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Best content from the best source handpicked by Shyam. The source include The Harvard University, MIT, Mckinsey & Co, Wharton, Stanford,and other top educational institutions. domains include Cybersecurity, Machine learning, Deep Learning, Bigdata, Education, Information Technology, Management, others.

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    Big data’s potential just keeps growing. Taking full advantage means companies must incorporate
    analytics into their strategic vision and use it to make better, faster decisions.
    Is big data all hype?

    To the contrary: earlier research may have given only a partial view of the ultimate impact. A new report from the McKinsey Global Institute (MGI), The age of analytics: Competing in a data-driven world, suggests that the range of applications and opportunities has grown and will continue to expand. Given rapid technological advances, the question for companies now is how to integrate new capabilities into their operations and strategies—and position themselves in a world where analytics can upend entire industries.

    A 2011 MGI report highlighted the transformational potential of big data. Five years later, we remain convinced that this potential has not been oversold. In fact, the convergence of several technology trends is accelerating progress. The volume of data continues to double every three years as information pours in from digital platforms, wireless sensors, virtual-reality applications, and billions of mobile phones. Data-storage capacity has increased, while its cost has plummeted. Data scientists now have unprecedented computing power at their disposal, and they are devising algorithms that are ever more sophisticated.

    Earlier, we estimated the potential for big data and analytics to create value in five specific domains. Revisiting them today shows uneven progress and a great deal of that value still on the table (exhibit). The greatest advances have occurred in location-based services and in US retail, both areas with competitors that are digital natives. In contrast, manufacturing, the EU public sector, and healthcare have captured less than 30 percent of the potential value we highlighted five years ago. And new opportunities have arisen since 2011, further widening the gap between the leaders and laggards.

    Leading companies are using their capabilities not only to improve their core operations but also to launch entirely new business models. The network effects of digital platforms are creating a winner-take-most situation in some markets. The leading firms have remarkably deep analytical talent taking on various problems—and they are actively looking for ways to enter other industries. These companies can take advantage of their scale and data insights to add new business lines, and those expansions are increasingly blurring traditional sector boundaries.

    Where digital natives were built for analytics, legacy companies have to do the hard work of overhauling or changing existing systems. Adapting to an era of data-driven decision making is not always a simple proposition. Some companies have invested heavily in technology but have not yet changed their organizations so they can make the most of these investments. Many are struggling to develop the talent, business processes, and organizational muscle to capture real value from analytics.
    The first challenge is incorporating data and analytics into a core strategic vision. The next step is developing the right business processes and building capabilities, including both data infrastructure and talent. It is not enough simply to layer powerful technology systems on top of existing business operations. All these aspects of transformation need to come together to realize the full potential of data and analytics. The challenges incumbents face in pulling this off are precisely why much of the value we highlighted in 2011 is still unclaimed.

    The urgency for incumbents is growing, since leaders are staking out large advantages, and hesitating increases the risk of being disrupted. Disruption is already happening, and it takes multiple forms. Introducing new types of data sets (“orthogonal data”) can confer a competitive advantage, for instance, while massive integration capabilities can break through organizational silos, enabling new insights and models. Hyperscale digital platforms can match buyers and sellers in real time, transforming inefficient markets. Granular data can be used to personalize products and services—including, most intriguingly, healthcare. New analytical techniques can fuel discovery and innovation. Above all, businesses no longer have to go on gut instinct; they can use data and analytics to make faster decisions and more accurate forecasts supported by a mountain of evidence. 

    Original source :  Mckinsey Global Institute

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    Former Reserve Bank governor D Subbarao today termed demonetisation as "creative destruction and the most disruptive policy innovation since 1991 reforms" that has helped destroy blackmoney.
    "On November 8, the Prime Minister (Narendra Modi) and the Reserve Bank have demonetised 86 per cent of currency in circulation overnight, which is what is arguably the most disruptive policy innovation in India since the 1991 reforms," he said.

    "Demonetisation, in that sense, is creative destruction.

    But it is a very special type of creative destruction. Because what it has destroyed is a destructive creation -- blackmoney.

    So, you can understand that demonetisation is creative destruction of a destructive creation," Subbarao said.

    He was addressing an international conference organised by the Institute for Development and Research in Banking Technologies (IDRBT) here.

    He further said demonetisation is "arguably" leading to a flurry of innovations in Indian financial sector by way of digitisation of payments.

    "There are two perspectives. Extension of a global trend of financial technology which is upending the finance industry and discontinuous change in a low-income country from cash incentive economy to a less-cash economy. Either way, we will have disruptive innovations in India's financial sector," he explained.

    Subbarao said that though cost and benefit of this demonetisation exercise is a very contentious debate, the subject of policy innovation is not contentious.

    According to him, the country witnesses a lot of disruptive innovations in finance in payment system.
    The model of traditional banking has access to low-cost deposits and has an advantage over other financial institutions, including fintech companies, according to the former governor.

    "That advantage is going to be neutralised by the business model of these fintech companies which will beat onefficiency, service and trust," Subbarao remarked. 

    He suggested the traditional banks should look into otheravenues to compete by tying up with these companies orpayments banks that are coming up.

    He urged regulators to promote innovation and protectconsumers and preserve financial stability.

    "On the one hand, they have to make sure the stabilityis preserved and on the other hand, they should regulatetightly that innovation is not scorched. This balance is avery difficult judgement call," he added.

    On microfinance, he said the model has benefited millionsof low-income families in India, particularly in AndhraPradesh (before the state bifurcation).

    He recalled that RBI was in a dilemma at the time of 2010crisis on whether to regulate the interest rates of MFIs andif so, what figure would be justified.

    View at the original source

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    It’s work in progress. Three events dominated India’s economic landscape last year, but whether they can be described as “progress” is debatable. One definitely isn’t: the unseemly brawl that broke out over control of the Tata group with Ratan Tata returning as interim chairman after ousting incumbent Cyrus Mistry. A lot of dirty linen is being washed in public, putting partly in the shade the political charges being traded elsewhere.

    The second is the goods and services tax (GST), whose objective is to replace all taxes levied by the federal government and the states with one central tax. The GST is scheduled to come into effect by April or — at the latest — by September. Although both houses of Parliament have approved the bill and the President has signed off on it, a GST Council is now squabbling over the details, which could delay implementation.

    “The timing is not right for implementation,” says West Bengal finance minister Amit Mitra, who is also chairman of the empowered committee of state finance ministers. He lays the blame squarely on the center’s move to demonetize Rs500 ($7.4) and Rs1,000 notes. “We all supported the GST under the premise that this would be the only destabilization factor,” Mitra told a TV channel. “We did not know that there would be a much bigger destabilization in the form of demonetization that would be let loose on the country.”

    According to Wharton emeritus professor of management

    , while it is too early to assess the impact of demonetization, the move raises long-term questions. “What will have been gained from this step, and at what cost and mostly borne by whom?” he asks. He notes that rival political parties that have protested against demonetization could “broaden their tactical agenda to harm or even derail the GST implementation.” It also remains to be seen how the negative sentiment against demonetization could hurt the BJP and its allies in assembly elections in Uttar Pradesh in February-March, he adds.

    “What will have been gained from [demonetization], and at what cost, and mostly borne by whom?” –Jitendra Singh

    Demonetization represents much more than destabilization; critics argue that it has struck a body blow on economic activity in India. The decision – which was entirely unsuspected – was announced on 8 November 2016. While the pros and cons of the measure still continue to be debated, the consensus of opinion appears to be that while the proponents of demonetization may have had good intentions, the suffering it has caused to millions of Indians is unwarranted. Since Rs500 and Rs1000 notes make up some 86% of the total currency in circulation in India, especially in the vast rural areas, one economist compared the pain to what individuals might experience if 86% of their blood was removed from their bodies.

    To be sure, demonetization has its supporters. While industrialists and corporate chiefs (Ratan Tata, Mukesh Ambani, K.V. Kamath and Deepak Parekh, to mention a few) favor the move, economists (including Nobel laureates Amaryta Sen and Paul Krugman, among others) are critical. “The clan of economists has spoiled the party [with] their estimates of how output will be affected as spending has stopped, manufacturing hit and several workers laid off. The net result can be a fall of between 0.5% and 2% in GDP,” says online news channel Firstpost. “The debate still goes on.”
    According to Singh, Modi took “a bold, even visionary, step” with demonetization in attempting to combat the black economy and counterfeiting, and cutting financial support to terrorism. “What was always key, however, was how well the implementation process would unfold,” he notes.

    “Even supporters of the decision would say that the implementation was far from perfect.”

    Kartik Hosanagar, a professor in Wharton’s department of operations, information and decisions, views demonetization against the backdrop of other economic gains. The year 2016 has overall been “a good year” for India, he notes, listing the highlights:

    ⦁ The GDP growth rate has held up at more than 7%.

    ⦁ Foreign direct investment went up significantly during the year. (It rose 30% on a year-on-year basis to $21.6 billion between April and September 2016, according to public ⦁ data published by the India Brand Equity Foundation, a government-sponsored trust.)

    ⦁ Initiatives such as the ‘⦁ Make in India’ program “have borne early fruits.” Many MNCs including Panasonic and Pepsi set up manufacturing facilities in India during the year.

    ⦁ “The startup world has seen ⦁ a drop in investment activity, but I see that as a return to sanity
    rather than a worrisome contraction,” Hosanagar adds.

    “The biggest wild card in all of this, of course, is demonetization,” notes Hosanagar. “It’s unclear how it will all play out.” He hopes that “any impact on economic activity and GDP will be temporary, and the long-term benefits such as an increase in cashless activity will be more permanent.” He adds that “this is the India optimist in me speaking.”

    “The biggest wild card in all of this, of course, is demonetization.” –Kartik Hosanagar

    Part of the problem with demonetization was that it came as a bolt from the blue; the government claimed giving advance notice would have the defeated its purpose. But not everyone agrees with that view. “There was no need for secrecy,” counters Jayati Ghosh, a professor of social sciences at Jawaharlal Nehru University. “All demonetizations through history have been done with some advance warning. This reduces the damage to innocent people. The government could monitor suspicious transactions after the announcement, just as it is doing now. In any case, I would not have demonetized Rs500 notes. If high-value notes like Rs1,000 are the problem, why replace them with even higher value notes?” (A Rs2,000 note has been introduced as part of the package.)
    Moving Goalposts

    The government, meanwhile, seems to have moved the goalposts: The claimed objective of the exercise has apparently changed from rooting out black money to promoting cashless transactions. Several measures have been introduced, among them a 0.75% discount on digital payments made for buying petrol and diesel and a 0.5% cut in the price of railway season tickets bought using digital technology.

    In another twist, the government appears to be no longer pushing demonetization as a “cashless” plan. It has now become a “less-cash” strategy. That is as it should be; the world doesn’t have a cashless economy so far. In India, Bloomberg data shows the share of cash in the volume of consumer transactions is 98% (against 55% in the U.S. and 48% in the U.K.). It is 90% in China and 86% in Japan. Much of the cash transactions are in rural India. So, expectedly, life came to a near standstill and much misery ensued when people found themselves unable to use their own money. Even when the money was in a bank account, limits on ATM withdrawals compounded the problem further.

    But India is also a country where finding novel, workable solutions to problems – commonly known as jugaad — is par for the course. While long lines multiplied in front of banks and ATMs (several people claimed to have had heart attacks while standing in them), ways were found to deal with the situation. By December 31, the visible impact was a Parliament at near paralysis as politicians took potshots at each other, a plethora of banking riches coming back into the system (some 90% of the Rs500 and Rs1,000 notes were returned), and a host of new scams to convert black money into white with the connivance of bankers and politicians.

    Nobody is denying a short-term setback. The Reserve Bank of India (RBI) has reduced the GDP growth rate forecast for 2016-17 from 7.6% to 7.1%, the Asian Development Bank from 7.4% to 7%, Fitch from 7.4% to 6.9% and Bank of America-Merrill Lynch from 7.7% to 7.4% (for calendar 2016). All believe, however, that growth will recover the next year.

