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November 2010

Highlights from HBR: November issue

The November issue of Harvard Business Review featured as its spotlight section "Leadership Lessons from the Military."

My favorite article was Which of These People is Your Future CEO? by Boris Groysberg, Andrew Hill and Toby Johnson (the first two authors are affiliated with Harvard Business School and the third author, a former US Army captain, is an executive at PepsiCo.) The article discusses "the different ways military experience prepares managers for leadership." Its core idea, summarized here, is that "veterans from different branches demonstrate different strengths". For instance, Navy and Air Force personnel "are expected to follow standard procedures without any deviation" because of the expensive equipment involved; in the corporate world, they perform best "in highly regulated industries" and "in firms with a process approach to innovation". In contrast, Army and Marine Corps personnel have to be very flexible in their military operations and end up being most successful in small companies.

My other favorite article (it was a tie) was the interview with the national incident commander for the Gulf oil spill, Admiral Thad Allen (US Coast Guard, Ret): You Have to Lead From Everywhere. I was very impressed by his insights into the response efforts after Hurricane Katrina, which he also led. In particular, he states that the problem with the response at first was that people followed the standard hurricane response model, under which "resources are provided to a local government, which applies them and runs the response." Adm Allen explains that, when the levees were breached, there suddenly was "no functional local government that could take the resources and apply them to the mission." The situation only improved when people began to apply the protocol for a resonse to a weapon of mass effect.

Two other valuable reads in the same Spotlight section on the military are:

1. Four Lessons in Adaptive Leadership by Michael Useem from UPenn's Wharton School. The article describes the interactions students in the MBA and executive MBA programs at Wharton have with the military (for instance, military officers come regularly to the campus to discuss their experiences with students), and shares the following lessons:

  • "Creating a personal link is crucial to leading people through challenging times."
  • "Making good and timely calls is the crux of responsibility in a leadership position."
  • "Establish a common purpose, buttress those who will help you achieve it and eschew personal gain."
  • "Make the objectives clear but avoid micromanaging those who will execute them."

2. Extreme Negotiations: What US soldiers in Afghanistan have learned about the art of managing high-risk, high-stakes situations, by Jeff Weiss, Aram Donigian and Jonathan Hughes. (Solicit others' points of view, build trust, propose multiple solutions and invite your counterparts to critique them, to name a few. A lot of suggestions are common-sense for the business world but the examples drawn from the real-life experience of US soldiers help the article rise above corporate truisms. The first two authors are affiliated with West Point and the third author is a partner at Vantage Partners.)

I also recommend Finding Competitive Advantage in Adversity, by Bhaskar Chakravorti (a partner at McKinsey), which lists interesting business opportunities in difficult environments with plenty of examples, How to Conquer New Markets with Old Skills (subtitle: "The surprising global success of Spanish companies proves the value of good old-fashioned networking") by Mauro Guillen of the Wharton School and Esteban Garcia-Canal of the University of Oviedo in Spain, about companies such as Telefonica and Santander, and the Idea Watch on Capitalizing on the Underdog Effect.

"Waiting for Superman"

The Academy of Motion Picture Arts and Sciences announced on Thursday that the documentary "Waiting for Superman" by filmmaker Davis Guggenheim, about US public schools and families' hope for a better future for their children, has been short-listed for an Oscar along with 14 other movies - the 5 nominees will only be known in late January. I found that movie heart-breaking when I saw it a few weeks ago and am thrilled that it is receiving the attention it deserves.

Many media outlets have written reviews about the movie: you can read the take of The Economist here ("For America’s children the education system is often literally a lottery"; "the film rightly identifies [the teachers' unions] as a big chunk of kryptonite standing in the way of a dramatic rescue for the children of America"; "The teachers’ unions have resolutely opposed efforts to pay good teachers more than mediocre ones, to fire the worst performers, and to shut down schools that consistently fail to deliver a decent education.") The New York Times wrote about the movie here. Time has also reviewed the movie there.

While the movie portrayed the teachers' unions as clear villains, bad teachers came a close second. One thing that bothered me was their depiction as - basically - inherently incompetent, hiding their true colors for a short few (two?) years until they got tenure and then could drop the cloth with an evil grin of victory: "you're stuck with me forever now!"

I thought the movie completely glossed over the burnout and the discouragement that come, for instance, from having to teach kids that are not prepared for their grade level and knowing they are doomed. Of course a two-hour documentary can't give all the nuances, and it did its job of raising the alarm very well (people in the audience gasped many times as we all watched, and some cried too at the end when the lotteries fail to give most of the kids profiled in the movie the break they were so desperately waiting for).

