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National Hockey League as a Paradigm for the New Capitalism

By Shlomo Maital

 

    Alexander Ovechkin, Washington Caps

  I was born and raised in Saskatchewan, where 9-month winters mean you can skate before you can walk,  and where great hockey players get their start by skating on farm ponds (like Gordie Howe).   Hockey is a fast exciting sport.   It was almost ruined (like capitalism itself) by money.  A lockout in 2004-5 by team owners, who balked at paying high salaries, hurt the NHL’s crucial TV revenues.  Now it has revived and reinvented itself.  A strong salary cap (i.e. a ceiling on how much you could spend on players) was imposed, preventing big-market cities like New York and Chicago from dominating.  This year, all the old-time dominant clubs like Detroit Red Wings, Boston Bruins (last year’s Stanley Cup winners), Chicago Blackhawks, and Vancouver Canucks (last year’s runnerup)   are gone, out of the playoffs.  Replacing them are no-snow hot-weather teams like Phoenix Coyotes, Tennessee Predators and Washington Capitols.  The reason?  The salary cap has greatly leveled the playing field.  As John Marshall (AP) notes in his column, “parity has taken over in the NHL playoffs, raising the possibility that the Stanley Cup  could end up in a place like Nashville, Tennessee or Glendale.”

     Can the NHL be a parable for capitalism itself?  Do we need to put strong ‘salary caps’ on capitalism, to keep those with obscenely deep pockets from buying politicians, and from buying up and monopolizing the real economy?  Do we need to tax the very wealthy, to level the playing field, instead of letting presidential candidate Mitt Romney, a multi-millionaire, pay less tax than Joe Plumber – and not fully disclose how little he did actually pay? 

     Once, Pittsburgh, New Jersey, Colorado and Detroit dominated the Stanley Cup. It was boring.  Then improbably, Tampa Bay won the Cup, in 2004.  Now, the contest is open and exciting.  Marshall says the final this year could be between Washington (and its star Russian player Alexander Ovechkin) and Nashville.  Who could have guessed?  Thanks, salary cap!  Thanks,  ‘levelled’ capitalism.    

Reverse Innovation Revisited: What the Poor Teach the Rich

By Shlomo Maital

 

 

 Vijay Govindarajan

 

 

 

   In an earlier  blog I mentioned business professor Vijay Govindarajan’s new book about ‘reverse innovation’ (innovating for the poor, leveraging the result for the rich).  Here is an excerpt from an excellent YouTube talk by Prof. Govindarajan about this important idea.

 “What is reverse innovation? Why is it so important?  What is it that multinationals must do to master reverse innovation? Think about the innovation paradigms inside GE, P&G, Pepsi, IBM, Cisco, Nestle and others. Historically, MNC’s design products in rich countries, and sell them in poor ones. Reverse innovation involvesthe opposite, innovating in poor countries and bringing the products to rich ones.  Clearly poor people want what rich people have.  But why would a rich man want a poor man’s product? That is the essence of reverse innovation.

  * Nestle:   is remaking itself as a health and wellness company. The place they are looking to innovate is emerging markets, because of the size of the consumer base.  They innovated under the brand name Maggy (noodles), in India,  low fat healthy noodles. It created a huge market in India, but is now sold successfully in rich countries.

  * Tata Nano:  $2000 car.  The cost of a DVD player in a BMW is much more!  They target the two-wheeler population in India.  Two-wheelers cost $1500. A $2000 car will win the two-wheeler population.  You are converting non-consumers into consumers. This is fundamental innovation.  Tata Motors plans to bring the Nano into Europe and the U.S.  This will transform the global auto business.

  * GE.  Five years ago GE pioneered an ultra low cost portable ultrasound machine in China. It costs $15,000.  Contrast that with the premium ultrasound machines, sold for $350,000.  Why do you need a portable machine in China?  90% of China is rural.  You have no hospitals.  The hospital has to come to the patient.  So the machine must be portable.  The low cost portable machine, innovated for China, is now creating markets for GE all over the world, including the US.  It is a $300 m. global business for GE.

    In the US, you can put the portable ultrasound machine in an ambulance, when there is an accident. 

