Yes, it was his hubris

In the Wall Street Journal, columnist Holman Jenkins writes about Ron Johnson’s term as JC Penney chief:

Every human effort is flawed. Failure is not proof of incompetence. So don’t buy the narrative that Mr. Johnson was done in by his hubris and cluelessness about retail. At Sears starting in 1989, a new leader introduced a new strategy of dramatically reduced promotions and manipulative “discounts.” Instead, Sears would feature “everyday low prices,” in-store boutiques and jazzier merchandise. Yes, the same formula. And Mike Bozic lasted the same 17 months that Mr. Johnson did.

I agree that failure is not proof of incompetence. But failure isn’t the reason Johnson has been charged with hubris. It’s not clear to me from Jenkins’ column why we shouldn’t buy the hubris narrative.

Johnson’s hubris was that he made network-wide changes to the business without evidence those changes would help. He never considered that he could be wrong. Some folks like it when someone swings for the fences, but shareholders should be leery when someone comes in with a shoot from the hip attitude. It’s the rare occasion that ends well.

If Johnson’s strategy would have worked across the entire network, it would have  worked on a smaller scale, first. He could have made the changes in a market, at much less cost and risk to business. Not testing his ideas first, when he has the ability to do that, is hubris…or stupidity, or a little of both.

Immortality may be overrated

In last weekend’s Wall Street Journal, Ray Kurzweil discusses his belief that we are closing in on a time where we will be able to upload our brains into the cloud and live forever.

When I first heard of Kurzweil’s belief a few years ago, it got me to thinking about a few things.

If we copy our brain, does our stream of consciousness go with it? I don’t think so. Or maybe so? I doubt it.

Will we care about anything or have any morals? How much of what we care about now is because we have constraints on our time?

How careful will we be if we can regenerate ourselves as easily as when our character is killed in a video game?

Will we care about enjoying good food anymore?  Maybe. If it’s a genuine copy, perhaps we’ll still enjoy good food. But, since our nourishment would come from the grid, maybe it wouldn’t matter how much we ate, but then we’d so much that we’d stop caring anyway.

Could we create our own worlds? Would we care if we interacted with real other people or fake other people?

Could we put ourselves on a ship and explore the universe?  We’d have the time.

Would we get so bored that we just eventually unplug ourselves?

Not sure it’s all that it’s cracked up to be.

Boards Beware

Today’s Wall Street Journal article, about the firing of Penney’s chief Ron Johnson, identifies clearly Johnson’s main problem:

The board’s decision ends a brief and turbulent career in the corner office for Mr. Johnson. He arrived at Penney to great fanfare in November 2011, but lost the confidence of directors and investors after he rolled out an ambitious plan to reinvent Penney’s stores without following the usual retail practice of testing the changes first.

Mr. Johnson was unapologetic about his decision not to test his strategy. Asked earlier this year if he would do things differently given a chance to start over, he replied, “No, of course not.”

That’s dumb. Boards of Directors should not hire these pompous jack-asses. Tests allow companies to discover what consumers want and prefer and evolve the business to serve their preferences.

This should be a standard question asked in an interview for a CEO, what do you think of testing? If the candidate doesn’t believe in tests, boards should stay away from these candidates.

Why?

Because what consumers want is not always obvious — even to consumers. Very few business ideas pan out, because they fail to deliver value to consumers — even if they sound really good. Tests are hedges against being wrong. They allow a company to discover if a new thing does what it is supposed to — provide what customers are willing to pay for.

What customers want isn’t often obvious. Even customers can rarely truly tell you what they want. They think they can, but what they say very often doesn’t match how they really behave. Economists call this the difference between stated and revealed preferences.

This is the reason why it’s rare that CEOs can divine what their customers want. Trial and error is how customers find out what they want and trial and error is typically how businesses figure out what customers value. Cut out the trial, and you set yourself up for a gigantic error. Small errors are better. Johnson has what economist F.A. Hayek called the Fatal Conceit. 

At least, in this case, from the Journal article we find out that one activist shareholder was the main reason Penneys went with Johnson and, thankfully, that shareholder took a bath for his foolhardiness. Perhaps he will learn a valuable lesson that discovering what customers want, rather than having a conceited fool like Johnson tell them, is a more effective approach running a business.

More Signals vs. Causes: Business Edition

In the Wall Street Journal, Rachel Emma Silverman reports on efforts by large company managers to learn from startups.

A couple of the observations made me think of the signals vs. causes thread.

Mr. Osifchin also took note of startup-company quirks, such as the large bell that staffers rang to gather colleagues and magnums of Champagne feathered with Post-it Notes encouraging workers to meet deadlines so that the bottles could be opened.

