Politi-View


Failure is healthy.

That’s what you hear if you’re an executive, venture capitalist, or entrepreneur in Silicon Valley. Failure teaches smart people great lessons that will come in handy “next time.”

Maybe that’s what the Fed was thinking when it continually relaxed banking, mortgage, and financial services policies and rules. Maybe it’s what the cavaliers at Goldman Sachs and the myriad of failed banks in the U.S. thought. We’ll get a bailout if we fail, and we’ll “learn.”

With pride colored with a pinch of regret I have to applaud Canada: Not a single Canadian bank or trust has failed since the Economic Crisis began 3+ years ago; the Canadian dollar, having dipped sharply, is almost at parity again with the USD; and the Bank of Canada has signaled strongly that it may soon raise interest rates.

Courtesy of The Economist

Canada is out of the Recession. Real estate is climbing, employment is up, and people are going to the mall.

So what’s the catch?

Here’s the rub:

Canada refuses (by policy) to let banks get too big to fail. It also highly regulates the banking industry–the Right hand actually knows what the Left hand is doing.

The downside is that Canada lacks “innovation” in the financial industries and maybe beyond. What it lacks in innovation, it acquires in un-failed banking institutions, low rates of home foreclosures, bankruptcies, and even business/banking scandals.

This is great news. And this is incredibly boring.

Can a country and its people “lead” with such an extremely regulated economy and accepting culture?

That said, can a country like the U.S. lead from its vantage point?

© 2009 John Dila

Why do we do things the way we do—health care, mortgages, credit/debt, US Senate rules, voting rules, foreign policy, and so on?

“Because that’s the way we’ve always done them,” comes the response, couched in educated certitude and embroidered into the fabric of the flag.

It’s why we require 60 votes to block a filibuster—that’s not a law, it’s just the way we’ve always done it. In fact, the U.S. Supreme Court ruled (in the 1890s) that changes to Senate rules could be achieved by a simple majority: “The constitution empowers each house to determine its rules of proceedings,” so we could change this old rule any time. We just have to decide to do it.

To question these things—for some—is sacrilege. Or worse. For others, to question the system seems daunting, complex, unpatriotic even. For yet others, questioning the status quo poses a serious threat to those who reap benefits from the way things are currently done.

But at a time when so many of our systems are on the brink of breaking, are breaking, and are already broken, some step-changes—not incremental ones—might offer the best solutions for our families and our nation.

I was raised in Canada and I remember when the Prime Minister, Pierre Trudeau, led the country to break away from England in 1982. Before that, Canada was governed by a constitution that was a British law! That was a step-change.

Pierre Trudeau does a pirouette at Buckingham Palace five years before he breaks away from Britain.

There is no blanket answer that will solve all our problems. We will not unearth an economic or social panacea. Our economy is a vast system—not unlike Avatar’s bio-botanical neural network that Pandora’s Na’vi are connected to—interconnected not only from within but also to all other economies around the globe. We’re very interdependent today; we act alone at our peril.

Also, it is very possible (likely) some of our fundamental values and systems are fatally flawed (like Canada’s Constitution had become).

But short of a panacea, there is something each of us can do, which can have a large impact, and give us more understanding of the issues, and provide better control and focus to fix things for the long-term.

We can stop sniffing the horse’s ass!

Stop accepting the stock responses we give and get.

Roma!

The Horse’s Ass, in fact, was a key dimension in early Western vehicle design: In Rome, when chariots were the chassis of choice and horses were the state-of-the-art power-plant that pulled them, design was all about the width of the horse’s ass.

Note: Width of chariot's axle = width of horse's ass.

The question, though, is: Why do we still design vehicles the same width (almost exactly) today as we did two-thousand-plus years ago?

Watch:

You’re driving on a road today. It has ruts—made over time by the weight of trucks and cars, all of which were designed with a similar wheel-axle width.

But why that width?

Well because, of course, the roads were designed to accommodate that size, that’s why!

But why?

