Creative Destruction

It turns out that success is coming from the atypical organizations, the ones that can get back to embracing irreplaceable people, the linchpins, the ones that make a difference. Anything else can be replicated cheaper by someone else.

Unfortunately, the society we live in subtly implies that the only way to learn something ‘correctly’ is through school. They couldn’t be more mistaken.

It’s not that we don’t learn new things, but the time slots in which we can learn are much shorter. We don’t have two hours to read a help manual. We probably don’t even have 20 minutes. Instead, we learn a bit here and a slice there, all adding up to real learning but not in contiguous time.

These days our experience is more like learning to fly while already in flight. We have to learn how to do something even as we do it. That is how little time we have! It’s like being asked to tango for the first time by a world-class dancer. You don’t have time to ask where the next step goes, you can’t ask what moves you’re going to do, you just gotta dance.

For software going forward, help will be built into the user interface. It will be a part of the infrastructure, embedded in normal interface elements instead of being an add-on. If it’s not available in context, it might as well be invisible.

In this way, the interface becomes more integral to the user experience than simply a tool to do a task with. As Julie Larson-Green has said:

“User interface is customer service for the computer.”

Take note of this, large corporations: Increase your spend on UX design, bring in some great people, and lower your CS costs.

It'll work, I'm sure of it.

Google subsidizes the cost of hosting our home and business videos in exchange for selling advertising around the content we upload. Our cellphone provider might cover a couple hundred dollars of the cost of our phone in exchange for a multiyear commitment to buy phone and data from them. What do we have to exchange in order for someone to cover all or part of our health care costs ?

Let me give you an example. Is it worth it for Walmart to add me to the self insured health plan that they offer employees in exchange for a commitment that I buy 100pct of any products Walmart sells from Walmart ?  If I promise to buy everything from toothpaste to celery to lightbulbs to underwear from them for the next 5 years, would the average person generate more than enough in net margin dollars to make it worth the incremental expense ? Remember, you have to build in the reduction in new customer acquisition costs as well. Is it worth it to Walmart ? What if my employer did the same type of deal. For the sake of example, what if the Dallas Mavericks promised to buy everything that we can from Walmart ? Would Walmart make us an affiliate for health insurance purposes and add Dallas Mavericks employees ?  Or could the program be simplified so that while Walmart wont commit to subsidizing all of the health care costs in their system, or require 100 pct of purchases, they could take a page from Visa and apply some percentage of purchases towards health care premiums for customers and allow them to participate in a Group Insurance program that Walmart , with their incredibly purchasing power set up.  Not surprisingly, this wouldn’t be a drastic step for a Walmart.

This is absolutely something to ponder. We get so focused on the way things are today, what about alternative business models that could be implemented to solve these problems?

Obviously the insurance business model is broken, and the cost of healthcare (to the insurer AND non-insured) isn't going down anytime soon with the way our government is heading.

Genius is the act of solving a problem in a way no one has solved it before. It has nothing to do with winning a Nobel prize in physics or certain levels of schooling. It's about using human insight and initiative to find original solutions that matter.

That is what the NFL and other pro leagues need to remember. You cant ignore risk. Nor can you assume 100pct of the risk and hope the real bad stuff never happens.  The NFL and its owners, since we are using them in our example, are assuming 100pct of the risk of the economy falling again. They are assuming 100pct risk of their bigggest TV customers having their primary delivery systems eliminated. They are assuming 100pct of the risk of trying to convey money from big markets to small markets to try to compensate for an irrational cap system. They are assuming 10opct risk on the capital invested in their franchises, PLUS capital they may have to add to cover any losses.

The players side ? While individual NFL players take on significant risk, the players as a whole take on ZERO risk.  If their membership just shows up for games, 53 guys on each team are getting paid.  They never have to give the money back or  contribute capital to make up losses.

The solution ? Its a system where risks and rewards are allocated properly. Owners should take on more risk than players because they have more upside from franchise appreciation. They shouldnt take on all the risk. Nor should players be excluded from sharing in the upside of equity appreciation. Im not saying that for example players earn a share of the sale price when an NFL franchise is sold. There are a variety of ways to track or index appreciation of franchises that rewards players that can work better and more efficiently.  When the index appreciates the economics available to players appreciate. When the index depreciates, the amount available to players should be reduced as well.

The bottom line of the bottom line is that its time for a new model for professional sports.  Merely changing the values of the current model is a recipe for potential disaster.  Black Swan events happen in professional sports and always will.