New York Times editorials about the movie include: "Waiting for Superman and the Education Debate", by Brent Staples, who says good things about the movie but also (correctly) deplores its lack of nuance, and "Waiting for Somebody" by Gail Collins, who shares my shock at the wildly inappropriate circus-like hoopla surrounding the lottery drawings (Collins writes: "I had no idea you selected your kids with a piece of performance art that makes the losers go home feeling like they’re on a Train to Failure at age 6. You can do better. Use the postal system.")

Many things have changed since the movie was made: New York's "rubber rooms" (where teachers wait, sometimes for months, with full pay while disciplinary cases against them are pending) have closed; DC teachers accepted merit pay in the spring but the polarizing chancellor, Michelle Rhee, recently resigned (also see this article), as did the chancellor of the NY school system Joel Klein.

As much as I appreciate Rhee's and Klein's efforts to improve the system, I found the "manifesto" they co-authored in the Washington Post with other education leaders simplistic and ill-advised, and applaud the scathing response entitled "Manifesto should be resignation letter" penned by a guest contributor, who criticizes their suggestions point by point. (One-line summary: it's a bit easy to put all the blame on the teachers and to advocate more testing.) The president of the American Federation of Teachers, who also appears in "Waiting for Superman", authored her own response in the Washington Post mid-October: "Don't scapegoat America's teachers."

But beyond the supersize personalities of highly accomplished individuals answering each other via the media, the fact remains that kids such as the ones profiled in the movie face a bleak future that is not of their own doing. The movie website offers some ideas for people who wonder how to get involved, and provides a list of organizations making a difference.

Robust Timing of Markdowns

My student Mike Dziecichowicz, former student Daniela Caro and I recently completed a paper on the robust timing of markdowns in revenue management. We apply robust optimization to the arrival rates of the demand processes, in an approach that does not require the knowledge of the underlying probability functions and instead incorporates range forecasts on those rates, as well as captures the degree of the manager's aversion to risk through intuitive budget-of-uncertainty functions. These budget functions bound the cumulative deviation of the arrival rates from their nominal values over the lengths of time for which a product is offered at a given price.

A key issue is that using lengths of time as decision variables - a necessity for problems on timing markdowns but a departure from the traditional robust optimization framework - introduces non-convexities in the problem formulation when budget functions are strictly concave. Concavity is a common assumption in the literature (it reflects that the longer a product is on sale, the more the various sources of uncertainty tend to cancel each other out, in the spirit of the law of large numbers, so that the marginal increase in time of the protection level decreases) and therefore must be incorporated in a tractable manner.

Specifically, we make the following contributions:

  • We model uncertainty on the arrival rates of the demand processes through range forecasts and capture the manager's risk aversion through a "budget of uncertainty" function (of time on sale at a specific price point), which limits the cumulative deviation of the arrival rates from their mean and is determined by the decision-maker.
  • In the nominal case and in the case where the budget of uncertainty function is linear in time, we provide closed-form solutions for the optimal sale time in the single-product case.
  • In the case where the budget of uncertainty is concave and increasing, again for a single product, we derive a mixed-integer problem (MIP) that approximates the robust non-convex formulation.
  • We develop a policy about the optimal time to put products on sale, which depends on both the number of items unsold and on the time-to-go, and use our robust optimization model to determine its parameters.
  • We extend our analysis to the case of multiple products. In particular, we present the idea of constraint aggregation to maintain the performance of robust optimization for that problem structure.
  • We provide numerical experiments to test the performance of the robust optimization approaches described in this paper.

The full paper can be downloaded here. Mike, a former NSF IGERT fellow, is a doctoral candidate who will be graduating next month (and is looking for a job - you can learn more about him here); Daniela received both her Bachelor and her Master's degrees from our department in 2008 and 2009, respectively (the Master's as a Presidential Scholar) and now works as a corporate pricing specialist at MillerCoors in Chicago. Feel free to email us any comments!

This research was funded through NSF Grant CMMI-0540143.

Mexico's Indeval and the Edelman Award

My favorite talk at INFORMS2010 last week was by the team who won the 2010 Edelman award back in April. The prestigious Franz Edelman award recognizes "significant contribution to work that is selected as representative of the best applications of analytical decision making in the world"; finalists make presentations during the INFORMS [Institute for Operations Research and Management Sciences] Practice conference in the Spring. The winning team is announced during the banquet and comes back for the Fall meeting, which is more academic-oriented, to give the presentation again.

