Friday, January 20, 2012

Lower cost of satisfaction

One of the few people who regularly reads my blog chided me this morning for not posting. That's because we're busy moving (you can follow those adventures there). Ridding our house of most of our belongings, many of which were obtained second-hand, has made me think about what I need to be "content." I think that so long as I have high-speed internet, a low-end notebook computer, an iOS device, a refrigerator, and hot water I'll be okay. Most of the satisfaction I get during the day revolves around those items. 

This has me thinking about one of Tyler Cowen's hypotheses in The Great Stagnation, that things like the internet entertain us immensely for so cheap that we're willing to live on less, need to work fewer hours, and we are therefore less productive (meaning slower GDP growth). This is partly why I frown on OWS-type railing against income inequality and calling for greater redistribution. A local Hebrew professor pointed out at church last week that Solomon's words in Ecclesiastes are backed up by economic studies of Richard Easterlin. Income, in and of itself, does little to predict or improve happiness.  Relationships, access to health care, internet, etc. are more important.

One chart I like to share with my Principles of Microeconomics students is one displaying the real cost of various household items over time as Mark Perry often does on his blog. Items like microwaves and refrigerators haven't changed much over the years, they bring the same basic benefits. While median wage growth in real terms may have stagnated since the 1970s, the hours worked to obtain these items has decreased significantly as their prices have fallen:
"In other words, with the income earned working 121 hours, the typical consumer 45 years ago in 1965 would have only been able to purchase a single appliance - the electric oven pictured above, compared to the eight appliances that a typical consumer could purchase today with the income earned working 121 hours."
In terms of appliances and internet speed, those in the top 1% aren't able to buy a whole lot of improvement with their money, and those in the bottom 1% are able to buy much more than they ever could per hours worked. I get an awful lot of free or 99 cent apps that do things that would have been unthinkable or really expensive (like calculators) a few decades ago.Couponing and thrifting gives us access to more items cheaply than ever before, and those don't show up well in official statistics.

Before I'm accused of predicting some type of Wall-E reality where nothing else needs to be produced and nobody works, it's obvious that there is more to be invented and discovered (teleportation, for example) and our quest for more and better innovations will continue to fuel economic growth. However, as Cowen projects, we could be in for a much slower period of growth as we substitute from hours worked into leisure. Those who become unemployed may choose to take longer to find a job, they can get by more easily on their savings and unemployment checks. A slower-growth economy with higher structural unemployment than before shouldn't shock us.

What items do you need to feel "content?" What level of income provides those items?

Tuesday, January 10, 2012

Book Review (#1 of 2012) Jim Collins - Good to Great

Good to Great: Why Some Companies Make the Leap...and Others Don't by Jim Collins (2001).  This is one of those must-read MBA texts that many people talk about but I just now got around to reading. 

Collins teaches at the Stanford Graduate School of Business. His research team looked at 1,435 Fortune 500 companies from 1970 to 2000 in order to find ones that had 15 years in which the stock price grew by about the same rate as the overall average, followed by 15 consecutive years of growth well above the market average. 11 companies fit the bill: Abbott Laboratories, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo.

The team then found firms in the same industry to compare these firms to, companies that maybe had a few years of outstanding growth and then fizzled. This allowed the researchers to compare and contrast characteristics of firms, so 28 companies are mentioned in total.

The common characteristics of the "Good to Great" companies are interesting.  Most of the CEOs preferred almost anonymity, and were fairly disciplined about spending and often forwent bonuses and large amounts of compensation. They had the Warren Buffett characteristic of living in the same house for 50 years, driving a used car, etc.  In a few companies, executives were rewarded purely by their titles rather than perks and pay, creating a corporate ethos that seemed to foster productivity.  The humility of the successful CEOs was a huge insight.

The companies also stuck doggedly to core principles, whatever those may be. Collins terms this the "hedgehog" concept. Never straying from your core business and defining your mission was crucial. There is also the "three circles" concept, the 11 companies pursued success in areas where they could be highly successful, in which they were highly motivated, and which fit their profile.  Collins admits that that some of the companies probably created a few products that may not have added much long-run value to our society (Phillip Morris).

The companies utilized technology where it fit the company, but none of the companies relied on a particular set of technology for a homerun.  These companies were studied during the tech boom of the 90's, and many were the antithesis of the fly-by-night companies of that era.

However, something that jumps out about the 11 companies is that just a few years later two of them (Fannie Mae, Wells Fargo) would require extraordinary government help to survive. Collins lauds Fannie Mae's helping pioneer the use of credit default swaps and other financial instruments that helped funnel credit into the housing market, particularly the subprime market, helping to fuel the housing boom. Collins never mentions that Fannie got to borrow at below-market rates because the market knew it had an implicit government guarantee that would keep it from ever defaulting. Wells Fargo was obviously also a large player in the subprime market, though it was interesting to hear how it responded to deregulation and excelled in comparison to other banks.  I remember reading in Capital Ideas how Wells Fargo was a pioneer of some areas of financial innovation, and its focus on hiring the absolute best and brightest is highlighted by Collins. To be fair, these companies thrived in an atmosphere of deregulation with certain government supports, but they thrived much more than firms they were competing with in the same environment.

The housing market crash and ensuing recession wiped out Circuit City. I'd like to read a follow-up on how Circuit City went from great to defunct by 2009.  Best Buy relegated it to #2 and Wikipedia records that CC had 567 stores nationwide when it went bankrupt.

