Friday, October 17, 2014

Profit Is Not The Purpose Of A Business: SeaWorld and Marineland

I subscribe to Peter Drucker's adage that the purpose of a business is to create a customer in a manner that generates a profit. Drucker argued that this was accomplished through marketing and innovation. While a business must earn a profit to remain viable, profit is the reward for creating value, not the purpose of a business per se.

This is an important distinction, because within this specific context, those who set out to run a business and put a focus on earning a profit ahead of how they earn a profit, will have more difficulty succeeding. The reason they will find success more difficult is that a building and sustaining a successful business requires a longer-term perspective, while placing a primary focus on profit tends to drive a short-term perspective. How much did we earn this year? Can we do better next year? Or worse, how much did we earn this month? Can we do better next month?

A major reason for a short-term focus on profits is that investors and managers want to reward themselves too soon, based on an arbitrary temporal measurement. By doing so, they often place themselves in a direct conflict of interest with their managerial responsibilities. Too often short-term incentives create moral hazard because they encourage actions that result in a diminishing value proposition for customers relative to their many alternative choices in the market. Distribution of profits in the form of wages or dividends to serve the short-term desires of employees can strip the business of needed re-investment of capital required to create and retain customers for longer-term success.

I doing research for my soon to be completed book tentatively titled Thinking Like Disney: The 9 Principles of Walt Disney's Business Success (Theme Park Press, www.themeparkpress.com), I came across this story about two Southern California tourist attractions competing for essentially the same market: Marineland and SeaWorld, that drives this point home.

The story comes from Harrison "Buzz" Price, in his book Walt's Revolution! By The Numbers. Price was a research consultant who specialized in theme park feasibility studies, and who got his start in the business working for Walt Disney in the early 1950s. It is a story about what can happen when entrepreneurs and business executives confuse the purpose of a business, and focus on working for and rewarding themselves ahead of working for and rewarding customers.
The biggest lesson I took away from this exposure to the fearless foursome who managed SeaWorld, was its powerful message on the value of aggressive reinvestment. SeaWorld's true competitor is Southern California was Marineland, located on the Palos Verdes peninsula nearby Los Angeles Harbor. Marineland had opened earlier, shortly before Disneyland opened, and with direct access to the huge Los Angeles County market, much larger than the San Diego market, drew 1.6 million in its first year. Marineland's policy, however, was minimum reinvestment, essentially nothing. The investors, a New York syndicate formed by Henry Harris of Harris Upham, had taken a risk and succeeded. Now it was time to pay off the investors with maximum dividend distributions. To misquote an old hymn, "Yield Was The Temptation". Thereafter, without the benefit of new attractions, attendance went steadily down. It was a dumb policy. They had a great running start, a year ahead of Disneyland, and squandered the opportunity of an early lead in the Southern California attractions business.
And then came along George [Millay], Milt [Shedd], Dave [Demotte] and Frank [Powell], working the same extended market with more or less the same kind of project but located in San Diego, a long way from the heart of the rich Los Angeles market. They reinvested every cent available form cash flow: no dividends, no fancy amenities, and no fancy salaries. SeaWorld, which had started out at the 500,000 level in the mid-sixties had grown to over two million attendance by 1975 and it had hit 3.8 million by 1988.
Meanwhile, Marineland went steadily downward to the 800,000 level by 1971. It could not compete with rapidly expanding SeaWorld. Later on, three or four subsequent owners of Marineland could never find the key to turning the park around by investing in later years with "higher cost dollars" (new investment cost more after a decade and a half of inflation). Marineland closed in 1985. Playing catch up with current money after under investing in prior years is not easy. It was a clear demonstration about the importance of reinvestment that would have made a fine Stanford Business School case study (maybe even a Harvard one)....
Walt Disney understood the need to bring his own aspirations in line with those of customers. His ability to always measure his business decisions within the customer framework was one aspect of his entrepreneurial genius. I provide many examples throughout his career in my book.

Saturday, August 02, 2014

My Recent Encounter With Complexity Worship

Call me simplistic if you have to, but I always was of the opinion that if someone really understands what they are talking about, they should be able to express it in ways that others can easily understand. I distrust people who make it a practice to speak in convoluted or technical language in order to make it a barrier to understanding.

