Category Archives: Learning

Why culture trumps strategy

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Culture Trumps StrategyI first heard the phrase “Culture Trumps Strategy” in 2008.  Intuitively this makes sense. Culture lasts.  Culture is everywhere.  Employees don’t need online training to understand it.  It’s who we are.  It’s what we stand for.  It’s why I like my work.

Ken Wilcox, Chairman of the Silicon Valley Bank gave a compelling talk on the topic here from a Stanford eCorner video podcast.  A few excerpts:

I believe that the most important things that a company can focus on are its strategy and its culture.  I also think that if you had to pick between the two, that culture trumps strategy every time. 
I think that because if you have a great culture, your people will develop a strategy that will win.  But if you don’t have a good culture, even a winning strategy will not be useful.

Culture is long term.  Culture transcends CEOs, management fads and business cycles.   The average tenure of a CEO is less than 9 years, while the typical CMO (marketing officer) is even shorter at 43 months.  It’s foolish to think that any strategy – no matter how well thought out – will be faithfully passed down from executive to executive.  With the changing of the guard, often times is a changing of direction.

Culture is everywhere.  Culture transcends job descriptions, product launches and supplier agreements.  It’s how employees think, behave, and recruit other people into the company.   Strong organizations have resilient cultures, where the “spirit of the law” is more important than the “letter of the law.”

Decision making is distributed to the most  junior person who can make the call because there is trust.  People make smart decisions, and the managers support them – even if the results are not perfect. There is trust.

Strategies are secrets.  Too often, strategies inadvertently remain a secret.  Executives and senior managers might understand the strategy, but is it translating into action? Is it making an impact on the customer?  Effective strategy = implementation.

Implementation takes effort, internal marketing, changing of incentives, and repetition to get buy-in from everyone.  It’s common for customer-service reps, sales people, and technicians to either be unaware of a strategy or lack the tools to implement it in their day-to-day work.  Strategy consultants beware.  Are your ideas getting implemented?

Broken culture is hard to fix.  Too often, companies hire management consultants very late in the game.  Revenues are down, costs are up, market share is shrinking, product development is stalling, and employee retention is poor.  Consultants can help with strategies, tactics, technology and tools – but outsiders cannot help with culture.  Ken Wilcox says some brutal things, that in my experience, are very true:

I believe that most people in most corporations in the United States are unhappy.  That most people in most corporations in the United States.  And this isn’t just a belief.  There have been studies done that would suggest that this is the case. 
They devoted half of their brain to their job and the other half to thinking about how nice it would be if they work someplace else.  And eventually, that opportunity comes.

Eustress

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Management consulting is a stressful job.  Traveling in a middle seat.  Creating presentations from an empty, white PowerPoint template.  Working with a new team.  Meeting new clients.  Learning on the job.  Crunching data in a hotel room.

Dr. Hans Selye (1907-1982) was a pioneer in the field of researching stress.  In fact, he is the one who coined the term “stress”, “distress”, and “eustress” (good stress).  At his height, he had 40 lab assistants, worked with 15,000 lab animals and authored 1,000+ research papers largely on the topic of stress.  Heck, that sounds kind of stressful.

Nowadays, it is commonly accepted that stress can be damaging, both physically and emotionally.  When someone is rude, underhanded, or just sinful – you can feel your blood boil.  The Mayo Clinic cites it as a risk factor for heart attack.  No one likes stress, right?

Eustress (good stress).  I am a big believer in good stress.  It pushes us to be more productive, creative, and provide better client service.  It gets us moving and motivated.

According to Selye’s research, stress is destructive if we cannot overcome it.  Only by harnessing it, adapting to it, resolving it, do we actually benefit from it psychologically.  Interestingly, your body – hormonally – does not know the difference between good and bad stress.  Instead, it is entirely your perception of the stress that matters.

What can you do to create more eustress?  Some things that work for me.

- Scope aggressively.  Define the problem narrowly enough so that the work can be done with the project time frame.  Don’t blindly say “yes” to the client.  That will get you in trouble.  Set up the project so that the problem gets solved and the client is happy,

- Don’t worry about the small stuff.  Focus on the customer and what she wants to achieve.  In Lean principles, it is critical-to-quality (CTQ) that defines what is valuable – because that is what the customer is willing to pay for.  Focus on the big idea.  Everything else is fluff and not worth stressing about.

- Think win-win.  As I described in the post about Networking, gotta think about the project as a win for the client, win for you, and a win for the team.

- Build trust, give trust.  Andy Stanley, pastor and leadership speaker, talks about the choice you make daily when people disappoint you.  You have a choice of filling that gap (e.g., late to a meeting) with either suspicion or trust.  He argues that you need to trust.  Great podcast you can listen to Trust or Suspicion.

