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!!

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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

Notes – Good Strategy/Bad Strategy (#strategy, #business)

Following up on my recent review of [amazon text=Good Strategy/Bad Strategy&asin=0307886239], I gave the book a complete re-read and I am now solidly convinced it is a 4/5 title worth the extra effort. There is a lot here to unpack, I ended up taking about five pages of notes as I read and tried to put major concepts into my own words this time around. I am tempted to just copy a list of bullet points but I think that’d be exhausting to read, so instead I will take a fragmented narrative approach.

The Good, The Bad

Good strategy is defined as designing a coordinated and focused group of actions against a critical factor in a given situation (business, military, political, etc.) Bad strategy can be recognized by its hallmarks:

  • ignores problems or obstacles in the way of intended action
  • ignores choice or focus in favor of attempting to accede to conflicting demands
  • embraces language of broad goals, ambition, vision and values (generic versus specific)

A good strategy “selects the path” of how, why and where leadership and determination are to be applied. This path is sketched out with the “kernel”, which consists of three important parts, in this order:

  1. a diagnosis of the challenge to be overcome
  2. a guiding policy describing the area of action to focus on
  3. a set of coherent actions that will be taken to overcome the challenge

A lot of the strength of strategy is gained simply by having a coordinated design for focused action on a single objective, a discipline many competing organizations will lack. Most complex organizations make the mistake of spreading rather than concentrating resources. Leaders need to learn how to say “No!” to a wide variety of competing interests and actions. With focus, one can “use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.”

Digging in on bad

The author actually has four signposts for bad strategy:

  • fluff, the illusion of high-level thinking created by manipulating language
  • failure to face the challenge, providing no way to direct action at an undefined entity
  • mistaking goals for strategy, stating mere desires rather than creating plans for achievement
  • bad strategic objectives, sabotaging an effort by impracticality or ignorance of critical restraints

In short, “bad strategy is long on goals and short on policy or action.”

Whereas good strategy seeks simplicity and utilizes heuristics to make complex phenomena understandable and addressable, bad strategy purposefully obscures meaningful dynamics by adding layers and complexity and minutiae to the discussion. Many bad strategies reveal themselves as exhaustive lists of hopes, dreams or things people would like to see done (such as, “Create a strategy for X”, a seeming meta-strategy!)

A strategy must define the primary challenge and the major obstacles to a plan for overcoming it.

Applying strategy

One place to look to for applying strategy is the part of your business that is changing, as there may be an opportunity here to get a jump on the competition. While resource plans are valuable because they ensure resources arrive as needed with expected business operations, they are not the same as a strategy which addresses what is dynamic in an operation. As a strategy is a choice of what goals to pursue, it has implications for sub-goals that permeate the different parts of the organization in order for the main goals to be achieved. But goals themselves are not a strategy, because there are many potential ways to achieve a specific goal; strategy is choosing which path to take and why.

If a strategy can’t bridge the gap between objectives and actions necessary to achieve them, it is merely wishful thinking. Underperformance is a result, not a challenge to be met strategically. Strategy needs to address the specific challenges that result in underperformance as an outcome.

Some common sources of bad strategy:

  • avoiding the pain of choice; facing the fact that you must displease someone
  • template-strategy temptation; an appealing substitute for actual analysis
  • New Thought; believing positivity and mindset trump all other real factors in a situation

If you propose a strategy and find everyone is immediately bought in, you probably haven’t made a hard choice which suggests you haven’t actually provided a strategy. Strategies have clear winners and losers in terms of existing and potential interest groups.

