Businomics has been published in the U.K. by David and Charles. Makes me a bit guilty about all those charts describing the U.S. economy. Note to British readers: the story's about the same with U.K. data. Don't sweat the details. (Note: I did not have an opportunity to review the translation.) U.S. readers can learn more here.
The most dangerous part of the hiring process is what you think you know, but which might not be true. I just finished reading Michael Lewis’s Moneyball, a best seller from a few years back that EVERY business manager should read. The book is officially about baseball, but if you can’t relate it to your own business, it may be time for you to retire.
Baseball has more statistics than almost any part of your business, except your sales department. When I was growing up, my best friend never read a book, but he studied the Dodger statistics every day. While most companies were managing on no more numbers than you’d find in a quarterly financial statement, baseball fans were devouring detailed daily statistics.
Surprisingly, though, baseball management was ignoring most statistics. As Moneyball explains, baseball managers and scouts had traditional ways to looking at players, and pretty much ignored the hard data available.
Billy Beane, General Manager of the Oakland A’s, hired a quantitative analyst who pored over the research of many amateur baseball analysts. Then he went digging in the data himself. The result was player arbitrage. Take the expensive players that other teams wanted, replace them with less expensive players who had the right stats. Billy Beane won more games than average, with fewer dollars of salary than average. Anywhere else you’d call it efficiency.
So do you just “know” how to spot a good customer service representative, just like baseball’s old scouts just “knew” how to spot a standout minor leaguer? Any chance that you’re judgment would stand up to statistical scrutiny?
Beane (actually his quant guy) also learned that some of the traditional statistics don’t do the best job of describing values. They ended up ignoring fielders’ errors. Instead of batting averages and RBIs, they focused on less common measures, such as on-base percentage and slugging percentage (a weighted average of bases per hit).
The business lesson here: what you think you know may not be true. The metrics you are using to justify what you are doing need to be subjected to tests and validation.
This is a great book to read after, or even before, Competing on Analytics, which I reviewed earlier. If it motivates you to rethink your hiring strategy, take a look at this post: The 4 Steps to Using Metrics in Hiring Decisions .
Competing on Analytics by Thomas Davenport and Jeanne Harris is an important book for business leaders. The title explains it well: some companies are setting up analysis of information as a major competitive strategy. If you are competing with them with gut-feel decisions, you're going to be in a world of hurt.
Simple example: you are insuring teenage drivers. The price insurance for teenage boys higher than for teenage boys, based on either the gut feel of the managers, or based on an old study done years ago. Your competitor regularly updates its loss estimates, and matches pricing to these up-do-date estimates. One gender or another finds a better deal at your competitor. That's the gender which you were overcharging. Now you have fewer of these. The other gender, however, finds your pricing attractive. These are the kids you have been undercharging. So you now have more of the drivers with losses in excess of premiums, and fewer of the drivers with losses lower than premiums.
Now let's expand the idea of identifying customers a bit. Suppose that your most loyal customers come in without discount coupons or promotions. They provide high profit margins. Can you identify them? Can you keep them happy? Can you keep them coming in?
Or you've built a business based on fast service. But there are times when you get more business than you serve quickly. Can you identify those times, so that you either staff up or you alert your customers that they won't get the usual speed this time?
These are all cases in which analysis of data can help you beat the competition. Here's the BIG WARNING: even if you don't choose this strategy, you're in trouble if your competitors do.
Remember quality? Total Quality Management and its variations were the fad sweeping business a decade and a half ago. We call it a fad, but the fact is that quality of products and services has improved tremendously since then. Analytics is the same type of thing. (In fact, the book reads like an old quality book in which the word processor's search-and-replace function was used to make it an analytics book. However, even if the subject sounds a bit hackneyed on the first reading, it's still vitally important.)
Davenport and Harris talk about the roles of executives, of analysts, and of "analytical amateurs." They emphasize that the top management do not need to be analysts, but they must understand analysis and encourage fact-based decision-making throughout the organization. The company must also recruit non-analysts who are comfortable working in an analytical organization. The analytical amateurs are not rocket scientists, but can use the results from the propeller-heads to make better decisions.
Competing on Analytics is not a book about analytic techniques. They describe some briefly. Regarding the ones I'm familiar with, I nodded my head. Regarding the ones that were new to me, I found myself wanting to see more details, maybe some equations. Perhaps that's just me. After all, one doesn't go to graduate school in economics just to pick up chicks. The book is vital to any corporate executive's shelf.
