Shyam's Slide Share Presentations


This article/post is from a third party website. The views expressed are that of the author. We at Capacity Building & Development may not necessarily subscribe to it completely. The relevance & applicability of the content is limited to certain geographic zones.It is not universal.


Friday, January 13, 2017

"Humiliated" by post-note ban events, RBI staff write to Urjit Patel 01-14

Feeling "humiliated" by events since demonetisation, RBI employees today wrote to Governor Urjit Patel protesting against operational "mismanagement" in the exercise and Government impinging its autonomy by appointing an official for currency coordination.

In a letter, they said autonomy and image of RBI has been "dented beyond repair" due to mismanagement and termed appointment of a senior Finance Ministry official as a "blatant encroachment" of its exclusive turf of currency management.

"An image of efficiency and independence that RBI assiduously built up over decades by the strenuous efforts of its staff and judicious policy making has gone into smithereens in no time. We feel extremely pained," the United Forum of Reserve Bank Officers and Employees said in the letter addressed to Patel.

Commenting on "mismanagement" since November 8, when note ban was announced, and the criticism from different quarters, the letter said, "It's (RBI's) autonomy and image have been dented beyond repair."

At least two of the four signatories --- Samir Ghosh of All India Reserve Bank Employees Association and Suryakant Mahadik of All India Reserve Bank Workers Federation --- confirmed the letter. The other signatories are C M Paulsil of All India Reserve Bank Officers Association and R N Vatsa of RBI Officers Association.

The forum represents over 18,000 employees of the RBI across the ranks, Ghosh said.
The letter said appointment of an officer to coordinate currency management is a "blatant encroachment" on the exclusive jurisdiction of the RBI on currency and accused the Government of "impinging on RBI autonomy".

"May we request that as the Governor of RBI, its highest functionary and protector of its autonomy and prestige, you will please do the needful urgently to do away with this unwarranted interference from the Ministry of Finance, and assure the staff accordingly, as the staff feel humiliated," it said, soliciting "urgent action".

The RBI has been discharging the role of currency management for over eight decades since 1935, it said, adding the central bank does not need "any assistance" and the interference from FinMin is "absolutely unacceptable and deplorable".

The letter comes days after concerns about RBI's functioning being raised by at least three former Governors -- Manmohan Singh (former PM), Y V Reddy and Bimal Jalan. Former Deputy Governors, including Usha Thorat and K C Chakrabarty, have also voiced their concerns.

The letter said the RBI staff has carried out its job excellently following the move to ban 87 per cent of the outstanding currency by the government.

View at the original source

Wednesday, January 11, 2017

No More Blueprints, Visions or Plans....We Need Liberty 01-11

Shyam's take on this article....

Poverty is an essential bane of democracy. Poverty alleviation is a constant unfulfilled promise of various political parties and politicians in all the democracies of the world.

It is not something unique to any one country.The day the poverty is really conquered, the relevance of the politicians and political parties comes to an end, or it gets substantially diminished.

While the poverty is a curse and suffering for people, it keeps the politicians relevant and affluent.

America has been debating the poverty and liberty for the last 240 years, and India for almost 70 years.

Now please read Ron Paul's Liberty report

It appears that Obamacare is going to be one of the early issues addressed by the incoming Trump Administration. There's a lot of back-and-forth about "repeal and replace" and "repeal and wait." It's all nonsense.

Politicians think of themselves as high and mighty architects, running around with their magnificent blueprints that they're going to force on society. However, (without exception) life and reality smack the pompous politicians down. The sought after results almost never come to pass.

Unfortunately, like dogs that chase their own tails, politicians bounce back with a new set of blueprints every single time...And around-and-around we go. 

No matter what type of society we are to live in, there will always be the poor, the uneducated, the hungry, and the unemployed. They would exist in an anarchist society. They would exist in a society with a limited or small government. They would even exist with free markets, sound money and rock-solid private property rights.

Poverty is not to be abolished. That's not an easy pill for many (most?) to swallow. As a result, people come up with the craziest ideas in order to fight this reality. Every idea has failed.

Take a look at America's current government. It's the biggest and most intrusive that the world has ever seen. 

Has it abolished poverty? On the contrary, it's a poverty manufacturer. 

Is it from lack of funds? Of course not! 

The U.S. government parasitically drains American citizens to the tune of trillions of dollars per year. And it doesn't stop there. The gang has buried itself in debt that can't possibly be paid...ever! 

And yet...

There are poor people everywhere. The uneducated (thanks to government schools) are growing exponentially and millions of people are still hungry and unemployed.

So what's missing? Does the federal government need another trillion dollars? Does it need more credit from foolish creditors? Does it need another professor to concoct another blueprint?

The answer is a resounding NO to all of the above.

A serious advocate for a society of liberty, sound money, voluntary interactions, and rock-solid private property rights understands that there is no getting rid of poverty. For it is a built-in part of life. 

But it's not as bad as it sounds. There's a very big upside, and here it is: In a free society, poverty may only be a temporary situation for each individual. As long as you have the freedom to think, to create, to serve, and to keep the fruits of your labor, you can raise yourself to unbelievable heights. That is the promise of freedom.

Unfortunately, that scares a lot of people. So instead of taking the peaceful route, most will choose to snuggle into the arms of the violent blueprint makers. "Let the politicians draw up plans to raise me out of poverty," becomes the belief. 

The blueprint makers love taking on this most impossible task. They get praise (and sometimes worship). But they live and breathe on mostly one thing: Dependency

Take a look at the arguments that are being presented in the Obamacare "debate." The left seems to brag about the numbers of dependents that they've created. What is to be done about the tens of millions who signed up for Obamacare? What are you going to do, rip their insurance away? 

The dependents have become political bargaining chips. 

Obamacare is just a small slice of the dependency web too. Factor in the unsustainable Medicare and Social Security scams and you've got a whole society of dependents (who believe they're entitled to what the government promised them).

Instead of a move towards liberty and free markets, the blueprint makers will bark at each other and settle on either keeping the monstrosity as it is, or "replace" it with another monstrosity that will inevitably fail.

A new philosophy must be embraced. Instead of trying to see how much poverty the U.S. government is able to create. Let's scrap the belief that stealing from (A) to give to (B) is a solution to any problem.

There's no way to make theft work.

There's no blueprint that will turn a wrong into a right.

Liberty is always the best option.

Perhaps someday it'll catch on.

Tuesday, January 10, 2017

Customer Loyalty Is Overrated 01-10

Marketers spend a lot of time—and money—trying to delight consumers with ever-fresher, ever-more-appealing products. But their customers, it turns out, make most purchase decisions almost automatically. They look for what’s familiar and easy to buy. This package explores that idea and the science behind it, offers a counterpoint, and includes conversations with the cochairman of the LEGO Brand Group and the chairman of Intuit. 

Late in the spring of 2016 Facebook’s category-leading photo-sharing application, Instagram, abandoned its original icon, a retro camera familiar to the app’s 400- million-plus users, and replaced it with a flat modernist design that, as the head of design explained, “suggests a camera.” At a time when Instagram was under a growing threat from its rival Snapchat, he offered this rationale for the switch: The icon “was beginning to feel…not reflective of the community, and we thought we could make it better.”