Revisiting the core of good strategy

To repeat, the strategy kernel consists of three parts, contemplated in order:

  1. a simplifying diagnosis of the problem
  2. a guiding policy directed at obstacles identified in the diagnosis
  3. a set of coordinated, coherent actions to carry out the guiding policy and address the problem

The guiding policy should be aimed at a source of leverage or should build on existing advantages. It needs to address “how” the diagnosis will be treated. The diagnosis itself should call attention to the most crucial facts– on what items does the balance between life or death hang? There are a few ways the guiding policy helps to create advantage:

  • anticipating actions and reactions (internally and externally)
  • reducing complexity and ambiguity about how to proceed and what is or is not within the scope of action
  • exploiting leverage through concentrated effort
  • building coherence in related actions and decisions so that they serve to reinforce one another

Coherence means that every action strengthens the others and complements them in some way; they do not remain distinct or in conflict with one another. Coherence is the application of centralized intelligence imposed on the “natural” workings of a system. Good strategy imposes only the essential coordination necessary to create large gains, while allowing specialization and decentralization in all else.

Strategic nuances

Foresight diminishes with increased time (uncertainty about the future) to an objective, so proximate objectives are most important when facing the highest amount of uncertainty.

Chain-link systems are one’s whose efficacy is defined by their weakest link. The threshold for improving the system is usually holistic in nature, as the weakest link “shifts” as the system is transformed.

Strategy as a design problem implies the need to make mutual adjustments, resulting in high peaks to gains or sharp costs and losses if wrong. Tighter integration of design requires higher costs/tradeoffs. The degree of integration in a design needed is proportional to the intensity of the challenge faced.

It is human nature to identify current profit with current actions, when really the seeds of present loss and profit were sown long ago.

To identify a company’s strategy, start by examining the business models of competitors. You can also study the business’s policies which are different from the competition and try to think about what that implies about what kind of coordination they’re aiming at.

Forgetting about whether traditional competencies apply to new paradigms is a classic strategic misstep.

Growth, by itself and for itself, is not a strategy. Growth doesn’t create value by acquisition unless you buy below fair value or can increase the value through operational control. Healthy growth usually comes commingled with higher market share and higher profitability as a result of greater cleverness, creativity, efficiency or skill. It can’t be engineered by an acquisition or a merger.

Thinking about competitive advantage

Advantage in competitive settings is rooted in differences which create asymmetries. No one has advantage in everything, so choose your battles wisely.

Competitive advantage is “interesting” when one can find ways to increase its value by creating greater strategic coherence. Having a competitive advantage by itself isn’t valuable because you’re likely to pay a premium to own it, but if you know how to increase or enhance the advantage you gain, then it is valuable to get control of it. Some ways you can increase the value of competitive advantages you possess via strategy include:

  • deepen the advantage
  • broaden the extent of the advantage
  • create higher demand for advantaged products or services
  • strengthen the isolating mechanisms that block competition

Advantage is deepened by increasing value to the buyer over cost, reducing expenses involved in providing the advantaged product or service, or both. To find ways to reduce costs, start by closely examining how work is being done in provisioning the product or service in question (ie, sources of waste or inefficiency in process).

Extending advantage means using it in new fields and against new competitors. Exploiting a wave of change means adapting your business and organization to where the high ground is shifting to before it can be occupied by others. To recognize industry change, consider these potential forms as guideposts:

  • rising fixed costs, often leading to consolidation
  • deregulation, price fixing and subsidies are eliminated creating “cost chaos”
  • prediction biases, trends and industry change rarely follow expected, smooth patterns but are more random
  • incumbent response, successful firms of the old paradigm will dig in and try to resist change
  • attractor states, think about how the industry “should” work as it moves to a state of higher efficiency

The inertia (unwillingness to change) of rivals can reveal the most effective strategic opportunities. Looking for inertia within your own operation can often result in the same opportunity, if you’re the first competitor to break free of your own orbit! This strategic opportunity is usually centered around renewal and refocus generated by a new guiding policy in a complex organization.

Inertia typically arises due to:

  • routine, firms can insist on playing by old rules in a new game because it worked in the past
  • culture, attitudes and behaviors seen as core to the organization’s identity, often masked by complexity
  • proxy, customer inertia translates into business inertia through still-profitable business lines

In responding to change, don’t make the mistake of building strategies around assumed competencies which aren’t actually present.

