotion, seeks out the facts, and makes rational choices for the long term.
None of the foregoing practises are stand alone triggers for success. Each influences the others in a range of ways, offering compounding benefits. In taking the long term view of his investment choices, Charlie allowed that most powerful force in the universe, (according to Einstein), compounding, to deliver for him. An investment of $100 and subsequent reinvestment of dividends in Berkshire Hathaway in 1978 when Charlie teamed up with Warren Buffet would be worth almost $400,000 today. This is an almost 20% annual compounding of value of the investment. It is 25 times the value today had that same $100 been invested in a S&P index fund. This is the effect of patience, long term thinking, and powerful mental models that increase the odds of success relative to other investment choices. Every owner and manager of an SME I have ever seen could benefit from the wit and wisdom of Charlie Munger.
Vale Charlie. If I was having one of those imaginary dinner parties where the most interesting people from history were around the table, you would be there.
Header photo: Charlie 5 days before his passing, holding forth in an interview with CNBC
Nov 29, 2023 | Governance, Innovation, Leadership
Of the many objections to the inequity and shortcomings of the tax system I harbour, the most egregious is the seduction by the fossil fuel industry of governments of all persuasions over the last 30 years.
I have two profound objections.
The first: They have known of the impact of CO2 on the climate for at least that long, and have not only not addressed it, but have aggressively sought to ensure that regulators and the general public do not get the facts, just bilious dystopian stories of what they are preventing from happening to us in the absence of their visionary management. The public are therefore unwilling to demand of regulators and lawmakers that the hard choices need to be made.
Scientists have been telling us for 30 years that the longer we wait, the harder and more costly the necessary changes will become, but what would they know?
On top of that, the fuel companies pay no tax on the billions of revenue generated in this country as a result of quite legal, but in my view absolutely immoral structuring of their tax affairs.
This avoidance is well known, they hold an honoured place in the top 40 tax avoiders list, collated by Michael West media. Along with property developers and various lobby groups, the political donations add up to 6 or 7 million dollars.
The second: Clearly, the fossil fuel industry has bought their favoured place in the political arena, but I am astonished that the price has been so low. A few million dollars in donations, and I would be pretty sure an equal amount in various tactical ‘softening’ of politicians and their advisors, and the threat of adverse advertising, in return for billions in tax free revenue.
What a great wicket they are on, paying for a cheap scooter and being rewarded with a Ferrari!
Another way of looking at it is that if you are going to be a whore, you may as well be an expensive one so you can be properly comforted for the loss of dignity. Clearly, there is very profitable leverage being wasted.
Obviously, the pollies and hangers-on need a bit of marketing and image building in order to properly leverage the key position they hold in the generation of tax free cash flow of fossil fuel companies.
The 20213 Budget delivered 9/5/23 amended marginally the PRRT and promised to impose the 15% minimum tax rate on MNC revenues in line with the OECD recommendation, a good start. Sadly, it does seem that the 15% minimum will not be imposed for some time, if ever. The power of the large multinationals with tax bases scattered around idyllic islands across the globe, does not reside just in Canberra. It hides in plain sight in London, Brussels, Dover (capital of Delaware), Reno, and many others.
Meanwhile we struggle with investment in the future productivity of the economy we are leaving to our children due to lack of public funds.
Nov 15, 2023 | Collaboration, Leadership
As a kid I was a reasonable tennis player, having been coached by an expert and playing competitively from a relatively young age. Nothing outstanding, just competitive at a district level.
Aged about 16, my father who had been an outstanding player and myself started coaching on a Saturday morning on two local courts for a bit of pocket money. I discovered to my surprise, that breaking down, simplifying, and articulating to others the lessons I had absorbed from my coach, to enable me to communicate with those I was in turn coaching, made me a better player.
Recently in a (business) coaching session with one of my clients, we discussed for the 3rd or 4th time the concept of break even. How a break-even point is calculated, the discrimination between fixed and marginal costs, and the management value it delivers. The conversation started because it became evident that despite the previous conversations, my client did not understand sufficiently well to be able to implement in his business.
Therein lies the secret.
The discussion involved him explaining the concept of break-even back to me, while drawing a typical break-even diagram. It took prompting and discussion, but by the end it was clear he understood the meaning and value of calculating his break-even point.
The secret was him explaining it back to me, and demonstrating that he understood by drawing an illustration of how and why it worked. It required him to break down in his mind the elements of a break even into its simplest form. Then, explaining it back to me, as if I was someone who had absolutely no understanding of the idea. Drawing the diagram, enabled the understanding.
This simple act of writing down an explanation is the value that writing this blog delivers to me. I often start a blog with an interesting idea which requires research and building of understanding before writing it down in its simplest possible form. Through that process, understanding builds.
If you cannot explain something in a way that a 10 year-old can understand, you probably do not understand it well enough yourself. The greatest exponent of this technique of using illustrative metaphors to explain complexity in simple ways was Albert Einstein.
Oct 16, 2023 | Change, Leadership
There is a notable omission amongst all the verbiage, finger-pointing, hollow triumphalism, and handwringing emerging after the predicted result of the referendum became a reality.
That omission is the failure of marketing, at least by the ‘Yes’ supporters.
The ‘No’ campaigners did get something right, in the ‘If you don’t know, vote No’ slogan. It was very effective, but was never truly tested in the public arena. It was just left to gather momentum.
Any student of marketing knows that facts and data by themselves struggle to gain and keep the attention of most. If you have ever sat in a presentation where the presenter was reading densely packed PowerPoint slides, you know what I mean, no matter how relevant, intriguing, or important the information being imparted, it fails to be engaging. Telling a story gains the initial attention of an audience, but that attention will be lost in the absence of a connection created by a few facts relevant to that audience. That connection is most powerful when it is both emotional, and quantitative.
Such a combination of the quantitative and personalised qualitative creates empathy that changes minds and generates action.
The ‘No’ campaign had a very good headline, gaining attention, and for many, was enough in the absence of any contrary facts or emotional magnet from the yes campaigners.
The ‘Yes’ campaign failed on both accounts. It did not have a headline, so failed to gain attention, and it did not use any facts to back up the weak and non-personalised emotional connection it set out to make.
At the disposal of the Yes campaign were plenty of facts. They needed to go no further than the statistics articulating the size of ‘the gap’ between education, health, and incarceration rates of first nations people and the general Australian population. What stopped them asking the question if these differences were acceptable to Australians? how would they feel if their child was statistically 14 times more likely to end up in gaol than a white kid, and would die 8 years before the average Australian? They failed to use these emotional doorways at all, at least in my line of sight.
It is easy in hindsight, but the foregoing has been obvious to any serious marketer for a considerable time. The politicians on both sides, and not only the elected ones, allowed the whole ‘debate’ and I use that word cautiously, to become a binary choice. Yes or No, argued in the absence of any basic marketing discipline or strategic thinking.
As an aside, it is my view that the referendum had reasonable odds of being the first in our history to pass despite the lack of bi-partisan political agreement. Australians are in general tolerant of difference. We could not be otherwise, and still be a reasonably successful multicultural and multi-religious nation. Those odds crashed to zero at the recognition that among the Aboriginal leaders, there was not only disagreement, but quite emotional and deeply held disagreement. Those in the electorate who had no strong pre-existing view, or base from which to create one, simply felt that if those who the referendum was about could not agree, who am I to vote for change?
Header photo courtesy SMH