    Modinomics to the Defense

    Modi defended the demonetization exercise in a televised speech on New Year’s Eve, arguing that it had to be done. “It seemed at times that the evils and corruptions of society, knowingly or unknowingly, intentionally or unintentionally, had become a part of our daily lives,” he said. “Crores of Indians were looking for an escape from this suffocation.”

    Modi said in his speech that after demonetization, only 24 lakh (2.4 million) Indians acknowledge an annual income of Rs. 10 lakh each (Rs. 1 million). “Can we digest this? Look at the big bungalows and big cars around you,” he said. “If we look at any big city, it would have lakhs of people with annual income of more than [Rs.] 10 lakh. Do you not feel, that for the good of the country, this movement for honesty needs to be further strengthened?” The upshot of that is his government would now try to bring hundreds of thousands of tax evaders into the net.

    But Modi will find it tough to strengthen the tax machinery sufficiently to force those people to start paying taxes, according to critics. “If he doesn’t, then what was the point of subjecting the whole country to so much disruption and pain?” writes Siddharth Varadarajan, former editor of The Hindu newspaper, in The Wire, a nonprofit publication.

    Modi also said in his speech that over the last 10-12 years, the demonetized currency was being used in the black economy, and that excess cash in the system caused inflation to spike and fueled corruption. “Lack of cash causes difficulty, but excess of cash is even more troublesome,” he said. Critics have attacked those remarks as being unsound in economic theory.

    Demonetization could have potentially derailed the GST, which was practically a done deal, according to experts interviewed by Knowledge@Wharton. The impact of demonetization will pass in a couple of quarters, but the GST delay will have more far-reaching effects. “Undoubtedly, the GST is a bigger reform. It would be the most fundamental reform initiated since 1991,” says Dharmakirti Joshi, chief economist at Crisil, a global S&P company.

    “There was no need for secrecy. All demonetizations through history have been done with some advance warning.” –Jayati Ghosh

    Commenting on demonetization, Joshi says: “Any disruption in the flow of money, verily the economy’s lifeblood, impacts business cycles quickly. There is no precedent to the scale of demonetization that has taken place in India. That is why quantifying its impact is so difficult. A few countries that replaced their old currency with new did it in a gradual manner — the introduction of the euro in the Eurozone, or in Zimbabwe where the old currency was gradually phased out.”

    The GST Impasse

    The government has only itself to blame for the GST impasse. The proposal has been around for a dozen years. Its origins lie even further in the past: In 2000, the BJP-led government of A.B. Vajpayee started a discussion on the GST. Prime Minister Narendra Modi had opposed it when he was chief minister of Gujarat; now, it is the pivot of his reforms. Experts agree that the GST could increase India’s GDP by 1.5% to 2%. It has received, in its time, the backing of former finance ministers Pranab Mukherjee (now president of the country) and P. Chidambaram. Yet it still gets held up.

    One reason is that implementing the GST requires a constitutional amendment. The GST Constitutional Act has already been passed by the Lok Sabha and the Rajya Sabha (the two houses of Parliament) and, on 8 September, the President of India signed off on it. The states – in the form of the GST Council – are reading from the same book. But it may take some time to get to the same page.

    According to Singh, while the GST has the potential to boost GDP growth and foreign investment flows, the opposition to it could cost the country dearly. “There is the very real possibility that some actors will take the low road, and try to delay or even derail the GST implementation,” he notes. “If that were to occur, it will not be the first time in post-1947 Indian history when key leaders would snatch defeat from the jaws of victory.”

    Singh hopes that the political parties involved, including state level parties, “put the collective long-term interests of India and all Indians above apparently enticing short-term partisan gains, and get the GST bill implemented at the earliest.”

    Viewed in isolation, demonetization and GST could be promising for India, according to Singh. “Absent some of these spillovers, the long-term impact of the demonetization could be quite positive for the Indian economy,” he says. “If the GST gets implemented soon, and if there is further rationalization of the tax structure, and if opposition parties cooperate, there may be a couple of quarters of somewhat lower growth, and then the economy would return to its positive trajectory. But there are several ‘ifs’ in between.”

    Tata, Cyrus Mistry

    The end of the year also saw a high-profile family split. The 149-year-old Tata group, the largest in the country and the most respected, with a global turnover of more than $100 billion, sent shockwaves through corporate India with the ouster of chairman Cyrus Mistry.

    Mistry took charge four years ago after a search panel was appointed to find a replacement for Ratan Tata, who was turning 75. The 50-year-old Mistry was a surprise choice. And problems were apparently building for a long time under the surface.

    “Any disruption in the flow of money, verily the economy’s lifeblood, impacts business cycles quickly. There is no precedent to the scale of demonetization that has taken place in India.” –Dharmakirti Joshi

    Mistry is now being ousted from all the Tata group companies. Says a letter to shareholders by Ratan Tata: “Since Mistry was appointed as a director of various Tata group companies only as a corollary to his being the chairman of Tata Sons, the right step would have been for him to resign as director. Unfortunately, he has not yet done so, and his continued presence as a director is a serious disruptive influence on these company boards, which can make the company dysfunctional, particularly given his open hostility towards the primary promoter, Tata Sons.”

    Responded Mistry: “I have to say that the board of directors [of Tata Sons] has not covered itself with glory. To ‘replace’ your chairman without so much as a word of explanation and without affording him an opportunity of defending himself in a summary manner must be unique in the annals of corporate history. The suddenness of the action and the lack of explanation have led to all manner of speculation and has done my reputation and the reputation of the Tata group immeasurable harm.”

    Most of the Tata group is owned by the Tata trusts, of which Ratan Tata is chairman. So there are no two ways about how the ouster move will go. But Mistry has his supporters. His family has a stake of some 20% in Tata Sons; the trusts hold about 66%. Besides, he is not without friends, who include some independent directors. Nusli Wadia, a board member of Tata Motors, has entered the fray (with yet another letter). “[JRD Tata, Tata Group chairman before Ratan Tata] never expected anyone to toe his or the Tata line,” he told the board of Tata Motors (where he has been an independent director). “It is both sad and unfortunate that Tata Sons and its interim chairman Ratan Tata are not only not practicing this great tradition but effectively destroying it.” Wadia has sued Tata Sons for defamation.

    Singh suggests that the problems at the Tata Group run beyond those related to Mistry’s ouster. He describes the group as “a structurally complex entity, with multiple interests at play, all of which may not always be naturally aligned.” As Mistry’s family owns a significant minority shareholding in Tata Sons, “it is natural to think that interpersonal issues are paramount here,” he noted. “This is a mistake. There are difficult structural issues embedded in the context, some of which will not go away with Mistry’s departure as chairman of Tata Sons.”

    According to Singh, the Tata-Mistry controversy could have wider, deleterious effects if it is not resolved soon. “At a minimum, it is a distraction from the effective governance and operations of the group; it could damage the Tata brand; and it also has the potential to raise questions in the international community about the attractiveness of India as an investment destination.”

    As matters stand, Mistry has resigned from the boards of the major Tata companies (except for Tata Sons). “The fight goes onto another platform,” he told the Business Standard newspaper after he quit. “[I] will pursue it further. This move gives me an opportunity to concentrate my efforts…. I will be moving legally.” Won’t the battle be long and arduous? “I have a lifetime ahead of me,” he replied.

    In a statement to the shareholders announcing his resignation, Mistry states: “Bringing to the fore these ethical issues can have a short-term adverse impact… I feel strongly that such short-term pain is necessary for long-term interests.”

    Is that Cyrus Mistry talking or Narendra Modi?

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    No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New York Times on September 13, 1970.

    As the leader of the Chicago school of economics, and the winner of Nobel Prize in Economics in 1976, Friedman has been described by The Economist as "the most influential economist of the second half of the 20th century...possibly of all of it". The impact of the NYT article contributed to George Will calling him “the most consequential public intellectual of the 20th century.”

    Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.

    How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “In a free-enterprise, private-property sys­tem,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders.

    Come again?

    If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not. The executive is an employee of the corporation.

    An organization is a mere legal fiction

    But in the magical world conjured up in this article, an organization is a mere “legal fiction”, which the article simply ignores in order to prove the pre-determined conclusion. The executive “has direct re­sponsibility to his employers.” i.e. the shareholders. “That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.“ 

    What’s interesting is that while the article jettisons one legal reality—the corporation—as a mere legal fiction, it rests its entire argument on another legal reality—the law of agency—as the foundation for the conclusions. The article thus picks and chooses which parts of legal reality are mere “legal fictions” to be ignored and which parts are “rock-solid foundations” for public policy. The choice depends on the predetermined conclusion that is sought to be proved.

    A corporate exec­utive who devotes any money for any general social interest would, the article argues, “be spending someone else's money… Insofar as his actions in accord with his ‘social responsi­bility’ reduce returns to stockholders, he is spending their money.”

    How did the corporation’s money somehow become the shareholder’s money? Simple. That is the article’s starting assumption. By assuming away the existence of the corporation as a mere “legal fiction”, hey presto! the corporation’s money magically becomes the stockholders' money.

    But the conceptual sleight of hand doesn’t stop there. The article goes on: “Insofar as his actions raise the price to customers, he is spending the customers' money.” One moment ago, the organization’s money was the stockholder’s money. But suddenly in this phantasmagorical world, the organization’s money has become the customer’s money. With another wave of Professor Friedman’s conceptual wand, the customers have acquired a notional “right” to a product at a certain price and any money over and above that price has magically become “theirs”.

    But even then the intellectual fantasy isn’t finished. The article continued: “Insofar as [the executives’] actions lower the wages of some employees, he is spending their money.” Now suddenly, the organization’s money has become, not the stockholder’s money or the customers’ money, but the employees' money.

    Is the money the stockholders’, the customers' or the employees’? Apparently, it can be any of those possibilities, depending on which argument the article is trying to make. In Professor Friedman’s wondrous world, the money is anyone’s except that of the real legal owner of the money: the organization.

    One might think that intellectual nonsense of this sort would have been quickly spotted and denounced as absurd. And perhaps if the article had been written by someone other than the leader of the Chicago school of economics and a front-runner for the Nobel Prize in Economics that was to come in 1976, that would have been the article’s fate. But instead this wild fantasy obtained widespread support as the new gospel of business.

    People just wanted to believe…

    The success of the article was not because the arguments were sound or powerful, but rather because people desperately wanted to believe. At the time, private sector firms were starting to feel the first pressures of global competition and executives were looking around for ways to increase their returns. The idea of focusing totally on making money, and forgetting about any concerns for employees, customers or society seemed like a promising avenue worth exploring, regardless of the argumentation.

    In fact, the argument was so attractive that, six years later, it was dressed up in fancy mathematics to become one of the most famous and widely cited academic business articles of all time. In 1976, Finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published their paper in the Journal of Financial Economics entitled

    “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

    Underneath impenetrable jargon and abstruse mathematics is the reality that whole intellectual edifice of the famous article rests on the same false assumption as Professor Friedman’s article, namely, that an organization is a legal fiction which doesn’t exist and that the organization’s money is owned by the stockholders.

    Even better for executives, the article proposed that, to ensure that the firms would focus solely on making money for the shareholders, firms should turn the executives into major shareholders, by affording them generous compensation in the form of stock. In this way, the alleged tendency of executives to feather their own nests would be mobilized in the interests of the shareholders.

    The money took over…

    Sadly, as often happens with bad ideas that make some people a lot of money, shareholder value caught on and became the conventional wisdom. Not surprisingly, executives were only too happy to accept the generous stock compensation being offered. In due course, they even came to view it as an entitlement, independent of performance.

    Politics also lent support. Ronald Reagan was elected in the US in 1980 with his message that government is “the problem”. In the UK, Margaret Thatcher became Prime Minister in 1979. These leaders preached “economic freedom” and urged a focus on making money as “the solution”. As the Michael Douglas character in the 1987 movie, Wall Street, pithily summarized the philosophy, greed was now good.