When someone asks a fairly simple straightforward question that requires a fairly simple straightforward answer, and instead what comes back is something extremely convoluted or impossibly technical and purposefully theory-laden, you have to wonder if at root is the post-modernist technique of "bullshit baffles brains." This appears to be a popular defensive methodology used by some people as a cover-up to protect themselves against the discovery by others that they really don't know what they are talking about. It often is a companion for those who resort to argumentum ad hominem as a normal part of argumentation, often under the guise of demonstrating how witty, charming and urbane they really are. 

Recently on an online forum I asked a very simple question to an accomplished expert in his field, who, for whatever reason, chose to participate in a discussion but was unable to provide a clear and articulate answer to any of the questions he was asked, even when asked multiple times.

As part of the discussion, this expert indicated that he provided a training course for corporate executives in the area of managing complexity and indicated that it is linked with decision-making and organization design. 

Here's the question I asked, which begins with me quoting the expert to whom I'm addressing:
You wrote: "What CAS [complex adaptive systems] indicates (in my view) is the need for different organisation forms to handle complex and chaotic environments. That includes things like human sensor networks (or whole or workforce engagement), the use of Crews, self-organising cross silo teams etc. etc. " 

Can you tell us something about the types of people you recommend companies assign to these teams or networks? Are they a cross section from front-line to executive? Are they usually VPs or executives with considerable tenure and work experience? Are they chosen randomly?
I didn't think this was a difficult question. It amounts to: how do you select which employees you will ask to participate in “human sensor networks” or as “crews”?

Surely some people are going to be better suited than others? Or maybe not. Maybe the person with the responsibility for selecting respondents can just select randomly. I just assume that there are likely to be established or emergent criteria pointing to some personal characteristics that prove beneficial to the manager accountable for generating a solution being sought for which the "network" or "crew" is being established.

Here is the answer I received:
Barry, I promised you a response to you question on Crews and Human Sensor Networks. You specially asked "the types of people you recommend companies assign to these teams or networks? Are they a cross section from front-line to executive? Are they usually VPs or executives with considerable tenure and work experience? Are they chosen randomly?". 

The way a crew works is that people are trained in role and role expectation and entry into the role is normally highly ritualised. We know that the impact of ritual is to change the cognitive activation pattern on the brain and this for a period the identity of the participant. In military and emergency response environments the approach allows people from all levels to participate and interesting allows delegation of authority without loss of status. This, along with modern insights on brain plasticity is one reason why I and others challenge any framework based on progressive or hierarchical concepts. 

A human sensor network is whole of employee of citizen ship engagement in problem solving using technology to remove barriers of time and space. The goal is to support decision making and understanding. 

Both of these approaches rely on changing the connections between individuals not on individual capability (although that does come in to some extent). That difference is one of the key switches those of us approach organisations from a natural science perspective are taking. It means that we do criticise ideas of progressive capability to handle complexity (for example).... 

So I am not sure I can answer you question in such a way as to fit into the paradigm that its formulation implies, but I hope this has been useful.
Sheesh! I didn't think my question was that difficult! And more importantly, it wasn't answered. Rather, an answer was avoided. Imagine how difficult it must be to select members of a crew! 

In all fairness, I have no idea what a "crew" or a "human sensor network" is, even though the author thinks one was provided ("whole of employee or citizenship engagement in problem solving using technology to remove barriers of time and space"), so maybe my question really doesn't make any sense...er...”fit into the paradigm that its formulation implies.”

Actually, I think a “human sensor network” is akin to crowd-sourcing – aggregating information from individuals via electronic means – but saying that wouldn’t be appropriately opaque.

(I am reminded of an incident I observed when I was in grade eight, when a pretentious six-foot-plus science teacher brought two boys into the office, holding on to them by the collars of their winter jackets, and announced loudly for all to hear that "these two boys were caught catapulting ballistics in front of the school." The office staff had no idea what he was talking about, so he had to explain that he had caught them throwing snowballs.)

Anyway, I'm skeptical that the answer provided to me is a real answer. Perhaps I'm being played with in the manner that Alan Sokal scammed the journal Social Text with his parody of postmodern criticism of science! If the explanation provide to me is for real and an example of quality of training business leaders are receiving to manage complex business problems, I hope these managers are able to put this stuff to good use in creating value for customers and shareholders. Hopefully a positive ROI from investment in this training is just one of the many positive outcomes that will be derived through the removal of the barriers of time and space.