     How come reverse innovation has become so important? It is because of the 2008-9 Great Recession. It has fundamentally reset the world.  Growth has shifted from developed to developing countries, from rich to poor.  15 years ago, GE used to prepare its global strategy, so there was a strategy for the US, Europe, Japan and the rest of the world.  Today GE has a BRIC strategy,  for the Mid-East, and – the rest of the world.  This is a fundamental change.  MNE’s have taken the 7 b. people on earth and divided them into 2 b. rich people, and 5 b. poor.  The latter were left to government and charity. This is outmoded.  We need to bring the 5 b. poor into the consumer base.  They cannot consume the same products consumed by the 2 b. rich base.  There is no product created for middle America ($50k pcap.) that can be adapted to capture middle India ($800 pcap.).  

    What should the MNE’s do to master reverse innovation?  1. Have a big dream for emerging markets.  Unless you think big, you won’t become big.  2.  Make ‘amplifying weak signals’ a core competence.  The future is unknowable. There are many ‘weak signals’ in emerging markets, MNE’s are unused to hearing them. They must become expert at it.  You cannot wait for the weak signal to become clear before you act.  By the time the signal is clear, the game is over.   The golden rule is, spend a little, learn a lot. Keep the cost of failure cheap. Then you can fail more often.  Failure is converting assumptions into knowledge. Fail early, fail fast, fail cheap. 3.  Fundamentally change the center of gravity of your organization. You have to massively redeploy resources from rich lands to poor ones. Delegate power.  Localize power and resources in emerging markets. This is hard for MNE’s. “

  Global Perceived Unfairness Will Change the World

By Shlomo Maital

  A BBC-sponsored poll by GlobeScan on ‘perceived economic unfairness’ has just been released. It covered all the major countries, and asked people whether the burden of adjustment to the global crisis has been unfairly placed on the poor. It also asked whether capitalism has ‘fatal flaws’.  Here is a summary of the results. 

* 61 % said the burden had been distributed ‘not at all fairly’ or ‘not very fairly’. Some 34% of Americans said the burden had been distributed ‘not at all fairly’, and a worrisome 66% of Spaniards. This bodes ill for Spain’s efforts to invoke austerity. 

* 24% said capitalism has ‘fatal flaws’ – but only 17% in America, despite the fact that American capitalism was the origin of the global financial crisis. 

* The U.S. has seen a sharp increase in the percentage saying “burdens have been shared unfairly”, from 2008 (52%) to 2012 (64%). 

* Germany is the biggest fan in the world of capitalism – amazing.  Some 74-75% of Germans say capitalism works well and efforts to regulate it will do damage – even though Germany itself has a government that is deeply involved in the economy, and is a key partner in, for example, social-contract wage negotiations nation-wide.

* France, in contrast, is one of the world’s biggest FOES of capitalism, with 41-43% saying capitalism has fatal flaws.   What then is the chance France and Germany will continue to collaborate, within the EU, when their peoples hold such different views??!

 Widespread global protests over social inequality will continue and will change the world.  It may take time — but it will happen.  The poll results show this is true.    Perception is reality.  Unfairness is widely perceived. It’s just a matter of time until this perception ‘bites’.

    

  Euro Stands – but Europe Falls

By Shlomo Maital

 

    

 

  Where do we stand regarding the euro crisis?  Here is a short update, for the handful of those who are not tired of reading about this ongoing badly-written soap opera.

  *  The euro has survived.  It is now clear the costs of returning to individual national currencies are enormous – even for Greece.  Threatening to do so opened the German purse-strings, but Greece never seriously planned a return to the drachma. 

  *  At $1.31, the euro is far far too strong. It is overvalued.  It should be at par with the dollar. Why is the euro strong? Supply and demand.  Somebody is buying euros.  Who?  It is not the European Central Bank.  It could be coming from Asia.  It could be sovereign wealth funds diversifying out of dollars.   When China’s currency is vastly undervalued, and Europe’s euro is overvalued – what hope do nations like Spain or even Britain have to export to China?  Only Germany’s powerful brands (Audi, Mercedes, Siemens, etc.) can overcome the powerful euro.

  * The strong euro is in part because of Germany’s success in exporting to China.  This has helped Germany’s economy but hurt the rest of Europe’s.  France and Germany, once strong allies, are now enemies (forget Merkozy!).   Germany’s selfish approach has done major and permanent damage to European union.

  * The euro survived. But Europe – if by that we mean a federation of states with common policies – has not.  Forget about the United States of Europe, like the U.S.A.  There will now be major retreat from common constitution and laws;  for example, countries like France will take measures to restrict immigration, and even the Shengen treaty will be weakened.   Jean Monnet’s vision will be abruptly curtailed.