    Moreover an apparent exemplar of the shareholder value theory emerged: Jack Welch. During his tenure as CEO of General Electric from 1981 to 2001, Jack Welch came to be seen–rightly or wrongly–as the outstanding implementer of the theory, as a result of his capacity to grow shareholder value and hit his numbers almost exactly. When Jack Welch retired, the company had gone from a market value of $14 billion to $484 billion at the time of his retirement, making it, according to the stock market, the most valuable and largest company in the world. In 1999 he was named “Manager of the Century” by Fortune magazine.

    The disastrous consequences…

    So for a time, it looked as though the magic of shareholder value was working. But once the financial tricks that were used to support it were uncovered, the underlying reality became apparent. The decline that Friedman and other sensed in 1970 turned out to be real and persistent. The rate of return on assets and on invested capital of US firms declined from 1965 to 2009 by three-quarters, as shown by the Shift Index, a study of 20,000 US firms.

    The shareholder value theory thus failed even on its own narrow terms: making money. The proponents of shareholder value and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time. Yet, precisely the opposite occurred. In the period of shareholder capitalism since 1976, executive compensation has exploded while corporate performance declined.
    Maximizing shareholder value thus turned out to be the disease of which it purported to be the cure. As Roger Martin in his book, Fixing the Game, noted, "between 1960 and 1980, CEO compensation per dollar of net income earned for the 365 biggest publicly traded American companies fell by 33 percent. CEOs earned more for their shareholders for steadily less and less relative compensation. By contrast, in the decade from 1980 to 1990, CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled."

    Even Jack Welch sees the light…

    Moreover in the years since Jack Welch retired from GE in 2001, GE’s stock price has not fared so well: in the decade following Welch's departure, GE lost around 60 percent of the market capitalization that Welch “created”. It turned out that the fabulous returns of GE during the Welch era were obtained in part by the risky financial leverage of GE Capital, which would have collapsed in 2008 if it had not been for a government bailout.

    In due course, Jack Welch himself came to be one of the strongest critics of shareholder value. On March 12, 2009, he gave an interview with Francesco Guerrera of the Financial Times and said, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

    From shareholder value to hardball…

    The supposed management dynamic of maximizing shareholder value was to make money, by whatever means are available.  Self-interest reigned supreme. The logic was continued in the perversely enlightening book, Hardball (2004), by George Stalk, Jr. and Rob Lachenauer. Firms should pursue shareholder value to “win” in the marketplace. These firms should be “willing to hurt their rivals”. They should be “ruthless” and “mean”. Exponents of the approach “enjoy watching their competitors squirm”. In an effort to win, they go up to the very edge of illegality or if they go over the line, get off with civil penalties that appear large in absolute terms but meager in relation to the illicit gains that are made.

    In such a world, it is therefore hardly surprising, says Roger Martin in his book, Fixing the Game, that the corporate world is plagued by continuing scandals, such as the accounting scandals in 2001-2002 with Enron, WorldCom, Tyco International, Global Crossing, and Adelphia, the options backdating scandals of 2005-2006, and the subprime meltdown of 2007-2008. Banks and others have been gaming the system, both with practices that were shady but not strictly illegal and then with practices that were criminal. They include widespread insider trading, price fixing of LIBOR, abuses in foreclosure, money laundering for drug dealers and terrorists, assisting tax evasion and misleading clients with worthless securities.
    Martin writes: “It isn’t just about the money for shareholders, or even the dubious CEO behavior that our theories encourage. It’s much bigger than that. Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.”

    Peter Drucker got it right...

    Not everyone agreed with the shareholder value theory, even in the early years. In 1973, Peter Drucker made a sustained argument against shareholder value in his classic book, Management. In his view, “There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.”
    Similarly in 1979, Quaker Oats president Kenneth Mason, writing in Business Week, declared Friedman's profits-are-everything philosophy "a dreary and demeaning view of the role of business and business leaders in our society… Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit."

    The primacy of the customer…

    Peter Drucker’s argument about the primacy of the customer didn’t have much effect until globalization and the Internet changed everything. Customers suddenly had real choices, access to instant reliable information and the ability to communicate with each other. Power in the marketplace shifted from seller to buyer. Customers started insisting on “better, cheaper, quicker and smaller,” along with “more convenient, reliable and personalized.” Continuous, even transformational, innovation became requirements for survival.

    A whole set of organizations responded by doing things differently and focusing on delighting customers profitably, rather than a sole focus on shareholder value. These firms include Whole Foods [WFM], Apple [AAPL], Salesforce [CRM], Amazon [AMZN], Toyota [TM], Haier Group, Li & Fung and Zara along with thousands of lesser-known firms. The transition is happening not just in high tech, but also in manufacturing, books, music, household appliances, automobiles, groceries and clothing. This different way of managing turned out to be hugely profitable.

    The common elements of what all these organizations are doing has now emerged. It’s not merely the application of new technology or a set of fixes or adjustments to hierarchical bureaucracy. It involves basic change in the way people think, talk and act in the workplace. It involves deep changes in attitudes, values, habits and beliefs.

    The new management paradigm is capable of achieving both continuous innovation and transformation, along with disciplined execution, while also delighting those for whom the work is done and inspiring those doing the work. Organizations implementing it are moving the production frontier of what is possible.

    The replacement for shareholder value is thus now identifiable. A set of books have appeared that spell out the elements of this canon of radically different management.

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    In effect, shareholder value is obsolete. What we are seeing is a paradigm shift in management, in the strict sense laid down by Thomas Kuhn: a different mental model of how the world works.

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    There is only one valid definition of a business purpose: to create a customer.

    – Peter Drucker, The Practice of Management (1954)

    When pressures are mounting to deliver short-term results, how do successful CEOs resist those pressures and achieve long-term growth? The issue is pressing: low global economic growth is putting stress on the political and social fabric in Europe and the Americas and populist leaders are mobilizing widespread unrest. “By succumbing to false solutions, born of disillusion and rage,” writes Martin Wolf in the Financial Times this week, “the west might even destroy the intellectual and institutional pillars on which the postwar global economic and political order has rested.”

    The first step in resisting the pressures of short-termism is to correctly identify their source. The root cause is remarkably simple—the view, which is widely held both inside and outside the firm, that the very purpose of a corporation is to maximize shareholder value as reflected in the current stock price (MSV). This notion, which even Jack Welch has called “the dumbest idea in the world,” got going in the 1980s, particularly in the U.S., and is now regarded in much of the business world, the stock market and government as an almost-immutable truth of the universe. As The Economist even declared in March 2016, MSV is now “the biggest idea in business.”

    The Birth Of A Bad Idea

    Why did the idea arise? MSV was a well-intended effort by firms to survive in a “VUCA” world, namely, a world that is increasingly volatile, uncertain, complex and ambiguous. In this more difficult context, in which power in the marketplace has steadily shifted from firms to customers, firms focused more sharply on what is immediately profitable. This was presented as a better approach than the then-prevailing view that a firm should seek to meet the needs of an array of stakeholders—customers, employees, shareholders and society. The misguided hope, articulated by Milton Friedman in September 1970, was that if a firm focused on solely on shareholders, everyone would be better off through the supposed “magic of the marketplace.”

    The result has been the opposite. MSV led to a vicious cycle of value extraction and economic decline.

    To be sure, companies often said that their goal is long-term shareholder value. Indeed, esteemed business school professors defend shareholder value in this way, as in an article in Harvard Business Review in August 2016. The professors seek to reclaim MSV by suggesting that shareholder value has been “hijacked by those who incorrectly believe that the goal is to maximize short-term earnings to boost today’s stock price. Properly understood, maximizing shareholder value means allocating resources so as to maximize long-term cash flow.”

    But since calculating the long-term cash flow of any particular action is an impractical guide for day-to-day decision-making in a firm, once shareholder value of any kind becomes the firm’s goal, it’s the impact on the current stock price that in practice becomes the basis for day-to-day decision-making. This in turn leads inexorably to a focus on the short-term.

    Short-term Incentives Are Larger Than Previously Understood

    Inside the firm, enhancing short-term shareholder value is what most CEOs are currently paid to do. Stock-based compensation is the main reason why the “hijacked version” of MSV—that the goal of a firm is shareholder value as reflected in the current stock price—has become so pervasive. By focusing CEO attention on the current stock price, stock-based compensation is often at odds with long-term growth.

    CEO stock-based compensation is even more massive than previously understood. Research published in 2016 in The Atlantic and Harvard Business Review by Professor William Lazonick, shows that the CEO–to-median-worker pay ratio is not, as commonly estimated, in the order of 300:1, with average CEO compensation in the order of $10-15 million, which is already shocking.
    Lazonick’s new research shows that the actual CEO–to-median-worker-pay ratio of the 500 highest paid executives is almost 1000:1 or $33 million, with 82% from stock-based pay. Over several decades, executive compensation has increased more than 1000%. 

    Creating long-term sustainable value through investment in market-creating innovation can have huge payoffs both for the shareholders and for the economy. But it usually takes years of hard work and is full of risk, with possibly no payoff during the tenure of the current chief executive. There are two much easier avenues available to the CEO to boost the stock price. One is cutting costs. The other is boosting the share price through share buybacks. Both are relatively easy and the results in terms of an enhanced share price are immediate, with practically no short-term risk. It is done in private with the stroke of a pen. Is it any wonder that CEOs give more attention to cost-cutting and share buybacks than to investment in risky slow-gestating innovation?

    Massive share buybacks are a relatively recent phenomenon. Prior to 1982, large stock buybacks were illegal because they constituted obvious stock price manipulation. But the SEC in the Reagan administration introduced a new rule—Rule 10b-18—which creates “a safe harbor” for firms to buy back as many shares as they like. This effectively opened the floodgates. The Economist has called the practice “a resort to corporate cocaine”. Reuters has called it “corporate self-cannibalization.”

    The SEC seems to consider itself powerless to do anything about the ensuing stock price manipulation. Thus in July 2015, when Senator Tammy Baldwin (D-WI) directly asked the SEC head in the Obama administration, Mary Jo White, to look into the issue of stock price manipulation resulting from share buybacks, White replied in effect that the SEC could not consider the issue because the protection offered by Rule 10b-18 was absolute. The prospects of changing that ruling in the investor-friendly Trump administration seem even more remote.

    Lazonick’s recent research also shows how SEC rules currently enable executives to time the granting and vesting of their own shares so as to maximize their own compensation, despite the blatant conflict of interest.

    As a result, CEOs have pursued lavish share buybacks with abandon, despite disastrous financial, economic and social consequences. As Upton Sinclair pointed out long ago, “it is difficult to get a man to understand something when his salary depends on not understanding it.”

    Share Buybacks Are Gargantuan In Scale

    The current scale of share buybacks is breath-taking. Over the years 2006-2015, Lazonick’s latest research shows that the 459 companies in the S&P 500 Index that were publicly listed over the ten-year period expended $3.9 trillion on stock buybacks, representing 54% of net income, plus another 37% of net income on dividends. Much of the remaining 10% of profits was held abroad, sheltered from U.S. taxes.

    The total of share buybacks for all US, Canadian, and European firms, for the decade 2004-2013 was $6.9 trillion. The total share buybacks for all public companies in just the U.S. for that decade was around $5 trillion.

    Buybacks might make some sense when a stock is undervalued, but Lazonick’s research shows that most buybacks occur when the stock is overvalued, thus enabling firms to mask other business problems. Contrary to the stated goal of enhancing shareholder value, the net result of share buybacks executed at the top of the market is to systematically destroy real shareholder value.

    As Robin Harding in the Financial Times concludes, it is “time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.”

    ‘The Stock Market Made Us Do It’

    Outside the firm, it is the stock market that acts as the enforcer of the MSV religion. As Dennis Berman in the Wall Street Journal points out, decisions are often driven by the C-suite’s perception that they are under “the threat from shareholder activists, who now patrol the market like prison guards with billy clubs. Overspend and get whacked.”