The assessment of AdWeek, the marketing industry bible, was clear from its headline: “Instagram’s New Logo Is a Travesty. Can We Change it Back? Please?” In GQ’s article “Logo Change No One Wanted Just Came to Instagram,” the magazine’s panel of designers called the new icon “honestly horrible,” “so ugly,” and “trash,” and summarized the change thus: “Instagram spent YEARS building up visual brand equity with its existing logo, training users where to tap, and now instead of iterating on that, it’s flushing it all down the toilet for the homescreen equivalent of a Starburst.”
It’s too soon to tell whether the design change will actually have commercial consequences for Instagram, but this is not the first time a company has experienced such a reaction to a rebranding or a relaunch. PepsiCo’s introduction of its aspartame-free Diet Pepsi was—like the infamous New Coke debacle—a botched attempt at reinvention that resulted in serious revenue losses and had to be reversed. The interesting question, therefore, is: Why do well-performing companies routinely succumb to the lure of radical rebranding? One could understand the temptation to adopt such a strategy in the face of disaster, but Instagram, PepsiCo, and Coke were hardly staring into the abyss. (It’s worth noting that Snapchat, whose market share among young users is now particularly strong, has assiduously stuck to its familiar ghost icon. Full disclosure: A.G. Lafley serves on the board of Snap Inc.)

The answer, we believe, is rooted in some serious misperceptions about the nature of competitive advantage. Much new thinking in strategy argues that the fast pace of change in modern business (perhaps nowhere more obvious than in the app world) means no competitive advantage is sustainable, so companies must continually update their business models, strategies, and communications to respond in real time to the explosion of choice that ever more sophisticated consumers now face. To keep your customers—and to attract new ones—you need to remain relevant and superior. Hence Instagram was doing exactly what it was supposed to do: changing proactively

That’s an edgy thought, to be sure; but a lot of evidence contradicts it. Consider Southwest Airlines, Vanguard, and IKEA, all featured in Michael Porter’s classic 1996 HBR article “What Is Strategy?” as exemplars of long-lived competitive advantage. A full two decades later those companies are still at the top of their respective industries, pursuing largely unchanged strategies and branding. And although Google, Facebook, or Amazon might stumble and be crushed by some upstart, the competitive positions of those giants hardly look fleeting. Closer to home (one author of this article is part of the P&G family), it would strike the Tide or Head & Shoulders brand managers of the past 50 years as rather odd to hear that their half-century advantages have not been or are not sustainable. (No doubt the Unilever managers of long-standing consumer favorites such as Dove soap and Hellmann’s mayonnaise would feel the same.)

In this article we draw on modern behavioral research to offer a theory about what makes competitive advantage last. It explains both missteps like Instagram’s and success stories like Tide’s. We argue that performance is sustained not by offering customers the perfect choice but by offering them the easy one. So even if a value proposition is what first attracted them, it is not necessarily what keeps them coming.

In this alternative worldview, holding on to customers is not a matter of continually adapting to changing needs in order to remain the rational or emotional best fit. It’s about helping customers avoid having to make yet another choice. To do that, you have to create what we call cumulative advantage.

Let’s begin by exploring what our brains actually do when we shop.

Creatures of Habit

The conventional wisdom about competitive advantage is that successful companies pick a position, target a set of consumers, and configure activities to serve them better. The goal is to make customers repeat their purchases by matching the value proposition to their needs. By fending off competitors through ever-evolving uniqueness and personalization, the company can achieve sustainable competitive advantage

An assumption implicit in that definition is that consumers are making deliberate, perhaps even rational, decisions. Their reasons for buying products and services may be emotional, but they always result from somewhat conscious logic. Therefore a good strategy figures out and responds to that logic.

But the idea that purchase decisions arise from conscious choice flies in the face of much research in behavioral psychology. The brain, it turns out, is not so much an analytical machine as a gap-filling machine: It takes noisy, incomplete information from the world and quickly fills in the missing pieces on the basis of past experience. Intuition—thoughts, opinions, and preferences that come to mind quickly and without reflection but are strong enough to act on—is the product of this process. It’s not just what gets filled in that determines our intuitive judgments, however. They are heavily influenced by the speed and ease of the filling-in process itself, a phenomenon psychologists call processing fluency. When we describe making a decision because it “just feels right,” the processing leading to the decision has been fluent.

Processing fluency is itself the product of repeated experience, and it increases relentlessly with the number of times we have the experience. Prior exposure to an object improves the ability to perceive and identify that object. As an object is presented repeatedly, the neurons that code features not essential for recognizing the object dampen their responses, and the neural network becomes more selective and efficient at object identification. In other words, repeated stimuli have lower perceptual-identification thresholds, require less attention to be noticed, and are faster and more accurately named or read. What’s more, consumers tend to prefer them to new stimuli.

In short, research into the workings of the human brain suggests that the mind loves automaticity more than just about anything else—certainly more than engaging in conscious consideration. Given a choice, it would like to do the same things over and over again. If the mind develops a view over time that Tide gets clothes cleaner, and Tide is available and accessible on the store shelf or the web page, the easy, familiar thing to do is to buy Tide yet another time.

A driving reason to choose the leading product in the market, therefore, is simply that it is the easiest thing to do: In whatever distribution channel you shop, it will be the most prominent offering. In the supermarket, the mass merchandiser, or the drugstore, it will dominate the shelf. In addition, you have probably bought it before from that very shelf. Doing so again is the easiest possible action you can take. Not only that, but every time you buy another unit of the brand in question, you make it easier to do—for which the mind applauds you.

Each time you choose a product, it gains advantage over those you didn’t choose.

Meanwhile, it becomes ever so slightly harder to buy the products you didn’t choose, and that gap widens with every purchase—as long, of course, as the chosen product consistently fulfills your expectations. This logic holds as much in the new economy as in the old. If you make Facebook your home page, every aspect of that page will be totally familiar to you, and the impact will be as powerful as facing a wall of Tide in a store—or more so.

Buying the biggest, easiest brand creates a cycle in which share leadership is continually increased over time. Each time you select and use a given product or service, its advantage over the products or services you didn’t choose cumulates.

The growth of cumulative advantage—absent changes that force conscious reappraisal—is nearly inexorable. Thirty years ago Tide enjoyed a small lead of 33% to 28% over Unilever’s Surf in the lucrative U.S. laundry detergent market. Consumers at the time slowly but surely formed habits that put Tide further ahead of Surf. Every year, the habit differential increased and the share gap widened. In 2008 Unilever exited the business and sold its brands to what was then a private-label detergent manufacturer. Now Tide enjoys a greater than 40% market share, making it the runaway leader in the U.S. detergent market. Its largest branded competitor has a share of less than 10%. (For a discussion of why small brands even survive in this environment, see the sidebar “The Perverse Upside of Customer Disloyalty.”)

A Complement to Choice

We don’t claim that consumer choice is never conscious, or that the quality of a value proposition is irrelevant. To the contrary: People must have a reason to buy a product in the first place. And sometimes a new technology or a new regulation enables a company to radically lower a product’s price or to offer new features or a wholly new solution to a customer need in a way that demands consumers’ consideration.

Robust where-to-play and how-to-win choices, therefore, are still essential to strategy. Without a value proposition superior to those of other companies that are attempting to appeal to the same customers, a company has nothing to build on.