  *  Europe will continue to lurch from crisis to crisis.  Today it is Spain. Some 200 b. euros may be needed to bail out Spain, because of people defaulting on mortgages. That is over double the 70 b. euros used to bail out Ireland.   Europe is now recognizing that ‘austerity’ will not restore growth.  That was obvious two years ago.  But Germany still believes in austerity. And Germany has the money. So there is deadlock.

     Britain has now slid back into recession – and it is not hampered by the euro millstone around its neck.  Even Germany’s economy will grow by less than 1 per cent this year.   Only investment, re-investment, and innovation will restore European growth. But who is even thinking of such arcane ideas right now?

 Old Dog?  You CAN Learn New Licks…Here’s Proof!

By Shlomo Maital

 Dr. Gary Marcus with “Rush Hour” band

   

 Professors have the privilege of a sabbatical year, with pay; they go off to another university and think.  It’s a conventional way to come up with unconventional ideas. Here’s how one professor, a psychologist, did it differently – and what we all can learn from him.

  He is Dr. Gary Marcus, NYU, and his specialty is cognitive psychology (language acquisition).  He happens to be very ‘un-musical’ (kicked out of 5th grade recorder class for massive incompetence).  So – he decided to use his sabbatical to become “a nearly listenable guitarist”.  He documents his experience in his book Guitar Zero, and is interviewed in the APA Monitor (April 2012, p. 26).   His goal was to see whether old ‘dogs’ can learn new (musical) licks.  Guess what?  They can! 

   Here is the message of his book: “so many other people harbor secret dreams. [My] book says, adults can learn to do new things that they may have thought were outside their reach and get a lot of satisfaction out of it. I’m not ever going to be Jimi Hendrix, but I am at the point where I can jam with people and still have a really good time.” 

   Marcus is shown in the photo with the members of Rush Hour, three 11-year-old musicians who formed a rock band.  The photo was taken at a Baltimore band camp.  Marcus says that his years of listening to music helped him do the arrangements for the band.  

  How come kids are better than adults at learning new skills?  Marcus says it’s all about “motivation” and “persistence”.  We adults know more. But kids are more stubborn. When they want to learn something, they just do it.  We adults assume we can’t, or try and just give up when the going gets tough.

  Thanks, Gary!  You’re an inspiration. All us old guys and gals are going to go out and try new stuff, learn new languages, and try new ‘licks’.   And we’re going to stick to it until we succeed. 

     I think I might try to learn how to write a novel.

Find Yourself a “Squeeze Box” – And Think In It;

Spend Less – and Innovate Better!

By Shlomo Maital

 

  

   Thinking “outside the box” is vastly over-rated. (I’ve written about this before). The best creative thinking is done INSIDE the box – but the right box.  By ‘box’, I mean the things about reality you CANNOT ignore because they just won’t go away.  Like time, money, and feasibility.

   A new book by author by  Vijay Govindarajan’s   Reverse Innovation: Create Far From Home, Win Everywhere (HBS) makes this point.  Despite the MBA/Harvard type title, Govindarajan is right.  (An excerpt appears in the latest Bloomberg Business Week issue).

  “Innovation in the rich world is based on the approach “Spend money and innovate.” In the U.S., you can see this clearly in health care. We push the frontiers of medical science and technology with very little attention paid to cost. Our health-care system is prohibitively expensive, yet does not guarantee the highest quality; nor does it provide universal coverage.  There is an alternative model of innovation: “Spend less and innovate.” This is the only feasible model in poor countries that are resource-constrained. As some companies have discovered, constraints can be liberating. This notion is at the heart of reverse innovation. General Electric (GE) was able to come up with an ultralow-cost electrocardiogram (ECG) only when it bumped up against many constraints in rural India.”

 

  Remember former Curitiba (Brazil) Mayor Jaime Lerner’s dictum?  If you want to truly innovate, slash two zero’s off your budget!   

   So, think different about thinking differently.  In wealthy countries, VC’s and MBA professors caution, “you always need more money than you ask for – ask for more, and then raise money when you can, not when you need it”.  Problem is, as all of us know, when you have money in the bank, you tend to spend it; you tend not to respect it. And then high burn rates kill the innovative companies. They run out of money because having money means you have time (to doddle) – but you don’t! Because time to market is crucial and urgent, and having money kills it. 

