Discussion of the Week - Prioritizing Shareholders vs. Stakeholders

Over the weekend, we had our first Financial Mgm't class, with Dr.Sandra Dow. One of the readings for the class was a piece by Michael Jensen (Harvard Business School), entitled Value Maximization, Stakeholder Theory, and the Corporate Objective Function.

[I'm paraphrasing & summarizing here, so my apologies to Dr.Jensen for butchering his theory]

The paper makes the argument that companies need to consistently put the maximization of Shareholder Wealth as their top priority, ahead of goals to enhance Stakeholder "value".

It was an interesting topic for a couple of reasons:

1 - Several other courses have brought up the Balanced Scorecard model as an example of how to manage the business, often showing that Balanced Scorecard provides management with balance across Financial, Customer, Internal Business Processes, and Learning & Growth. This was the first time the Balanced Scorecard was presented as the wrong approach for running the business, and that it led to too many internal conflicts to be able to manage simultaneously.

2 - It was the first class with Dr.Dow, and the first couple hours were spent going over the Pros and Cons of these different prioritizations. Needless to say, it was a healthy discussion as my classmates had very strong opinions (on both sides) about how well each approach worked in their experience, the morality issues, the conflicts of interest with employee/mgm't stock ownership, how much lower-level employees or managers could impact shareholder wealth (ie. stock price), etc.. Dr.Dow has been very generous with her time in extending this discussion with several of us via email since the class, and I expect it will be an on-going discussion throughout the semester, especially given the existing economy (how we got in, and how we might get out).

Overall, it was a good discussion to reflect on how this applies to each of our companies, our existing roles, and if we'd make any changes if we held higher roles within our organizations. I personally used it to contrast some existing thinking I've been having about 20th Century vs. 21st Century thinking that has been inspired by Dr.Umair Haque, and his recent talk at the Daytona Sessions in Sweden.

[UPDATE: An interesting article looking at how Amazon has created an 180* turnaround on their balance sheet (2002-2009) and how it used an unorthodox model of revenue growth vs. profit growth.]

Sometimes I wonder if I'm doing bad vs. good things

Within the Exec MBA class of 2009, I'm sort of the outspoken "Internet Guy". There are others in the class that do work related to technology, but I'm primarily of the one that waves the flag for all the things the Internet could do...especially as it relates to changing business.

"The Internet" is a pretty amazing thing. It's been a lot of fun over the past 15 years to work on Internet-related projects. In terms of the scope of man-made things that have had as much impact on the world, I suppose it's right up there with democracy, the wheel, the assembly line, and the atomic bomb.

But sometimes I wonder if the pace at which the Internet moves and changes is a good thing for mankind. It's a pros and cons list that I think about quite often.

This video is a good reminder that sometimes we need to put the impact of the Internet on our lives in perspective. Yes, the Internet has allowed people to do some amazing things (collect the world's information, visit friends and family without leaving the house, learn things that otherwise we couldn't afford, connect with old friends, help the world's poor), but it's also changed our perspective on time and scope.

It's good to step back from time and time and put some things in perspective....

Broadcast TV will be dead soon!!

There seems to two consistent themes this semester (in the classroom or reality):

1. Manufacturing in the US is dead or dying.
2. The Internet is completely changing all forms of media, and the old ones will be dead soon.

I've written about the impending death of the paper newspaper, and I think it's time to start collecting facts and stories to write the obituary for broadcast TV.  I'm calling it right now...it'll be dead within 10yrs.  How do I know this?  

• It took about 10yrs for the Internet to kill the newspaper industry
• It took 5-10yrs for the Internet (VoIP) to kill the voice revenues of the telephone industry
• And with announcements like this starting to pop up, it's time to start the 10yr timer for broadcast TV.  

The first sign that the old industry is dying is when they realize that the competitive service is taking off and the only thing they can do is starting taking short-term actions to block it's growth.  They can't compete with the new service on price or ability to attract new customers, so they resort to actions that are completely defensive and create no value in the market.  

For anyone that is in the content creation business, this is an inflection point.  The online opportunities are now going to happen fast & furious.  You can stop thinking about distribution via broadcast networks and cable, and start only focusing on Internet and mobile devices. Potentially some great new business opportunities for WFU MBA students with start-up ideas.

Even great brands can't rest on their laurels

You might think that after 350 years (and 100 for HBS) that reputation and years of top rankings would lead an organization to relax and potentially ride the wave of past successes.  Not the case. BusinessWeek does a nice job of showing how Harvard's recruiting office aggressively goes after the best in an effort to retain the ideals that the school was founded on.  

