Jim Follain has a proposal for empirical macro

He writes:

First, let’s do more research to help reduce the uncertainty regarding the fiscal situation we face and the new, modern and more complex economy in which we live. This step will involve de-emphasizing a number of metrics underlying macroeconomics built around national totals, such as national income, GDP and the aggregate unemployment rate. Instead, we are wise to take a more geographically granular view of our economy that measures regional, state and local economic activity and adapts policies specific to these areas. Focusing upon the national aggregate or the national average masks the extraordinary variation among markets in this country and, indeed, can even make it harder to identify seriously stressful events until it’s too late. This is difficult to do, but c’est la vie.

CAPABILITY & COMPETENCE ADVANCEMENT AGENDA (C2A2)

MODERN DAY CORPORATIONS SHOULD HAVE A STRUCTURED CAPABILITY & COMPETENCE DEVELOPMENT PROCESS IN PLACE TO ACHIEVE LONG-TERM SUCCESS! PRESENTING, THE THEORY OF IT ALL – A BENCHMARK MODEL THAT ORGANISATIONS CAN IMPLEMENT OFF-THE-RACK FOR DEVELOPING CAPABILITIES AND COMPETENCIES

Look around – and you’ll easily find a plethora of visionless CEOs arbitrarily deciding which business areas should a company enter and which it should leave, without giving a glimmer of thought to whether their organisations have the wherewithal to succeed in chosen battlefield. The astoundingly mammoth list of failed M&As is evidence of the same. More evidence is provided by the speed with which CEOs are being eased out of their jobs – from Yahoo to Google to Tiger Airways to Wipro to RIM, from new-age to traditional industries, companies and CEOs seem to be deciding on new businesses based more on the “fools dare where...” ideology than basing the same on a logical and structured capability and competence advancement agenda. I usually write what my readers term ‘light stuff’ – easy on the eyes and amusing on the brain – and would have used this column to simply berate those organisations that don’t have structured plans to develop competencies and would have praised those that did. But I realized that even for an organisation that in all sincerity wants to set in motion a long term plan that could match its capabilities and vision, there practically exists no ‘readymade’ model that one could implement straight off the board to document one’s competencies. Worse, there’s no telling which competence fits where and is how important for future growth!

Guess what, for a change, I decided to ditch the ‘light stuff’ trademark and to go ahead and benchmark the methodology that is followed by the best in class to match vision with strengths, goals with skills, objectives with focused training – I call it the C2A2 model; in other words, the ‘Capabilities and Competencies Advancement Agenda’! Of course, the ‘C2A2’ term might seem pure limerick at its best, meant to invoke ‘term recall’ in the minds of the reader. But irrespective of the play of the term, the fact is that implementing such a competence development agenda in your organisation – whatever you call it, as long you have a process that does it – might just save your firm from getting decimated in the near future.


C2A2: AN IMPERATIVE FOR IMPLEMENTING STRATEGIC INTENTIONS

An imperative reason for corporations to take up the C2A2 model is the fact that immediately, the top management within the organisation is forced – or encouraged – to match their irreverent business vision (which may have been earlier propagated more due to their ego) with the competencies that are documented within the organisation. In other words, call it what you may, but even if you have documents floating around in various business of your organisation that have mapped out various strengths and weaknesses of those businesses, you’re well started already. But wait, there’s much more left – and that’s where I hit you with the jargon.

‘CAPABILITY MODULATION’ IN C2A2: KNOW YOUR HARDCAPS Vs. SOFTCAPS

Capabilities within any organisation should be visibly perceived in two basic forms, namely HardCaps and SoftCaps. Hard capabilities, or HardCaps, show themselves in the forms of visible ‘hard’ items that can be seen. For example, machinery, cash, personnel, number of patents et al, are HardCaps. Soft capabilities, or SoftCaps, show themselves up in the form of ‘soft’ items that cannot be necessarily seen, rather can be perceived. The backbone of any company’s strategic architecture is made up of the combination of HardCaps & SoftCaps. HardCaps can be quantified. But Hard Capabilities are ruled by Soft Capabilities and this is where the problem arises. It is much difficult to maintain and understand SoftCaps. Knowledge management, process manuals, ISO et al, are all attempts by any organisation to maintain a Hard interface on Soft Capabilities. The corollary is that SoftCaps are most difficult for competitors to replicate and hence can become the basis for extremely long sustainable competitive advantages. But a corporation cannot succeed on Soft- Caps alone. There has to be a most practicable combination of Soft Capabilities and Hard Capabilities for any company to succeed.

