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This is a photograph of a remarkable human being, an inventor, named Forrest Bird. He’s in his late 80’s, still working 12 hour days, still inventing, and still flying his 21 planes. Chances are, you never heard of him. Neither had I until I watched a CBS 60 Minutes segment. But odds are good that you know someone whose life he saved. Bird invented the respirator — the device that keeps people breathing when they cannot themselves. His BabyBird respirator has saved numerous babies’ lives, including the lives of two of his neighbors in Idaho, now strapping young men.

Forrest Bird

Forrest Bird

What is Bird’s story? As with all inventor stories: he identified a need, and satisfied it, using his skills, inventiveness, creativity and determination.

Here is what the 60 Minutes segment revealed about his respirator, that helps lungs breath, based on his knowledge of aviation:

“In the lung are rudimentary air foils. It’s like a million airplane wings all down through the lungs. In and out, all the way through, that facilitate your normal, spontaneous breathing. So it was just applying all this,” Bird explains. “Taking it from aviation.” It sounds simple enough, a concept even school kids can grasp. But in reality, the human lung works with mind-numbing complexity. For his own education, the military sent Bird to medical school. And though his studies took him to the outer limits of science, his next respirator was still definitely low tech.

For example, he used strawberry shortcake tins to construct one of his early machines. “And what I did was, I put a diaphragm in here so that when you did that, it would drop the pressure and this magnet would grab it and hold it off,” he explains. Back then, there weren’t many options for people with respiratory problems. The worst cases required iron lungs, which were big, primitive, expensive and confining. So Bird kept on trying to develop a small, affordable device that could automatically help people breathe. His breakthrough came in the late 1950s with the “Bird Mark 7” respirator, a device so effective the Air Force made a training film about it, with Hollywood music and all. “We were able to assist your respiration. We could control it,” Bird explains.

Bird’s respirator kept his first wife, who suffered from advanced emphysema (lung disease), alive for many years.  Ultimately she died of the disease, when her lungs were simply destroyed. 

Bird makes his respirators in Idaho, in the complex in which he has his home and lab. They are used all over the world.

Is it safe for someone his age to fly? Of course, Bird says.

Matter of fact, he says, in some air emergencies, like pulling out of a dive without blacking out, it’s the old guy you want at the controls. “We have arterial sclerosis. Now, our young fellow, at 25, will black out faster than we will because our arteries are harder and they’re less expansive. So we maintain our blood pressure better.”

What can innovators learn from Forrest Bird?

*   Build prototypes. Use what you have. They can be crude — but they are essential. Paper business plans are just not enough.
*   Use what you know. Bird understood aviation, air foils, aerodynamics, and transferred this knowledge from airplane wings to lungs. Find knowledge in “X” and transfer to “Y”, when no-one else has thought of doing it or has seen the connection.
*   Keep innovating. Bird is still coming up with inventions and improvements. Creativity is not the sole province of the very young. Older people may have harder arteries, and poorer memories, but they have the wisdom of age and ages.  
*   Accept huge challenges. When Bird invented his respirator, many people, including children, were doomed to huge Iron Lungs — breathing machines that were expensive, confining and very non-portable. Most people just accepted the fact that those constraints were a necessary part of survival, especially for children who had polio. Bird did not.  His first model was patched together, and was operated by a door knob — push on it, and air streams into your lungs.  
*  Make it yourself, if you can. You don’t have to assume automatically that you can only make your device in China.  There are huge advantages to making it right next to your development lab. If it’s in Idaho, you can have your home next to your plant, right next to amazing mountains and a sparkling clear lake (where you land your seaplane), like Forrest Bird.

Adair Turner — Lord Turner, a blueblood — is Britain’s chief financial regulator. Almost alone, he has been willing to tell the truth about the world’s banking and financial services sector and their role in the 2007-9 global crisis. In payment, according to a New York Times report, he has been called “crackers” “stupid” and “insulting”. 

