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Norman Borlaug passed away on Sept. 12, at the age of 95. Borlaug was the innovator, an agronomist, who created the Green Revolution. He developed strains of wheat that had short stalks and were disease resistant. When the wheat puts its energy into its kernel, not into the straw, yield improvements of 100% (double) resulted. 

As a boy I grew up in Milestone, Saskatchewan, amidst fields of waving wheat higher than my head. Today that same wheat no longer waves. It is only a foot or so high. A simple yet powerful idea, that according to the Nobel Institute has saved hundreds of millions from hunger in India and Pakistan, primarily. Mexico became a wheat exporter in 1963 as a direct result. Borlaug was awarded the Nobel Peace Prize for his efforts in 1970. 

Borlaug was the great grandchild of Norwegian immigrants to America. He worked as a boy and teenager on the family farm in Iowa, and came to know farming at the ground level. Borlaug’s grandfather encouraged him to leave the farm and study at college. “If you want to fill your belly,” he told Norman, “go fill your head!” A Depression-era program that enabled low-income students to afford college made it possible for Borlaug to enroll at University of Minnesota. He failed the entrance exams, but persisted, and eventually ended up in the College of Agriculture.

Here is how Wikipedia describes just one of his innovations: “dwarfing”.

Dwarfing is an important agronomic quality for wheat; dwarf plants produce thick stems and do not lodge. The cultivars Borlaug worked with had tall, thin stalks. Taller wheat grasses better compete for sunlight, but tend to collapse under the weight of the extra grain—a trait called lodging—and from the rapid growth spurts induced by nitrogen fertilizer Borlaug used in the poor soil. To prevent this, he bred wheat to favor shorter, stronger stalks that could better support larger seed heads. 

The graph below shows the dramatic rise in grain yields Borlaug achieved. He developed the Green Revolution wheat varieties in remote Mexico, finding suitable strains of wild wheat, in difficult conditions, with low budgets and oppositions from those who directed his work. Few innovators can claim, as Borlaug could, that they saved hundreds of millions from starvation.

Wheat Yields

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The September 2 edition of The New York Times carried a front-page article by columnist and Nobel Laureate Paul Krugman, about “how did economists get it so wrong?”. The article was the ‘most read’, #1, according to www.nyt.com
But — in what way did economists get it wrong? In two ways. One, they failed to foresee the global financial and economic collapse that began in 2007, and accelerated almost exactly a year ago, when Lehman Brothers collapsed;  and two, after the collapse, they had no clue, and absolutely no consensus, on what to do about it. Politicians and leaders like President Obama had to improvise, and made many many errors in their ‘stimulus packages’ and ‘bailout packages’. Seven Nobel Laureates were asked what to do, and, as the Bible says, “ran off in seven different directions”.

What was the problem? Krugman says: Economists abandoned Keynesian thinking, which denies that people are always rational, capital markets are always efficient, and free open unregulated markets always are optimal. It is time they returned to Keynes, he recommends.

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

I have a different view.

I am writing this in a hotel room in Nottingham, UK, where we have brought some 31 Israeli high-tech managers from five companies, on a best-practices (and ‘next-practices’) benchmarking trip, to London, Derby, Birmingham, and Manchester. This is the 37th such trip for TIM and its managers. The goal: Visit great companies, and learn from great leaders how they manage, then adopt and adapt what they tell us. We are visiting LandRover, Rolls Royce, British Petroleum, British Telecom, British Airways, Manchester United football team, and others. We are in the 3rd day of our 6-day trip and have learned enormously already.

Economists failed, because they sat in their offices and crunched numbers rather than spent their time in the field observing real people, real companies and real markets. If they had,  if they had seen what is truly going on, in housing, sub prime mortgages, derivatives, options, etc., they would not have been as sanguine. They might have built theories that hold water. 

So economists: how did economics go wrong? By seeking truth in the wrong place (under the lamp-post, goes the tale,  instead of in the dark corners where economists dropped the coin, or the ball…). Seek truth in the real world. Leave your office. Do your research on site, where the economy unfolds. THEN return home and recount what you saw, and build your theories based on it.

