Integrative Thinking to Win

Mergers and Acquisitions

2009-08-27T10:14:00.003-04:00

I've been away for two months and this blog has suffered the difference.

I've noticed that it is not beneficial for me to be posting multiple posts on two blogs, so I've merged them both to my amgstr.blogspot.com blog and continue from there.

Slowly, I'll depreciate this blog.

Game Theory Foundations: Production-Possibility Frontiers

2009-06-26T09:23:00.001-04:00

The next concept relating to efficiency is the idea of production-possibility frontiers. This is the idea that given a limited amount of resources and accounting for systematic diminishing returns, that there is some limit where you cannot create more of one product without sacrificing another. In the simplest case, this is described as a curve on a graph with two axis each reflecting one product (a more complicated model with more products can be represented with more dimensions in a multi-dimensional model, but is beyond the scope of this discussion).

The most popular form of this model includes the Guns or Butter model as well as the efficient frontier in market portfolio theory.

In the Guns or Butter model, a government has the choice of spending its resource on foreign or defense projects (Guns) versus domestic or civilian projects (Butter). With a limited budget, there is some limit where in order to get more of one, they have to sacrifice production of the other. Plotting the points along this curve produces the production-possibility frontier.
Excusing the violent association with the "Guns" component, it is possible to instead substitue the idea of exportable goods and globalization which affect the balance of trade between countries (a topic for another time).

An efficient frontier in market portfolio theory describes a securities portfolio which includes securities in the most efficient weights and correlations such that the portfolio exhibits no un-systematic risk and is composed entirely of non-diversifiable risk (Capital market line - CML). Here the frontier is presented a little differently with the resource simply being combinations of different securities betas versus their expected return to form the efficient frontier (which intersects with the investor's marginal utility curve to determine the efficient market portfolio).

It seems like everywhere we go we naturally run into these frontier limits. How can we describe them in game theory? As it turns out, there are some models which describe behaviour in different stages of game theory.

Positions on the efficient possibility frontiers can not produce more of one benefit without sacrificing another. In game theory, this manifests as a zero-sum game. That is to say for one participant to gain (show on the production possibility frontier as one axis), another has to lose out).

Points contained within the curve (but not on the curve) allow for gains of one benefit or the other without having to make any sacrifices. This is represented in game theory as a non-zero sum game. That is to say, that at the end of the day, it is possible for both parties to benefit positively without the expense of the other.

You'll notice that the theme here is one of efficiency. In an environment where no more benefit can be extracted from the system with out additional resources (maximum efficiency), it becomes a zero-sum model. However, if production is inefficient, there is potential for a non-zero sum model (recouping the inefficientcy as non-zero sum gains - getting more of A without comprimising B).

This is also an indicator of efficiency and competition. In an industry with a maturing life cycle, transactions, deals and strategy will slowly being to have less non-zero sum models.

Game Theory Foundations: Economies of Scale or Diminishing Returns?

2009-06-26T09:14:00.002-04:00

Before we start out foray into game theory, I'd like to do a quick review of economic efficiency framed as economies of scale versus diminishing returns for growing enterprises. In the examples provided by economics textbooks, they will often express diminishing returns as using less efficient resources in order to produce the same task (which reflects a decreasing marginal utility / benefit / revenue).

However, in the abstract, we are also told about economies of scale, where adding staff and capacity can result in productivity gains beyond what is expected (Specialization of tasks and the Model T assembly line strategy). In evaluating a scenario, how can we tell which stage we are in?

The best way to understand your efficiencies is by understanding the production bottle necks of your current factors of production. That is to say that you can fight off diminishing returns if you add resources to the weakest link of your system (similar to the idea of critical path of a PERT chart). While adding resources in general will cause you to gain diminishing returns in the one production line, it should create synergies that recoup the drop in efficiency.

Now, if you are sensitive to seemingly meaningless buzzwords like "synergy" which tend to be overused, you'll probably recoil a little as I did upon hearing that word so let's break it down to less abstract terms with an example.

Example: A factory has 200 workers working on 20 machines. The optimal ratio of workers to machines is 12 to 1 for the purposes of scheduling and capacity planning. Although adding the 21st machine will bring some benefit (versus not having the machine at all), it is clearly diminishing versus adding the 3rd machine. In this scenario, adding another 40 workers would help bring the worker / machine level up to its target concentration. Note that beyond that, adding another worker begins to diminish the benefit of workers and the value of adding a machine starts to increase again.

Now assume that you have a limited number of resources to apply to your production. What mix of workers to machines will you have?
This introduces the idea of production-possibility frontiers which we will discuss in the next post.

Game Theory - An "Emerging" Field of Study and Interest

2009-06-26T08:50:00.000-04:00

While game theory, the study of strategic interactions, has been a field of study in social psychology for sometime, it has become an increasingly important field which on which management science has recently begun to focus on. Particularly, the logical analysis of decision making processes to optimize success as defined within the model.

While the CFA has introduced the idea in the Economics portion of their level I curriculum, I thought that it would be valuable to look beyond what is presented there (including the "optional" sections) and how using game theory can predict strategic level behaviours.

First, the basics, we are familiar with the Hawk-Dove model (a game of chicken) which I used in my investment blog to describe the benefits and pitfalls awaiting investors hoping to gain first movers advantage in the market. I've also used the Prisoner's Dilemma to describe OPEC and Oil.

However, what is what oversimplifies these two examples of game theory is the assumption that they occur only once. That is to say that these models only look at a particular snapshot in time. Whereas we know that the game continues to be played and is modeled by a series of events rather than one discrete iteration. Also, the models used to describe these scenarios are simple 2x2 matrices. As we start to remove some of the assumptions, we will also begin to look at more flexible (and therefore complex) models.

In the next couple of posts and into next week, I will focus on a series of posts aiming to look at more involved cases of game theory and how they can be used to model strategic business behaviour.

Demand Elasticity - Who pays?

2009-06-11T07:25:00.002-04:00

In high school, through university and even in the CFA, economics is an important field of study. One of my favourite topics is the concept of elasticity.

Elasticity is literally defined as the percentage change in quantity over the percentage change in price and has several flavours (negative elasticity, positive elasticity for substitutes, negative cross elasticity for complements etc)

Elasticity = %ΔPrice / %ΔQuantity
%ΔPrice = ΔPrice / Pavg = P1 - P2 / Pavg
%ΔQuantity = ΔQuantity / Qavg = Q2 - Q1 / Qavg

Mathematically, note that as you move up and down the curve, the elasticity changes because percentage is affected by the absolute value of the average price. If the average price falls, the elasticity increases because the change becomes larger relative to the average to which it is compared for percentage purposes.

Another way of looking at elasticity is flexibility or bargaining power. If you review Michael Porter's five forces, you can see that elasticity for suppliers or customers increases their bargaining power. That is to say, the more competition and choices available means more options.

Let's look at a good which exhibits perfect inelasticity. This means that regardless of the price, consumers will always consume a constant amount (they set the quantity demanded). This manifests in a horizontal demand curve as shown below:

Note that the determining factor of the price is the supply curve. If there are more suppliers, the supply curve shifts right and the price drops. If there are less suppliers, the supply curve shifts left and the price rises. This is similar to what happens with oil and the "prisoner's dilemma" in OPEC's oligopoly.

Next, look at a perfectly elastic curve. This means that given the slightest change in price, the consumers will dramatically change their spending habits (that is to say, that consumers set the price). This manifests as a horizontal demand curve (at the price they set).
The only power suppliers have here is to set the quantity sold (they are price takers). If there are more suppliers, the supply curve shifts right and there is more quantity sold. Visa versa, if there are less suppliers the supply curve shifts left and there is less quantity sold.

This is important when determining how price changes will affect measures like total revenue, quantity consumed etc. This also applies regardless of whether you are talking about goods sold, wages paid, taxes paid etc.

[Example] The government is thinking of applying a tax on a good which exhibits perfectly elastic demand. Who bears the cost?

The supplier
The customer
The supplier and the customer share the tax burden

[Solution] One way to look at this is that if the good exhibits perfectly elastic demand, then the customers have all the bargaining power. This means that if any supplier were to simply "pass along the tax" and make the consumer pay, the consumer would just go to a different supplier. This means the supplier is forced to take on all the tax. The solution is 1. Notice this also means it eats into the producer surplus.

If the good were perfectly demand inelastic, the suppliers have all the bargaining power then the customer would bear all the tax and the solution would be 2. This would eat into the consumer surplus.

If the good were neither perfectly demand elastic or inelastic, the supplier and customer would split the difference in fractions based on who had more relative bargaining power. Both producer and consumer surplus would diminish. The solution would be 3.

Cash Flow and Operating Cycle

2009-06-09T07:04:00.003-04:00

I've written about cash flow with queuing theory as the lifeblood of business in my blog, as well as activity (operations) ratios in my financial profitability analysis series on my investment blog, but I wanted to review an interested concept in the CFA level I regarding the cash conversion cycle.

First let's do a review of the tools and topic. Firstly, what affects operations from a cash flow perspective? Using the direct method, the operating items which affect cash flow is change in working capital and the three items that affect that is Accounts Payable (AP), Accounts Receivable (AR) and Inventory (Inv). Now let's look at a standard process for how changes in each affect the operating cycle.

Order of Operations (like the BEDMAS of elementary arithmetic):

Purchase supplies from vendor on credit (AP up, Inv up)
Process supplies into goods for sale
Sell products on credit (Inv down, AR up)
Pay back supplier (AP down, cash down)
Receive payment from customers (AR down, cash up)

Notice that you don't actually receive any cash until step 5, but you have to pay it back in step 4. This means that you have a negative cash flow until you complete the cycle.

Recall that in the indirect method (calculating CFO from NI):

If more inventory is made than sold, some "cash value" is retained in Inventory (Inv up, cash down)
Alternately, if more inventory is sold than made, then you are liquidating your inventory (Inv down, cash up)
An increase in AP means that you owe your supplier more money. This means that instead of paying with cash, you paid with credit so your cash flow goes up
A decrease in AP therefore means you paid back your debts
An increase in AR means that your customers paid you with credit so your cash flow goes down
A decrease in AR therefore means you were paid back (collected on sales on account)

This next little diagram illustrates the relationship between Operating Cycle, DOH, DSO, Days Payables and Cash Conversion Cycle:
Operating cycle is simply the time it takes from when you purchase supplies to when you collect the cash and is composed of two components, Days Inventory on Hand (DOH) and Days Sales Outstanding (DSO).

Days Inventory on Hand includes the manufacturing process, as well as storage. In accounting terms, this means works-in-progress (WIP), finished goods, sales cycle.
Days Sales Outstanding is the time between sales on credit and the collection of cash.
Cash conversion cycle is the time between when you pay your vendor to when you yourself collect cash. It is the difference between operating cycle and Days Payables.

In looking at which company is more likely to have cash flow problems, cateris paribus, it would be the company with the largest cash conversion cycle. That is to say, it has a low Days Payables (bills due sooner - cash out), but a long Operating Cycle (takes really long to produce and sell goods as well as collect on credit - cash in). So the larger the cash conversion cycle, the worse the operational and implicit structural liquidity.

Meet the Dean - Roger Martin and Integrative Thinking

2009-06-05T10:14:00.007-04:00

I figure I'll take a short CFA study break to write about an encounter I had at the Meet the Dean session at Rotman early last week. I thought it was an invitational event for those of us who were accepted, but it turns out there were some people who were still applying, waiting for acceptances or deciding.

Dean Martin spoke about how Rotman is different from other MBA programs and for once, I was actually impressed with the Rotman presentation. This may seem kind of odd, coming from someone who has already "sampled" the proverbial kool-aid so to speak by accepting my offer letter to start in September, but the truth of the matter is that I was more sold on Rotman by my colleagues and friends currently enrolled (or graduated) than I was from the Faculty administration. I'm quite embarrassed to say that the admin simply made it seem like just an MBA program whereas my friends were raving about their experiences.

The reason I bring up this point is that Dean Roger Martin brought it up and addressed it as well. Now from ANY MBA program, you would expect some pomp and circumstance regarding why their program is so fantastic. One of the major issues facing MBA programs today is their incremental value add. For instance, there are some top schools for which recruiting companies have stated they would rather hire students who were accepted, rather than students that had graduated. The reason? Top schools who accept good candidates are simply validating their position as top performers, whereas the marginal benefit of attending a top school doesn't necessarily justify the exorbitant increase in salary.

Dean Martin reframed this postulate as top schools resting on their laurels and not affecting the changes required by society in light of the financial crisis in the markets. He put up a rather simple diagram of a three dimensional box with the dimensions described as depth, breadth and flexibility. He called the current state of MBA education, shallow, narrow and static where it should be deep, broad and dynamic. I can't remember who he was quoting off hand, but he mentioned: "There aren't marketing or finance problems. Only business problems" (reflecting the interdisciplinary relationships).

He used the example of the Blacks-Scholes models for derivatives valuation and that stated limitations in the model made it inappropriate for use in many circumstances. However, this model is widely used in ALL derivatives valuations and therefore leaves models with large vulnerabilities in their assumptions.

The punch line?

Integrative thinking is a framework which systematically creates people who ask the right questions to make the right decisions.

2 Week Hiatus

2009-05-25T16:45:00.000-04:00

I will be going on a two week hiatus in preparation for the CFA Examination on Saturday June 6th, 2009.

However, I will continue to post on Amongst the Stars, my Investment Blog, with a focus on CFA level I examination related topics and concepts.

Wish me luck!

Business Continuity Series, pt 5 - Implementing the Plan

2009-05-22T07:42:00.002-04:00

Once all the homework has been done understanding the relationships and inter-dependencies and once the plan has been put together, it's time to test and implement the plan.

At this stage there is a tricky conundrum. On one hand, in order to do a realistic test, planned outages are required for live services to ensure that systems will be resilient in the manner anticipated (reducing the shock of discovering additional failures during an actual disaster). However, deliberately causing outages is the last resort of any service provider.

Even in the best conditions, where service consumers are notified in advance with a long lead times and everything goes according to plan it is usually heavily orchestrated event that consumes many non-revenue generating resources.

Testing the plan should attempt to avoid being disruptive. As with any change management procedure, downtime should be kept to a minimum and attempts should be made to reduce the impact on live customers (usually translating into "off-peak testing", coming in late on a Saturday night or early Sunday morning).

The shutdown of highly technical and regulated services like nuclear power plants usually requires all hands on deck at the most ungodly hours of the night (colleagues of mine working with in nuclear power remind me that their credo is "Never forget that you work in a very unforgiving industry").

In this stage, often managers and professionals discover more inter-dependencies implying that their plans are either incomplete or not as robust as they had anticipated. This is where GAP analysis comes into play to further develop the plans.

Even in the event of an ideal and perfect implementation of a BCP plan, there is still the requirement of ongoing vigilance. This is because that as the environment changes, certain assumptions which become obsolete suddenly cause vulnerabilities to appear in the system. At this point, BCP projects evolve into on-going BCP maintenance programs.

Business Continuity Series, pt 4 - Building a BCP Plan

2009-05-21T07:47:00.002-04:00

Before you can build a plan you need to understand what value you are deriving out of the system. Unfortunately, in the real world, Business Continuity Program planning is constrained by resource allocation like any other project, so understanding the value derived from the program. It is possible to quantifying the problem by understanding:

Frequency of outages
Average duration of outage
Time value of outage
Value of data lost
Opportunity cost of capital investment in plan

Total cost of outages = Frequency x Duration x Time Value

This basic consideration will give you a foundation for justifying budgeting more or less funds into your Business Continuity Program.

When you've arrived at a stage where you need to begin to start choosing a strategy, there are several categories for recovery strategies, each with an escalating financial and resource commitment and proportional recovery / resiliency benefit:

Passive-Passive - Cold solution. New equipment may need to be ordered at the time of the event. Capital on-hand 'just-in-case'. Can be improved with planning (better use of capital). Essentially a "do nothing" solution. Probably manifests as a paper plan only with no physically available resources.
Active-Passive - Warm redundant systems - Literally: Turn-key or push button solutions. There is equipment ready but it is not currently in use. It is on hand and can be activated on short notice. This is usually because of technology or financial limitations.
Active-Active - Traffic is load balanced across multiple systems. Disrupted systems are by-passed and traffic is routed to different machines. Usually minor disruptions pass unnoticed. Only catastrophic events knocking out the entire system are noticed by users. The main concerns of an Active-Active system are costs and capacity. Problems generally only become visible when enough modules are knocked out such that the system is over capacity.

As usual, better plans usually cost more resources, however sometimes there are non-zero sum gains to be had. For instance, a Passive-Passive solution might be to have $5M allocated in the budget as "contingency" in the event of a disaster. Perhaps rather than have $5M budgeted as "contingency" you can employ $1M in capital expenditures to build resiliency into your processes. Although this investment will depreciate over time, it could potentially be better than keeping the capital idle and the economic loss of the internal rate of return (IRR) of $5M.