What did Turner say to deserve these epithets?

Mr. Turner is daring to ask the very question that many Britons, and indeed, many Americans, are asking themselves: What good are banks if all they do is push money around and enrich themselves? As he sees it, the City takes too much from British society and gives back too little. It has grown too big and too powerful. And, he contends, the bankers have co-opted many of the regulators who watch over them.

What remedies does Lord  Turner propose?

• Tax financial transactions. •  Increase capital requirements. •  Shrink the financial industry, which, at its peak, accounted for roughly 11 percent of the British economy. Only then, he argues, can banks’ excessive profits — and bankers’ pay — be curtailed.

Turner says:

“We have begun to accept this idea that liquidity is the new God,” Mr. Turner said in an interview earlier this month.  “The ideology of efficient markets became deeply embedded within the regulatory community,” he continued. “And if you are of the belief that we have to challenge this, then you can’t help not to make speeches about it.”

Turner became Britain’s chief financial regulator a year ago, right after the collapse of Lehman Brothers. Should the Conservatives win the next UK election, as expected, he will be out of a job and his proposals shelved. And his financial oversight agency will likely be merged into the Bank of England. But Turner will still have done some good, by almost alone, declaring “the bank empires have no clothes”.

I am an admirer of Frank Partnoy, now Professor of Law and Finance at the University of San Diego. His book Infectious Greed (2003) revealed  financial thievery, scams and chicanery on Wall St. during the previous 15 years. Had we read it carefully and believed it, we would have sold all our assets at once, well before the 2007-9 crisis.  

Partnoy was recently interviewed by CBS’ 60 Minutes team. His ‘take’ on the underlying cause of the global financial crisis is stark and simple. It is this: America legalized and deregulated gambling — but only on Wall St. Elsewhere gambling is closely regulated, and on-line gambling is still not legal. The gambles Wall St. took were concealed, huge and irresponsible. When they lost, so did all of us. 

How and why did this happen? I’ve written about this in detail in our forthcoming book*. But Partnoy explains it very simply.   

In the bubble leading up to 1907 (see my earlier blog on this), Wall St. was covered with ‘bucket shops’ — places where you could place a bet on a stock without actually buying that stock. Since stocks were always rising, mostly you won.  So the bucket shops pulled in money like a huge vacuum cleaner. The Financial Collapse of 1907 was caused in part by bubble speculation driven by these bucket shops. After the crisis, tough legislation made such bucket shops illegal — permanently. This legislation also banned anything that resembled financial gambling…

….Until the year 2000. In its dying breath — the last day of the last session of the 106th Congress — the Commodities Futures Modernization Act was passed. Recall, Clinton was still President, but Congress was Republican and pro-free market. Page 262 of the Act, notes Partnoy, banned state governments from enforcing “bucket shop” laws against financial gambling. The same Act, I note in my book, made “swaps” and “derivatives” immune from any form of government regulation, including collection of statistics.  

Now, credit default swaps (CDS, insurance against bond default) had been invented in 1994. They were called ‘credit default insurance’. Quickly the name was changed to ‘credit default swaps’, because swaps were not subject to regulation. (A credit default swap is in no way anything resembling a swap). After the  2000 Act passed, legalizing CDS gambling boomed, growing from $100 b. to a market totaling over $50 trillion (four times the US GDP). The bucket shops were back — only now, they were global and a million times bigger and more toxic. Blame Clinton and Greenspan, notes Harvey Goldschmidt, a former Securities Exchange Commission lawyer. Clinton permitted this. And Greenspan (Fed Chair) flooded the world with money to facilitate it. 

Three companies — Bear, Stearns; Lehman Bros.; and AIG — made money on CDS’s, because in boom times, no bonds are in default, and the two percent premiums (a CDS cost roughly 2% of the face value of the bond) are licenses to print money. Their senior managers got enormous bonuses as a result. But when the security-backed mortgages collapsed, these companies could not pay their debts. Bear Stearns was acquired for pennies on the dollar, Lehman went bankrupt and AIG was bailed out by the US Treasury to the tune of a staggering $180 b. 

