Business managers and value creation

Posted March 9th, 2019 by russfrazierwp and filed in Business and Economy, Low Snark Kvetching
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There are certain disparities between what business academics teaches and real-world organizational operations. A particularly fundamental difference relates to the conscious recognition of value creation. An MBA is taught that a firm is like a money-making machine, returning value to stakeholders by generating wealth through the act of value creation. Focusing on value creation should be a goal of organizational planning and strategy.

That is far from what business managers think day to day, however.

If, for example, an MBA prescribes the use of forecasting based on historical results, why would a business manager ignore the advice and use guesswork or nothing at all?

The first conclusion is that contrary to what MBAs have been taught, business managers are not interested in value creation, per se. They are far more motivated by a drive for self-determination and ego. I think this translates into the frequently expressed but vaguely defined idea of “freedom” in a business context. Value creation is too much of an abstract microeconomic concept, divorced from the everyday struggles of time and resource management, selling, operational control and career ambitions.

When people feel that their independence is being questioned, the first reaction is to resist. They aren’t ready to listen to an involved explanation as to why they should do things a certain way, supported by a significant body of management research and case studies, even if doing so suggests the result would be a higher probability of value creation. People simply don’t like being told what to do. As in other walks of life, the truth is no match for human beliefs.

My opinion is based on my work experiences in over 40 years with over 20 widely different organizations including the military, large public corporations and small privately owned operations. After all that, I can say with confidence that I can tell the difference between good and bad management. All managers have certain things in common. It is a rare one who considers an objective point of view and asks, “What if I did do it that way? Maybe my results would be better.”

Lessons learned – Architectural sims

Posted September 24th, 2017 by russfrazierwp and filed in Business and Economy
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In 2005 I created an LLC, Synthegenic, that was intended to be a vehicle for commercializing ideas. I had just completed an MBA and was certain that if I worked hard at applying all that business knowledge, I could achieve financial independence – the closest thing to true freedom that I can think of.

I spent a great deal of time developing software, writing business plans and doing a lot of government grant application research. Having gone through the NCSU HiTec program, I was experienced with working on the commercialization aspects of brand-new technology. At that stage of technology development, it isn’t clear whether a technology will ever make any money, or if it is even useful for anything at all.

I created a fuzzy-logic based expert system whereby I could screen ideas very quickly for economic potential. This sort of application is not unheard of in some organizations, as it’s well understood by management researchers that ideas fall like raindrops but only a very few end up being economically feasible. The more quickly an organization can screen the unworkable ideas from the workable ones the better.

Well, one of the ideas that got through my sieve was a sort of architectural design simulator. A 3D application and system that would allow architectural clients and designers to engage in self-directed walk-throughs of designs. Like a First Person Shooter (FPS) game or Second Life, the client would log in to the system, download the “map” and be able to walk or fly themselves around the site. However, unlike an FPS game or Second Life, the site would be limited to just the project design, would be updated as necessary continuously throughout the project design period, would be available to clients only and would have features to alter the design, accurate ephemeris data for sun and moon, lighting, shadows, weather and the surrounding ambient environment, including sound.

The vast bulk of configuration work would be behind the scenes.

I envisioned a technology-based service that would shift the tedious, time-consuming and frustrating computer software work away from architects and onto a dedicated team of Computer Aided Design (CAD) engineers. Architects would find this attractive because it would free them from work that wasn’t design-related and it would improve the way they communicated certain design ideas to their clients.

During the entire phase of a project, the virtual site would be available, first perhaps populated by a simple naked ground site, then with simple sketches and then with increasingly solid structures and landscaping as design elements became more certain. All that is quite possible with modern game development technology. My main development focus was building this application system.

The several people I discussed the idea with were more enthusiastic than I anticipated. Almost all of them thought it was a good idea. But, as indicated above, a good idea does not mean it can drive a viable business model. A lesson I learned in business school and took to hear

My thinking was that I could find a collaborative architectural partner who would be willing to help me work out things like:

  • How to quickly and systematically convey an abstract hand drawing to the CAD engineers so they could make it into an equivalent abstract foreground object for the simulation
  • How to convert Autocad drawings into a format the simulation system could use
  • What kinds of ideas are best conveyed in a simulated environment and which ones don’t carry over.

