Market-Based Management®

Eying the Prize!

Sir Richard Branson is my third favorite billionaire (easy guess who numbers one and two are).  I like him because the British have a tendency to view success as some sort of embarrassment, and he has done much to resurrect the acceptability of their entrepreneurial heritage.  Sir Richard recently took a page from Ye Olde English playbook, when he offered a $25 million prize for the development of an effective means of removing carbon-dioxide from the atmosphere. 

The use of prize money to spur innovation is often thought of as a daring new concept – consider the recent $10 million X Prize for a privately build spacecraft.  However, prize money was the original source of government sponsored research and development.  Long before governments could afford to fund labs and R&D bureaucracies, they sought answers to technical challenges by offering prizes.  The most famous of these was the British government’s 18th century Longitude Prize, which offered the then astronomical sum of £20,000 to whoever could develop a means for ships to calculate their longitudinal position (miscalculating positions and running into things was a major problem).  The prize resulted in the development of reliable sea clocks or chronometers, which have since saved the lives of thousands of seafarers and thousands more people through the extension of more reliable commerce.

The advantage of prizes is that they unleash the creativity of human beings.  Often when governments or businesses conduct research and development, they place bets on specific solutions or technologies.  This narrows the range of possible solutions.  Furthermore, when you pay people to research and develop, they do just that – research and develop.  If anyone ever actually develops anything, then they often lose their funding!  It is also common for the best connected political groups to gain government funding for their own particular solution, which leaves out the less connected and backyard tinkerer with the novel, effective solution.  Not only does the promise of a prize give heart to the little guy, but it creates an incentive for entrepreneurs to search him out and support him – for a cut of the prize of course. 

I cannot wait to see what comes out of Sir Richard’s contest.  If the prize is ever given, then I am sure the $25 million will have unleashed more creativity than ten times as much in government expenditure.  I myself, have my own entry.  It is a highly complex biomechanical hybrid constructed from advanced alloys.  Actually, it is a fern decorated with tinfoil in a titanium pot; but one has to start somewhere.

Entrepreneurship [Updated]

I've heard the following line attributed to several different famous people: "The problem with the French is that they don't have a word for Entrepreneurship." It's funny, of course, because "Entrepreneur" is a French word - there is no word in English.

Some writers and speakers on the subject will translate Entrepreneurship into English as "to undertake something," and Entrepreneur as "undertaker," explaining that undertaker in French doesn't have the same meaning as undertaker in English (which is silly, since the French don't say "undertaker," they say, "entrepreneur" -- you might recall the Steve Martin line: "Those French have a different word for everything!").

A better translation might be "between-taker" - but that too lacks the fullness of the term. There is no English translation. At best we can approximate it and, as with poetry, hope that its fuller meaning comes out not just in the lines written, but "between the lines" as well.

Entrepreneur is built on two words: Entre ("To be in") and Prendre ("To take").

"Preneur" is straightforward - the noun version of the verb "Prendre." A sound translation is "Taker."

"Entre," is often (correctly) translated as "between" -- as in "entre chien et loup", which literally translates as "between dog and wolf". That phrase is French idiom. It describes dusk, or that time of day (just before nightfall) when you wouldn't be able to distinguish between a dog and a wolf trotting towards you at that level of light. It is also used to describe the tension between habit - what is comfortable, familiar - and the discomfort of the unknown.

With "entre," it doesn't seem to be as much about being in between two things - physically or metaphorically - as it does to be "inside" or "within" the situation. To be in.

Entrepreneurship is perhaps better understood as pouring yourself into something that takes hold of you in the attempt to take a profit. It is a process of deep immersion into a specific opportunity - an attempt (based on a hunch informed by personal knowledge and market signals) to efficiently fill an unmet need or want in society. If you're right (customers want it) and you're good (faster than your competition, execute well), you are rewarded with profit, and profit is very good - because it means you've created real value for society.

In an MBM company we strive to create and maintain a culture of Principled Entrepreneurship™ - Each of us striving to maximize the long-term profitability of the company by creating real value for society while faithully conducting all affairs lawfully and with integrity.

It requires virtue and talent so that you can pour yourself into the opportunities that arise based on your comparative advantage. It demands a sense of urgency, discipline, accountability, judgment, initiative, economic and critical thinking skills and a risk-taking mentality.

