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Ron Baker - 02/01/2012
Reading business books is tedious, as former management consultant Martin Kihn reminds us:
Business books are boring. They are bloated compendiums of half-baked ideas committed in fourth grade prose. Their purpose is to transform a commonsense concept or two into a consulting career through the catalyst of hollow jargon.
If you’re over reading business books, here are my ten favorite books from 2011, which I thoroughly enjoyed.
Steven Levitt and Stephen Dubner. Super Freakonomics.
An enhanced version of the hardback book. It does contain more information, much of it quite interesting. If you read the original hardcover, though, this one is probably not needed, but still a fun read.
William J. Bernstein. The Birth of Plenty.
I enjoyed this book immensely; it is a tour de force of history, economic growth, and the importance of institutions.
The author, a Medical Doctor, has truly done his homework. His question is simple: Why did economic growth explode when it did (1820)? Until 1820, per capita economic growth was near zero. He concludes it’s not geography, climate, exposure to microbiological agents (as Jared Diamond has argued in his books), but rather four factors:
- Property rights
- Scientific rationalism (positing and falsifying theories)
- Capital markets
- Improvements in transportation and communication
Which of the four is most important? All of them are like ingredients to a cake, all are equally important to produce a just dessert.
It’s not physical objects (materialism) that matters, but rather institutions. Yet here I believe the author doesn’t go deep enough. What about Human Capital, and not formal education, but attitudes, entrepreneurship, linguistics, and faith in the future? I think Deirdre McCloskey is closer to the answer with her book series on Bourgeois Virtues.
Also, the importance of trust in expanding the number of strangers we can deal with is critical to free markets.
And yet for all it’s virtues, there are major points where I disagree vigorously with this author.
He claims that government needs to regulate the stock market to prevent accounting scandals, fraud, and protect investors. He should read George Stigler’s work on why the SEC is ineffective.
We’ll never reach perfection, nor zero fraud, nor is riskless risk an option. He points out market failure but never discusses government failure. In the real world intentions don’t matter; results do.
He does the same with the Great Depression, without ever mentioning the recent economic research that shows the government and New Deal policies prolonged and deepened the Great Depression.
He claims that income and wealth inequality rises during periods of rapid industrialization as a few prosper at the expense of the rest of society. Yet this is zero-sum thinking, and it’s economically illiterate.
He’s a “gapologist” who believes inequality matters. But relative inequality is another word for envy. What matters is absolute poverty. I rather be poor anywhere in the world today than 200 years ago.
Nor does he seem to realize the poorest people are not the same people over time—we do have tremendous mobility in the USA and other free market economies. He’s read Thomas Sowell on history, he should read his work on income and wealth inequality.
But the only known antidote to poverty is wealth, and while this book is an exploration of how wealth is created, the author seems to revert to the socialist idea of redistribution rather than creation.
He also pulls out the old canard about CEO pay, again so what? It’s not his money, and if it is, sell your stock if you think Apple pays Steve Jobs too much.
The author states near the end that property rights are expensive to enforce. So what? This is one of major reasons we have government, so the price is worth paying.
The book rarely uses the word freedom and liberty, except in the discussion about property rights. But the author seems to be too enthusiastic to suspend these rights in his quest to close the inequality gap.
As long as you are grounded in the works of Thomas Sowell and George Gilder, read this book for a great historical tour, but ignore his conclusions for a better ordering of the universe. He’s off the mark too often.
Top Choice: Kevin Williamson. The Politically Incorrect Guide to Socialism.
This is a fantastic book! It is well written, irreverent in places, and an excellent historical tour of the failures of socialism and communism.
Kevin Williamson is an editor at National Review. He begins by defining socialism, and not as the “ownership of the means of production” but by two factors:
- Public provision of non-public goods; and
- Economic central planning.
Even a mixed economy like the USA can have pockets of socialism—public schools, Medicare, Obamacare, Social Security, etc.—just like communist/socialist countries can have pockets of free markets.
There is a learned discussion of the enormous difference between the Labor Theory of Value and the Subjective Theory of Value, and the importance of the role of prices.
Williamson devotes a chapter each to debunking the socialist paradises of India, Sweden, North Korea, and Venezuela, and one on why socialism is really bad for the environment (the ten dirtiest cities in the world are all in socialist or former socialist countries).
If you think the BP oil spill was bad, it’s nothing compared to a government run company that takes zero responsibility and pays no damages to injured parties.
I also loved how he lambasts the idea of “US energy independence,” a centrally planned socialist dream if there ever was one. Why should we be independent with respect to energy? This is the road to poverty, not wealth.
He even does an excellent job at explaining why mark-to-market accounting is so wrong, and how it contributed to the Great Recession of 2008. This is because GAAP cannot predict value into the future, but rather only record it after a transaction has taken place.
I highly recommend this work, and it makes me want to read other books in the series.
Top Choice: Guy Sorman. Economics Does Not Lie.
What’s scarcer than bird crap in a cuckoo clock? A French intellectual who champions the free market. This is an excellent book, well written and researched, on how societies create wealth and how economics leads the way.
The enemy of human development is bad economic policies. Since the 1980s, 800 million people have escaped mass poverty, especially in China and India. The book is a wonderful exploration of how wealth is created, and the author believes in the premise of explaining wealth, not poverty (which is rare in circles other than economics).
He devotes an entire chapter to Paul Romer’s New Growth Theory and the necessity of ideas. And while economists know how to create wealth and avoid poverty, they cannot guarantee prosperity for any one individual anymore than a doctor can heal every patient.
The author favors globalization, and cites the leading economic thinkers who defend it as one of the most effective ways for countries to escape poverty.
Just look at the countries that were isolated (USSR, China, India) and how they only escaped by opening up to trade. Look at the countries that remain isolated to see how the alternative works (North Korea).
The author rightly points out that the Chinese Yuan has become a scapegoat for outdated US companies, and how China’s prosperity depends on US consumers.
It never made sense to me why we fear China, India, or indeed any other country, becoming rich. If China invents the cure for cancer, aren’t we all better off even though we didn’t get the jobs?
The author devotes a section to the limits of rationality, and discusses behavioral economics. As for the argument that behavioral economics will lead to statism, he argues that this is unfair to the theory since it also accounts for the irrationality of government actors (as does Public Choice Theory).
There’s a chapter on the Asian Tigers, India, and Brazil. Another chapter explains why China’s capitalism is not a third way, but rather the result of capitalism being highly diverse and capable of handling many types of regimes—from Hitler and Pinochet to Francos.
Another chapter looks at Europe and the USA, with some very interesting insights on which is declining. Another looks at the setting sun of Japan, and another asks if the Greenhouse Effect will leave us broke? The answer is no.
The author even explains why the Kyoto protocols aren’t working in Europe; because you cannot create a market by decree.
The only disagreements I have with this author are minor: his claim that diversity in universities create better business managers is more conventional than wisdom, and his views on why insider trading laws are necessary. But these are minor quibbles.
His concluding chapter lays out a synthesis of the findings of economics into 10 propositions, a consensus, if you will, among economists:
- The market economy is the most efficient of all economic systems.
- Free trade helps economic development.
- Good institutions help development.
- The best measure of a good economy is its growth.
- Creative destruction is the engine of economic growth.
- Monetary stability, too, is necessary for growth; inflation is always harmful (this last point is debatable).
- Unemployment among unskilled workers is largely determined by how much labor costs (why Europe’s labor markets are so rigid—it’s expensive to fire).
- While the welfare state is necessary in some form, it isn’t always effective.
- The creation of complex financial markets, despite excesses, has brought about economic progress.
- Competition is usually desirable.