I badly needed to check the viability of the business model. I created a business plan for the project which included a model showing what the proposed prices would look like for an architectural firm that wanted to use the service. The way I saw it, architects would only be able to justify an additional cost like that if they could cut costs somewhere else. I had no idea if adding the service would result in reduced costs elsewhere for them. I was fairly certain that nobody in the architectural field would pay for an extra service without being able to cut something else out. They were already expensive and adding additional services would only eliminate more potential clients.

The other side of the business model was true cash flow from operations. I could squeeze out a one-digit IRR by increasing the number of projects and having personnel run multiple projects simultaneously. I used a reasonable cost of capital derived from proxy firms, but it was significantly higher than that IRR. I was not willing to assume outsourcing CAD work to a low-wage country or things like harsh and inexpensive work environments. That whole picture made it less and less compelling to investors who might want their 30% in five years.

One warning flag came when I was doing research into similar firms. I did find a software project that embodied the same ideas. It apparently didn’t take off and become a growing business concern. It didn’t look to me like it was ever sold as a stand-alone technology. So there was something going on with the business assumptions around the whole thing. And I was likely to make the same assumptions.

It was clear, after creating these business models, that

  1. The project would be operating on a thinner margin that I hoped and
  2. That there was no guarantee that the architectural firms would buy it.

Those were two key considerations.

Even after all that doubt, I had managed to set up a meeting with a local architect, just to get a reaction. Well, I got a reaction, but it wasn’t what I expected. She interrupted me before I could finish the entire presentation and declared the thing no different than SketchUp. SketchUp is for modeling. My technology is more like a customized FPS game where the modeling is done elsewhere and multiples users can log in…

Anyway, I was not prepared for a negative reaction like that, and did not even know how to respond. I had completely expected at least a courteous response, if not an encouraging one.

One takeaway that I can claim from that experience is that objective truth is no match for human bias. And that my salesmanship was poor. Sales people know that people might react in hostile ways and they know how to respond appropriately.

The other takeaway is related to overcoming barriers to entry. There are understood barriers when a competitive product or service enters an existing market. But when the product or service is brand new and unknown to the potential market, the barriers are completely different. The standard strategic considerations of economies of scale, differentiation, etc. don’t necessarily apply because there isn’t any historical record yet to base any of that on.

I think my initial instinct of finding a development partner within the customer community was correct. It is essential to develop a new unknown technology or service with guidance from the customers. And a brand new product or service that was already being used by an early adopter or thought leader within the customer market would make it easier for others to accept it. However, I overestimated my own ability to sell, my ability to be effective outside my field, and I underestimated human bias.

I did not trust my cost of capital estimate when I should have admitted that it looked prohibitive, given my requirements of fair compensation and realistic expenses.

Finally, my screening tool did not have the necessary additions required to estimate the barriers associated with introducing a novel product or service. It assumed acceptance associated with novelty, not rejection.

Necessary but not sufficient: Control and value creation

Posted September 10th, 2017 by russfrazierwp and filed in Business and Economy
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One of the most common errors in reasoning that managers in business make is that if they are in control of their business processes, then they are creating value.

If I control my business processes, I will create value.
I am controlling my business processes.
Therefore, I am creating value.

After all, it is arguably true that in order to create any sort of lasting or meaningful value, the organization must deliberately take in inputs and convert them somehow to create value.

However, merely controlling the processes may be insufficient if the business model is unworkable. For example, not being able to charge a high enough price for the product or service. Businesses will continue on, carrying out their carefully laid out plans right up to zero net income.

Workplace people

Workplace people

A situation like that becomes even more precarious if the business is small because they often just have the one model and limited resources to deal with changes such as a cash flow crisis. A larger business with several reasonably decoupled projects can cut a failed project before it causes further losses and reassign personnel and possibly capital.

It is often only by force of economic reality that the organization takes corrective action. Then, because of the business’s debt or equity structure (i.e. leverage, investors) the action is catastrophic, resulting in personnel terminations, loss of capital or very unsound decisions.