More likely, the large bells and Champagne celebrations reflect milestone celebrations for folks that are heavily invested and stand to benefit a great deal from the company’s true success.

That success probably represents something larger than the standard large company 10 – 20% bonus that is predicated on factors other than your team’s success — like if the rest of the company delivers, or someone limits your payout to get more for their buddies.

In other words, they don’t work better because of the bells and champagne. They work better because of the incentives. The bells and champagne just help them blow off the steam that comes with that kind of effort.

Here’s another one:

After comparing notes, the executives found that senior managers at the startups spent a significant amount of time in product meetings, says Brad Smith, Intuit’s CEO. That observation led the company to decide its executives should spend more time in the product-development trenches, says spokeswoman Cassie Divine.

More likely, senior managers at startups are the original founders of the product and they have a good idea of what they want it to become.

Senior managers at large companies achieved their status with bully bureaucrat skills, not delivering what the customer wants. Put these guys in the trenches and they’ll feel the need to dominate the discussion and show all the underlings why they’re the big-shots.

What is your company focused on? Startups fail. Big businesses fail. Big businesses were once startups that got a hold of a valuable enough value proposition to sustain itself.

But, if you want to learn something from successful startups, learn this. They respond and evolve to what customers want, not what a steering committee full of empty suits who are far removed from their customer base wants. They have to survive.

The senior leaders of startups are closer to their customers. They probably started off solving a problem they were experiencing and discovered others experienced the same problem and were willing to pay for a fix.

Leaders of steering committees will say they are focused on what customers want. They don’t recognize what they really mean is they are focused on the stylized, segmented, homogenized interpretation of what the steering committee members want the customer to want.

Want to replicate a startup? Remove as many obstacles to getting a true read on the customers’ response as possible.

Then, get the startup people out of corporate and give them some rope. If they succeed, the rewards should be rich. If they fail, they shouldn’t get a paycheck. They should lose something.

From the story, I’ll give credit to GE for doing more than mistaking signals for causes:

General Electric Co.’s ”GE Garages,” created in partnership with four tech startups, are roaming workshops that allow GE’s own workers and visitors to tinker and noodle together on new products. GE also began a companywide venture-capital initiative earlier this year, making the firm an investor and partner in some 60 startups.

Competition in education

Here’s a great article about emerging acceptance and experimentation with charter schools, in the Wall Street Journal (found by way of Instapundit). Check out this paragraph from the article:

Mr. Finegold, the bill’s sponsor and the son of public-school teachers, said his motivation sprung from conversations with parents in Lawrence, part of his district northwest of Boston, where the struggling school district was taken over by the state in 2011. The state has since brought in charter operators to run two low-performing schools, and parents told him, “we’d be out of here” had that not happened, Mr. Finegold said. “One thing I don’t think people realize—charter schools are keeping a lot of the middle class in cities,” he said.

Someone finally responded to the exit feedback response.

While I’m sure this thought isn’t original to me, it occurred to me while reading the article how odd it is that strong supporters of the government education monopoly are often also critics of business monopolies.

I suppose they believe that more evil things may happen under a for-profit monopoly, like rising prices, corruption and fat cats getting richer.

Apparently, they haven’t kept up with how the price to educate a child in public schools has grown faster than inflation for decades, or how much money superintendents make and what type of corruption persists at failing school districts that keep getting their funding.

I’m guessing that’s exactly the behavior they would expect from business monopolies. To fix this in business, they want competition. To fix it in education, they usually want to keep out competition and just bring in a different fat cat.

“Losses Encourage Prudence”

I wonder if Russ Roberts saw the opinion piece, How to Shrink the “Too-Big-to-Fail” Banks, in Monday’s Wall Street Journal from Richard Fisher and Harvey Rosenblum, who are, respectively, the CEO and Director of Research, at the Federal Reserve Bank of Dallas.

I wonder if Russ Roberts has seen it, because it appears to agree with his hypothesis that a history of government bailout of banks contributed to the financial crisis, because bankers took on more risk than they otherwise would.

Here are Fisher and Rosenblum’s first three paragraphs:

A dozen megabanks today control almost 70% of the assets in the U.S. banking industry. The concentration of assets has been in progress for years, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system.

Meanwhile, the mere 0.2% of banks deemed “too big to fail” are treated differently from the other 99.8%, and differently from other businesses. Implicit government policy has made these institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks.

It also emboldens a sense of immunity from the law. As Attorney General Eric Holder admitted to the Senate on March 6, when banks are considered too big to fail it is “difficult to prosecute them . . . if we do bring a criminal charge, it will have a negative impact on the national economy.”

That last paragraph paints an image for me of the TBTF bankers holding the economy hostage for the taxpayer ransom. I wish I could draw.