Entropy can eat up profitability; de-clutter your organization and operation for increased profitability.

Thinking about thinking

When studying change and theorizing about a response, pay attention to anomalies (situations where experience doesn’t confirm predictions or theories), which represent the frontier of knowledge. Resolving anomalies is where strategic advantage lies.

Improve your diagnosis to improve your strategy. Define problems in need of solutions. Attempt to undermine proposed alternatives to find their weak points. Create a virtual panel of experts and consult with them by imagining what their commentary would be on a specific proposal or circumstance. Pre-commit your judgment in writing to develop the habit of making decisions and not re-rating your analysis after the fact.

[amazon asin=0307886239&template=iframe image2]

Review – Good Strategy/Bad Strategy (#review, #books, #strategy)

[amazon text=Good Strategy/Bad Strategy: The Difference and Why It Matters&asin=0307886239]

by Richard Rumelt, published 2011, 2013

I recently came across GS/BS on an old blog I have been subscribed to for years. Being in the middle of some strategic planning within our own business, the find seemed timely so I moved the title to the top of my list and set aside “[amazon text=The Russian Revolution: A People’s Tragedy&asin=014024364X]” for completion at a later date. I am glad I did, although having now concluded the read I find I have a conflicted view of the book.

One reason I find myself interested in this book is it is in fact, interesting. I find myself thinking a lot, and thinking differently, about various strategic topics covered in the book as well as my own related challenges, which suggests the book has given me a valuable new framework. On the other hand, I thought the author did not define his terms in such a way that leaves me feeling confident he has created a solution to the problems he has identified with most approaches to strategy– it’s almost like he came up with an even sexier sounding way to think about strategy problems without addressing the concrete limitations of the approaches he has critiqued.

In my review rubric, a 5/5 is a “classic” book that not only can be read again and again, but should and likely will be, each reading offering new insights or appreciation of the human condition examined within. A 4/5, on the other hand, is not a “near classic” but rather just a “very good book” that is worthy of recommendation to others. A 3/5 is a book with some value, but is otherwise unremarkable. And we won’t waste or time rehashing the miserable 2/5 and 1/5 ratings. I am puzzled because I think I am going to end up re-reading this book, and most likely in a very short period of time after I’ve tried to digest and apply some of what I think I’ve just learned to my own strategic activities. That suggests it is a potential 5/5. But I don’t feel like I will enjoy this book more with each re-reading, especially because some of the case studies contained within will have grown very stale (many I have encountered in other reading materials and few of those had any new insights to glean this time around). And because of my concerns with the definitions and overall structure of the book, I am not even sure it is a 4/5. I went back and forth with a friend in a private message system about whether I thought he should read it or not, finally settling on “yes”, and I have recommended it to others since then. It’s definitely not a 3/5.

Since my mind is not made up about what this book is saying, I don’t have a concise review of its major ideas to offer at the moment. I might reflect and write another post if and when I do, likely after the suggested re-reading. For now, I am just going to collect all the passages I highlighted and see if anything obvious bubbles up into my consciousness as a result:

  • Strategy is about “discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.”
  • A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.
  • Doing strategy is figuring out how to advance the organization’s interests.
  • The kernel of a strategy contains three elements: a diagnosis, a guiding policy and coherent action.
  • The most basic idea of strategy is the application of strength to weakness.
  • A hallmark of true expertise and insight is making a complex subject understandable.
  • If you fail to identify and analyze the obstacles, you don’t have a strategy.
  • A strategy is like a lever that magnifies force.
  • Strategic objectives should address a specific process or accomplishment.
  • Business competition is not just a battle of strength and wills; it is also a competition over insights and competencies.
  • To obtain higher performance, leaders must identify the critical obstacles to forward progress and then develop a coherent approach to overcoming them.
  • The need for true strategy work is episodic, not necessarily annual.
  • A good strategy defines a critical challenge.
  • Strategies focus resources, energy and attention on some objectives rather than others.
  • All analysis starts with the consideration of what may happen, including unwelcome events. I would not care to fly in an airplane designed by people who focused only on an image of a flying airplane and never considered modes of failure.
  • A great deal of strategy work is trying to figure out what is going on.
  • Slowing growth is a problem for Wall Street but is a natural stage in the development of any noncancerous entity.
  • A diagnosis is generally denoted by metaphor, analogy or reference to a diagnosis or framework that has already been accepted.
  • A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than cancelling one another out.
  • The coordination of action provides the most basic source of leverage or advantage available in strategy.
  • Anticipation simply means considering the habits, preferences, and policies of others as well as various inertias and constraints on change.
  • A master strategist is a designer.
  • The truth is that many companies, especially large complex companies, don’t really have strategies. At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to produce a breakthrough in any one of them.
  • A competitive advantage is interesting when one has insights into ways to increase its value.
  • The first step in breaking organizational culture inertia is simplification.
  • To change the group’s norms, the alpha member must be replaced by someone who expresses different norms and values.
  • Planning and planting a garden is always more interesting and stimulating than weeding it, but without constant weeding and maintenance the pattern that defines a garden — the imposition of a special order on nature — fades away and disappears.
  • In a changing world, a good strategy must have an entrepreneurial component. That is, it must embody some ideas or insights into new combinations of resources for dealing with new risks and opportunities.
  • Making a list is a basic tool for overcoming our own cognitive limitations. The list itself counters forgetfulness. The act of making a list forces us to reflect on the relative urgency and importance of issues. And making a list of “things to do now” rather than “things to worry about” forces us to resolve concerns into actions.
  • When we do come up with an idea, we tend to spend most of our energy justifying it rather than questioning it.
  • A new alternative should flow from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives. The creation of new, higher-quality alternatives requires that one try hard to “destroy” any existing alternatives, exposing their fault lines and internal contradictions.

4/5

[amazon asin=0307886239&template=iframe image2]

Notes On The Family As Long-Lived Institution (#family)

I’ve been doing some thinking about the family as an institution, especially from the standpoints of ideal strategy for a person planning a family and as a social cure to the economic and cultural problems we witness today. I wanted a place to put my notes as I think through these things. This post, or at least the ideas, is by no means complete or comprehensive on the subject and it only captures some of my thinking as it stands right now.

The Family As Brand

A family is a brand and historically it may have been the first brand concept in existence. Families have names and reputations. They have traditions and certain values that are esteemed or deplored and transmitted through space and time across generations. The members of a family may specialize economically, socially or intellectually and develop a reputation for this specialization. The reputation of the family helps to reduce uncertainty for other individuals, families or institutions interacting with the family in knowing what to expect (of course, this reputation could become a weight around the neck of a genetic or otherwise outlier family member who doesn’t fit the mould).

Old families, especially noble or aristocratic families, took the concept of family branding in an explicit direction by adopting a logo, or symbol, of the house, by adopting familiars or animal associations which connoted the spirit or key characteristics of the house (ie, the lion as a symbol of courage or adventure), certain colors and even words or mottos which might today be thought of as the “brand promise”. Certain families which were especially grand came to be known not by their name, but by their property, or by an assumed name that better represented their stature and ambitions.

Rational Family Planning Strategy

Family planning can be done rationally and purposefully, or it can be done irrationally or at random. A rational, purposeful family plan starts with a goal for the family and the goal is associated with a long-term vision or plan. An irrational, at random family plan adopts an attitude of mystery and powerlessness in the face of fate and lets the chips fall where they may. The family isn’t going anywhere necessarily and no special effort is put in place to help direct the family and its energies as a result.