- Remember that projects end.  One nice thing about project work is that it ends.   No matter how much dislike the project, client, or even your manager . . . hang in there.  It will change soon enough, and you can reinvent yourself on your next project.

- Answer 3 questions.  One of my mentors said that you should always ask yourself 3 questions to keep your career on track:

  • What am I doing? (content of the project)
  • How well am I doing it? (performance)
  • What have I learned? (learning)

Using this a simple example, you can see that all projects have their plus/minus.  Rarely is it all good, rarely is it all bad.  Perhaps this can help you re-orient your thinking and feeling about the project.  Help you to convert the lead distress into gold eustress.

3 Questions

Corps Business: The 30 Management Principles of the US Marines by David H. Freedman

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Corps BusinessI read this book in June 2002 by David H. Freedman.  It was the year before I went to MBA, and it made an impression on me.  I remember telling the HR director about it, and then seeing quotes from the book in one his presentations.

Whether you are a hawk or a dove (agree or disagree) with the US military’s goals – there are lessons to learn.  In fact, HBR recently dedicated an entire issue on leadership lesson from the military in 2010.

= = = The Amazon.com book review I wrote in 2002 in blue = = =

As you might expect from a book that parallels the military and business management, there are many references to training, discipline, order, and sacrifice.  However, a vast majority of the book gives a perspective of the US Marine Corps which is radically different than most people would expect.

Provided that Freedman is correct in his analysis, the US Marine Corps is an extremely focused group which is both fast, versatile, and effective in complex situations.

Marines aim for the 70% solution because in the battlefield, speed and boldness is more important than perfection. Put another way, indecisiveness is a fatal flaw. It is better to make small, frequent, and rapid decisions.  Complete analog to consulting.  The client situation is always fluid, so it’s smart to update the client regularly. 

Marines find the essence of any mission. It should be made very clear. In the process, all the assumptions, boundaries (what shall we NOT do) should be questioned and explored. Dissension is invited prior to the final decision.  This was a bit of a surprise, I originally thought the military would be very rigid (to a fault), but then I ran across this quote from 4-Star General Colin Powell, which only made me respect him more:

Colin Powell“When we are debating an issue, loyalty means giving me your honest opinion, whether you think I’ll like it or not.  Disagreement, at this stage, stimulates me. But once a decision has been made, the debate ends. From that point on, loyalty means executing the decision as if it were your own.”   – Colin Powell

Marines push decision making to very low levels in the organization. Bureaucracy does not work in the battlefield. To quote. “The best soldiers are ones who follow orders from above, but do not depend on them.”

The Marines are very competitive. Marines hire through trial by fire. Boot camp is a form of Darwinian natural selection. The best and fittest survive. Even after boot camp, many officers leave the Corps because they cannot be promoted, because they are not the best. Similar to the “up or out” promotion criteria used at most strategy consultancies.

Leadership is defined as the ability to have others follow you. If a Marine does not follow an legitimate order, he / she can face disciplinary action, but the superior who gave the order will often find their career stops too. (It demonstrates a break in leadership ability.)  This is deep and worth digging into.  This implies that superiors (or managers in the business world) take some blame when their subordinates don’t follow.  It shows a break down in trust, communications or leadership.  When kids don’t follow their parents, the parents are somewhat to blame.  I like it.

Marines glorify the lower levels of the organization. The most training is at the lowest level of Marine leadership – Corporal.  Even in the dress, there is little difference in dress from the officers and the privates.

Marines focus on the end statement. Marine leadership focus on WHAT TO DO (Mission), not HOW to DO (Details).  This is also very deep.  This is a huge lesson for all of us who have been kick ass individual-contributors in the past, and now are having trouble delegating to others.   Leaders need to lead.

Marines reward failure. The best way to learn is through experience, and if someone does not fail from time to time, they are not pushing the envelope. Marines are focused on continuous improvement, and that requires temporary failure.  Fail and learn.  Fail, but not at the same thing twice.

The Marines have passion for what they do. The Marines have an expression to describe people who just go through the motions of their job: “Going Admin”  This is a word of warning for all of us who have been “on the beach” or relaxing between projects.  The lull of an internal project can be attractive, but ultimately deadly.  Gotta stay sharp.  Stop from “going admin.”

Get a MBA? Pros and Cons

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I got my MBA 8 years ago.  It was a good use of my time, attention, and money.  That said, there are a lot of MBA skeptics out there, and they have good reasons.

3 CONS of the MBA:

1. MBA inflation: MBA programs are not created equal, there are more than 100,000 MBAs awarded each year.  A plain MBA (however you define that) is just not valuable on its own; the program’s pedigree and regional brand matter.