    So, find a ‘squeeze box’.  Find a tight constraint, a challenging one.  Make sure it is credible. Use it to create urgency, the first step in transformative change.  And then work hard inside that box. When John F. Kennedy made his famous “we will go to the moon by the end of the decade” speech before a joint session of Congress, on May 25, 1961,  he did precisely that. And just eight years later, in 1969, American put a man on the moon.  The ‘squeeze box’ definitely helped.  If he had said, well, we’ll go to the moon, sometime before the year 2050, would it have happened? 

    Here’s how GE innovated the electro-cardiogram device affordably for rural India.

  GE’s premium ECG machines were nonstarters in rural India, because patients didn’t have the money to pay for the test and small clinics and physicians couldn’t afford the machine or the support costs.  These constraints defined the sandbox for GE Healthcare to develop an $800 ECG machine for rural India that is portable, battery-operated, easy-to-use, and easy-to-repair.  GE found many ways to cut costs. The high-end machine was custom-designed, so GE built a machine using commodity components, realizing huge cost advantages. For a cost-effective printer, GE used the kind of ticket printer found on public buses and in movie theaters. Since these printers are produced in the millions, GE could enjoy significantly lower costs due to economies of scale.  The small printer reduced the weight of the machine—less than a can of Coke—and helped make it portable. By eliminating the monitor, GE reduced the need for huge power consumption. This, in turn, contributed to longer life for the rechargeable battery.

http://www.businessweek.com/printer/articles/20236-the-case-for-frugal-thinking

The Fundamental Flaw in the Global Ecosystem

By Shlomo Maital    

Clyde Prestowitz

    My friend Clyde Prestowitz, President Ronald Reagan’s chief trade advisor, someone who understands the realities of world trade better than anyone, blogs at the Foreign Policy website.  His latest blog makes a simple but painful point.  Many countries in the world pursue a policy of export-led growth:    Japan, Korea, China, Taiwan, Singapore, the Netherlands, Malaysia, Vietnam, and Brazil.  It sounds logical. Build your economy by selling to others.  The problem is, the ‘rules of the game’ say you need to do this fairly, without illegally subsidizing or helping your exporters or taxing imports.  China, for instance, maintains its exchange rate at hugely undervalued levels, to keep its exports cheap. World Trade Organization rules don’t allow this. But China’s been doing this for years, and will continue to do so.  Even Germany, according to Prestowitz, is ‘mercantilist’ (i.e. following a policy of maintaining forever an export surplus).  Part of Europe’s problems is not the misguided wreckage of dumb policy in Greece, Ireland, Spain, Portugal and Italy, but the fierce export-driven policy of Germany, which in part comes at the rest of Europe’s expense.  Keep in mind that if one country runs an export surplus, some other country will necessarily have to have an import surplus.  All the countries in the world cannot each have exports exceed imports, unless we start trading with Mars.  Germany piles up export surpluses, then balks at using its wealth to assist fellow EU countries that have suffered because of those surpluses, thus endangering European union.

     America more or less adheres to the rules of free trade, and as a result has had trade deficits for over 30 years, causing high external debt, and very weak economic growth. (Imports, remember, create jobs abroad, not at home).   How long will America continue this losing policy?

     When some countries play by the rules, and others bend or break them, the system is unstable. And that is what we have now.   When everyone becomes mercantilist, world trade breaks down, as it did in the 1930’s. 

    There is a stark choice. Either all countries embrace free trade, fairly and openly, or no country will in the end adopt free trade.  The latter seems increasingly likely. 

 Wanted —  in America:  Educated Men

By Shlomo Maital

 

 

 

  Female (blue) vs. Male (black) College Enrollment

Dating back to 1980, in the U.S.,  more women are going to college than men.  The gap is now large enough to be worrisome:  14 m. women will enroll, in 2019, compared with fewer than 10 m. men.  Since men tend to study engineering and science, this bodes for a shortage of technology skills in the U.S.  Moreover, it will create an ever more polarized society (remember, the 1% vs. the 99%?).  According to Craig Torres, writing in  Bloomberg Business Week:

   “So-called middle-skill jobs, typically well-paying work that doesn’t require extensive higher education, are vanishing, dividing the labor force into high- and low-skill positions.” 

    No other country that I know has such a huge male-female enrollment gap.

    The article does not explain the underlying causes of the gap.  Nor does it explain why men, who know that you need college education to get a job and to get good pay, still enroll far less than women.  The median full-year wage for men 25-to-34 years old with a bachelor’s degree was $51,000 in 2009 compared with just $32,900 for those with a high school diploma.  So much for economic rationality.

