Stanford GSB Sloan Study Notes, Week 2, Autumn quarter
Covered in this issue:
- Rational decision making. Why and by how much discount the future?
- In search for a strategic fit – those sweet moments when stars actually align for a while. Resulting competitive advantage that holds due to the complexity of interdependencies. Cases: CapitalOne (data driven mass-personalisation) and Lincoln Electric (super productive manufacturing).
- Real-Life Ethics: Guest Michael Marks on being bullied by huge OEMs while Flextronics CEO. And should a SEC-inestigated company throw an innocent CFO over board to settle? Role of the board in backing the CEO.
- Guest selling their story: Smule co-founders Jeff Smith & Ge Wang. Andrew Mason of Groupon.
- Peer-organized public company valuation training.
- Analysis of a persuasive argument: 1 man turning 11 jurors around in the 12 Angry Men movie. The case of Silicon Valley’s most effective networker.
- Cash flow reporting. And intangible assets, especially software.
And here on to the full notes:
GSBGEN378 – Decisions About the Future (Hardisty)
- St Petersburg Paradox
- how much would you pay to play a coin flip game where the 50/50 payout increases exponentially: ($2^n) for flip n?
- people tend to offer a few dollars
- expected value calculation is infinite: EV() = $1 + $1 + $1…
- expected utility is finite because of the diminishing marginal utility of every next win
- Rational decision making axioms
- connectedness: A > B >= C
- dominance: A > B >= C
- transitivity: if A > B >= C then can not be that A < C
- independence: it A > B then A+$10 > B+$10
- temporal consistency
- there is a common intuitive assumption that future societies are richer
- advancement in technology, long-term economic growth, …
- “spend now rather than save” = “us, the poorer, have more use of this than rich of the future”?
- reasons to discount future:
- analytic convenience (e.g.: infinite investment problem, ex: would make sense to grow social security reserves forever for wider benefit in the future, but recipients start dying at some point)
- opportunity cost
- impatience
- uncertainty
- interest & inflation
- if you would not take $105, but take $110 in one year instead of $100 today:
- delta = (100 / AVG(105,110) ) ^ (1 / 1year – 0) = 0.93
- 93% discount factor, or “stuff in a year is worth 93% of it’s today’s value” for me
- in 2 years: 0.93^(1/2-0)=0.865
- discount rate: (delta-1) = 0.93-1 =0.7% per year
- Pascal’s Wager – does God exist?
- Ben Franklin’s decision making method
STRAMGT279 – Global Strategic Management (Roberts)
- Briefest current definition of strategy by Van den Steen:
- just enough management decisions…
- made up front…
- to be combined with local information for implementation
- Strategic positioning: performing different activities or similar activities differently than rivals (Porter 1996)
- variety-based: deep niche or wide horizontal selection of products
- needs-based: serving most or all needs for particular group of customers (does NOT mean “serve every random need that is voiced by any customer”)
- access-based: a function of customer location, scale, …
- Operational effectiveness: doing similar activities _better_than competitors
- competition on OE alone is mutually destructive, winners being those who can outlast others in the cycle of becoming more generic and alike
- pursuit of OE is seductive because it is concrete and actionable
- Manager-to-client ratios – a reflection of need-based strategic positioning
- Bessemer Trust: 1 per 14 families (>5M investable assets); virtually no loan traffic, but investment & estate management to accounting for racehorses & aircraft
- Citibank Private: 1 per 125 clients (>250k minimum assets); primarily lenders
- same value chain couldn’t profitably meet the needs of both groups
- Straddle: an attempt of an incumbent to retain their business AND emulate a disruptive newcomer at the same time
- Ex: old airlines trying to retain their business while creating no-frills offerings to match the low-cost players
- usually results in enormous straddling penalties from lack of efficiency of activities (over- or under designed for their purpose), inconsistency of image/reputation and limits on internal coordination & control
- Strategic fit between activities can be just a simple consistency (companies who want low prices advertise less), reinforcing or optimisation of effort
- As competitive advantage raises from entire system of activities, the more intertwined & complex the fit, the harder to untangle and replicate it by competition
- a certain combination of…
- position (brand, monopoly/barriers, first mover, AAPL fanboys)
- capabilities (design, Sony & miniaturisation in 70s)
- resources
- quickly diminishing multiplied probabilities that each activity can be successfully copied: 0.9 * 0.9 * 0.9 * 0.9 = 0.66
- Strategic continuity (esp saying no to things decidedly out of scope) does not imply a static view of the markets & competition
- Capital One case (SM-135)
- “80% of strategy is figuring out where the world is going and 20% is about what a company is going to do in response to that” (Fairbank, CEO)
- “Decision-making process should be a competition of ideas, not people.”