Well because, of course, before cars were invented those roads were carriage roads, and that’s how wide they were built, that’s why, silly!

But why?

Well because, of course, before carriages were invented for the masses the roads were used by Romans who rode in chariots, and they were that wide, that’s why, silly!

But why?

Well because, of course, Romans designed chariots to be pulled by a horse, silly, and they designed them as wide as—you guessed it—the horse’s ass, that’s why! (I’ve adapted the horse’s ass myth a little for poetic effect.)

A horse’s ass in the ointment

“Why do companies exist?” is a question we ask a lot in business school. And news reporters often ask it after a scandal breaks at a well-known firm, when evidence of “creative accounting,” or fraud, is brought to light.

In the final trimester of our 20-month EMBA—we’d built up to that lofty pinnacle by studying Organizational Behavior, Statistics, Finance, and Marketing first—our cohort studied “Strategy.”

Oooh. Ahhhhh!

Everyone in the class was excited to dig into the texts, read the cases, and discover enlightenment.

That weekend, as I finished Chapter One: Strategic Management: Creating Competitive Advantages, I found this little gem among the exercises and ethics questions at the end:

“A company focuses solely on short-term profits to provide the greatest return to the owners of the business (i.e., the shareholders in a publicly held firm). What ethical issues could this raise?”

Ah, great question, I thought. Finally we are getting to the good part.

I immediately started flipping through our strategy tome looking for the chapter that would address this question.

Baffled, I discovered the chapter did not exist.

Follow the horse’s ass

And we—collectively—beat up Corporate America for its failings, scandals, and that pesky 400-to-1 top-earner-to-bottom-earner salary ratio in many of our firms today.

But it doesn’t have to be that way. Some firms put caps on top earners. At Whole Foods, for example, “No one at the company can have a salary more than nineteen times what the average team member makes.”

Whatever else you might want to label Whole Food’s monetary reward practices, it is an example of the planned abandonment of the standard way of rewarding executives.

Whoa! as you would say to a horse when you want her to stop:

People who studied business texts lead our businesses today, so maybe we should draw a line from those leaders to another horse’s ass:

Maybe our business schools—our professors, committees, and chancellors—and the governments, corporations, and large publishers that subsidize them, are not ready to admit the textbooks we write and curricula we develop are too narrow (or wide) for the global road we’re on.

Why do companies exist?

A business student will always answer, “It depends.”

But if you ask your own children, or a small-business owner, or someone from a different country, the answers will have something to do with customers and their needs and wants.

So now customers are part of the value chain of the horse’s ass.

We (customers) save our hard-earned money to put little Jenny into the very best schools our money can buy. The ones—that’s right—that are teaching the wrong stuff at the wrong time to the wrong generation to solve the wrong problems.

Uhg!

It’s difficult to change a horse’s ass, but you may change horses if you like

Peter Drucker (1909-2005)—a writer and business management professor—developed the notion of “planned abandonment,” by observing how business and government tend to cling to “yesterday’s success” rather than seeing and accepting when something no longer works well.

Peter Drucker...planned abandonment.

Peter Drucker...planned abandonment.

It’s easy to understand why we “cling to yesterday’s success:” It takes time to build a company, a country, and an economy. It takes massive investment—of capital and human resources—and deep commitment.

When we finally build something and really get it humming along with a good revenue growth curve, or GDP, it’s hard to say, “Wait a minute, this isn’t any good any more; let’s change it!”

Yet the pace of change in the world is unprecedented today, across all dimensions: From 1986 to ’96 China had the second highest economic growth in the world (11.4%), but from 1996 to ’06 seven new countries had even higher growth than China; and there’s Moore’s law, which describes the long-term trend of how computer processing speed and memory capacity doubles every two years, driving more, newer, and faster changes in society, enabling new kinds of change, powered by social media, micro-loans, and global economies; and we are using our natural resources faster than ever as more nations emerge as buyers and sellers in the global marketplace.