The family plan could be malevolent, but I will excuse that possibility here and focus on a beneficial arrangement. The family plan must include peaceful parenting as part of the framework for developing a long-term cooperative effort. What is peaceful parenting? One way to think of it is parenting without any behaviors you would find would be ridiculous, illegal or mean-spirited when used with an adult– no hitting or physical intimidation, no badmouthing or emotional manipulation, no threats or use of coercion of any kind. In positive terms, it is an approach based on negotiation, empathy, respect for differing needs, communication around means and ends and a willingness to hear and be heard. A peaceful parent models the values of the family plan so they can “be the change” they want to see in their child and in the world; they get buy-in and cooperation on the shared goals of the family plan by explaining their merits and value to all, rather than creating arbitrary strictures and enforcing them with overwhelming parental control.

I’ve outlined our parenting philosophy in an earlier post: to help our children achieve physical, emotional, intellectual and financial independence and to model the value of interdependence. A friend who also blogs about parenting is quick to warn of the “bird parent phenomenon”– prepare kids for life, then push them out of the nest and hope they can fly on their own. As she says, we’re not birds, we’re apes, and apes live in connected troops that are typically multi-generational. And this is true, too. That is the interdependence idea, with luck we will have provided compelling reasons for our children to remain close or even continue to live life together with us as they grow older and even have their own family. Pure independence would be bird parenting, which is not ideal but does contain the merit of giving our children what they need to soar on their own, should they choose to do so. What we definitely don’t want to do is develop a dependence model– bee parenting, where the children are mindless drones for the queen parent(s) and live to serve them and, if not them, than someone else, but never themselves.

What then is the role and purpose of education within this family framework? A great deal of it is still about classic learning such as reading, writing and arithmetic, the simple tools that people need to be able to think for themselves and be self-directed learners capable of researching ideas that interest them as deeply as they would like. Another part of it, missing from public education in this country in large part (and for good reason, at least as far as that system is concerned) is self-knowledge, thinking about things like “Who am I?” “What do I want? What is important to me?” and “What do I want to do with my life?” Ideally, this all happens within the meaningful context of the family, which means that an even bigger part of education is about the family, its values, its legacy and history and its assets and accumulated wealth and the opportunities that come with them. A family education involves “coming along to life”, learning what the family does and how it does it and why it does it to provide itself with the things it has. At age/development appropriate times, it will include “job shadowing” and then apprenticeship within family economic activities. It also involves a specific approach for parents and other elders or existing family members in how they structure their time and responsibilities so they can be around children and share with them about what is going on!

Assuming a family is functional and manages to acquire assets over time through low time preference and thrift, the succeeding generations of the family will have to contend with a growing inheritance. This means they’ll have to learn specific habits and ways of life and acquire certain knowledge and responsibilities that those before them didn’t need and had no reason to think about. This means the family needs a meta-process for contending with the inheritance and learning to manage it through increasing size and complexity, especially as the potential number of inheritors grows over time as well! Children in each new generation of the family will need to receive instruction, from a very young age, about the family assets, how to grow them and how to manage them as well as ways to benefit from and enjoy their ownership.

And assets must be managed and controlled by someone, so while the children are immature and learning the ropes it is up to the adults to take care of these things. But in time, the adults become the elders, the children become the adults and the next generation of children arrives. A rational family plan accepts this cycle as a necessary part of family life and makes arrangements ahead of time to effect smooth transitions in the ownership and control of family assets from generation to generation. I’m not talking about tax planning here (which I believe in some ways is a futile exercise with no free lunch), but rather the idea of allowing for a financially secure retirement for the elders, complete with a transition in their identity and personal activities which is not disruptive to their enjoyment and fulfillment in life, combined with a “rising” of the next generation to true adult responsibility in having primary control and influence over the next stage in the family’s wealth plan. This next generation might continue the existing growth strategy, or transform the assets by selling them and then buying into a new concern (or starting one up)– these decisions are context dependent.