So how does one understand which ‘Caps’ is more important? And which less? And how does one know which capability does one need to develop and which to destroy? Differentiating your capabilities using the Structural Capabilities Architecture is one solution that provides the answers.

THE STRUCTURAL CAPABILITIES ARCHITECTURE

Structural Capabilities within any organisation belong to four categories. Doorway, Elemental, Enrichment and Power Leadership Capabilities. Once you have categorised each and every capability under these heads, you would automatically understand which ones you need to maintain, develop and which ones you need to leave go.

DOORWAY CAPABILITIES: These are essential capacities which allow entry of the organisation into targeted businesses/markets/ industries by dissolving entry barriers. These capabilities could relate to any of the functional areas (marketing, human resources, manufacturing, finance, research & development, legal, advertising et al). For example, any corporation wishing to enter the business of manufacturing aircraft needs to have all-encompassing financial capabilities, technology backup with respect to personnel, plant & machinery, necessary government licences, patent clarifications et al. Similarly, every industry has a set of Doorway Capabilities (Porter slantingly refers to these as Entry Barriers), which one has to obtain ‘before’ entering an industry. The simple corollary which most CEOs forget: if you don’t have Doorway Capabilities, it makes quite less sense to enter a new industry, however attractive it might be. Ergo, first document what Doorway Capabilities are required to enter an industry, then acquire those capabilities, and subsequently enter.

ELEMENTAL CAPABILITIES: These are capacities that, after an organisation has procured the Doorway Capabilities, sustain any organisation’s functioning on a day-to-day basis. When Barista took leadership of the narrow market of café sales through Barista stores all over, competitors were more moved by the glamour of it all, rather than the pure profit dynamics. Also-ran competitors did not realise that coffee parlours were not a source of industry leadership, but were rather only a source of industry survival and continuance (Elemental) capabilities. Duncans (a G. P. Goenka group company) went into setting up Barista style tea parlours in various East Indian territories with the collaboration of retail outlets like Pantaloon (Café Bollywood). At the same time, Café Coffee Day was bent on targeting the highest potential markets by opening up coffee parlours all over India. Even though Nestle also has Café Nescafe outlets all across relevant markets, Nestlé is the leader in the overall coffee segment (with HUL following in at second rank) not because of Café Nescafe coffee parlours, but thoroughly because of the focus on converting traditional supply chain channels (institutional sales, vending machines, retail sales et al) into ‘Enrichment capabilities’ (definition on next page). Nestle & HUL have clearly realised that in this industry, the maximum sales growth can occur only through leadership in traditional channels, rather than through fashionable outlets.


But wait, there are two groups of Elemental Capabilities – Pure & Derived.

Derived Elemental Capabilities are those that are continuations & combinations of improved Doorway Capabilities. For example, for an automobile manufacturer, having a plant is a Doorway Capability, but continuing production in the plant is an Elemental Capability derived from already existing Doorway Capabilities like the plant, personnel, electricity availability etc. The fact that Maruti Suzuki India Limited’s plant in Manesar (Gurgaon), rolls out the maximum number of vehicles per day (1200 units, as of September 6, 2011) and has been attaining similar benchmarks for the past 14 years (since it started) is a brilliant example of excelling at attaining derived elemental capabilities. Setting up marketing channels are invaluable Doorway Capabilities for retail corporations to start operations; maintaining these marketing channels using a combination of Doorway Capabilities like sales personnel, dealer network, and transportation et al, is a Derived Elemental Capability. Globally, Walmart is an example of this.

The other group of Elemental Capabilities is known as Pure Elemental Capabilities. These are capabilities that have not been derived from Doorway Capabilities but have been developed or acquired anew. Having detailed customer query handling processes, in spite of not being Doorway Capabilities, are essential for almost all airlines and computer selling organisations for able day-to-day customer relationship management, thus becoming Pure Elemental Capabilities that should be acquired & developed by any computer organisation. Virgin Atlantic’s customer relationship management programme, being currently handled by loyalty marketing specialists ICLP (which also works with airline group Star Alliance and for several carriers like Cathay Pacific, Air New Zealand and Qatar Airways) is an example.