Planned abandonment is about seeing, accepting, and doing something about the situation, rather than giving—and/or accepting—a Horse’s Ass answer, taking a Horse’s Ass approach, and becoming a Horse’s Ass.

When your gut tells you there’s a Horse’s Ass standing in front of you, don’t just stand there: Put on protective eyewear and call, “Horse’s Ass!”

If you don’t, you may as well be looking in a mirror.

© 2009 John Dila

Cool-Aid

One reason I often write about China is because of the lopsided coverage and criticism Western media routinely dishes out. And despite the obvious lack of rigor and balanced reporting, our country drinks the cool-aid. It’s like we’ve forgotten one of our important early childhood lessons—there are (at least) two sides to every story.

The West seems to suspect the worst about China around everything from China’s mercantilist practices, to human rights violations, to sullying the air, to standing in the way of climate change progress, and so on. We rarely take a more collaborative, or analytical approach to understanding things from China’s perspective.

When we read Western reports about China, why do we accept the Western characterization of China as villain, and not ask intelligent questions? And why do we accept that China is solely responsible for creating big problems, and not look for ways we can solve problems together?

Even at home, we polarize our views to our detriment. The results of the recent special election in Massachusetts ends the Democrat’s filibuster-proof supermajority. Why did we try to solve something as complex as healthcare unilaterally in the first place? Going forward, it is likely that the only way we’ll achieve meaningful health reform is “in smaller waves of bipartisan effort rather than a hyper-partisan big bang.”

With technology and the Internet lowering the barriers to entry in many businesses, industries, and sectors we have to expect a large, emerging, able, willing nation like China to seek to improve living conditions at home. That’s what every nation wants, after all, and China is certainly no different in that respect.

For example, economically, China needs mining resources in order to realize its national vision of raising standards and the overall quality-of-living conditions for hundreds of millions of its citizens. Its situation is in some ways analogous to the emerging nations of the 15th and 16th centuries, whose mercantilism enabled them to gain power and economic status. And it’s much like how the U.S. has sought to control as many oil reserves as it can in support of its national vision and strategies in the 20th century.

Mercantilism was how the world did business back when Britain had the biggest navy and empire in the world. Today it’s a bad word among the literate white-collar first-world nations of the Earth.

But we should not get hung up on individual words, like mercantilism, because their meanings change, especially as disruptive innovations in technology and business alter the contexts of our economies.

21st century mercantilism, mixed with some red-blooded market economics, and stirred with some culture- and education-exchange programs might be just the thing for a world that must contend with a community and emerging economy of China’s proportions and intentions.

Mirror, mirror

But we can’t leave it there—our economies are more interconnected than ever before, and it’s not only us contending with them, it is them contending with us.

We all might do well to think of us as we, not as us and them anymore.

But the West falls sadly short on providing leadership, insights, and collaboration best practices around how to partner with China. Indeed, on issues around solving poor air quality and global warming, it’s all about the we. And we in the West tend to forget that we produced about 90% of all the carbon perhaps since the Industrial Revolution.

Worse, our brand of capitalism nearly bankrupted the United States while simultaneously fueling what some term “China’s mercantilism” (which could as easily and as accurately be viewed as American greed and desire to buy more cheap goods than we could ever use in a lifetime) and which has caused such an internal backlash as to prompt our own government to bail out (i.e. take ownership of, to some extent) our banks and some of our major industries, too (autos, for example).

Our lack of fiscal restraint has been bolstered by the lack of structure in some of our key policies, which underscores either our leaders’ lack of insight into their own actions or their complicity in driving us to our current predicament, or both.

Our embarrassing bail-outs have brought us precariously close in practice to the protectionist mercantilism we so condescendingly denounce from our oversized couches as we watch our oversized plasma televisions (made in China, of course).

Some critics go so far as to dub America’s system, structural mercantilism, which describes “the institutional and ideational structures perceived to have been built by, and in the interests of, rich countries and corporations” (Gee, T, The World System is not Neo Liberal: The Emergence of Structural Mercantilism).