To do all of the above equally and exceptionally well is an ideal to be strived for - to actually pull it off would, perhaps, be superhuman. But then, to me at least, the Principled Entrepeneur is the penultimate superhero.

Creative Destruction - Best Buy style

There was an interesting article on Best Buy in last weeks Fortune (no subscription required). For the last decade Best Buy has been the clear leader in consumer electronic sales, with 30 billion dollars a year in sales and 17 percent of the consumer electronics market. What caught my attention was the following excerpt.

Wander around the executive suite at the Minneapolis headquarters of Best Buy, and near the CEO's office you'll encounter a strange tableau.

It's a mock "retail hospital"--including a row of truncated beds in which effigies of stricken retailers like Kmart and Woolworth, the old five-and-dimes, lie with their corporate logos propped up on pillows and with their abysmal financial results displayed on bedside charts. Declares a sign nearby: THIS IS WHERE COMPANIES GO WHEN THEIR STRATEGIES GET SICK.

But the mock hospital is a reminder that in the volatile, low-margin retailing realm, complacency brings doom. Because of that awareness, Brad Anderson (CEO) has been willing to roll the dice again and again throughout a legendary retailing career, junking perfectly good business models in favor of high-risk innovations.

"When most of us say, 'Well, I'm more comfortable where I'm at,' " says CFO Darren Jackson, "Brad pushes us around the next corner."

Whatever the business it is essential that each employee looks for better, or more effective, products or ways of doing things.  The only way to truly beat your competitors is to drive creative destruction internally faster, and more effectively than your competitors.  In our increasingly globalized marketplace the rule is simple -- innovate or die. To be clear, innovation by itself doesn't guanantee survival, but failure to innovate will lead to certain death.

Drucker's "Innovation and Entrepreneurship"

Since Drucker's recent death I've pulled out my old Drucker books and been sifting through them. Here's a little gem from Drucker's 1984 "Innovation and Entrepreneurship".

More than thirty years ago, I was told by the chairman of New York's largest department store, R. H. Macy, "We don't know how to stop the growth of appliance sales."

"Why do you want to stop them?" I asked, quite mystified. "Are you losing money on them?"

"On the contrary," the chairman said, "profit margins are better than fashion goods; there are no returns, and practically no pilferage."

"Do the appliance customers keeps away the fashion customers?" I asked.

"Oh no," was the answer, "Where we used to sell appliances primarily to people who came in to buy fashions, we now sell fashions very often to people who come in to buy appliances. But," the chairman continued, " in this kind of store, it is normal and healthy for fashion to produce seventy percent of sales. Appliance sales have grown so fast that they now account for three-fifths. And that's abnormal. We've tried everything we know to make fashion grow to restore the normal ratio, but nothing works. The only thing left now is to push appliance sales down to where they should be."

For almost twenty years after this episode, Macy's New York continued to drift. Once new management came in (1970), reversed the emphasis, and accepted the contribution of appliances to sales, Macy's - despite inner-city decay, despite its high labor costs, and despite its enormous size- promptly began to prosper again.

The Macy's story will be called extreme. But the only uncommon aspect about it is that the chairman was aware of what he was doing. Though not conscious of their folly, far too many managements act the way Macy's did. It is never easy for management to accept the unexpected success. It takes determination, a willingness to look at reality, and the humility to say, "We were wrong!"

"Creative destruction is the essential feature of capitalism" (Schumpeter) Therefore companies must innovate (though their own disciplined efforts but also keep their eyes open for the unexpected successes that will sometimes emerge).

Creative Destruction in Cement

Here's a story saying that Italian producer Italcementi has created a "smog-eating" cement road surfacing product that's been shown to reduce various pollutants by 40-65% outside of Milan.  It's getting another test in the alpine region of Alto Adige.

The company says it's product can also be used for flooring, roof tiles, cement-based masonry paint, building siding, and noise barriers. 

Making cement's pretty straightforward.  Get some clay, a lot of limestone, grind it up into a powder, mix and bake at 2700 degrees Farenheit.  There's some variations -- your competitors might throw in a bit of gypsum.  Then someone says, "hey, what if we could put stuff in this that would react with light to absorb smog?" 

Were customers asking for smog-eating cement surfacing for their roads?  Were they saying to cement makers, "gee, if you only made cement that could eat smog..."  Customers don't know what they want because they don't know what the alternatives might be.  It's producers that drive innovation by anticipating what customers will want (and pay for).