    These perceptions are not far from reality. Take the case of Timken Steel, a company in Canton Ohio which has been making steel and bearings for almost a hundred years. It’s the kind of firm where “making things still matters.” Unlike other companies in the region, like Goodyear Tire & Rubber or the Hoover Company, Timken has not tried to cut costs by moving production to other countries where labor is cheaper. Instead Timken has made huge capital and social investments in Canton Ohio. Over the last decade, its share price had kept pace with the stock market, but that was no protection against “activist shareholders,” formerly known more accurately as “corporate raiders.”

    In 2013, Timken was attacked by Relational Investors, in partnership with the California State Teachers’ Retirement System, (CalSTRS), which represents some 236,000 teachers and other retirees in California. Relational applied its usual modus operandi: acquiring stakes in the company, pressuring it to make changes to “unlock value”, insisting that the firm load itself up with debt, buy back their own shares, return assets to shareholders and drive their share prices higher. Relational then cashes in its profits with no thought for the financially fragile state in which it leaves the company it has attacked or the jobs that it might have destroyed.

    Using CalSTRS as a PR shield to deflect criticism, Relational was successful in its raid on Timken. All told, Relational acquired its stake at about $40 a share and sold it at around $70, reaping a 75% gain — $188 million — in just over two years. Relational sold all its shares after the quick profit and moved on to the next victim.

    Since then, the results for Timken have been less happy. Loaded with debt and split into two firms, its share price has declined by more than 60% and its long-term viability is uncertain.

    In making its profit, Relational created no jobs and generated no products or services for any real people. It simply extracted money that had been created over years by the hard work of Timken’s management and workers and left Timken in a weakened state.

    Timken is just one example of the noxious effects of the doctrine of MSV by which activist shareholders extract value and disturb the creation of long-term value. The Timken case is part of a broader pattern of attacks by activist shareholders on public firms that depress investment in innovation.

    In fact, it looks like another record breaking year for shareholder activism activity, “both in the number of campaigns (more than 230 campaigns in the United States alone in 2015) to the size and iconic nature of the companies targeted (e.g., AIG, DuPont, General Electric and General Motors).” While some long-term investors are having second thoughts about shareholder activism, since “it cannot be the case that 'divest and distribute' is the right strategy for shareholder value as often as is advocated by activist funds relative to other ideas,” nevertheless the raids continue to increase with ever bigger and bolder campaigns. 2016 is also on track to be a record year for activism outside the United States.

    The Cost Of Shareholder Activism

    What is the cost of shareholder activism? The impact of the stock market on investment has been quantified in a brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle.“ The study compared the investment patterns of public companies and privately held firms.

    The study found that “keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”

    In other words, public firms invest roughly half as much as those private firms that are relatively free from the pressures of MSV. As Matthew Yglesias at Slate concluded: “We are reaping the bitter fruits of the ‘shareholder value’ revolution.”

    Double Whammy: The Link To Bureaucracy

    But wait, it’s not just shareholder value alone. MSV is a double whammy. Shareholder value forms a sinister partnership with top-down bureaucracy—a devastating constraint in a world in which a motivated workforce producing continuous innovation is a necessity for survival.

    Thus when a firm embraces the goal of making money for the shareholders and its executives, it can’t inspire its staff to pursue that goal with any commitment or passion. Making money for the boss at the expense of the customer doesn’t put a spring in anyone’s step or excite anyone to give his or her very best. The goal is inherently dispiriting.

    So once a firm commits to MSV, it has little choice but to manage itself with strict command-and-control to force employees to pursue a goal that they don’t really believe in. So MSV and top-down bureaucracy fit together in a perfect interlocking relationship, like a hand and a glove. If a firm tries to move away from bureaucracy, for instance by introducing Agile team practices, then the goals, prescriptions and metrics of MSV kick in to undermine the change and force a reversion to bureaucracy. So once firms embrace MSV, they are doomed to a state of suboptimal equilibrium with lackluster bureaucratic management.

    The sorry current state of the work force has been measured by Gallup. It found that only 33% of U.S. corporate employees are engaged in their work, while 17% are disengaged and actively involved disrupting the firm. Deloitte’s studies show that only 11% of the workforce is passionate about what they do. The result is a workforce that is ill-adapted to producing the market-creating innovation that is urgently needed, thus making cost-cutting and share buybacks ever more attractive to the CEO.

    Macroeconomic Impact

    The impact of these management practices are now everywhere apparent. For instance, as shown in Deloitte’s Shift Index the rates of return on assets of U.S. firms continue their half-century decline that has been independent of political parties, recessions, bubbles, and major world events.

     Work done by the Kauffman Foundation and the Institute for Competitiveness & Prosperity shows that over the last twenty five years, companies more than five years old were net destroyers of jobs, not job creators.

    Meanwhile workers wages have stagnated for decades. Since the advent of MSV in the 1980s, the benefits of productivity gains have flowed to shareholders, including the executives, not to workers who created those gains.

                                      View enlarged image

    The stock-price manipulation involved in massive buybacks—and the resulting exorbitant executive pay—are thus not just moral or legal problems. The consequences of MSV and share buybacks are a macro-economic and social disaster: net disinvestment, loss of shareholder value, diminished investment in innovation, destruction of jobs, exploitation of workers, windfall gains for activist insiders, rapidly increasing inequality and sustained economic stagnation. Stock buybacks are thus a financial bonanza for stockholders and senior managers, but they destroy economic value for society.

    Meanwhile, since the U.S. presidential election in November 2016, the stock market has been on a tear. Investors seem to believe that by releasing resources that are currently “bottled up” by bad tax policy, business will get an automatic stimulus for investment. The case is plausible to the extent that the stash of cash overseas is massive. U.S. firms are currently holding almost $2 trillion in assets overseas, pending some kind of tax reform. But what will happen if the cash is repatriated? But where will it go?

    The answer was unhappily apparent in an interview with Cisco Systems CEO, Chuck Robbins, on CNBC’s Squawkbox in December 2016. He was asked what Cisco would do if it could repatriate overseas capital. Cisco has more than $60 billion abroad, and it stands to gain a great deal if the repatriation measures currently being considered are implemented.

    Robbins’ answer was frank. As he had outlined in an earlier call with Cisco's investors, Cisco would, he said, use the money for “a combination of dividends, share buybacks and M&A activity.” In other words, If this pattern is replicated, there will be more of the short-term financial engineering that has kept the U.S. economy in a seemingly endless state of secular economic stagnation.

    There Is Another Way

    There is of course another way to run a corporation. Firms pursuing this way start from the opposite premise from MSV. Instead of the firm being focused on extracting value for shareholders, the firm aims primarily at creating value for customers. The aspiration isn’t new. It’s Peter Drucker’s foundational insight of 1954: “There is only one valid purpose of a firm is to create a customer.” It’s through providing value to customers that firms justify their existence. Profits and share price increases are the result, not the goal of a firm’s activities.

    The most prominent example is Amazon. Amazon never focused on short-term shareholder value. At Amazon, shareholder value is the result, not the operational goal. Amazon’s operational goal is market leadership. Although short-term profits have been very variable, the stock market has handsomely rewarded Amazon’s long term strategy.

    “We first measure ourselves,” says CEO Jeff Bezos, “in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.”

    Amazon obsesses over customers, not shareholders. “From the beginning, our focus has been on offering our customers compelling value."  Long-term shareholder value, says Bezos, “will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.”

    Amazon Is Not Alone

    Amazon is not alone in rejecting the doctine of MSV .

    Thus Vinci Group Chairman and CEO Xavier Huillard has called MSV “totally
    Alibaba CEO Jack Ma has declared that “customers are number one; employees are number two and shareholders are number three.”

    Paul Polman, CEO of Unilever has denounced “the cult of shareholder value.”

    John Mackey at Whole Foods has condemned businesses that “view their purpose as profit maximization and treat all participants in the system as means to that end.”

    Marc Benioff, Chairman and CEO of Salesforce declared that MSV is “wrong. The business of business isn't just about creating profits for shareholders -- it's also about improving the state of the world and driving stakeholder value.”

    In a 2014 report from the Aspen Institute, which convened a cross-section of business thought leaders, including both executives and academics, the most important finding is that a majority of the thought leaders who participated in the study, particularly corporate executives, agreed that “the primary purpose of the corporation is to serve customers’ interests.” In effect, the best way to serve shareholders’ interests is to deliver value to customers.

    Len Sherman’s new book, If You're in a Dogfight, Become a Cat! (January 2017) offers many further examples, including Costco and JetBlue.

    The report of the SD Learning Consortium (November 2016) also gives examples, including Barclays, Cerner, C.H.Robinson, Ericsson, Microsoft, Riot Games and Spotify.

    The management journal, Strategy & Leadership, has courageously championed and elaborated the principles of this better way over a number of years.

    Firms pursuing this different approach include young firms and old firms, big firms and small firms, US and non-US firms, those in software and those outside software. In effect, the discussion isn’t about a type of firm, but rather a different set of leadership and managerial practices.

    The argument offered by executives that “Wall Street made us do it” thus has the same legitimacy as “the dog ate my homework.” A significant set of public companies have already been successfully pursuing customer value, with broad applause from Wall Street and strong support from discerning thought leaders.

    The result is a virtuous circle of value creation.

    A Wider Set Of Issues For Society

    Thus we know how to resist the lure of short-termism. The question is: when will firms get on and do it?

    It is of course theoretically possible that CEOs and their boards of directors will awaken tomorrow morning and commit themselves to creating value for customers rather than extracting value for shareholders.

    It’s theoretically possible that investors will awaken tomorrow and refocus their attentions on firms that create real long-term value.

    It is theoretically possible that the new head of the SEC will remove Rule 10b-18 which enables massive stock price manipulation.

    Realistically though, these things won’t happen unless and until there is a sea change in the wider political, social and organizational context. Thus the current situation is one of fundamental institutional failure across the whole of society. The behavioral breakdown is mutually reinforcing.

    CEOs are extracting value from their firms, rather than creating it. CFOs are systematically enforcing earnings-per-share thinking in decisions throughout their organizations. Business schools are teaching their students how to do it. Hedge funds and activist shareholders are gambling risk-free with other people’s money to take advantage of it. Institutional shareholders are complicit in what the CEOs and CFOs are doing.

    Regulators remain indifferent to systemic failure. Rating agencies reward malfeasance. Financial analysts applaud short-term gains and ignore obvious long-term rot. Politicians stand by and watch. In a great betrayal, the very leaders who should be fixing the system are complicit in its continuance. Unless our society as a whole reverses course, it is heading for a cataclysm.

    Thus change in behavior is needed in a whole set of institutions and actors: CEOs, CFOs, investors, legislators, regulators, rating agencies, analysts, management journals, thought leaders, business schools and politicians—all need to think and act differently.

    A Moment Of Truth Has Arrived

    We are thus at a critical point in a vast societal drama. We have reached that key moment, which Aristotle famously called “anagnorisis” or “recognition.” This is the theatrical moment in a drama when ignorance shifts to knowledge. Just as King Lear in Shakespeare’s play eventually recognized that his apparently virtuous daughters, Goneril and Regan, were a really bad lot, and that his apparently disrespectful daughter, Cordelia, truly loved him, so society is learning that much of ‘the talent’ it thought were adding value have in fact been extracting value for themselves.

    As usual with anagnorisis and the shock of recognition at a disturbing, previously-hidden truth, there is a disquieting sense that the accepted coordinates of knowledge have somehow gone awry and the universe has come out of whack. This can lead to denial and a delay in action, even though the facts are staring us in the face.

    If the recognition of our error comes too late, as in Shakespeare’s Lear, the result will be terrible tragedy. If the recognition comes soon enough, the drama can still have a happy ending. We are about to find out in our case which it is to be.

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    The Stanford professor who pioneered praising kids for effort says we’ve totally missed the point.