Very interesting analysis on risk in professional sports and how it needs to be more evenly distributed. I completely agree.

Netflix’s decision to give in to Warner Bros. demand that they not rent new release DVDs until after a 28-day window has expired. Today, Redbox, has announced they’ll do the exact same thing. Simply put, this is another blow to consumers.

Price Elasticity of demand, simply put, is how much consumers respond to a change in price of an item. I pay about $16/month for my Netflix account. This is about the price of one brand new DVD. I get maybe 5-7 DVDs per month depending on how quickly my finance and I get through them. RedBox is even more exaggerated at $0.99/night - you could get almost 16 movies for the price of one brand new DVD.

Warner Bros. apparently thinks that the time value that consumers put on renting movies is enough to justify paying for one Netflix subscription just to see a movie 28 days sooner. There's no doubt in my mind that if the entire movie industry moves to this, all that will happen is that Netflix consumers will simply wait a few more days to see their new releases. On top of that, WB is supposedly offering the discs at a lower cost to Netflix/RedBox, so they may end up losing money on these deals.

I can't wait to see how this plays out...

During her 45 minute PowerPoint-guided presentation, she said the word “growth” eleven times; she talked about deliverables and accountability; she went over their various systems, their management structure, and their mission statement. She didn’t mention sandwiches until I asked her which one she liked the most. She didn’t mention that the owners traveled extensively picking ingredients at tiny farms and bakeries, or brag about their customer service (their founder wrote a best-selling book about it), or describe their massive mail-order sales, or explain the seminars and tastings from which they generate a substantial profit, etc. In short, she didn’t really say anything at all, and yet the kids around me were taking notes.

That’s the root of the problem. That’s what the business school teaches us to do. Not once has a professor told us to “make great products” or “do something people love.” Why? For one, it’s harder to teach engineering to a marketer than it is to teach marketing to an engineer (take Google). The thing is, we’re designed to be investment bankers and management consultants, the professionals who guys like Warren Buffet will tell you are just “friction” in the economic system. And this coming from a guy who has created more wealth than almost any human ever. From the Berkeshire Hathaway 2005 annual report: “For investors as a whole, returns decrease as motion increases.”

At business school, it seems, bullshit wins.

It was clear from the first few minutes of lecture that the business school got what it asked for: friendly, busy kids with mediocre math skills. The accounting class was like any other, though it crawled along, and exams were simple rearrangements of the practice tests; the book was put together nicely, so there was no reason to attend class, though the lectures I went to were unbelievably boring (think Ben Stein in Ferris Bueller’s Day Off). OMS was, for this little essay, a perfect case in point.

We learned what took 45 minutes in my Econometrics class in an entire semester. We spent three weeks discovering that flipping heads with a fair coin three times in a row has a probability 1/8. We powered through Excel spreadsheets that could average long columns of data. We learned Bayesian statistics by plugging numbers into tables. There was no rigor - for instance, when we learned the basics of optimization we were told to visually solve problems by moving a sloped line away from the origin and note where it hit the other lines, rather than tackle a system of equations or (aha!) do simple calculus. All the while we were told that what we were doing related to business through oversimplified case studies where we served as consultants to Firm A. Using the word “Science” in this course’s title is insulting.

There’s nothing wrong with introductory classes. Basic concepts, after all, need to be addressed early on. The problem was (a) the lack of rigor: we were taught to “plug and play” numbers (in accounting, too) rather than understand them. We studied hypothesis testing without mentioning research design or understanding variance, we saw conditional probabilities as a few fields in a table and ignored set theory, we were taught to answer questions about Excel Solver output by saying “If this number is 0, then it means ___” without being told why (the answer had to do with negative marginal returns). If you’re rigorous, answering not just the how but the why, you can get even remedial kids to do great things; if you only hit the surface level, if you only teach procedures, you make everyone a monkey. And (b) the attitude: I’d lose 30% credit on a problem set for not simplifying equations, or skipping two steps of algebra, or writing VBA code to solve problems instead of drawing a decision tree. There were no opportunities for acceleration, and the focus was on terms and processes, templates and formatting.

I think there are a couple of things at work here. The main thing is that the professors are by definition not right for their position. At least Math or even Economics professors (at the top universities) are leaders in Math and Economics; they publish important papers, work for the Federal Reserve, and teach really smart kids in their spare time. B-school professors use buzzwords, follow slow but tried-and-true curricula, and make sure that in submitted work your group’s names are in alphabetical order. They don’t run companies or make great products, and they’re not even consultants!

