Review – Brunelleschi’s Dome

Brunelleschi’s Dome: How a Renaissance Genius Reinvented Architecture

by Ross King, published 2013

The cathedral of Santa Maria del Fiore, known far and wide as Florence’s Duomo, took nearly 150 years to construct, beginning in 1296 and ending in 1436 with the completion of its massive dome under the direction of capomaestro Filippo Brunelleschi. The quinto acuto arch of the dome was an engineering marvel constructed without stabilizing buttresses and without a wooden centering to hold it in place as it was built. It defied the imagination of the civic leaders responsible for building the cathedral at the time and the methods and architectural rationale behind it were made purposefully obscure by the paranoid and secretive master “Pippo”.

Fast forward over 500 years of history and the principles by which the dome was constructed appear to be no less mysterious. From the post-war era onward numerous attempts at magnetic imaging and other sounding methods have been made to try to ascertain the precise materials and methods used with most returning a Magic 8-Ball-esque  answer of “Reply hazy, try again.” Many lesser domes had been constructed in earlier history in the West and the East, but Brunelleschi’s dome was the greatest span and the highest height achieved since the Hagia Sophia in Constantinople and before that the Pantheon of Rome. Few have attempted anything nearing its proportions since and it seems apparent from the text that even if some modern had an inkling to they’d be hard pressed to figure out how to accomplish it without “cheating” in some way by use of innovative new materials or other supportive techniques.

But the grandiosity and secrecy of the dome’s construction is just one of the many wonders involved. Another is that Brunelleschi was not a trained architect but a goldsmith. Of course, goldsmiths of his era were considered the master craftsmen and technicians of their time (the book mentions how most significant architectural works in the West predating the Florence cathedral failed to record the name of the architects responsible for designing and raising them, so lowly was their perceived status) and the task before Brunelleschi was not simply to design the dome but to coordinate its construction via teams of specialized handiwork guild members as well as to manage the logistics of supplying the building materials, much as a film producer is responsible for pulling together writers, actors, financiers, set locations, film teams and so on. Still, it seems to demonstrate the virtuosity of the man’s mind that he was responsible for building something which was essentially an amateur attempt given his background.

Another wonder of the raising of the cathedral and the dome is the fact that this was one of many simultaneous grand public works built over the time. The city had organized a well-financed oversight committee, the Opera del Duomo, led by the most esteemed woolen cloth guild (a key pillar of Florence’s economy and regional importance), the Arte della Lana, which hired contractors to complete the cathedral and numerous other churches, sculptures and edifices around the city. Today we might think of an economic boom period lasting a decade but it seems that Florence’s skyline was littered with cranes, booms and scaffolds for the better part of two centuries.

Besides innovating architecturally, Brunelleschi also created numerous ingenious tools and machines to aid the construction process. One was an enormous ox-powered materials hoist which rose to the height of the roof of the cathedral from the floor of the nave and had changeable gearing such that the ox team could raise and lower materials in a controlled fashion without being removed from harness and changing direction, an enormous time savings over the life of the project. He also invented specialized cranes, pulley systems and other machines for traversing materials across the expanse of the open dome while it was under construction. Getting multiple hundred-ton slabs of marble, hardened timber beams and iron chains and clasps up the 20-story height of the cathedral was only half the battle as once there they needed to be moved across numerous axes in a precise, controlled fashion before being lowered into place, all while gusts of wind, rain and sometimes even snow obstructed the workers’ efforts.

As impressive and awe-inspiring as structures like Santa Maria del Fiore are and were, I couldn’t help thinking about the monumental waste of these projects compared to alternative uses for the materials and labor and ingenuity involved. Most of the space created by the cathedral is empty by design– this heightens the sense of majesty of the house of God. And this is partly why the building was so complex and expensive to create. The mere fact that the people of this era could construct something like this is a demonstration of their wealth, organizational capabilities, technical know-how and culture of productivity. I just wonder if they weren’t filling up multiple city blocks with empty temples made of the finest construction materials, what could they have built instead that isn’t there?

Ironically, it was these “wasteful” decisions that are the primary source of Florence’s modern tourist economy, so in that sense it was a far-sighted decision by the early city masters to invest in their descendant’s future well-being. And some have even made the case that the splendors of Florence’s Renaissance urbanity were enough to protect it from destruction during World War II.