Part of the problem has to do with the desire for managers to maintain control on a personal level. The need for control overrides the rationale for focusing on creating value.

When people become so focused on the challenges of control, whether it be the technical minutia of software development, the complexities of raising adequate funds for continuation or dealing with people, they lose track of the fundamental determining fact of profitability contained in, or insufficiently represented in, the business model.

As an exacerbating effect on this tendency, I offer you fad organizational structures that increase the silo effect between departments and reduce transparency and communication between key decision makers.

Sunken ship

Sunken ship

When this happens business managers put their energies into control, and not into value creation. The result is animated and engaged managers busy with the current crisis while the organization sinks further into trouble.

Collaboration versus Competition – part 2

Posted March 29th, 2013 by russfrazierwp and filed in Business and Economy
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Recently, I had a business meeting with a person I had never met before. She agreed to meet with me (I thought) to provide some feedback and guidance regarding a new business idea. We are talking Fuzzy Front End here, so development is still underway, there are lots of questions and uncertainty. The risk has been entirely on my part and nobody else has had to finance this venture.

I started my presentation and she became very impatient and immediately misunderstood what I was telling her. Then I suggested I show her the demo, because she obviously was not interested in the presentation. Well, that didn’t go very well. She assumed the demo was something it was not and then proceeded to lecture me about competition. So I felt pretty bad because I had wasted my time and hers going to her office. And the taste of being somewhat dressed down because of impatience and ignorance was rather sour and metallic in the mouth. Their mediocre office coffee did not improve it.

Let's beat the crap out of each other!

Let’s beat the crap out of each other!

Here is wisdom (not mine). Businesses that concentrate on differentiation instead of obsessing about competing in a crowded field are in a much better position to survive and thrive. This seems to run counter to everything I’ve experienced so far trying to get business ideas off the ground. It seems to me people are more interested in competing against each other individually than in collaborating with each other as a team. And I find it sad and demoralizing that I encounter this again and again when dealing with people. You know that Careerbuilder commercial where the managers are drinking martinis while entertained by the workers fighting each other? That is really, sadly, the case.
Cooperation fixes the machine.

Cooperation fixes the machine.

And if I said, “You know, you probably spend much, much more time collaborating with your fellow workers than you do competing. So it would be beneficial to you to learn how to collaborate and cooperate well, wouldn’t it?” That would go down like a lead balloon. Nobody likes that. They want to grind each other down, they want to win, win, win. Because the system had made us all into snarling dogs and we are not in control of it.

Small business taxes control hiring. Really?

Posted October 18th, 2012 by russfrazierwp and filed in Business and Economy
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There has been a lot of political spin this year surrounding the issue of small business taxes. One side maintains that small businesses will hire more people if their taxes are lower. Presumably, tax is a cost that if eliminated or reduced, will allow the business owner(s) to shift this cost to the operational cost of employee compensation.

The first thing wrong with this assumption is that small business owners are chomping at the bit, ready to hire, if only the government would leave them alone and stop asking for tax revenue. Why is that wrong?

Office work

An office with workers

A business would not hire additional workers unless the revenue opportunities, i.e., demand, were sufficient to expansion. The number of workers is determined by the need to produce the goods or services. If a business hires more people than is warranted by revenue, their profits decrease. So that means if a business hired workers based on a decrease in their tax burden, the workers would not be able to contribute to revenue, given the lack of demand. In this economy, I haven’t heard one single small business owner say, “I need to expand because of increased demand for my product/service. In order to do that, I would hire more people, but I can’t because of the government.”

I’ve heard a form of the second part of that statement, not the first. And that bothers me because I think it is disingenuous.

The second thing wrong with the main assumption is that small businesses apparently don’t do any scenario analysis or contingency planning for environmental conditions beyond their control. Those items include government regulations, taxes and such things as globalization and communications technology. If you were to ask a small business person, “Why are you doing this?” One answer you’re likely to get is, “More control over my life and career.” Alright. More control means you understand what you can change and what you cannot and you work within those limitations. You don’t sit on your hands and act helpless because you don’t know if your tax burden will change by 10%. You make adjustments to your business so you are ready for such changes.