    It is well known that telling a kid she is smart is wading into seriously dangerous territory.
    Reams of research show that kids who are praised for being smart fixate on performance, shying away from taking risks and meeting potential failure. Kids who are praised for their efforts try harder and persist with tasks longer. These “effort” kids have a “growth mindset” marked by resilience and a thirst for mastery; the “smart” ones have a “fixed mindset” believing intelligence to be innate and not malleable.

    But now, Carol Dweck, the Stanford professor of psychology who spent 40 years researching, introducing and explaining the growth mindset, is calling a big timeout.

    It seems the growth mindset has run amok. Kids are being offered empty praise for just trying. Effort itself has become praise-worthy without the goal it was meant to unleash: learning. Parents tell her that they have a growth mindset, but then they react with anxiety or false affect to a child’s struggle or setback. “They need a learning reaction – ‘what did you do?’, ‘what can we do next?’” Dweck says.

    Teachers say they have a “growth mindset” because not to have one would be silly. But then they fail to teach in such a way that kids can actually develop growth mindset muscles. “It was never just effort in the abstract,” Dweck tells Quartz. “Some educators are using it as a consolation play, saying things like ‘I tell all my kids to try hard’ or ‘you can do anything if you try’.”
    “That’s nagging, not a growth mindset,” she says.

    The key to instilling a growth mindset is teaching kids that their brains are like muscles that can be strengthened through hard work and persistence. So rather than saying “Not everybody is a good at math. Just do your best,” a teacher or parent should say “When you learn how to do a new math problem, it grows your brain.” Or instead of saying “Maybe math is not one of your strengths,” a better approach is adding “yet” to the end of the sentence: “Maybe math is not one of your strengths yet.”

    The exciting part of Dweck’s mindset research is that it shows intelligence is malleable and anyone can change their mindset. She did: growing up, she was seated by IQ in her classroom (at the front) and spent most of her time trying to look smart.

    “I was very invested in being smart and thought to be smart was more important than accomplishing anything in life,” she says. But her research made her realize she could take some risks and push herself to reach her potential, or she could spend all her time trying to look smart.

    She and other researchers are discovering new things about mindsets. Adults with growth mindsets don’t just innately pass those on to their kids, or students, she says, something they had assumed they would. She’s also noticed that people may have a growth mindset, but a trigger that transports them to a fixed-mindset mode. For example, criticism may make a person defensive and shut down how he or she approaches learning. It turns out all of us have a bit of both mindsets, and harnessing the growth one takes work.

    Researchers are also discovering just how early a fixed and growth mindset forms. Research Dweck is doing in collaboration with a longitudinal study at the University of Chicago looked at how mothers praised their babies at one, two, and three years old. They checked back with them five years later. “We found that process praise predicted the child’s mindset and desire for challenge five years later,” she says.

    In a follow-up, the kids who had more early process praise—relative to person praise—sought more challenges and did better in school. “The more they had a growth mindset in 2nd grade the better they did in 4th grade and the relationship was significant,” Dweck wrote in an email. “It’s powerful.”
    Dweck was alerted to things going awry when a colleague in Australia reported seeing the growth mindset being misunderstood and poorly implemented. “When she put a label on it, I saw it everywhere,” Dweck recalls.

    But it didn’t deflate her (how could it, with a growth mindset?). It energized her:
    I know how powerful it can be when implemented and understood correctly. Education can be very faddish but this is not a fad. It’s a basic scientific finding, I want it to be part of what we know and what we use.

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    Marketers spend a lot of time—and money—trying to delight consumers with ever-fresher, ever-more-appealing products. But their customers, it turns out, make most purchase decisions almost automatically. They look for what’s familiar and easy to buy. This package explores that idea and the science behind it, offers a counterpoint, and includes conversations with the cochairman of the LEGO Brand Group and the chairman of Intuit. 

    Late in the spring of 2016 Facebook’s category-leading photo-sharing application, Instagram, abandoned its original icon, a retro camera familiar to the app’s 400- million-plus users, and replaced it with a flat modernist design that, as the head of design explained, “suggests a camera.” At a time when Instagram was under a growing threat from its rival Snapchat, he offered this rationale for the switch: The icon “was beginning to feel…not reflective of the community, and we thought we could make it better.”

    The assessment of AdWeek, the marketing industry bible, was clear from its headline: “Instagram’s New Logo Is a Travesty. Can We Change it Back? Please?” In GQ’s article “Logo Change No One Wanted Just Came to Instagram,” the magazine’s panel of designers called the new icon “honestly horrible,” “so ugly,” and “trash,” and summarized the change thus: “Instagram spent YEARS building up visual brand equity with its existing logo, training users where to tap, and now instead of iterating on that, it’s flushing it all down the toilet for the homescreen equivalent of a Starburst.”
    It’s too soon to tell whether the design change will actually have commercial consequences for Instagram, but this is not the first time a company has experienced such a reaction to a rebranding or a relaunch. PepsiCo’s introduction of its aspartame-free Diet Pepsi was—like the infamous New Coke debacle—a botched attempt at reinvention that resulted in serious revenue losses and had to be reversed. The interesting question, therefore, is: Why do well-performing companies routinely succumb to the lure of radical rebranding? One could understand the temptation to adopt such a strategy in the face of disaster, but Instagram, PepsiCo, and Coke were hardly staring into the abyss. (It’s worth noting that Snapchat, whose market share among young users is now particularly strong, has assiduously stuck to its familiar ghost icon. Full disclosure: A.G. Lafley serves on the board of Snap Inc.)

    The answer, we believe, is rooted in some serious misperceptions about the nature of competitive advantage. Much new thinking in strategy argues that the fast pace of change in modern business (perhaps nowhere more obvious than in the app world) means no competitive advantage is sustainable, so companies must continually update their business models, strategies, and communications to respond in real time to the explosion of choice that ever more sophisticated consumers now face. To keep your customers—and to attract new ones—you need to remain relevant and superior. Hence Instagram was doing exactly what it was supposed to do: changing proactively

    That’s an edgy thought, to be sure; but a lot of evidence contradicts it. Consider Southwest Airlines, Vanguard, and IKEA, all featured in Michael Porter’s classic 1996 HBR article “What Is Strategy?” as exemplars of long-lived competitive advantage. A full two decades later those companies are still at the top of their respective industries, pursuing largely unchanged strategies and branding. And although Google, Facebook, or Amazon might stumble and be crushed by some upstart, the competitive positions of those giants hardly look fleeting. Closer to home (one author of this article is part of the P&G family), it would strike the Tide or Head & Shoulders brand managers of the past 50 years as rather odd to hear that their half-century advantages have not been or are not sustainable. (No doubt the Unilever managers of long-standing consumer favorites such as Dove soap and Hellmann’s mayonnaise would feel the same.)

    In this article we draw on modern behavioral research to offer a theory about what makes competitive advantage last. It explains both missteps like Instagram’s and success stories like Tide’s. We argue that performance is sustained not by offering customers the perfect choice but by offering them the easy one. So even if a value proposition is what first attracted them, it is not necessarily what keeps them coming.

    In this alternative worldview, holding on to customers is not a matter of continually adapting to changing needs in order to remain the rational or emotional best fit. It’s about helping customers avoid having to make yet another choice. To do that, you have to create what we call cumulative advantage.

    Let’s begin by exploring what our brains actually do when we shop.

    Creatures of Habit

    The conventional wisdom about competitive advantage is that successful companies pick a position, target a set of consumers, and configure activities to serve them better. The goal is to make customers repeat their purchases by matching the value proposition to their needs. By fending off competitors through ever-evolving uniqueness and personalization, the company can achieve sustainable competitive advantage

    An assumption implicit in that definition is that consumers are making deliberate, perhaps even rational, decisions. Their reasons for buying products and services may be emotional, but they always result from somewhat conscious logic. Therefore a good strategy figures out and responds to that logic.

    But the idea that purchase decisions arise from conscious choice flies in the face of much research in behavioral psychology. The brain, it turns out, is not so much an analytical machine as a gap-filling machine: It takes noisy, incomplete information from the world and quickly fills in the missing pieces on the basis of past experience. Intuition—thoughts, opinions, and preferences that come to mind quickly and without reflection but are strong enough to act on—is the product of this process. It’s not just what gets filled in that determines our intuitive judgments, however. They are heavily influenced by the speed and ease of the filling-in process itself, a phenomenon psychologists call processing fluency. When we describe making a decision because it “just feels right,” the processing leading to the decision has been fluent.

    Processing fluency is itself the product of repeated experience, and it increases relentlessly with the number of times we have the experience. Prior exposure to an object improves the ability to perceive and identify that object. As an object is presented repeatedly, the neurons that code features not essential for recognizing the object dampen their responses, and the neural network becomes more selective and efficient at object identification. In other words, repeated stimuli have lower perceptual-identification thresholds, require less attention to be noticed, and are faster and more accurately named or read. What’s more, consumers tend to prefer them to new stimuli.

    In short, research into the workings of the human brain suggests that the mind loves automaticity more than just about anything else—certainly more than engaging in conscious consideration. Given a choice, it would like to do the same things over and over again. If the mind develops a view over time that Tide gets clothes cleaner, and Tide is available and accessible on the store shelf or the web page, the easy, familiar thing to do is to buy Tide yet another time.

    A driving reason to choose the leading product in the market, therefore, is simply that it is the easiest thing to do: In whatever distribution channel you shop, it will be the most prominent offering. In the supermarket, the mass merchandiser, or the drugstore, it will dominate the shelf. In addition, you have probably bought it before from that very shelf. Doing so again is the easiest possible action you can take. Not only that, but every time you buy another unit of the brand in question, you make it easier to do—for which the mind applauds you.

    Each time you choose a product, it gains advantage over those you didn’t choose.

    Meanwhile, it becomes ever so slightly harder to buy the products you didn’t choose, and that gap widens with every purchase—as long, of course, as the chosen product consistently fulfills your expectations. This logic holds as much in the new economy as in the old. If you make Facebook your home page, every aspect of that page will be totally familiar to you, and the impact will be as powerful as facing a wall of Tide in a store—or more so.

    Buying the biggest, easiest brand creates a cycle in which share leadership is continually increased over time. Each time you select and use a given product or service, its advantage over the products or services you didn’t choose cumulates.

    The growth of cumulative advantage—absent changes that force conscious reappraisal—is nearly inexorable. Thirty years ago Tide enjoyed a small lead of 33% to 28% over Unilever’s Surf in the lucrative U.S. laundry detergent market. Consumers at the time slowly but surely formed habits that put Tide further ahead of Surf. Every year, the habit differential increased and the share gap widened. In 2008 Unilever exited the business and sold its brands to what was then a private-label detergent manufacturer. Now Tide enjoys a greater than 40% market share, making it the runaway leader in the U.S. detergent market. Its largest branded competitor has a share of less than 10%. (For a discussion of why small brands even survive in this environment, see the sidebar “The Perverse Upside of Customer Disloyalty.”)

    A Complement to Choice

    We don’t claim that consumer choice is never conscious, or that the quality of a value proposition is irrelevant. To the contrary: People must have a reason to buy a product in the first place. And sometimes a new technology or a new regulation enables a company to radically lower a product’s price or to offer new features or a wholly new solution to a customer need in a way that demands consumers’ consideration.

    Robust where-to-play and how-to-win choices, therefore, are still essential to strategy. Without a value proposition superior to those of other companies that are attempting to appeal to the same customers, a company has nothing to build on.

    But if it is to extend that initial competitive advantage, the company must invest in turning its proposition into a habit rather than a choice. Hence we can formally define cumulative advantage as the layer that a company builds on its initial competitive advantage by making its product or service an ever more instinctively comfortable choice for the customer.

    Companies that don’t build cumulative advantage are likely to be overtaken by competitors that succeed in doing so. A good example is Myspace, whose failure is often cited as proof that competitive advantage is inherently unsustainable. Our interpretation is somewhat different.
    Launched in August 2003, Myspace became America’s number one social networking site within two years and in 2006 overtook Google to become the most visited site of any kind in the United States. Nevertheless, a mere two years later it was outstripped by Facebook, which demolished it competitively—to the extent that Myspace was sold in 2011 for $35 million, a fraction of the $580 million that News Corp had paid for it in 2005.