Also, systems which are heavily used or mission critical will require more active plans. For instance, if Google or 911 suffered any downtime, people would notice.

When putting together a plan there are other important considerations. For instance, is the a correlation between risk factors and support infrastructure? What is the geographical distance between my redundant systems and what is the possibility of a single event knocking out both my systems? Understanding and process mapping all interdependency is paramount in any BCP endeavour.

Before you think it is too unlikely, recall the power outage in the summer of 2003 which knocked out power for the Ontario and North East USA. If you located redundant system for Toronto was in New York (or vice versa) thinking that locating in a different country was enough insulation and redundancy, this event showed that it sometimes isn't enough.

Business Continuity Series, pt 3 - Service metrics - What are your goals?

2009-05-20T07:44:00.003-04:00

Although we try our best to avoid failures with methodologies and goals like six sigma (the idea that output from processes should be contained within six standard deviations or approximately 3.4 failures per million) there are still some failures which need to be dealt with.

In the event of a system failure, there are two key metrics which are a good indicator of resiliency: Recovery Point Objective (RPO) and Recovery Time Objective (RTO).

RPO refers to the amount of assets lost which can be quickly recoverable. For instance, an RPO of 24 hours for a database server means that if there is a failure (server crash, hard drive failure, building burns down) then the data that is restored is at most 24 hours old (or in other words, all data created in the last 24 hours is lost as a worst case scenario). RPO describes how current the information in your back up from auxiliary sources is.

RTO refers to the amount of time the process /service unavailability (time til service resumes). An RTO of 48 hours for cable television means that if a cable TV signal is disrupted (damaged line, transmitter failure, etc) that it will take the cable company 48 hours to restore service to your house.

The counter balance to achieving excellent RPOs and RTO's is cost. Generally speaking, the less latency for RPO and the less delay for RTO required, the more exponentially costly the solution (inversely proportional relationship).

Using a project management framework, the RTO of system system recovery is based on the critical path of recovering services (which in turn is heavily dependent on the system module with the longest RTO). And without a proper context most data will be useless so the weakest RPO in the system usually reflects the RPO of the system in general (a series relationship).

Email Example: A consultant backups their email every month locally on their laptop and their office mail server experiences an outage for 3 hours. The RPO in this scenario is one month (all the emails on their laptop) and the RTO is however long it takes the IT staff to restore email service (3 hours).

Business Continuity Series, pt 2 - Parallel versus Serial Failure and Resiliency

2009-05-19T07:43:00.006-04:00

Before we can delve into the world of business continuity, we need to understand the underlying logic of systems design and the probability mechanics of describing failure. Taking a systems approach to redundancy planning, let's look at the mathematics behind failure probabilities of parallel systems and systems in series.

First let's look at a system in series:
The system above contains three modules in series, each with an 80% success rate. Each is independent of the others. The success rate of the system is the probability union of all three modules, in other words, in order for this system to work, you must traverse all three modules. The probability of success is as follows:

Success = 80% x 80% x 80% = 51.2%

Look familiar? It should. This is the exact same model I used for my post about the failure of communication between organizational levels and why smart people say stupid things with CEO's being on the left and mid-level managers on the right.

Note that even though each individual module has a fairly high success rate (80%) each incremental and potential failure compounds the overall success of the system. In series, all modules have to work in order for the system to work. This means that a system in series is vulnerable to single points of failure. If there is one point which goes down in the process, the whole system shuts down.

In human resources planning or even individual career development, being irreplaceable is identical to being a single point of failure.

Next let's look at a system in parallel:
The assumptions here is that each module is interchangeable with any other. That is to say that if one system fails, the other systems will pick up the slack. Here each module is fairly mediocre with a 60% success rate (or a 40% failure rate). However, for the system to fail, all three modules have to fail simultaneously. The probability of that happening is the union of all the failures:

Failure = 40% x 40% x 40% = 6.4%
Success = 1 - Failure = 93.6%

Notice that even while each individual component is not of particularly good quality, when they work together to ensure success they collectively cover for each other in the event of individual failures.

This model is analogous to electrical circuits (and the idea of resistance and conductance):

Modules are equivalent to resisters (from the perspective of conductance). Where conductance is a process channel.
Electrical current is work done.
Voltage differential potential work waiting to be done.

Remember, that formulas for electrical are analogous to fluid mechanics (if you come from a chemical or mechanical engineering background and feel more comfortable with those terms).

Modules are pipes
Water flow is work done
Pressure is potential work

With all these analogies, there are also problems associated with capacity. Although an individual failure might not disrupt a system with parallel components, if the system as a whole is operating at 90% capacity, the loss of one third of it's capacity is also a serious problem (system over capacity) and this will manifest in a variety of ways:

Unstable queue growth (work is coming in faster than you can process it)
Large (and growing) delay times (backlog)
Mechanical failures / server crashes / employee sickness (overworked)

In the next section, we will look at the goals of continuity planning, how to set goals and understand how to measure performance in an environment where an anticipated failure has occurred.

Business Continuity Series, pt 1 - Overview

2009-05-18T07:34:00.003-04:00

Business continuity was an extremely hot topic during 9/11 as well as with current worries about avian and swine flu. The question posed is this: "How resilient are your business process to disruptions"? Whether that be a building fire, a crashed server or the loss of key personnel due to illness, companies need to know the inter-dependency of related systems as well as the redundancies (or lack thereof).

The next series will look at the math and mechanics of business resiliency planning

Part 1. Overview (This post)
Part 2. Parallel versus Serial Failure and Resiliency
Part 3. Service metrics - What are your goals?
Part 4. Building a BCP Plan
Part 5. Implementing the Plan

What is important is to differentiate between fear mongering and understanding real business risks associated with the operating environment and taking appropriate steps to mitigate them efficiently and effectively.

The material that will be covered in this series is a combination of engineering statistics principles coupled with business continuity planning as described by the Disaster Recovery Institute (DRI) as part of the Associate and Certified Business Continuity Professional level certifications (ABCP and CBCP respectively).

Gap Analysis and Integrative Thinking

2009-05-14T19:09:00.001-04:00

Gap analysis is a framework enabling a management team to evaluation actual performance with its potential. At its core are two questions: "Where are we?" and "Where do we want to be?". In game theory, this manifests as potential non-zero sum gains and in economics manifests as working within the potential frontier curve (both describing inefficient processes).

Gap analysis is a logical step following common size analysis and other forms of bench marking. It helps identify the causes of performance shortfalls and areas for improvement.

Many managers who are familiar with ISO 9000 for quality management (which implements a Plan, Do, Check, Act (PDCA) framework) will notice it has many similar characteristics and goals to GAP analysis applied recursively.

Sometimes gaps are easy to quantify: Our competitors computer model has 20% more computing power. Other times it is not: Our brand equity is weak relative to comparable fashion designers.

Understanding the factors that produce these distances is the first step in bridging them. The initial steps of an integrative thinking framework also has similar characteristics in using Salience, Causality, Architecture and Resolution to move from problem to solution.

Changing the Model - Newspapers as Not-for-profit

2009-05-13T11:16:00.005-04:00

The death of newspapers has been an interesting topic in the news lately (notice that I couldn't find a newspaper with the article... Only another blog), and I included them in a previous post on my investment blog about the decline and bailout of the financial and automotive industries.

However, we have heard some interesting discussion about possible solutions. One in particular which I thought was rather insightful was the idea of making newspapers into not-for-profit entities. This idea comes from Jefferson's fundamental idea:

"The basis of our governments being the opinion of the people, the very first object should be to keep that right; and were it left to me to decide whether we should have a government without newspapers or newspapers without a government, I should not hesitate a moment to prefer the latter." ~Thomas Jefferson

While a good idea there are some serious considerations:

Government bailout (and part ownership) of media has some potentially devastating Orwellian consequences (in the extreme, think 1984) due to conflict of interest.
Newspapers and media should be considered a public service as the dissemination of information is of paramount importance to the operation of a free society. (Even right wing conservative supply side economists must agree that free flowing information is a major component of the assumptions in economic theory).
Not-for-profit does not imply no revenue streams. Depending on the government definitions and regulations regarding NPOs, certain fees (to a cap) are excluded from taxation (sales revenue below a certain number, membership dues, etc).
A broken business model is a broken business model. There will be no tax to pay if there is no profit to begin with. And there will soon be no profit with declining revenue.
Using Profitability Analysis, there needs to be fundamental cost cutting in the way of distribution methods as well as a look at the advertising revenue streams (the bulk of the revenue is from advertising rather than subscription fees).

While a bit of fantasy, this strip from LICD highlights the drastic change in models required:

Sohmer has already received a great deal of criticism for the "practicality" of his idea, but I think what is highlighted is the dramatic nature needed to implement the change. As previously discussed, the newspaper industry finds itself in a crisis change situation.

PERT Charts - Project Management

2009-05-12T13:22:00.000-04:00

Often large projects with many inter-dependencies can seem quite challenging to plan and execute. It can seem as if there is so much work to be done. While we often hear the advice to "prioritize tasks", what does that actually mean? Experienced project managers (especially those with PMP certifications from the Project Management Institute) will be familiar with Gantt and PERT charts.

Let's create a sample model to explain the methodology of project management:

Assume that you have five mile stones to achieve A, B, C, D and E.
Milestone A is your starting point
Milestone B is dependent on A and requires 2 hours of work to achieve
Milestone C is also dependent on A and requires 4 hours of work
Milestone D is dependent on Milestone B and take 5 hours of work
Milestone E is dependent on Milestone B and requires 2 hours of work, requires 1 hour of work after Milestone C and finally requires 3 hours of work after Milestone D.

The line highlighted in red is the critical path. Assuming that you have enough resources that can work in parallel (and that you cannot add resources to reduce job times) the critical path (the path that determines the minimum time require to finish the job) is:

A --> B (2 hours)
B --> D (5 hours)
D --> E (3 hours)

For a total critical path time of 10 hours. This is because there is no other path from A to E which requires more time. Note that A --> B --> E has a slack time (or float) of 6 hours (10 hours - 4 hours). This means that this path can be delayed as much as 6 hours without an adverse effect on the project as a whole. Similarly, for A --> C --> E which has a slack time of 5 hours (10 - 5 hours).

However, this becomes more complicated if resources can be moved from one task to another to influence (shorten) the job time. In this case it is possible to use graph theory and Dijkstra's algorithm to determine which paths are relatively over capacity (shortest paths) so that they can contribute resources to the critical path to reduce over all project time.

In the example above, resources could be taken from the following tasks and reallocated to the slowest task (B --> D) with the goal being to reduce systematic slack time across any path to 0.

A --> C
C --> E
B --> E

In this case, it becomes more appropriate to describe the tasks work in a quantity of man hours.

SAT Based Example: It takes 4 people 1 hour to paint a house. How many man hours are required for 16 people to paint 8 houses?

Answer: 1 house takes 4 people one hour so each house is 4 man hours of work. 8 houses would be 32 man hours (4 man hours per house x 8 houses) of work.

32 man hours divided amongst 16 people evenly is 2 hours.

Obviously, the examples provided in this post assume that workers are interchangeable, that there are no diminishing returns of labour etc. However, even without these assumptions, if there are large unbalances in the project paths, there is an obvious benefit to moving resources from one area to another to improve the overall project completion time.

Being Irreplaceable - The Good and The Bad

2009-05-11T07:01:00.000-04:00

In my work with career development, I often hear stories of professionals who are quite happy with the fact that they are irreplaceable. They take it as a sure sign that they have job security. While in this economy, there are few who would look a horse in the mouth with regards to that view, in the long run, being too irreplaceable has it's downfalls to.

For those who are upwardly mobile, being irreplaceable should have an upward bias. That is to say that if you are looking for a promotion, you should be looking to add value outside of your position which apply to broader scopes.

Being irreplaceable at lower levels is not healthy for individuals or organizations. To have a foundation which rests on one point is extremely unstable and does no one any good. Also, if you are irreplaceable, there is a strong bias NOT to promote you. Not only is it detrimental but also selfish, as it prevents those below you from organic and professional growth as well.

[Case Study] An administrator for NPO was promoted for her work with a one of the organization's leading programs where she was the program head. She moved into an acting director position for all similar programs while continuing to act as program head for her previous team. She had always been proud of her work and the team celebrated the fact that there was no one people in her staff who could replace her. She had years of experience and knew all the in's and out's of past and running projects, fund raising and soliciting contributions from members.

However, after she received her promotion and new responsibilities across a broader field, her previous program began to suffer. She was repeatedly called back to deal with issues and ended up spending more time at her old position than the new to the detriment of both. After much effort, she finally trained a junior team lead to take the position of program head and was finally able to focus on her new position.

[Case Study] A software programmer was developing a module for communication infrastructure. He was absolutely indispensable as he was the only one who was able to do maintenance on the code due to legacy technology issues. As a result, he was a talented programmer whose skills could be transferred to another bigger more profitable project, however because he could not be replaced, he was passed over.

Finally, when he understood the situation, he went to his manager and put forth a proposal: "If I can find a suitable replacement, will you authorize a transfer?" Upon approval from the manager, and mentoring a junior developer, the programmer was able to successfully transition to a new position.

Profitability Analysis Framework, pt 5 - Price: Elasticity and Differentiation

2009-05-08T07:07:00.002-04:00

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Price is probably one of the most universally important characteristics about a product or service. It usually acts as the primary (and fundamentally important) characteristic about a product. There are different ways to structure fees and payments.

From a strictly economic point of view, price will influence other factors such as quantity supplied and demanded (your standard micro-economic curves).

Your customer's price elasticity will also affect what price you can charge depending on your customers propensity to consume additional (or less) increments of your products.

One way to capture more consumer surplus is to differentiate your product (assuming that it is non-transferable). There are several strategies for accomplishing this task including product differentiation and consumer segmentation. Another consideration related to differentiation is whether customers would benefit of our product if we could customize certain characteristics. Can we achieve economies of scope in developing new product lines (leveraging technology and skill sets) and use these product lines to further refine our sales practices?

Where economics has a more difficult time modeling pricing is in luxury goods and brand equity (and is probably more interesting as well). Looking at similar competitors products in the market, some similar products sell at multiples of competitors products with similar features. For instance, clothing at stores like Banana Republic will sell Khakis at multiples versus what is available at Gap or Old Navy (all owned under GAP Inc). Here the product line differentiation is coupled with very strong brand identities based on design and style to command higher price points for similar products. To be able to understand what the public wants and to determine the best way to appeal to your customers is the ultimate goal of sales and marketing.

For products or services which are larger outlays versus the customers income (houses, cars etc) the high price and required cash outlay may make the purchases inaccessible. However, with financing plans with reasonable interest, potential customers with good credit still have access to purchase these goods whether the financing is arranged through a bank or through the company itself.

Also, for frequent purchases where there is some negotiation, it is important to look at the discounts being offered to close deals. Compensation models and sales commission structures are an important motivator for your sales staff, but they should not come at the expense of the sales team as a whole. Predatory pricing can be just as market inefficient as collusion.

[Case Study] Airlines need to maximize the capacity of an airplane in order to make a profit, however, they can also begin to differentiate between customers as their product is generally non-transferable.

For instance, a family going on vacation or a student knows that he or she is coming home for the holidays and can therefore plan ahead and book a ticket in advance. However, a business consultant only finds out at the last minute that they need to travel to a client site the next day.

Airlines can differentiate between these two groups by charging the first group a lower rate for booking in advance while charging the consultant a premium for last minute bookings. Also, a business class passenger gets a differentiated product.

Along with the additional lead time before a purchasing decision is made, there is also more flexibility (elasticity) in the first group than the second.

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Profitability Analysis Framework, pt 4 - Sales: Volume, Brand Equity and Positioning

2009-05-07T07:07:00.008-04:00

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

A rather important theme that has reoccurred in the last few posts about fixed and variable costs is the idea of quantity sold (sales volume).

At any given price, quantity sold is directly proportional to the total revenue stream for any given product or service.
What are potential explanations for movement in your sales volume? If you find yourself losing market share it could be either because of substitution to another product (entry by a new competitor) or general decline of the industry (less use of buggy whips). Cross elasticity of substitutes can result in lost sales if you are being undercut by a competitor. Another explanation is it could be a change in the social trend (less hamburger consumption and more salads).