This is a refreshing, optimistic book. Coming from a French intellectual—in the mold of another Frenchman who understood capitalism, Jean-Francois Revel—makes it that much more pleasant. Highly recommended.
Donald Luskin and Andrew Greta. I am John Galt.
This is an innovative book, and the authors have really done their homework on Ayn Rand.
They compare the heroes and villains from her novel, Atlas Shrugged, to real-life people from today, drawing some interesting parallels, while demonstrating how prescient some of Rand’s fictional scenarios have turned into ugly reality.
Some of the heroes: Steve Jobs; Bill Gates; John Allison, of BB&T, the 12th largest bank built on Objectivism principles, and a bank that refuses to loan to developers who seize property through eminent domain; TJ Rodgers of Cypress Semiconductor and an outspoken capitalist; and the last chapter is devoted to Milton Friedman, the Champion of Liberty, even though Rand had some disagreements with his views.
The villains are also interesting: Paul Krugman—the one author, Donald Luskin, actually founded the Krugman Truth Squad blog, whose purpose was to debunk his NYT editorials with facts, evidence, and the truth; Barney Frank is exposed for his major role in the housing crisis, which is also covered in depth and brilliantly in this work; and Angelo Mozilo from Countrywide Mortgage fame for his role is sub-prime lending, illustrating the perils of moral hazard created by government entities Fannie and Freddie.
If you’re a Rand fan, you’ll enjoy the parallels to her books, as well as the chapter on Alan Greenspan ("The Sellout"), who was a Randian insider, and to this day believes in her philosophy. A good, cogent read.
Todd Buchholz. Rush.
In the spirit of The Rational Optimist, Todd Buchholz has written an uplifting book. He makes the very counterintuitive claim that happiness comes from us rushing around.
There’s no evidence that cutting out the frenzy in our lives would make us happier. In 1900, the average life expectancy was 47; today it’s fast approaching 80. Could it be that competition and stress actually extend life?
Buchholz cites a lot evidence—from all fields—that they do. He takes on the “Edenists” who believe we are all on a hedonic treadmill. But it’s not envy, greed, or keeping up with the Smith’s that keeps us rushing around. It’s the drive to improve ourselves, create, build, and earn our keep.
Why else would anyone attend college, take the Bar, or CPA exam?
This drive is encoded into our genetic nature. Aristotle believed in cultivating good habits, and the very term “second nature” recognizes we have a first, while holding out hope it can be changed.
What separates humans from animals is our ability to create for the future; indeed, Buchholz says we spend 12% of our time thinking about the future. Personal control predicts happiness much better than income.
Why aren’t you happy is the wrong question. Social scientists ask the wrong question a lot: like, what are the root causes of poverty? (rather than what creates wealth?), or why do bad things happen to good people? (why don’t bad things happen all the time?).
I also love Buchholz’s discussion on how an advanced economy relies on transactions among strangers. It’s strangers, not neighbors or a village, that creates wealth. Commerce fosters the Rule of Repeats, which turns strangers into partners (think of how your life is the hands of an airline pilot).
This is the virtue of a competitive economic system. Reputation counts:
Trusting someone we have just met—or even more astounding, trusting someone we will never see face-to-face—that is the trick to moving from mud huts to prosperity. ...It requires more flexible brain patterns. We are a face-to-face species.
He also discusses the Industrial Revolution, saying perhaps it should be called the Industrious Revolution.
Also, even though GDP is a flawed measurement, happiness measurements are worse. At least GDP shows a strong correlation with longer life, higher IQs, more charity, and less crime.
Buchholz also debunks the Emotional Intelligence and self-esteem fads. He even takes on Dan Ariely’s work along with behavioral economics. Relying on young people, in contrived laboratory experiments, has major biological flaws.
But what he wants the Edenists to answer is when should we stop moving forward. 1776? 1900? If so, we wouldn’t have airplanes and polio vaccines.
Without the Twentieth century’s progress, we’d all be watching television by candlelight, according to Milton Berle.
The philosopher Kierkegaard called anxiety the dizziness of freedom. If everything is stress, then the only answer is Timothy Leary’s “turn on, tune in, drop out.”
Surely that’s not the answer. We are fine-tuned for adaptation and survival, much less so for happiness.
Yet we try, even though it’s elusive. The stress, competition, and struggle is what keeps us all going. On balance, it’s all good.
Top Choice: Thomas Sowell. The Thomas Sowell Reader.
As usual, brilliant!
Paul Johnson. Humorists.
This is the fourth book in Paul Johnson’s excellent series; the first three being Intellectuals, Creators, and Heroes (all reviewed on my Shelfari shelf).
He starts by stating that comics are probably the most valuable of the four, as the world is a “vale of tears,” and the central force that creates laughter is chaos, contemplated in safety.
As with any Johnson work, this book is full of interesting historical facts, and no one profiles historical figures better than he does.
We learn that both Karl Marx and Jeremy Bentham thought punning was beneath them, the latter calling it “an atrocity.”
Where else would you learn that Field Marshall Helmuth von Moltke, the leading nineteenth-century Prussian strategist, laughed only twice: once when told that a certain French fortress was impregnable, and once when his mother-in-law died.
Also that the catch-phrase was invented in the 18th century. His first profile is Hogarth, then Ben Franklin, who invented the one-liner in Poor Richard’s Almanac, and maybe even the term “smart aleck.”
We learn that Charles Dickens used to write a paragraph, stand up and act out the scene, including facial expressions, in a mirror. Not very efficient; but highly effective.
Reason itself is a matter of faith, which is why “poets do not go mad—but chess-players do.” See Bobby Fisher. Maybe this is how House, M.D. will meet his end?
Damon Runyon is profiled, as is, of course, W.C. Fields, who along with J. Edgar Hoover hated Eleanor Roosevelt.
Fields was full of one-liners, “Women are like elephants. I like to look at them but I don’t want to own one.” Mae West is also mentioned, along with one of her favorite jokes: “She was Snow White, but she drifted.”
Charlie Chaplin comes in for some criticism, his biggest moral failure being he never criticized communism. His most famous movie, Modern Times, was an attack on industrial capitalism, but the movie was banned in Nazi Germany and Fascist Italy.
Laurel Hardy and the Marx Brothers are included, with some great one-liners from Groucho: “I never forget a face but I’ll make an exception in your case.” “I’ve been around so long I can remember Doris Day before she became a virgin.”
The book ends on a note of pessimism on the state of humor. Johnson points out that over the last generation Political Correctness has created “hate terms” and allegations of “racism,” creating the most comprehensive system of censorship since the days of Hitler and Stalin.
He writes:
The future of humorists thus looks bleak, at the time I write this. The ordinary people like jokes, often crude ones, as George Orwell pointed out in his perceptive essay on rude seaside picture postcards.
Let’s hope that our comedians are braver than the forces of PC, for the only line drawn in humor should be whether or not the joke is funny. Would you agree, Greg Kyte?
Mark Steyn. After America.
Mark Steyn is one of my favorite writers. Not only does he provide brilliant commentary, he does it with an acerbic wit that’s a joy to read.
His column in National Review, and blog, are must-reads. His latest book is a force to be reckoned with.
Using the acronym ARMAGEDDON to arrange the book, Steyn touches on the world’s woes.
Here’s what it stands for: Addiction; Redistribution; Monopoly (i.e., government); Arteriosclerosis; Global Retreat; Engineering; Decay; Disintegration; Open Season; and Nukes Away.
Steyn offers excellent analysis of: Europe’s idiocy; cultural decline; demographic decline (the future belongs to those who show up for it); how debt is a moral issue, not an economic issue; the strangulation of the human spirit from government regulation and Nannyism (big government makes small citizens); the failure of Keynesian economics’ the self-deluding self-esteem movement; and of course, PC lunacy.