A great lesson for not only my WFU classmates, but the entire WFU administration as we seek to create greater value for students of the newly combined WFU business schools, as well as draw closer to the ideals that WFU was founded upon.  

Why am I not driving an electric or solar car?

Following up on the 21st century concepts discussed previously, and considering how rapidly the technology seems to be evolving, I need to ask myself the question...why?  My commute to work is about 45-50 miles roundtrip, in partially rush hour traffic, and it's probably sunny 300+ days a year here in NC.  I drive to the office or the airport in my car, and the rest of the time with the family in the van.  Maybe it's time for me to investigate this more deeply on a personal, professional and investment level.  

Conflict of Crisis - 21st Century Economics

[More details about these concepts can be found here]

This is about a 70min video from Umair Hague,  called Conflict of Crisis.   I'd highly recommend it to all my classmates.  It goes against the majority of what we learn in MBA programs, because they typically teach based on examples (cases, companies, etc.) that succeeded over the past 5-20yrs.  

Haque's messages are starting to connect with me more and more for a few reasons:

1. In OpsMgmt, we're reading case after case about how manufacturing jobs and companies are leaving the US because of lower costs.  But while the US grew to economic dominance on the backs of these manufacturing giants, we're not necessarily seeing similar prosperity happening in the 3rd-world countries that are taking over this work.  Why is this not happening?
2. The GenY population is not embracing large company ideals and culture, they are bringing their principles to companies and asking why they aren't being embraced.  
3. The "value" created over the last 10yrs is almost completely unsustainable (as we've seen with the last two bubbles; Internet & Credit).
4. The hyper-connectness of the Internet is allowing very different business models to be created and grow.  

So what does all of this mean?  It means the pace of change could potentially start moving much faster than any principles we're learning in B-School today.  It means businesses could be in sprint mode all the time, with radical market shifts happening every 5 years.  It means you need to keep you mind open to new ideas, and consider looking for ways to focus on the 4 principles Haque mentions.  While the examples he gives are still somewhat limited, they are beginning to show the building blocks of what could be the new 21st century economic principles.  

=========

Here are the four pillars of smart growth - for economies, communities, and corporations:

1. Outcomes, not income. 

2. Connections, not transactions. 

3. People, not product. 

4. Creativity, not productivity. 

2 Guys and the Internet?? Maybe your next business...

This past week, I watched a video from the new Dean of the WFU Business schools, Steve Reinemund. It covered a number of topics:

• The current economy and its effects on WFU and the business schools (undergrad and graduate)
• The merging of the undergrad and graduate programs and the vision to improve the school's offerings and ranking.
• Steps the school is taking to ensure that near-term graduating students will receive additional assistance in finding employment.

One area that interested me quite a bit were his comments about creating new business school models that leveraged the breadth of education that WFU offered, both from the liberal arts of the undergrad departments and the joint activities of the business schools. The main idea being that we need to do a better job of bringing together excellent ideas and people, regardless of their field of discipline. It makes alot of sense to me, considering that very few companies compete in markets which are only taught in B-Schools (maybe banking or consulting?).

Over the weekend, I went to a number of social events and the topic of the economy came up with several friends. We made the obligatory guesses at how long the downturn will last and how severe it will ultimately be. In most cases, we determined that many of the jobs being lost will probably not come back, at least not for large corporations. They will find that productivity has outpaced the cost of the employees, or that buying habits will be changed for many years to come because of this recession.

These two things got me thinking. Why doesn't the school create a "2 Guys (or Gals) and the Internet" program to drive entrepreneurship? It could start as an extension to Dr.Mandel's Center for Entrepreneurship, or it could be much smaller and focused, like Mark Cuban's Open Source Stimulus program. And don't limit it to just the Business school. Begin to leverage the goal to tie in the entire set of skills and thoughts of Wake Forest. Or be really bold, and start expanding the program to include other schools from the ACC, maybe leveraging those that have skills that aren't world-class at Wake Forest. Lots of smart engineers at Georgia Tech, Virginia Tech and NC State. Amazing things happen when you allow yourself to branch out with small ideas.

So where does the "and the Internet" part come into this thinking? Am I requiring that these new ventures be only focused on Internet technology? No way!! I'm suggesting that since there are so many opportunities these days to leverage the interconnectedness of the Internet to source aspects of a business, that this should be a mandate of the program. These "2 person" operations will need to use all the leverage they can to compete, and that's completely possible with today's Internet. Need business cards - link up with Moo. Need to host your business operations - link with Amazon. Need early market research or advertising buzz - link up with Twitter. These are just basic items, but the ability to pay-as-you-need and grow without all the fixed costs (or people) is there for the right idea and motivation.