“Elegance”, MIT economist and Nobel Laureate Paul Samuelson has said, “is for tailors”. Economics’ elegant mathematical theories were beautiful and useless. Let’s deal instead with the messy real world, and try to understand it. I admit that I am an economist. I share my discipline’s faults. I believed the numbers told the story. They don’t. In fact, they often lie. I discovered this only after beginning to teach managers and hence to understand their world, the real world of economics and business. 

We at TIM are happy to lead a benchmarking tour for economists who wish to seek truth the right way — in reality.

Really, this is going too far. I mean, innovation is all well and good, but — innovating opera? And at London’s  Royal Opera House? After all, is nothing sacred? Good heavens. Who in the world thought of this ghastly idea?

Someone had the idea of asking the public to submit “tweets” (to the Royal Opera website). One month ago, the Royal Opera website presented the public a sentence on which to build a story: “One morning, very early, a man and a woman were standing, arm-in-arm, in London’s Covent Garden.” Some 900 140-character messages were received.  Composers Helen Porter and Marc Teitler set the tweets to music. If they all were used, they would be a full seven-act opera — even beyond Wagnerian Valkerie proportions. So instead, excerpts will be used, making a twenty-five minute opera. It will be performed as part of the Deloitte Ignite arts festival.

The BBC Music Magazine’s deputy editor called the exercise “an accident waiting to happen”. He said: “Whenever there is a new fad you know somebody in the art world is going to grab hold of it by the horns. They should be careful that it doesn’t overtake the serious stuff they do.”

In response, Sara Parsons, the publicity officer for Ignite, says, “It’s about getting people involved and interested in opera — and it’s certainly done that.” 

Talk about breaking the rules. Opera is opera. It ends when the fat lady sings, not when the last thin Tweet ends. Give us a break!

However, here is my own Tweet contribution, following on to the lead sentence. 

“Let’s tweek the twats,” the man said, “and Twitter Aida! Pyramids, shmyramids!”. 

Managers know that ‘domain expertise’ — intimate knowledge of markets, clients, technology, competitive forces and industry structure — is vital. Trying new markets without such expertise can be fatal. Infosys, for example, sells its IT expertise with great success by first establishing ‘domain expertise’.

Now, Cisco’s legendary CEO John Chambers has announced his plans to lead Cisco into 30 (yes, 30!) new areas of business. His strategy is described in the latest issue of The Economist*. He calls them ‘market adjacencies’ — markets close to, or adjacent to, markets in which Cisco already operates.

In 2002, Cisco successfully pursued this strategy during the recovery, expanding into internet telephony, optical networks, and wireless equipment. These businesses now bring in 25% of Cisco’s profits. 

Chambers again sees opportunity during the current weak, volatile and fragile recovery, and plans to pursue a similar strategy, while competitors remain risk averse and mainly pursue cost-cutting strategies. Cisco will tackle ‘virtual health care’, ‘cloud computing’, safety and security, and ‘routers in space’. To implement this strategy, Cisco uses a rather elaborate organizational system that involves councils (markets potentially reaching $10 b.), boards ($1 b.) and working groups. Cisco has some 50 boards and councils, involving 750 managers. They are fluid and change rapidly.  

Will analysts’ fears that Cisco is overextending its capabilities be justified? I doubt it. After practicing its ‘moving up in a downturn’ strategy after the 2000-2001 recession, Cisco is well positioned to make it work during the much deeper current recession.

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*Reshaping Cisco The world according to Chambers. The Economist, Aug 27th, 2009.

Who has the right to file a patent application? Is it, the first person to apply for a patent for that particular idea (first to file)? Or is it the first person who actually invented the idea (first to invent)?

Most of the world follows “first to file”. It is defined as: “the right to the granting of a patent for a given invention lies with the first person to file a patent application for protection of that invention, regardless of the date of actual invention.”