Partnoy notes that many people became hugely wealthy by buying CDS’s, betting the bonds would collapse. They prefer, for obvious reasons, not to be widely known in public. Some were Saudis. Note that a CDS had nothing to do with insurance. It was a pure gamble. One hedge fund manager who invested in CDS’s got $3.4 billion (that’s billion, not million) in fees and bonuses in a single year.

How many senior managers in the financial services industry really understood the risks and intricacies of these CDS roulette wheels?  

“At senior levels, I think they were only vaguely understood,” notes Partnoy.  

How bitter life must be for these Masters of the Universe, who in a split second went from hero to villain, over something that they did not fully understand or bother to understand. 
____
* S. Maital, D.V.R. Seshadri. Global Risk/Global Opportunity: Ten Essential Tools for Tracking Minds, Markets and Money. Forthcoming: SAGE 2010.

This week the Group of 20 leading countries, G20, met in Pittsburgh on Sept. 24-25, to address two key issues: climate change and the fledgling global recovery. This meeting is important, because on Sept. 25, this forum announced that it will be the main one in which global business and economic policies are shaped, replacing the G8.

The G20 comprises the finance ministers and central bank heads of countries that account for 85 percent of world GDP, 80 percent of world trade and two-thirds of world population. The countries are: Argentina, Australia, Brazil,  Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, UK, U.S. The European Union is also represented, hence the “G20”. Last April  the group met at heads-of-government level in London — recall the TV shots of each Prime Minister entering 10 Downing St. with his gowned wife, one by one, in a fashion parade. Next year G20 will meet in Muskoka (a resort north of Toronto) and in South Korea. 

Politicians, economists, pundits and others all proclaim the crisis is over and the recovery has begun. But managers are not so certain. And it is managers who are in the field, daily, producing and selling the goods and dealing with clients. Here is what McKinsey Global Research found in their recent survey of managers worldwide:

In early September, McKinsey surveyed more than 1,600 business executives around the world about their current views on and hopes for the economy. Only 20 percent believed that a “normal” recovery starting in late 2009 would be the most probable outcome. Some 42 percent thought that 2010 would be a year of flat economic activity. About a third believe that an extended period of anemic global economic growth (below 1 percent per annum) is likely for the next several years. The remaining 7 percent felt that something akin to a double-dip recession was probable.

I think the real story of the Pittsburgh G20 is Pittsburgh, not G20. My sister and brother-in-law live there and I have been visiting Pittsburgh regularly for 55 years. I watched Pittsburgh transform itself from a dirty steel town (I recall touring the steel mills along the Allegheny River), permanently coated in soot, to a sparkling clean modern high-tech city with great universities (University of Pittsburgh and Carnegie Mellon), entrepreneurial energy and excellent mayoral leadership. Located at the confluence of two great rivers, the Allegheny and the Monongahela, Pittsburgh has escaped the decay and decline other cities experienced when their heavy industry disappeared. As a city that successfully reinvented itself — one of very few — Pittsburgh merits careful study by innovators and deserves a visit by tourists. Come especially to see what they’ve done to the old Union Station — it’s amazing.

Today’s BBC Business Daily reports on new and fascinating research by Professor Priya Raghubir Stern School of Business, NYU. Prof. Raghubir has found, in her research, that contrary to the economists’ assumption of rationality, how much money people spend depends on what jingles, or rustles, in their pockets. $50 in small notes and coins? We spend it freely. One big note, like $50? We hesitate to break it to spend it. 

Professor Raghubir notes:

We spend more in small denominations than with single large bill. Why? People fear, if they break large bill, they will have no control over it, it will go away. If they hold on to large denominations, they are more likely to maintain self-control.

