Wednesday, December 28, 2016

The Interests of Investors

While advertising activities are primarily directed toward the purchasers in a market, it also stands to reason that it has an indirect effect on the financial markets:  the belief that a company will be successful in growing its market share through advertising leads to an expectation of greater revenue and better financial performance of the company as a whole, which makes its stock and other investment vehicles more appealing to investors.

However, this is not as straightforward as it seems:  investors take different perspectives as to their preference for short-term versus long-term profitability of their investments.  The long-term investor is more concerned with slow and sustainable growth, whereas the short-term investor wants as much of a return as soon as possible and shows little concern for the long-term sustainability of the firm.

The effect of investor confidence is likewise not solely to be considered in terms of new investors purchasing into a company, but of existing investors selling out.   Where any action on the part of the firm signals the potential for short-term profit but long-term damage, institutional investors dump their holdings on the hordes of eager short-term investors.   Likewise, when an action serves the long-term benefit of a firm at the sacrifice of short-term profits, the short-term investor leave the firm and unload their holdings on those with a greater long-term interest.

This problem is complicated by the traditional approach to ownership, in which the investors maintain complete control over the firm and place their interests before those of all other stakeholders.   Since management is beholden to investors, it is essentially helpless to object to the agenda of those investors.   Where investors wish the firm to achieve short-term returns while sacrificing the long-term sustainability, management must yield to this directive (or be replaced by more amenable managers if they resist).

While it is believed that the articles of incorporation provide protection against the firm’s being raided by investors with a short-term agenda, this protection is entirely superficial, given that the investors can simply change the articles to favor their agenda.   There is no contract or manifesto that is ironclad, as history has shown.

Friday, December 23, 2016

What’s in a Name?

It was one of those conversations you can’t help overhearing because it was going on at a volume that was meant to be overheard: a group of three unemployed twentysomethings having a brainstorming session in a public place about an idea one of them had for an internet company that would make them all rich.  The discussion wasn’t about the product or how to best provide value to the customer, but about what the company ought to be called.   It struck me that, while it seemed puerile, I’ve been bored by the very same conversation in the meeting rooms of Fortune 500 companies.

Far too much emphasis is placed on trivial things like this, to the detriment of the more important decisions that actually create value to the customer – whether it’s the name of the firm, its logo, or what color to paint the reception area, these are simply distractions from business and aren’t as important as those who have great enthusiasm for trivial matters like to pretend.

I’m unaware of any evidence that the name of a firm is a critical factor of its success, and am meanwhile aware of many company names that make absolutely no sense in terms of the brand or the products the company provides.  Scroll through the Fortune 500 and you will find very few companies whose names are meaningful in and of themselves.

Ultimately, the name of a firm functions like the name of anything else: it is merely a mnemonic device by which something is remembered and can be spoken of.  The name of a firm doesn’t become meaningful until the brand becomes meaningful, and isn’t known to anyone unless and until they benefit from the brand enough to make it worth remembering to ask for the next time a similar need arises.

Aside of the need to avoid names that are awkward or offensive (locally or globally), or a name that is already strongly associated to something else, there is no reason to prefer one name to another.   Toss a handful of Scrabble tiles on a table and add a few vowels, and you likely have a perfectly usable name and one that stands as good a chances as any other of becoming a household word if the brand is any good.

In the end, it just doesn’t seem to matter, and it stands to reason that the more time and money spent on superficial things such as this are distractions from the more important matter of devising a way to deliver value to the customer.   And it could well be that people who are most enthusiastic about such discussions are well aware of that.

Monday, December 19, 2016

The Sovereign Consumer

One of the most significant features of the free market is in the sovereignty of the consumer.  Ordinary people decides for themselves what they will consume and undertake the effort necessary to produce or obtain it.   And so it follows that "the mass" of the mass market is not a collective that makes decisions collaboratively, but an amalgam created to give observers the mistaken sense that a group of people do not function as individuals.

Hence "the market" is an observer's perspective upon the ways in which individuals produce, consume, and trade with one another - each by their own volition, though often voluntarily imitating the behavior of others.   Each person decides what he wishes to consume, what he wishes to produce, and with whom he will engage in exchanges of his product for the product of others.

Institutions such as corporations are merely a method by which people organize their productive activity in response to the demands of other people for things to consume.   The demand of consumers creates the market for goods, and suppliers attempt to satisfy that demand.   In that sense, the corporation serves the consumer, never the other way around.

It is in this sense that the worker has charge of himself, which is to say he has authority over his own choices rather than being subject, serf, or slave to an authority who makes all of his productive and consumptive decisions for him.   In his consumption, he gives incentive to others to produce for him by offering financial reward.  In his production, he is servant to others and must produce that which they desire in order to gain what they wish to pay him for producing it.   From this perspective, it is clear that all revenue of producers is granted to them by consumers in exchange for service.

The capitalist, who uses his wealth to generate more wealth, is a servant to the market: he can only increase his wealth by delivering what others demand at a price they are willing to pay.   Granted, there is opportunity for the cheapskate ad swindler to take advantage by means of deception - but this cannot be done consistently and sustainably.   The capitalist who fails to actually satisfy the desire of a market will exhaust the supply of gullible customers.

