I read the latest issue of Harvard Business Review over the weekend. Here are some highlights.
Financial Literacy. In "Are Your People Financially Literate?", a short article by Karen Berman and Joe Knight in the Forethought section, the authors report the following: "Asked to take a basic financial-literacy exam - a test that any CEO or junior finance person should easily ace - a representative sample of US managers from C-level executives to supervisors scored an average of only 38%. [...] About 70% couldn't pick the correct definition of 'free cash flow', now the measure of choice for many Wall Street investors." While the authors wonder why people don't tell their bosses that "they don't speak finance", a more relevant question would be: why don't they bother buying one of the many books available on the topic? The one-line bio at the end of the article does provide a website for "tools that help boost financial IQ" and the name of a book the authors, two principals at the Business Literacy Institute, wrote in 2006 along with another person.
Innovation at GE. General Electric CEO Jeff Immelt and two other GE affiliates co-authored "How GE Is Disrupting Itself," a fascinating account of GE's reverse flow of innovation from developing to developed countries. Companies such as GE have traditionally relied on glocalization; they "develop great products at home and then distribute them worldwide, with some adaptations to local conditions." But the ultrasound machine GE manufactured for the US in the 1990s could not be adapted to the needs of countries like China, where it was too expensive and bulky. Then, "in 2002 a local team in China leveraged GE's global resources to develop a cheap, portable machine using a laptop computer enhanced with a probe and sophisticated software." (Notice the switch from hardware in the developed countries to software in the developing countries.) This new machine opened the market of portable ultrasound devices, which are now used in the US in ambulances and on accident sites.
Baseball. "Major League Innovation" by Scott Anthony points out the importance of choosing the correct metrics; for instance, minor league statistics, which used to be dismissed by general managers, "turned out to be highly useful predictors of success." The author also draws a parallel between depth charts and innovation portfolios. This July 2009 article in the New York Times provides another perspective on the topic of applying statistical analysis to baseball.
Risk management. HBR's October issue has a whole dossier on risk, including an article co-authored by Nassim Taleb, of Fooled by Randomness and Black Swan fame, along with two other people ("The Six Mistakes Executives Make in Risk Management"). Taleb often disparages traditional financial engineering and quantitative techniques in the media, where he usually comes across as having a high opinion of himself and a low opinion of just about anyone else (read for instance this article in the New York Times, and just about any page in the Black Swan; the one-star reviews on Amazon summarize well the issues I have with that book - Fooled by Randomness, Taleb's first book, is a lot more readable.) The neutral tone of the HBR article was therefore a pleasant surprise. The article makes some good points, for instance (Mistake #1), "[i]t's more effective [rather than focusing on a few extreme scenarios] to focus on the consequences - that is, to evaluate the possible impact of extreme events." The authors give the example of nuclear plants: the goal is not to predict the likelihood of an accident, but to develop a contingency plan when the accident does happen.
Another point that attracted my attention was Mistake #4: "We assume that risk can be measured by standard deviation." I was quickly disappointed, though. I had expected a sophisticated argument, such as "standard deviation penalizes downside and upside risk equally, when we are really interested in downside risk", but the authors come up with the following reason: "The standard deviation corresponds to the square root of average squared variations - not average variations. The use of squares and square roots makes the measure complicated." Honestly, if a company's risk manager finds square roots complicated, that company has some serious problems on its hands.
Mistake #5 also sounded reasonable ("We don't appreciate that what's mathematically equivalent isn't psychologically so") but the explanation for it seemed far-fetched. The authors explained they asked people in an experiment whether they would board a plane in a foreign country if the "[s]afety statistics show[ed] that, on average, there has been one crash every 1,000 years on this airline." Everybody said yes. Then the authors changed the question to read that "[s]afety statistics show that, on average, one in 1,000 flights on this airline has crashed." Only 70% said they would take the flight. The authors point out that "in both cases, the chance of a crash is 1 in 1,000." Uh, no. One crash every 1,000 years is not the same thing as one crash every 1,000 flights. If you do experiments just to trick people, or pretend you did, the experiment loses its value and its meaning.
Fighter brands. "Should You Launch a Fighter Brand?" is my favorite article of the whole issue, written by Mark Ritson, a faculty member of Melbourne Business School. It explains that "[i]n eras of belt tightening, marketers are often tempted to launch fighter brands. Properly executed, a fighter brand fends off low-cost rivals while allowing a company's premium brand to stay above the fray. [...] But the long list of failed fighter brands shows how hard they are to pull off." The article is full of detailed examples, including the Busch Bavarian beer, the Luvs brand from P&G, the Celeron chip from Intel, the Saturn car that was a brand success for General Motors but also a financial disaster, and Jetstar, Qantas's cheaper brand in the Australian airline industry. The author also provides great insights on what makes a successful fighter brand and which questions managers should ask before taking the leap.
Other articles I enjoyed reading include "The Five Traps of Performance Measurement" by Andrew Liekierman (which include "set[ting] easy-to-game metrics" and "cling[ing] to systems that have outlived their usefulness") and "Making Time Off Predictable and Required" by Leslie Perlow and Jessica Porter, a must-read for anyone involved in the consulting industry.