Here they sum up the problem rather well:

…market discipline is still lacking for the largest dozen or so institutions, as it was during the last financial crisis. Why should a prospective purchaser of bank debt practice due diligence if in the end, regardless of new layers of regulation and oversight, the issuing institution won’t be allowed to fail?

The return of marketplace discipline and effective due diligence of banking behemoths is long overdue.

In case you are wondering, prospective purchasers of bank debt practicing due diligence is an example of market discipline, just like you practicing due diligence on your car purchase.

Credit Fisher and Rosenblum for going on to offer a solution, which involves rolling back the Federal government safety net and restructuring TBTF banks into entities that can go through speedy bankruptcies so they will be “too small to save”.

I like it. Read the whole thing.

Know your audience

Arthur Brooks made a great point in his Wall Street Journal opinion piece yesterday, Republicans and Their Faulty Moral Arithmetic.

Raging against government debt and tax rates that most Americans don’t pay gets conservatives nowhere, and it will always be an exercise in futility to compete with liberals on government spending and transfers.

Instead, the answer is to make improving the lives of vulnerable people the primary focus of authentically conservative policies. For example, the core problem with out-of-control entitlements is not that they are costly—it is that the impending insolvency of Social Security and Medicare imperils the social safety net for the neediest citizens. Education innovation and school choice are not needed to fight rapacious unions and bureaucrats—too often the most prominent focus of conservative education concerns—but because poor children and their parents deserve better schools.

That reminds me. I have made headway with liberal friends on the subject of school choice by doing exactly what Brooks suggests, making it about the kids and the parents who need the most help.

I pointed out that middle-income and wealthy folks already have school choice because they can afford to live in an area with a good public school district or pay to send their kids to private school. That may contribute to why these schools are successful.

I then asked why low-income parents shouldn’t be given more choice, too.

Several told me that changed their mind about school choice and they became supporters of it.

I’ll have a cost-benefit analysis, less the costs and heavy on the benefits, please

Daniel Henninger, in his Wall Street Journal opinion article, Obama’s Colossal Politics, correctly and succinctly identifies two causes of runaway government.

First, there’s the bad cost-benefit analysis, that overplays the benefits and doesn’t consider the costs:

 ”If there’s just one life that can be saved,” Mr. Obama said Monday in Minnesota, using standard Washington risk-benefit analysis, “then we have an obligation to try it.”

Then there’s this:

When serious scientists try to solve a problem, they ask, What works? When Washington takes on a problem, it says, Why not?

Why not? We must look like we’re trying.

RomneyCare lessons

Here’s another opinion piece worth-reading from the Wall Street Journal this morning. Key snippets:

The health reform that Mitt Romney passed in 2006 in Massachusetts presaged President Obama’s, and its results are showing what we can expect nationwide. The latest warning comes in a huge new tax increase proposed by Governor Deval Patrick.

But last August Beacon Hill was forced to impose new price controls and a cap on overall state health spending because “health-care spending has crowded out key public investments,” as Mr. Patrick puts it in his budget.

He’s right about that: Health care was 23% of the state fisc in 2000, and 25% in 2006, but it has climbed to 41% for 2013. On current trend it will roll past 50% around 2020—and that best case scenario assumes Mr. Patrick’s price controls work as planned. (They won’t.) In real terms the state’s annual health-care budget is 15% larger than it was in 2007, while transportation has plunged by 22%, public safety by 17% and education by 7%. Today Massachusetts spends less on roads, police and schools after adjusting for inflation than it did in 2007.

 

Shrinking middle class prop

Two non-pathetic economists, Don Boudreaux and Mark Perry (one has bought me beer), write in the Wall Street Journal today that the shrinking middle class is a nothing more than a political prop.

You should read their criticisms of cost and wage measurements. But, here are a few points that are more compelling to the average joe. First, the basics have never cost us less:

According to the Bureau of Economic Analysis, spending by households on many of modern life’s “basics”—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.

Second, gadgets of prosperity are available to all:

Today, the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford—iPhones, iPads, iPods and laptop computers. They aren’t much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.

Finally, a true measure. Would you trade what you earn and have today with someone from the 1950s or 70s?

Even though the inflation-adjusted hourly wage hasn’t changed much in 50 years, it is unlikely that an average American would trade his wages and benefits in 2013—along with access to the most affordable food, appliances, clothing and cars in history, plus today’s cornucopia of modern electronic goods—for the same real wages but with much lower fringe benefits in the 1950s or 1970s, along with those era’s higher prices, more limited selection, and inferior products.

I can’t believe anyone buys the shrinking middle class barb. For those of us that have been around for more than a couple of decades, we don’t need economists to point out that the suburban blossom of mcmansions and the roads becoming clogged 4×4 family passenger trucks occurred during this period where the middle class supposedly shrunk.