- “Most executives spend 1% of time recruiting and 75% of time managing their recruitment mistakes.”
- [VIDEO: Fairbank in Stanford]
- on broadening the data-driven culture to new areas (like auto loans): “Find sleepy, boring industries that are _information_industries in disguise” (Fairbank)
- slow moving
- less competition
- great people are usually not rushing into those
- Capability [to execute a strategy] = there is a replicable process
- “being free of preconceptions & free of knowledge are different things”
- Intel builds fabs as “copy true” – _exact replicas_of past fabs (factories of that same generation)
- they know they don’t know why, but it worked – why introduce unnecessary additional risk to what is very complex production anyway?
- Books:
- GM labor contracts with unions are 3′ stack of paper
- Toyota’s supplier contracts: 2 pages
- Goog indicator of trust
- Trust-driven incentive systems require promotion from within
- participant oversight & control
- manager’s open doors, worker councils
- Piece-rate payments to employees are illegal in Germany
- Difference between labour security:
- job security – in tough times you can do less/worse, but you are not laid off
- income security – union favourite for optimising for “an average worker”; in tough times prohibitive cost leads to layoffs
- Fewer non monetary perks
- seems “less caring” in some hiring competition today
- alternatively can be viewed as removing them creates more employee choice and freedom
- International ignorance: After Citibank & Traveller’s merger, fewer than 1/3 of Traveller’s board members had passports!
- Intel was hailing itself to be a DRAM company, but allocated resources based on margin
- resource shifted naturally to high-margin processors instead
- org responded to incentives despite of the top-down communicated strategy
- Moore & Grove had to reactively decide, how to deal with it (org diverging from agreed strategy!)
- checking question “what would we do if we had just taken over this company today” led to shutdown of DRAM business
- Multiple coherent patterns (ex: flexibility vs breadth; agility vs rigid process)
- Mix and match does not work.
- Beware of alleged “best practice” out of context.
- Multiple models in one firm almost surely means trouble, mis-fit
- Could be a good hint which parts of the organisation define as independent BUs, where to draw formal interfaces!
GSBGEN566 – Real-Life Ethics (Mark Leslie, Peter Levine)
- Tech startup blogging policy case recap
- setting a policy — or not — impacts employee behaviour…
- as it creates a moral compass…
- for the CEO dilemma: do you back internal (key employee) or external (key partner) in conflict?
- decision to not create a policy implicitly means you are trusting employee judgement
- not solving the problem in time (misjudging the scale of the issue) just makes both sides dig their heels in more
- Michael E. Marks – guest speaker with real-life cases from his Flextronics CEO period
- “It is lonely at the top… but you do get to eat better”
- Selection of tactics available for an EMS (contract manufacturer) pressured by their OEM clients
- negotiate
- coordinate with other suppliers
- avoid negative precedent -> ruins the future market “appropriate terms”
- prepare for worst (mainly mentally, hard to do much practically)
- call the bluff -> don’t know the reaction
- People bluff in business much less than you think!
- push the issue further down the chain to your suppliers
- All big companies are by design bullies at times: towards smaller partners, suppliers, even customers
- Stock market / investor relations consideration: one time payout or long-term loss of customer (discussed by analysts forever)
- “Goodwill bank”: do favours to partners who have a positive goodwill deposit for their past favours
- Often when you do the “right thing” according to your moral values, negative raminifications are on so many people _not_you
- Ex: CEO firing 10,000 people due to the business cut by a pissed customer whose ethically questionable proposal CEO refused
- On CEO asking advice:
- should always be able to go to their board, not external mentors, etc
- if not – have you got a wrong board?
- board only has something to do in crisis
- CEO dies
- needs to hire a new CEO
- CEO needs help/decision (= NOT business as usual)
- normal, routine board meetings can feel like a waste of time – but are needed for continuous context for when the crisis (above) hits!
- A good sign of fraud is that only a few people seem to know about some proposal.
- Leadership stock purchase plans (putting in own/lent money, not just options)
- Lenovo carried out a stock purchase plan for top management by peer pressure: if you’re not buying, are you in the CEOs circle of trust any more?