He thinks the USA’s inability to replace the World Trade Center after a decade is a shame, noting that the Empire State Building was built in 18 months during the Great Depression.
Today, you couldn’t build the Hoover Dam, and even if you did, it would be shut down for not being wheel chair accessible.
That’s not to say I agree with everything he writes. He seems to believe in “manufacturism” and the materialist fallacy, since he cites the Boeing 747, Concorde, and the Moon Landing as the era when human capability peaked (1965-1975).
This ignores Google, Apple, and a host of other advances since then.
I find Matt Ridley’s The Rational Optimist far more compelling on why our future will be better.
Steyn also seems to believe that buying a house is the surest route to wealth for most Americans. But surely human capital is far more important, which he recognizes when he chastises China for destroying so much of it.
He also uses the line “They have our souls who have our bonds.” But this is debatable. What does it mean that China buys our debt? Is that a sign of weakness or strength?
Nevertheless, you will LOL at many places in this book. Steyn is incredibly entertaining, probably more so Than PJ O’Rourke. This is well worth reading, and pondering. It will, no doubt, change your mind on a variety of issues.
Mark Kramer, et. al. The Black Book of Communism.
This is a somber, but critically important, book. It sets out to answer the question, Why?
Why did communism exterminate its enemies. Why was it bloody no matter where it was implemented? It claimed it needed to break eggs—and it did, to the tune of about 100 million deaths—to make an omelet. But there was never an omelet.
Why did it inspire other nations, whereas the French Revolution never did (all communist nations were linked by an umbilical cord to the Soviet womb)?
Why was there no Nuremberg trial, no stigma, no accounting for the massive crimes of this regime?
Why was there never a “benign” period in the evolution of communist regimes? All were bloody form the start.
The Tsarists, between 1825-1917, committed 3,932 deaths. This number was surpassed by the Bolsheviks in four months.
Communism didn’t just commit criminal acts; it was a criminal enterprise.
Whereas Nazis killed based on race and territory, communism murdered based on class.
All I could think of as I read this work was Stalin’s memorable line: “One death is a tragedy; one million is a statistic.” The death toll is almost unbelievable:
- USSR = 20 million
- China = 65 million
- Vietnam = 1 million
- North Korea = 2 million
- Cambodia = 2 million
- Eastern Europe = 1 million
- Latin America = 150,000
- Africa = 1.7 million
- Afghanistan = 1.5 million
- International Communist movement not in power = 10,000
This approaches 100 million deaths. By (gruesome) comparison, Nazism murdered about 25 million.
Yet the French government’s National Lottery actually used an image of Stalin and Mao in an advertising campaign. Could you imagine if some enterprise dare used Hitler or Goebbels? At least Nazis were made to account for their crimes.
The book catalogs the crimes of the USSR, from the Red Terror, Great Terror, Great Famine, collectivization and dekulakization, The Gulag, the Katyn massacre, up to Khrushchev’s Secret Speech.
In chapters, it explores communism around the world: Spain, Poland, communism and terrorism, Central and Southeast Europe, China, North Korea, Vietnam and Laos, Cambodia, Latin America, including Cuba and Nicaragua, Africa, and Afghanistan.
What also makes this book amazing is that the authors are a group of French scholars, many of whom were actually supporters of communism at one time, but now are rethinking that position.
This has not made them popular with their left-wing friends, but as they say, they have to go where the truth leads them.
I’m not sure this book answers the question as to why. Maybe there is no answer, excepts man’s unbelievable capacity for cruelty in the quest for Utopia.
No one can read this book and walk away without feeling an incredible hatred for not only a bad idea (communism) but also the ruthlessness of the people who acted in its name.
This is a heavy book, and it is a bit dated (1999), since more research is coming out everyday from the opening of archives in the former Soviet Union. However, it is one volume that chronicles, in graphic detail, the murderous regimes and should be read by anyone interested in the history of ideas.
Ron Baker - 01/30/2012
Someone recently asked me which were the best business books I read last year. Since we here at VeraSage are inveterate readers, I’d love to know your best books from last year.
Tom Hood recently posted his, so I thought I’d share my Baker’s Dozen.
Some of these books I’ve already reviewed elsewhere, so will limit my remarks to books not previously discussed.
I’ve also noted my absolute Top Choices, so if you only read a few from this list, start with these.
Also, as always, you can access my shelf at shelfari.com for my complete library, my Top 100 Best Business Books of all time (see tag “bbb” underneath the shelf).
Business Books
Peter Drucker. Technology, Management and Society. Read full review here.
Jim Rains. Target Cost Management. Read full review here.
Top Choice: Thomas Alexander. Stanley Marcus: The Relentless Reign of a Merchant Prince.
He was called “America’s Merchant Prince,” and “the melancholy Plato of retailing.” I consider Stanley Marcus the grandfather of Total Quality Service.
Here’s a man who understood the value of each and every customer, long before CRM and Lifetime Value became management fads.
The founders of Neiman Marcus also certainly understood their “Why” (see Simon Sinek’s Start with Why).
Stanley wrote four books during his lifetime, but this is one of the only ones I’ve seen written about him by an insider, Thomas E. Alexander, who met Stanley in 1965 and served nearly 20 years as his executive vice president of marketing.
This was an incredibly demanding job, since Marcus was the consummate marketer, and many previous men failed in this role. Alexander obviously did something right that made Marcus keep him around that long.
Alexander gives you an insider’s view of the famous Neiman Marcus Fortnights, a Dallas institution until they were discontinued in 1986.
There are many fantastic pictures and other inside stories of how Marcus conducted business, treated customers, his team, and foreign government officials. Many of the pictures come from the Stanley Marcus Collection at South Methodist University, DeGolyer Library.
You’ll read about the first out-of-state store in Bal Harbour, Florida, opened in January 1971, and also the controversy of the San Francisco store opening at Union Square.
The columnist Herb Caen was an vocal critic of Neiman Marcus opening there, and the irony was that Stanely Marcus was farther to the left than Caen ever dreamed of being.
One very amusing anecdote about Marcus are the two things that exceeded his expectations, which were very high. One was Sophia Loren, and the other was the Bohemian Grove in San Francisco.
In the final chapter, “Saying Goodbye,” Alexander tells of Marcus, age 95, reflecting: “Without change, there is no challenge, and without challenge there is only the status quo but no progress.”
Wise words. Stanley Marcus was an amazing man, and his story is compelling on many levels. This book adds another dimension to a man who has left an indelible legacy on the culture. Well worth reading after you read Marcus’s own, Minding the Store, the best book ever written on customer service.
Robert Kanigel. The One Best Way. Read full review here.
Bob Lutz. Car Guys vs. Bean Counters. Read full review here.
Top Choice: Howard Hansen and Steven Geske. Healing Leadership. [Kindle Edition only].
I had the honor of writing the foreword to this book, but it doesn’t change the fact that this book had a profound influence of my thinking. Here is an excerpt from that foreword:
They say any writer should be able to sum up the purpose of their book on the back of a business card. I can do that for this book by using another author’s book:
The colossal misunderstanding of our time is the assumption that insight will work with people who are unmotivated to change. If you want your child, spouse, client, or boss to shape up, stay connected while changing yourself rather than trying to fix them.
As with most ideas and relationships, it is no coincidence that the above was written by Edwin H. Friedman, in his masterful book A Failure of Nerve: Leadership in the Age of the Quick Fix.
Healing Leadership takes a totally different approach, and one that is not very comfortable for those of us used to reading business books. How many books on leadership have you read where the central message is you can’t succeed at affecting change in the people you lead? That you need to get out of the business of needing others to change? The authors even admit they won’t get rich by dispensing this type of advice.