ENRICHMENT CAPABILITIES: Any capability that provides the basis for growth over and above the current standards of the organisation is known as an Enrichment Capability. Enrichment Capabilities are not about gaining leadership in the industry, neither are they about obtaining competitive advantage. Rather they are about gaining absolute growth in areas that are critical to the organisation. Jet Airways entered the Indian market in May 1993, and has since then, carried millions of passengers. Since the start of its operation, Jet was clinically involved with a radical focus on improvement of structural capabilities. It continuously attempted to upgrade the most critical structural capability, namely the aircraft fleet. In 2003, Jet Airways started with an operational fleet of 34 Boeing 737s and 8 ATR72-500 aircraft. Since then the airline has earned a reputation for “constantly maintaining its average fleet age below 10 years”, which is characterised by frequent phasing out of aircraft that exceed 10 years of age. As of May 2011, the average age of the airline’s fleet stood at just 5.4 years – the lowest in the industry! Today, the airline’s total fleet of 97 aircraft consists of 12 A330s, 55 B737s, 10 B777s and 20 ATR72s. Aircraft are nothing but Enrichment Capabilities for Jet, as growth of the airline increases with the number of aircraft acquired by Jet, ceterus paribus. In fact, today, despite not being at the top in terms of the number of aircraft in their fleet, Jet Airways has the largest market share of 25.5% (June 2011) and is the only profitable FSC (with a positive bottomline of Rs.96.9 million during FY2010-11) in the domestic market.


But wait. Even Enrichment Capabilities can be pure or derived.

The capabilities that have been derived from Elemental Capabilities are known as Derived Enrichment Capabilities.

For example, a food services organisation might believe after research and inference that improvement of the marketing channel reach might result in improvement of its market share. In this case, the organisation would attempt to Derive Enrichment Capabilities from the already existing Elemental Capabilities by combining factors like PR campaigns, advertising et al. The food services organisation might replicate this combination of its Elemental Capabilities in expanding marketing channels to other geographic regions, thus providing the much needed growth. For an automobile manufacturer, having a plant is a Doorway Capability, continuing production in the plant is an Elemental Capability, but improving production process efficiencies in order to be more cost effective are Derived Enrichment Capabilities. The other group of Enrichment Capabilities is known as Pure Enrichment Capabilities. These are capabilities that have not been derived from previous Capabilities but have been developed or acquired anew. Capability processes covering PR, market scanning & research, training & development, technology & capital asset acquisitions, research & development are all examples of capabilities that can take the form of Pure Enrichment Capabilities if directly acquired or taken over from the external environment. Brand takeovers, joint ventures, plant acquisitions, marketing channel purchases are all examples of Pure Enrichment Capabilities.

POWER LEADERSHIP CAPABILITIES (OR COMPETENCIES): Capabilities that provide the basis for gaining leadership and sustainable competitive advantages in various industries and markets – those that give you Power Brands too – are known as Power Leadership Capabilities or Competencies. This set is what a company should strive to maintain.

For example, becoming the lowest cost manufacturer in any industry could be a direct result of a previous Enrichment capability of cost effective manufacturing becoming extremely superior to those of competitors. Do not forget that this ‘cost effective manufacturing’ must have been obtained after combining various Elemental Capabilities like relevant training of personnel, process improvements & IT systems integration being refined to the highest degree and thus becoming a reason for industry leadership (see chart on previous page for progression). But this can be bought in one straight shot too!

Yes, Power Leadership Capabilities can also be obtained without necessarily goingthrough the progression of organic development of capabilities. M&As are typical examples of how companies attempt in one go to gain Power Leadership Capabilities external to the organisation by taking over targeted companies that have critical and strategically important assets, products, brands, structures and processes. But given the ever-present risk within M&As, it’s better (but not necessary) if Power Leadership Capabilities are developed organically within the organisation.

What I’ve attempted in this massively theoretical editorial is to tell you – the CEO – that the first step to becoming a world class organistion setting superlative benchmarks, is documenting a plan to know, maintain and develop your capabilities and competencies. And if you had no idea how to prepare that document, just blindly implement what I’ve presented here – and keep sending me the royalty.

Ten-Year Treasury Below 2 percent!

If I am reading this graph correctly, we are at a 130 year record:

Those bond vigilantes sure are being vengeful.  And how about that S&P downgrade?

The good news graph of the day, though, comes from the Fed:

This is the average financial obligation ratio, which is debt service plus rent over disposable income.  Lower interest rates do seem to be helping, although it would be useful to know what has happened to the median, as opposed to average, household.  I refinanced my mortgage earlier this year, and it was great, and meant my financial obligation ratio fell by ten percent or so. But underwater borrowers who can't refinance (or households whose income fell enough to precent qualification for a new mortgage) may be worse off than before.  It is hence possible that while the average has improved, the median has not.

Where are the Medicis when you need them?