- VP level participation/impact (and thus motivation to buys stock) is very dependent on CEOs leadership style
- SEC investigations
- unlimited police power
- arms-length teams reporting to board, not management team
- tactic to isolate all accused: if 10 managers involved, you have each bring their external counsel
- 2005-09: 2300 filed SEC litigations. If 1/5 of all investigations litigated: 2000 investigations/year
- VERY expensive to be in this process, innocent or not
- “firing” and “resigning” are synonyms in US corporate culture, for the mark on your CV
- personal ethics VS fiduciary duty
- mirror test: “if I make this decision for shareholder’s benefit, will I be able to look in the mirror and answer – who am I?”
ACCT219 – Financial Accounting (Guttman)
- In highly leverage companies: cash management needs to be tight (there is interest cost on net cash)
- _Orders_are a non-event on financial statements, yet
- inventory, liabilities, cash can change due to production
- revenue & COGS on shipment
- Dividends & interest received are under Cash Flow from Operating activities in US
- In theory in US either direct or indirect CF methods are allowed, yet for reconciliation with Net Income in I/S, everyone ends up doing indirect
Sloan Investment Club – Valuation training
- Difference in cashflow-based valuation methods
- DCF (what are the estimated future cash flows worth today) – a banker spending a day on valuation is already a lot
- Buyout (what am I willing to pay today to get to the 20% IRR I want over next 5 years) valuations are built often in months, with full access to the books, etc
- Buyout people look at EBITDA (and -based multiples), because “everything else below that _I_ want to engineer”
**MS&E 472 – **Entrepreneurial Thought Leaders
- Jeff Smith & Ge Wang from Smule
- See full video here – well worth watching for product demos!
Ge:
- Pan flute flowchart:
- Startups are like pan flutes – you really shouldn’t do one… unless there is some curiosity you cannot satisfy any other way
- By sanctioning a rebellion you take all the fun out of it and it dies
- Case in point: giving a drum kit to a child
- Academic institutions / experiments around computerised music:
- What is a musical instrument?
- A 500-year old Stradivarius in my hands? No, it is not
- Music = “expressive sound”
- Instrument -> allows you to be musically expressive (defined via the user)
- YouTube as definite research source for startups (to see pre-product if people care)
- Smule’s Ocarina app born after final confirmation that the “clay ocarina tutorial” video on YT had 4M views
- Technology should create calm – from ubiquitous computing research
- AutoRap Stress test:
Jeff:
- Hanging out at a VC firm in ER role is one of the worst places where to contemplate a startup idea
- culture focused too much on analysing why it would fail
- gesamtkunstprodukt – “the total product (of art)”, usable as a product management principle
- can you build a catch into the first 30 seconds of first-time UX?
- if yes – you get high K-factor
- ex: a virtual lighter app on iPhone. yes, you can blow it off too – something that you want and demo very quickly to your friends.
- mobile business models trend from paid apps -> content inside free app
- Smule’s extra layer: subscription model to get all content across all of the company’s different apps
- Hiring philosophy: don’t sell, roll down the curtains and show the real culture & life inside the company as best as you can
- help people to self-select in
View From the Top speaker series
Andrew Mason, CEO of Groupon. (video will be available here at some point, I guess). I never met Andrew in person before, but I expected him to be a bit more energetic, outgoing and edgy. Might be the post-IPO communication rules kicking in, or might be that he has just become more rounded, balanced and serious as the company (and his role) have grown?
- Tech industry is not as homogenous as it is served sometimes – you can divide tech companies to two by asking “how long could their staff stay at home and do nothing and business would still continue?”)
- Pure tech (GOOG, FB, …) – 6 months?
- Operational (AMZN, GRPN, …) – 5 days?
- More demanding, daily “street fight”
- Actually not the best fit to be located in Silicon Valley: what do you do when you need to hire 3000 non-engineering people quickly here?
- Everything “local” is an easy business to get into, hard one to scale
- On evaluating Groupon clones to acquire:
- #1 – people: are there strong leaders who can continue growing the business semi-autonomously
- will it work with US folks being physically over only rarely?
- speed of growth via M&A first, only now getting to proper integrations on culture, tech
- often much slower than the acquired party would wish
- Disconnect between tech press & geeks vs GRPN: your mom loves it, not you.