Positioning based on the questions above are of the utmost importance and are often based on the following dimensions:

Price as explained above
Quality - With different dimensions as defined by the specific product (style for clothing, processing power for computers, horse power for cars etc)
Availability accessibility (consumption of cola generally goes up the more convenient it is, hence more vending machines)
Consumption of complementary and paired products (consuming more cola with an increase in consumption of pizza slices)

In growth opportunities, an important consideration is the geographic distribution channels and opportunistic sales. Are your customers able to get your product or service when they need it? Or are they going to your competitors? Do you have adequate point of sales to service your customers needs? What are the hottest geographic areas to locate more sales capacity?

[Case Study] Malcolm Gladwell talks about Airwalk as being a company which became famous for being unconventional and targeted directly towards skateboarding subculture of Southern California. Their advertising reflected a lifestyle which was uniquely different and had a special perceived brand equity. This allowed Airwalk to sell their shoes in boutique stores at prices that were much higher than their "competitors".

However, upon growth and expansion, when Airwalk started putting their shoes in more conventional locations (department stores, etc), their brand quickly became diluted as being too "common" and they lost their luster of being unconventional. What had originally been ironic and trendy and had become rather blasé.

Suddenly, by diluting their brand equity customers became disinterested, and their sales numbers suffered.

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Profitability Analysis Framework, pt 3 - Variable Costs, Cost of Goods Sold

2009-05-06T07:20:00.005-04:00

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Continuing the Profitability Analysis - Framework and Practice series, part 3 will look at variable costs.
Now our graph gets a little more interesting. Variable costs increase with the quantity sold (more resources such as raw material and labour are necessary for each additional unit). Also, we now have the two pieces required to put together a total cost curve (fixed cost + variable cost). Notice now that the fixed cost is the y-intercept and that the derivative (slope) of the variable cost curve (marginal cost) is the same as that of the total cost curve. These are two critical concepts in understanding how to graph and model cost curves.

Variable costs are directly related to costs of goods sold (COGS) including factors such as labour and raw materials. For any individual product line and for any given factor of production, the total product curve takes an S shape. This also implies that the variable cost curve doesn't have to be (and often isn't) perfectly linear (which also emphasizes the points made above about the slope of variable cost being identical to the slope of total cost).

Assuming managers can select the workers for the job from highest margin to lowest (most useful to least), there is an accelerated growth pattern due to economies of scale. However, eventually, the law of diminishing returns is such that marginal utility approaches zero for each additional dollar of value put into the system. If you flip the x and y axis, you now have a basis for adding your variable costs against your fixed costs.

Regarding specific details for variable costs, this includes many factors of production such as materials, resources and labour. Common themes that affect this area include:

Cost of materials. If there is a change in the price of raw materials required for production or if there are inventory management issues which cause loses in the form of lost productivity. Also, if numbers are too high, this could be an indication of wastage, theft or some other form of inefficiency.
Cost of resources such as computing power, electricity or oil. Consumption of resources at peak demand often results in inefficient and expensive hidden costs. Any ability to offset or time shift demand could dramatically cut costs and reduce systematic stress and dependency. Also if costs are seasonal or otherwise predictable, financial hedges such as oil futures can insulate the company from short term volatility (although not long term changes).
Increased costs for overtime pay. This could be an indication that labour capacity is too low and that there needs to be more hires. This is directly related to the seasonality of your organization and could require you to outsource or hire more workers.

[Case Study] A factory is manufacturing cars and has a policy to pay it's workers 1.5 x for overtime worked above 40 hours. With it's current workforce and equipment, a particular factory line is able to produce a maximum of 20 cars per day. However, with a recent spike in the car model produced by this factory line, the demand requires production to increase to 25 cars per day.

While the automated equipment does not need to be augmented to meet demand (lines can simply run longer), there needs to be more human labour to satisfy demand. Should the factory authorize overtime or hire more staff?

[Solution] Looking at the solution, authorizing overtime would increase the labour component of cost of goods sold by 50% (1.5x pay for overtime). For 5 additional cars (or an increase of 25%), this would result in an increase of 37.5% of the total cost of labour (25% increase @ 1.5x labour cost).

In order to get the same increase in labour from hiring, they would simply need to hire 25% more labour (assuming no diminishing returns) would cost 25% more.

Using this logic, it's obvious that it would be better to hire more people and pay them at the stated rate than pay 1.5x for overtime.

So why not just always hire more people rather than pay 'expensive' overtime? If this demand is seasonal rather than permanent, having extra capacity will be detrimental if the demand doesn't last (if the demand for these cars evaporates). In this case, you are left with having to pay the salary for employees who are idle.

The premium for overtime is justified if 1. the incremental revenue is higher than the marginal cost of overtime labour (profitability of marginal units is positive) 2. the demand is temporary and doesn't justify increasing the permanent labour force.

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Profitability Analysis Framework, pt 2 - Fixed Costs: Capacity and Investment Decisions

2009-05-05T07:06:00.005-04:00

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Total costs are composed of fixed costs and variable costs. In this post, we will decompose total costs and focus on fixed costs. Fixed costs are composed of assets for whom increased production does not influenced total costs and includes items such as administration, sales and marketing, land and equipment. Fixed costs usually involve some form of previous investment decision (having financed the purchase of a factory). Or other costs such as management and administrative costs as well as sales and marketing for building brand equity.
While the diagram above is probably the most boring graph you have ever seen, we will use it as a foundation for building the rest of our framework. Note that the fixed cost is constant regardless of quantity. Investment decisions will affect how this line moves up or down on the graph.

However, looking at the individual performance of fixed costs as it's own class of expenditure, the key metric with regards to fixed costs is actually not total fixed cost, but rather average fixed cost.

Average Fixed Cost = Total Fixed Cost / Quantity Produced

Since fixed cost does not change with quantity produced / sold, the only way to improve the operational advantage of a fixed cost outlay is to ensure that the resource cost (and benefit) is spread over as much of the good or service produced.

The following are specific examples of how this applies to different classes of fixed cost allocations.

Land and Equipment
Usually looking at this area is a result of cost cutting measures.

The company is thinking of opening another plant or reducing capacity.
Analyzing these performance metrics (such as output versus equipment) should tell a story regarding the operational capacity of equipment. If your relative cost of equipment is too high, you might have too much capacity and you can consider divesting equipment, or leasing your capacity.

Sales and Marketing
Investigating this area is usually a result of discovering a weak profit margin or product line. Cost savings from reducing sales and marketing budgets is generally a bad idea (you can't shrink yourself to greatness).

Sales and marketing might be a place to focus as brand equity is dramatically inter-related to many other interesting aspects of products (such as pricing and service).
A high sales and marketing budget might allow for higher sales margins (or sales numbers) in the revenue side of the equation.

Management and Administration

If a company has a very high cost in this area versus competitors, it might be a sign of operational inefficiencies (bloated management layers, practices or compensation).

Now that we have taken a quick peek at fixed cost, tomorrow we will look at variable costs.

[Case Study] One prime example of fighting fixed costs is in the semi-conductor fabrication industry where there are only a few major players (Intel, AMD, Texas Instruments etc). Fabrication facilities have exorbitant and prohibitive capital requirements.

They also have incredibly low variable cost (the individual products of these fabrication plants is relatively worthless). In order to keep a good profit margin, the capacity of the plants must be running at near 99%.

While each of these three major players has high demand, they cannot fully satisfy the demand requirements themselves (resulting an a high average fixed cost per product).

However, by outsourcing their facilities to other semi-conductor designers, they are able to increase the volume and quantity coming out of their facilities (lowering their average fixed cost). They also have a schedule of production queuing to ensure that the facilities always have work to do (to ensure 99+% of the capacity is always utilized).

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Profitability Analysis Framework, pt 1 - High Level Overview

2009-05-04T07:38:00.004-04:00

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

As public corporations are profit seeking entities, one of the most common frameworks in use is the profitability analysis. Over the next week, I'll be posting about the different components that make up this analysis as well as some of the common challenges that arise and some solutions based on case studies of previous companies.

While the underlying math and mechanics of this discussion will usually be quite simple, what is more intriguing is the surprising relationships that surface as a result of an integrated and systematic analysis of the case studies. Most companies are unique (providing them with their own competitive advantages and challenges) however there are some common themes to learn from the cases which are applicable to any business environment.

We will review them as follows:

Part 1 - High Level Overview (This post)
Part 2 - Fixed Costs: Capacity and Investment Decisions
Part 3 - Variable Costs: Cost of Goods Sold
Part 4 - Sales: Volume, Brand Equity and Positioning
Part 5 - Price: Elasticity and Differentiation
Everyone is familiar with the basic formula for profit:

Profit = Revenue - Costs
(individual product lines)

Shareholders Equity = Assets - Liabilities
(symmetrical for companies at large)

Costs can be further subdivided into two categories:

Total Costs = Fixed Costs + Variable Costs

And similarly for revenue:

Revenue = Price x Quantity Demanded

While we have hardly made any ground breaking discoveries here, what should be highlighted at this point is the ability to ask the right questions when confronted with a declining profit scenario. It is important to understand what is happening in the competitive landscape such that profits are declining. By quickly identifying which area should receive attention we can systematically analyze the company's fundamentals to determine where changes are needed).

In Part 2, we will look at fixed costs and how they affect profitability as the need for more investment or more efficiently allocating capacity.

Profitability Analysis Framework Series
[ 1. Overview, 2. Fixed Costs, 3. Variable Costs, 4. Sales, 5. Price ]

Change Management - The Subtle Difference Between Being Inert and Fickle

2009-05-01T07:56:00.001-04:00

With the current problems faced by various companies in different sectors (automotive, newspaper, media etc), I thought it might be a good idea to look at change management and how urgency affects decision making as well as overall performance.

Change management is often an issue of hot debate amongst well meaning managers. On one side, there are those who argue "If it ain't broke, don't fix it" while others would warn that "change is needed to compete / differentiate / survive".

Often, there are good arguments to be made on both sides. This is particularly true for live systems that are operating 24 hours. In any change management scenario involving downtime, taking live systems with large traffic loads down is best done during off-peak hours (maintenance on a subway system, telephone network, power plant etc) when the demand of those affected is at a minimum.

However, before that decision is even reached, managers will do cost-benefit analysis and evaluate whether a decision to implement a change should be accepted. You'll notice that generally speaking, there is a trend in that as time progresses, the readiness for change (sense of urgency) increases, but the performance (strategic capability) to change precipitously declines ("is it too late?").
The sweet spot of change management is an anticipatory change right before it becomes reactive, or in other words, making a change at the last minute so that it is ready right when it's needed (the metaphorical holy grail of change management). Why is the performance of change management so low at the beginning? Why don't we invoke changes (assumed to be improvements) right away?

Think about it in terms of discounting the required time and resource "investment" from when it is implemented to when it becomes optimally useful. In the same vein as disruptive technologies (as coined by Clayton M. Christensen in his 1995 article Disruptive Technologies: Catching the Wave) if you provide too much utility too fast, the capacity to efficiently utilize the resource diminishes until your capabilities and needs catch up. In this scenario, the "If it ain't broke, don't fix it" philosophy wins out.

For instance, think of fax machines. When the fax network was "young", owning an expensive fax machine didn't make sense as you could only be connected to a small network. However, as the network grew, having a fax machine to be connected to this larger network became critical to the point where to not have one was a detriment to your business. Same can be said of email and many other technology changes. There is usually a hefty premium to be paid for first mover advantage when it comes to technological improvements.

It is no secret that change management is essentially looking out for the long term at the expense of the short term (which is why it can often be a very difficult decision to make). And while short term results are critical for demonstrating solvency and profitability in the long run, ignoring looking into the horizon for too long can have disastrous effects (as we are seeing now as weak companies struggle in this economic recession).

PEST Analysis

2009-04-30T07:37:00.000-04:00

In continuing with different analysis frameworks such as SWOT and Porter's Five Forces, another good framework to use is PEST (which stands for Political, Economic, Social and Technological factors). Using this framework helps identify macro-environmental factors which influence strategic management. Since PEST takes a higher level view, it can also provide a longer lead time for understanding the evolution and coming changes, however, that is counter balanced by the idea that the farther you look into the future, the fuzzier the picture gets.

Political factors examine how and to what degree a government participates and intervenes in the economy. Specifically, political factors include areas such as tax / subsidy policy, labour laws (minimum wage, safety regulations etc), environmental regulation, trade barriers and tariffs, and political stability. Furthermore, governments have great influence on the health, education, and infrastructure of a nation.

Economic factors include macro-level economic factors such as economic growth (GDP), interest rates, exchange rates, the inflation rate and unemployment rate. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.

Social factors include the culture, education level, health, population growth rate, and age distribution. Trends in social factors affect both internal and external factors in the company including the demand for a company's products or services (what the public in that geography demand) and how that company operates (who is available to be hired from the pool of workers).

Technological factors include R&D activity, automation, the rate of technological change as well as the current state of technology (i.e. communications infrastructure). They can determine barriers to entry (patent law) or provide strategic leverage.

By looking at all these factors, an analyst can determine the relative attractiveness of looking at different geographies from a macro-perspective. From a top-down approach to strategic thinking, a PEST analysis is a rudimentary starting point for any decision making.

Urban Planning and the Irony of Mass Transit

2009-04-29T07:58:00.010-04:00

With the focus on how Obama's administration wants to stimulate the economy by starting shovel ready government projects with an emphasis on sustainability (combined with my experiences commuting by public transit) I thought it might be timely to look at urban planning, specifically as it relates to mass transit.

Particularly, with a mildly satirical tone, I wanted to look into the phenomenon of clustering. In other words, I wanted to answer two questions:

"Why do I always seem to miss buses in pairs?", and
"Every time I try to ride the bus, why do I always get the full one?"

It turns out that there are many circumstances in life for which starting earlier (Or being closer to the finish) doesn't necessarily meaning finishing earlier. Let's build a simple model to help us understand how fundamental mass transit capacity planning works:
To understand what I mean, let's assume:

A bus route to a main station has five equally distanced stops A, B, C, D and E.
The distance between stops (described as time to traverse from one stop to another) is 2 minutes irregardless of traffic and other factors.
It takes 2 minutes to load a bus at each stop regardless of number of passengers, unless there are no passengers (or the bus is full) in which case the bus travels "express mode" and doesn't stop at all.
A bus can hold 50 people maximum.
That each stop has 15 people (total 75). It will take 2 buses to pick up all the passengers.

Scenario i The first bus will pick up 15 from A, 15 from B, 15 from C and 5 from D (50 total). The second bus will pick up 10 from D and the remaining 15 from E.

Notice that whatever the interval between buses (say 15 minutes) is the minimum wait time that the passengers at D and E have to wait for the second bus (on top of normal travel time if they could get one bus 1).

The travel time for each group is as follows:
Bus 1 (containing Passengers from A, B, C and 5 from D) arrives at the terminal after 18 minutes
Time = 2 min per stop x 4 stops
+ 2 min drive time between 5 stops

Bus 2 (containing the remaining passengers from from D and E) arrives at the terminal after 29 minutes
Time = 2 min per stop x 2 stops
+ 2 min drive time between 5 stops
+ 15 minute delay between Bus 1 and 2

Generally,

Travel time for any given bus = time spent picking up passengers (delay per stop x number of stops)
+ time spent driving between stops (travel time per stop x number of stops)
+ time delay between buses (anticipated wait time for a passenger who 'just missed the bus')

Notice that in this model, a bus that follows another will have a more "efficient route" excluding the delay time between the buses (currently set at 15 minutes) if the delay is less than 11 min, Bus 2 arrives before Bus 1! This is because Bus 1 (assumed to have "first dibs" on the passengers) will be held up in "transactions" picking up passengers.

Scenario ii What would happen in an incremented step by step analysis (if the two buses left at the same time) is as follows:

Bus 1 picks up all passengers at A (2 min) while at the same time
Bus 2 travels to stop B (4 min).
Bus 2 picks up all passengers at B (2 min) while at the same time
Bus 1 travels to stop C from A (4 min).
Bus 1 picks up all passengers at C (2 min) while at the same time
Bus 2 travels to stop D from B (4 min).
Bus 2 picks up all passengers at D (2 min) while at the same time
Bus 1 travels to stop E (4 min).
Both buses run "express" to the terminal

Both Buses 1 and 2 arrive after 12 min (they share the load equally). This is what happens during non-rush hours and I would describe as "clustering", the phenomenon where buses (even when they start at different times) start to travel together.

As you can tell, this is a horrible situation when it comes to urban planning. For most lines, this means that even if you deliberately stagger buses so that they are 15 minutes apart (assuming that this is also the minimum amount of time someone would have to wait between buses), the truth is that with clustering on non-rush hours it is more likely the wait will be double that (because one bus will naturally catch up with the other if there isn't enough traffic). Hence the answer to: "Why do I always seem to miss buses in pairs?" is because they have a natural tendency to cluster.

Also, implementing queuing and network traffic theory, you can use the analogy that each bus stop is a server node and each bus is a service arrival.