2. MBA is temporary: Peter Drucker said it 40 years ago, but knowledge workers should never stop learning.  A MBA is perfect at a certain stage of your career, but that is temporary.  Steven Covey said to “sharpen the saw”.  Seth Godin said to “Learn all the Time”  As trite as it sounds, it is true: What Got You Here, Will Not Get You There.   The value of a MBA at age 45 is about as valuable as a BA/BS is at age 30.  Which means, not very.

3. MBAs are not free: I would say that 1/3 of the value of a MBA is the core learning: marketing, strategy, statistics, negotiations, finance, accounting etc. . .  If you look at the curriculum at top MBA programs (e.g., UCLA, Michigan, and Yale) that is what you will find.

As shocking as it sounds, you can find a lot of that online for free.  For fun, I put together a nice curriculum for you from Coursera (one of the big MOOCs)

Some will say that these courses (e.g., Princeton) are not MBA-level programs, and that many are only 5-6 weeks long.  Fair criticism, but let’s remember it is free.  Clearly you can get 50% of MBA-type content online.  Not perfect, but if you are looking to get smart on a topic, it’s a great start.  You have the opportunity.  No relief for the lazy.

So why bother with a MBA?  Depending on the program and the timing in your career, it might be exactly what you needed.  For many of us, our career progression looks like the first S curve in the graph.  It ramps up, but then slows down.  For many of us, it’s when we are 27-33 years old and its when a lot of people head back for their MBA.

The MBA helps you jump the S curve in your early career.   It is a step-jump to the next level of career path.  You’ll note that the MBA doesn’t do anything for your next jump.  That one is up to you and has less to do with your credentials, and more with your achievements.  The MBA helps get your 1st good job out of school, but not your 2nd one.

When a MBA makes sense

4 PROS of the MBA:

1. Relationships: You meet good people.  Diverse people from different countries and professional careers. Lots of personalities – but all motivated learners.  Although I have been out of school for 8 years, I still email and talk to people from my MBA class monthly.

It is the relationships that last.  Trust me, after being out of school – being able to calculate the WACC (weighted average cost of capital) is a lot less important that being able to call a MBA buddy for some advice, referral or a favor.

2. Recruiting: My first consulting role was as a campus hire.  If you are looking to break into management consulting, the easiest entry point is through campus recruiting.  Transferring as a lateral hire into consulting is not an easy or a pretty process.

3. Redefinition: For those who are career switchers, MBA is the way to go.  I saw people successfully move from the military, or education, or sales to management consulting.  I came from a B2B marketing / strategic planning role and made the switch.

4. Recharging: If you are fortunate enough to spend the time and money for a 2 year full-time program, MBA life is a luxury.  It’s a chance to do college right.  The formula I came up with :  MBA = Business Learning + Good Paying Jobs + Solid Friends.

For those interested, there are many websites on MBAs, but here are the 2 best ones:

BCG report: Ending the Era of Ponzi Finance

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Not sure how this happens, but the entire developed world is in debt.  Europe, the US, and Japan have borrowed so much money that they are headed towards ruin.  The Boston Consulting Group even went so far as to call it the biggest Ponzi scheme in history.   That is some pretty bold talk from a buttoned-downed group of consultants.

After reading the BCG report Collateral Damage: Ending the Era of Ponzi Finance, I tend to agree with them.  The 23 page report is well-argued and makes 3 points: 1) the global debt picture is pretty bad . . . 2) and getting worse . . . 3) unless something is done soon.

Developed economies are in enormous debt.  Europe, the US, and Japan have taken on monstrous levels of debt and are not really getting a good return on that money.  It would be different if the money was being invested productively, but too much of it is just being spent.  Governments, companies, individuals – all need to take some blame.

It is not simply that the developed world has borrowed significantly from future wealth to fund today’s consumption, leading to huge burdens for the next generation.  It has also reduced the potential for future economic growth, making it more difficult for the next generation to deal with this legacy.  -BCG

In the BCG graph below, you can see that the total debt (government, corporate, and household) is many multiples of the countries’ GDP.  Put another way, Japan’s debt is 3-4x the total output of the country.  Can you image if your personal debt was 4x what your gross income was?  Any good financial planner would be screaming at you to reduce your debt and increase your income.

BCG: Ending the Era of Ponzi Finance - Total Debt to GDP

The debt situation is getting worse.  This is a bummer to say, but there are many reasons why the debt burden could increase over the next 20 years.