But the United States, in this as in other areas, is out of step with the world. There, it is “first to invent”, defined as:  “Invention in the U.S. is generally defined to comprise two steps: (1) conception of the invention and (2) reduction to practice of the invention. When an inventor conceives of an invention and diligently reduces the invention to practice (by filing a patent application, by practicing the invention, etc), the inventor’s date of invention will be the date of conception.”

To make matters worse, America has indicated its intention to shift its patent legislation from “first to invent” to “first to file”, to get in step with the rest of the world.

But it has not yet done so.

The result: as a patent attorney acquaintance notes, “this causes much uncertainty, and indeed lengthy ‘interference’ cases.”

Get with it, America. Can we please have a consistent patent policy everywhere?

A column in the Financial Times on Sept. 2 asks, “is the time right for the return of the conglomerate”? In the 1960’s, and later in the 1990’s, it became fashionable for large companies to diversify their businesses by acquiring companies in a wide range of different industries. The idea was based on financial diversification and spreading risk. If retailing did poorly, well, perhaps media and entertainment would offset it. The core of the idea came from a Harvard Business School proposition that management is management — if you could manage an oil business, you could also manage a movie study, because the basic fundamental principles were the same.

This hubris (excessive pride) proved inaccurate. Management is not management universally, and there is a core competency of understanding deeply the industry in which one operates, based on long experience. Many conglomerates failed for this reason. Exxon, for instance, expanded into non-oil industries like high-tech and failed in them. 

But — is it time to revive this conglomerate business model? And if so, what is the rationale?

The reason is simple. A key constraint limiting growth and expansion today is credit and finance. Banks are reluctant to lend, and even when the recovery picks up steam, banks will likely be far more stringent with their loans than in the past. Conglomerates, because of their size and clout and ability to generate cash, will be able to surmount this constraint and supply credit to their constituent businesses. This may prove a key strategic asset. 

Consultant Ian Harnett notes: Companies that generate free cash flow for their group can provide risk capital for more widespread investment, when banks’ risk appetite disappears.

Look for the conglomerate to return. If it does, it will be a wise reaction to the paradigm shift in finance and financial services, that suddenly makes companies become their own financiers.

It’s now official. Mickey Mouse is The Incredible Hulk’s father-in-law.

This week Walt Disney acquired Marvel Comics for $4 b. Disney  began when Walt Disney drew some sketches in 1928 in a rat-infested warehouse office in California (Mickey Mouse was inspired by a real mouse that eat some of Disney’s lunch crumbs). The Walt Disney Company bought the comic book company that had entered bankruptcy in 1996 when comic books no longer were sought and  bought by kids, and later emerged from it.    

Then, suddenly, movies based on Marvel comic book characters drew huge box offices. For example: (with the date and box office figures) Blade 1998 – $131 m., X-Men 2000 – $296 m., Spider-Man 2002 – $822 m., Incredible Hulk 2008 – $263 m., and so on…. Marvel tried to make some of its own movies, but generally was not successful — its core competency was in inventing some 5,000 comic book characters, not in making movies. Disney was great at making movies, and bought Pixar for animation skills, but perhaps lacked the soaring imagination of the Marvel comic book artists. 

It is remarkable that adult viewers sometimes find imaginary comic book characters like Spiderman more realistic than the ‘real’ characters that appear in Hollywood scripts.  

A management lesson  is, I believe, the following:

One of Gary Hamel’s four ‘boxes’ that define a business is called STRATEGIC ASSETS. (The other three? Customer interface; Value network; Core strategy). There are companies that have utterly failed because they have been unable or unwilling to fully exploit a key strategic asset. These are prime targets for acquisition, because those strategic assets may be the missing piece in the puzzle for another company, such as Disney. Business opportunities arise when entrepreneurs see value in places where others do not.