Rather than assaulting the reader with endless platitudes and checklists of “do this and don’t do that,” this book advocates a “way of being,” recognizing that leadership is an emotional process, not a mechanistic science that treats humans like machines.
You are about to explore some very profound, powerful, and simple concepts. But please don’t confuse simple with simplistic. Virtuoso bass player, accomplished pianist, bandleader, and composer Charles Mingus said: “Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that’s creativity.”
Three creative concepts from Healing Leadership have permanently altered not only my worldview, but my behavior. The authors present the “Energy Management Model,” which teaches how we could have greater success in achieving our goals if we tried not so much to control time—an impossibility, as it is outside us—and instead tried to control energy—eminently possible, as it is within us.
You’ll learn the difference between episodic and chronic anxiety, along with the 10 telltale signs of someone who is chronically anxious, and what to do about it.
Finally, the concept of Emotional Triangles—what the authors call “the weather of human relationships.” This framework ties everything in the book together, while offering an enormously effective way to lower your anxiety. After reading about Emotional Triangles you’ll wish you had understood them in elementary school.
But don’t confuse simple with easy. These frameworks are very counterintuitive, and they will no doubt cause some confusion. Don’t despair. That’s a leading indicator that your understanding is deepening. You simply must wrestle with the concepts in this book if you want to achieve real change—transformations that will truly make a difference in your life.
One of my favorite definitions of the role of leaders comes from business consultant Peter Block: “The real task of leadership is to confront people with their freedom.” In Healing Leadership, Steven and Howard do exactly this. It’s not comfortable, it’s vexing, and it goes against everything you were taught in business school. The difference is: it works.
John Kay. Obliquity.
John Kay is an economist who has written many books I highly recommend. He does a good job blending economic theory with business strategy.
This book is all about obliquity, which he defines as “Goals are often best achieved without intending them.” Achieving complex objectives indirectly rather than directly. The real world isn’t like Sudoku, where you can arrive at your objective directly.
Citing many different examples of this concept, Kay does an excellent job of applying it to business. A couple of example of the obliquity route: cities. Jane Jacobs despised the urban planners who believe they can directly create a great city. Great cities flourish when they are unplanned, which leads to creativity.
Creating shareholder value (which Jack Welch called one of the dumbest ideas) is an example of a direct objective, but it’s obtained indirectly by creating great products (think Apple). No one works to maximize shareholder value.
We do so more in line with Simon Sinek’s Start With Why. Kay does a good job dispelling the notion that business is based on greed: “A corporate culture that extols greed cannot, in the end, protect itself against its own employees.”
He talks about how measurements can cloud judgment. Using [Benjamin] “Franklin’s Rule” (drawing up a list of Pro and Con to make rational decisions), Kay illustrates that real decisions aren’t made this way—though we think they should be.
Robert McNamara’s tragic management of the Vietnam war by the numbers illustrates the flaw in this thinking.
Kay also discusses the “teleological fallacy,” which infers causes from outcomes, and how it’s one of the oldest mistakes people make. Today we call it the Halo Effect.
Kay explains why business autobiographers can describe their success, but not explain it. Sort of like John Paul Getty’s advice: “Strike oil.”
Kay also explains why it’s more important to be right rather than consistent (unlike, say, in legal matters, where precedent is more important).
The book validates much of my own thinking in Measure What Matters to Customers, especially the Seven Moral Hazards of Measurements.
Numbers give a false sense of precision and it’s no way to build a great business. Think Six Sigma when Kay writes: “The process in which well-defined and prioritized objectives are broken down into specific states and actions whose progress can be monitored and measured is not the reality of how people find fulfillment in their lives, create great art, establish great societies or build good businesses.”
Top Choice: Tim J. Smith. Pricing Strategy.
I met Tim Smith at the Professional Pricing Society conference in Chicago in April 2011. He told me he read my book (Pricing on Purpose) while in Prague, which kept him from getting into trouble...LOL.
He does cite my book in his, as a justification for pricing discrimination. Although this book is more like a textbook, and is very quantitative, it’s still very readable and enjoyable.
He’s got plenty of thought-provoking exercises (there’s a companion workbook for this text). Smith understands that pricing is not just about the numbers; that it’s more art than science, but he does discuss both, and even has a chapter on behavioral economics.
Overall, this book needs to be in every serious pricer’s library.
William Taylor. Practically Radical.
I enjoyed William Taylor’s other book, Mavericks at Work.
This book is also good, with three major themes: 1) Transforming your company; 2) shaking up your industry; and 3) challenging yourself.
A lot of it is profiles of change agents from a wide swath of sectors, some of whom you’ll find fascinating. Most change fails because it focuses too much on what’s wrong while undervaluing what’s right.
The book advises not to benchmark your competitors for new ideas (stop looking in the same places) and gather as many “zero-gravity” thinkers as you can—folks who are not weighed down by the baggage of industry expertise.
Taylor also understands the importance of a company’s “Why” or purpose, and provides many thought-provoking examples and research supporting this concept.
He’s wrong about the housing crisis at the start of the book, but other than that, this is good journalism, along with some important lessons. If you enjoy reading about entrepreneurs and change agents, this is well written and very interesting.
Dan S. Kennedy and Jason Marrs. No B.S. Price Strategy. Read full review here.
Andreas Widmer. The Pope & The CEO.
This is a great book by a former Swiss Guard, who are charged with guarding the Vatican.
Adreas Wedmer spent two years (1986-88) in his early 20s guarding Pope John Paul II, and this book discusses the leadership lessons he learned, which helped him become a successful entrepreneur.
He met Ronald Reagan at the Vatican in June, 1987, two days before Reagan delivered his “Tear down this wall” speech in Berlin. There’s a great discussion of ethics in the book, with the point being made that utilitarianism is the framework behind pornography.
Also, how firms are not moral agents because they have no soul. Hence, a person-centric framework is what the Pope espoused. Other lessons from the Pope apply to business as well, since business and faith go together.
I found the inside look at the Swiss Guards fascinating. A very worthwhile read.
Joseph Maciariello and Karen Linkletter. Drucker’s Lost Art of Management.
This is an incredibly deep book, which contains a wonderful idea: Management is really a liberal art—not a science or a profession—and should be a humanities discipline.
This would lead to a more humane and moral society. The idea that business is a science has always seemed strange to me, since we are dealing with human beings, not machines. This is an idea Matthew Stewart discusses in his excellent book, The Management Myth.
A liberal art is defined more by what it’s not: vocational training. Its purpose is to educate citizens to be society’s leaders, by emphasizing judgments and values.
Drucker first mentioned this idea in 1988, but he didn’t clearly define it. The two authors of this book both knew Drucker personally, and they are scholars, one from business and the other a historian.
They have researched all of Drucker’s writings on this link between liberal arts and management, shedding light on how this could be accomplished.
Drucker defined himself as a social ecologist—someone who creates and maintains a society of functioning organizations that anticipate change, and manage both continuities and discontinuities.
The book is a deep look at which philosophers, political scientists, economists, and other thinkers influenced Drucker’s worldview. It discusses his concept of the knowledge economy and knowledge workers. It’s a bit long, but still a very worthwhile read.
I now believe society would be better off closing its business schools and folding them back into the humanities. On average, I rather be led by someone with a liberal arts degree than an MBA.
Inder Sidhu. Doing Both.
Why do we build such beautiful bridges, such as the Golden Gate? After all, the military build utilitarian bridges all the time, capable of handling extreme loads. It’s costly to achieve the aesthetic appeal of the Golden Gate, so why bother, especially since the Bay Bridge right across the way does the job just as well without the flocks of visitors or suicide jumpers.