But if it is to extend that initial competitive advantage, the company must invest in turning its proposition into a habit rather than a choice. Hence we can formally define cumulative advantage as the layer that a company builds on its initial competitive advantage by making its product or service an ever more instinctively comfortable choice for the customer.

Companies that don’t build cumulative advantage are likely to be overtaken by competitors that succeed in doing so. A good example is Myspace, whose failure is often cited as proof that competitive advantage is inherently unsustainable. Our interpretation is somewhat different.
Launched in August 2003, Myspace became America’s number one social networking site within two years and in 2006 overtook Google to become the most visited site of any kind in the United States. Nevertheless, a mere two years later it was outstripped by Facebook, which demolished it competitively—to the extent that Myspace was sold in 2011 for $35 million, a fraction of the $580 million that News Corp had paid for it in 2005.

Why did Myspace fail? Our answer is that it didn’t even try to achieve cumulative advantage. To begin with, it allowed users to create web pages that expressed their own personal style, so individual pages looked very different to visitors. It also placed advertising in jarring ways—and included ads for indecent services, which riled regulators. When News Corp bought Myspace, it ramped up ad density, further cluttering the site. To entice more users, Myspace rolled out what Bloomberg Businessweek referred to as “a dizzying number of features: communication tools such as instant messaging, a classifieds program, a video player, a music player, a virtual karaoke machine, a self-serve advertising platform, profile-editing tools, security systems, privacy filters, Myspace book lists, and on and on.” So instead of making its site an ever more comfortable and instinctive choice, Myspace kept its users off balance, wondering (if not subconsciously worrying) what was coming next.

Compare that with Facebook. From day one, Facebook has been building cumulative advantage. Initially it had some attractive features that Myspace lacked, making it a good value proposition, but more important to its success has been the consistency of its look and feel. Users conform to its rigid standards, and Facebook conforms to nothing or no one else. When it made its now-famous extension from desktop to mobile, the company ensured that users’ mobile experience was highly consistent with their desktop experience.

To be sure, Facebook has from time to time introduced design changes in order to better leverage its functionality, and it has endured severe criticism in consequence. But in the main, new service introductions don’t jeopardize comfort and familiarity, and the company has often made the changes optional in their initial stages. Even its name conjures up a familiar artifact, the college facebook, whereas Myspace gives the user no familiar reference at all.

Bottom line: By building on familiarity, Facebook has used cumulative advantage to become the most addictive social networking site in the world. That makes its subsidiary Instagram’s decision to change its icon all the more baffling.

The Cumulative Advantage Imperatives

Myspace and Facebook nicely illustrate the twin realities that sustainable advantage is both possible and not assured. How, then, might the next Myspace enhance and extend its competitive edge by building a protective layer of cumulative advantage? Here are four basic rules to follow:

1. Become popular early.

This idea is far from new—it is implicit in many of the best and earliest works on strategy, and we can see it in the thinking of Bruce Henderson, the founder of Boston Consulting Group. Henderson’s particular focus was on the beneficial impact of cumulative output on costs—the now-famous experience curve, which suggests that as a company’s experience in making something increases, its cost management becomes more efficient. He argued that companies should price aggressively early on—“ahead of the experience curve,” in his parlance—and thus win sufficient market share to give the company lower costs, higher relative share, and higher profitability. The implication was clear: Early share advantage matters—a lot.

Marketers have long understood the importance of winning early. Launched specifically to serve the fast-growing automatic washing machine market, Tide is one of P&G’s most revered, successful, and profitable brands. When it was introduced, in 1946, it immediately had the heaviest advertising weight in the category. P&G also made sure that no washing machine was sold in America without a free box of Tide to get consumers’ habits started. Tide quickly won the early popularity contest and has never looked back.

BlackBerry may be the best example of a conscious design for addiction.

Free new-product samples to gain trial have always been a popular tactic with marketers. Aggressive pricing, the tactic favored by Henderson, is similarly popular. Samsung has emerged as the market share leader in the smartphone industry worldwide by providing very affordable Android-based phones that carriers can offer free with service contracts. For internet businesses, free is the core tactic for establishing habits. Virtually all the large-scale internet success stories—eBay, Google, Twitter, Instagram, Uber, Airbnb—make their services free so that users will grow and deepen their habits; then providers or advertisers will be willing to pay for access to them.

2. Design for habit.

As we’ve seen, the best outcome is when choosing your offering becomes an automatic consumer response. So design for that—don’t leave the outcome entirely to chance. We’ve seen how Facebook profits from its attention to consistent, habit-forming design, which has made use of its platform go beyond what we think of as habit: Checking for updates has become a real compulsion for a billion people. Of course Facebook benefits from increasingly huge network effects. But the real advantage is that to switch from Facebook also entails breaking a powerful addiction.

The smartphone pioneer BlackBerry is perhaps the best example of a company that consciously designed for addiction. Its founder, Mike Lazaridis, explicitly created the device to make the cycle of feeling a buzz in the holster, slipping out the BlackBerry, checking the message, and thumbing a response on the miniature keyboard as addictive as possible. He succeeded: The device earned the nickname CrackBerry. The habit was so strong that even after BlackBerry had been brought down by the move to app-based and touch-screen smartphones, a core group of BlackBerry customers—who had staunchly refused to adapt—successfully implored the company’s management to bring back a BlackBerry that resembled their previous-generation devices. It was given the comforting name Classic.

As Art Markman, a psychologist at the University of Texas, has pointed out to us, certain rules should be respected in designing for habit. To begin with, you must keep consistent those elements of the product design that can be seen from a distance so that buyers can find your product quickly. Distinctive colors and shapes like Tide’s bright orange and the Doritos logo accomplish this. 

And you should find ways to make products fit in people’s environments to encourage use. When P&G introduced Febreze, consumers liked the way it worked but did not use it often. Part of the problem, it turned out, was that the container was shaped like a glass-cleaner bottle, signaling that it should be kept under the sink. The bottle was ultimately redesigned to be kept on a counter or in a more visible cabinet, and use after purchase increased.
Unfortunately, the design changes that companies make all too often end up disrupting habits rather than strengthening them. Look for changes that will reinforce habits and encourage repurchase. The Amazon Dash Button provides an excellent example: By creating a simple way for people to reorder products they use often, Amazon helps them develop habits and locks them into a particular distribution channel.