Florence in the Renaissance was something like New York City today, a wealthy center of commerce and banking, confident in its own power and influence, a great patron of culture and the arts and continually raising great structures in honor of itself. But whereas you can walk amongst the streets of Florence today and see a Medici palazzo or a fine church built half a millenium ago, it’s hard to imagine walking the streets of New York City five hundred years from today and finding the remains of yesteryear still standing and still full of wonder and delight.

 

Advertisements

Review – American Icon

American Icon: Alan Mulally and the Fight to Save Ford Motor Company

by Bryce Hoffman, published 2013

As I read this book, three questions ran through my mind. The first question was “Was Ford Motor Company worth saving?”, the second question was “What do we mean by ‘save’ and what would have happened to Ford Motor Company if the effort was unsuccessful?” and the final question was “Why was Ford savable but GM and Chrysler were not?” But before I share my thoughts on those three questions I will try to summarize my understanding of how Alan Mulally did it.

Prior to being headhunted for the CEO role at Ford, Alan Mullaly had not spent any time in the international or US auto industries. While he had a nostalgic interest in Ford products rooted in his childhood memories like many Americans of his generation, Mullaly was an aeronautical engineer by education and trade and had made his name climbing the ranks of Boeing’s commercial aviation division. He was known as an able executive manager from that experience but many people inside the company and in the wider business world were skeptical that he’d be able to make an impact without understanding the unique intricacies of Ford’s automotive operations.

Besides questions about the applicability of his experience and skillset, Mulally faced the problem of the “bench”– by recruiting an outsider to run the company, Bill Ford was signalling that there was no one within the company who was up to the task. Further, there was a belief within the company and shared by other business strategists that Ford’s culture was broken and it couldn’t be fixed by continuing to employ the very leaders who were responsible for it being what it was. People expected Mulally to come in and make a number of dramatic public executions but no one could predict how he’d repopulate the executive ranks with fresh faces when the company was going through a crisis and faced a nightmare in attracting talent to a sinking ship.

Mulally’s solution, then, was both simple and unexpected. He treated his lack of industry knowledge as irrelevant in favor of installing proven management practices he developed at Boeing; and he endeavored to let the individual members of the leadership team come to their own conclusions as to whether they had what it took to change the culture and save the company– he created a new standard for performance and accountability and expected everyone to rise to the occasion or else fold under the pressure and leave on their own.

The cornerstone of his management practice was a weekly business plan review held on Thursdays with the global leadership team. Each VP was asked to run through a number of preformatted slides and color-coded KPIs in front of their peers, indicating the state of their operations against plan and projected five years out. The goal of the meetings was to publicly acknowledge challenges and to generate awareness that could lead to group problem-solving in follow-up special review meetings. Bringing visibility to problems created opportunities for the team to consider solutions that might originate outside a specific operating unit and it also allowed them to avoid compounding mistakes by adjusting operating plans in light of new challenges in related divisions.

This practice addressed one part of the corporate governance problem Ford had. The other part was addressed by restructuring roles and divisions themselves. Mulally implemented a matrix approach to management hierarchy and reporting which not only increased the number of VPs reporting directly to him, solving the problem of information silos or lack of accountability through problems hidden by bureaucracy, but it also organized more functions on a per-project basis which increased the likelihood of successful resource coordination within the boundaries of the project.

When most people think about strategy, they think about competitive strategy meaning what kinds of decisions does the company make with regard to its customers or its competition? But there is another layer of strategy which is often more important in a very large, very complex organization such as Ford, which is corporate strategy– how will the internal resources of the company be organized to maximize scale, efficiency and coordination? Mulally definitely made adjustments to Ford’s competitive strategy (such as his insight that their product lineup was too complex and fractured and needed to be radically simplified to fewer competitive models, or his commitment to raise the quality and durability of Ford’s products) but it appears the biggest impact was made through his corporate strategy rooted in new corporate governance initiatives.

Every social organization faces coordination problems. Without successfully solving these coordination problems, which are unique to each entity based upon its history, size and competitive position, there is chaos inside the company which results inwardly in waste and outwardly in a weakened competitive position. It is therefore entirely possible that something as simple as creating more effective meetings (which increase the quantity and quality of information-sharing across the organization, improving coordination) and restructuring roles and responsibilities (which empowers the “right” people to act on certain information, or else creates new responsibility for action that otherwise did not exist) can have a dramatic impact on the fortunes of a multi-billion enterprise.