More resources and more control

China needs more resources, and it wants control over those resources when and where it can have control.

That’s why China’s state-owned PetroChina purchased a 60% stake in Alberta’s Athabasca Oil Sands Corporation for USD$1.7B at the end of 2009.

It’s also why Chinalco (the state-owned Aluminum Corporation of China) tried to purchase a stake in Australia’s mining assets for USD$19.5B from Rio Tinto. The deal would have given Chinalco an 18.5% stake in Rio, which would “have made the Chinese government Rio’s single biggest shareholder by far and given it an advisory role in the company’s operations. Chinalco would also have gained substantial stakes in individual mines in several countries.”

After months of negotiating during the first half of 2009, the UK-Australian-owned Rio Tinto Group ultimately rejected Chinalco’s offer, citing issues of “widespread political concern over control of the country’s natural resources.”

Patrick Mulloy (a member of the United States-China Economic and Security Review Commission) said of PetroChina’s Athabasca acquisition, “I don’t think we have fully understood that we’re dealing with state mercantilism.” Mulloy, stressing he was not speaking on behalf of the Commission, which reports to Congress, said, “We don’t have an overall policy to deal with this new direction in foreign policy.”

And although the Chinalco-Rio deal fell through, the PetroChina-Athabasca deal’s success might point a way toward the future. Mulloy’s comment, in the context of China’s natural resources shopping spree, suggests that non-traditional partnerships, unorthodox business arrangements, and more flexible, collaborative foreign policies might be required in our generation.

Are mega-partnerships a better place?

If China succeeds in owning more mining resources, it might also, for example, want to control where and how metals like steel and aluminum are processed for use in buildings, roads, rails, and other major strategic infrastructure projects in China.

For example, the whole world knows (from the steel industry’s experience with Nucor) that mini-mills are cheaper, cleaner, and more flexible to operate than traditional steel mills. Looking to the future, China might seek partners with mini-mill technologies, skills, and experience for their on-and off-shore operations. This could present a golden opportunity for a firm that wants to break away from its competitors.

China isn’t shy to acknowledge when someone else has a better product, and they’re willing to pay for such experience and expertise. China bought the Hummer brand for precisely this reason.

If the legacy economic models enabled integrated, publically traded firms to compete in and dominate industries, why can’t today’s model center on a new brand of mega-partnership—where the partners are firms, nations, and global markets? Of course, monopoly, conflict of interest, and anti-trust issues are hurdles in either model and, as Mulloy and other economists suggest, we will need to recast some of our policies to better align with today’s realities.

Higher-order partnerships that rely on each mega-partner bringing a specialization-suite or an entire market to the game are becoming more common, even when the partners include unseemly bedfellows (by traditional standards).

An example of a mega-partnership is one that evolved between Better Place (a Silicon Valley green tech firm founded and led by SAP’s former tech guru, Shai Agassi, who is the mega-partnership’s visionary), Renault (an innovative car company), and Israel (a republic, ranked 31st in GDP):

Better Place supplies an innovative (patented) green-engine technology; Renault supplies the car manufacturing expertise, skills, supply chain, and distribution; and the Israeli government supplies an able workforce, a willing market for the environmentally-friendly cars, and economic subsidies for Israelis who want to buy them (think of the potential analogous market in China if such a mega-partnership could be struck there).

In addition, all three partners can potentially “leap frog” ahead of their respective competition by being first-movers and/or market-leaders (they also shoulder the burden of first-mover risk).

A better way forward

It’s very tough to argue that we need anything short of radical policy change to move forward in any number of key industries and sectors at home and around the globe—health-care, automotive, banking, and exchange markets, not to mention all the corollary socio-cultural aspects of the flattening world.

We don’t yet have the right thinking (and policies) in place to deal with bids like Chinalco’s—either at the government or the business level.

The day when such policies and business strategies are put into place must not be far off, though.

Leaders—and their nations and companies—who see and embrace a mega-partner vision for the future will have an easier time getting there than those who do not.

© John Dila 2009