This is only one of many mechanisms that we develop to control our own selves, and protect ourselves against ourselves.

Is this finding robust across different cultures?

We found it in 3 different countries: First, in the U.S., where we replicated it with children. Pre-schoolers were not prone to this effect, they think that lots of little coins is more money than paper…something called “numerosity.” But for older children, as with adults, five $1 bills, or coins were far more likely to be spent than one $5 bill. Second, we showed this in India, with a 500 rupee note vs. smaller notes. Third, I’ve shown it in China, with a group of housewives in Shiangtan, the effects were spectacular. There, people were far less likely to spend 100 yuan given in one banknote than when given 100 yuan in small denominations. 

All of us who travel know there is what Prof. Raghubir calls a foreign currency effect:

If I’m used to spending 1 dollar for cup of coffee, I will tend to spend 1 dollar for it in Canada, (worth only 67 U.S. cents), one pound in the UK, worth about $1.50, or one euro in Europe (also worth about $1.50). People inadequately adjust for exchange rates.  

So, does this mean we are dopes, and dupes? Not at all. Quite the opposite. It means that people are clever in devising ways to guard themselves against short-termitis, the tendency to spend and enjoy now rather than in the future.   

Do you also behave in this way? asked the BBC interviewer of Prof. Rughabir.

Of course, she said. 

Conclusion: In your business model, do sweat the small stuff. Because people do sweat (spend) it. Nickel and dime your business model, and you can boost your revenues.

Malaria is an infectious parasitic disease carried mainly by mosquitoes, in tropical and subtropical regions, including parts of the Americas, Asia, and Africa. According to Wikipedia, each year there are approximately 350–500 million cases of malaria worldwide, killing between one and three million people, most of them young children in Sub-Saharan Africa.

Had 3 million persons, mainly children, died in the West from anything, there would be massive investment to combat it. But for Merck, Pfizer, Novartis and other Big Pharma firms, there is no margin in innovative cures for malaria. Meanwhile, the mosquitoes are gaining — the parasites they carry are developing resistance to the current leading anti-malaria drugs.   

Now, a $3 b. program to combat malaria has been announced, led by 59-year-old Tanzanian President Jakaya Kikwete. The program is beautifully ultra-simple. Provide 250 m. mosquito nets (treated with insecticide) for Africans. Organize logistics to bring them (and related educational efforts) to the remotest of African villages.

Kikwete is one of Africa’s lesser known but more effective leaders, mainly because he is not involved in scandals or notoriety. In general Tanzania has had enlightened leaders, dating from its first President, Julius Nyerere. 

Let us wish Kikwete and his program success. Let us also ask: In our innovation efforts, why do we value some lives far less than others? Is not a life, a life?

The Jewish world celebrated its New Year on Saturday and Sunday, Sept. 19 and 20. By the Jewish calendar, the year 5770 began. In our tradition, Rosh HaShanah marks the day on which the world was created and the time when human beings were created. 

Ask 100 people about the Biblical account of how and when people were created, and 99 will tell you about Adam and about how Eve was created from Adam’s rib. This of course is accurate. But few know that there are two rather different accounts of Man’s creation, one in Genesis chapter one and the second in Genesis chapter two. The key differences between the two are explained clearly by the late Rabbi Joseph B. Soloveichik, the American prophet of modern Orthodox Judaism, in his 1956 article, “The Lonely Man of Faith”, published in Tradition, vol. 7, 1965. The two accounts are relevant for innovators and entrepreneurs.

The first account of mankind, Soloveichik notes, in Genesis 1, states that human beings were created in God’s image. “And God created man in his image; in his image God created man, male and female He created, and God blessed them…”. What does this mean, “in his image”? It means, the learned Rabbi says, that just as God is the Supreme Creator, so are human beings creative, just like their Creator. This first version of humanity speaks of how human beings — men and women, created together, jointly — seek to master their environment, by constantly asking the question “how?”, and come up with ideas that answer it in ways that make life better. This is the ‘feet on the ground’ aspect of innovation and entrepreneurship, whose roots are in Genesis 1. What are our needs? How can we meet them? Here, mankind is commanded “to fill the Earth and conquer it” creatively.   