  • Under-funded pensions: Governments and companies have made promises to their citizens and retirees that have not adequately funded.  Pew recently reported that the largest 61 US cities have only funded 74% of their pension liabilities.
  • Longer lifespan and healthcare costs: People are living longer which is good news, but how will this all be paid for?  Healthcare costs are rising faster than inflation.  In the same Pew report, the top 61 US cities have only funded 6% of their retirees’ health care liabilities.  This is a huge problem that is getting worse.

Pew - Retiree Bills

  • Fewer young people: Often times, pension costs are paid for by the contributions of younger workers who are essentially paying it forward.  Well, what happens when you have fewer younger people than older people?  BCG put together this fascinating chart that shows that the population has already peaked in many Europe countries.  Even China (not one of the “developed countries” with a debt problem) has an issue with their population peaking much earlier than India because of the one-child policy.

Peak Population by Country - BCG: Ending the Era of Ponzi Financing

  • Rising interest rates: Although not explicitly mentioned in the BCG report, rising interest rates pose a huge risk.  Like any good monetarist, I believe the increase in money supply and competition for resources will drive up rates longer-term.  Have developed countries become too complacent?  How much longer will investors buy US government 30 year bonds at  3.125% (2/14/13).
  • Many other reasons including lower productivity, under-investment in the asset base, rising prices for resources, international competition, barriers to innovation

What’s to be done?  BCG argues that there are steps that can be taken to reduce the risk of this global financial car-wreck.  Find the full list here, starting on page 14.

They are not simple solutions.  Systemic issues require a strong dose of political will and leadership.  It will take more than just marginal improvement.  Financial sacrifices will be required from all interest groups.   Perhaps the most direct statement in the BCG report:

The critical starting point is to accept the fact that many of today’s debts will never be repaid and to embrace debt restructuring and defaults.

BOOM – If that is not a strong statement, that yes indeed, the debt burden of developed economies is a Ponzi scheme that does need some unraveling.

Related links:

What is a MOOC? Massively Open Online Courses

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Two months ago I didn’t know what a M-O-O-C was.  Now, I am convinced it will be the juggernaut that disrupts higher education.  For the last 20 years, traditional universities have only given lip-service to online education.  They may have put out a few extension courses here and there, but they largely forfeited the medium to the likes of Kaplan and University of Phoenix – the publicly-traded, for-profit education companies.

New boldness.  Where traditional universities were once timid, they are now bold.  Call it a second lease on life, but now Harvard, Princeton, Stanford, and MIT are putting courses online for free.  Peter Norvig, Director of Research at Google, and Sebastian Thurn, Director of Stanford’s Artificial Intelligence Lab, offered an engineering course that enrolled 160,000 students from 209 countries.  See the TED talk here.

MOOC - TED Stanford

Three big MOOCs.  The big three MOOCs are Udacity, Coursera, and EdX.  As you can see below, they are all a bit different in structure, origin, and financial backing.   That said, they all have access to premium content and a limitless distribution platform.

MOOC - Coursera Udacity EdX

Ambitious vision.  The MOOCs are here to educate students on a massive scale.  From Coursera’s website, they describe their not-so-humble vision of future education:

We envision a future where the top universities are educating not only thousands of students, but millions. Our technology enables the best professors to teach tens or hundreds of thousands of students.

This is not hyperbole or unwarranted internet braggadocio.  It’s hard to overstate how fast MOOCs are growing and how scalable this model is.  Looking at the numbers for Coursera below, you can see that during the last 8 months, the number of courses grew from 33 to 214.  Coursera’s student enrollment grew 800% to 2.4 million.

MOOC - Coursera courses and students

Less boring, more interactive.  The New York Times notes that MOOCs have been around for a while, but they were largely “techie, online learning tools”.  The platforms have matured enough to create a user-friendly, learning community.  Taking a cue from Khan Academy, professor video segments are short.  To keep people motivated, the videos are interspersed with quizzes and there is a course timeline that keeps you engaged each week.  Like real life, you can’t procrastinate completely.

These MOOCs have a Facebook-like feel where students upload profiles, participate in chat boards and even meet up in real-life for study sessions.  I recently enrolled in a Coursera class and this is a screenshot of the sub-forums.

MOOC - Coursera topics

For those who say that you have to be on a college campus to learn from others, I completely disagree.  There is discourse here.  My professor replies to questions with surprising timeliness.  Better than going to office hours, right?