    Why did Myspace fail? Our answer is that it didn’t even try to achieve cumulative advantage. To begin with, it allowed users to create web pages that expressed their own personal style, so individual pages looked very different to visitors. It also placed advertising in jarring ways—and included ads for indecent services, which riled regulators. When News Corp bought Myspace, it ramped up ad density, further cluttering the site. To entice more users, Myspace rolled out what Bloomberg Businessweek referred to as “a dizzying number of features: communication tools such as instant messaging, a classifieds program, a video player, a music player, a virtual karaoke machine, a self-serve advertising platform, profile-editing tools, security systems, privacy filters, Myspace book lists, and on and on.” So instead of making its site an ever more comfortable and instinctive choice, Myspace kept its users off balance, wondering (if not subconsciously worrying) what was coming next.

    Compare that with Facebook. From day one, Facebook has been building cumulative advantage. Initially it had some attractive features that Myspace lacked, making it a good value proposition, but more important to its success has been the consistency of its look and feel. Users conform to its rigid standards, and Facebook conforms to nothing or no one else. When it made its now-famous extension from desktop to mobile, the company ensured that users’ mobile experience was highly consistent with their desktop experience.

    To be sure, Facebook has from time to time introduced design changes in order to better leverage its functionality, and it has endured severe criticism in consequence. But in the main, new service introductions don’t jeopardize comfort and familiarity, and the company has often made the changes optional in their initial stages. Even its name conjures up a familiar artifact, the college facebook, whereas Myspace gives the user no familiar reference at all.

    Bottom line: By building on familiarity, Facebook has used cumulative advantage to become the most addictive social networking site in the world. That makes its subsidiary Instagram’s decision to change its icon all the more baffling.

    The Cumulative Advantage Imperatives

    Myspace and Facebook nicely illustrate the twin realities that sustainable advantage is both possible and not assured. How, then, might the next Myspace enhance and extend its competitive edge by building a protective layer of cumulative advantage? Here are four basic rules to follow:

    1. Become popular early.

    This idea is far from new—it is implicit in many of the best and earliest works on strategy, and we can see it in the thinking of Bruce Henderson, the founder of Boston Consulting Group. Henderson’s particular focus was on the beneficial impact of cumulative output on costs—the now-famous experience curve, which suggests that as a company’s experience in making something increases, its cost management becomes more efficient. He argued that companies should price aggressively early on—“ahead of the experience curve,” in his parlance—and thus win sufficient market share to give the company lower costs, higher relative share, and higher profitability. The implication was clear: Early share advantage matters—a lot.

    Marketers have long understood the importance of winning early. Launched specifically to serve the fast-growing automatic washing machine market, Tide is one of P&G’s most revered, successful, and profitable brands. When it was introduced, in 1946, it immediately had the heaviest advertising weight in the category. P&G also made sure that no washing machine was sold in America without a free box of Tide to get consumers’ habits started. Tide quickly won the early popularity contest and has never looked back.

    BlackBerry may be the best example of a conscious design for addiction.

    Free new-product samples to gain trial have always been a popular tactic with marketers. Aggressive pricing, the tactic favored by Henderson, is similarly popular. Samsung has emerged as the market share leader in the smartphone industry worldwide by providing very affordable Android-based phones that carriers can offer free with service contracts. For internet businesses, free is the core tactic for establishing habits. Virtually all the large-scale internet success stories—eBay, Google, Twitter, Instagram, Uber, Airbnb—make their services free so that users will grow and deepen their habits; then providers or advertisers will be willing to pay for access to them.

    2. Design for habit.

    As we’ve seen, the best outcome is when choosing your offering becomes an automatic consumer response. So design for that—don’t leave the outcome entirely to chance. We’ve seen how Facebook profits from its attention to consistent, habit-forming design, which has made use of its platform go beyond what we think of as habit: Checking for updates has become a real compulsion for a billion people. Of course Facebook benefits from increasingly huge network effects. But the real advantage is that to switch from Facebook also entails breaking a powerful addiction.

    The smartphone pioneer BlackBerry is perhaps the best example of a company that consciously designed for addiction. Its founder, Mike Lazaridis, explicitly created the device to make the cycle of feeling a buzz in the holster, slipping out the BlackBerry, checking the message, and thumbing a response on the miniature keyboard as addictive as possible. He succeeded: The device earned the nickname CrackBerry. The habit was so strong that even after BlackBerry had been brought down by the move to app-based and touch-screen smartphones, a core group of BlackBerry customers—who had staunchly refused to adapt—successfully implored the company’s management to bring back a BlackBerry that resembled their previous-generation devices. It was given the comforting name Classic.

    As Art Markman, a psychologist at the University of Texas, has pointed out to us, certain rules should be respected in designing for habit. To begin with, you must keep consistent those elements of the product design that can be seen from a distance so that buyers can find your product quickly. Distinctive colors and shapes like Tide’s bright orange and the Doritos logo accomplish this. 

    And you should find ways to make products fit in people’s environments to encourage use. When P&G introduced Febreze, consumers liked the way it worked but did not use it often. Part of the problem, it turned out, was that the container was shaped like a glass-cleaner bottle, signaling that it should be kept under the sink. The bottle was ultimately redesigned to be kept on a counter or in a more visible cabinet, and use after purchase increased.
    Unfortunately, the design changes that companies make all too often end up disrupting habits rather than strengthening them. Look for changes that will reinforce habits and encourage repurchase. The Amazon Dash Button provides an excellent example: By creating a simple way for people to reorder products they use often, Amazon helps them develop habits and locks them into a particular distribution channel.

    3. Innovate inside the brand.

    As we’ve already noted, companies engage in initiatives to “relaunch,” “repackage,” or “replatform” at some peril: Such efforts can require customers to break their habits. Of course companies have to keep their products up-to-date, but changes in technology or other features should ideally be introduced in a manner that allows the new version of a product or service to retain the cumulative advantage of the old.
    Even the most successful builders of cumulative advantage sometimes forget this rule. P&G, for example, which has increased Tide’s cumulative advantage over 70 years through huge changes, has had to learn some painful lessons along the way. Arguably the first great detergent innovation after Tide’s launch was the development of liquid detergents. P&G’s first response was to launch a new brand, called Era, in 1975. With no cumulative advantage behind it, Era failed to become a major brand despite consumers’ increasing substitution of liquid for powdered detergent.
    Recognizing that as the number one brand in the category, Tide had a strong connection with consumers and a powerful cumulative advantage, P&G decided to launch Liquid Tide in 1984, in familiar packaging and with consistent branding. It went on to become the dominant liquid detergent despite its late entry. After that experience, P&G was careful to ensure that further innovations were consistent with the Tide brand. When its scientists figured out how to incorporate bleach into detergent, the product was called Tide Plus Bleach. The breakthrough cold-cleaning technology appeared in Tide Coldwater, and the revolutionary three-in-one pod form was launched as Tide Pods. The branding could not have been simpler or clearer: This is your beloved Tide, with bleach added, for cold water, in pod form. These comfort- and familiarity-laden innovations reinforced rather than diminished the brand’s cumulative advantage. The new products all preserved the look of Tide’s traditional packaging—the brilliant orange and the bull’s-eye logo. The few times in Tide history when that look was altered—such as with blue packaging for the Tide Coldwater launch—the effect on consumers was significantly negative, and the change was quickly reversed.
    Of course, sometimes change is absolutely necessary to maintain relevance and advantage. In such situations smart companies succeed by helping customers transition from the old habit to the new one. Netflix began as a service that delivered DVDs to customers by mail. It would be out of business today if it had attempted to maximize continuity by refusing to change. Instead, it has successfully transformed itself into a video streaming service.
    Although the new Netflix markets a completely different platform for digital entertainment, involving a new set of activities, Netflix found ways to help its customers by accentuating what did not have to change. It has the same look and feel and is still a subscription service that gives people access to the latest entertainment without leaving their homes. Thus its customers can deal with the necessary aspects of change while maintaining as much of the habit as possible. For customers, “improved” is much more comfortable and less scary than “new,” however awesome “new” sounds to brand managers and advertising agencies.

    4. Keep communication simple.

    One of the fathers of behavioral science, Daniel Kahneman, characterized subconscious, habit-driven decision making as “thinking fast” and conscious decision making as “thinking slow.” Marketers and advertisers often seem to live in thinking-slow mode. They are rewarded with industry kudos for the cleverness with which they weave together and highlight the multiple benefits of a new product or service. True, ads that are clever and memorable sometimes move customers to change their habits. The slow-thinking conscious mind, if it decides to pay attention, may well say, “Wow, that is impressive. I can’t wait!”

    But if viewers aren’t paying attention (as in the vast majority of cases), an artful communication may backfire. Consider the ad that came out a couple of years ago for the Samsung Galaxy S5. It began by showing successive vignettes of generic-looking smartphones failing to (a) demonstrate water resistance; (b) protect against a young child’s accidentally sending an embarrassing message; and (c) enable an easy change of battery. It then triumphantly pointed out that the Samsung S5, which looked pretty much like the three previous phones, overcame all these flaws. Conscious, slow-thinking viewers, if they watched the whole ad, may have been persuaded that the S5 was different from and superior to other phones.

    But an arguably greater likelihood was that fast-thinking viewers would subconsciously associate the S5 with the three shortcomings. When making a purchase decision, they might be swayed by a subconscious plea: “Don’t buy the one with the water-resistance, rogue-message, and battery-change problems.” In fact, the ad might even induce them to buy a competitor’s product—such as the iPhone 7—whose message about water resistance is simpler to take in.

    Remember: The mind is lazy. It doesn’t want to ramp up attention to absorb a message with a high level of complexity. Simply showing the water resistance of the Samsung S5—or better yet, showing a customer buying an S5 and being told by the sales rep that it was fully water-resistant—would have been much more powerful. The latter would tell fast thinkers what you wanted them to do: go to a store and buy the Samsung S5. Of course, neither of those ads would be likely to win any awards from marketers focused on the cleverness of advertising copy.


    The death of sustainable competitive advantage has been greatly exaggerated. Competitive advantage is as sustainable as it has always been. What is different today is that in a world of infinite communication and innovation, many strategists seem convinced that sustainability can be delivered only by constantly making a company’s value proposition the conscious consumer’s rational or emotional first choice. They have forgotten, or they never understood, the dominance of the subconscious mind in decision making. For fast thinkers, products and services that are easy to access and that reinforce comfortable buying habits will over time trump innovative but unfamiliar alternatives that may be harder to find and require forming new habits.

    So beware of falling into the trap of constantly updating your value proposition and branding. And any company, whether it is a large established player, a niche player, or a new entrant, can sustain the initial advantage provided by a superior value proposition by understanding and following the four rules of cumulative advantage.

    Reproduced From Harvard Business Reveiw

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    Shyam's take on this article....

    Poverty is an essential bane of democracy. Poverty alleviation is a constant unfulfilled promise of various political parties and politicians in all the democracies of the world.

    It is not something unique to any one country.The day the poverty is really conquered, the relevance of the politicians and political parties comes to an end, or it gets substantially diminished.

    While the poverty is a curse and suffering for people, it keeps the politicians relevant and affluent.

    America has been debating the poverty and liberty for the last 240 years, and India for almost 70 years.

    Now please read Ron Paul's Liberty report

    It appears that Obamacare is going to be one of the early issues addressed by the incoming Trump Administration. There's a lot of back-and-forth about "repeal and replace" and "repeal and wait." It's all nonsense.

    Politicians think of themselves as high and mighty architects, running around with their magnificent blueprints that they're going to force on society. However, (without exception) life and reality smack the pompous politicians down. The sought after results almost never come to pass.

    Unfortunately, like dogs that chase their own tails, politicians bounce back with a new set of blueprints every single time...And around-and-around we go. 