Such a system is based on the presumption of rational thought, but has the flexibility to accommodate the irrational.   A consumer who spends unwisely and does not obtain what he actually needs will soon learn from his mistake, and a producer who invests unwisely and does not make what is actually needed will likewise learn.   Poverty and bankruptcy are the ultimate ends of unwise decisions, but both are temporary rather than permanent conditions for the individual who is capable of learning.  Said another way, the freedom to decide for oneself comes with the responsibility to decide wisely or bear the consequences. And ultimately, to accept such a system requires a basic respect for one's fellow man and his right to be his own sovereign.

Tuesday, December 13, 2016

Trust and Predictability

While the goal of earning a profit serves the interests of investors, its investors tend to prioritize short-term profit over the long-term sustainability of the firm.   Every investor has a horizon, be it a date or a target price at which he will cash out and walk away, and will insist the firm be managed to reach this target at all costs.

But the investors are only one faction whose interests must be served by the firm.  There are many others (customers, employees, suppliers, and others) that have a more long-term interest in the firm, and upon whose trust the firm depends for its long-term sustainability,   Managing solely toward the short-term interests of investors can alienate these stakeholders, who become disinterested and reluctant to interact with it.

The firm, like any other organization, has a stated purpose (its mission), a set of supporting values, and practices that align to both.   These are communicated outside the firm to set expectations, thus enticing outsiders to contribute to or, in some cases, directly interact with the firm and even to become part of it.    Where these expectations are met, trust is earned, and the firm thrives.   Where they are not met, trust is broken and the firm finds itself without the resources and support it needs to sustain itself.

It can therefore be said that a firm can only work properly if it earns the respect, trust, and cooperation of external parties.  And it can only do that by communicating its intent clearly and acting in a manner that is predictable and relevant to its stated intentions.  

As such, its behavior becomes routinized and predictable – and this is necessary to earn trust and gain engagement.  Where a firm is inconstant or erratic, there is uncertainty of what the result of an interaction will be.   There is uncertainty as to whether engaging with the firm will in fact deliver the value stakeholders seek to gain by investing their time, effort, and money in the firm.   And consequently they will seek opportunities to invest with a different one, which is more trustworthy and predictable.

Granted, there are many misunderstandings: any stakeholder may bring his own expectations to the table, ignoring the intent that the firm has communicated.   If this seems to happen often for a given firm, it’s likely that the core problem is not the misperception of the stakeholders but its own misrepresentation of value that has led others to have “inaccurate” expectations – they may be inaccurate to what the firm wants them to believe, but accurate to what the firm has led them to believe, intentionally or unintentionally.

Ultimately, the legitimacy of respected institutions arises from a clear and unambiguous statement of its values and a correlation of its behavior to those values over the course of time.   A firm that is consistent in its behavior will gain the support of the stakeholders it needs to survive, provided that its values are shared by those stakeholders.   A firm that is inconsistent will falter and invariably fail – and this is of little concern to the investors so long as the failure occurs after they have cashed out.

Thursday, December 8, 2016

Innovating in a Change-Averse Culture

Optimizers and innovators speak two different languages.  Optimizers speak the language of reliability, and use terms that emphasize the importance of consistency with past practices, whereas innovators speak the language of validity, and use terms that emphasize the potential of future practices.   As a result, they fail to understand one another  and this misunderstanding leads to disagreements when, in reality, they may actually agree.

Learning to speak another person’s language means changing your behavior to accommodate them, or at the very least listening with an open mind and attempting to understand rather than rectify their perspective.  Optimizers are inherently opposed to changing their behavior, are entrenched in their beliefs, and cannot be expected to learn the language of the innovator.   And so, an innovator must learn to speak the language of the optimizer, and should be more open to doing so because he is characterized by a willingness to change and accommodate.

The key to communicating with optimizers is in understanding that their motivation is based on fear:  they immediately fear anything that is unfamiliar and will not put much effort into attempting to understand it.  As a result the typical conversational pattern of the optimizer is nay-saying: they point out the problems with a proposal and have no suggestion of how to solve them.  

And so, the proposal of any change must begin in the context that is familiar, before considering improvements or deviations from current practices. One excellent tool is analogy: to describe an unknown concept in terms of something that is already known.   The innovator will acknowledge that he understands what is presently being done and why things are thus before suggesting a change, and then emphasizing the way in which the new method will still do the things that the old one does.   This helps the optimizer to overcome his resistance to the changes.

It is a serious mistake to attempt to enlighten them – nothing new can be proposed except in context of what is already known.   One must pay homage to the old ways, consider that the optimizer views any change to the status quo to be a threat to his comfortable routine.  He cannot be sold on dramatic changes, but may be titrated to minor changes if they are presented as improvements or enhancements on the current ways.

In this way, radical changes can be introduced slowly, and it will take many years to get done what might have been accomplished in a few months – but so long as the optimizer is in a position to prevent change, it would be impossible to accomplish the goal in any amount of time.   So it is a slower and less efficient approach to innovation, but it may be the only route to evolution when working within a change-averse culture.