Serious brands.  Unlike the recent proliferation of for-profit online universities, these movements have pedigree. Two MOOCs (Coursera and Udacity) were born out of Stanford, and edX was born out of Harvard and MIT.  Just look at the roster of universities below that are contributing content to Coursera.  Tiger moms would approve.Coursera Universities

Since each university has their own strengths, wouldn’t it be incredible to learn Medicine from John Hopkins, Engineering from Stanford and Finance from Wharton?  We are not there yet, but look at these courses:

Democratization of Education.  As a progressive, I believe that a top-notch education should be available to everyone.  It’s a fundamental input that allows people to use the gifts that God gave them.  It certainly starts with primary and secondary education (think: Khan Academy), but does not stop there.  Thomas Friedman, author and NY Times columnist, penned an article called Revolution Hits the Universities where he makes a compelling case that MOOCs have the potential to flatten the higher-education world.   I agree.

Next steps: This is just the beginning of something huge.  In my mind, there are so many questions left unanswered, such as:

  • What is the business model of MOOCs?
  • Will students eventually (some future date) get course credit?
  • How will the online, for-profit education companies react?
  • What does this mean for 3rd and 4th quartile universities?
  • What are some consulting frameworks to think through this problem?

Let me know what you think about MOOCs.  Do you think they will be a real catalyst for universities to change, or a flash in the pan?  For now, I gotta go and listen to 2 Coursera lectures and take the quizzes by Tuesday or it hurts my grade.

American Philanthropy: Utah and the Giving Pledge

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It’s tax time, and there are usually few things to be happy about.  One of the small things is the tax-deduction from charitable gifts.  For many of us, we get to enjoy the donations twice – once when we make the gift, and another time when we deduct it from our taxes. A bit selfish to say, but true.

So how generous are Americans overall?  For all of America’s great wealth disparity, and often times shocking poverty, America is also home to generous people.   According to the Chronicle of Philanthropy, Americans gave an estimated $200+ billion annually.

Who states gave the most?  One study looked at the IRS tax returns by zip code and analyzed which states gave the most $ to charity.  When you look at the average charitable  donation (as a % of house income) the state rankings look like this.

Charity as a Percentage of Total

Utah is the winner.  When you take a look at the same data by city, you see that 5 of the top 10 most generous cities (median $ contribution by household) were in Utah.

A cynic might say that monetary donations are not everything, but the states with the highest $ contributions tended to have the most people who contribute time as well.

How generous is your neighborhood?  Use this tool to dig down into the data and see how your state / city / country / town / zip compares.  You can sort the median contributions by income levels $50K-$99K, $100K-$199K, $200K+ if you want to.

How America Gives

The Giving Pledge.  Yes, the rich can be generous.  In 2010, Warren Buffett, and the Gates’ invited America’s wealthiest to give 50%+ of their wealth to charity before or at the time of their death.  Amazingly, 93 billionaires have signed the pledge so far.

The website states that the pledge is a “moral commitment to give, not a legal contract.”   They don’t track how much has been given, but they do ask all future-donors to write a letter explaining why they are taking the pledge.  A few inspiring excerpts:

BuffettWarren Buffett: More than 99% of my wealth will go to philanthropy during my lifetime or at death.  Measured by dollars, this commitment is large. In a comparative sense, though, many individuals give more to others every day.Millions of people who regularly contribute to churches, schools, and other organizations thereby relinquish the use of funds that would otherwise benefit their own families.  The dollars these people drop into a collection plate or give to United Way mean forgone movies, dinners out, or other personal pleasures.  In contrast, my family and I will give up nothing we need or want by fulfilling this 99% pledge.

Bloomberg

Michael Bloomberg: One of the senior managers at my company, Bloomberg LP, recently told me that part of his new hires recruiting pitch is to ask, “What other company can you work for where the owner gives nearly all the profits to charity?”  Nothing has ever made me prouder of my company than that one story.

Peter Petersen

Peter G. Petersen:  My parents were Greek immigrants who came to America at age 17, with 3rd grade educations, not a word of English and hardly a penny in their pockets.   Their dream was the American dream, not just for themselves but for their children as well.   My father took a job no one else would take – - washing dishes in a steamy caboose on the Union Pacific railroad.   He ate and slept there and saved virtually every penny he made.  He took those savings and started the inevitable Greek restaurant, open 24 hours a day for 365 days a year for 25 years.

Throughout this period, he always sent money to his desperately poor family in Greece and fed countless numbers of hungry poor who came knocking on the back door of his restaurant.   Above all else, he wanted to save so as to invest in his children’s education.  When I enjoyed a most surprising billion dollar plus windfall from the public offering of The Blackstone Group, a firm co-founded, I pondered, what should I do with all of this money?