The premise of Inder Sidhu in this book is you can do both most of the time. He’s a veteran of Cisco, the 1984 startup that is now the 14th most valuable brand in the world, according in Intrabrand, and part of the Dow Jones Industrial Average.
This book was recommended to me by a colleague who suggested it would shed light on the “efficiency vs. effectiveness” that we have been engaged in over at VeraSage for years. It didn’t really help settle that issue, but actually reinforced the view that effectiveness everywhere and always trumps efficiency. But it’s an interesting book nonetheless.
Doing both is not a balanced compromise between two objectives but rather a mutually reinforcing multiplier. Each chapter provides an example in broad categories, such as:
Sustaining and Disruptive Innovations. A company doesn’t have to choose between one or the other, but should strive for both.
Multiple business models. Cisco embraces new business models either by acquisition or internal development. This is not easy, but it’s often necessary in order to capture new markets and not be cannibalized. Software as a Service and Subscription based pricing, as with WebEx, are examples of how they have changed their business model.
From volume to value with partners. Cisco evaluates its 55,000 partners not based on volume, but on value contributed—new customers, solving difficult technical problems, entering new vertical markets, etc. Rather than just providing discounts that can be used by bigger partners against smaller ones, Cisco changed the criteria to evaluating value, a great idea.
Excellence and Relevance. “By zeroing in on what matters most to customers, Cisco became excellent by focusing on customer pain points. But it became relevant by moving from customer frustrations to their aspirations.”
Superstars and winning teams. You can have both in your company. I think this one is tougher to achieve than the author leads us to believe.
Westpoint and Woodstock. This deals with the governance model of authoritative vs. democratic leadership. Cisco has both types, and it is a very interesting model, including councils, boards and working groups for decentralized management, and the traditional functions, geography and countries for centralized management. This has potential for professional firms as well.
Overall, this is a short book and a good read. But I still remain convinced that efficiency and effectiveness cannot be “balanced” as they are different things, and this book supports that view.
Honorary Mentions
Two of my VeraSage colleagues wrote books that I read in 2011.
Tim Williams. Positioning for Professionals.
Even with all my bias, this is a fantastic book—a concentrated, yet cogent, look at how professional knowledge firms can position themselves based upon value creation.
Tim dispels many myths in this work, from size being the path to profit, and why going broad is not really as profitable as going narrow.
Tim also takes on “commodity” thinking, debunking this myth as well. As he writes, “Service is a commodity. Smart thinking is not.”
If you are a leader of a PKF, you will profit immensely from Tim’s intellectual capital on how to position and differentiate your firm. As Tim argues persuasively, this is the only way to capture more of the value you create and command premium pricing. A fantastic read.
Jay Shepherd. Firing at Will.
This is an excellent guide to everything an employer needs to know in protecting its legal rights, and avoiding costly litigation and other legal issues. Written beautifully, and very non-lawyerly, it’s easily accessible to everyone. You will get the benefit of Jay’s 17 years of practicing law on the management side. Indispensable. (Ignore the foreword).
Ron Baker - 01/10/2012
Nearly ten articles have been published on Holland & Knight’s Lobby Division saying bye-bye to the billable hour.
Actually, they are saying bye-bye to timesheets, as most of the revenue from H&K’s lobbying group was already on a fixed-price basis.
The first article was in Politico on December 13th. It quoted Rich Gold, head of H&K’s public policy and regulation group:
I think if you look out 10 years, this will be a very large trend...and we could either lead or follow.
Our favorite line from this article is from Ivan Adler, a headhunter with the McCormick Group:
This has the potential to be a real game breaker in law firm recruiting because it opens up a new vein of talented folks who have previously shunned law firms like a fruitcake at a Christmas buffet because of the billable hour.
Another telling fact from the article is:
Several former aides-turned-lobbyists said they opted for consulting firms and lobby shops over law firms for two reasons: Nonlawyers are treated like second-class citizens at firms, and they didn’t want to have to keep track of their time.
One of the issues that must be addressed when moving away from timesheets is how will the firm allocate revenue per person going forward if there are no timesheets.
Another article, dated December 14th, from The Washington Post explains how H&K will account for revenue:
Now, instead of billing hours to a matter, Holland & Knight will allocate upfront a portion of the monthly or yearly retainer to each individual working on the matter, based on estimates of how much they’ve charged in the past.
Ed Kless and I were privileged to be involved with H&K’s transition, working with Rich, Friedrich Blase, and several other partners from the PPRG group.
The group innovated the “Client Value Share” KPI. Since the price to the customer is already fixed, this KPI is a way to allocate, prospectively, that value amongst the team members who will work on the matter.
The beauty of this KPI is it forces the team to collaborate, upfront, on who will handle what, and decide what the value contribution will be from each person.
Someone may bring incredible value to the engagement but have relatively low billable hours. The CVS KPI will now account for that discrepancy.
And since the CVS is decided upfront, there will be less conflict regarding write-downs and allocations that are a normal part of the timesheet culture.
If someone on the team doesn’t pull her weight, the CVS can be adjusted, and reasonable people should be able to agree on that process.
This is a momentous change within the culture of H&K, and we applaud the vision, leadership, and courage of Rich, Friedrich, and the other partners, who understand what an enormous competitive advantage this will bring to the firm’s ability to attract top talent, while providing a better level of service to its customers.
It is one more data point that the naysayers, who believe it’s not possible for a law firm to eliminate timesheets, will have to contend with.
Ron Baker - 12/29/2011
I was happy to be interviewed by Tony Powell, my old editor from CCH.
He’s writing a three-part series on ethics, and interviewed me for the first installment on “The Origin of Ethics.”
The interview was published in the November 2011 issue of CPA Practice Management Forum.
You can read the entire article here.
Ron Baker - 11/25/2011
Any book that states on the first page, “price is a terrorist,” is bound to grab your attention. It makes sense: price instills fear into sellers, and much of that fear is unwarranted.
The other factor that impressed me immediately about this book was how the authors, Dan Kennedy and Jason Marrs, disagree that pricing and profit are about greed. They then suggest you read Ayn Rand’s Atlas Shrugged, and Rabbi Daniel Lapin’s Thou Shall Prosper (a fantastic book).
Your prosperity is your price strategy. We’ll never get paid more than we think we are worth. I like their line:
Go to the ocean with a teaspoon or bucket; the ocean doesn’t care.
They make the point that the rich are paid in advance, whereas the poor are paid after they work.
Another great insight is how the majority of customers want to make purchasing decisions on factors other than price—like, “It’s good for my family,” which is true for Michelin tires and even toilet paper.
The importance of price integrity—similar to brand integrity—is a theme throughout the book.
There are a few case studies that are very interesting. One by a Canadian doctor who has opted out of Canada’s health care system in favor of a concierge-type model.
Over 5,000 doctors in the USA have already done the same, and more are expected to do so if Obamacare remains the law of the land.
The author’s are on the same soapbox as VeraSage: There’s no such thing as a commodity, and they offer several poignant and entertaining examples:
- Allen Brothers steaks: it places top steakhouse logos on its catalog pages, creating the framing effect of comparing its prices to that of dining out.
- Kennedy Barber Clubs, just for my dad and brother.
- MotoArt sells furniture made from real airline parts, obviously to a specialized customer segment.
- In 2009, Americans spent $45.5B on their pets, up 5.4% from 2008, and $3 million of that went to Doggles—sunglasses for your pets! We often say in our economics course that American’s pets eat better than a lot of the world’s poor.
- But my favorite has to be Kopi Luwak—cat-poo coffee. And you thought Starbucks was expensive.
The authors also deal with aspects of behavioral economics, especially the anchoring and framing effects.