Of course there were other key initiatives that took place either at Mulally’s behest or on his watch which played critical roles in how the story turned out, including a major renegotiation of the company’s union contracts as well as a massive refinancing of the company’s debt and capital structure. But from my reading of the text, these things would’ve at best given the company a bit more rope with which to hang itself. Fixing corporate governance and leveraging the company’s corporate strategy was the real coup de grace that Mulally delivered. For an amateur executive manager such as myself it is both inspiring and a bit unnerving to think of how poorly managed so many major and minor enterprises alike are given this insight.

Now that I’ve offered my interpretation of how Mulally pulled it off, let’s explore the three higher level questions I wondered about as I was reading. I’ll take them in reverse order.

The book doesn’t make it clear why Ford could be saved while GM and Chrysler could not. (Along the lines of the “rope to hang with” logic, while Ford had an incipient existential crisis aggravated by the Global Financial Crisis of 2008, GM and Chrysler remained happily/deludedly oblivious to their own until the GFC arrived.) One answer might be that Ford still had significant private family ownership while GM and Chrysler had already been converted into unfamiliar, faceless corporate automatons by that point and so there was no individual impetus to save them. This reason, if true, represents a different kind of corporate governance problem that extends into the realm of social governance.

Another reason might be that GM’s and Chrysler’s problems were too deep. Even if someone was aware they needed saving, and wanted to save them, they couldn’t be. It would’ve been futile. So no one even tried. A final argument I considered is based upon scarcity. There was only one Alan Mulally in the world, he could only save one legacy American automobile manufacturer and so once he was called upon to save Ford there was no one left for the other two. I consider this to be the least likely circumstance but it could be true.

In any case, it might not be an important question to answer. We might consider why in trying to answer the second question, “What do we mean by ‘save’ and what would’ve happened if the effort was unsuccessful?” Things get sticky here. If Ford Motor Company collapsed, as many American and international nameplates collapsed over the years ahead of it, life would go on just as it did when the others fell. Some of the physical assets, such as plants and parts inventory, would be purchased by surviving manufacturing entities and others would be scrapped or abandoned. Some employees (and managers) would find work in the same field under different ownership and others would find work in new fields unrelated to automotive. Some of the brands, technology and IP of the company might be purchased by third parties and in that way the Ford brand might be “kept alive” indefinitely. Or it may have been the case that a failure of that magnitude killed the value of this historic franchise and the Blue Oval would be buried for good.

If anything Ford did had value and utility in the marketplace, it would likely continue to have such value and utility whether “Ford” was responsible for producing it or not. And to the extent it did not (in whole or in part) there’s really no reason why such activity should continue under Ford’s aegis if it wouldn’t under anyone else’s. Nostalgia by itself is only worth so much and it turns out that is not very much.

So “saving” Ford really means keeping a certain collection of assets under the control of a certain collection of financial and management interests and retaining certain contracts with employees and a certain ecosystem of vendors and distributors. There’s nothing magic or eternal to this and the evidence for this fact is contained by the knowledge that Ford itself had agglomerated into itself other foreign brands such as Volvo, Mazda and Jaguar-Land Rover. If some brands can die and others can live on under Ford’s ownership, certainly something similar could happen to the Ford brand and organization without cosmic repercussions. The dramatic tension of the story loses a bit of gusto when we consider all of this.

The final question is a moral question. It implies a “should”. Should Ford Motor Company have been saved? Asking about its worth begs the question “Worth to whom?” And you could insert many answers there: its employees, its suppliers, its customers, politicians with Ford operations in their districts, “society” at large, and so on. But because Ford Motor Company is and was a public company owned by a collection of shareholders and operated with the intent of earning a profit and thereby generating wealth, I want to focus this question on the members of the Ford family, who were its controlling shareholders and thus primarily responsible for the strategic governance of the company.

The book makes it clear that aside from Bill Ford and one or two other direct descendants of Henry Ford, the Ford family as shareholders were not deeply involved in the management or operations of the company and in fact many of them might be what are politely termed “trust fund layabouts.” That is, many of the existing Ford family members did little through their own efforts to contribute to the enhancement of the value of the Ford Motor Company nor any other personal enterprise they might be associated with and instead enjoyed a comfortable life of easy wealth and leisure thanks to the luck of being born into an inheritance.

Personally, I see no moral evil in that, though many people do. Some people will be rich and some people will be poor and the fact that some people are rich simply because they had a successful relative isn’t their fault. If anything, we should protect these privileges as a social obligation because the wealth they enjoy was rightfully created by one of their heirs and that individual, because they created it, has every right to do whatever it is they want to do with it up to and including giving it away to charity, giving it away to relatives or burying physical manifestations of it in a giant pit.