3. Innovate inside the brand.

As we’ve already noted, companies engage in initiatives to “relaunch,” “repackage,” or “replatform” at some peril: Such efforts can require customers to break their habits. Of course companies have to keep their products up-to-date, but changes in technology or other features should ideally be introduced in a manner that allows the new version of a product or service to retain the cumulative advantage of the old.
Even the most successful builders of cumulative advantage sometimes forget this rule. P&G, for example, which has increased Tide’s cumulative advantage over 70 years through huge changes, has had to learn some painful lessons along the way. Arguably the first great detergent innovation after Tide’s launch was the development of liquid detergents. P&G’s first response was to launch a new brand, called Era, in 1975. With no cumulative advantage behind it, Era failed to become a major brand despite consumers’ increasing substitution of liquid for powdered detergent.
Recognizing that as the number one brand in the category, Tide had a strong connection with consumers and a powerful cumulative advantage, P&G decided to launch Liquid Tide in 1984, in familiar packaging and with consistent branding. It went on to become the dominant liquid detergent despite its late entry. After that experience, P&G was careful to ensure that further innovations were consistent with the Tide brand. When its scientists figured out how to incorporate bleach into detergent, the product was called Tide Plus Bleach. The breakthrough cold-cleaning technology appeared in Tide Coldwater, and the revolutionary three-in-one pod form was launched as Tide Pods. The branding could not have been simpler or clearer: This is your beloved Tide, with bleach added, for cold water, in pod form. These comfort- and familiarity-laden innovations reinforced rather than diminished the brand’s cumulative advantage. The new products all preserved the look of Tide’s traditional packaging—the brilliant orange and the bull’s-eye logo. The few times in Tide history when that look was altered—such as with blue packaging for the Tide Coldwater launch—the effect on consumers was significantly negative, and the change was quickly reversed.
Of course, sometimes change is absolutely necessary to maintain relevance and advantage. In such situations smart companies succeed by helping customers transition from the old habit to the new one. Netflix began as a service that delivered DVDs to customers by mail. It would be out of business today if it had attempted to maximize continuity by refusing to change. Instead, it has successfully transformed itself into a video streaming service.
Although the new Netflix markets a completely different platform for digital entertainment, involving a new set of activities, Netflix found ways to help its customers by accentuating what did not have to change. It has the same look and feel and is still a subscription service that gives people access to the latest entertainment without leaving their homes. Thus its customers can deal with the necessary aspects of change while maintaining as much of the habit as possible. For customers, “improved” is much more comfortable and less scary than “new,” however awesome “new” sounds to brand managers and advertising agencies.

4. Keep communication simple.

One of the fathers of behavioral science, Daniel Kahneman, characterized subconscious, habit-driven decision making as “thinking fast” and conscious decision making as “thinking slow.” Marketers and advertisers often seem to live in thinking-slow mode. They are rewarded with industry kudos for the cleverness with which they weave together and highlight the multiple benefits of a new product or service. True, ads that are clever and memorable sometimes move customers to change their habits. The slow-thinking conscious mind, if it decides to pay attention, may well say, “Wow, that is impressive. I can’t wait!”

But if viewers aren’t paying attention (as in the vast majority of cases), an artful communication may backfire. Consider the ad that came out a couple of years ago for the Samsung Galaxy S5. It began by showing successive vignettes of generic-looking smartphones failing to (a) demonstrate water resistance; (b) protect against a young child’s accidentally sending an embarrassing message; and (c) enable an easy change of battery. It then triumphantly pointed out that the Samsung S5, which looked pretty much like the three previous phones, overcame all these flaws. Conscious, slow-thinking viewers, if they watched the whole ad, may have been persuaded that the S5 was different from and superior to other phones.

But an arguably greater likelihood was that fast-thinking viewers would subconsciously associate the S5 with the three shortcomings. When making a purchase decision, they might be swayed by a subconscious plea: “Don’t buy the one with the water-resistance, rogue-message, and battery-change problems.” In fact, the ad might even induce them to buy a competitor’s product—such as the iPhone 7—whose message about water resistance is simpler to take in.

Remember: The mind is lazy. It doesn’t want to ramp up attention to absorb a message with a high level of complexity. Simply showing the water resistance of the Samsung S5—or better yet, showing a customer buying an S5 and being told by the sales rep that it was fully water-resistant—would have been much more powerful. The latter would tell fast thinkers what you wanted them to do: go to a store and buy the Samsung S5. Of course, neither of those ads would be likely to win any awards from marketers focused on the cleverness of advertising copy.


The death of sustainable competitive advantage has been greatly exaggerated. Competitive advantage is as sustainable as it has always been. What is different today is that in a world of infinite communication and innovation, many strategists seem convinced that sustainability can be delivered only by constantly making a company’s value proposition the conscious consumer’s rational or emotional first choice. They have forgotten, or they never understood, the dominance of the subconscious mind in decision making. For fast thinkers, products and services that are easy to access and that reinforce comfortable buying habits will over time trump innovative but unfamiliar alternatives that may be harder to find and require forming new habits.

So beware of falling into the trap of constantly updating your value proposition and branding. And any company, whether it is a large established player, a niche player, or a new entrant, can sustain the initial advantage provided by a superior value proposition by understanding and following the four rules of cumulative advantage.

Reproduced From Harvard Business Reveiw

Monday, January 9, 2017

Bringing up the children. can we just shift from praise for achievement, effort,To, a learning reaction...It helps.... 01-010

The Stanford professor who pioneered praising kids for effort says we’ve totally missed the point.

It is well known that telling a kid she is smart is wading into seriously dangerous territory.
Reams of research show that kids who are praised for being smart fixate on performance, shying away from taking risks and meeting potential failure. Kids who are praised for their efforts try harder and persist with tasks longer. These “effort” kids have a “growth mindset” marked by resilience and a thirst for mastery; the “smart” ones have a “fixed mindset” believing intelligence to be innate and not malleable.

But now, Carol Dweck, the Stanford professor of psychology who spent 40 years researching, introducing and explaining the growth mindset, is calling a big timeout.

It seems the growth mindset has run amok. Kids are being offered empty praise for just trying. Effort itself has become praise-worthy without the goal it was meant to unleash: learning. Parents tell her that they have a growth mindset, but then they react with anxiety or false affect to a child’s struggle or setback. “They need a learning reaction – ‘what did you do?’, ‘what can we do next?’” Dweck says.

Teachers say they have a “growth mindset” because not to have one would be silly. But then they fail to teach in such a way that kids can actually develop growth mindset muscles. “It was never just effort in the abstract,” Dweck tells Quartz. “Some educators are using it as a consolation play, saying things like ‘I tell all my kids to try hard’ or ‘you can do anything if you try’.”
“That’s nagging, not a growth mindset,” she says.

The key to instilling a growth mindset is teaching kids that their brains are like muscles that can be strengthened through hard work and persistence. So rather than saying “Not everybody is a good at math. Just do your best,” a teacher or parent should say “When you learn how to do a new math problem, it grows your brain.” Or instead of saying “Maybe math is not one of your strengths,” a better approach is adding “yet” to the end of the sentence: “Maybe math is not one of your strengths yet.”

The exciting part of Dweck’s mindset research is that it shows intelligence is malleable and anyone can change their mindset. She did: growing up, she was seated by IQ in her classroom (at the front) and spent most of her time trying to look smart.

“I was very invested in being smart and thought to be smart was more important than accomplishing anything in life,” she says. But her research made her realize she could take some risks and push herself to reach her potential, or she could spend all her time trying to look smart.

She and other researchers are discovering new things about mindsets. Adults with growth mindsets don’t just innately pass those on to their kids, or students, she says, something they had assumed they would. She’s also noticed that people may have a growth mindset, but a trigger that transports them to a fixed-mindset mode. For example, criticism may make a person defensive and shut down how he or she approaches learning. It turns out all of us have a bit of both mindsets, and harnessing the growth one takes work.

Researchers are also discovering just how early a fixed and growth mindset forms. Research Dweck is doing in collaboration with a longitudinal study at the University of Chicago looked at how mothers praised their babies at one, two, and three years old. They checked back with them five years later. “We found that process praise predicted the child’s mindset and desire for challenge five years later,” she says.