The winner this year was Indeval from Mexico, for its entry entitled "Indeval Develops a New Operating and Settlement System Using Operations Research." The presentation is available at the INFORMS Video Learning Center (free registration required). Indeval is the Mexican Central Securities Depository for all securities transactions; settlement systems provide the link between buyers and sellers in the financial marketplace. The importance of real-time settlement was illustrated by the demise of Lehman Brothers, when unsettled trades got stuck in the system (this WSJ article from September 2008 provides a good description of the resulting problems).

One of the main high-level ideas is that trades should be settled together rather than individually. This way, inflow of money resulting from a trade can be used to settle another, and in the end there is no need for actual money to circulate (if inflow equals outflow); more generally, it is only necessary to exchange the difference between inflow and outflow, a process called netting (more information here). The Indeval team gives the following example in the presentation: Bank A buys 100 securities from Bank B for $500. This transaction is settled using a Delivery vs Payment (DvP) method, which is made possible by the central depository. There are 3 possible DvP models:

  1. Real-time gross settlement (this is the model where trades are settled individually, with payment received and securities delivered at the same time; the advantage is that funds and securities are available immediately),
  2. Netting of funds,
  3. Netting of securities and funds.

Models (2) and (3) are useful when Bank A is not only buying 100 securities from Bank B, but selling them the same day to Bank C for $500. If Bank A has no money, under Model (1) it needs to borrow to buy the securities from Bank B, and then sell them to Bank C, and then repay the money it had borrowed. This is inconvenient (inefficient). The netting procedure, which is done for instance at the end of the day, removes unneeded intermediary steps. Model (2) is efficient but is not done in real time. Model (3) uses netting of both funds and securities to obtain a much smaller set of transactions that remain to be settled at the end of the day. For instance, Banks B and C can exchange funds and securities directly, without involving Bank A. Implementation of Model (3) is lengthy and delays the settlement of the transactions. The new model, called Dali, aims at combining the best of all these worlds. The challenge, in the words of the presenter, was "to determine which transactions should be settled using the participants' cash." (It took three years for the system to be developed and implemented, which gives an idea of the underlying complexity of the problem. It is worth pointing out, though, that this was all done within schedule and within budget.)

A key feature of the new model is that actors were convinced to accept partial settlement of payments so that decision variables would not need to be binary. This improved overall settlement rates and led to a much more tractable formulation, with a unimodularity property (imagine that, finance practitioners discussing unimodularity, even including it in their slides [see slide around time 18:50]!) The presentation is fascinating and I highly encourage anyone interested in the topic to view it. Total running time is 40min. The Video Learning Center also includes the presentations of the other finalists: Delaware River Basin Commission, Deutsche Post DHL, New Brunswick Department of Transportation, Procter & Gamble and Sasol. Being declared a finalist of the Edelman competition is a big accomplishment in its own right, just like being nominated for an Oscar; all the teams achieved significant gains or savings for their companies through the implementation of operations research. This is important because it means companies operate more efficiently and/or better fulfill their mission without reducing service levels or laying off employees.

Congratulations to the Indeval team for a great presentation and a well-deserved award!

Business of Books

Here are a few links for people interested in the book industry:

  • "It's a Terrible Idea. Let's Get Started: Launching a Lit Mag from Scratch", an article by Sophie Beck in the Nov/Dec issue of Poets & Writers. This should be required reading for anyone interested in starting a literary magazine (admittedly a very small sample of the population). I liked that her advice didn't limit itself to the obvious - anyone can guess that expenses will include postage, printing and a Web site - but included the unexpected, which only the brave souls who ventured into the publication business can be aware of: "fees to the Library of Congress to register to the title, fees for bar codes to place on the covers"; "[the first] issue was printed on paper so heavy the mailing costs nearly bankrupted us." Such a piece, maybe shortened, would be at home in business magazines too. I love the name of this new periodical: The Normal School, certainly in part because its translation in French is L'Ecole Normale, which happens to be the graduate school that trains the elite among future top researchers and academicians. (Normal here, both for the magazine's title and the French name, refers to trying to define a norm rather than, say, what is not abnormal.) You can learn more about the magazine - or even subscribe! - here.
  • "Inside Indie Bookstores: McNally-Jackson Books in New York City", an article by Jeremiah Chamberlin, also in the Nov/Dec issue of Poets & Writers (full text is apparently available online). It is hard to believe that McNally-Jackson, in its six short years of existence, has managed to position itself as an institution on the New York literary scene - its rich schedule of readings and personality-full store certainly played a role in that. I doubt an independent bookstore can survive based on inventory alone - will always offer many more books. The most successful indie bookstores, from Harvard Bookstore in Cambridge, MA to Politics & Prose in Washington, DC, are known for their excellent reading series, which allows them to bring value to customers in spite of their smaller selection of books. The website has a directory of independent bookstores as well as bestseller lists.
  • "Publish or Perish: Can the iPad topple the Kindle, and save the book business?", a feature by Ken Auletta in the New Yorker ("Annals of Communication" series). I already mentioned this article back in April; I link to it again here because Sarah McNally refers to it in her interview. The New York Times recently announced it would publish e-book bestseller lists, both in fiction and nonfiction; the move is viewed as an acknowledgment of the growing importance of e-books, which currently represent 10% of sales at some publishers' and whose market share is expected to continue to grow. "According to the Association of American Publishers... e-book sales in the first nine months of 2010 were $304.6 million, up from $105.6 million from the same period in 2009." In addition, said in July that "sales of books for its e-reader, the Kindle, outnumbered sales of hardcover [not paperback] books" for the first time. Here are links to more New York Times articles on e-books: Does the Brain Like E-Books?, Literary Agent Plans E-Book Editions, Amazon Introduces a Format for Shorter E-Books, and finally: Great Holiday Expectations for E-Readers.