That being said, because it is not a moral evil for them to have it it’s also not a moral evil for them to lose it. They’re certainly not entitled to it and they don’t seem to have any real capability to make anything out of it beyond a means of personal amusement. Why Ford Motor Company should be “saved” to protect them from the follies of the world is a question with no objective answer. If it wasn’t them who owned this wealth it would be someone else, so why worry so much if their ownership claim dissolves in a pool of historical mismanagement and transfers to some other person or persons with a better idea of what to do with it? That sounds like progress, to me.

In fact, it sounds not just like progress, but like Thomas Jefferson. We might but repurpose a few words from his famous correspondence to have something rather fitting for this occasion, as seen here:

What signify a few fortunes lost in a century or two? The tree of economy must be refreshed from time to time with the wealth of trust fund layabouts & shiftless public shareholders. It is its natural manure.

Review – The Blue Bottle Craft Of Coffee

The Blue Bottle Craft of Coffee: Growing, Roasting, and Drinking, with Recipes

by James Freeman, Caitlin Freeman, published 2012

It seems that coffee might best be appreciated by a mathematician when one considers how many various ways the factors of coffee production can be manipulated prior to it being poured into one’s cup. For example:

  1. Arabica or robusta species? Which varietal?
  2. Where was it grown? (Ethiopia, Kenya, Brazil, Hawai’i…) At what altitude? What were the weather and soil conditions during that crop?
  3. How was it processed? Dry or wet? Organic?
  4. Is it single-origin or a blend?
  5. How was it roasted? What temperature? How long? Starting and stopping moisture? Time to first crack? Second crack?
  6. How were the beans ground? Coarse? Fine? Hand grind or motorized?
  7. How was the coffee brewed? Pour-over? Espresso? French press? Cold brew?
  8. Black or with condiments? Whole milk or heavy cream? Butter? Sugar? Spices?

It may be that only true professionals can discern meaningful differences between one cup and the next when it comes to certain degrees of some of these variables, but nonetheless they’re there and on a gross basis they’re meaningful. Coffee from Ethiopia is different from coffee from Costa Rica. Pour-overs have different profiles than coffee that has been French pressed. Even the temperature of the water and the time of extraction matter within each brewing method.

Coffee is a global commodity, but the Freemans’ book makes it clear that coffee nonetheless defies commoditization for those looking for an individualized, craft experience. One can endlessly explore the world of coffee by twisting these knobs and pulling these levers.

Something about coffee seems delicate after reading this book. One grower profiled had 6,000 trees on their plantation which each yield only a pound of green coffee. A talented human harvester can clear about 2 pounds worth of finished coffee per hour from the trees. We’re not talking about shaking pounds of fruit with one bump like an orange tree here. And coffee goes stale quickly after roasting and even more speedily after grinding. With all the time and intermediate steps between planting and drinking, one could easily ruin the essential qualities of their coffee with simple mistiming or lack of coordination. Brew a minute too long, swirl the water in your pour over a little too fast, and something sublime is lost forever, replaced with tasteless mediocrity.

It is surely an art to do it well!

The discussion around organic certification on coffee also caused me to pause. Organic is not a perfect measure of quality or nutrition by any means when it comes to food, and organic farming practices have some of their own problems. But all else equal, we’d rather not ingest the pesticides if we can avoid it. Yet when it comes to coffee (and wine, “biodynamic”), I haven’t thought twice about insisting on organic sources. This is an odd oversight on my part because it’s probably even more important given that the act of extraction in coffee making virtually guarantees that residual chemicals end up fully dissolved in a readily-digestible concoction, but even more so because for most people coffee is a daily habit so you are being exposed constantly rather than periodically. Unfortunately, this is one place where the market isn’t keeping up. I think on average at my local coffee shop there is one organic offering for every ten or twelve types of beans presented.

James Freeman, the founder of Blue Bottle Coffee and author of the coffee sections, makes it clear that most people in America drink bad coffee each morning. Their sins are many and born of ignorance mostly, convenience secondly. They use automatic drip brewers, pre-ground (stale) coffee, unfiltered water, incorrect temperatures for brewing, unkindly ratios of water to coffee grounds and, worst of all cases, “pod coffee” (K-cups, Nespresso, and so on).