There are many other examples of this kind of thing - of highly educated technocrats creating proprietary terminology to stand for improperly or undefined concepts. Often these constructs are so abstract and impenetrable as to be rendered useless as valid tools of cognition in helping us understand and organize information and knowledge for human use.

A convoluted theory that was recently brought to my attention as being meaningful and helpful in gaining deeper insights into organizational design is an idea called “panarchy.”

Here’s how the usefulness of panarchy was explained to me:
Panarchy theory is useful to make object transitional patterning and discern this from transformation, translation, transmission and composition patterns. Seeing resilience and robustness as counterparts contributes to agility, and helps prevent category errors.
The person who posed panarchy as useful asked me what I thought of it. Here’s an edited version of my reply:
Concepts have to stand for something that exists. They serve as a way for humans to condense and process information. When concepts don't correspond to anything in reality, they are floating abstractions and therefore invalid concepts. When it comes to language, I don't subscribe to making things more difficult and abstract than they need to be, which is what appears to be happening here. 
For example, if you say, "It is useful to point to systems in a way that is relevant to a group and meaningful to those who are part of it," I can understand what that means. But when words that stand for concepts are inserted with undefined meaning, and those words only seem to be used to create a lack of clarity, then understanding is completely lost and nobody knows what is being talked about.
That may not be what is happening here, but I have no idea what it means when someone says to me: It is useful to use translation to direct composition to a group through transmission. If, to be understood, they have to say, "well, what I mean is that it is useful to point to systems in a way that is relevant to a group and meaningful to those who are part of the system," then why not just say that in the first place? And do those two sentences really mean the same thing? Nobody knows. 
The first explanation provides no meaning. There may be specialized meaning to these concepts, but unless the person you are having a conversation with knows what they are, the words you utter are just sounds, and no communication is taking place. 
I prefer simpler language that people can understand. I know technical language is sometimes needed to condense information into higher-level concepts, but for people to understand it, they have to understand all the links back to something that they can relate to -- to real objects. 
You indicate that these abstract concepts are non-objects. I'm not sure that one can work with non-objects, as you propose, even conceptually. All valid concepts are a condensation of knowledge about things that exist and can be validated by the evidence of our senses. 
Don't get get me wrong. I'm not saying whether or not "panarchy theory" is valid or invalid. I'm just saying in general that it appears to be making things more complicated by introducing specialized language that IMO makes things less clear rather than more clear, at least as you've tried to explain it. I'm not a systems theorist, so I'm in no position to pass judgment on the validity of Panarchy Theory and whether it is epistemologically sound.  

I challenge anyone with too much time on their hands to make sense of this explanation to which I was referred, and then explain in regular language how it provides practical help in contributing to or achieving any human goal, particularly one related to business organizations.

Sunday, July 06, 2014

Elliott Jaques Reflects on Ethics For Management

Most readers of Elliott Jaques' work on managerial systems know that like Deming and Ackoff, he looked towards the incentives and disincentives built into systems as the primary determinant of the actions of individual operating within those systems, rather than immediately looking to place blame on the individuals themselves. He was of the opinion, based on his personal experience and observations, that systems, not people, were at the root of most business problems.

He reflected on how improvements to management systems could lead to more ethical outcomes in a paper titled "Ethics For Management," published in Management Communications Quarterly, Vol. 17, No. 1, Aug 2003.

In Ethics for Management, Jaques writes that the problems of rampant unethical behavior in organizations as seen at Enron or Arthur Anderson "are a direct reflection of deep-seated and chronic problems embedded in our governance and people-management systems and practices." Such systems, he says, often undermine the requisite practices needed to promote acceptable ethical behaviors. "Dysfunction-inducing systems like these cannot be repaired by teaching ethics," he writes. "The systems themselves need drastic changes to bring them into line with ethical requirements."

Jaques proposes solutions that are inherent to the system of management he developed which he called Requisite Organization, and which include the following elements.

1. Corporate Governance, which needs to adopt mechanisms that promote a longer-term outlook on business management.

2. Appropriate vertical structuring with optimal layers "determined by  the measured size of the top executive role" as objectively measured by time-span.

3. Define accountability for each role in which managers are "accountable for the results of the work and working behavior of their immediate subordinates," because it is managers who determine the work and guide the behavior of their direct reports. When subordinates are held accountable for their own work and bonuses are used as an additional incentive, the door is opened for the active manipulation of short-term results and "the expression of corrupt practices at the top that are driven by the same systems that drive corruption at the bottom."