I know I will catch some flack for this, especially since some of my former b-school professors read this blog. Because of that, I'd like to preface this with the fact that I had some incredible professors in my time in college. They challenged me to look at the world from different points of view, they helped me to understand the way that the world works, and gave me amazing insights into things that I will carry with me for the rest of my career. However, I achieved this because I developed personal relationships outside of class with them that I will carry for years to come. I still email with many of them and keep up with what is going on post b-school.

This blog post is exactly it though - I just finished my degree in Finance and have already started work on my MBA in a top 50 national program. I learned a lot about Finance and about many other topics, and developed a strong interest in Economics (which at it's core is really the social behavioral side of Finance, Finance is an offshoot of Economics). I sat around in class, rarely reading textbooks and simply carrying with me the strong core fundamentals that it felt like we spent half the semester reviewing. I would be in a class of 50-60 students (big for my school's standard) where maybe 20 would come to class.

Getting the grades was simply being able to regurgitate concepts that I could forget the next day. Very few teachers challenged me to to create and to push the envelope. Very few even wanted more than simple charts and graphs. In an accounting class I'm currently in for my MBA, I submitted a "financial analysis" project for the professor to review. He responded to me saying that it was great but that I needed to "explain the ratios." To do that, he suggested I "add a few more charts" - so I did and got a great grade on a powerpoint that took me 30min to throw together.

Perhaps this is why I've developed a strong interest in Economics, but Business Schools today leave out some of the most important skills I've learned in my first few months of working full-time. They leave out the interpersonal relationship building skills, they leave out the innovation and the ability to set yourself apart from your peers. If anything, Business School is an exercise in "fitting in" and doing what everyone else is doing - pretending to set themselves apart.

One of my most challenging assignments in college was called an Eisenhower. It stemmed from a challenge that General Eisenhower had during World War II. To become a general, you had to be able to write what the war was about in one page or less. Believe it or not, not many people are capable of doing this. My professor would give us a huge topic, like say "How would you save General Motors," and give us one page to explain how.

So what I'm coming to here is that yes, business school is important - people need to learn how to manage, but like the article above sums up, the business school model of management is accurate, but that doesn't make it good.

I'll go ahead and admit it - I'm getting my MBA to get a check mark off the list of "must-dos," it's not a life changing event, it's simply something you have to get through to succeed in a career in corporate america (since I've made the choice to not be self-employed). But I learn more every day from my inspiring co-workers.

Update: After thinking about this some more, I should clarify: I do feel like I learned a lot coming out of business school - mainly when I was challenged to create and really think for myself. I figured out I didn't want to do finance when an outstanding professor of mine gave the class a project to create a stock analyst report from scratch on a company of our choice. Boy, did that teach me it wasn't what I wanted to do, and I told him that. The professor responded that one of his goals is that if finance is not what you want to do, he hopes is class will get you out of that - the last thing he wants is for people to get caught up in careers they don't like.

I guess my biggest struggle is with the testing system that doesn't foster creativity - it doesn't encourage students to learn to think for themselves and make great products. It's just studying and regurgitation. 

The tech press loves checklist comparisons. Let’s evaluate the iPhone to see whether it’s a good product:

Sounds like a terrible product. I bet it will fail.

Remember the MacBook Air’s launch?

Sounds like there’s no reason to buy one. (Like nearly everyone else, I complained about all of this when the Air launched. We all do it sometimes.) But it’s been very successful, especially in its later revisions, and the SSD models are great machines for people who travel a lot.

So it bothers me when either of two common failures occur.

Assumed equality

This is when a competitor advertises (and often, truly believes) that their product is at least equivalent to another one because it has checkboxes in many similar categories.

Since the iPhone’s launch, every other phone manufacturer has made competing phones with 3” touchscreens, music playback, and square app icons arranged in a 4x4 grid. (Well, except Microsoft’s hilarious interpretation.)

It’s like the CEOs commanded their engineering teams to come up with lists of the iPhone’s “features” and copy them so their phones would sell as well as the iPhone.

Every few months, the copy-list gets longer. Everyone just finished checking off their App Store box and is wondering when the developers are going to rush in.

Can also be called feature bloat. Thank goodness people are realizing that more is not always better. Many great ideas start off as copies, just make sure that whatever yours is, it's better than what it's copying, otherwise you just spent a ton of development dollars making a sub-par product.