This shows, as in the first scenario (Scenario i), that buses that lead are full. Assuming that occasionally when a few people get off at later stops (rather than waiting for the terminal) this is the only circumstance when a bus frees up more capacity to take on more passengers (also why they ask people to leave from the rear and board from the front). Hence the answer to: "Every time I try to ride the bus, why do I always get the full one?" is because during rush hour, most buses are full to capacity and only buses with marginal capacity available (almost full) stop to pick up more passengers.

Now the system described here only describes an oversimplified one line system. Imagine multiple inter-related lines, time sensitive with daily cyclical traveler arrival patterns, complicated with traffic congestion, traffic lights, construction and other "features" interacting on the road. You certainly can't just throw more buses into the system if you want to improve performance. And we can certainly sympathize with both the Traffic Engineer as well as the person in the car in this xkcd comic:

Michael E. Porter's Five Forces - Industry Competitive Analysis

2009-04-27T11:23:00.005-04:00

While an index like the Herfindahl-Hirschman Index (HHI) might give you a nice quantitative number describing the level of competitiveness in a given industry, a framework such as Porter's Five Forces will start to explain why this is the case.

Porter's five forces analysis looks at:
Another way of looking at this is a 360 view around your company's position in an industry. This includes your supply chain (vertical view of suppliers and customers) as well as within your market (horizontal view of entrants and substitutes). Each of Porter's four mutually exclusive forces contribute to the over all competitive rivalry in an industry.

This helps you answer the question, "Should we start a new venture in this industry?"

Let's have a closer look at each category:

The threat of substitute products The greater the number and the closer substitute products imply an increase the propensity of customers to switch between alternatives (high elasticity of demand).

buyer propensity to substitute
relative price performance of substitutes
buyer switching costs
perceived level of product differentiation

Example: Coke and Pepsi are (propensity to substitute, "brand loyalty" aside) cost about the same. In a convenience store, there is no cost to switch from one to the other and there may be some small differentiation between brands. The threat of substitution is high. Test this by going into a restaurant that only serves Pepsi and ask for a Coke. Chances are your server will ask "Is Pepsi, ok?" (if they ask at all)

The threat of the entry of new competitors Inefficient or overly profitable markets will attract more firms and capacity investment. More capacity results (for under served markets) results in decreasing profitability. The markets will always seek equilibrium even if that equilibrium is artificially imposed by barriers.

the existence of barriers to entry (patents, rights, etc.) - Note the expiry of patents can trigger new a equilibrium and competition rivalry movements in the industry
size - capital requirements and economies of scope
brand equity
access to distribution
learning curve advantages - required skill
government policies, regulations and licensing requirements

Example: Although the mass production of juice might require specialized equipment for economies of scale, individual producers (lemonade stand) are not prevented from entering the market with smaller equipment investments. Threat of new competitors is high. Other than standard food and health regulations (FCC), there are no licenses required to produce juice.

The bargaining power of customers Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.

buyer concentration to firm concentration ratio
degree of dependency upon existing channels of distribution
bargaining leverage, particularly in industries with high fixed costs
buyer volume
buyer switching costs relative to firm switching costs
ability to backward integrate - can customers do this themselves?
availability of existing substitute products
buyer price sensitivity
differential advantage (inimitable characteristics) of industry products

The bargaining power of suppliers Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

supplier switching costs relative to firm switching costs
degree of differentiation of inputs
presence of substitute inputs
supplier concentration to firm concentration ratio
employee solidarity (e.g. labor unions)
threat of forward integration by suppliers relative to backward integration by firms
cost of inputs relative to selling price of the product (profit margins)

Example: Bread inputs include flour, eggs, etc (highly fungible and cheap base commodities). Supplier concentrations of these inputs to firm is very high. Individual suppliers do not dominate the market and will probably not forward integrate (an egg distributor / farmer) will generally have no interest in making and selling bread.

The intensity of competitive rivalry For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.

number of competitors
rate of industry growth
intermittent industry overcapacity (like the service industry)
exit barriers
diversity of competitors
informational complexity and asymmetry
fixed cost allocation per value added

Example: Cellular carrier companies (Canada: Rogers, Bell, Telus. US: Verison, Sprint, AT&T) requires large economies of scale for infrastructure. Industry suffers from over capacity at off peak hours. There also also high exit barriers (selling cellular infrastructure). Competitors are not particularly diverse and informational complexity is fairly low. Cellular billing (cost per minute) is fairly fixed. Competitiveness is generally high.

Each of these sections are scored and collectively analyzed to understand the competitive forces in any given industry. This framework highlights the key factors which determine any industry's overall competitive rivalry (and attractiveness). Industries which are not competitive may be attractive for other companies to enter (or increase investment), industries which are overly competitive may force out weaker companies and would generally be unattractive for new ventures.

How We Decide, by Jonah Lehrer

2009-04-26T07:39:00.000-04:00

For those who have read Malcolm Gladwell's Blink, this book may seem to get off to a bit of a slow start (Lehrer also refers to the same strawberry jam experiments and makes the same points regarding how the brain works). About a fifth to a third of the book sounds familiar from the start. It needs to set up the same frame work for understanding how the mind works on unconcious levels.

However, Jonah eventually starts to venture into new ground when he begins discussing moral decision making.

His highlights the key take aways of his book, the most important being to "think about thinking":

Whenever you make a decision, be aware of the kind of decision you are making and the kind of though process it requires.

Specifically:

Simple problems require reason.
Complex problems benefit (ironically) emotional decisions.
Novel problems require reason - analyze underlying patterns to find solutions.
Embrace uncertainty - deliberately contrarian hypotheses to avoid discounting uncomfortable yet material facts.
You know more than you know (paradoxically) - emotions may often be hard to analyze, but they can provide a wealth of information if you know how to use them and when to trust them (and what their limitations are).
The best decision making requires analysis and emotions and the best decision makers will have a mixed approach, knowing when to use which.

Sent from my BlackBerry device on the Rogers Wireless Network

SWOT Analysis

2009-04-23T07:12:00.001-04:00

One of the most commonly used frameworks in the business world is SWOT (Strengths, Weaknesses, Opportunities and Threats) for competitive analysis. A SWOT analysis can give a high level view to a organization's management regarding their current strategic positioning as well as insight into potential future road maps.

Another way of looking at a SWOT analysis is a 2 x 2 matrix. Strengths and weaknesses are generally internal factors, Opportunities and Threats external. Strengths and Opportunities are positive aspects and Weaknesses and Threats are negative.
This is a great structure to apply to make team members more aware of the current context for decision making and setting direction.

Strengths

What is our area of expertise?
What is our inimitable difference?
What are we recognized and associated with?
What are the key factors in driving our brand equity?

Weaknesses

What can we improve?
Where is the largest number of systematic failures?
Who are our biggest critics and what are they focused on?

Opportunities

Are there additional growth sectors in the market?
Can our products and services be applied in other areas or have other uses?

Threats

What are our processes dependent on?
What risks are associated with our business?
What is the probability of disruptions from external events?

Once the initial analysis is complete, it is critical to ask the right questions:

How can we leverage our Strengths?
How can we improve each Weaknesses?
How can we benefit from each Opportunity?
How can we mitigate each Threat?

This provides a good context to decide next actions from a strategic point of view and also allows managers to prioritize responsibilities based on what appears in the SWOT analysis.

Other methodologies that pick up after a SWOT analysis include matching and converting.

Matching uses competitive advantage to pair strengths with opportunities.

[Case Study] Starbucks is very well known for it's coffee, but it didn't become a huge success overnight. Upon analyzing their business models, Howard Schultz understood that what they were selling was more than just coffee, but an experience. By leveraging the Starbucks expertise in coffee, he was able to extend the brand offering to "re-creating the Italian coffee-bar culture in the United States [as] Starbucks' differentiating factor".

Converting means converting weaknesses or threats to strengths or opportunities.

[Case Study] A threat McDonald's position in the wake of movies such as Super Size Me was a movement towards healthier living where McDonald's was decidedly not well positioned.

However, McDonald's is the world leader in standardized food preparation services, having pioneered the field in the 50's under Ray Kroc. With an opportunity in the growing healthy foods space, McDonald's leveraged it's strength and food processing skills to provide a new repertoire of products well outside their original hamburger mandate. Their product line retained their strength of delivering cheap convenient food (their hallmarks) while entering a new and growing market space.

Case Study: Manufacturing Capacity, Opening a New Factory

2009-04-22T07:37:00.005-04:00

Introduction: A company is looking to open a new factory location (or close an old one) and is looking for your assistance in determining a location. How do you go about selecting where to open a new plant (or which old plant to close)?

Salience: There are many factors which are important in making this decision. For instance, how much capacity is required after the proposed changes? What is the distribution network needs based on geography? What is the cost of the factors of production (land, labour, capital) associated with different locations?

Causality: With the goal of optimal operations to achieve maximum profitability, each of these factors will have a different effect on how you make your decision. In closing an old plant, you will have to do a cost / benefit analysis of each plant and determine which one makes the most sense to shut down. The following framework can be adapted to better understand the closing of one factory to the entire manufacturing load and network.

In the scenario of opening a new plant, you technically have more flexibility in terms of which locations where you want to open (including even outsourcing capacity from others) so we can start to build a framework about how to decide what consitutes an optimal solution.

Architecture: There are many factors to consider in a holistic approach.

Geographic capacity demand.
Distribution of products.
Local labour, material and transportation costs.
Resource availability.

Geographic Center of Gravity First, let's simplify the model by assuming, cateris paribus, that the only thing that matters is geography. In this case, you can make an easy decision by taking mapping potential factories by using a center of gravity formula. "Gravity" in this case is capacity demand. Also, factories currently in operation would serve as negative "gravity". This is because they are already servicing demand in the area. The resulting "center of gravity" would be a reflection of an area with the highest capacity demand.

R = Σ [Vi x Qi] / n

Where:

n is the number of current factories in operation
R is the optimal vector of your new factory location
Vi is the vector describing the locations of your relevant capacity factors.
Qi is a weighting applied to the relative capacity impact of each location (a positive value implies a customer demand, a negative value implies a factory capacity supplied). This factor can also be scaled for other factors accordingly.
i is a counter variable iterating from 1 to n (encompassing all elements affecting capacity)

This formula assumes that each factory has identical weight in terms of capacity, costs etc. However, instead of a straight forward calculation of an average, each factory can be weighted with these additional factors to provide a more reasonable measure. For instance, each factory can be weighted with it's relative capacity.

Now, what if you only have a limited number of possibilities because of such factors as labour and resources are limited to big city areas etc? You need to match the profiles of your possible solutions to your "optimal" solution. However, in looking at your optimal solution, perhaps it will provide you with a potential solution that you had not previously considered (locating in a different town for instance).

Resolution: Although this is a very reasonable methodology, it only provides a mechanical answer based on the inputs provided and requires the analysts to accurately gauge the weight and importance of each individual factor. There may be many other influences such as political pressure to locate in a particular area. However, it acts as a logical framework for identifying the value of different locations while considering the broadest and more relevent factors relating to the capacity management decision.

[Case Study] A consulting company has 5 equally skilled consultants in the same field. 2 are in New York, one lives in Boston, MA and one in Philadelphia, PA. Their business is as follows is divided geographically as follows:

20% Philadelphia
50% New York
30% in Boston

Assume that each consultant is equally effective and the work is divided evenly. Also, the last consultant is more flexible to travel (but all consultants generally want to travel as little as possible), where should the last consultant reside?

Using the formula above, what is the optimal location for the last consultant to reside?

[Answer: Hartford, Connecticut. Reasoning: Each consultant reflects 20% of the work load. This means that the consultant in Philadelphia can deal with the work load there. Two of the NY consultants reduce NY's capacity deficiency to 10% as does the consultant in Boston. Another way to look at the solution is that the only work left for this last consultant is equally split between New York and Boston.

The so in calculating the center of gravity, we learn that the optimal location solution is equidistant from New York and Boston (Hartford) - Note that Hartford was not a suggested location, but came up in the investigation.

Also note that the assumptions were just for simplicity in illustrating the solution, but the differences of the contributions, demands and travel costs of each individual component can be mathematically weighted against the whole - Philadelphia has more work demand than Boston, Senior Consultants do more work, costs for junior consultants is cheaper etc.]

Measuring Competitiveness - The Herfindahl-Hirschman Index

2009-04-21T07:07:00.008-04:00

While CFA candidates are aware of the Herfindahl-Hirschman Index (HHI), let's look at the fundamental math behind the formula to understand exactly what is going on (and why this metric is a mathematically good formula for competitiveness).

First, look at the different models available for describing a market place (in decreasing competitiveness): Perfectly competitive, monopolistic competition, oligopoly, and monopoly.

Looking at the extreme cases, we would expect a company in a perfectly competitive industry would have an insignificant market share (mathematically represented by an infinite number of firms with an infinitesimal market share). A monopoly would only have one firm will all the market share.

How can we use an index to describe the competitiveness of the intermediate competitive states? Number of firms is one option, however it needs to incorporate the relative market share for each.

Now let's return to the formula for HHI:

HHI = Σ Xi, i from 1 to n

Xi is the percent market share of firm i x 100
n is the number of firms (or 50 if more than that)

Upon further inspection, the HHI index is strikingly similar (identical with some modifications) of the idea of standard deviation with a mean of 0. Each companies' real percentage market share is described as a variance from perfect competition of zero. The more any individual firms have a disproportionate control (variation) from the expected average, the more weight it is assigned mathematically by squaring it's value.

Also, why choose a limit of 50 firms? Why place any limit at all? Well first of all, for every 50 firms, each additional firm contributes less than 2% (remember that firms are added from largest to smallest) and therefore affects the HHI less and less (less than 4 points out of a possible 10k). This was probably put in as a computational limit in order to simplify calculation. There is very little precision or accuracy lost by discounting remaining firms beyond 50.

An economically and mathematically perfectly competitive market will have an HHI of near 0 (in theory only, as a nearly perfect competitive market with 100 firms with 1% will still have a score of 100). A maximum HHI score (indicating a monopoly) occurs at 10,000.

The CFA text book proposes the following HHI metrics for the various competition levels:

Perfect Competition less than 100
Monopolistic Competition 101 to 999
Oligopoly 1,000+
Monopoly 10,000

However, they also mention that the Department of Justice using different metrics (in the measure of degree of competition in the case of approving merger decisions) as:

Competitive less than 1000
Moderately competitive 1000 to 1800
Uncompetitive 1800+

In this respect, HHI is more descriptive of the actual competition rather than a four firm concentration ratio. For example, a monopoly is much less competitive than an industry with four firms equally sharing 25% of the market. This would be captured by the HHI score (monopoly 10,000 and four firm 2,500), but would be reflected in a four firm ratio as 100% as both cases being identical.

Supply Chain Management - The Vertical Integration Decision

2009-04-20T15:27:00.003-04:00

What are the scenarios where vertical integration of the supply chain is a good solution?

Well as it turns out, there are very heavy capacity implications when making acquisition decisions up the chain. Each layer of the supply chain adds value (and challenges) in unique ways. What are the key metrics for creating a compelling case for vertical integration? If your organization:

needs more control over your supply chain management (planning, synchronization, JIT inventory practices)
requires a greater degree of customization not currently available through third parties
has the capacity demand to generate your own economies of scale (lower costs)
can experience growth and efficiency and capture synergies in the new vertical integration

Conversely, in a scenario where an organization has too much capacity or cannot maximize the benefits of a division, rather than shut down it down, they can also sell of capacity to other organizations who can make more efficient use of those resources or spin it off.

Vertical integration can either be backwards (up the supply chain) to encompass inputs or forwards (down the supply chain) to encompass distribution channels.

What are the challenges to vertical integration? Each layer reflects a value added component and therefore is fraught with its unique challenges such as market sizing, competitiveness, industry regulations etc.

However, as a word of caution companies that do forward integrations (cutting out the "middle man") are often in danger of venturing into unknown territory as well as damaging relationships with other distributors (who can see this move by a company as repositioning from cooperative to competitive). This is exactly what happened between Harlequin and Simon & Schuster in the late 70's.

[Case Study] Today, Pepsi Co has put a set a $6 billion bid to acquire two of it's largest independent bottlers for Pepsi Bottling Group and Pepsi Americas. In this particular case, the decision for vertical acquisitions was driven by the need to gain a strategic advantage through controlling over 80% of their distribution. Each of the acquired companies shares are currently valued at 17% over their Friday closing price.

International Marketing - Pitfalls of Translation

2009-04-20T12:14:00.002-04:00

In the Canadian Federation of Engineering Students everything had to be translated into both English and French and this led to some interesting results. As a former President, I have seen some interesting mistranslations including the occasional and unfortunate mistranslation such as a dinner menu of chicken breast translated as chicken boob.