4. Performance appraisal and compensation systems that pay fair differentials for differences in levels of work. Pay should be related to the difficulty of the work assigned to subordinates by their managers as measured in time span. The assumption is that when people are paid appropriately for the work they do, they do not require additional incentive systems that often unsuspectingly promote unethical, dysfunctional and corrupt behavior.

5. The selection process to fill roles is often inadequate to ensure that the person selected "is the right person of the right size for the size of the role." When people are over-promoted -- assigned to do work above their level of applied capability -- the inevitable result is an undermining of accountability in the system. People who are over promoted have a tendency to "manipulate results in order to look better than they are." Using tools discovered and developed by Jaques "to measure accurately both the size and complexity of roles, as well as the size and ability of individuals to handle complexity," will, says Jaques, "without any other changes, consistently [produce] shifts in behavior towards ethically sound practices."

The failure of CEOs and managers to properly address these aspects of their management systems, writes Jaques, contribute to corrupt behaviors in organizations by creating dysfunction and the erosion of trust.

Jaques' prognosis is that CEOs and executive leaders have a tremendous impact on the ethical behavior of their people based on the types of governance and people-management practices they have in place. Leaders need to take more seriously that impact that the systems under their direct control have on the effective functioning of their organizations to serve customers, employees, and other social and economic beneficiaries in an ethical manner.

Monday, May 12, 2014

Smart People Can Ask The Darndest Things

Someone with an acute sense of humour and perhaps scientific training once said that the two most common elements in the world are hydrogen and stupidity.

Here's a great story about stupidity from famous Beatles record producer Sir George Martin. It comes from the bonus material on the DVD documentary "Produced by George Martin."

Sometime early in his career as a young record producer at the famous Abbey Road Studios, following a board meeting, the directors of EMI came to the studio to see what was done there. Martin tells the story.
You had all these directors and non-exec directors wandering around saying "Well tell us about this now."
And of course, I being the  young Martin, was given the job of escorting them around. And I showed them all the studios and told them what we did. And one bloke said, "Look Martin, I want to get something from you because I'm puzzled by this."
I said, "Yes?"
"Well, last year, as a group, we issued six hundred and sixty singles."
"Yes," I said, "that's about right."
He said, "And only twenty-five of them made the charts."
"Yes."
And he said, "And those twenty-five were responsible for ninety percent of our profits." 
 "Yes," I said. "That sounds reasonable."
He said, "Why did you make the other six hundred and thirty-five?"
I was floored. I thought, "What a stupid thing to say." This was a man who earned about a hundred times more than I did and he had no concept of what we did in the studios."   
  

Tuesday, February 25, 2014

It's An Economic Fact: Free Markets Cure Poverty

I found this to be interesting information on the correlation between capitalism and the fight against poverty. It is from the transcript of the Freakonomics podcast of 12/19/2013, "Pontiff-icating on the Free Market System." The podcast guests include economist Jeffrey Sachs and Joe Kaboski, economics professor at the University of Notre Dame.

This quote is from Joe Kaboski:

"[W]e’ve never seen an example of any country that has escaped extreme poverty because of foreign aid or NGOs. And more people have escaped extreme poverty in the past 25 years in part through the growth of China and India than in any period of human history. And all of these miracle countries, miracle in the economic sense, China, South Korea, Taiwan, Hong Kong, Singapore, you know, Chile down in Latin America, they’ve all grown through high levels of trade, market economies. And that’s important. The importance of a market economy you can see no better than South Korea and North Korea. I mean, North Korea people are starving to death and dire poverty. And South Korea is basically a high income country at this point, and it’s because of 40 years of intense growth versus opposed to 40 years of stagnation or even going down."

More wealth is created when people are free to think, to choose, to act, i.e., to be free to exercise their minds, than when freedom is constrained by arbitrary restrictions against cooperation and economic liberty. Political coercion always creates economic chaos and is less optimal that economic freedom. This is a basic moral, political and economic principle. 

The State of Ebony - Taylor Guitars

I think this a great story about how consumers and business leaders should embrace long-term thinking to improve their lives. We can continue to make our lives better by embracing voluntary exchange instead of sanctioning government coercion by taking responsibility for the values we support. As consumers, we really do empower entrepreneurs to work for us. Let's support the one's that do work that we truly value, and not the one's that engage in irrational and destructive behavior. Morality and free markets go hand-in-hand.