I've found a few bloggers who have increasingly looked back on this book with a critical eye.  You'll also find a number of organizations that give out "Good to Great" awards to employees, managers, etc.

MBA literature is worth reading for the insights it gives into successful companies. But the constant creation of new vernacular (like "Level Five Leader") are a turn-off for me.. too many fads!  There's nothing new under the sun, as Solomon put it.  What I see from the leadership of the Good to Great companies is very Psalm 15, and that's what I primarily gleaned from the book.

I give it 4 stars out of 5.  

Sunday, January 08, 2012

Book Review (#37 of 2011) Joe Gibbs - Racing to Win

Racing to Win: Establish Your Gameplan for Success by Joe Gibbs with Ken Abraham (2002). I well remember Joe Gibbs' Redskins dynasty in the NFL and am well-acquainted with Gibbs' NASCAR team, which he runs with his sons. I didn't know Gibbs' background and upbringing, so I was eager to check out his autobiography.  Rather than just being an autobiography, however, Gibbs gives various "cornerstones" for success throughout the book, making it read more like a management/leadership text. (How many "cornerstones" can you have?  I would think that after the fourth cornerstone you should call them something else, but that's just me.)

The Tim Tebow controversy this season strikes me rather odd given how outspoken guys like Gibbs were about their faith while in the NFL (Reggie White is another).  I guess if you've won multiple Super Bowl titles nobody questions or is offended by what you say?  Gibbs is unashamedly evangelical, even closing the book with a Gospel presentation and invitation.

Gibbs' life had follies.  His poor financial decisions left him bankrupt at the peak of his NFL career in the late 1980s. He blames his diabetes on his poor lifestyle choices. His competitive drive on the racquetball circuit (who knew?) cost him money and time with his family.  But Gibbs preaches from his experiences.

Given that Gibbs has won multiple Super Bowls and NASCAR points championships, it's no surprise that people want whatever his "secret" is, but you won't find much unusual here. One could probably make an argument that Gibbs got his success through good networking and after he'd achieved some success he found others willing to help him out of bankruptcy and into a NASCAR start-up that likely would not have been possible otherwise.

If there's one key trait, I think it would be that Gibbs built his NFL teams around character, doing in-depth research on players to figure out which ones had an internal motivation and not just great physical talent. This seems to be what he looks for in NASCAR drivers as well.  He hired someone to develop some type of empirical evaluation to measure their potential at whatever position they were applying for in his organization.
Surround yourself with guys who are highly motivated and that will separate you in a league where parity is the norm.  

How Gibbs runs his racing team was most interesting to me. His current team features hard-chargers Denny Hamlin and Kyle Busch, and Busch's character seems to fall far short of Gibbs' standards (Busch was fined and suspended for intentionally wrecking someone late this season, ending his hopes of a title and angering his sponsors). This book was written just after JGR won its first overall points championship with Bobby Labonte in 2001.  Gibbs talks of weekly (voluntary) chapel services for all of his employees, of how Dale Jarrett was led to Christ as one of his employees, and how at least one of his major sponsors wants to "reach people for Jesus" via NASCAR.  It's hard for me to equate that with the childish, volatile behavior of Gibbs' current group.

But there was almost nothing in the book about his coaching methods, communication style, or even his continual improvement in anything.

In all, I give this book 2 stars out of 5.  If you don't care to learn about Joe Gibbs, then this book isn't for you.

Book Review (#36 of 2011) Stephen R. Covey - 7 Habits of Highly Effective People

Just got back from a great, short trip to Ankara where I've secured housing for my family. But my departure coincided with the end of a road trip and family reunion in Chicago which means I had time to knock out a couple more books before New Years.

7 Habits of Highly Effective People - Stephen R. Covey. I had never read Covey's book, but I assume that almost everyone I know who has held some type of leadership or management position has read it as it's probably the all-time bestselling management/leadership book and easily one of the most influential.

The Seven Habits:
1. Be Proactive - means not blaming others for your circumstances but owning up to them yourself.
2. Begin with the End in Mind - Character matters and underlies everything else. You should have a mission statement that sets out your goal. Each day you "flex your proactive muscles" to make it happen.
3. Put First Things First - Tasks fall into one of four categories and you should focus on the ones that are important but not necessarily urgent.  That will help guide your organization and keep things from becoming important and urgent, ie: a crisis.
4. Think Win-Win - Negotiate hard. It's a little like Adam Smith or David Ricardo's idea that two parties don't enter a transaction unless both benefit. So, maximize your benefit and make sure the other party feels it is winning too.
5. Seek First to Understand, Then be Understood - This helps generate Win-Win, and is a basic sales technique. Don't expect to get what you want without respecting the other party's wants.
6. Synergize - Be an effective leader that fosters teamwork and brings out the best in everyone. It's more than the whole being greater than the sum of its parts, but that's the basic idea.
7. Sharpen the Saw - Take time to rest and do activities that improve your physical health and spiritual well-being.

I don't know how many hundreds of books are out there that have built on Covey's concepts.  There are a lot of basic, timeless truths that he puts simply and I guess that's why this book is so hugely popular.  I'd like to put him in a room with Frederick Taylor and see how it goes.

Reading this book tempts me to size up leaders of organizations by how well they follow the seven habits. I like thinking about the first three the best, particularly in evaluating my time management. Is what I'm doing right now important, and how urgent is it?

I give it 3.5 stars.