My favourite is the mistranslation of semi-formal as "demi-habillé" (or half dressed). As a result, the Quebecois, in a good natured attempt to remind English speaking Canadians of the importance of translation, collectively came to the semi-formal event literally half dressed in a shirt or blouse and boxer shorts (other more "creative" Quebecer's choose which half to dress up). Now at all semi-formal events, they come continue to come "demi-habillé". The proper translation for semi-formal is "tenue de ville".

While these mistranslations were embarrassing, we weren't alone in a few other disastrous mistranslations of advertising slogans by public entities.

With the recent 2008 Olympic games in China, I was fairly happy with some of the Mandarin translations of foreign products including:

Coca Cola translated in Chinese to "Delicious Happiness".
BMW is translated in Mandarin as Bao Ma (literally "valuable horse"). It also doesn't hurt that "Bao Ma" is a useful phonetic equivalent of the slang "Beamer".

I understand that speaking and reading any dialect of Chinese can be difficult (let alone translation). Words that sound alike usually take on the context and implicit meaning of the other. "Ma" itself can mean horse, mother or be used a grammatical inflexion indicating a question (be careful as to which meaning you want to imply).

This is also the case with certain lucky numbers and images in Chinese culture. For instance, the word for the number 4 sounds an awful lot like death and is therefore associated with bad luck. The number 8 is prosperity associated with fortune. The traditional Chinese new year greeting "Gong hei fat choi" contains the word "fat" sounding like 8. Without an intimate knowledge of the language and context, Babelfish style translations (replacing words with literal translations and with a rudimentary understanding of grammar) are sure to run awry.

Quantifying The Value of Trust - Assigning a Value to the Intangible

2009-04-20T07:22:00.000-04:00

I was recently having lunch with a colleague who was involved in the import / export business. He was describing how he was currently dealing with the shipment from overseas and the customs related to this transaction when we got to the topic of financing.

What had initially started off as a conversation about the mechanics of importing and financing (supply chains, letters of credit, customer relationships etc) eventually wandered into the realm of how to value trust.

It began with my colleague outlining the various incremental stages of an international supply chain relationship:

New relationship. You don't know the supplier and the supplier doesn't know you. Although you both require each others services, you need to be sure that the other party won't default on their side of the transaction. You bring in banks (or government trade institutions) in order to secure financing and guarantees with an irrevocable letter of credit for the payables (supplier / exporter) and the appropriate shipping documentation for the receivables such as the bill of lading (importer).
Mature relationship. You have conducted business with the supplier previously and are more familiar with the terms of delivery and credit. While perhaps there are not as many requirements necessary for insurance type guarantees against default, there is still the need for appropriate financial transactions. The banks are still involved in currency conversions and transactions.
Intimate relationship. Payment and shipping terms can be adjusted according to needs of both parties with minimal (if any) intervention by intermediaries. This improves cash flow as well as just-in-time / economies of scale related inventory needs and has a built in stress tolerance against default.

While this progression of trust and relationships may seem quite obvious, what surfaces upon further analysis is an ability to quantify the value of trust at each stage.

For instance, between stages 1 and 2, the monetary value of the improved relationship and trust can be approximated by the reduction of cost associated with no longer requiring intermediaries such as banks to provide services to insure and guarantee the transaction. This can become quite sizable as the fees associated with these services are not insignificant. You are essentially paying banks to manage risk for you.

Between stages 2 and 3, the monetary value is a bit less obvious, but still applicable. For instance, financing costs with deferring payment can be calculated as the marginal cost of capital required to reorganize the payment schedule. The cost of financing to improve cash flow is also not marginal relative to the overall costs of the transaction (usually a sizable percentage).

In this way, it is easier to put a price tag on something intangible by looking at the opportunity cost of the alternatives and the financial outlays associated with each. It also quantifies the investment in your relationship with suppliers (or customers) to see what the hidden costs were to arrive at these more optimal arrangements.

Jack and Suzy Welch, Winning

2009-04-19T07:27:00.004-04:00

If I had to use only the shortest possible sentence to describe the mechanics of success so that anyone can understand Jack's management style it would be:

"Use only the shortest possible sentence
to describe the mechanics of success
so that anyone can understand."

Jack is an avid crusader against unnecessary bureaucracy and management layers in favour of flexibility and ownership as a mechanism for empowerment. The ideas he puts forth in his books expounds his philosophy that direct communication and quick action in its various forms are the key to success in a variety of different operational functions.

While hardly a new book, it is one of my favourites. Jack deals with a broad range of topics, each of which is still relevant (sadly) today. Some of my favourite topics discussed are:

Candor - direct and clear communication of unpleasant (but necessary) topics in the search for solutions
Differentiation - the acknowledgment and rewarding of good work and values and the correction of poor behaviours (a natural corollary to candor)
The hiring batting average - holding recruiters responsible for building an organizational culture around performance
Divesture and parting ways - dealing with issues of strategic and systematic non-performance in organizations and individuals
Six-sigma - Understanding the value of consistency. Literally in statistics: reducing the variance of output to encompass six sigmas (standard deviations) - a *very* narrow band in any field
Ownership in career management - taking responsibility for advancement through adding value and understanding your role

His books have strikingly similar content to his website / pod cast (nearly identical in some areas) so even if you don't have time for the book (or prefer to consumer media in a different format) I would strongly recommend you having a look.

Sent from my BlackBerry device on the Rogers Wireless Network

Using Oligopolies and Monopolies to Model Union Behaviour

2009-04-16T22:53:00.004-04:00

Imagine there are a limited number of organizations which control the supply of a valuable resource. This small group of organizations collude with each other to deliberately regulate and restrict the supply of this resource in such a way as to maximize profit (acting in a similar manner as a monopoly). I'm not talking about OPEC and oil, I'm talking about unions and labour.

While it should hardly be a surprise that organizations and individuals look out for their own best interests, why is it permissible for some to exhibit behaviours that would be considered illegal by others?

What do I mean? Unions are essentially collaborating (colluding) with each other in order to capture as much of the labour market as possible across different industries. Whatever sectors they have influence over will usually experience inflated costs. If any business ever did that, they would be struck with anti-trust and anti-competition legislation.

Now any intelligent person will immediately point out that people should not be treated in the same way as oil. Of course not. However, the fruits of their labour can be quantified as a wage and to stray too far from that natural intrinsic value is poor practice.

Don't get me wrong. I don't think labour should be under paid. That scenario is just as unstable (and disastrous). But please don't act surprised or insulted when there is an inevitable reckoning when a scenario demanding more competitive practices force dramatic changes. Inefficient and unfair practices, whatever form they take, are inherently unstable. This is currently the scenario with Fiat purchasing Chrysler but incredibly weary of union wages inflated above the industry norm.

The difference between a union and good management is that good management should adjust wages as close as possible to their intrinsic value (up or down). Bad management will always try to under cut and unions will always try to get more. Its ironic (and extremely unfortunate) that in unions often start (and perpetually persist) in companies that at one time or another exhibit bad management practices regarding labour. Resulting in extravagant tug-of-wars in which no one really wins.

The best way to keep a union out? Be a responsive, flat and flexible management. Pay your staff well, respect them and be sensitive to their needs so they don't feel like they need an "additional management layer / political structure" to take membership dues in order to insulate them from poor management. A scenario where you regularly pay dues requires you to regularly justify your use of those fees (as any accountable organization should) and the situation naturally becomes resistant to change as unions are required by their mandates to always fight for higher wages even if the situation does not permit it (this is due to the zero-sum non-efficient use of membership fees to capture labour "demand surpluses" of businesses).

Regarding my previous model of profit per employee, I think that there should also be a risk / reward model when applied to wages for jobs. This is in direct response to critics who see CEO's with large compensation packages who leave sinking ships. I firmly believe (as do our capital markets) that if you want higher rewards, you must take more risks. The golden parachutes provided to CEO's seem to defy this logic. Certainly another example of an unstable scenario that doesn't "feel right".

Story of Stuff - Sustainability and Statistics

2009-04-15T07:31:00.007-04:00

I was recently introduced to this interesting video on the history of stuff (~21 min) and thought it might be helpful to do a quick review. I think there are some brilliant messages here, but at the same time, I think this is a prime example of having to look more closely at statistics and question what's presented. First let's look at some of the key points:

Linear systems are not sustainable (and certainly cannot support exponential growth). You need a cyclic system in order even have a chance.
Externalizing costs is a model which offsets the factors of production to keep costs low (and like over utilizing any resource is itself unsustainable).
The three R's are Reduce, Reuse, Recycle (in that order). Recycling should actually be a last resort from a sustainable consumption perspective.

While I like the overall message, I find some of the points and use of statistics questionable. Or as xkcd puts it:

For instance, Anne Leonard states that 99% of everything we consume is disposed of in 6 months. That's a lot. I have a general heuristic for these types of scenarios. If your statistic produces a result of more than 90%, that generally means there is some selective data mining going on. To reach a number like 99%, it suddenly becomes more interesting as to define what is the 1% that we keep beyond 6 months. It seems pretty astronomical, yet something about this doesn't seem right. What could possibly justify this number?

Why six months? Why not look at a quarter? A year?
Is it measured by income dollars spent? Mass of goods? Volume occupied in a landfill versus in storage?
What's included? Housing, food, gasoline, seasonal clothes, books, text books per semester, garbage?
What would be a more appropriate number given the same metrics? What should we aim for?

Next, Anne mentions that the US has 5% of the worlds population but they are consuming 30% of the resources (implying a footprint of 6x of what is should be). She also mentions that we are consuming 2x as much as 50 years ago which I feel is like comparing our peek consumption with our valley (which upon further analysis is almost meaningless). 50 years ago is very close to the depression and WWII which are the lowest consumption rates in recent history.

I am very opposed to peak to trough comparisons in behavioural studies because they represent extremes. I'd be more impressed with a normalized study over time with standard deviations rather than an opportunistic snapshot of a scenario 50 years earlier. This is because I'd expect that despite the growth of consumption, there is a corresponding diminishing utility that Anne hints at as a cause of decreased happiness since the 50s.

Her point on computers and planned obsolescence is both correct in many respects yet highly oversimplified and as a result (I would suggest) misleading. She implies that a computer upgrade is simply a CPU replacement and that companies intentionally design chips so that they cannot be easily substituted.

Upgrading a computer can *sometimes* be as simple as replacing a chip, but often with increases processing power come increases in bus speed and memory. A computer system is a much more complicated than simply replacing an old chip with a newer, better one. It's not just a matter of "shape" as suggested. Actually, the change in shape is deliberate to prevent people who don't understand how computers work from blindly substituting in parts (and destroying both).

Despite my negative tone regarding her use of statistics, I really think Anne has done something phenomenal. Her attempts to reach a broad audience are successful, but she does sacrifice a bit of credibility for accessibility. Some of her broad and extreme claims leave her work more vulnerable to criticism than it should be. I do like her proposed solutions, but I think the corresponding required change in consumer behaviour will be quite a challenge. I think that everyone should spend the just 21 minutes and watch this video.

Selfish Sustainability - Save or Starve pt 3

2009-04-14T07:21:00.001-04:00

Selfish Sustainability - Save or Starve Series [ 1 - 2 - 3 ]

While our hotel was able to improve the situation for the local populace, as I mentioned towards the end of part 2, this acts only as a starting point for those who are concerned about the broadest picture:

Migration Patterns and Shared Responsibility
One of the challenges we face is that although individual countries try to protect what's in their waters, the migration and mating patterns of aquatic life are such that they often move from place to place. While 80% of every aquatic species in the world can be found in the "golden triangle" between Malaysia, the Philippines and Indonesia, each location has different laws and different populaces. While you can protect species in one area, it does you no good if they are being over fished or otherwise destroyed in another. Therefore there is still some unmitigated risk exposure and protection must become a shared responsibility.

This is analogous to many other environmental cases (such as CO2 emissions) as these issues can propagate across geographies and therefore become shared responsibilities.

Market Failure - Dealing with the Black Market Space
The problem with protecting an endangered species is that because it is so rare, it also becomes valuable (think of an inelastic and weak 'supply' curve otherwise known as the species' population - supply push 'inflation'). As a prized fish suddenly becomes more rare, the market price for capturing and consuming one goes up. The incentive to find and catch one goes up as well. The only 'counter balance' is that they become harder to find, but that is hardly any real reconciliation.

When asked what was your definition of endangered, a colleague of mine remarked: "Anything that humans take out of the sea that they don't put back." This idea of a linear relationship with our natural resources won't hold because our population and consumption is growing exponentially. Linear relationships cannot support exponential ones without some form of crash as the inevitable conclusion.

Destroying - Much easier than creating
Destroying (or depleting) a natural resource is *much* easier than creating or renewing one. And there are *many* more people destroying than creating. It takes only moments of carelessness to destroy a coral bed, but years to have it grow back (even with modern technology).

Accelerating the systematic entropy and decay is a disaster. Externalizing the costs is a neat way to offset your responsibility, but it is an unstable model who's destiny is to collapse (with dire consequences).

Sustainability and competition for resources is one of those types of problems that will inevitably come up on the radar if it hasn't already. Basic science and economics dictate that it is coming and we need to pay attention to these issues.

Selfish Sustainability - Save or Starve Series [ 1 - 2 - 3 ]

Kickstart - How Successful Canadians Got Started

2009-04-13T07:38:00.002-04:00

By Alexander Herman, Paul Matthews and Andrew Feindel

Canadian talent usually tends to be understated, and these authors venture out to learn from successful Canadians and how they got their start in life. Many of us can sympathize with (or are currently experiencing) the concept of a quarter-life crisis, the idea that we have reached a point in our lives where we are re-evaluating how we want to apply ourselves and the directions we want to set.

Each personality has a different definition and vision for how they apply themselves and what they want to achieve. There are a broad range of experiences, each with its own lessons for any reader. Interestingly, one's "key to success" could become another's potential road to disaster.

I think the book's structure makes it both interesting and easily digestible. It certainly feels as if each story is like sitting down for a coffee with the interviewee. The biographies are divided into three groups: Searchers, Survivors and Dreamers, and each story reflects the Canadian perspective and highlights how our unique backgrounds can help (or impede) our path to success (whatever form it takes).

A must read for young Canadians, especially those of us about to (or who have recently) come out of university and are dealing with the quarter-life crisis. The three authors are friends of mine from high school and (as the introduction suggests) are currently facing the same challenges that we all are.

Sent from my BlackBerry device on the Rogers Wireless Network

Selfish Sustainability - Save or Starve pt 2

2009-04-11T07:36:00.012-04:00

Selfish Sustainability - Save or Starve Series [ 1 - 2 - 3 ]

Now that we had a "new" mission. We were forced to help change. Not by governments nor regulations, but our own self interest as a profit loving entity. We had to take a new perspective on our goals and extended the scope. Now we were a force of change.

New Problem: Depletion of natural resources
We can't call ourselves a top luxury hotel with pristine nature if the sea bed has been bombed to smithereens. Our natural resources are being depleted in a decidedly unnatural rate. As mentioned in my previous post, we had to understand why.

Salience:
We need to increase the awareness of the damage that's being done to our natural resources with the public. Issues arise that quickly become apparent. This is an illegal activity. You can't just advertise a class for fish bombers and hope you get good attendance.

We also need to address the poverty and danger associated with this negative short term thinking and the negative economic externalities they impose on the local community.

Causality:
Fish bombing is driven by a combination of poverty which is a result of a lack of opportunity, education and awareness in the general local public. It also thrives because of lack of policing due to difficulty to coordinate naval operations with the community.

Architecture:
How should we model our action plan to solve these challenges?

There is a need to work closely and communicate with the community to educate them and start a community dialogue. We need to educate our society to understand the value of this natural resource for everyone.
We need to fight the root causes of this destruction and poverty by creating better, higher paying jobs and opportunities for local members of the community. Suddenly, instead of selling a pile of dead fish for a few RM each, you can have wealthy tourists pay you the same amount just to look at them. One of these you can do forever. The other guarantees your children a worse future than what you have now.
The community needs to be connected to the relevant policing agencies to actively protect our natural resources.

Resolution:
A higher quality resort demanded higher quality service. We had to introduce language classes, service training to give our staff an opportunity to develop into new more fulfilling roles. It was nice to see local hires who saw the resort as a family. No longer simply "changing sheets", they became part of the hotel experience and fellow nature lovers.

Our staff numbers more than doubled from the previous management (which excludes the second island resort), wages and benefits also increased (caused by the increased demand for labour). In one of the arguably best applications of supply side economic theory working in the real world, we demanded more from our team, compensated them better to keep them and they stepped up to the task.

Also, we developed incredible programs such as the Marine Ecology Research Center (MERC) based on leading edge research to restore marine life in the water. We increased the number of PADI certified divers in our resort, making diving equipment and training accessible to our locally based general employees so that they could experience and understand what they were protecting.