    No matter what type of society we are to live in, there will always be the poor, the uneducated, the hungry, and the unemployed. They would exist in an anarchist society. They would exist in a society with a limited or small government. They would even exist with free markets, sound money and rock-solid private property rights.

    Poverty is not to be abolished. That's not an easy pill for many (most?) to swallow. As a result, people come up with the craziest ideas in order to fight this reality. Every idea has failed.

    Take a look at America's current government. It's the biggest and most intrusive that the world has ever seen. 

    Has it abolished poverty? On the contrary, it's a poverty manufacturer. 

    Is it from lack of funds? Of course not! 

    The U.S. government parasitically drains American citizens to the tune of trillions of dollars per year. And it doesn't stop there. The gang has buried itself in debt that can't possibly be paid...ever! 

    And yet...

    There are poor people everywhere. The uneducated (thanks to government schools) are growing exponentially and millions of people are still hungry and unemployed.

    So what's missing? Does the federal government need another trillion dollars? Does it need more credit from foolish creditors? Does it need another professor to concoct another blueprint?

    The answer is a resounding NO to all of the above.

    A serious advocate for a society of liberty, sound money, voluntary interactions, and rock-solid private property rights understands that there is no getting rid of poverty. For it is a built-in part of life. 

    But it's not as bad as it sounds. There's a very big upside, and here it is: In a free society, poverty may only be a temporary situation for each individual. As long as you have the freedom to think, to create, to serve, and to keep the fruits of your labor, you can raise yourself to unbelievable heights. That is the promise of freedom.

    Unfortunately, that scares a lot of people. So instead of taking the peaceful route, most will choose to snuggle into the arms of the violent blueprint makers. "Let the politicians draw up plans to raise me out of poverty," becomes the belief. 

    The blueprint makers love taking on this most impossible task. They get praise (and sometimes worship). But they live and breathe on mostly one thing: Dependency

    Take a look at the arguments that are being presented in the Obamacare "debate." The left seems to brag about the numbers of dependents that they've created. What is to be done about the tens of millions who signed up for Obamacare? What are you going to do, rip their insurance away? 

    The dependents have become political bargaining chips. 

    Obamacare is just a small slice of the dependency web too. Factor in the unsustainable Medicare and Social Security scams and you've got a whole society of dependents (who believe they're entitled to what the government promised them).

    Instead of a move towards liberty and free markets, the blueprint makers will bark at each other and settle on either keeping the monstrosity as it is, or "replace" it with another monstrosity that will inevitably fail.

    A new philosophy must be embraced. Instead of trying to see how much poverty the U.S. government is able to create. Let's scrap the belief that stealing from (A) to give to (B) is a solution to any problem.

    There's no way to make theft work.

    There's no blueprint that will turn a wrong into a right.

    Liberty is always the best option.

    Perhaps someday it'll catch on.

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    Feeling "humiliated" by events since demonetisation, RBI employees today wrote to Governor Urjit Patel protesting against operational "mismanagement" in the exercise and Government impinging its autonomy by appointing an official for currency coordination.

    In a letter, they said autonomy and image of RBI has been "dented beyond repair" due to mismanagement and termed appointment of a senior Finance Ministry official as a "blatant encroachment" of its exclusive turf of currency management.

    "An image of efficiency and independence that RBI assiduously built up over decades by the strenuous efforts of its staff and judicious policy making has gone into smithereens in no time. We feel extremely pained," the United Forum of Reserve Bank Officers and Employees said in the letter addressed to Patel.

    Commenting on "mismanagement" since November 8, when note ban was announced, and the criticism from different quarters, the letter said, "It's (RBI's) autonomy and image have been dented beyond repair."

    At least two of the four signatories --- Samir Ghosh of All India Reserve Bank Employees Association and Suryakant Mahadik of All India Reserve Bank Workers Federation --- confirmed the letter. The other signatories are C M Paulsil of All India Reserve Bank Officers Association and R N Vatsa of RBI Officers Association.

    The forum represents over 18,000 employees of the RBI across the ranks, Ghosh said.
    The letter said appointment of an officer to coordinate currency management is a "blatant encroachment" on the exclusive jurisdiction of the RBI on currency and accused the Government of "impinging on RBI autonomy".

    "May we request that as the Governor of RBI, its highest functionary and protector of its autonomy and prestige, you will please do the needful urgently to do away with this unwarranted interference from the Ministry of Finance, and assure the staff accordingly, as the staff feel humiliated," it said, soliciting "urgent action".

    The RBI has been discharging the role of currency management for over eight decades since 1935, it said, adding the central bank does not need "any assistance" and the interference from FinMin is "absolutely unacceptable and deplorable".

    The letter comes days after concerns about RBI's functioning being raised by at least three former Governors -- Manmohan Singh (former PM), Y V Reddy and Bimal Jalan. Former Deputy Governors, including Usha Thorat and K C Chakrabarty, have also voiced their concerns.

    The letter said the RBI staff has carried out its job excellently following the move to ban 87 per cent of the outstanding currency by the government.

    View at the original source

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    The IMF today cut India's growth rate for the current fiscal year to 6.6 per cent from its previous estimate of 7.6 per cent due to the "temporary negative consumption shock" of demonetisation, days after the World Bank also decelerated India's growth estimates.

    "In India, the growth forecast for the current (2016-17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative," the International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO) update released today.

    The IMF said that after a lacklustre outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies.

    The global growth for 2016 is now estimated at 3.1 per cent, in line with the October 2016 forecast.
    Economic activity in both advanced economies and emerging market and developing economies (EMDEs) is forecast to accelerate in 2017-18, with global growth projected to be 3.4 per cent and 3.6 per cent, respectively, again unchanged from the October forecasts, it said.

    As per new IMF projections, India's growth in 2016 is now estimated to be 6.6 per cent as against 7.6 per cent earlier forecast.

    In 2017, IMF has projected a growth rate of 7.2 per cent as against its previous forecast of 7.6 per cent.

    The Indian economy is likely to revive to go back to its previously estimated growth rate of 7.7 per cent in 2018, according to the WEO update.

    The cut in India's growth rates comes days after the World Bank decelerated India's GDP growth for 2016-17 fiscal to 7 per cent from its previous estimate of 7.6 per cent citing the impact of demonetisation. But forecast issued on January 11 said that India would regain momentum in the following years with a growth of 7.6 per cent and 7.8 per cent due to a reform initiatives.
    Despite IMF's downward revision of India's growth rate and a slight upward revision of China's growth projections, India continues to be the fastest growing countries among emerging economies.
    But in 2016, China with 6.7 per cent has edged past India (6.6) with 0.1 percentage point.
    The growth forecast for 2017 was revised up for China (to 6.5 per cent, 0.3 percentage point above the October forecast) on expectations of continued policy support, the IMF said. India's growth rate in 2017 as per the latest IMG projections is 7.2 per cent.

    In 2018, China's growth rate is projected to be 6 per cent against India's 7.7 per cent.
    IMF said, in China, continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment.

    These risks can be exacerbated by capital outflow pressures especially in a more unsettled external environment, the IMF said.

    IMF said global activity could accelerate more strongly if policy stimulus turns out to be larger than currently projected in the US or China.

    Notable negative risks to activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and in some emerging market economies, increased geopolitical tensions, and a more severe slowdown in China, it said.

    Maurice Obstfeld, Economic Counsellor and IMF Research Department Director, at a news conference here, said among emerging economies, China remains a major driver of world economic developments.

    "Our China growth upgrade for 2017 is a key factor underpinning the coming year's expected faster global recovery. This change reflects an expectation of continuing policy support; but a sharp or disruptive slowdown in the future remains a risk given continuing rapid credit expansion, impaired corporate debts, and persistent government support for inefficient state-owned firms," he said.

    In light of the US economy's momentum coming into 2017 and the likely shift in policy mix, IMF has moderately raised its two-year projections for US growth.

    "At this early stage, however, the specifics of future fiscal legislation remain unclear, as do the degree of net increase in government spending and the resulting impacts on aggregate demand, potential output, the Federal deficit, and the dollar," Obstfeld said.

    View at the original source

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    Donald John Trump, the 45th U.S. president, will be the first to go straight from the boardroom to the Oval Office without any political experience or military service.

    During the 2016 campaign, Trump parlayed his fame as a celebrity real estate developer into a winning pitch to voters as a Washington outsider. Emphasizing his decades of experience as a wheeler-dealer building luxury hotels, casinos, and golf courses around the world, Trump pledged to use his business savvy and hard-charging leadership style to “drain the swamp” of the Washington bureaucracy and deliver results for the American people.

    The United States is not a company, of course, and its citizens are not employees, but voters still were drawn to his promises of a fresh approach to governing. So what skills and perspectives might the wealthy businessman draw on as he transitions from CEO to commander in chief?
    To get a better sense of the months ahead, The Gazette asked Harvard Business School (HBS) faculty members how Trump’s nearly 50 years of experience in building a global corporate empire might shape his approach to the presidency. Their insights follow.

    Real estate rarely a zero-sum game

    John D. MacomberSenior lecturer of business administration

    You have to start by distinguishing between a branding operation that’s supported by other activities, like Disney Hotels, and pure real estate [companies], like Boston Properties and Vornado. Trump is primarily a branding operation.

    There are many sectors in real estate. Hospitality is one of them. In hotels, there are usually three parts to every deal. Usually, there’s one entity that owns the land and owns the building. There’s a different entity that likes to do operations like housekeeping and food and beverage. And there’s a third entity that has the brand. Companies like the Four Seasons or Ritz Carlton, we say they “flag” a hotel. They don’t manage it; they “flag” it. Trump has a few hotels, but mostly the properties are owned by other investors and he’s the “flag,” the name.

    Given that case, that would inform a world view that has a high sensitivity to perceptions in what we call in real estate “the real economy.” Are the rooms full, and in which locations? Hotel people have a high sensitivity to what they perceive as “the financial economy.” They don’t know the inner workings, but “what are the interest rates?” They have high sensitivity to transactions and to partners, because everything’s a bespoke, one-off transaction. Typically, people like this also see the shared value. They seldom get into a zero-sum negotiation. They think, “How can we help each other?”
    You’d expect someone like this to be very transactional, with a very high sensitivity to perception of current events, with a very high sensitivity to perceived financial prices, if not the inner workings of the financial market, and extremely high sensitivity to brand: What are people thinking? And you’d expect a much lower sensitivity to administration, to structure, to organizational dynamics, to long-term view, and to capital spending.

    The incoming president has a really good sense for what people want to buy in that demographic. But going forward, one would expect that the temptation would be to continue to play your strong suit and try and express your own taste and your ideas because it’s worked for you for 50 years.
    The second issue you’d expect of anybody in this situation would be that they’re probably quite confident in their own judgment. Having a very long record of reinforcement in making good decisions, for anybody, that would make them think they’ll be expert in other areas, whether it’s aviation or welfare or defense.

    I think an early indicator will be: Can he persuade a different group of people? He’s so good at persuading the people he knows, but can he persuade Congress to act? If he’s a good communicator and good negotiator and good creator of shared value, he’ll figure out something that works for House Speaker Paul Ryan and for Senate Minority Leader Chuck Schumer. A second thing to look for is how much leeway does he really give to someone like Secretary of State nominee Rex Tillerson or to Wilbur Ross, the Commerce Department nominee, or to Vice President Mike Pence? It looks like he’s a person who hasn’t delegated a lot in the past. So those would be early things to see. And then there’s what he’d do in a crisis. From what’s been reported by the press, the crises in the past, he’s been able to bluster through. There may be different crises here, where it’s not a question of, say, talking firmly to your bankers.

    For the most part, it looks like he’s always had the choice to walk away. In most of these project negotiations, he’s had a chance to do that. In the presidency, there will probably be negotiations — with Congress, with other nations, or with agencies or with all the people a president deals with — where you have to make a deal, and walking away is not a choice. It’ll be interesting to see how well he can create shared value in that context.