In a follow-up, the kids who had more early process praise—relative to person praise—sought more challenges and did better in school. “The more they had a growth mindset in 2nd grade the better they did in 4th grade and the relationship was significant,” Dweck wrote in an email. “It’s powerful.”
Dweck was alerted to things going awry when a colleague in Australia reported seeing the growth mindset being misunderstood and poorly implemented. “When she put a label on it, I saw it everywhere,” Dweck recalls.

But it didn’t deflate her (how could it, with a growth mindset?). It energized her:
I know how powerful it can be when implemented and understood correctly. Education can be very faddish but this is not a fad. It’s a basic scientific finding, I want it to be part of what we know and what we use.

Resisting The Lure Of Short-Termism: Kill 'The World's Dumbest Idea' 01-09

There is only one valid definition of a business purpose: to create a customer.

– Peter Drucker, The Practice of Management (1954)

When pressures are mounting to deliver short-term results, how do successful CEOs resist those pressures and achieve long-term growth? The issue is pressing: low global economic growth is putting stress on the political and social fabric in Europe and the Americas and populist leaders are mobilizing widespread unrest. “By succumbing to false solutions, born of disillusion and rage,” writes Martin Wolf in the Financial Times this week, “the west might even destroy the intellectual and institutional pillars on which the postwar global economic and political order has rested.”

The first step in resisting the pressures of short-termism is to correctly identify their source. The root cause is remarkably simple—the view, which is widely held both inside and outside the firm, that the very purpose of a corporation is to maximize shareholder value as reflected in the current stock price (MSV). This notion, which even Jack Welch has called “the dumbest idea in the world,” got going in the 1980s, particularly in the U.S., and is now regarded in much of the business world, the stock market and government as an almost-immutable truth of the universe. As The Economist even declared in March 2016, MSV is now “the biggest idea in business.”

The Birth Of A Bad Idea

Why did the idea arise? MSV was a well-intended effort by firms to survive in a “VUCA” world, namely, a world that is increasingly volatile, uncertain, complex and ambiguous. In this more difficult context, in which power in the marketplace has steadily shifted from firms to customers, firms focused more sharply on what is immediately profitable. This was presented as a better approach than the then-prevailing view that a firm should seek to meet the needs of an array of stakeholders—customers, employees, shareholders and society. The misguided hope, articulated by Milton Friedman in September 1970, was that if a firm focused on solely on shareholders, everyone would be better off through the supposed “magic of the marketplace.”

The result has been the opposite. MSV led to a vicious cycle of value extraction and economic decline.

To be sure, companies often said that their goal is long-term shareholder value. Indeed, esteemed business school professors defend shareholder value in this way, as in an article in Harvard Business Review in August 2016. The professors seek to reclaim MSV by suggesting that shareholder value has been “hijacked by those who incorrectly believe that the goal is to maximize short-term earnings to boost today’s stock price. Properly understood, maximizing shareholder value means allocating resources so as to maximize long-term cash flow.”

But since calculating the long-term cash flow of any particular action is an impractical guide for day-to-day decision-making in a firm, once shareholder value of any kind becomes the firm’s goal, it’s the impact on the current stock price that in practice becomes the basis for day-to-day decision-making. This in turn leads inexorably to a focus on the short-term.

Short-term Incentives Are Larger Than Previously Understood

Inside the firm, enhancing short-term shareholder value is what most CEOs are currently paid to do. Stock-based compensation is the main reason why the “hijacked version” of MSV—that the goal of a firm is shareholder value as reflected in the current stock price—has become so pervasive. By focusing CEO attention on the current stock price, stock-based compensation is often at odds with long-term growth.

CEO stock-based compensation is even more massive than previously understood. Research published in 2016 in The Atlantic and Harvard Business Review by Professor William Lazonick, shows that the CEO–to-median-worker pay ratio is not, as commonly estimated, in the order of 300:1, with average CEO compensation in the order of $10-15 million, which is already shocking.
Lazonick’s new research shows that the actual CEO–to-median-worker-pay ratio of the 500 highest paid executives is almost 1000:1 or $33 million, with 82% from stock-based pay. Over several decades, executive compensation has increased more than 1000%. 

Creating long-term sustainable value through investment in market-creating innovation can have huge payoffs both for the shareholders and for the economy. But it usually takes years of hard work and is full of risk, with possibly no payoff during the tenure of the current chief executive. There are two much easier avenues available to the CEO to boost the stock price. One is cutting costs. The other is boosting the share price through share buybacks. Both are relatively easy and the results in terms of an enhanced share price are immediate, with practically no short-term risk. It is done in private with the stroke of a pen. Is it any wonder that CEOs give more attention to cost-cutting and share buybacks than to investment in risky slow-gestating innovation?

Massive share buybacks are a relatively recent phenomenon. Prior to 1982, large stock buybacks were illegal because they constituted obvious stock price manipulation. But the SEC in the Reagan administration introduced a new rule—Rule 10b-18—which creates “a safe harbor” for firms to buy back as many shares as they like. This effectively opened the floodgates. The Economist has called the practice “a resort to corporate cocaine”. Reuters has called it “corporate self-cannibalization.”

The SEC seems to consider itself powerless to do anything about the ensuing stock price manipulation. Thus in July 2015, when Senator Tammy Baldwin (D-WI) directly asked the SEC head in the Obama administration, Mary Jo White, to look into the issue of stock price manipulation resulting from share buybacks, White replied in effect that the SEC could not consider the issue because the protection offered by Rule 10b-18 was absolute. The prospects of changing that ruling in the investor-friendly Trump administration seem even more remote.

Lazonick’s recent research also shows how SEC rules currently enable executives to time the granting and vesting of their own shares so as to maximize their own compensation, despite the blatant conflict of interest.

As a result, CEOs have pursued lavish share buybacks with abandon, despite disastrous financial, economic and social consequences. As Upton Sinclair pointed out long ago, “it is difficult to get a man to understand something when his salary depends on not understanding it.”

Share Buybacks Are Gargantuan In Scale

The current scale of share buybacks is breath-taking. Over the years 2006-2015, Lazonick’s latest research shows that the 459 companies in the S&P 500 Index that were publicly listed over the ten-year period expended $3.9 trillion on stock buybacks, representing 54% of net income, plus another 37% of net income on dividends. Much of the remaining 10% of profits was held abroad, sheltered from U.S. taxes.

The total of share buybacks for all US, Canadian, and European firms, for the decade 2004-2013 was $6.9 trillion. The total share buybacks for all public companies in just the U.S. for that decade was around $5 trillion.

Buybacks might make some sense when a stock is undervalued, but Lazonick’s research shows that most buybacks occur when the stock is overvalued, thus enabling firms to mask other business problems. Contrary to the stated goal of enhancing shareholder value, the net result of share buybacks executed at the top of the market is to systematically destroy real shareholder value.

As Robin Harding in the Financial Times concludes, it is “time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.”

‘The Stock Market Made Us Do It’

Outside the firm, it is the stock market that acts as the enforcer of the MSV religion. As Dennis Berman in the Wall Street Journal points out, decisions are often driven by the C-suite’s perception that they are under “the threat from shareholder activists, who now patrol the market like prison guards with billy clubs. Overspend and get whacked.”