"I enjoyed you book immensely. It was very helpful."
Dave Martin, Funding Tomorrow LLC
"It is a really practical guide for businesspersons about how macro trends affects your company. I will probably assign it to my students."
Professor Philip Romero, Lundquist School of Business, University of Oregon
I held it in my very own hands at my local Borders.
Businomics connects the dots between the economy and business decisions. If your are an executive or a business owner who reads the economic news, but isn't always sure how to relate that news to your business decisions, Businomics is for you.
First, it gives you a framework for understanding economic fluctuations in different parts of the economy.
Businomics helps the business leader evaluate the company's vulnerability to recession. The book explains how to set up a company-specific early warning system. A check-list for economic contingency planning is provided, along with an explanation of how to get the flexibility needed to cope with a downturn.
Economic risks vary in different regions of the country, foreign activites, and certain industries. Businomics explains how to cope with these risks.
A chapter on the stock market explains what investors as well as corporate executives need to know about the relationship between the economy and the market.
Not all Borders have it on the shelf yet, but you can check ahead. I spot checked a few Barnes & Nobles, and they had it, as well as Portland's great bookstore, Powells. Until we get our shopping cart working, you can order by emailing me: Bill@ConerlyConsulting.com.
My book, Businomics: From the Headlines to Your Bottom Line--How to Profit in Any Economic Cycle is now in stock at Powell's bookstore in Portland, which also sells on the Internet.
Amazon also has copies.
The official release date isn't until next week, but the super-efficient staff at Powell's is ready for your business. (I'm embarrassed to say that we're still working on the shopping cart at www.Businomics.com.)
I just started reading Competing on Analytics, because analysis of data is a huge competitive advantage in the Trial and Error Economy.
The preface, by Harrah's CEO Gary Loveman (who has a Ph.D. in economics!) has a telling point:
"... all organizations seek to please the leader, so there is constant pressure to give my otherwise lame and ill-considered view far more gravitas than they deserve."
First, let's praise Gary for recognizing the problem. Many CEOs say that their people will speak up to them--but they only promote people who never speak up.
Second, let's help the business leader deal with this problem. Scientists with a hypothesis are trained to ask, "How could this hypothesis be disproved?" The CEO with an idea should ask what might disprove the idea. Then the boss should ask for data.
As an example, I posted a while back about Starbucks CEO Howard Schultz's thoughts about his company's strategy. This gist of his thoughts, apparently, were that Starbucks had to return to its roots regarding roasting beans on premises and letting customers see the baristas work. The danger to Starbucks is that the vice presidents begin a "back to our roots" campaign without offering the CEO any pushback. Schultz could ask, "How would I know if I'm wrong?" Simple answer: we test the approach on a random sample of stores and see how they do relative to a control group. Then a staff member doesn't have to say, "Howard, you're wrong." The staffer simply says, "Here are the results from the test that you requested."
A third approach surprised me a while back. A corporate CEO asked me to come up with some ideas for implementing a particular strategy. After nosing around the company, I suggested that this strategy was not a good idea. The CEO asked me to present my findings to the board. Turns out the CEO wanted me to validate his own disbelief in the strategy; so he gave me the assignment just to see if I would push back. The use of consultants isn't perfect here--we have an incentive to tell the client what he wants to hear, just as employees do. However, if we take the risk and lose, we've lost one client, worth maybe 5% to 20% of annual revenue. If an employee loses a job, that's 100% of revenue.
The important takeaway message for CEOs: give some thought to how you can get employees to tell you when you're wrong.
Great Book: Knowledge and the Wealth of Nations: A Story of Economic Discovery by David Warsh This is one of the best books I’ve read in years. Warsh tells the story of one idea—one very significant idea—in the history of economic thought. The book is surprisingly readable, even the several chapters that explain how economists thought about growth prior to Paul Romer’s idea of “endogenous growth” which is the subject of the book.
Non-economists can enjoy Knowledge, especially if they are the sort who like economics. There is but one equation, and though there are several passages about the use of mathematics in economics, the reader doesn’t have to know any math to understand the story.
For a person thinking about pursuing a Ph.D. in economics—or any other academic field—this book is must reading for an understanding of how the academic world works.