One interesting example is a chiropractor who has sold more treatments when patients were escorted from the waiting room to the examining room, rather than simply being called out.
Differences and Annoyances
Jason Marrs brags about the hourly rates his therapists make relative to the competition. Yet he understands that customers buy results, not time or costs. I wonder if he’s ever run across the labor theory of value?
There’s a comment made about how most recent trends are disadvantageous: our diet, chemical-laden foods, stress, etc. But then why are we living longer than ever before?
One chapter mentions “intrinsic value,” but other than life itself, there’s no such thing. Because the book offers no theory of value, this is a shortcoming. But like Adam Smith, the authors may get some of the theory wrong, but they get the practice right.
The authors also claim that .99¢ pricing works, but ignore evidence to the contrary. But they also believe in testing.
I also have misgivings about Dan Kennedy’s idea that your business is not about improving your customer’s lives. He makes an interesting argument; I just don’t find it persuasive (but I do totally agree that business is not about creating jobs, which is something you rarely see in a business book).
After all, if business isn’t about improving human beings, what’s the point?
The most annoying aspect of this book is the constant sales pitches for both author’s websites, services, etc. This really grates on my nerves, and it will turn a lot of people off.
Which is too bad, because this book is a worthwhile read.
And, if after reading it, you say: “But my business is different!"—the authors rightly point out that this is the rallying cry of the poor.
Ron Baker - 11/20/2011
Dan Morris and I will be conducting the Sole Proprietor’s Retreat this December 9-10 for the California CPA Education Foundation. This 1.5 day program was designed as a way to give sole props the opportunity to have a retreat with their peers, since they don’t have partners.
It was a predecessor program to the Firm of the Future Symposium, but designed specifically for sole props and all the issues they face.
Ric Payne has agreed to offer a 12-month membership to the Principa Alliance, which provides access to its Practice System (a $1,295 value).
If anyone is interested, don’t hesitate to contact me, or Dan. We always limit the participation to 7-12 to make the group more intimate.
Also, if you could help spread the word that would be much appreciated.
Ron Baker - 10/15/2011
One of my favorite Peter Drucker aphorisms is “Don’t solve problems, pursue opportunities.”
Solving problems only restores you to yesterday, whereas opportunities are about the future.
One question we recommend firms ask customers to help comprehend value is, “What keeps you up at night?”
I know many sales consultants hate this question, and it has become cliche. I’ve never really liked it either, but never really thought about why, since I still found it useful.
But in the spirit of Drucker, how about this question instead: “What gets you up in the morning?” What keeps you committed, engaged, excited?
Might this be a better question to help companies seek opportunities? Not to mention to get an understanding of their “Why” (Purpose)?
Would love your thoughts.
Ron Baker - 09/21/2011
I’ve long been a fan of Michael Gerber’s E-Myth book. His concept of working “on” the business rather than “in” the business was a major theme of the Accountant’s Boot Camp, developed by my good friends Paul Dunn and Ric Payne.
So when I learned that Darren Root co-authored The E-Myth Accountant with Gerber, and especially since I was presenting with Darren at the Sage Summit, I was looking forward to reading their views on what Darren calls The Next Generation Accounting Firm™. The Firm of the Future is a topic near and dear to my, and VeraSage’s collective, heart, and I was looking forward to learning another perspective.
Areas of Agreement
There is a lot of good advice in this book with which I agree. Here is a bullet point summary of some of their better recommendations, most of which come from the chapters that Darren Root wrote:
- Darren asks a good question: “How did the accounting profession become a mass of technicians and very few business leaders?” David Maister’s book, True Professionalism, is necessary reading to overcome this.
- Firms engage in mass client acquisition, whether or not they are a good fit for the firm. We call this the market-share myth, a form of cancer (growth for the sake of growth). It leads to incredibly weak pricing power.
- Same as above with offering too many services, which Darren argues keep CPAs at the technician level as well. The debate between the specialist and generalist is over—the specialist won. This video from the late Paul O’Byrne illustrates this very effectively.
- Darren writes:
It’s time to trust your people, let go, and give yourself the opportunity to work on your practice...not in it.
Good point. Follow this path to its logical conclusion: it leads to scrapping timesheets and implementing a Results-Only Work Environment (ROWE).
- It’s hard to disagree with this:
The old business model has long been to sell billable hours. Instead of selling billable hours, your firm sells complete solutions. If your goal is to get off the proverbial hamster wheel and build a business, it is critical to abandon the billable-hour model and adopt value billing [sic—he means value pricing].
Darren believes that accountants are finally starting to hear the value pricing message, and I hope he’s right. He says that hourly billing doesn’t take into account efficiency or new technologies.
However, that’s not the major weakness of the billable hour. It’s Achilles heel is it doesn’t take into account customer value, and is based upon an incorrect theory of value.
- In a chapter written by Gerber ("On the Subject of Clients"), he discusses how to deal with client dissatisfaction with a 7-step process. What’s missing, though, is the recommendation that firms offer a guarantee to all customers.
- Darren suggests spending a good portion of your marketing budget geared toward strengthening existing client relationships. Indeed. As the AICPA pointed out years ago, it costs eleven times more to acquire a customer than to retain one.
The Gap
For as many topics as we agree on above, I’m afraid the chasm that exists between my vision of the Firm of the Future and the one laid out in this book is simply irreconcilable.
But as with most disagreements, this is more a conflict of visions rather than a disagreement about facts. I’m reminded of what Blaise Pascal wrote in Pensees:
When we wish to reprove with profit, and show another that he is mistaken, we must observe on what side he looks at the thing, for it is usually true on that side, and to admit to him that truth, but to discover to him the side whereon it is false. He is pleased with this, for he perceives that he was not mistaken, and that he only failed to look on all sides.
The side the authors are coming from is to build the McDonald’s of professional firms, by laying out a path for creating “a highly efficient money-making practice.”
Yet a glaring omission from this work is any mention of the knowledge economy, or knowledge workers. This is the dimension the book ignores completely.
A professional knowledge firm isn’t McDonald’s, nor should it be. This example of Gerber’s has always irritated me, but it is particularly egregious in a book for professionals.
This is where the author’s analogies to the importance of systems break down in a knowledge economy. Gerber posits “The People Law: without a systematic way of doing business, people are more often a liability than an asset.”
This is strange statement, given that 75% of the world’s wealth resides in human capital, according to the World Bank.
The prominence given to the “system” over people is redolent of Frederick Taylor, who wrote:
In the past the man has been first; in the future the system must be first.
Peter Drucker refuted this logic in his 2002 book, Managing in the Next Society:
What made the traditional workforce productive was the system—whether it was Frederick Winslow Taylor’s “one best way,” Henry Ford’s assembly line, or Ed Deming’s Total Quality Management. The system embodies the knowledge. The system is productive because it enables individual workers to perform without much knowledge or skill....In a knowledge-based organization, however, it is the individual worker’s productivity that makes the system productive. In a traditional workforce, the worker serves the system; in a knowledge workforce the system must serve the worker.
Yes, knowledge workers will create their own systems. That’s the point. Two surgeons will not perform an operation the same way. Even two barbers won’t cut hair the same way (nor would we want them to).
This is why Steve Jobs says:
The system [at Apple] is that there is no system. That doesn’t mean we don’t have a process.
Sure, there are things that can be turned into a repeatable process, but the value in knowledge work lies in where there is applied judgment, creativity, and wisdom. And you simply can’t systemized those virtues. Indeed, if you try—with Six-Sigma, Lean, etc.—you kill them.
The better solution is to capture the knowledge that is tacit in those unique ways of doing things so the knowledge can be spread across the firm. Yet any discussion of knowledge management and capture is missing from this book.