To take back the pride of good coffee, to create one’s own coffee ritual and to further develop the art of the craft, he recommends a basic setup for the novice:

  • electronic gram scale
  • thermocouple thermometer
  • conical burr grinder
  • swan-neck kettle
  • single-cup pour-over dripper + filters

There are many preparation methods detailed in the book but I was surprised to learn that he recommended the simple pour-over as the first and best technique to master. He also recommends making coffee one cup at a time– a difficult task for a family man trying to mass-produce breakfast! Most interestingly, while he believes you can have a delicious cup of coffee with any kind of bean and roast that has been properly farmed and processed, he recommends single-origin light roasts, black, for the cleanest presentation in the pour-over method.

It’s easy for me when reading a book like this to focus on the “recipe” and ignore the “principles”. Freeman offers a number of rules of thumb and general guidelines but the key idea is personal experimentation and discovery within extreme bounds. Water that is too cold or too hot is just never going to produce good coffee, but water between 205F and 190F, to personal preference, will produce personally-satisfying coffee. It is not about what is objectively best but what is subjectively delicious to you.

Tidying Up Our Library

Today I tried to sort through a number of reading lists I keep on Amazon.com in order to find a few new things to read.

I failed. Quickly.

A minute amount of arithmetic can show us why. If I dropped everything else of interest to me and developed greater discipline than I’ve exhibited in the last several years and devoted all of my free time each day to reading, I might, possibly, get through all of the titles I’ve accumulated in my lists in about… five years.

Five years straight of regimented reading. And of course these titles were accumulated over a period of about five years, so by the time I finished, I’d have my reading for the next five years ready to go. An endless fight, I could make my way through the stacks until life itself exceeds me and I succumb to my war wounds, surrounded by loved ones and my unread materiel.

Trying to sort these potential odysseys, I became overwhelmed and soon the books sorted me. How did I get here? What am I really trying to do? What is the point?

Every book I’ve encountered and subscribed to my lists (there are 22, by the way, starting with “American History”, ranging through “Farming & Ecology” and ending with “Social Science”) represents a hope for mastery and wisdom. Each represents one human being’s life work, in many cases, or at least a component piece of a corpus representing everything they’ve learned about a specific area of human inquiry they’ve devoted their energies and attentions to understanding.

So I grabbed them by the bushel, the box, the bundle, and stuffed them into 22 unique intellectual genuses for my future edification. Are you seeing the problem here?

This is intellectual hoarding on an epic scale. And each hope hides a dying regret, that I didn’t learn all of this sooner or at some other time in my life.

There may have been many opportunities to learn everything there is to know about Ancient Roman social and political and philosophical history; of EO Wilson’s sociobiology and studies of ants; of comparative studies in global religious traditions and the historical implications for host societies; of the supreme importance of mycelia (read: mushrooms) for soil health in one’s home garden or the world at large; of what the Founding Fathers really meant by the words they wrote in the Constitution and why the US really is a unique and special polity on the world stage.

But I didn’t. And I have to learn to accept that fact and let all these possible, potential, unrealized versions of me go. I know 80% more about philosophy than the average yokel, but I will never truly know Nietzsche. I made it this far without such arcane wisdom and I’ll have to see if I can make it a bit further.

It’s hard for me to let go of all the time I spent finding this stuff, though. In some weird combination of the sunk cost fallacy and the labor theory of value, it seems like because I spent all this time and had all these dreams it’d be a shame to just, hit the delete key, and watch these lists get disappeared out of some internet memory bank.

Instead of wholesale, scorched earth reset, I am considering utilizing Marie Kondo’s “spark joy” principle. I will scan my list and imagine, briefly, pulling each of these titles out of a freshly delivered Amazon.com box and holding it in my hands, feeling its weight and staring at the cover in person for the first time. How do I imagine myself feeling in that moment?

If I am ready to forget whatever it was I was doing the split second before the package arrived because I am too eager to sit down and begin reading, this title is capable of “sparking joy” for me. It touches something of my true essence, my actionable values, and a case can be made for keeping it on a shortlist for purchase if not ordering it immediately.

Everything else is getting torched. If it doesn’t spark joy for me now, it might spark joy for me never. It would be wasteful to maintain the delusion that I’m going to get to it one day and worse still to make the mistake of actually buying it. Then, Amazon’s inventory investment problems become my own. And I have no retail platform!

Some might suggest that there is value in maintaining a personal library. Here’s a recent picture of mine:

This is not every book I’ve ever owned nor every book I currently own. Sadly, I have more books than this and in more places than this. Many have been read. Some never will be. If the idea that I’ll eventually read all of these books is insane, the notion that some are worth keeping for re-reading or reference is marginally less connected to reality. Who has time for this? I don’t.