But let’s say there is this scenario: A small business is operating very lean, with workers putting in overtime without extra pay, taking other compensation cuts, like cheaper health insurance, no 401(k), etc. The workers complain they are overworked. If they could have just one more person, they maintain, it would make their lives so much easier. But the business owner says, “Sorry. I can’t hire anyone, not even one more person, due to the taxes we pay. Perhaps if our taxes were lower, we would do so.” Really?

To hire one more additional person, the business would have to realistically be assured of at least one year of salary for that person. Let’s say the employee makes $50,000 a year. A reasonable rough estimate of salary plus benefits and employment taxes would be 1.3 times the salary. So this means the business needs an additional 50,000 x 1.3  = $65,000 guaranteed additional money available for operational costs. If that money came from a tax break, it would come from an incremental decrease on a percentage of overall revenue. Now let’s say the business does $260,000 in sales per year. To obtain a $65,000 operational boost, the tax on that $260,000 would have to be cut to 10%. At a 35% rate, the tax burden on $260,000 is $91,000, and at a 10% rate the burden is $26,000, a difference of $65,000. Not even the Republicans are proposing a tax cut that deep.

Collaboration versus Competition

Posted October 16th, 2012 by russfrazierwp and filed in Business and Economy
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To collaborate or to compete?

This deals with the issue of collaboration versus competition. We are conditioned and trained as middle class Americans to compete with each other from a very early age. It continues on through college and becomes more or less intense depending on your career path.

Consider the modern American system of meritocracy. Not a completely overarching principle, but frequently encountered when a person embarks on a professional career requiring at least one college degree. The competitive effort can be seen as a string of high stakes tests taken in a relatively short period of time, after prolonged study. It starts in the sixth grade now, with tests and quizzes, continues in high school and the SAT, continues on through university course midterms and finals. If you go to graduate school, you have to take the GRE, GMAT, MCAT, etc. Then there is more of the same. If you are a masochist, and go into a PhD program, you can expect a thesis defense. In every case just mentioned, there is a high-stakes, time-limited hurdle to complete, like a game. Some resemble zero-sum games with one winner and many losers (e.g., the highest SAT scorers get to go to MIT, Harvard, Stanford, etc., while most of the rest attend public schools) while others are not as strictly competitive.

A (low-stakes) zero-sum game

After you are done with all that, do you want to collaborate with people, or do you want to kick butt? You want to kick butt and take names. You want to make money because you were poor in graduate school. You want to dish out the shit because you’ve been eating it for so long.

Now, consider what has to be done to accomplish complex, resource-intensive and time-consuming tasks, for example, planning a city revitalization project, creating policy for leading a large country into the 21st century, designing a computer chip. It takes many people, of different specializations, abilities, skills, temperament, etc. all working together for a common goal. Are we as middle class Americans, honed by the process of obtaining credentials in a highly competitive environment suited to collaboration?


What’s it like losing your job?

Posted October 9th, 2012 by russfrazierwp and filed in Bitter lametations, Business and Economy
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Lot’s of people know what this is like. Here’s the perspective from an engineer who was making over 90K with bonuses, had, at one time, exercised stock options that paid for a new car and enjoyed a comfortable life. I used to travel internationally, enjoying the occasional business trip and vacationing in the Caribbean or at Lake Tahoe once a year. That’s over.

Well, I will say that after several years of reflecting, the hardest part for me has been the complete loss of social status. Engineers generally make useful contributions to the world. They have difficult jobs, which is partly why they (used to) get paid so much. It felt good to do a difficult job, be recognized for my work and earn pay reflecting some sort of corporate recognition of compensation. My friends, family and spouse respected me. Strangers treated me well.

That is all gone now, save for a grain of respect my wife is sustaining, somehow, but is notably strained. Is it money, is it simply the fact that I no longer serve a purpose? I don’t know the answer to that, but I will say that I might as well be a different person. It’s as if that other person I used to be no longer exists. Acquaintances, family and friends are suggesting I become such things as:

  • Fitness trainer
  • Pet sitter
  • Dog trainer
  • School teacher