These perceptions are not far from reality. Take the case of Timken Steel, a company in Canton Ohio which has been making steel and bearings for almost a hundred years. It’s the kind of firm where “making things still matters.” Unlike other companies in the region, like Goodyear Tire & Rubber or the Hoover Company, Timken has not tried to cut costs by moving production to other countries where labor is cheaper. Instead Timken has made huge capital and social investments in Canton Ohio. Over the last decade, its share price had kept pace with the stock market, but that was no protection against “activist shareholders,” formerly known more accurately as “corporate raiders.”

In 2013, Timken was attacked by Relational Investors, in partnership with the California State Teachers’ Retirement System, (CalSTRS), which represents some 236,000 teachers and other retirees in California. Relational applied its usual modus operandi: acquiring stakes in the company, pressuring it to make changes to “unlock value”, insisting that the firm load itself up with debt, buy back their own shares, return assets to shareholders and drive their share prices higher. Relational then cashes in its profits with no thought for the financially fragile state in which it leaves the company it has attacked or the jobs that it might have destroyed.

Using CalSTRS as a PR shield to deflect criticism, Relational was successful in its raid on Timken. All told, Relational acquired its stake at about $40 a share and sold it at around $70, reaping a 75% gain — $188 million — in just over two years. Relational sold all its shares after the quick profit and moved on to the next victim.

Since then, the results for Timken have been less happy. Loaded with debt and split into two firms, its share price has declined by more than 60% and its long-term viability is uncertain.

In making its profit, Relational created no jobs and generated no products or services for any real people. It simply extracted money that had been created over years by the hard work of Timken’s management and workers and left Timken in a weakened state.

Timken is just one example of the noxious effects of the doctrine of MSV by which activist shareholders extract value and disturb the creation of long-term value. The Timken case is part of a broader pattern of attacks by activist shareholders on public firms that depress investment in innovation.

In fact, it looks like another record breaking year for shareholder activism activity, “both in the number of campaigns (more than 230 campaigns in the United States alone in 2015) to the size and iconic nature of the companies targeted (e.g., AIG, DuPont, General Electric and General Motors).” While some long-term investors are having second thoughts about shareholder activism, since “it cannot be the case that 'divest and distribute' is the right strategy for shareholder value as often as is advocated by activist funds relative to other ideas,” nevertheless the raids continue to increase with ever bigger and bolder campaigns. 2016 is also on track to be a record year for activism outside the United States.

The Cost Of Shareholder Activism

What is the cost of shareholder activism? The impact of the stock market on investment has been quantified in a brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle.“ The study compared the investment patterns of public companies and privately held firms.

The study found that “keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”

In other words, public firms invest roughly half as much as those private firms that are relatively free from the pressures of MSV. As Matthew Yglesias at Slate concluded: “We are reaping the bitter fruits of the ‘shareholder value’ revolution.”

Double Whammy: The Link To Bureaucracy

But wait, it’s not just shareholder value alone. MSV is a double whammy. Shareholder value forms a sinister partnership with top-down bureaucracy—a devastating constraint in a world in which a motivated workforce producing continuous innovation is a necessity for survival.

Thus when a firm embraces the goal of making money for the shareholders and its executives, it can’t inspire its staff to pursue that goal with any commitment or passion. Making money for the boss at the expense of the customer doesn’t put a spring in anyone’s step or excite anyone to give his or her very best. The goal is inherently dispiriting.

So once a firm commits to MSV, it has little choice but to manage itself with strict command-and-control to force employees to pursue a goal that they don’t really believe in. So MSV and top-down bureaucracy fit together in a perfect interlocking relationship, like a hand and a glove. If a firm tries to move away from bureaucracy, for instance by introducing Agile team practices, then the goals, prescriptions and metrics of MSV kick in to undermine the change and force a reversion to bureaucracy. So once firms embrace MSV, they are doomed to a state of suboptimal equilibrium with lackluster bureaucratic management.

The sorry current state of the work force has been measured by Gallup. It found that only 33% of U.S. corporate employees are engaged in their work, while 17% are disengaged and actively involved disrupting the firm. Deloitte’s studies show that only 11% of the workforce is passionate about what they do. The result is a workforce that is ill-adapted to producing the market-creating innovation that is urgently needed, thus making cost-cutting and share buybacks ever more attractive to the CEO.

Macroeconomic Impact

The impact of these management practices are now everywhere apparent. For instance, as shown in Deloitte’s Shift Index the rates of return on assets of U.S. firms continue their half-century decline that has been independent of political parties, recessions, bubbles, and major world events.

 Work done by the Kauffman Foundation and the Institute for Competitiveness & Prosperity shows that over the last twenty five years, companies more than five years old were net destroyers of jobs, not job creators.

Meanwhile workers wages have stagnated for decades. Since the advent of MSV in the 1980s, the benefits of productivity gains have flowed to shareholders, including the executives, not to workers who created those gains.

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The stock-price manipulation involved in massive buybacks—and the resulting exorbitant executive pay—are thus not just moral or legal problems. The consequences of MSV and share buybacks are a macro-economic and social disaster: net disinvestment, loss of shareholder value, diminished investment in innovation, destruction of jobs, exploitation of workers, windfall gains for activist insiders, rapidly increasing inequality and sustained economic stagnation. Stock buybacks are thus a financial bonanza for stockholders and senior managers, but they destroy economic value for society.

Meanwhile, since the U.S. presidential election in November 2016, the stock market has been on a tear. Investors seem to believe that by releasing resources that are currently “bottled up” by bad tax policy, business will get an automatic stimulus for investment. The case is plausible to the extent that the stash of cash overseas is massive. U.S. firms are currently holding almost $2 trillion in assets overseas, pending some kind of tax reform. But what will happen if the cash is repatriated? But where will it go?

The answer was unhappily apparent in an interview with Cisco Systems CEO, Chuck Robbins, on CNBC’s Squawkbox in December 2016. He was asked what Cisco would do if it could repatriate overseas capital. Cisco has more than $60 billion abroad, and it stands to gain a great deal if the repatriation measures currently being considered are implemented.

Robbins’ answer was frank. As he had outlined in an earlier call with Cisco's investors, Cisco would, he said, use the money for “a combination of dividends, share buybacks and M&A activity.” In other words, If this pattern is replicated, there will be more of the short-term financial engineering that has kept the U.S. economy in a seemingly endless state of secular economic stagnation.

There Is Another Way

There is of course another way to run a corporation. Firms pursuing this way start from the opposite premise from MSV. Instead of the firm being focused on extracting value for shareholders, the firm aims primarily at creating value for customers. The aspiration isn’t new. It’s Peter Drucker’s foundational insight of 1954: “There is only one valid purpose of a firm is to create a customer.” It’s through providing value to customers that firms justify their existence. Profits and share price increases are the result, not the goal of a firm’s activities.

The most prominent example is Amazon. Amazon never focused on short-term shareholder value. At Amazon, shareholder value is the result, not the operational goal. Amazon’s operational goal is market leadership. Although short-term profits have been very variable, the stock market has handsomely rewarded Amazon’s long term strategy.

“We first measure ourselves,” says CEO Jeff Bezos, “in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.”