Bill and Joyce Cummings

Bill and Joyce Cummins: After about 15 successful years in commercial real estate, we came to recognize and believe that no one can truly “own” anything.  Particularly, as regards real estate, how can we possibly think of ourselves as actually owning land?  How can we ever be more than caretakers of the land, which lies beneath whatever we might develop on a property?  With that in mind, it was easy to start giving things away.KaiserGeorge Kaiser: I suppose I arrived at my charitable commitment largely through guilt.  I recognized early on, that my good fortune was not due to superior personal character or initiative so much as it was to dumb luck.  I was blessed to be born in an advanced society with caring parents.  So, I had the advantage of both genetics (winning the “ovarian lottery”) and upbringing.   As I looked around at those who did not have these advantages, it became clear to me that I had a moral obligation to direct my resources to help right that balance.

Amazon margins and online sales tax

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Amazon reported Q4 earnings on Tuesday.  Q4 revenues soared to $21 billion, up 22% Y-o-Y.  Net income was a dramatically different story at $97 million.  Looking at the net margin, it comes out to about 0.5%.  It reminds you of the imaginary quote “Don’t worry about the profits, we will make it up on volume.”

What’s up with the margin? Is it okay to only earn 1/2 of a penny on each dollar?  Amazon CEO Jeff Bezos was on a recent Harvard Business Review podcast and was asked that exact question. His response was pretty sensible,

“Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.”

Amazon - Sales Tax - BezosBezos is no fool.  He is an ex-hedge fund manager, and Fortune Magazine’s 2012 Businessperson of the year.  He holds a long-term strategy and has consistently made bold, strategic, and industry-altering moves.  He has also done well for investors.  Apparently, Bezos has delivered about 12,000% shareholder return while CEO.

Analysts like the stock.  As of today’s close, AMZN was $272.  On Finviz, you can see that most analysts reiterated their ratings with a target price between $260-$335.

What about sales tax?   My primary questions is about sales tax.  If you compared Amazon’s net margin % with the average sales tax % (that is not getting collected by Amazon, or the Government) it’s not a pretty picture.  If customers had sales tax added to purchases, would they buy so much stuff online?  If AMZN had to hypothetically pay state taxes (after operating or net income), they would be unprofitable.

AMZN vs sales tax

States want their taxes.  Apparently 45 states have sales or use tax that should apply to online purchases.  Either the retailer should collect the sales tax (which most don’t) or the buyer should voluntarily pay the tax on their tax form here.  The majority of online retailers don’t collect sales taxes with the order because they do not have a physical presence (nexus) in the state of the buyer.  Here is a good explanation of sales tax on the internet.

I was curious, so I dug up a state tax form.  This one is from Virginia (pdf) and it looks like they really do want the tax money from the online purchases. Un-fun.

The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax was not paid at the time of purchase.

Amazon know this.  They have a section of their website that gives instructions to customers and tries to clarify the mystery surrounding taxes for online purchases.

Just as often, they lobby against the require to collect sales tax at the time of purchase.  Naturally, they would like to leave it to the consumer (who may, or may not do it).   Amazon went back and forth with the California legislature, but lost.  Amazon started collecting taxes on purchases made from California in September of 2012.  Unsurprisingly, people started to stock up on things from Amazon before the tax-collection started.

The looming deadline prompted San Diego artist John Purlia to finally buy that Samsung flat-screen television that had been sitting in his Amazon shopping cart for months

Inevitably, more sales tax will be collected online.  States and local municipalities are dirt poor.  Tax revenues is shrinking.  Some of their bonds are junk status.  States want that revenue and they will argue (rightly) that this levels the playing field for local retailers.

I am no fan of taxes, but the law already exists.  From the state’s point of view Amazon will do a better job of collecting sales taxes than relying on 1) millions of people in the US 2) filing their taxes 3) keep track of their purchases 4) and doing it appropriately.

It’s a headwind for Amazon and other retailers.  If Amazon has to collect that tax from all of its millions of consumers, sales will go down.  That said, I am avid shopper on Amazon and will continue to use their website, reviews and free 2 day shipping with Prime.  Even though I don’t believe the 0.5% net income is a sustainable business model, I will not be betting against Bezos or the stock.  I will not be writing naked calls.

Related Articles / Resources:

PwC CEO Survey: This is what 1,300+ global CEOs thought

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PricewaterhouseCoppers (PwC)  just published its 16th annual global CEO survey.  It’s a hefty survey with responses from 1,300+ CEOs across 68 countries.  To me, this type of survey is very credible.  CEOs suffer from the herd mentality like any of us do, but they do have a pulse on the market and can make hiring / capital investment decisions.

PwC did a good job with this report.  In the boring old days, they would have put together a 100+ page report and be done with it.  Not this time.  They put together several ways to dig into the data whether by written reports, online tools, or CEO videos.