We started our own sustainable fish farms and water treatment and recycling systems. As an island resort, we couldn't just hook up to the city mains. Plus our treatment systems were more advanced that those provided by the city. We made an effort to have our values and behaviours reflect our over arching philosophy. We are profiting from nature, so we have to protect our interests.

Long Term Outlook and Lessons Learned:
If you want to use capitalism as a force for good, how can you redirect 'greed and the drive for profits' into a solution for sustainability? Align the corporation with the values of society. Our situation was unique. There was a direct correlation between the health of our environment and our profits. Our environment: Save or starve.

Anyone who is a cynic of corporations will immediately raise their hand and ask "Uh... Shouldn't governments be looking after the natural resources and interests?" Absolutely. But some governments are not as wealthy as others. The unfortunate truth is that many wealthy countries have exploited their natural resources. The remaining ones that are naturally beautiful usually remain that way because they haven't been industrialized (and tend to be poorer). While this isn't strictly always the case, often governments often can't afford to police and protect their resources. Malaysia is hardly unique in this area. They know they have a valuable resource and are working hard to try to find more effective ways of protecting it.

This was a topic of the Asia Pacific Ecotourism Conference (APECO). While corporations may not be the best solution in all cases, it certainly beats the solution of no awareness and no responsibility. There were countless examples of beautiful areas that were ruined because they were neglected. These areas were notorious for exploitation by seemingly less scrupulous individuals who (it turns out) were just looking to feed their families.

There are certainly a lot more issues and complexity that arise from the discussions and further study regarding ecotourism policies, corporate social responsibility and sustainability. This series of posts is intended only as a starting point to illuminate another path for more enlightened discussion:

Corporations, if used appropriately, can actually be a force for good rather than stereotypical greed,
Corporations can contribute funds to develop positive programs, real opportunities and supply good jobs, rather than simply act as a source of tax shelter based charitable donations, and that
Integrative thinking can help you find the surprising nugget of gold in a case where there is a lot of chaotic data and relationships

Selfish Sustainability - Save or Starve Series [ 1 - 2 - 3 ]

Selfish Sustainability - Save or Starve pt 1

2009-04-11T07:25:00.007-04:00

Selfish Sustainability - Save or Starve Series [ 1 - 2 - 3 ]

Corporations are based on greed right? Is there any way to use the drive for profits to enforce ecological sustainability? Turns out there is. One of the reasons I love this case (derived from my experience in Malaysia) was that it started out as a standard vanilla business problem and evolved into something wonderful. Suddenly, evil corporations could be on the side of angels.

If there was ever a case where integrative thinking would lead a corporation to pursue success while preserving the environment, my work with hotel developers in Malaysia would certainly fit the bill. It's a great case study for looking at a problem through the framework, coming up with more interesting questions and reaching a surprising conclusion. Another reason why I like this case is that when you use integrative thinking to look at the broad perspective of what's going on, you can often find surprising answers to your original questions.

Let's look at what happened:

*Initial* Problem Definition: Let's Make Money
Our holding company held several properties. Two key properties were beautiful island resort properties which had unfortunately been left in disrepair. Our Managing Director had seen some great potential for these new island properties to be acquired and developed into boutique luxury hotels to service the affluent Asian and Australian market.

Salience:
Metrics of a hotel are pretty standard. You want to charge good rates and have lots of people come. As I mentioned in my previous post about hotel capacity management, the raw math for making money in a hotel is pretty straight forward.

Causality:
As I also alluded in my previous post, average room rate (ARR) is dramatically effected by quality (real and perceived). Also occupancy (OCC) was greatly affected by market presence. Both of these qualities are strongly correlated to brand equity. Certainly no surprises here.

Architecture:
(Where new problems and interesting challenges start to surface)
One of the reasons I was brought on the team was to bring in an international perspective. Most of the senior staff was composed of local managers who (although talented) had trouble perceiving (and therefore developing and selling) the differences in the international market. Many of our sales agents had a legacy two-star rating of our old services and facilities. So we set up a framework for dealing with those issues:

Upgrade facilities to match a 5+ star boutique quality with a luxury brand network (such as Small Luxury Hotels or Prestige)
Leverage network to attract high quality clientele (from outside of local markets - average spend of a visitor to our part of the world was RM2000 (Ringgit Malaysia) or ~$700USD for an entire week long vacation. We were charging $300 USD per night). Relying on the average and status quo wasn't going to work.
Renew brand equity and highlight natural beauty and proximity to nature as inimitable point of differentiation against other leading international hotels in the luxury space (in the luxury space you have to be exceptionally unique to attract guests)
Have world class operations to support your brand equity promise of a peaceful, serene resort experience

While all of this may seem rather obvious (even those of us who haven't yet finished our fancy MBA school degrees), I deliberately emphasize the importance of natural beauty *and* proximity to nature because without it, we were a resort like any other.

While services like jungle trekking and scuba diving were available in beautiful places like Sipadan (World class diving site) or jungle trekking in the depths of the Sabah's jungles, we were the only location that was located only a 15 minute boat ride from main ferry terminal in the heart of the capital city and offered both.

Every other hot destination required a minimum 3 hour bus ride. Sipadan also required a flight to Tawau on the other side of Sabah followed by a lengthy boat ride. While they are worth it for those who are "hardcore" (I myself have done these trips) they are hardly easily accessible and require additional days travel. We were isolated, pristine and accessible.

Resolution:
Exploit natural resources, build hotel, make money. Right? Well that would seem to be the natural answer. But if you're livelihood depends on the pristine condition of your surroundings you have to make sure that you look after your natural resources.

There was a problem in Sabah. While rich in natural beauty, like many developing nations, the majority of the population was poor. By Malaysian standards. This resulted in some extremely negative short term behaviour.

New problem: Destructive Fishing
One such example is fish bombing. As an outsider, I thought it was an over exaggerated myth until I experienced it on a trip during a day off.

I was taking some time off with the diving staff so we decided to scuba dive in a reclusive area of the island. With our proximity to the city, we often see fishing vessels of locals. Pump boats, notorious for being illegal vessels (because they can outrun police boats in shallow shoals), are still incredibly common. On our search for a dive site, we passed by one and in my good natured naivety, I waved as we passed by. Unamused, the two fishermen, sharing what is essentially a canoe with a lawnmower engine, eyed me suspiciously before returning to their work. I though nothing of it at the time (whereas my two diving companions apparently knew better).

Our dive was nice, but fairly uneventful, until towards the end, just before we decided to surface, I heard a rather forceful explosion and felt as if someone has punched me in the chest. It was incredibly unsettling. At first I thought someone's tank exploded, looking at my two companions they were fine. I checked my equipment and everything seemed to be in order. When we returned to the surface I was shaken: "Did you hear that? What was that?"

"Fish bombing" came the reply, "probably from those guys we passed earlier." Although the explosion was a good distance away (judging by the position we last left the two fishermen in the pump boat) I had temporarily forgotten the physics of propagating waves in water (water is an exceptionally good transmitter of waves and pressure). The force felt so close, I thought it had to be nearby.

It turns out this "urban myth" is all too real. What happens is that poor fish farmers will create homemade grenades, toss them in the water and cause large vibrations which immediately kill the fish in a large area by rupturing their organs and they immediately float up to the top for a catch which will supply the fisher man with as much as a reported RM4000 for a days work (average salary for Malaysian workers ranges from RM300 to RM1000 per month for skilled or semi-skilled labourers) so that translates into a great deal of money.

The obvious problem is that this indiscriminate form of destruction also destroys corals that took years to grow. Besides being beautiful in it's own right, coral also acts as a home and food supply for many forms of aquatic life and is therefore a critical part of the ecosystem in the water. In recursively applying the integrative thinking framework (Salience, Causality, Architecture and Resolution) the less obvious "secondary" problem that surfaces becomes the primary one. Fishermen are poor and have an good financial incentive to take more aggressive measures to ensure their livelihood (exploiting their future for the present).

Suddenly, not only is a matter of developing the resort facilities, but also the society that the resort exists in. Our problem definition has suddenly become more complicated (and enriching) than "build hotel, make money".

[cont'd on pt 2]

Selfish Sustainability - Save or Starve Series [ 1 - 2 - 3 ]

Globalization - Like Graduating from High School to University

2009-04-10T07:41:00.002-04:00

Making the jump from a leading domestic company and taking your business onto the global stage is analogous to going from high school to university in many ways. You suddenly become part of a much bigger universe and there is much more diversity (cultural, interests, geography, skills etc). Usually, this means that you have to be more focused to succeed and start to specialize in your field of expertise while at the same time being exposed to more opportunities and broadening your horizons. Everything becomes a little less structured and you become even more responsible for your own development. You are leaving your comfort zone.

Another particular analogy is the idea of grants. Particularly talented individuals get grants to attract them to different institutions. If you're a talented student (especially in a particularly desirable field of study), you get a grant to further your education. If you're a talented company, countries will often try to grant you subsidies or other concessions to attract you to reside within them. Desirable companies like manufacturing operations to boost exports and the balance of trade.

Standards for success increase. Just because you were smart in the previous life is no guarantee for success in the next. In fact, taking that first big step into the bigger world often acts as a wake up call. Immature behaviour which was previously tolerated because of youth and lack of exposure can now get you in big trouble, but at least you now have a much greater awareness and the opportunity to adapt. You have to change your habits and take on more responsibility.

While previous generations could rely on making the jump to a higher level as their ticket to success, an increasingly crowded pool of talent means that this new higher level isn't a point of differentiation: It's now just table stakes (necessary and not sufficient). And if you choose not to make the jump (for whatever reason) it doesn't mean you are insulated from other people who decide to make the jump when you are competing in the same market place. Old jobs that would allow you to start without a certain level of education are slowly requiring that you make the jump to a higher level or be beaten out by others that do. You have to change your habits and gain new skills to succeed.

But you don't have to go it alone. There are support networks at home. You can join up with partners in the new playing field. You can be mentored by those who have gone before you. You can investigate and ask about the potential benefits (and challenges) that await. It doesn't have to be an overwhelming nor insurmountable challenge. But it will be a challenge. And depending on what you invest in it, it could be incredibly rewarding.

The bottom line is that to succeed you have to be good at what you do, take responsibility, and keep improving.

LISTEN TO ME! Closing the Loop on Corporate Communication

2009-04-09T07:21:00.000-04:00

One of the largest root causes for many of the challenges companies face is directly related to communication. Companies need to know how to better serve their customers, but getting good data is becoming increasingly difficult. The demographics and complexity of each customer segment is becoming larger and more refined in its wants and needs. The old methods of communicating with customers are slowly on their way out.

Because of the sheer number of respondents required in order to get an accurate sampling of customer needs, large processes and systems are needed to ensure statistical relevance when looking at customer responses. However, the larger the system becomes, the more distanced and less intimate it becomes, reducing the effectiveness of each contact. Potential customers are very skeptical of corporate surveyors who want to know how they can "serve" them better.

Door to door and phone based solicitation of feed back is dramatically becoming less effective. The models of feedback surveys had started to migrate online. Also the idea of a "middle man" or a intermediary used to collect data is uncomfortable from a privacy perspective as well as the idea that the message is slowly being filtered out naturally (rather than deliberately). Also, with many membership and reward programs in the consumer and retail space, many individual customers are thinking "why can't you just ask me directly?"

With corporations relatively slow to change versus consumer expectations, it seems as if corporations aren't actually "listening".

Therefore, it has become incumbent on PR and Marketing professionals to step up the *relevant* communication. Follow ups are required both to keep contact as well as ensure that feedback is still "alive" in the system. By staying close to the customer, corporations can be more responsive and, as the saying goes in politics, "look busy as well as be busy" doing the work they were prescribed.

Malcolm Gladwell's Outliers

2009-04-08T08:10:00.009-04:00

I've been looking forward to this book since Jim Balsillie hinted at WES that his old U of T college roommate and author of Blink, Malcolm Gladwell, was writing his third book (I hear he was a speaker at WES again this year).

Gladwell investigates the story of success and undermines key assumptions in the story of the successful "individual".

He talks about society's overarching design to promote talented individuals and the flawed idea that differences in underdeveloped individuals disappear over time. He contends that rather than dissipate, they actually become amplified.

He recognizes certain key factors of success:

Hard work - manifested as 10,000 hours cumulatively spent on learning a skill set.
Complexity, autonomy and a relationship between effort and reward in doing creative work as a measure of how meaningful each hour is
The effect of power distance and language to affect entitlement and the ability to challenge while asking the right questions
The benefit of persistence, self education and drive in development

Malcolm Gladwell emphasizes the role of opportunity, not just as luck nor preparedness, but a blending of the two in order to produce outliers, success stories on the long tail.

Sent from my BlackBerry device on the Rogers Wireless Network

Cash flow and Queueing Theory: The Lifeblood of Business

2009-04-06T09:44:00.005-04:00

Cash flow is the life blood of any business and one of the best metrics to analyze cash flow is the Cash Conversion Cycle (Net Operating Cycle). It's a measure of liquidity by determining the time elapsed from when a company invests working capital to when it collects cash. It is calculated as:

CCC = DOH + DOS - number of days payables

DSO - Days of sales outstanding (Account Receivable collection to cash)
DOH - Days on hand - how long inventory is held
Number of days payables - Accounts payable liquidated to cash instrument payments to suppliers

Recall that:

DSO = AR / Average days sales on credit or [AR turnover]
DOH = COGS / Average Inventory [Inv turnover]
Number of days payables = AP / Average day's COGS [AP turnover]

aka: How long is money sitting in any particular stage?

It logically follows that there are several operational strategies companies can use to influence these cycles. Depending on the nature of the business in question, the benchmarks for operations performance will be different, but can still be influenced in several ways:

Extend / reduce time for collections terms
Extend / reduce payment terms to suppliers
Just-in-time / overstock inventory practices
Aggressive sales practices
Financing receivables / payables

Other issues that can arise are issues like churning. Abrupt halts in cash flow can result in expensive financing solutions. This must be counter balanced against the potential lost revenue in sales from out of stock scenarios. However, with proper planning and management these situations should generally be avoided altogether or at least optimized for maximum profit.

Looking at this financial model, there is an analogous model which can be taken in queuing theory:

Throughput - cash flow (as COGS per period)
Latency - float
Arrival rate (λ)- incoming cash (AR conversion rate to cash)
L - Inventory
Processing rate (μ) - cash output (AP conversion rate to cash)

If you consider cash flow as a queue, you can suddenly use a whole host of queuing model formulas to describe your cash flow, things like Little's law:

L= λ W

And queue formulas such as utilization rate?

ρ = λ / μ

This formula essentially describes a short term profitability based on your most liquid assets (or an approximation of overall real profit margins). This has similar characteristics as the Current Quick ratio, but differs in that it describes financial performance as a partial derivative with respect to time (shorter term marginal performance - this metric describes the change in liquidity - rather than the current financial position of your liquidity).

While a good measure of liquidity, cash flow can also indicate if there are other problems going on as well. For instance, if cash conversion rates are too slow, that may be indicative of credit problems and possible default scenarios (a topic for another post).

* Quick note, in order for queuing theory to work, you HAVE to assume FIFO accounting (queues are FIFO in nature). LIFO would be better represented by memory stack models (push and pop flows).

Zeller's New CEO Overly Ambitious

2009-04-02T16:06:00.002-04:00

Zeller's new CEO, Mark Foote, is trying to pitch the public the idea that Zeller's is in a position to profit from the recession in the same way Walmart is, as the discount retailer in the HBC brand. If you read my post about why Canadian's can't seem to compete at the same levels of our American cousins, you would be (and should be) a bit skeptical.

While Mark has his direction and focus in the right area, "supplier relations" and "productivity" (as measured by sales per square inch) will hardly be easy challenges to surmount.

As far as supplier relations go, if Zeller's wants to compete with Walmart, they have a long way to go in terms of cut throat relationships to drastically cut prices that characterize successful discount retailers. Walmart has also had a good head start with "supplier relations" (notoriously so that they've constantly been targeted by activists for having "bullied" suppliers). But worst of all, Zeller's won't have the strategic leverage they can apply against their suppliers for better conditions as their parent company is having financial troubles of it's own. Also their distribution channels are not particularly noteworthy versus other retailers. It's hard to be the school yard bully if you're the skinny and sickly nerd.

In terms of "productivity", it isn't a cause of their woes, it's a symptom of their diluted brand equity. This is the consequence of their brand swaying back and forth and not entirely owning the discount space. Been to a Zeller's recently? In peak hours, there's no one there. Walmart's continue to be constantly packed. The Zeller's brand isn't even bringing people through the door.

Mr. Foote's "sanguine" attitude is encompassing and descriptive: Win or lose, The future looks both hopeful and bloody.