One of my greatest joys in reading has been discovering books and chasing down my own rabbit holes. Maintaining a library says something like, “One day, someone in my family or one of my friends or someone who cares about me is going to be really excited to chase down all my old rabbit holes like I did.” That day isn’t coming, but one in which your loved ones, a friend or someone who cared about you (maybe because they’re being paid to haul away your garbage and remains) tosses your books in the dump, is. It’s vanity to collect books as if it represents some important intellectual legacy you’re preserving for others.

That being said, maybe as part of family governance there are a select few titles that the patriarch (or matriarch) insists family members become familiar with as part of a shared family intellectual culture. That seems reasonable. But in the photo above, such selections would probably be able to fit on an individual division of one shelf at maximum.

Besides losing some nice wall art, you would gain some space if you stopped having a library and copious lists of books you’ll never actually read. You might also gain some freedom and satisfaction. What does it do to your soul to carry all that stuff you’ll never do and all the knowledge you’ll never have stuck in books you’ll never read, to carry it around in the back of your mind, day after day? What limitations do you set on yourself here and now when you spend any amount of time punishing yourself for what you aren’t yet but might be one day?

So, just let it go. If it’s important, if it’s you, it’ll come back to you one day when you go looking for it.

Review – Corporate Strategy

Corporate Strategy: Tools for Analysis and Decision-Making

by Phanish Puranam, Bart Vanneste, published 2016

What is corporate strategy and how is it any different from business strategy? That was actually a distinction I hadn’t made in my own mind when I picked this title up. I was generally interested in exploring “strategy” in an economic or business competition sense and this book was one of many I selected for further research. It was a happy accident then to realize there is a difference and this book is all about explaining what it is and why it’s different.

Business strategy aims at creating competitive advantage in a firm-against-firm struggle within a given industry. It flows outward from customer behavior through organizational structure and management practice to policies and processes surrounding marketing, sales, production, distribution and customer service.

Corporate strategy aims at realizing synergies from the joint ownership of different businesses. Synergies can be realized between businesses competing in the same industry but with common ownership (and perhaps diverse geographic territories), the case of a “corporate HQ” utilizing economies of scale in back-end or administrative functions to lower their cost or raise their quality across the individual customer-facing businesses. Synergies can also be realized between businesses operating in distinct industries but where coordination between actors in these industries allows for new products or services to be bundled, consider a bank and an insurance company owned by one corporate parent which can then offer a full range of financial services to customers.

One interesting takeaway from the book is that all public equity investors who do not have 100% of their investments in a single company (ie, they own a portfolio of stocks) are engaged in corporate strategy. However, as the book advises, passive investors are not able to realize synergies which those in control of these businesses can through exerting influence over their management. So, a passive equity investor could have an insight about the unique value of owning a complimentary basket of businesses representing corporate advantage, but they do not have the means to act upon it unless they are able to successfully agitate for M&A activity or have enough resources to get voting control over the companies in which they can sway management to extract the synergies they’ve spotted.

Another concept that was interesting to me was the irony that by bringing businesses under common ownership, a corporation destroys its own best benchmark for valuation (ie, the individual market prices of each business) and thus it is trapped in a perpetual game of trying to evaluate whether it’s coordination of economic activity within the corporation is synergistic and creating value, or wasteful and destroying it.

Warren Buffett as a conglomerator par excellence is an interesting case because, at least nominally, he does not provide managerial oversight to operations of the businesses he owns and has never claimed he has purchased a business for synergistic reasons for corporate strategy. Rather, he purchases businesses ONLY because he considers them to be available on a bargain basis, that is, he thinks they are available for less than their intrinsic value.

The entire point of corporate strategy, according to the book, is to be able to pay market or “fair” prices for assets and businesses, but still realize a profit from owning them, because of the ability to manage or exploit them differently under a joint ownership structure. So, Buffett is NOT a corporate strategist, although he is a really great investor.

And if you can realize synergies AND buy at bargain prices (AND apply leverage safely…) then you are really cooking with gas!

One of the great ironies of the (public) business world is that many managers (they are hardly ever significant shareholders themselves) think they can spot synergies all over the place, which either they or their investment bankers use to rationalize their acquisition activity. But the data demonstrate that few synergies ever appear to be realized– acquiring companies usually overpay, their stock falls on the announcement of an acquisition and the target company’s stock rises. Further, these acquisitions are often followed years later by goodwill writeoffs or divestitures of the previously acquired business or assets.

On average, a corporate parent that divests a business increases shareholder value.