1. Written reports: These are a bit high-level, but they are good for hallway conversations.  At the very least, you have something intelligent to say when you go to lunch and the client starts talking about the World Economic Forum, and Davos.

After skimming through this, you will see that CEOs are cautious.  Almost bearish.  This is how the 1,300+ CEOs responded to this question:  “Do you believe the global economy will improve, stay the same or decline in 2013?” . . .

  • 18% Improve
  • 52% Stay the same
  • 30% Decline

2. Interactive tool: Consultants know that averages don’t mean much.  The high and low scores cancel each other out, and you end up with generalizations.  Thankfully, PwC created an interactive way to play with the data and group responses:

For example, this chart compares the responses of three different groups to the same question: How confident are you about your company’s prospect for revenue growth over the next 12 months?  Here, consumer goods CEOs are the most bullish.

PWC CEO survey - Consulting blog - Comparison

3. CEO interviews:  They have 30+ CEO interview clips (2-3 minutes each) from the CEOs from Blackrock, Schneider Electric, Nokia, Commerzbank etc.   In particular, they talked a lot about managing risk by creating more nimble and flexible organizations.

There is a lot of risk out there.   Just looking at the list of man-made and natural disasters below, there is a good reason that PwC called the last 10 years the “Disruptive Decade.”  The lesson seems to be that traditional “risk management” may be insufficient.

  • Blind spots on the types and scope of risk (e.g., black swan events)
  • Velocity and interconnectedness of the markets (e.g., Lehman Brothers)
  • Large number of markets (e.g., a crisis somewhere that is affecting business)

Diasters - PWC CEO Survey - Consulting Blog

4. Industry-specific highlights:  PwC also put the highlights for each of the 19 different industry segments.  For consultants about to roll-on a project in a new industry, this gives a good sense of the mega-trends and the industry mood.  Here are just a few of them.

Takeaway #1: Surveys create data.  Plan to write a longer post on this, but let’s agree that surveys are an excellent way to create data.  It taps into the wisdom of the crowds and if you get the demographic information (who replied to what), you can do some fancy segmentation.  It also puts together numbers to support your hypotheses.

PWC CEO survey - Consulting blog contact names automotive

Takeaway #2: This is marketing.  Thought-leadership is a great way to market professional services.  That is why there are so many conferences, trade shows, and white papers.  Of course, PwCers want to interview CEOs.  Who doesn’t?  Notice there is not a PwC global analyst survey.

On the industry pages, you can easily see the contact information for each of the industry leads.  On the automotive page, can see that Rick, Thomas, and Felix run the PwC automotive practice.  Give them a call.

Takeaway #3: Industry matters.  Management consultants – especially early in their career – are unique in that they are less specialized by industry.  It is a gift because you get to work on diverse projects, and you can see the connections across businesses, functions and industries.  You are focused on how businesses run, not industry.  This does not last forever.  Clients are more demanding and don’t want you learning the industry on their dime.

Takeaway #4: They used other sources too.  Frankly, CEO surveys are usually very high-level, and therefore, less valuable.  It’s an art to really think on the topic and divine meaning out of the results.  In the PwC reports you will find a fair amount of analysis that they brought from outside the survey.  It is a cocktail of data from disparate sources.  For example, this table shows the current growth and acceleration/deceleration of that growth.  Trust me, this did not come from a survey of CEOs.

PWC - Leaderboard - Consulting Blog

Nudge: Beware of Default Choices

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I recently read the 2008 best-seller Nudge and was surprised to discover how many of our so called “decisions” are actually default choices, illusions, and mental rules of thumb.  We are educated to believe that individuals are rationale all the time.  In reality, we blaze through our work day making hundreds of non-decisions.

Idealized Decision-Making Process.  On the left, you can see what an idealized thought process might look like.  Linear and orderly.  The decisions are measured and  distinct.  Depending on the probabilities and payoffs, you can choose: A, B, C, D, E.

Human Decision-Making Process.  On the right, you can see what happens a lot.  We only see one option – due to our preconceived notions, laziness, or even eagerness to fit in.  There is a myopia in decision-making because, well frankly, we are human.

Nudge Decision Process

Choice Architecture.  Nudge was written by two University of Chicago professors – Richard Thaler and Cass Sunstein – who argue that people can be nudged to make better decisions with more thoughtful “choice architecture.”  The way the choices are displayed and the default options heavily influences the outcome.  See their blog here.

At face value, it’s not a radical concept.  If you have read Paco Underhill’s Why We Buy, you know that there is a lot of science and psychology in the placement of products at retail stores.  The best-marketed products are placed at eye-level and aisle end-caps so they catch the shopper’s attention.  Consumer product companies pay $ millions in slotting fees to get good shelf space.