Profit per Employee - Understanding and Quantifying Your Worth

2009-04-02T07:18:00.002-04:00

Face it, you don't have a job because the business you work for "enjoys your company" (unless you are an entertainer). Everyone knows that you have work to do and that you play a role in the success of the team. But these pretty words and pleasant philosophy shouldn't prevent you from trying to understand and quantifying your worth.

While some jobs may be more easily measured than others (productivity in line assembly work, revenue generation metrics for sales staff, completes in a call center etc) some maybe more difficult to classify.

However, a relatively new and unique model is being proposed based on profit per employee. By comparing the value add by your employment, what is the profit margin that employers are getting based on your current salary. For instance, if you are a a new hire what is the marginal value that the company expects your work to generate? Look at an example:

At a top engineering consulting firm, a junior engineer is hired at a salary of $60k (~$30/h). However, under the supervision of a P.Eng and colleagues, the junior engineer's work is billed at a rate or $80/h. Assuming a 75% engagement rate, the profit the organization is gaining off the junior engineer would be

Profit margin= ($60 - $30) / $30
or 100%

While this example is terribly oversimplified, it should highlight the idea that whatever your salary is, the company you are working for should be benefiting more (otherwise, the incentive to hire you disappears as does your job possibly).

If the value you calculate is completely out of whack (as compared by relevant benchmarks), it could indicate the following:

You are adding tremendous value to the organization - time for a promotion
You are under paid - maybe it's time for a move (conversely the organization may need to re-evaluation it's compensation programs)
The nature of your job has high multiples on return
The company may have a strategic interest in hiring more people to undertake similar work
There are external factors at play - this job is attractive for other reasons - scheduling flexibility, intellectual challenge etc

While hardly a perfect model by any means, it does provide an interesting alternative for looking at individual performance. Also this type of mindset will really help anyone at the salary negotiating table (regardless of which side you are sitting on).

Capacity Management - Why Hotels and Airlines Deliberately Overbook

2009-04-01T14:13:00.007-04:00

With my recent investment blog post about Air Canada current troubles, I began to look at the service industry and capacity management (a staple concern and metric of success).

Any seasoned manager in the hospitality industry is familiar with capacity management. In the services industry, maximizing capacity (as services can't be time shifted to other periods, they are either consumed or not) is a great way to increase overall profitability.

Most people would assume that hotels book until they are at 100% capacity and fill all the rooms. They are usually surprised when they find out that the hotel is over booked. How can that be? It's not operationally difficult to track the number of rooms and the number of guests! Let's explore why:

Profitability for hotels, the top two most important metrics for revenue are ARR and OCC (Average room rate and occupancy rate respectively).

Revenue = ARR x OCC

Now, many services will try to boost their ARR through marketing, improved services etc, but for this example, let's assumed it's fixed. It's quite obvious that the best way to boost revenue is to increase occupancy (have more people visit).

Now as a hotel you've booked 100% of your rooms. Great right? Well not entirely. Unfortunately, for a variety of reasons, people cancel, have no shows, etc. So your OCC drops from 100% to it's real life value (usually 70-80%). One solution to recover costs is to instigate a cancellation or no-show fee to recover some of the 20-30% of OCC lost (in the form of a 10-50% fee depending on when the cancellation is made).

Revenue = (ARR x OCC) + (Cancellation fee x number of cancellations)

Now some clever analysts determined that by trying to predict how many people would cancel, it was possible to deliberately overbook the hotel in hopes of boosting revenue. For instance, if 10% of people booking canceled, it is possible to over book the hotel proportionally so that the final result (expected visitors) would be 100% (and you could also charge cancellations the regular fee).

OCC = # of bookings x (1 - Cancellation rate)
[Target = 100%]

So if you expected 10% of people to cancel (90% show up), and you had 100 rooms, you would book about ~110 guests, expecting only 99 - 100 to show up.

However, this begins to creep into the case most of us are familiar with: more people show up than expected. In this case, the hotel has a problem. For simplicity sake, let's just say that in order to resolve this issue (upgrades, alternate accommodations, loss of good will etc) there is an "all encompassing" penalty cost of Y dollars.

The full revenue cost formula becomes:

Revenue = (ARR x OCC) + (Cancellation fee x number of cancellations)

- (# of over bookings x Y)

Now in order to maximize profit, the derivative of the revenue function is taken with respect to occupancy, to find the sweet spot where revenue is maximized. Essentially, you begin to counterbalance the benefits of maximizing occupancy with the cons of over booking.

Of course there are some major assumptions which (if refined) can provide a better picture of the profitability and costs:

Average cancellation rate can be refined to more by accurately segregating guest demographics to improve accuracy in predictions (is cancellation affected by age, geography, time of year, other consumer qualities)
"Cost" of overbooking (especially if it's pervasive) can be detrimental to brand quality and could adversely affect ARR (guests feel like the quality of services drop)
Hospitality is seasonal by nature so assumptions and rules governing overbooking need to change accordingly
Over booking assumptions for finding alternate accomodations might be prohibative if there are simply no alternates during a "hot" season

Earth Hour Post - TCO Models for Sustainability

2009-03-28T19:54:00.011-04:00

One of the controversial environmental topics I like to bring up is solar power. While naive (but well meaning) environmentalists support solar technology (for mass consumption in it's current state), they don't realize that more energy (in the form of oil) is consumed to create a solar panel than will ever be extracted from it.

Also, many "environmentally" friendly models are simply offsets of other more polluting or less sustainable practices.

As a corollary of my previous post on this topic, as with any strategic endeavour that wishes to succeed (not just on moral grounds but also on more pragmatic and physical terms), I believe it is necessary to take a more all encompassing total cost of ownership (TCO) approach. That is to say that non-sustainable processes cannot be "green washed" by offsetting the true environmental costs (with striking similarly to NIMBY).

Case in point, solar panels may be "green" with no emissions where they are installed, but they are tremendously inefficient for their purpose. NASA puts solar panels on it's space craft because it can provide a light weight, steady stream of power with the majority of its complexity and drawbacks offset off the actual device and doesn't need a complicated external fueling source (such as gasoline with atmosphere or batteries).

In deciding if something is environmentally friendly (through and through), a more cradle to grave to cradle approach is needed which encompasses the many definitions of sustainability. There are even some European counties leading in policy innovation in these areas (yes, this article was written in 2001, and we wouldn't *DREAM* of implementing something so bold here in North America).

Also, in awareness for Earth hour, I'm putting this post up as my last activity before I shut down all electronic devices I have for an hour between 8:30 PM and 9:30 PM.

Aside: Note, that "Earth Hour" is actually in Ontario's off peak hour (and by extension, most people's similar behaviour pattern) for energy consumption so we are actually saving the least amount of power possible in an hour. For Earth Hour to have maximum potential (and exposure), it probably would have been best to execute this hour during peak hours aka (7 to 11am or 5 to 8pm on a Winter weekday or 11am to 5 pm Summer weekday).

Zimbabwe Defeats Hyperinflation

2009-03-28T08:53:00.007-04:00

The Globe and Mail wrote an article on How Zimbabwe slew the dragon of hyperinflation and it warrants looking at some of the key features of this story.

When a country's currency is in trouble (hyper-inflation) most traditional fiscal and monetary policy remedies won't work. There are several rather extreme options to deal with the problem:

Issuing a new currency
Adopting foreign currency

Now in either of these cases, you are forced to abandon your previous currency (obviously). However, issuing your own new currency tends not to help in the case of Zimbabwe as it is implied that they would have run into the same problems again. Following this option would have required an overhaul of the financial system there along with the replacement of key government officials and policies to instill confidence in the new currency (you can't just label a lemon an orange and try to sell it again).

However, that method is slow as it requires the people who hold the new currency to have faith in the government that controls it. Instead, Zimbabwe opted to switch to foreign currencies: US dollar, South African rand and Botswana pula. What's the downside of this option? No control on monetary policy (which works as both a plus and minus). This means that the government has no control over the currency (which for some people is a good thing in this case).

Loss of a currency is a serious issue. For instance, I would be interested in seeing what a Zimbabwe "federal budget" would look like.

Also, on the ground level, there isn't much "change" as the article states, as shop keepers don't have enough to coins and small denominations to make change and they will issue notes or ask customers to take change in the form of candies or small trinket products. This is indicative of the hiccups in the money flow and must have a negative effect on the velocity of money (and GDP).

Although this is a major step in trying to set things right, there is plenty more work to be done.

Petro Can and Suncor - Why Can't Canadian's Compete?

2009-03-25T07:45:00.002-04:00

The latest "exception" might be this financial crisis, in which case our banks simply weren't "beat up as badly". I'd call that winning the race for last.

However, Canadian consumer products businesses always seem to be small shadow's of their American cousins. Examples?

Jumbo Video versus BlockBuster
Mr. Sub versus Subway
Petro Canada (Sunoco) versus ESSO (Exxon Mobile) - Check out my post on the Petro Canada / Sunoco merger posted yesterday

Aside: I might also note that American readers probably look at the above list and have no idea what I'm talking about. The American businesses have crossed the border, but many of the Canadian ones have limited success (or have closed down) on our side of the border only.

Even Tim Horton's (founded out of Hamilton by the famous hockey player of the same name) was purchased by Wendy's a while back.

Now granted, there are some obvious general assumptions which apply which make it harder for us to "compete" on a comparable level playing field:

The US has a 10x larger population than Canada, generally more demand
Canada is geographically much bigger which results in a compound effect and lower population density
We typically have higher tax, but enjoy more social programs
American's have higher marginal propensity to consume (MPC) improving their GDP multiplier and demand curves

I sincerely think that this is a "handicap" of our own making. While Canadian business would rather keep prices stable and sell a constant volume (as was described to me by the owner of an export company), American's are willing to drop their margins to get the higher volume. Simply put? American businesses are more willing to push competition.

Note as well that it's not that the American's are targeting us per-say when they make an expansion onto our soil, but rather they are embracing globalization. Generally, the companies listed above have a presence in other countries as well as Canada.

Particularly in the Petro Canada / Suncor example, it's clear who's the bigger player as they will be retaining the Suncor name and CEO.

Superstructures in Social Networks

2009-03-24T07:29:00.002-04:00

"We can save memory by storing the year as two digits instead of four" ~80's programmer
"640K ought to be enough [memory] for anyone" ~ Bill Gates, 1981

You always have to think of the consequences of your design...
Or, as one of my favourite webcomics, xkcd, puts it:

The most recent reincarnation of the limits of software design has surfaced was Facebook's notorious 5000 friend limit. This is well above Dunbar's number (~150), a proposed theoretical natural limit to the number of useful social connections we can have.

Now I'm sure a Facebook software designer would argue (rightly) that having 5000 friends is probably some form of inappropriate use of Facebook (if not outright abuse), but it turns out that is exactly what happened when popular web personalities tried to use Facebook as a tool to connect with their readership. With sky rocking success, suddenly Facebook's 5000 friend limit was a lot closer than people originally thought. Although most intentions were good (to keep closer contact with their fan bases) it turns out their success was too much for the Facebook frame work.

Certainly, most of us who imagined internet fame didn't conceive of this type of double edged sword.

I was recently speaking with a colleague who is a lead software developer for a popular Facebook application who was describing the processing inefficiencies that managers don't seem to understand when they design systems. Recopying entire databases, poor message protocols etc. Even with the most efficient code, there was that nasty problem of becoming 'popular', and suddenly experiencing exponential network growth. In a system like Facebook, where connections are always 'two-way', it exacerbates the problem.

What does that mean exactly? Unlike Twitter, where connections are generally one way (I follow you, but you don't HAVE to follow me), Facebook connections are all bidirectional - There is one connection shared between us. However, Twitter, each connection is one way and as such, you can have one popular node (such as a Barack Obama) with many connections in without as many connections out. What does this translate into?

I can follow Barack, but I'm pretty sure he doesn't care too much to follow me.

This simple assumption dramatically cuts down on the memory, processing and bandwidth requirements needed to provide the same level of basic service. But even, if the technology will permit it, are our minds too "primitive" to keep up? Or is it just physically impossible to reply and stay current at that volume on such an intimate level (versus the traditional mass communication channel models)?

I'm quite surprised that Facebook servers don't burst into flame each time someone logs into their website. At the time of writing, my Facebook boasts exactly 450 friends. From what I can see on my friends connections, this is hardly staggering. If you asked me to design a search algorithm that identified the latest activity of 450 people and then sorted them in order of time and relevance on my homepage in real time (a few seconds loading and transmission delay), I might have a heart attack (or a very large consulting contract). However, it becomes very clear (especially with their previous incarnation of "More / Less stories about..." design) that there is an inherent (unstated) hierarchy of friends. I would almost expect it to be a sort of "page rank of friends" that helps Facebook efficiently sort interesting stories for you.

Why I love YPBlogs

2009-03-23T09:22:00.009-04:00

Salience:

Readers may have noticed that I've recently subscribed to various Blog directories in a narcissistic attempt to drive more traffic to my website, boost my page rank and generally solicit more feedback on my postings. I wanted to create a bigger audience for my material beyond my own networks in Facebook and Linkedin.

Causailty:

Anyone who designs or uses webpages will be familiar with Google's pagerank formula, and therefore if you are looking for an effective method of boosting your rank, you need to incorporate that into how you seek links to build your organic ranking. However, there are more metrics for success on the web. For instance, the number of hits, comments and the "quality" of said metrics. Keeping these goals in mind, I've been evaluating some of the tools I use to promote traffic to my website, particularly focusing on blog directories using a framework which cointains these elements and their relationships.

Architechture:

Among these blog category services, my favourite would have to be YPBlogs (Young Professional Blogs). The reason? I get good quality hits from the site is the short answer. But it's because of the subtle differences in how the site is structured (to match my goals). Let's look at the details:

By virtue of the site's writers / target audience, it attracts a certain crowd - energetic, exuberant, intelligent and technology proficient young professionals
You are listed on the front homepage - Unlike some of the other categories where you are listed on the 97th page among 50 other blogs on that page alone
They enjoy a decent page rank
It's a free service
They aggregate most recent blog posts on their homepage making it easier for you to immediately hit the latest news (and conversely for people to hit your recent posts)
They have dynamic content which refreshes *constantly* attracting people to return often
Bottom line - You get good hits and comments - I have two blogs posted on their service and I swear that my traffic has doubled (Ok. Maybe my blogs are relatively new, and "doubled" isn't really that impressive, but it is certainly way more traffic than I'm getting from the other services - a more "apples to apples" comparison).

Resolution:

I think the most interesting point here though isn't what YPblogs has been able to do for my Blog, but rather, what it's been able to do for my blog reading habit. I've found it surprisingly difficult to find interesting blogs to read (that aren't major publications by writers who blog as a full time job). What I was looking for was independent blogs of individuals who simply wanted to express themselves or ideas and this was a great place to find material.

In the interest of full disclosure, I'm hoping to become a featured site on YPBlogs by writing this post, however, the outcome of that is uncertain as this is a post they have not solicited and I would have (or rather, have just) written anyways.

Smart People Saying Stupid Things

2009-03-21T07:38:00.005-04:00

Remember Senator Ted Stevens' comments about the internet being a series of "tubes" rather than a "dump truck"? His description of the internet was so flawed (or rather poorly described) he got heckled by the Daily Show and it resulted in the spawning of (and his self immortalization through) his own personal internet meme.

The unfortunate thing is if you dissect what he was saying (between his pauses and stuttering), he was actually trying to describe the difference in message flows between Stacks (dump trucks) and Queues (tubes) and why net neutrality is important for internet traffic. How unfortunate. I pictured in my minds eye, some techno-consultant who shook his head at his message being butchered while silently crying that he would probably be blamed for this later.

As tragic (or humourous depending on your perspective) as you find this story, a good lesson here is the dilution of any message by the messenger. One of the biggest issues facing organizations is that for each additional management layer you create, the message usually loses about 20% fidelity while passing between layers (or retains 80%). So after two layers you're down to 64%. After three layers 51% and so on. Think of the childhood game of broken telephone. Or this Dilbert Comic from Scott Adams:

There are some obvious solutions. Jack Welch is a strong advocate of flat management for this very reason. The idea that being flat and having a minimal number of reporting structures makes your organization literally (and ideologically) more tightly knit and flexible.

Another is a very well organized communication plan. Messages should be unified and repeated. Changes should be well managed, but not so drastic that they violate or become misaligned with your core values. In an ideal scenario, people should almost be preemptively able to anticipate your communication. There should be few "surprises" which usually lead to things being taken out of context which further obfuscates the truth. A good example of this is technology companies and the "planned obsolescence" of consumer products.