The authors also seem to think that the systems should only be designed by the firm’s owners, rather than its workers—this is a large part of working “on” the business rather than “in” it.
But to borrow from Steve Jobs again, does it really make sense to hire smart people and then tell them what to do? Apple hires smart people so they can tell Apple what to do. Welcome to the knowledge era.
The idea that all the intelligence rests with management didn’t work in Frederick Taylor’s industrial era and it certainly doesn’t work in a knowledge economy. Worse, you cannot inspire creative knowledge workers by spouting Taylor’s efficiency mantra.
Today, knowledge workers are the system, which means they have to have a hand is designing it. Even auto manufacturers understand that those closest to the work are the ones who can improve it the most. See Toyota.
Yet the cult of efficiency is worshipped throughout the book, even though Darren quotes Steven Covey:
If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.
Nowhere is the recognition that there’s nothing more wasteful than being efficient at doing something that shouldn’t be done at all. Or that efficiency—and technology—are mere table stakes, not a competitive advantage, since your competition can easily replicate those gains.
Darren even suggests you identify those services you do best, which he defines as being able to perform with a high level of efficiency. But surely you should identify those services that you can perform most effectively—better yet, efficaciously—and that create the highest value.
If there’s that much efficiency to be gained, they are probably low-value services that should be outsourced (see the Stan Shih Smile Curve).
Peak efficiency is a sign of no innovation.
The same error is made when he claims the major factor driving realization is the existence of proper systems and processes. But this is incorrect. Price drives profit more than any other factor.
Further, he writes that his firm’s realization is over 100%, but that just means he’s still comparing price to hours x rate; it has nothing whatsoever to do with pricing commensurate with value, as he claims.
He also proclaims he’s not a proponent of throwing away timesheets, since they can catch scope creep, measure efficiency, benchmark against other firms, and allow him to manage what he can measure.
These are weak arguments for timesheets. If you’re catching scope creep from timesheets, it’s way too late to price it—you’re billing and ducking in arrears at that point, and by the hour. Project management is far more effective.
And the idea that timesheets measure the efficiency of a knowledge worker has been well destroyed in all of my books. This is illusion of control and one of the seven moral hazards of measurement.
This defense of timesheets is particularly amusing when compared to what he writes toward the end of the book:
Remember: Just because you’ve always done things in a certain way doesn’t mean you have to continue that tradition. If it’s not working, it’s not working. Abandon the old and make way for the new.
Except, of course, when it comes to the ancient tradition of maintaining timesheets.
Also, towards the end of the book, Gerber explains that Time is not money; time is life. If true, then why are we dividing a firm’s revenues and costs by life?
[And even if you still believe the old canard that time is money, all that means is we are dividing cost by cost if we use the hourly metric system].
There are other major areas of disagreement with the book. Their concept of a firm’s vision is too focused on what and how, not why. It’s far more effective to develop your firm’s why, letting that drive your what and how, consistent with Simon Sinek’s TED talk, and book Start With Why.
Gerber posits that there are six types of clients around which your entire marketing strategy must be based. But I find this unconvincing, and it could benefit from Occam’s Razor. Asking customers about their expectations would be more effective. Also, innovation is the firm’s job, as customers don’t innovate, they iterate.
Then Darren writes that clients are a firm’s greatest assets. But customers are not owned by firms, anymore than human capital is owned. Speaking of them as assets is inhumane and demoralizing.
The book does not contain any endnotes, a bibliography, or index. Outside of the few books and authors mentioned, it would be helpful if the authors shared the books that have shaped their thinking.
In conclusion, if you read this book, do so with this caveat: the book’s gap of not discussing the knowledge economy is simply too wide for me to overcome. It overshadows everything they write, and the logic traps them into the cult of efficiency rather than one of creating value.
We no longer live in an industrial economy where the talisman is Frederick Taylor’s enigma of efficiency and the “one best way.” A PKF is a human relationships-based entity, not a factory.
On the positive side, now that I’ve met Darren, there’s an opportunity for ongoing dialogue. If all goes well, we’ll get him to trash his timesheets someday.
Ron Baker - 09/19/2011
We’ve been talking a lot about Simon Sinek’s TED talk on the importance of a company figuring out its “Why"—its purpose. The idea that customers buy not what you do, or how you do it, but why you do it.
One man who understood both was Charles Revson. At the age of 25, Revson tweaked his last name to make it sound less harsh and launched the Revlon cosmetics empire in 1933, introducing color-coordinated nail polish and lipstick during the Great Depression. Talk about lousy timing for launching a vanity business.
Many commentators hailed the bright colors as “trashy,” but Revson instinctively understood women needed color to feel pretty. And during the Great Depression women were wearing drab colors, recycling rather than buying new fashions, so there was a ready market for relatively inexpensive glamour.
Revson’s competitors acted as if the product was a commodity, but he knew better. Nail enamel was not just a concoction of chemicals, or a beauty aid, but a fashion accessory, and he believed women should use different shades to suit different outfits, moods, and occasions.
This, of course, greatly expanded the market, as women now purchased multiple nail colors, and matching lipstick expanded the market again. Indeed, he understood better than his competitors what his customers were really buying, how to differentiate it, and price it.
His famous saying, “In the factory, we make cosmetics; in the store, we sell hope,” reflects the wisdom of a man in touch with his customers’ expectations.
Revson refused to believe what he sold was a commodity, and reportedly spend forty-five minutes in front of a seminar of his international marketing executives having a dialogue with a glass of water, attempting to illustrate the meaning of product differentiation. As explained by his unauthorized biographer Andrew Tobias in Fire and Ice:
...the water glass caught his eye. He picked it up, held it out in front of him, and said, in his friendliest way, “Hello, glass. What makes you different? You’re not crystal. You’re a plain glass. You’re not empty, you’re not full...” and then he began telling the glass how it could be made special...by changing the design, changing the color of the water, giving it a stem, and so on.
Revson didn’t compete on price, since he understood Revlon was selling the chance of turning the right head or lend a touch of class. While other polish sold for a dime, Revlon’s sold for .50¢, and its lipstick for $1.00 compared to .49¢, all during the Great Depression.
The most famous—and effective—shade promotion was launched, Fire and Ice, in the fall of 1952. There’s a little bit of bad in every good woman, Revlon marketers felt, what Kay Daly (a Revlon executive who was probably the highest paid female executive in the country) called “a little immoral support.”
Along with a picture of model Dorian Leigh, the ad copy ran the headline “ARE YOU MADE FOR ‘FIRE AND ICE?’” You were, the ad stated, if you answered eight of the fifteen questions in the affirmative.
The ad caught the country by storm, with nine thousand window displays devoted to it, every newspaper and magazine wrote about it, and every radio announcer made reference to it.
Norman B. Norman, head of Revlon’s advertising agency, Norman, Craig & Kummel, said:
All Revlon marketing had to do with emotions: how women thought, how they lived, how they loved. That’s quite different from what most companies do, where they describe their products, the benefits of them. Revlon never did that, which was a brilliance of its own.
One of the things that frustrates me about the distinction between B2B and B2C is it doesn’t take into account that humans purchase everything. And emotions are an enormously important factor in all decisions.
So here"s my question. What would a Fire and Ice campaign look like for a Professional Knowledge Firm? What questions would you ask?
Maybe we should have a contest for the best questions, with the winner given a bottle of one of Dan’s best wines?
[N.B. Fire and Ice is in my top 100 all-time favorite business books. Just an excellent read of an incredibly shrewd and driven man who changed the country’s culture. Many would argue he was a misogynist. He might have been, but he sure understood what women were really buying. Visit my Shelfari.com bookshelf, and click on the tag “bbb” for the Top 100 best business books. You have to register for an account. Shelfari is owned by Amazon.]