In fact, one of the strategic suggestions of the authors is the always be on the look out for someone who is a better owner of a business or asset than you (ie, willing to pay you more than it’s worth to you to continue owning it) and selling things seems to be one of the most reliable ways for corporate strategists to create corporate advantage. It’s a pity, then, that most corporate strategists are buyers, not sellers!

If some other corporate parent has even stronger synergies with a business than you do, you should consider divesting.

Divesting when you can, and not when you have to is usually preferable.

Imagine that, starting today, the two businesses would be moved into separate ownership and would be operated completely independently, with no communication or exchange of any kind between the two. How would the value of the businesses be effected?

If one thinks one is smart enough to beat the odds, the authors suggest four places to look for synergies from joint ownership and operations for corporate strategists:

  1. Consolidation, creating value by rationalization across similar resources from similar value chain activities by eliminating redundancies, affects mostly costs and invested capital
  2. Combination, creating value by pooling similar resources from similar value chain activities, such as combining purchasing to obtain volume discounts or acquiring a competitor then raising prices for customers, impacts either costs or revenues
  3. Customization, creating value by co-specializing dissimilar resources in order to create greater joint value, results in improved value in production or consumption and involves modification of resources, the transfer of best practices can create unique value
  4. Connection, generates value by simply pooling the output of dissimilar value chain activities, for example customers may value being able to buy a bundle of different products and services together, the product development of one business is being connected to the distribution channel of another

Here are some other major strategy risks that are common:

One common negative synergy is brand dilution, ie, does the brand apply? Another is complexity. Another is market rivalry, this is a significant concern in the advertising industry, where when two firms who serve rivals merge, the chances of keeping both their clients is low.

Governance costs act as taxes that eat into the potential benefits from synergies when they are attempted to be extracted. [ie, the price you pay to operate an acquired business effectively.]

When an autonomous business becomes a division within another, the incentives of the owner and managers are necessarily diluted.

Synergies likely to generate significant transaction costs are less likely to be successfully realized in arms length relationships between independent firms than under common ownership.

I particularly appreciated the discussion about the corporate advantage that can be achieved through thoughtful design of the organization and its management.

One should be able to read the corporate strategy of a company in its organization chart: what kinds of activities does the top management feel are essential to integrate?

While all organizational structures represent a unique combination, there are three “pure form” ways to structure the corporation and its management structure: by activity, by output, by user/customer.

The authors recommend that corporate strategists “Think about the multi-business corporation as a collection of value chain activities” and look for synergies accordingly. But, being economic entities, there are necessary tradeoffs to beware of with each choice:

Grouping similar activities together emphasizes economies of scale at the expense of economies of scope, whereas grouping different activities together does exactly the opposite.

Every grouping arrangement emphasizes certain interactions but excludes others, which show up as opportunity costs and bottlenecks.

Further, if the innovation literature and hundreds of years of business history haven’t beat it into your head yet, things change. That means that the “right” structure (the synergistic one) is likely to change over time. “No structure is permanent.” Corporate strategists should always be considering the possibility that the ideal economic structure for managing the company has changed in reflection of new competitive dynamics, customer tastes and habits or advancements in technology, culture and society. A good rule of thumb might be that the appropriateness of the corporate structure needs to be reconsidered every time a major acquisition or divestiture occurs.

There were two other nuggets of corporate strategy wisdom that stood out to me. One was that most multi-business firms have capital allocation decision-making on auto-pilot. Either every request gets granted, or every request gets denied, or every business gets to keep whatever it generates. The corporate strategist can grab some low-hanging fruit by being thoughtful about capital allocation decisions within the portfolio and providing a critical voice about whether capital should be redistributed amongst divisions or even outside the company (ie, dividend or acquisition activity).

The other was in the author’s description of the typical M&A process (which includes not just execution of the acquisition transaction but also successful completion of the post-merger integration process). The most overlooked, and final, step in the process is Evaluation, which “refers to a post-transaction review of what went right and wrong” and analyzes the economic impact of the transaction on the entire firm. Were synergies realized? In the amounts predicted? Did costs materialize that were surprising? Did any other kind of disruption or distraction that was not anticipated earlier occur during the course of the merger? From my personal experience, it is difficult for management teams to take the time to look into the rear-view mirror like this, and even harder for them to be honest about what they see!!