- In China, referral traffic from e-mail is virtually nonexistent – bad for models optimised around that channel
OB278 – Organizational Behaviour (Flynn)
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Organizational repairs (from Heath, Larrick and Klayman paper – PDF here)
- Motivational: increase energy and enthusiasm with which individuals pursue a task
- Cognitive: improve the mental procedures individuals use to pursue a task
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Very good article by Malcolm Gladwell on dotcom boom era tech sector hiring and effectiveness of interviews in the process: The New-Boy Network
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Dinner party guest list rule: every person invited should know half of everyone else – creates minimum necessary sense of familiarity, yet enough new acquaintances and interesting conversations
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Deal junkies vs commitment persons in VC industry: always looking for the next hot thing or preferring to work with investments already made
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Pipeline volume for Heidi Roizen (Softbank): 10 incoming plans a day, 1 in 50 invested, 2h per day spent on feedback to declined proposals (to build and maintain relationships for the future)
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Movie as a persuasion case study: 12 Angry Men
- Full movie on YouTube: http://www.youtube.com/watch?v=s0NlNOI5LG0
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Quick straw-polling of initial stand before discussion
- many juries do that even when explicitly asked not to
- can enforce group think
- at the same time – polarises votes for both sides
- intends to create a baseline, “could we get out of here easy if it happens we all agree anyway”
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Partipants divide their positions into dichotomy
- if I choose A (guilty), I believe 100% he is guilty
- THEREFORE those who choose B (not guilty) must believe he is 0% guilty
- this allows for strategy introducing doubt:
- convince A’s that they should vote B-s even if they have 99% belief in guilty
- reduce the gap from 100 -> 1 unit only
- much more doable than talking black to white
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Spotlight is on minority opinion who needs to explain
- majority not compelled to say anything
- minority needs to work (questions) to get their arguments out
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When introducing a counterargument
- solidify the schema you are attacking (show evidence that supports it)
- THEN break it with your argument for maximum impact
- Knife argument example in the movie:
- When casting a re-vote, pick the question posed carefully to make it easier to change sides
- instead of just “guilty or not” -> “if everyone thinks guilty, we are done” (fatal) & “if someone still feels not guilty, we discuss a bit more” (less committing)
- Foot in the door
- enter with a non-controversial ask: “do you like puppies?”
- follow-up with the real ask: “can we put a 2m puppy statue in your yard for a few weeks”?
- experiments
- compliance grows 17% -> 76% after the person agrees to the non-controversial lead
- “can you fill in this survey” vs “can I ask you a favour? – yes – can you fill in this survey?”: 54% -> 87%
- Demonstrations are extremely effective
- underused because speakers (esp higher raking!) assume the audience expects from them conclusion, analysis and opinion, rather than the display of the path that took them there
- to lay the foundation for your demo, ask the audience to state/confirm the underlying facts
- Emotional contrast
- people who control the equilibrium (tone, emotion, pace, etc) of the argument win
- emotion is a divergence from equilibrium
- when using emotion for contrast: the switches are more powerful in a bouquet
- calm discussion -> emotional reaction to someone’s behaviour -> switch back to calm discussion
- lack of response to someone else’s outburst un-validates it
- option: stay completely quiet until it becomes awkward
- the silence forces the emotional side to cool and start offering concessions to break the silence
- Case: Heidi Roizen
- saying “no” well:
- consistency (over time: predictability)
- “no, because…”
- most people don’t bother the additional effort investment to explain
- explanation leaves room for re-engagements (asked can come back after fixing a few issues)
- protect the key nodes in your network from overflow
- strongest predictor of future relationship: anxiety of first meeting
- does this person make you comfortable or not?
- what can you do to increase comfort of the first meeting’s context?
- saying “no” well:
- Informal networks
- people feel bad asking and good giving
- a self-motivator to get yourself over the natural tendency to not as (= be greedy, incompetent, …): it opens doors for others to give (help, information, feedback…; = feel good)
- successful transaction, no matter how small, builds basis for future relationship
- asking open-ended questions feels more appropriate (less pushy, leaves discretion & room for the others)
- yet, research shows more specific asks get more response
- wrong to assess “can this question be answered in this group” and self-censor based on that
- secondary contacts/networks are mathematically much larger than any present one
- physical proximity (ex: office layout) still a major network efficiency driver despite of all the tech improvement
- people are lazy.
- people feel bad asking and good giving
CS207 – Software Economics (Wiederhold)
- Of all intangible assets, intangible property is only the part that is owned
- Property: patents, copyright (US: both federal protection), trade secrets (US: state protection varies)
- Not property: customer loyalty, employee competence
- Discount rates for risk: 15% (on top of interest) is a low end for well functioning, established software companies
- Need for maintenance -> enables long-term income
- Software set apart from other intangibles
- unlike some other IP, ex: a book on 16th century explorers
- IEEE definitions for maintentance drivers:
- Corrective: bugfixing
- Adaptive: externally driven (underlying OS changes, API/interface changes)
- Perfective: (growing/changing customer expectations
- Software set apart from other intangibles
- “Standard bodies are very hard to manage because you need people who are both smart and patient. Rare combination.”
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