Amazon obsesses over customers, not shareholders. “From the beginning, our focus has been on offering our customers compelling value."  Long-term shareholder value, says Bezos, “will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.”

Amazon Is Not Alone

Amazon is not alone in rejecting the doctine of MSV .

Thus Vinci Group Chairman and CEO Xavier Huillard has called MSV “totally
Alibaba CEO Jack Ma has declared that “customers are number one; employees are number two and shareholders are number three.”

Paul Polman, CEO of Unilever has denounced “the cult of shareholder value.”

John Mackey at Whole Foods has condemned businesses that “view their purpose as profit maximization and treat all participants in the system as means to that end.”

Marc Benioff, Chairman and CEO of Salesforce declared that MSV is “wrong. The business of business isn't just about creating profits for shareholders -- it's also about improving the state of the world and driving stakeholder value.”

In a 2014 report from the Aspen Institute, which convened a cross-section of business thought leaders, including both executives and academics, the most important finding is that a majority of the thought leaders who participated in the study, particularly corporate executives, agreed that “the primary purpose of the corporation is to serve customers’ interests.” In effect, the best way to serve shareholders’ interests is to deliver value to customers.

Len Sherman’s new book, If You're in a Dogfight, Become a Cat! (January 2017) offers many further examples, including Costco and JetBlue.

The report of the SD Learning Consortium (November 2016) also gives examples, including Barclays, Cerner, C.H.Robinson, Ericsson, Microsoft, Riot Games and Spotify.

The management journal, Strategy & Leadership, has courageously championed and elaborated the principles of this better way over a number of years.

Firms pursuing this different approach include young firms and old firms, big firms and small firms, US and non-US firms, those in software and those outside software. In effect, the discussion isn’t about a type of firm, but rather a different set of leadership and managerial practices.

The argument offered by executives that “Wall Street made us do it” thus has the same legitimacy as “the dog ate my homework.” A significant set of public companies have already been successfully pursuing customer value, with broad applause from Wall Street and strong support from discerning thought leaders.

The result is a virtuous circle of value creation.

A Wider Set Of Issues For Society

Thus we know how to resist the lure of short-termism. The question is: when will firms get on and do it?

It is of course theoretically possible that CEOs and their boards of directors will awaken tomorrow morning and commit themselves to creating value for customers rather than extracting value for shareholders.

It’s theoretically possible that investors will awaken tomorrow and refocus their attentions on firms that create real long-term value.

It is theoretically possible that the new head of the SEC will remove Rule 10b-18 which enables massive stock price manipulation.

Realistically though, these things won’t happen unless and until there is a sea change in the wider political, social and organizational context. Thus the current situation is one of fundamental institutional failure across the whole of society. The behavioral breakdown is mutually reinforcing.

CEOs are extracting value from their firms, rather than creating it. CFOs are systematically enforcing earnings-per-share thinking in decisions throughout their organizations. Business schools are teaching their students how to do it. Hedge funds and activist shareholders are gambling risk-free with other people’s money to take advantage of it. Institutional shareholders are complicit in what the CEOs and CFOs are doing.

Regulators remain indifferent to systemic failure. Rating agencies reward malfeasance. Financial analysts applaud short-term gains and ignore obvious long-term rot. Politicians stand by and watch. In a great betrayal, the very leaders who should be fixing the system are complicit in its continuance. Unless our society as a whole reverses course, it is heading for a cataclysm.

Thus change in behavior is needed in a whole set of institutions and actors: CEOs, CFOs, investors, legislators, regulators, rating agencies, analysts, management journals, thought leaders, business schools and politicians—all need to think and act differently.

A Moment Of Truth Has Arrived

We are thus at a critical point in a vast societal drama. We have reached that key moment, which Aristotle famously called “anagnorisis” or “recognition.” This is the theatrical moment in a drama when ignorance shifts to knowledge. Just as King Lear in Shakespeare’s play eventually recognized that his apparently virtuous daughters, Goneril and Regan, were a really bad lot, and that his apparently disrespectful daughter, Cordelia, truly loved him, so society is learning that much of ‘the talent’ it thought were adding value have in fact been extracting value for themselves.

As usual with anagnorisis and the shock of recognition at a disturbing, previously-hidden truth, there is a disquieting sense that the accepted coordinates of knowledge have somehow gone awry and the universe has come out of whack. This can lead to denial and a delay in action, even though the facts are staring us in the face.

If the recognition of our error comes too late, as in Shakespeare’s Lear, the result will be terrible tragedy. If the recognition comes soon enough, the drama can still have a happy ending. We are about to find out in our case which it is to be.

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The Origin Of 'The World's Dumbest Idea': Milton Friedman 01-09

No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New York Times on September 13, 1970.

As the leader of the Chicago school of economics, and the winner of Nobel Prize in Economics in 1976, Friedman has been described by The Economist as "the most influential economist of the second half of the 20th century...possibly of all of it". The impact of the NYT article contributed to George Will calling him “the most consequential public intellectual of the 20th century.”

Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.

How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “In a free-enterprise, private-property sys­tem,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders.

Come again?

If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not. The executive is an employee of the corporation.

An organization is a mere legal fiction

But in the magical world conjured up in this article, an organization is a mere “legal fiction”, which the article simply ignores in order to prove the pre-determined conclusion. The executive “has direct re­sponsibility to his employers.” i.e. the shareholders. “That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.“ 

What’s interesting is that while the article jettisons one legal reality—the corporation—as a mere legal fiction, it rests its entire argument on another legal reality—the law of agency—as the foundation for the conclusions. The article thus picks and chooses which parts of legal reality are mere “legal fictions” to be ignored and which parts are “rock-solid foundations” for public policy. The choice depends on the predetermined conclusion that is sought to be proved.

A corporate exec­utive who devotes any money for any general social interest would, the article argues, “be spending someone else's money… Insofar as his actions in accord with his ‘social responsi­bility’ reduce returns to stockholders, he is spending their money.”

How did the corporation’s money somehow become the shareholder’s money? Simple. That is the article’s starting assumption. By assuming away the existence of the corporation as a mere “legal fiction”, hey presto! the corporation’s money magically becomes the stockholders' money.

But the conceptual sleight of hand doesn’t stop there. The article goes on: “Insofar as his actions raise the price to customers, he is spending the customers' money.” One moment ago, the organization’s money was the stockholder’s money. But suddenly in this phantasmagorical world, the organization’s money has become the customer’s money. With another wave of Professor Friedman’s conceptual wand, the customers have acquired a notional “right” to a product at a certain price and any money over and above that price has magically become “theirs”.

But even then the intellectual fantasy isn’t finished. The article continued: “Insofar as [the executives’] actions lower the wages of some employees, he is spending their money.” Now suddenly, the organization’s money has become, not the stockholder’s money or the customers’ money, but the employees' money.

Is the money the stockholders’, the customers' or the employees’? Apparently, it can be any of those possibilities, depending on which argument the article is trying to make. In Professor Friedman’s wondrous world, the money is anyone’s except that of the real legal owner of the money: the organization.

One might think that intellectual nonsense of this sort would have been quickly spotted and denounced as absurd. And perhaps if the article had been written by someone other than the leader of the Chicago school of economics and a front-runner for the Nobel Prize in Economics that was to come in 1976, that would have been the article’s fate. But instead this wild fantasy obtained widespread support as the new gospel of business.