Here are some other long-term family planning considerations: marriage, genetic optimization, nutrition and fitness, generation of intellectual/human capital

Role of the Family As An Economic Unit

If we think of a family as an economic unit, we can draw parallels in the “life cycle” of the family economically that is similar to that of business organizations. Business organizations experience predictable stages of growth and decline– start-up, high growth phase, slow growth phase, plateau and decline (or, for the more agile, transformative innovation, which is the transition between decline and start-up that skips the end point of death). A family’s economic legacy has similar stages– pioneering, empire building, consolidation and reinvention. The pioneers are the early ancestors who first take a gamble on an interesting economic opportunity with long-run potential and begin accumulating assets. The next generation, if properly instructed, can take the seeds of this early effort and expand it rapidly as they build out an empire and come to dominate an industry or economic niche. The subsequent generation inherits substantial wealth and also substantial risk, namely, has the empire-building generation been successful in instructing them in the ways and means of managing this empire so that they’re up to the task? There usually is not a lot of low-hanging fruit available to continue the growth strategy, the name of the game at this point is consolidating gains and holding on to them. By the fourth generation, risk must be transformed. The growth that can be had, has been had, and the horizon is sloping downward, perhaps rapidly. It’s time for the family to make the hard decision of divesting themselves from the economic circumstances that initially founded their fortune to “go mobile” and pioneer once more by transforming their assets into a different industry or start-up venture. The difference this time is that these pioneers have three to four generations of know-how and human capital behind them that their earlier ancestors did not, which will hopefully prove to be an impressive competitive advantage.

The key concept for the family to master at each stage and through each generation is the discipline of accumulating savings by living below one’s means. For the pioneers, this is obvious, as there is no back-up plan and no rainy day fund save what they can provide for themselves, and being a new risk they must provide their own capital to grow as they will have trouble convincing third parties to participate. For the empire builders, a new risk presents itself, that of the temptation to live flashily and show off, but being so proximate to the pioneers it is likely they will have a deep and fond respect for the frugal habits of their forebears. In the consolidation phase, savings and capital seem so hyperabundant it can be difficult for this generation to understand the meaning and importance of continuing to save. Any time the family entity has required capital to operate, there has been plenty, so why worry too much about this? The innovative generation must be intimately aware of the importance of safeguarding capital and the productive value of its assets, as they won’t be worth anything when they hope to sell them if they’re not careful, and they learn a new appreciation for cash and the optionality it allows in planning family economic strategy into the future.

Within this inter-generational framework of family asset management we can see a unique opportunity for family members to participate as meaningful apprenticeships as they transition from dependent children to independent or interdependent adults contributing to the growth of family assets. The need or desire to gain formal educations and interview for skill-building career opportunities in outside organizations is minimized; the family can be not only a high-quality hiring pool for workers and managers in the family business, but also a source of that training opportunity.

And over time, the close alignment of multiple generations of the family with a particular enterprise and its needed specializations in thinking and experience mean that the business will leave its mark on the family and vice versa. Just as the family might develop a reputation for certain virtues such as “truth” or “loyalty” or “consistency”, it might also develop a reputation for industrial or professional excellence, “the best factory managers there are”, “strategic thinkers without comparison”, “the most knowledgeable people in the food service business”. Reciprocally, the industry might leave an imprint on the family name, “When you see ‘Jones’ on the building, you know they’re developing quality inside.”

Some fear to admit this, but all businesses are like families. In fact, many careerists expect that in giving to their company, their company will give back to them, much like a family, by being concerned for their well-being, providing benefits if they get sick or fall on hard times, and by allowing them interesting new opportunities as they gain in experience and skill over time. The difference is that some businesses pretend at being a family while remaining “faceless corporations” with fairly anonymous employees and rotating, mercenary managers who run the company, while other businesses really are families because they’re owned and operated (and in part, staffed) by them. Many are not fortunate enough to have a family in business, so they’re forced to go looking for another “family” to join when their career starts. Wouldn’t it be better if you could save yourself the trouble and get working where your family is?