Richard White's Railroaded: The Transcontinentals and the Making of Modern America, is a wonderful book.  In it he shows how the railroad barons were crooks and swindlers who suckled on the federal teat every bit as much as the deposed yet still wealthy CEOs of failed Wall Street and mortgage firms.

But at least the Huntingtons (well, Collis' nephew Henry, anyway) left us with the Huntington Library and Gardens, an institution that by itself makes a trip to Pasadena worthwhile.  And Leland Stanford left us with, well, Stanford.  Angelo?  Dick?  We're waiting.

Realtors should love school spending

In the most recent Wisconsin gubernatorial election, Realtors and homebuilders were the leading campaign contributors to Scott Walker. As governor, Walker has shown hostility toward public education in general and school teachers in particular.  If one were to analyze what ails Wisconsin, public education would not rise to the top of the list, because Wisconsin has among the highest high school graduation rates in the country (or conversely. among the lowest drop-out rates), along with strong SAT and ACT scores.  Milwaukee public schools are another matter, but somehow I do not think the school children of Milwaukee are among the top of Governor Walker's concerns.

Beyond all this, however, it puzzles me as to why real estate people would support someone hostile to public education.  There is a very long literature that shows that spending on schools produces higher property values, particularly in the suburbs that are the places where Realtors and homebuilders make most of their money.  Lisa Barrow and Cecilia Rouse:

In this paper we use a 'market-based' approach to examine whether increased school expenditures are valued by potential residents and whether the current level of public school provision is inefficient. We do so by employing an instrumental variables strategy to estimate the effect of state education aid on residential property values. We find evidence that, on net, additional state aid is valued by potential residents and that school districts do not appear to overspend on education. We also find that school districts may overspend in areas in which residents are poor or less educated, in large districts, and in districts with higher shares of rental property. One interpretation of these results is that increased competition has the potential to reduce overspending on public schools in some areas.

A money quote from the NBER digest on the paper:

… A $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure."


The Barrow and Rouse paper are not alone in their findings: starting with Wally Oates' seminal 1969 paper through Hilber and Mayer's recent work, the empirical literature finds that school expenditures produce higher property values.


Wisconsin's economy has real problems, among which is a startling poor culture of entrepeneurship: if one looks at venture capital, it ranks very poorly.  As such, the children that it educates well leave for other states to find opportunity (despite the stellar performance of its schools, its adult labor force is below average in share of workers with a college degree).  But to attack one of the things the state does well--public education--makes no sense.   And for Realtors to abet an attack that diminishes their own earning power makes even less sense.

Happy Birthday, Business Computing

September 5, 2011

On this date sixty years ago, September 5 1951, the world's first business computing program was first tested on the world's first business computer, the Lyons Electronic Office (link).

LEO was inspired by wartime computers that calculated things like artillery aiming tables for the military.  Lyons was a massive restaurant chain in the UK, and realized that the new digital computers could simplify its human-driven accounting operations.  So it built its own computer, consisting of 21 racks with 6,000 vacuum tubes and occupying about 5,000 square feet.  The company's first use of LEO was to calculate the cost of all the baked goods produced by its 12 bakeries (link).

From that humble beginning...wait, that wasn't a humble beginning at all, it was a very cool beginning.  The first use of a business computer was to solve a real-world problem faster and more accurately than people could do it on their own.  That's exactly what you're supposed to do with computers.  LEO was quickly adapted to other tasks, where it achieved impressive results.  For example, it cut the time needed to calculate an employee paycheck from eight minutes to 1.5 seconds.

It's hard to believe that many people believed for years that computers didn't increase business productivity (link).

From that very auspicious start grew most of the computing industry we know today (link).  So take a moment to contemplate that dinner roll or slice of pie you eat today, and say a quiet thank-you to David Caminer, John Pinkerton (link), and the other pioneers who got it all started sixty years ago today.



More about Lyons
More about LEO

A point I wish I had made to NPR

I just finished taping an interview with Robert Siegel on finding our way out of the housing crisis.  I agreed with Elizabeth Duke about the need to blow out second liens, and with the Hubbard-Mayer-Gross plan to allow current underwater borrowers to refinance easily.

My contribution was that we needed to perform a kind of triage--that places that had massive house price declines and have very high unemployment (i.e., Miami, Las Vegas, Fresno) should get debt relief, lest it take forever for them to recover.  What I didn't say (and I wish I had) is that one way or another, many loans in these places will fail, because it will be nearly impossible for borrowers to get above water.  We might as well take the pain of the write-offs now, rather than have zombie-loans hanging around.