Twitter for Sales, Customer Service &/or Market Research?

Following up on the growing usage of Twitter, here's a good example of how customers are going to start using Twitter for things that relate to business and revenue...and not just their social status.

A few questions for companies:

1. If you have any sort of online presence (sales, product information, customer service, etc.), can you afford not to have a presence on Twitter? It costs nothing more than some time of people to monitor the Twitosphere. Most of this could be automated.
2. Wouldn't it be great to be able to monitor the preferences and dislikes of your competitors and customers? In real-time?
3. Wouldn't it be easy to let your customers and potential customers know about projects that you're working on, or recently released products, or a sale or coupons or discounts?

While it's not the exact science that we study in MBA courses, it does provide an excellent, real-time view of the crowdsource opinions and marketplace. I suggest that if you don't have a presence today, that you make it an action item for Monday.

"Google devalues everything it touches"

One of my classmates, Domingo Isasi, runs Que Pasa Media.  Que Pasa operates for hispanic customers in North Carolina.  Domingo and I have had several conversations about news media and how the Internet is changing its form and economics around the world.  One of the great things about the MBA program is getting first hand experience from classmates.

Charlie Rose recently hosted a discussion of online value for newspapers, which touches on a number of the challenges they are facing, including:

1. How to get people to pay for content once they can get similar content (or reblogged content) online for free.
2. The challenge of trying to convey value to customers that probably didn't truly think about value before, since there weren't easy alternative options to get news before the internet (that's simplified, I know).
3. How all of these news creating sources (newspapers, magazines, blogs, video-blogs, microblogs) will be able to survive with only advertising revenues, especially given how Google is driving down CPMs.
4. Is it a good thing that Google seems to be one of the few companies making money around news, while the newspapers fail?   Or is this just the next phase of Darwinian evolution and new models will emerge?
   
5. What role do local newspapers (or local media outlets) play in the bigger picture?  Are people willing to pay for that local content in order to feel connected with communities? (this is Que Pasa's business).

There are many more aspects of this, and it will be interesting to see how it plays out over the next 3-5 years.  While maybe not as economically impacting as the banking challenges, I think it's equally important to see some controlled survival.  I'm pulling for the local newspapers, both because of my past employment and for the experiences of my children, whom I hope enjoy reading for pleasure and knowledge just as much as I do.  

As an aside, maybe this is a good excuse to teach myself (and my children) Spanish, so we can follow the local news via Que Pasa, and I can help support a classmate!  

Twitter is Mainstream - Will this change the Freemium Model?

A classmate, Jim Schweitzer, posted this update to his Facebook page today "CNN likes twitter now too:http://www.cnn.com/2009/TECH/02/12/twitter.shorty.awards/index.html i don't know if it's cool anymore."

For those that haven't heard about Twitter, it's an online "micro-blogging" service that let's people and companies communicate in short, 140 character messages.   People use it for fun to send status messages to friends ("at work but want to meet up at bar for drinks at 7pm") and various companies are starting to use it as a way to communicate with customers or about their current projects.

Twitter is a free service, with over 1,000,000 users.  To run this service, Twitter obviously has to provide massive amounts of computing services (servers, bandwidth, software programming).  So how does it stay in business if it collects no revenue?  Welcome to the "freemium" business model, where the primary goal is to create as many users of your online service as possible, and then figure out how to eventually get at least a small percentage of them to pay for an enhanced version of the service. Or maybe nobody ever pays for the service, because it's subsidized by online ads. 

I bring this up for a couple of reasons:

1. People have become such big fans of Twitter that others are running contests to help Twitter come up with a business model.  Most of these models involve Twitter charging users for some aspect of the service.  
2. With the economy being where it is today, people have less to spend, VCs are funding fewer opportunities, and companies that aren't cash-flow-positive aren't going to survive very long.  This means asking for money will be difficult (from customers or VCs), but it's almost mandatory to survive.  Tough spot to be.
3. For one of my StratMktg Analysis projects, I'm going to explore the Freemium business model and how companies can evolve into hybrid-Freemium or full-paid serivces.  I suspect it's going to be interesting psychological research, since most customers prefer to see prices go down than up.  

The project isn't due until April, so I have a little bit of time, but I'm really looking forward to seeing what ideas may come out of this challenge.  It's not the same problem I recently mentioned with Facebook, but they have similar challenges.  I hope to explore both aspects.  I'll post the results when the paper is finished. 

[UPDATE:  Looks like Twitter just got a bunch more VC money, and hired their first BizDev person.]