In fact, a family running a high-quality, growing organization is going to attract to it just those kinds of people who really want a “home” and a family to be a part of and this is where the idea of a lieutenant, or adopted family member, comes into play. With trust and special contribution, business families might find some people in their organizations growing so close that they come to be seen as junior-family members– they may not be blood, but the level of concern for their comfort and well-being is nearly identical. There are some real benefits to be had, especially with regards to counteracting the mercenary mindset. If a person can achieve junior-family member status, they have a strong incentive to align their actions and conceptions of well-being with that of the family in a mutually beneficial arrangement.

This is probably one of the primary reasons why corporate governance would be expected to be superior under family owner-operators versus a diversified base of small shareholders with an elected board of representatives to oversee professional managers. There are deep-rooted agency problems with the traditional public company governance model, where shareholders don’t have a meaningful stake in the company to have any control or influence over its management, nor real concern for its long-run prospects. It’s always easier to sell and pass the problem off to someone else than to take an organized stand, similar to the problems of democratic political systems. The boards become captured by the managers, just like governments become captured by special interests. The end result is chaos, short-termism and relative instability and insecurity for all involved. Family-based owner-operator management can remedy all of this: concentrated ownership creates unity of strategic vision and needs, especially within the framework of multi-generational planning; the unification of owner demands and management representation ensure the vision will be clearly articulated and enforced, with severe consequences for managers who go rogue; and the lieutenant network or junior-family member approach increases the likelihood that managers can better align their sense of well-being with the family’s and by extension, the company’s.

Revival of the Family as an Alternative to Failed State Institutions

It’s obvious to any objective observer that the modern state has failed in virtually every arena it is presently engaged. Of particular concern to those without security are the failures of the modern state in providing welfare and what is termed the “social safety net” to those who are needy. The revival of the family as an alternative to these failed institutions is not only a perfect answer, it’s the only answer. The State can not provide individuals with comfort and security without first taking it from other individuals, particularly individuals composed as families (for example, the inheritance tax). The charity which the State might provide is derived from the family in the first place. Family should care for its own and must care for its own instead of placing this burden upon “society” with all the terrible social engineering temptations that come with it once politicians get involved in these schemes. And to be in a position to provide these welfare benefits to its members, families must rediscover the art of purposeful planning of their activities and legacies.

We hear of scions of old who were the institutional members of their communities: the Carnegies, the Rockefellers, the Mellons and so on. Families must reclaim this institutional identity and seek to be the pillars of their own communities. They must build the resources and create the organizations needed to address the challenges specific to the places they live. Families should provide education to their members and the people in their communities, not the State. When there is a social problem, families should get involved to address it, rather than calling for a new law or government program which inevitably they will finance but they will not control. Families, as owners of land and other local resources, should determine land use patterns, not government bureaucracies. And families should be developing the skills and experiences amongst their members necessary to build and develop local businesses and economic entities, rather than raising their children up just to send them away to join somebody else’s. Families can even be in the business of arbitration and peacefully resolving disputes which might arise in the community. This is another way in which reputations and specializations within families can be instrumental in adding value to communities.

Avoiding Common Family Problems

In the future, it will be useful to explore some common social risks associated with families and family management of social institutions, such as:

  • The risk of nepotism
  • The risk of degeneracy
  • The risk of mutual hatred
  • The risk of incompetence/disability

Review – Restrepo (#film, #war, #documentary, #politics, #NationBuilding)

I watched a NatGeo documentary last night called “[amazon text=Restrepo&asin=B0042KZJIC].” It’s about the conditions and objectives of a small US Army platoon in the mountainous wilderness of Afghanistan.

Very little happens in this movie over its 1.5hr runtime. There is a lot of buildup and talk about how often the base is attacked, and this is depicted several times, but overall nothing happens. I don’t know if this was an intentional part of the plot (“the futility of the Restrepo mission”) or if it’s bad editing or belies a fraud about the claims being made in the film about what it is like for these troops, but it is not entertaining. And by that I don’t mean, “Gee, I wish there were more poor, dumb soldiers getting wasted in this real life documentary” but rather, “Gee, what am I getting out of watching this film?”