This problem gets further compounded and exacerbated if:

You are in a MNC - Your audience speaks different languages and struggles with understanding idioms, slang or cultural customs.
Globalization - Issues related to distance in transmitting messages or updates.
Lack of standards or a common lexicon - Changes in context from one department to another lead to gross misunderstandings.
Decision cycles - Propagation of time delays from when a message was fresh to the latency after it is released for public consumption including the iterative refining process before it is approved.
Message volatility - Chaos. Too much communication and too much changing at once. No "version control" on ideas.
Weak culture - Unclear vision or mission in the company's core values or over arching goals causes people to constantly second guess the organization's direction and their role in it.

In professional (and personal) relationships, a top complaint many people have is that communication is poor leading to unnecessary misunderstandings. By identifying the most recurring issues facing your organization's communication channels you can reach the low hanging fruit: preemptively get the most out of your resources with a minimal effort.

Developing Your Personal Brand

2009-03-20T14:55:00.006-04:00

We've often heard horror stories of people who've been burned because of a blog post, Facebook photo or Youtube video of them doing something embarrassing, it being discovered by their boss and them getting canned over it.

People should realize by now that their online presence in the public domain can be detrimental if left un-managed. However, the other side of the coin is that a well managed online identity can bolster your image, especially as a recruitment tool.

While most applications for jobs and competitive opportunities limit your application materials (2 page resume / CV, cover letter, essays, etc) it is beneficial to have a strong online presence to supplement your materials. Without the restrictions of a standard application package for example, including a website can stretch the valuable time a recruiter looks at "You" (your personal brand identity) from the standard 30 seconds before you are placed in the "blue bin" filing system to maybe that extra few moments in which they decide you're interesting enough to call in for an interview.

Some particularly good examples? Check out Jamie Varon's twittershouldhireme.com which only started on March 9, 2009. Although she's placed all her eggs in one basket so to speak, she's already got a fairly large following (she explains on an online interview that she was one of the top followed uh... twitter-ers).

In her example, she had a unique and bold idea, great execution and strong social networking / advertising. Her story is in it's interim stage as she is being called in for an interview by Twitter, but her fan base has its fingers crossed for good news.

Twitter, Facebook and Software Modularity

2009-03-19T10:42:00.007-04:00

I've just recently added Twitter to my account after receiving numerous invitations from friends and colleagues and after watching several episodes of The Daily Show with Jon Stewart, figured I shouldn't allow the technological gap between myself and US Senator's get extended too far.

I've also added the Twitter app to update Facebook status as well as Twitterberry, an application to update Twitter through your BlackBerry. It occurs to me how much layering is now involved in social networking.
When I update my Twitterberry application, it updates my Twitter account which in turn updates my Twitter application on Facebook which updates my Facebook status. All this in less time than it takes for my Firefox browser to refresh my Facebook homepage.

This is a testament to modular software design. However, as seamless as this progression appears to be, the recent updating of Facebook's "faceplate" for lack of a better word, brings up an interesting question when it comes to systems design.

Facebook was previously divided into several categories of communication: Status Updates, Messages, Wall Posts and (more recently) Comments. However, this new design begins to blur some lines (particularly between Wall Posts and Status Updates. While users may remember Status Updates as preceding with "is", Facebook has quietly removed the "is" as the default precursor to your activity update and slowly blended it such that status updates appear simply to be posts on your own wall. Similarly for sharing Notes or Links.

Now, this has some users up in arms based on the user interface and online "form factor", but in looking at my old Facebook for BlackBerry app ("old" by the online versions new standards, but still the "latest version") I noticed that much of the context that made sense in the previous versions now don't make much sense at all. It's a wonder that the API still works as well as it does (legacy code probably not yet depreciated) however, it's only a matter of time before this application gets a major overhaul.

Software vendors and developers need to catch up with Web 2.0 (it's hardly "new" anymore as it's been around for years now) and understand that in the development life cycle, there are major issues associated with changing form factors and even templates when your services are so integrated and intertwined with other services.

Modularity was a nice to have when your software was standalone and you simply wanted the ability to cheaply and quickly roll out new releases of software and be flexible with passing your code from one developer to another for outsourcing purposes, however now with the interdependency of message protocols and databases, it has become a critical necessity.

Especially as enterprise customers begin to rely on social networking technologies such as Twitter and Facebook as part of their mobility strategy, software design for increasingly critical applications must be more robust.

Differentiation - A Necessary Ingredient in the Recipe for Success

2009-03-16T09:57:00.005-04:00

I've always been a big advocate of differentiation. Both as a principle for individuals and organizations. Differentiation answers the question: "Why should we pick you?" and is a lead in for all the important questions and actions that follow. What key characteristics is it that makes "you" worth the attention of your audience? What qualities of your products or services makes them interesting or noteworthy? Why should we pick you?

Many business leaders subscribe to the idea that competition brings out our best performance. Some will even go as far as competitively ranking (by percentile) and categorizing employees. The top 20% make the A group, the super stars. The next 70% are the B group, the vital work force engine. The final C group are "mismatched", and depending on the aggressiveness of the firm, may be reprimanded, retrained or might not be employed for much longer. While such aggressive behaviour is debated by both advocates and detractors of differentiation, people who are in sales roles will know the value of being aware of the dynamics (even if they choose not to participate). And sales roles doesn't just encompass building customer relationships to eventually lead to the consumption of your products or services, but also the sale of ideas to colleagues or projects to upper management etc.

In a world with shrinking resources, global competition in all markets and increasingly skilled workers, the ability to sort out and match requirements must keep pace with the needs of the organization or consumers (whether they are individuals or corporations).

's to 's

This is particularly notable in a weak economy, when many people make small realizations that "paper towels are just paper towels" and slowly start to adopt "inferior" (in the economic income elasticity sense of the word rather than quality) goods versus "normal" goods. Differentiation on brand alone isn't good enough any more. Now that people don't have the financial exuberance they previously had, corporations must work extra hard to pull out that extra couple of cents from the consumer's marginal propensity to consume.

Is Globalization and Outsourcing "The Devil"?

2009-03-12T09:23:00.003-04:00

Often we hear cries that globalization and outsourcing are the demons of capitalism and create unfair playing fields for local business while oppressing the poor of foreign countries for the benefit of the rich. Unfortunately, often many activists have reason to complain.

Many altruistic people are comfortable drawing parallels between our lifestyle versus those of developing nations, akin to: "You should be happy with what you have compared to what poor people in other countries have." I would propose that responsibly exporting components of success that lead to a shared and similar lifestyle is the first step towards achieving that dream.

While good intentions are the motivations at the start of the journey, it is necessary to have the engine to drive you there which I propose is the idea of fair trade and responsible globalization.

I think that if you are aiming for the noble goal of global equity (as the aforementioned statement assumes) than you will have to rely on some degree of globalization to happen. And as with anything, a good idea can be poorly applied if the implementation is not well planned.

I do believe that globalization is inevitable (for better or worse). Furthermore, I perceive the inequities in terms of purchasing power and lifestyle as inherently unstable scenarios that free trade should theoretically begin to remedy. However, I can understand an activists concern at the potential (or rather, historical) of exploitation of poor foreign workers (or even "opportunistic disaster capitalists" as Naomi Klein describes them in her book Shock Doctrine) which subsequently also results in lost jobs in home countries. While the opposite strategy would be considered protectionist, this strategy certainly seems reckless, benefiting only a select few based on morally weaker ground and attracts negative attention.

The focus should not only be on exporting the engine of capitalism, but also the standards that come from more developed countries in terms of workers rights and democratic process that should go with it. This is to bring a more broader definition of success and prosperity into an economically (and potentially politically) less developed country.

Any company that attempts to outsource without taking these issues into consideration will certainly struggle as consumers and workers demand more corporate responsibility from their leadership and insist that company's stick to their stated core values.

Assuming a more optimistic tone, a corporation that is sensitive to these issues will not abandon globalization, but will rather do it in a more responsible fashion. The economic assumption from free market and supply side advocates is that a company opening a new factory in an area should be increasing the labour demand curve and as a result raise the wages of the local populace. While a rise in real wages is a great metric for describing success, what is more important for the population at large in this case is that the entrant companies are providing options for local workers.

That is to say, if current workers are unhappy with their working conditions in their current jobs, this new opening will need to provide them with incrementally better opportunities in order to attract them from their current positions or to fill a vacuum of unemployment. This is the opportunity that foreign companies can and should offer to locales where they open new operations.

For companies who are constantly looking for differentiation, this leads to the obvious marketing and PR component. In this day and age, it is simply not enough to do social good without having an open and frank discussion about it in public (in a closed loop communication system). Corporate communications should proclaim their messages of good faith coupled with their good deeds so that the public can transparently judge them based on their actions.

Facebook: Privacy and Broken Business Models

2009-03-09T08:46:00.007-04:00

Facebook had originally started as an online community for University students unlike MySpace which was inherently considered more public domain. Only as recently as last year did Facebook start allowing the creation of "public profiles" which are now not much more improved than short summaries of friends lists.

Even recently, Facebook had to retract changes made to their ToS because of IP issues associated with the changes. As they look for creative ways to make money from their services, they have to come to terms with the initial strategy with which they were originally modeled.

Because of this initial definition of their space, they are having difficulty when it comes to leveraging their extensive network. Their network size is larger than MySpace, but their revenue is struggling to match their growth pattern.

Using an advertising model to make up most of their revenue, Facebook users will notice that their interface has become plagued with irrelevant ads (IQ tests, get rich quick schemes and all the garbage we hated on other parts of the net).

They should be leveraging their "intimate" knowledge of us for more targeted advertising. This has already started to appear in its infancy as a form of social advertising: Your friend, X, has joined the Y group or become a fan of Z product (with the implied suggestion that maybe you'd also be interested). There is potential here to do more direct communication with your fan bases in a similar vein as a membership or frequent purchasers program.

Also as differentiated products and brands can also be a form of self expression. Actively becoming a member or fan of such products on your social networking site become a natural extension of this expression. Marketing Mavens in the community can create a "celebrity endorsement" in their communities by proclaiming their interest in certain products by signing up for and participating in these fan memberships and groups.

These fan memberships and groups also provide focused and attentive groups for targeted communication. They are a captive audience eager to consumer your products but more importantly are interested in learning more about updates or possibly participating in feedback relating to these products.

This greatly affects current advertising models as well as how corporations solicit feedback and communicate with their loyal customer bases.

This may be good solution and business model to follow which allows Facebook to have it's privacy cake and eat it too. For now it seems like this type of model is rapidly gaining popularity as a nice to have, but could very quickly become a necessity for businesses who want to stay in close quarters range of their customers.

Sustainability and a Green Focus

2009-03-04T18:10:00.005-05:00

The top issue with MBAs and other business leaders today is the idea of sustainability (Wikipedia article authored Jan 8, 2009) coupled with corporate responsibility. Although, MBAs are currently highlighting this area as important, it lacks a definition which is meaningful as actionable advice.

I would propose that the most base definition of sustainability should relate directly to energy capture and consumption. However, since products cannot simply be arbitraged nor modeled directly as energy consumption, there are many other aspects which must be considered: carbon emissions, land use, natural resource extraction rates etc.

It is quite obvious that anything which is consumed and not replaced is in an inherently unstable relationship. Currently, companies such as Monsanto are working "diligently" in order to increase the yields of products we consume (in Monsanto's case, GMO food products) as a solution to assuage the strain and diminishing return of our resources. However, even the most cynical and fastidious capitalists must recognize that there exists some natural limit of efficiency (even with technological augmentation).

Biotechnology growth has recently spiked up as a result and its now up to companies to find out what that means for them. How should companies incorporate business practices so that they can benefit from this inevitable trend. While some companies are contributing at the forefront with new innovations in resource management, other companies will have to find which services they can provide or will demand in the future. Whether these companies are innovating to create substitutes or trying to increase the efficiency of how we use our resources, sustainability management will likely become an increasingly popular (and necessary) field.

The Hiring Process

2009-03-03T13:50:00.002-05:00

With the economic downturn, it has become more important than ever for companies to employ the best HR practices possible, whether they are looking to shed excess capacity (lay off workers) or use this opportunity to pick up top talent.

I don't think anything drives this point home more than a recent job fair I went to in Toronto where the line up went out the door and across the floor of a crowded convention hall to meet up with a hand full of employers, only a fraction of which were actually hiring. Although these employers can have their pick of the litter, it becomes very difficult to sort the wheat from the chaff.

The recruitment process, a process like any other, has many metrics which can be used to determine it's success rate. Recruitment and hiring can also be evaluated at different stages to understand the relative performance and contribution of each stage to the overall success of recruitment efforts. First let's take a high level look at the recruitment process:
Recruitment Events:

Although it would be perfect for recruiters to be able to attend all recruitment events with potential candidates, the reality of the situation is usually that there is a limited staff and budget. This in turn means that recruitment teams have to prioritize their attendance based on their recruitment goals and needs. Similar to a targeted marketing campaign, HR recruiters need to advertise to their perspective new hires to get them interested in applying. A valuable metric to evaluate for this stage is how many applicants applied and how did they find out about the posting. While job boards like Monster.com might have a swarm of applicants, the quality and relevance of each applicant might not be of the caliber or fit you are looking for.

Application Process:

The problem with recruitment today (especially in this climate of high unemployment) is that there is usually an insurmountable number of applicants. The application process needs to be able to navigate through the clutter, however, it also must be concerned with disguarding good candidates. Even the best tools in this area will appear as double edged swords. The application process is usually as follows:

Application materials are screened by an automated process (Resume / CV, cover letter, references, transcripts)
Recruiters pick out top candidates for a first round interview. In this interview, the recruiter does a pre-screen for fit within the company, behavioural interviews, and leadership / soft skills assessment etc.
If the candidate passes, they are then passed along for a second interview, usually with the hiring manager or colleagues for competencies and technical skill.
A subsequent interview may follow by a senior executive for long term potential within the company and final approval.

Many companies have referral programs which aim to quickly identify good quality candidates. These pre-existing relationships act as a pre-screen for candidates as current employees vouch for their ability to perform the roles. It has often been said that 80% of all jobs are found through networking. Some companies even provide an incentive for employees by offering a referral fee for candidates who are extended an offer.

At this stage, it is also important for companies to evaluate the process and individuals participating in what Jack Welch calls the Hiring Batting Average. It's essentially a review of the success of your company's recruitment team to ability to identify and hire star employees at each stage. Those who are proficient should continue to be involved (or escalate their involvement) while those who are less successful need to improve their "batting averages" or be taken out of the process.

Candidate Offers:

Hopefully, by this point there are few hiccups in hiring process. However, for highly skilled or demanded candidates, there may still be the need to negotiate terms, benefits and salaries. If you offer competitive salaries, you will not lose as many good candidates to other companies (and retain them for longer also). Looking at your compensation system and ensuring that it is aligned with your needs and value proposition as an employer of choice.

Hired!

By looking at all of these items independently and as a whole, companies can make the most of the resources they have in order to provide the most benefit for their operational teams. In an environment where more is being demanded with less, it is crutial for all members in a company to operate at their most efficient levels. Especially the component which is responsible for adding more memebers.

Local Coffee House Profit Conundrum

2009-03-02T11:34:00.002-05:00

Introduction:

A local coffee house was looking at its books and noticed that it's profit margin for the last quarter were down. This was a seemingly large contradiction and interestingly confusing to the management, who decided to investigate further as growth had been fairly steady. In fact, their intuition told them that they had more customers these last few months than usual. Let's use the Rotman School's Integrative Thinking model to break down the problem.

Salience:

In breaking down the their profit model, they were certain that their cost model was the same: Despite the fact that there was more traffic coming to the store, they had not changed their hours or personnel per shift. Standard supply side items such as rent and food and beverage suppliers had not changed and there were not any large capital outlays for new equipment nor maintenance.

In investigating the revenue side of the profit function, very little had changed as well. The product prices had remained the same and volume had even gone up recently.

Causality:

However, upon inspecting the volumes of each types of products purchased, it became apparent to the management that there was less people dropping in for snacks. There was a steady strong demand for lunch products such as sandwiches, but a decline in the demand for coffee, a high margin product.

As a result there was also a shift in the peak periods from the 10 am to the noon hour, when a local university's students were let out of their morning classes for lunch.

Architecture:

To identify how to build a framework around the issue, the management team looked at the causes of the drop in profit margin and looked for opportunities and strategies to capitalize on this new dynamic.

By identifying this shift in consumer behaviour, there is an opportunity to better align their services with their new client base to serve them better.

Resolution:

Based on this demographic shift, there was a higher demand for their lunch products and potential to develop a more robust menu beyond the limited offering they were currently providing.

There also exists the possibility to shuffle the shifts to meet the change in demand from the shift in the clientele and to adjust their inventory sizes accordingly to minimize inventory carrying costs and spoilage.