Notes – Corporate Strategy

The following are my unedited notes from my reading of Corporate Strategy:

Corporate strategy versus business strategy

Corporate advantage versus competitive advantage

Two ways of increasing competitive advantage:

1.) raise the price customers are willing to pay

2.) lower the price suppliers are willing to sell for

Maximizing corporate advantage may or may not be consistent with maximizing the competitive advantage of each individual business

Some businesses could give up competitive advantage in their business in order to enhance the competitive advantage of other businesses in the portfolio

Corporate strategy matters at least as much as the analysis of industry competition (implication for passive investment analysis)

A natural, minimal benchmark for a corporate strategist is a passive investor

Synergy is therefore the means through which corporate advantage is created relative to a typical investor who can select the same portfolio of investments

Portfolio assembly can be a corporate advantage in cases of private/restricted capital markets

By coming into existence, the multi-business firm in effect destroys its own best benchmark

The super-rich may treat their business group as their own mutual fund

Corporate advantage is defined in terms of jointly owning businesses and synergies in terms of jointly operating them.

While an investor could create corporate advantage, an investor cannot extract synergies.

For a corporate strategist to create corporate advantage over what an investor can achieve in efficient capital markets, there must at least be some form of synergy between two businesses in the portfolio

To find synergies, construct a value chain for each business/division and look for opportunities to coordinate or economize activity

Forms of synergy

  1. Consolidation, creating value by rationalization across similar resources from similar value chain activities by eliminating redundancies, affects mostly costs and invested capital
  2. Combination, creating value by pooling similar resources from similar value chain activities, such as combining purchasing to obtain volume discounts or acquiring a competitor then raising prices for customers, impacts either costs or revenues
  3. Customization, creating value by co-specializing dissimilar resources in order to create greater joint value, results in improved value in production or consumption and involves modification of resources, the transfer of best practices can create unique value
  4. Connection, generates value by simply pooling the output of dissimilar value chain activities, for example customers may value being able to buy a bundle of different products and services together, the product development of one business is being connected to the distribution channel of another

One common negative synergy is brand dilution, ie, does the brand apply? Another is complexity. Another is market rivalry, this is a significant concern in the advertising industry, where when two firms who serve rivals merge, the chances of keeping both their clients is low

Governance costs act as taxes that eat into the potential benefits from synergies when they are attempted to be extracted

When an autonomous business becomes a division within another, the incentives of the owner and managers are necessarily diluted

Synergies are likely to generate significant transaction costs are less likely to be successfully realized in arms length relationships between independent firms than under common ownership

A management services firm is a kind of non-equity alliance

The more mature and efficient the capital markets in which a company operates, the greater the pressure on the company to engage in diversification primarily on the basis of potential synergies between existing and new businesses

The CEO should be spending the shareholders’ money on entry into new businesses only to extract value that the shareholder could not by investing directly in such a business on her own

In the absence of bargains, passing the synergy test is necessary but not sufficient to pass the diversification test

If some other corporate parent has even stronger synergies with a business than you do, you should consider divesting

An active policy of looking for divestiture opportunities is sensible

On average, a corporate parent that divests a business increases shareholder value

Imagine that, starting today, the two businesses would be moved into separate ownership and would be operated completely independently, with no communication or exchange of any kind between the two. How would the value of the businesses be effected?

Divesting when you can, and not when you have to is usually preferable

Outsourcing often carries significant transaction costs

Think about the multi-business corporation as a collection of value chain activities

One should be able to read the corporate strategy of a company in its organization chart: what kinds of activities does the top management feel are essential to integrate?

Pure forms of organization: by activity, by output, by user/customer

Grouping similar activities together emphasizes economies of scale at the expense of economies of scope, whereas grouping different activities together does exactly the opposite

Every grouping arrangement emphasizes certain interactions but excludes others, which show up as opportunity costs and bottlenecks

No structure is permanent

Don’t forget about how to integrate activities while you’re thinking about ways to partition them up

Corporate management functions:

  • Treasury
  • Risk management
  • Taxation
  • Financial reporting
  • Company secretary
  • Legal counsel
  • Government relations
  • Investor relations

The goal of resource allocation in the portfolio is thus to push businesses further away from the origin toward the top and right, away from the investment threshold (pg 212)

One low hanging fruit for multi-business firms in terms of corporate strategy is to actually give thoughtful consideration to capital allocation decisions within the portfolio

In the M&A and Post-merger Integration process, Evaluation refers to a post-transaction review of what went right and wrong

On average, acquirers do not benefit (in terms of market cap) from an acquisition; most target shareholders benefit from an acquisition

The ICSA Company Secretary’s Handbook, resource for corporate management