   The worst part of it?  This issue, too, has become political and polarized in America.  On Jan. 24, in his State of the Union address, President Obama said that every American family should be able to afford to send its children to college.  Former Republican presidential candidate Rick Santorum’s response:  “He wants everybody in America to go to college,” Santorum told supporters in Troy, Michigan, on Feb. 25. “What a snob.” 

 SodaStream’s Bubbly Business: Making Money from Air

By Shlomo Maital

    Daniel Birnbaum & Susan Sarandon

  

 

The next time you face a risky but intriguing career choice, consider Daniel Birnbaum. He had a great job, heading Nike Israel, from 2003-2006.  In early 2007 he was offered the job of CEO of a failing Israeli company, Soda Club, selling an old fashioned product (devices to carbonate water using CO2 cartridges).  He took the job – and the rest is history. Today SodaStream, the reincarnation of Soda Club, is a $300 m. annual business, with $35 m. net income, operating in some 50 countries, selling cool colorful carbonating devices with a powerful ‘razorblade’ model (most revenues come from selling the flavors, so the one-time sale of the machine is no longer a key part of the money model).  One family in every five in Sweden has a SodaStream device.

  How did he do it?  He shared the story with a group of Israeli managers of ‘traditional’ industries last September *.   A key innovation was not in the product, but in how it is advertised.  Birnbaum does not hire expensive ad agencies, who spend millions on ads, half of which are worthless (but, the old cliché goes, ‘you never know which half’).  Instead, SodaStream uses Public Relations firms, whose job is not to buy media time but to get SodaStream into the public consciousness and create ‘buzz’.  In the photo, for instance, Daniel Birnbaum is shown with Susan Sarandon, Hollywood movie star and environmental crusader.  They are shown at a Chicago housewares exhibition. The ‘cage’ contains 10,657 empty bottles and cans, collected by high school kids from a Malvern, Pa. school.  Birnbaum holds one SodaStream bottle – sufficient to replace all those cans and bottles.  If a picture was ever worth a thousand words, this is it.  Sarandon was quoted as saying, :   “The recycling rate in America is less than 35 percent. Troubling news to say the least, particularly considering that this means that 141 billion beverage cans and bottles go to landfill each year.”   PR firms cost money, true – but far far less than ad agencies, and perhaps far more effective.  

    The latest SodaStream product to be launched April 17 is the bright red AquaBar, an on-demand tabletop device that provides hot, cold, ambient and carbonated water, designed by a leading Italian designer. The launch will be at a design show. 

    By the way, SodaStream did an IPO on NASDAQ in August 2010, reached a market value of $1.5 b. a year later, and is still worth nearly $700 m.  That career shift turned out very well for Birnbaum.  Sometimes, it does indeed pay to leap off a cliff…  

  • ·         Based on a case study by Yaara Ben-Nahum, Knowledge & Innovation Center, Technion.

 

 Peter van de Werken’s Rainbowed Rose at Keukenhof

By Shlomo Maital

 

   

 

 

   

 

  We’ve just returned from a visit to Keukenhof, the amazing Dutch park 40 minutes south of Amsterdam, where visitors from all over the world flock to see springtime bursts of color – hyacinths, tulips, amaryllis, orchids and other flowers, in acres and acres of meticulously-arranged gardens.  The Dutch are bonded to flowers through their souls – but also make a good living from them; flowers are sent to Amsterdam from all over the world, and are auctioned in an incredibly efficient Dutch-auction market, then flown to all parts of the world, all of this taking place within hours. 

   At Keukenhof, we saw an “innovation” – a multi-colored rose, known as the rainbowed rose, shown above.  No, it’s not painted.  It’s a real rose.  It’s created by introducing colored water to the rose’s stem, but in a manner that the colors reach the petals at different places.  The inventor, Peter van de Werken, keeps the process a secret. A similar process is also done for flowers similar to Gerbera, creating a startling rainbow effect.   This too is done by introducing colored water to the stem, in a secret layered fashion. 

   Nature, of course, has its own multicolored flowers, including red-and-yellow tulips, and brilliant red and white orchids.  One wonders if Man’s innovation of ‘rainbow’ flowers really does improve on Nature.  If Nature found some advantage in rainbow flowers, Nature would have already invented them.   

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
April 2012
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