People just wanted to believe…

The success of the article was not because the arguments were sound or powerful, but rather because people desperately wanted to believe. At the time, private sector firms were starting to feel the first pressures of global competition and executives were looking around for ways to increase their returns. The idea of focusing totally on making money, and forgetting about any concerns for employees, customers or society seemed like a promising avenue worth exploring, regardless of the argumentation.

In fact, the argument was so attractive that, six years later, it was dressed up in fancy mathematics to become one of the most famous and widely cited academic business articles of all time. In 1976, Finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published their paper in the Journal of Financial Economics entitled

“Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

Underneath impenetrable jargon and abstruse mathematics is the reality that whole intellectual edifice of the famous article rests on the same false assumption as Professor Friedman’s article, namely, that an organization is a legal fiction which doesn’t exist and that the organization’s money is owned by the stockholders.

Even better for executives, the article proposed that, to ensure that the firms would focus solely on making money for the shareholders, firms should turn the executives into major shareholders, by affording them generous compensation in the form of stock. In this way, the alleged tendency of executives to feather their own nests would be mobilized in the interests of the shareholders.

The money took over…

Sadly, as often happens with bad ideas that make some people a lot of money, shareholder value caught on and became the conventional wisdom. Not surprisingly, executives were only too happy to accept the generous stock compensation being offered. In due course, they even came to view it as an entitlement, independent of performance.

Politics also lent support. Ronald Reagan was elected in the US in 1980 with his message that government is “the problem”. In the UK, Margaret Thatcher became Prime Minister in 1979. These leaders preached “economic freedom” and urged a focus on making money as “the solution”. As the Michael Douglas character in the 1987 movie, Wall Street, pithily summarized the philosophy, greed was now good.

Moreover an apparent exemplar of the shareholder value theory emerged: Jack Welch. During his tenure as CEO of General Electric from 1981 to 2001, Jack Welch came to be seen–rightly or wrongly–as the outstanding implementer of the theory, as a result of his capacity to grow shareholder value and hit his numbers almost exactly. When Jack Welch retired, the company had gone from a market value of $14 billion to $484 billion at the time of his retirement, making it, according to the stock market, the most valuable and largest company in the world. In 1999 he was named “Manager of the Century” by Fortune magazine.

The disastrous consequences…

So for a time, it looked as though the magic of shareholder value was working. But once the financial tricks that were used to support it were uncovered, the underlying reality became apparent. The decline that Friedman and other sensed in 1970 turned out to be real and persistent. The rate of return on assets and on invested capital of US firms declined from 1965 to 2009 by three-quarters, as shown by the Shift Index, a study of 20,000 US firms.

The shareholder value theory thus failed even on its own narrow terms: making money. The proponents of shareholder value and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time. Yet, precisely the opposite occurred. In the period of shareholder capitalism since 1976, executive compensation has exploded while corporate performance declined.
Maximizing shareholder value thus turned out to be the disease of which it purported to be the cure. As Roger Martin in his book, Fixing the Game, noted, "between 1960 and 1980, CEO compensation per dollar of net income earned for the 365 biggest publicly traded American companies fell by 33 percent. CEOs earned more for their shareholders for steadily less and less relative compensation. By contrast, in the decade from 1980 to 1990, CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled."

Even Jack Welch sees the light…

Moreover in the years since Jack Welch retired from GE in 2001, GE’s stock price has not fared so well: in the decade following Welch's departure, GE lost around 60 percent of the market capitalization that Welch “created”. It turned out that the fabulous returns of GE during the Welch era were obtained in part by the risky financial leverage of GE Capital, which would have collapsed in 2008 if it had not been for a government bailout.

In due course, Jack Welch himself came to be one of the strongest critics of shareholder value. On March 12, 2009, he gave an interview with Francesco Guerrera of the Financial Times and said, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

From shareholder value to hardball…

The supposed management dynamic of maximizing shareholder value was to make money, by whatever means are available.  Self-interest reigned supreme. The logic was continued in the perversely enlightening book, Hardball (2004), by George Stalk, Jr. and Rob Lachenauer. Firms should pursue shareholder value to “win” in the marketplace. These firms should be “willing to hurt their rivals”. They should be “ruthless” and “mean”. Exponents of the approach “enjoy watching their competitors squirm”. In an effort to win, they go up to the very edge of illegality or if they go over the line, get off with civil penalties that appear large in absolute terms but meager in relation to the illicit gains that are made.

In such a world, it is therefore hardly surprising, says Roger Martin in his book, Fixing the Game, that the corporate world is plagued by continuing scandals, such as the accounting scandals in 2001-2002 with Enron, WorldCom, Tyco International, Global Crossing, and Adelphia, the options backdating scandals of 2005-2006, and the subprime meltdown of 2007-2008. Banks and others have been gaming the system, both with practices that were shady but not strictly illegal and then with practices that were criminal. They include widespread insider trading, price fixing of LIBOR, abuses in foreclosure, money laundering for drug dealers and terrorists, assisting tax evasion and misleading clients with worthless securities.
Martin writes: “It isn’t just about the money for shareholders, or even the dubious CEO behavior that our theories encourage. It’s much bigger than that. Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.”

Peter Drucker got it right...

Not everyone agreed with the shareholder value theory, even in the early years. In 1973, Peter Drucker made a sustained argument against shareholder value in his classic book, Management. In his view, “There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.”
Similarly in 1979, Quaker Oats president Kenneth Mason, writing in Business Week, declared Friedman's profits-are-everything philosophy "a dreary and demeaning view of the role of business and business leaders in our society… Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit."

The primacy of the customer…

Peter Drucker’s argument about the primacy of the customer didn’t have much effect until globalization and the Internet changed everything. Customers suddenly had real choices, access to instant reliable information and the ability to communicate with each other. Power in the marketplace shifted from seller to buyer. Customers started insisting on “better, cheaper, quicker and smaller,” along with “more convenient, reliable and personalized.” Continuous, even transformational, innovation became requirements for survival.

A whole set of organizations responded by doing things differently and focusing on delighting customers profitably, rather than a sole focus on shareholder value. These firms include Whole Foods [WFM], Apple [AAPL], Salesforce [CRM], Amazon [AMZN], Toyota [TM], Haier Group, Li & Fung and Zara along with thousands of lesser-known firms. The transition is happening not just in high tech, but also in manufacturing, books, music, household appliances, automobiles, groceries and clothing. This different way of managing turned out to be hugely profitable.

The common elements of what all these organizations are doing has now emerged. It’s not merely the application of new technology or a set of fixes or adjustments to hierarchical bureaucracy. It involves basic change in the way people think, talk and act in the workplace. It involves deep changes in attitudes, values, habits and beliefs.

The new management paradigm is capable of achieving both continuous innovation and transformation, along with disciplined execution, while also delighting those for whom the work is done and inspiring those doing the work. Organizations implementing it are moving the production frontier of what is possible.

The replacement for shareholder value is thus now identifiable. A set of books have appeared that spell out the elements of this canon of radically different management.

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In effect, shareholder value is obsolete. What we are seeing is a paradigm shift in management, in the strict sense laid down by Thomas Kuhn: a different mental model of how the world works.

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