That being said, this is not good propaganda for the US government’s desire to nation-build overseas. Why does the military allow journalists and documentarians to embed with their troops? Restrepo is an offshoot of a slightly larger but still insignificant base tasked with enlarging the “security bubble” in the area so that a road can be safely built connecting two hapless economic regions into one, which is supposed to bring jobs, incomes and peace and happiness to the land. Every bit of tactical maneuver in war seems really stupid when studied by itself — “50 men gave their lives for a bridge that was ultimately destroyed by the enemy anyway, why did 50 men die for a bridge?” — but the Restrepo mission seems especially stupid not because these men are fighting and dying and accidentally murdering local civilians for an unbuilt road, but because the premise behind building the road is itself very stupid. Do the local Afghans even WANT this road? If they did, why didn’t they build it before the US Army showed up?

Is military Keynesianism a viable structure for developing foreign economies? Keynesianism doesn’t seem to work to develop domestic economies. And the military, professional murderers and demolishers, don’t seem to be the right people to task with building things, let alone people’s economies. Wouldn’t it make more sense to send overwhelming military force through the area, wipe out/expel the organized Taliban elements and then let civilian diplomats and construction contractors come through and negotiate new power structures and infrastructure plans?

The Korengal Valley itself, where the drama unfolds, is truly magnificent geography. It reminds me of the valleys I hiked on the Inca Trail in Peru on my way up to Macchu Picchu. In fact, the remoteness, the terraced cultivation and the “primitive” lifestyle and social organization of the Afghans looked nearly identical to what I saw in Peru. It seems like a perfectly nice place for the locals to live and you get the insane idea watching the movie that they never asked for the US Army to invade their territory and murder their wives and children in helicopter gunship assaults, and they’re not all that thankful for their service now that they’ve shown up. Would it be unpatriotic, dare I say even treasonous, to suggest that the Afghans are getting a raw deal here and it’s hard to wonder why they wouldn’t want to overtly or covertly support the Taliban in these circumstances?

That old quip about “I’m from the government, and I’m here to help you” runs hard through the film’s narrative. We see again and again the way the local commander makes big promises and doesn’t follow through– he murders a guy’s cow and offers no agreeable compensation, he disappears a local who he suspects of being an accomplice of the Taliban and then offers the vague assurance that he’s being treated nicely and will soon return though he doesn’t, and he responds to an attack by calling in a fire mission on a neighboring village that kills and maims several women and small children. I don’t care who someone is fighting for, if I had to hold the charred body of my innocent two year old in my arms and watch a bunch of crude monkeys rifle through the smoking remains of my home looking for contraband after such an incident, I think I’d lose my shit.

And what IS the best solution to murdering someone’s cow, anyway? If you could get your higher-ups to release the $400-500 cash to pay the guy back (I think the village elders took the US Army for a ride on that request, by the way, there is no way a cow is worth half a grand in the mountains of Afghanistan) doesn’t that incentivize them to let more of their cattle wander into your concertina wire whenever they lack liquidity? And if you can’t get that cash released, aren’t you guaranteed to keep pissing off the locals while insisting you’re there to win hearts and minds?

The long and the short of it is that imperialism is a terrible idea in the first place, but the United States government isn’t even good at imperialism. It is very half-hearted and half-assed in its attempts to brutalize and control foreign peoples and spends more time apologizing and groveling about its numerous mistakes than making any meaningful progress in terms of rapine and pillage. It makes you wonder the whole time how such a pointless and ineffectual system can sustain itself, until you realize that the people who are really getting mulcted in this process are the guileless American people “back home.”

And the poor, dumb US foot soldier is the tool used to tug at those people’s heart strings while picking their pockets clean. “Thank you for your service,” indeed.

2/5

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