No design is neutral.  They contend (and I agree) that there is no such thing as a neutral design.  Something has to be on the front of the menu, something has to eye-level in the grocery store, something has to the default shipping preference on amazon.com.  If any configuration of choices has a slant or bias, why not do the homework . . . and present the choices so that people tend to pick the “better” one?

Policy makers love this stuff.  You can see why this is an attractive idea.  It respects the libertarian ideas of choice and individual responsibility, while also suggesting that governments/ institutions can subtly tilt people’s choices towards better decisions.  It is the rare type of solution that has some appeal to tea-party Republicans and big-deal Democrats alike.  It’s gotten lots of traction from policy makers in many countries.

Default Choice.  There are dozens of reasons that we have faulty judgment, but this post will only talk about one of them – default choice. The concept is simple enough; default choice is the option that is selected if you do nothing.  It is the status quo option.

Because we are ambivalent – default choice.  Interestingly, the #1 ringtone is the default one provided by Verizon, AT&T and Sprint.  Not the prettiest sound, but some people such as my parents just can’t be bothered to change it.  After all, it’s a small and trivial thing.  No real value there and the default option works.

Because we are lazy – default choice.  Being ambivalent on something minor like a ringtone seems plausible, but what if I told you people did the same thing with their 401(k) and 403(b) retirement plans?  30-40 years of stocking away $$ from your pay check is certainly not trivial.  It’s a non-decision that can cost $ hundreds of thousands.

In Nudge, they discuss a somewhat depressing study conducted with CALPERS, the gargantuan pension fund for California state teachers.  CALPERS found out that the average number of times that teachers changed their asset allocation (% of stocks, bonds, cash) of their portfolio during their careers . . . .wait for it. . . . was 0 times.

Nudge - Default Choice

That means that more than 50% of people in that pension did not ever change their asset allocation.  Essentially, they started teaching at 25 years old with some generic allocation in stocks / bonds / cash, and they stuck with that generic setting for 15-40 years.   Why gamble your retirement on what someone in HR chose as the default choice for the 401K? Yikes.

Because we don’t pay attention – default choice.  A study (pdf download) from 2003 showed that the % of the population who donated organs was highly correlated to the default option on the driver’s license.  If the default was YES, 85%+ people donated their organs at death.  If the default was NO, most people did not donate.  In the graph below, the blue color represents countries that assumed you would donate (default choice) or you had to opt-OUT.

Nudge - Organ donation rate by countries

So what does this mean to consultants? All this business-book talk is fine, but what does this mean to consultants and their clients?

#1. Coach your clients on default choices.  For those focused on sales and marketing projects, coach your customers to think through the choice architecture.  The options that your clients show their end customers matter.  Google is uniquely aware of this and paid Mozilla (creator of Firefox) to have Google as its default search engine.  Of course Google argued to regulators that other search browsers were only 1 click away – but you and I know that people don’t take that extra step.

#2. Put your best recommendation first.  When you storyboard your recommendations, and present options, put the best one first.  The order of the options matter.  Don’t bury your best thought in the middle of the deck.  Put your best foot forward.

#3. Expect resistance to change.  Don’t forget that your client’s organization has a default choice too.  The status quo option for them is to NOT listen to you.  It is easier for them to do nothing, take the default choice, and ignore the changes you are recommending.  It is not enough to argue with logic (head).  You have to provide the passion (heart) which motivates them to act, and give them the tools (hand) to make it easy to repeat and implement the change.  Persuade by using head, heart and hand.

#4.  In sales, use the assumptive close.  A well-known, and proven tactic in closing the sale with a client is called the “assumptive close.”  It goes like this.

You have vetted the client, know their needs, and believe in good conscience that your product/service is needed.  The client is hesitant or just indecisive.  Judging on the situation and your selling style, just proceed as if they agreed to buy.  Essentially, you are giving them the default choice of buying from you – unless they tell you otherwise.

As strange as it sounds, it works.  In a previous life, I was a stockbroker and there is nothing as raw as selling stocks.  “Mr. Smith, sounds like this is a good fit for you, and you are interested in XYZ.  I will put you down for 100 shares at the market price, okay?”

#5. Beware of default choices.  As a consultant, a good part of your job is to see past the default choices that the client’s organization has convinced itself of over the last 50 years.  They have oral history, precedents, and institutional memory.  Things we hear:

  • “We can’t do that, we tried that before”  [default choice]
  • “They VP will never agree to that” [default choice]
  • “We have never done that type of project before” [default choice]

#6. Look for opt-in and opt-out marketing.  Once you open your eyes to it, you will see default choices everywhere, even on this blog.

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