Case study: K-Mart, a discount department store, in the U.S. and Puerto Rico. A hedge fund operator named Edward Lampert bought K-Mart for a virtual ‘song’ for only $300 m., after it went broke. Why? Lampert spotted K-Mart’s strategic asset: The real estate value (not listed at its proper value on K-Mart’s balance sheet) of its many stores, in shopping centres across the U.S. Lampert sold off K-Mart real estate, used the money to buy Sears, changed the holding company name to Sears (more respected), then relaunched K-Mart and Sears. Essentially, Lampert bought K-Mart with part of its own strategic assets others failed to see, and that historical book-value balance sheets failed to reflect.

Recently Bank of Israel Governor Stanley Fisher became the first Western central banker to raise interest rates. Central Bank rates in most Western nations range from 0.25 to 1 or 2%, after banks drastically slashed rates to battle the global recession. Most of these banks are for now maintaining rates at their low levels.

But could they have reduced rates even further? Is it possible, for instance, to set a negative interest rate? In other words: I borrow $100, and at the end of the year, pay back only $99?

Of course, this has happened in the past, when real interest rates (the nominal or actual rate less inflation) were negative, because inflation exceeded nominal rates. But, can nominal rates be negative?

Writing in the Financial Times, Wolfgang Munchau points out that “the zero lower bound [of interest rates] is one of the great myths of monetary economics”. Last week, he notes, the Swedish Riksbank set a small negative deposit rate. I recalled, in reading his piece, that decades ago the Euroyen interest rate (the rate of interest paid on yen deposits held in European banks) was negative, when Japanese interest rates were about zero, mainly because banks did not want to hold such deposits and set negative rates to discourage them.

Should this be done? Can it? asks Munchau.

The answer to both is, yes. 

We teach managers to examine every single fundamental assumption inherent in their business designs. Governments and central banks should do the same, in these turbulent times. What are we assuming, they should ask, that may be wrong.

Apparently, the assumption that interest rates must be above zero is one of them.

Since I was a child, I have been myopic and won glasses. As a kid, I fought wearing glasses for years, even when I could not see the blackboard at all, for fear of being called ‘short eyes’ and worse. 

Today, I see managers doing the same. They are myopically short-sighted, cannot see the future even as it unfolds clearly, and endanger their companies, even their industries, by doing so. Today, uncorrected myopia exacts a heavy price.

The media industry is a prime example. As Andrew Edgecliffe-Johnson notes in the Monday Financial Times*, “from the morning paper to the evening news, the media industry is in crisis”. PWC says global revenues from newspapers and their digital incarnations will fall 10% this year and will shed $20 b. in revenues between 2008 and 2013. Worse than airlines!

Why?

A report notes that the media industry “has failed to make the digital transition”. News organizations’ digital revenues were only 11% of total revenues, compared with 69% for the broader information industry (e.g. including legal and financial data providers like Reed Elsevier, a publisher, and Bloomberg).

Where were the industry leaders’ glasses? Were their curtains shut hermetically? Did they notice at all what happened to the music industry, which stuck to selling CD’s when the technology dictated downloads? Did they miss successful innovators in their own industry, like the Seattle Post-Intelligencer, which shifted from newsprint to a solely digital format [see this Blog, Paradigm Shift in newspaper: Sleepless in Seattle, March 2009]?

The warnings signals were clear and powerful. Craig Newmark founded Craigslist as a service to his friends in 1995.  That was 14 years ago! Since then on-line classified advertising has exploded. Now, newspapers used to make much of their profit from their classifieds. Today, newspaper advertising, including classifieds, is down 29% in the U.S. I believe classified advertising revenues fell far more. When Craigslist appeared, did newspaper owners and managers grasp that this was a powerful paradigm shift, one they could not ignore? Why did they not see it? Did these industry leaders wait, like a condemned criminal on Death Row, for their businesses to wither and die?

A great many good people are going to lose their jobs, forever, in the media, because of the myopia of their leaders.   Perhaps we should say, as did the broadcaster in Network, “I’m mad and I’m not going to take it any more!”. If your leaders refuse to put on corrective glasses, stand up and help them see the future. Save your own job and those of your friends.
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* “Sacrifices made in hunt for new model”, Financial Times, Monday Aug. 31, 2009, p. 12.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2009
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