End of LinkedIn?

I took part in the panel on social media at Informs2010 this morning and, among the many fascinating insights that were exchanged, Wayne Winston from the Indiana School of Business (who writes a blog on math and sports called mathletics, in addition to being the author of many operations research books that have become ubiquitous at universities around the country) made the comment that, (I paraphrase), if anyone bothered to take on LinkedIn, they could crush them the way Facebook crushed MySpace. I completely agree, and hope maybe some entrepreneurship-inclined students out there will take on the challenge.

I have a LinkedIn page, but have found the site to be very static, and not helpful in building a network. This is an issue I would expect college students or young graduates to struggle more with, since they are the ones set to benefit the most from having a network for their job search. I only link to people I know, and I do appreciate the notifications as to what people in my network are up to, but the structure is very barebones and I have so far failed to see the value of LinkedIn groups. In other words, I find the current LinkedIn website to fall very far short of its stated goal to "strengthen and extend your existing network of trusted contacts" and "help you discover inside connections."

What are features you think a business-network site should have? I guess people should be able to, in addition to posting their resume (which LinkedIn already does through the profile function) present some sort of portfolio of their work if they want to describe recent projects in more details, post links to multimedia links or news releases about their work or expertise, engage in public or private discussions with other users, and in general offer more opportunities for frequent updating. Relationships between people who link to each other would benefit from being clearer (who do you interact with on a frequent basis? who do you link to because you knew them in graduate school ten years ago?)

A mentoring/advising feature would be welcome as well - for instance, they could check off a box saying "I am willing to give insights by email into my industry/company/job function to people who are X links away from me in my network". An industry leader could be profiled at regular intervals and share his/her perspective about how he/she made it to the top. It should make it easy for companies to identify users who have worked with a potential hire in the past (maybe people should give the names of five people they have worked closely with and the dates of interaction whenever they add a work position to their profile - people would not give the names of teammates they did not get along with, but a good algorithm would look at who else the people they named are connected with and would produce the names of these potential acquaintances as well). The site could be financed via advertising by, say, higher education programs (especially continuing education or executive education), although companies could also pay a small fee to post job openings and the like.

Also, I would like to suggest the heretic idea of not displaying, ever, the number of connections users have (don't even make it an option.) A lot of people out there love the feeling of being popular and, as has become clear on Facebook and even more so on Twitter, will try very hard to increase whatever number their popularity is measured by. They follow others on Twitter with the sole goal of getting followed, although their Twitter feed is usually only a list of retweets and links to ways to increase one's followers, and usually stop following within a few days if the other party doesn't promptly follow them back. A successful business-network site should be built on the premises that the quality of connections counts a lot more than their quantity, and that you do not need to have 500 connections to be a powerbroker (although of course, it doesn't hurt either).

A good business-network site should also assist companies in identifying applicants who have padded their resume or glossed over bad work experiences. Think about the PR drama that unfolded when Skype hired an engineering executive at Yahoo!, unleashing a storm of negative comments on social-media sites (especially; this ultimately resulted in the Yahoo! alumnus leaving Skype after a month. Better reference-checking on Skype's end would have helped avoid putting it under a negative spotlight - at the very least, it would have been aware of potential problems before the social-media storm. A networking site that could help companies identify good people to contact for references, and applicants find good sources of advice as they try to find a foothold in an industry, would be invaluable. This would require users to volunteer quite a bit of data (something the Millenium generation has become increasingly comfortable with), and operations researchers to implement good algorithms to sort through this data. Maybe the next Facebook success story will be built on analytics.