Ron Baker - 09/09/2011
From the September 9-15, 2011 Pittsburgh Business Times comes this article quoting Stephan Liozu on the idea of appointing a Chief Value Officer.
I met Stephan at the Professional Pricing Society conference in Chicago last April. We are collaborating on a book chapter, dealing with the C-level position of CVO.
Ron Baker - 08/30/2011
Mike Bezos was 15 years old when he escaped from Cuba and fled to the USA, working his way through the Univ of Albuquerque.
He gave his stepson, Jeff, a 1988 Chevy Blazer, and while Jeff’s wife Mackenzie drove across the country to Seattle, Jeff typed up the business plan for Amazon.
Not bad for a first generation immigrant. Thank Fidel for Amazon!
I remember George Gilder writing that Fidel wanted to create the world’s greatest city in Cuba, so he expropriated all of the physical capital, suffering from the “physical fallacy"—the idea that wealth resides in tangible things.
Fidel did create a great city—in Miami—since the most important capital fled.
Ron Baker - 08/29/2011
Because George Gilder believed (and wrote) the following, Ayn Rand denounced him.
The moral code of capitalism is the essential altruism of enterprise. The most successful gifts are the most profitable—that is, gifts that are worth much more to the recipient than to the donor. The most successful givers, therefore, are the most altruistic—the most responsive to the desires of others.
The circle of giving (the profits of the economy) will grow as long as the gifts are consistently valued more by the receivers than by the givers. A gift is defined not by the absence of ANY return, but by the absence of a PREDETERMINED return. Unlike socialist investments, investments under capitalism are analogous to gifts, in that the returns are not preordained and depend for success entirely on understanding the needs of others. Profit thus emerges as an index of the altruism of a product.
Rand despised altruism, but I believe Gilder is right.
The most profound thing I have ever read on the morality of capitalism is Gilder’s ”Soul of Silicon” speech delivered to the Vatican in May 1997. It’s not a light read, but well worth the investment.
Ron Baker - 08/24/2011
Ron Baker - 08/23/2011
Ed Kless recently reminded me of one of Peter Drucker’s last live appearances. It’s worth revisiting, especially in the context of a book I just read by Bob Lutz: Car Guys vs Bean Counters: The Battle for the Soul of American Business (review coming in my next post).
On December 21, 2006, my mentor, George Gilder, wrote on his blog about the last time he saw Peter Drucker live. It is such a profound piece that goes to the heart of how accounting is becoming increasingly irrelevant to the spirit of enterprise, it is worth quoting in full:
The last time I saw Peter Drucker, he was keynoting a Forbes conference in Seattle for CEOs. In the auditorium at the International Trade Center next to the bay, they had wheeled out the great man to the middle of the stage in a great fluffy easy chair.
Close to 90 years old—at the end of the previous century gazing toward the next—he was the numinous name and Delphic presence at the conference. Everyone leaned forward to hear what he had to say.
Then a gasp shook the rows of CEOs. The conference management stood there stricken, unable to move: “For the Love of Malcolm’s motorcycle...What is this?” The CEOs sat popeyed.
The hoary sage’s balding pate flopped back in the chair as if he had fallen asleep...or worse.
Perhaps Forbes had erred in staking a major conference on an aging guru seemingly well over the hill and in parlous health.
Then his entire body fell forward. I was ready to run up to catch him if he should tumble toward the crowd. But he somehow caught himself. His eyes opened, and he looked out intently at the throng of CEOs. Everyone sighed with relief. He was awake. He had their attention.
Drucker growled: “I have just one thing to tell you today. Just one thing...”
Wow, I said to myself, it better be good.
“Noone,” he continued, “but noone in your company, knows less about your business than your See Eff Oh.”
Huh?
This was the era of the heroic Chief Financial Officer (CFO). Scott Sullivan of Worldcom, Andy Fastow of Enron, clever, inventive folk like that.
You remember them. Across the country, CFOs were in the saddle. CEOs would not move without consulting them.
What could Drucker have meant?
He was stating law number one of the Telecosm.
Knowledge is about the past. Entrepreneurship is about the future.
CFOs deal with past numbers. By the time they get them all parsed and pinned down, the numbers are often wrong. In effect, CFOs are trying to steer companies by peering into the rearview mirror. Past numbers do not have anything much to do with future numbers.
Moreover, CFOs tend to focus on internal problems. But most internal problems cannot be solved internally.
Determining business outcomes are decisions made by customers and investors and both are outside the company and not directly managed by the company. Their views can change in an instant, casting all the existing numbers into oblivion.
To reach customers and investors takes outside vision and leadership, not internal problem solving.
Tech companies should not try to solve problems. Solving problems sounds good, but it is a loser. You end up feeding your failures, starving your strengths and achieving costly mediocrity.
Don’t solve problems—that’s the CFO’s forte and pitfall. Pursue opportunities.
A Deteriorating Paradigm
Approximately 70% of the average company’s value cannot be explained by traditional GAAP financial statements.
Adding more arcane and picayune rules to GAAP, or converging existing GAAP with international accounting standards, will not solve this problem.
The accounting model is suffering from what philosophers call a deteriorating paradigm—it gets more and more complex to account for its lack of explanatory power.
In all fairness to accounting, it never was meant to predict value prospectively, only to record transactions retroactively. In effect, accounting can only measure the price of exchanges after they have taken place.
This is why accounting can only record the “goodwill” of a business until after is has been sold. Accounting has no way to place a value on that goodwill until a transaction takes place. That is why our late colleague Paul O’Byrne said goodwill is the name we give to our ignorance.
The best an accountant can do is to extrapolate the past into the future, and unless one’s theory is that the future is going to be the same as the past, this technique is fraught with hazards. This was Drucker’s point at the CEO conference in Seattle.
CEOs have to create the future, not relive the past, and the only way to do that is with a theory of the business, and to get outside of the four walls of their organizations and connect with external reality—where all value is created.
Ron Baker - 08/20/2011
An interesting article ran in Lawyers Weekly, May 7, 2010, by [star] reporter Angela Priestley: “Blasting Billable Units in the Top-Tier.”
Australian firm Freehills’ managing partner, Mark Rigotti, discusses his views on “alternative pricing strategies.”
But he’s not so sure the demands from clients are as intense as people think. Here’s an intriguing line:
Like all trends, it might be a little over-baked at the moment. I say that both from the client and law firm’s perspective. Hourly rates still feel like old slippers, they might be a little worn and a little ragged to look at, but they are still something that are comfortable.
This is similar to what King George III wrote in his diary on July 4, 1776:
Nothing of importance happened today.
Yet the firm has formed a pricing committee, while Rigotti admits:
Freehills needs to be at the vanguard on it and needs to be understanding and participating in it—instead of just waiting for it to happen.
One is left wondering why you’d want to be in the vanguard of an “over-baked” trend?
He cites an example of a client who refused an alternative pricing structure and stuck with the billable hour.
Sure, if you give them an option. But law firms—especially those in the top-tier—are going to have to learn that sellers change pricing strategies, not buyers.
If the only way to become a customer of Freehills is to accept its pricing strategies, then client’s reluctance will wane very fast.
Do you see sports fan revolting at teams adopting “dynamic pricing"—that is, charging different prices for different games, times, etc.?
At least Rigotti understands the big issue:
The debate about alternative billing is not about discounts, it’s about value. It’s not a threat, it’s an opportunity for both clients and for law firms.
If that’s true—and it is—then why say one thing and continue to do another?
Why the reluctance to throw away those ratty old slippers, Mr. Rigotti?
Lawyers_Weekly_Freehills.pdf
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