But the second version of human beings’ creation is “significantly different”, Soloveichik writes. In Genesis 2, man is created by God out of the earth. Women are then created out of Man’s rib. And mankind is commanded by God not to conquer the Garden of Eden, but rather to preserve and enhance it. (In no time, we manage to mess up that mission badly). No mention is made here of God’s image. So, says Soloveichik, in this version, mankind asks metaphysical questions: Why? For what purpose? This version of mankind is “head in the clouds”, the thinkers, the questioners, the dreamers. Mankind questions everything.

Innovators and entrepreneurs fulfill both versions of mankind’s Creation. They are feet-on-the-ground innovators, creators. And they are head-in-the-clouds dreamers, questioners, who challenge every assumption and who break the rules.

Both qualities of mankind are vital if we are to endure and prevail on this earth. And both qualities are vital, if innovators and entrepreneurs are to succeed in changing the world by meeting real pressing human needs.

*This blog was inspired by a brilliant lesson led by our Rabbi, Dov Hayun, Rabbi of Moriah Synagogue, Haifa.

An interesting article in Business Week by Peter Coy, asks “can we protect consumers (from financial innovation) and still be creative?” [Incidentally — Business Week was put up for sale by McGraw Hill last week. There were few buyers.  Business Week’s famed investigative reporting has reportedly been hamstrung…].

His answer?   

In spite of the public’s mistrust, entrepreneurs and academics are plunging ahead. They’re working on ideas they hope will help the consumer borrow more safely and build wealth more reliably. Some are ambitious, like reducing homeowners’ exposure to declines in local housing prices. Others are fanciful, like an electronically rigged wallet that becomes harder to open when your bank account is low, an idea from the Massachusetts Institute of Technology.

Let us remember Joseph Schumpeter’s memorable phrase: Creative destruction. All creation involves destruction.  Old things have to die in order for new ones to be born. That is one interpretation. Another is: All creative things can be used destructively. It is not inherent in the innovations, but in the people who use them.  

Sub-prime mortgages in principle made housing affordable even for low-income people. A great idea, if used properly. But it was used to enrich unscrupulous thieves. It is not the fault of the innovation, but of those who misused it.

Financial innovation will continue. As it does, hopefully those who pioneer in it will remember that the foundation of capitalism is in creating long-run sustainable value for people,  in creating customer margin as well as company profit margin. The “I’ll be gone, you’ll be gone [before the earthquake we created happens]” principle that drove much financial innovation in the past is hopefully dead and buried.

All eyes are focused on the struggling UK economy, and on each quarter’s GDP numbers. TIM recently completed a fascinating benchmarking program in Britain, and what we learned will be the subject of several future blogs. Meanwhile, let us put Britain into perspective — three centuries of perspective.

The 1800’s were the British century. We had Globalization 1.0. The British Empire, on which the sun literally never set, created a global trading system far more durable, far more global, than the present one. There were fewer government restrictions and impediments to trade. We had the Victorian Internet — the telegraph. The gold standard ensured no country could issue excess currency. Britain set up the system to profit, often at the expense of its colonies. And Britain grew wealthy.

But by 1900 the Empire was waning and America was replacing Britain as the world’s dominant power. The 20th Century was American. America learned to do industrial R&D from Germany and from Britain, and did it better. Two world wars ended Globalization 1.0. Bad politics, not bad economics. But at Bretton Woods, in July 1944, 65 years ago, Globalization 2.0 was born. It worked fantastically until 2007. But it was flawed. The world currency was the dollar. But America overspent, undersaved, flooded the world with dollars and ruined the system. In 2007 it crashed. The UK suffered even more than America, because its financial services caused, and profited from, the bubble as much or more than America’s. Bad economics ended Globalization 2.0. Bad American economics.