Beyond that, Knowledge and the Wealth of Nations explains a key to long run growth around the world. The people of the world will be richer because one of the things that economic growth brings is more growth of technological knowledge, which will lead to even more economic growth. And readers will be intellectually richer for reading Warsh’s book.
Business Strategy Implications: Business leaders should be familiar with some of the key concepts discussed in the book, including non-rival goods, increasing returns, and network effects. Knowledge doesn't claim to be a primer on these topics, but it's one way to get an understanding.
Other Blogs Posting on This Topic: Marginal Revolution thought it might be the best book of 2006. Tim Harford reviewed the book for the Financial Times. John Hagel comments on the book from a management perspective.
I've been reading and enjoying The Long Tail, the best seller by Chris Anderson about high sales of products that are low sellers. That is, they are low sellers individually, but collectively large sellers. One point he makes (p. 172) is that substantial choice can help buyers substantially. That calls to mind a section from my paper, "E-com Econ: The Economics of Electronic Commerce:
"Wide inventory holdings can also help buyers make decisions when involved in a problem-solving purchase. A buyer, especially a consumer, may not know which product best fits his needs. Consider an example from our personal experience. The parent faced with coaching a youth soccer team for the first time wants a general book of advice. He passes a small bookstore, finds that it carries three books about coaching soccer, but isn’t sure than any of these are right for him. He stops by a large chain bookstore, such as Borders or Barnes and Noble, and finds 20 books. Some of these are clearly for younger players, some for advanced players, some with lots of charts, some with checklists. The buyer is confident that he has found the one best book for him, and buys it. That book might well have been one of the three offered at the small bookstore, but the wide selection helped convince the buyer that he was making the right choice. Although this example focuses on the “big box” retailers, it also applies the electronic commerce sites, which can offer a much larger number of selections. An Amazon.com search turned up 184 book titles and 6 video tapes on “coaching soccer.”
Anderson goes on to say that it's vital to help consumers deal with the large range of choice through reviews, lists of "people who liked this also like that," etc.
I had been a touch hesitant to buy the book, thinking that I had all the insights from the article in Wired Magazine (read it here). The author adds enough additional insight to make the book purchase a very good value.
Interesting pre-review over at Crooked Timber (thanks to Mark Thoma at Economist's View for the tip):
The best recent books about capitalism and the circumstances in which it helps poorer people escape their poverty are Hernando de Soto’s “Mystery of Capital” and Rajan and Zingales’ “Saving Capitalism from the Capitalists”. I met with Fred Mishkin yesterday, who has convinced me that his new book – ” The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich” will be a worthy complement to these two.
Certainly, I suspect it will be a lot more insightful than the other globalisation book about to appear, Joseph Stiglitz’s “Making globalisation work”, the follow up to his anti-World Bank rant, “Globalisation and its Discontents”.
What I most like about de Soto’s work is its emphasis on the legal system, and the importance of it being accessible to the poor and supportive of their de facto property rights. The great strength of “Saving Capitalism from the Capitalists” – a book that deserves to be much more widely read – is its focus on the problems that flow from the existence of an entrenched elite that writes the rules of capitalism to secure its own position, rather than to allow the bulk of the population to participate fully.
Mishkin, who says he will not be allowed to give interviews about his book under impressively strict conflict of interest rules once he becomes a governor of the Federal Reserve in a few weeks, takes the story one step further, arguing that opening a country up to international capital markets in the right way is crucial to growth. As he notes, so many countries have botched the process of joining the world financial system that many are tempted to conclude it is better not to try – Argentina being a recent example. But, says Mishkin, rightly I think, doing so sentences them to remaining a poor, low growth economy.
That is, above all, because to successfully open up to international financial markets, a country has to develop the right domestic institutions, including rule of law, central banks and good governance.
Mishkin is particularly worried about Latin America, where he fears a serious reversal of the process of building sound institutions. The outcome of the current Mexican stand-off may be particularly important – not because Calderon, the declared winner of the Presidential contest, is necessarily the better candidate (his closeness to powerful business interests may limit his capacity to be a reformer) but because if the loser, Lopez Obrador, succeeds through public protests in overturning the result, that would deal a death blow to the election commission, the establishment of which was a huge step forward for institution building in Mexico, a country not hitherto known for its strong independent institutions. Here’s hoping the election commission stands firm.