The UK chose to join the European Union but not to adopt the euro. It left the European Exchange Rate Mechanism on Sept. 16 1992, under PM John Major, and never rejoined. At first this appeared brilliant. The flexible pound gave Britain elbow room to stimulate its economy. But after the global recession this decision seems flawed. The Euro countries are recovering much faster than Britain — especially Germany.  

Britain clearly needs to reinvent its business model. So far it has focused on short-term survival, rather than long-term competitiveness. 

So which country will dominate in the 21st C.? Will Britain continue to wane or will it recover? With a likely shift from Labor to Conservative government in the works, Britain desperately needs transformative change. But will it happen?   And how will Britain’s global companies endure and prevail within this atmosphere of uncertainty?   

Perhaps the best way to understand the British is by listening to  this song A British Tar (a tar is a sailor) from Gilbert and Sullivan’s H.M.S. Pinafore, 1878. Here is a portion of it:

A British tar is a soaring soul,
As free as a mountain bird,
His energetic fist should be ready to resist
A dictatorial word.

His nose should pant
and his lip should curl,
His cheeks should flame
and his brow should furl,
His bosom should heave
and his heart should glow,
And his fist be ever ready
for a knock-down blow

His foot should stamp, and his throat should growl,
His hair should twirl, and his face should scowl;
His eyes should flash, and his breast protrude,
And this should be his customary attitude,
His attitude
His attitude

Are there still “British tars”? Where? Will Britain’s attitude, energy and innovation continue to sink, behind China (#1?), America (#2) and even Germany (#3)? Or will the British tar make a startling comeback?

Stay tuned, and keep your eye on the long run.

TIM managers have just completed a remarkable benchmarking week in Britain, visiting 13 organizations, including LandRover, BT, BP, Virgin, Rolls Royce, RBS and Manchester United.

Our visit included a trip to the Prince of Wales Theatre in London’s West End, where we met with Richard Pulford, CEO of the Society of London Theatre, a trade association of theatrical producers.

We learned many things about the business of producing plays and musicals. The main lesson: It is not enough to create value. (London plays and musicals create enormous value, and memorable customer experiences, for 14 m. theatre visits annually!) Some shows have run for decades — Agatha Christie’s The Mouse Trap ran for 57 years,  Phantom of the Opera for 27 years, Cats for 21 years!.  

But you have to capture that value in order to sustain the business. London theatres are sustained only by the fact that producers tend to be wealthy and can afford to lose money. Only one play or musical in 10 makes money, two break even and 7 lose! Why? Market failure — inability to capture value. Here is how Richard Pulford explains it:

West End theatres are crucial for London. They bring in many tourists, who spend on restaurants, cabs and hotels.  For instance, total hotel revenue is £ 415 m. yearly. Much of this comes from theatre-goers. Perhaps £ 1 b. in tourist revenues is directly related to the theatres. Yet, the theatres cannot capture this revenue, it is an ‘externality’. [Perhaps they could, if they practiced market segmentation, like Manchester United…but they do not, and have not apparently benchmarked Man Utd.]. A rare strike in the theatres drastically cuts tourism.

We were convinced that with market segmentation, with the techniques used by Manchester United, BT and other businesses we visited, London theatres could be profitable. They could capture more of the value they create. Yet they appear to avoid benchmarking other businesses, because theatre is, well, theatre is artistic, not business. But why? In social entrepreneurship, powerful business principles are used to do good in the world and to help people. Why not do the same in theatres?

Every business begins and ends with creating value for its clients. But every business must also know how to capture a large portion of that value. Businesses that do not are doomed to lose money. They will disappear, unless, like the theatre, they have wealthy backers willing to lose money forever.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2009
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