    A lot of negotiations are also about leverage, and for the most part, he’s gotten himself in a very favorable position where he usually has the negotiating leverage. He may not have the leverage going forward. It’ll be interesting to see how he handles that. And can he use those negotiating skills and those communication skills and create shared value skills in a situation where there’s no walk-away option and he doesn’t have the leverage.

     “Command and control” management model

    Nancy F. KoehnJames E. Robison Professor of Business Administration

    I study business leaders, government leaders, religious leaders, social activists, and other individuals — past and present — who exercise real, worthy impact. As a historian, I don’t see huge differences among political and business leaders in terms of what makes them effective. Courageous, serious leaders are men and women who are animated by a big, honorable mission, who get things done to achieve that mission, who demonstrate consistent emotional awareness as they do this, who motivate others to try to be better and bolder in pursuit of this purpose, and who work (tirelessly) to become better leaders themselves while they are doing all these other things.

    Thus far, we have not seen much evidence — either along the campaign trail or since the election — that Mr. Trump meets most of these criteria. But I think many voters perceived him as being successful in getting things done. Some of this perception was likely a result of his public confidence. Some may have resulted from his bluntness and his stated intent to cut through the red tape of Washington, along with its perceived stagnation, dominance by big money, and the sense that so many Americans have that the federal government is run by a small number of people calling all the shots.

    I think his hard-charging tone, coupled with his willingness to single out certain groups — from the media to Muslims to women to Hispanics — as responsible for many of the nation’s problems unleashed reservoirs of frustration, anger, and fear among certain groups of Americans. History makes it clear that all leaders have to be able to understand and respond to emotional currents among the people they influence. And I think Trump did that on the campaign trail in ways that served his political purposes very well. It is much less clear that inciting such animosity — and indeed hatred — among certain groups of Americans toward their fellow citizens will serve our country well. Certainly, history offers no such assurances. In fact, leaders who have risen to power by relying heavily on collective anger and discrimination toward other groups have proven to be despots, tyrants, and men who destroy the values and institutions that lie at the heart of democracies.

    Homing in on Trump’s reputation as a hard-charging man of action, we can perhaps think about his management style as one of “command and control.” This is a description in which the company, organization, or enterprise runs as a kind of military operation in which everyone lines up and falls in line. Although in the early 20th century many businesses were structured along such lines, “command and control” organizations have become much less common — outside of the military — in the last 40 or 50 years.

    Today, businesses and other enterprises are flatter, much less hierarchical, and much more diverse than the companies that first grew to great scale and came to define the modern

    industrial economy. This evolution is partly a result of globalization and the fact that many large organizations have become much more interdependent and complex; one-size-fits-all no longer works so well. This development is also a function of social, economic, and political change. Leaders now have to deal with a much broader set of stakeholders, including citizens, consumers, and labor around the world in a way that they simply didn’t half a century ago.

    At the same time, business has become responsible for much more than simply “selling high and buying low” and “delivering a healthy return for shareholders.” Today, companies are being held accountable for a whole host of social and political issues, from labor practices to environmental policies. In this context, hard charging and “command and control” are perhaps overly blunt instruments.

    I write and teach about individual leaders concerned with an honorable purpose, men and women who succeed against great odds. The people I study — from the explorer Ernest Shackleton to Abraham Lincoln to the environmentalist Rachel Carson — all have a great deal of deftness, meaning they understand the precept: “In this particular situation, what do I need to do to move my mission forward?” They also have great reserves of emotional awareness, which they apply to themselves and the people they are trying to influence. From this perspective, it seems to me that if you’re always on a hard-charging default drive, then it’s very difficult to pause and summon up the suppleness, care, and emotional acuity that leaders need in high-stakes situations.

    I think the incoming president has been very successful in terms of how he’s managed the American media to his ends. I can count on two hands the number of leaders I have seen in my lifetime who could walk into a room, take the measure of a large crowd so quickly, and then move into that energy and bring them along to embrace his agenda at a given moment. He has done this over and over, not only among his political supporters, but also among reporters and other members of the press.

    Despite these skills, which require some foresight, he appears to be extraordinarily reactive in his emotions, in his declarations, in the very heavy hammer that he wields across the board on different subjects as they come up, in real time, using social media. This is unprecedented. There is nothing in American history that compares with this aspect of his behavior: a public candidate and now president-elect, who is not only willing but eager to raise the public temperature so significantly, so often, and on such a widespread basis.

    When I reflect on strong leaders, I usually see an important connection between a given individual’s decisions and his or her respect for the organization for which that person is responsible. Government leaders make choices affected by laws and the founding documents of a nation; judges issue decisions anchored in precedent; CEOs consider the values and mission of their companies; even disruptive entrepreneurs struggle to build an organization that will execute a larger end and then endure. This connection is critical because a worthy leader wants the people whom he or she motivates to respect the organization and to serve that enterprise from such a place. This means a leader is always working to deepen the sense of integrity that his or her followers accord the organization, including its values, its charter, and those charged with serving as stewards of these critical aspects. We have yet to see Mr. Trump evidence such respect or incite it among his fellow Americans.

    Anyone we would say was an effective leader had the respect of his or her organization and toggled always back and forth between “what does this mean for the trajectory and the integrity and the character and the identity and the stability of my organization?” and “how is that related to my actions?” And that critical umbilical cord is, from my vantage point, not in sight here. I don’t see it. And I’m most troubled by that.

    “Push” and “pull’ marketing to build public support

    John A. QuelchCharles Edward Wilson Professor of Business Administration and professor in health policy and management at the Harvard T.H. Chan School of Public Health

    Marketing is important in campaigning. It is equally important in governing. In 2008, Barack Obama won the presidency with an uplifting call for hope and change. He leveraged online media to attract volunteers and donors, building a swell of grassroots support. In 2016, Donald Trump also leveraged new media, notably Twitter, to generate grassroots support around his call to make America great again. Effective communications and wise targeting of resources against key voter segments, notably in swing states, were equally important in both cases.

    Marketing in the world of politics is different from marketing in the world of commerce. In politics, you need majority support or at least a plurality to be successful. In commerce, you can be highly profitable as a niche brand appealing to a narrow segment of the population. In fact, being all things to all people is a recipe for disaster. The other noteworthy distinction is that the presidential marketer needs to win the vote on one day every four years, whereas the commercial marketer needs the cash register to ring every day.

    Nevertheless, public opinion is important to any president, and President Trump enters office with a low popular approval rating. That will require him to hone his communications skills and to win over many people who remain skeptical of his motives and competency. He must consciously set out to escape the Washington bubble and stay in touch with the ordinary voters from whom he draws much of his energy and confidence. Their continued enthusiasm to lobby their senators and representatives will be important to his ability to legislate his campaign promises.

    Governing as president therefore requires a combination of “push” and “pull” marketing. Coca–Cola pushes its products through retail distribution and at the same time advertises directly to consumers to generate demand that pulls the product off retail shelves. In the same way, President Trump must push his agenda through Congress, but strong popular support backing the agenda will help persuade legislators to vote accordingly.

    A likely force benefiting small business

    Karen MillsFormer administrator of the U.S. Small Business Administration (SBA) and now a senior fellow at HBS and at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School 

    Having a businessman in the White House has the potential to change the conversation in America around small business. Indeed, President Trump’s business background, if applied in the right way, could help him understand the needs of American small business. There are certainly thousands of small businesses that hope this will be the case.

    However, to do this right, President Trump needs to step up the focus on small business and ensure this critical part of our economy is part of every economic discussion his team has. So far, his attention seems to be on big business — aside from his nomination of Linda McMahon as SBA administrator. Big business often has significantly different needs from small business. Small businesses have a more difficult time accessing capital, providing health care to their employees, navigating complex regulations at every level of government, and much more. His promises to cut taxes and reduce burdensome regulation for small businesses could be a good start. But on both of these fronts, the policy details will matter when it comes to what small businesses need to grow and succeed.

    On the regulatory front, as I have written in a recent working paper, small business lending falls through the cracks of our current oversight framework. Small businesses and lenders should push President Trump to streamline the current “spaghetti soup” of regulation that is supposed to ensure greater access to capital, transparency, and borrower protections. Small businesses could also benefit from more incentives for large companies, which stand to get significant tax breaks under a Trump administration, to give more of their supply chain contracts to U.S.-based small businesses. In addition, National Federation of Independent Business surveys show that access to affordable health care is a top small business priority. Obamacare began to address this issue through the SHOP [Small Business Health Options Program] exchanges, but “Trumpcare” could go further in ensuring affordable rates for small businesses.

    Small businesses should advocate for President Trump to treat them like the customer, something that can be done by leveraging technology and innovation in ways that streamline interactions with federal agencies, like online form filing.

    Stars align to fix a broken tax system

    Mihir DesaiMizuho Financial Group Professor of Finance and professor of law at Harvard Law School

    The stars are in alignment for a major tax reform under President Trump. Thirty years of inaction on tax reform, along with significant changes in the economy and other countries’ tax policies, has made the U.S. tax system unwieldy and problematic in many ways. Most obviously, the corporate tax has become a dominant factor in the market for corporate control (i.e., so-called inversions), financing patterns (i.e., cash holdings), and profit-shifting activities (i.e., transfer pricing of profits).
    In short, it’s broken and we have the worst of all worlds relative to the rest of the world. We have high marginal rates that distort incentives, especially on profit-shifting, and only middle-of-the-pack average tax rates. The ratio of tax-induced distortions to revenue is creeping higher every year.
    The individual tax side of things is not quite as broken, but is overgrown and not serving our needs.

    We have numerous overlapping and confusing incentives on education, health, and child care expenses that ultimately limit the uptake of these programs. We have enacted several stealth tax increases that are quite large by phasing out deductions and exemptions. And, broadly speaking, the tax system may not reflect the apparent current support for more redistribution. One reason for that is the top bracket used to contain 0.1 percent of the taxpayers and now has 1 percent of the population. This creates resistance to increased top marginal rates.

    Finally, the usual guiding lights of equity and efficiency in tax policy now have to be complemented with a third concern: complexity. In the globalized world, there are ever-more margins on which economic agents can respond to complexities through planning. The overly complex system, especially on the international corporate side, is becoming a planner’s paradise.

    What will President Trump do? His plan during the campaign was admirable in some ways. The simplicity of the rate structure for individuals, the expansion of the standard deduction, the limitation on deductions, and the reduced corporate rate were broadly sensible. But, there were critical mistakes, including repeal of international deferral and a minimum tax for corporate foreign source income. It was fiscally irresponsible and not attuned to current tastes for redistribution.

    Given the relative inexperience of most of the current Trump economic team on these issues, I would expect that House Speaker Paul Ryan will dictate the broad outlines of any proposed legislation. His proposal, also known as the Ryan-Brady plan, is not just a renovation or a gut-rehab, it’s a teardown. It shifts the base of taxation to consumption from income through a “destination-based cash flow tax.” In effect, it is a form of value-added tax (VAT). Corporations will face a considerably lower rate, will not be allowed to deduct interest payments, and will be allowed to expense investments.

    The easiest way to understand that is: Because all business-to-business transactions are effectively deductible, the tax base becomes business-to-consumers transactions. In other words, consumption.
    One of the most important wrinkles in this system is that export revenue would be exempt from taxation, and the costs of imports would not be deductible under what is known as “border tax adjustments.” This has the potential for being incredibly redistributive across sectors, as exporters would have tax losses as far as the eye can see and importers would have much larger taxes due, unless exchange rates adjust to neutralize these changes in taxation, as economic theory would suggest.

    Will they? It’s hard to say because nothing on this scale has ever been attempted. Moreover, the plan has numerous question marks over how it would work. How would financial institutions get taxed? Would pass-through entities have their current treatment? Most importantly, it’s not clear it would pass muster with the World Trade Organization.

    The key advantage to Trump of the Ryan-Brady plan may well be the ability to characterize the border tax adjustments as tariffs. The box he put himself in regarding protectionist measures can be escaped by implementing the plan and labeling those adjustments as tariffs even though they’re not really functioning in that way. From an economic perspective, that deceit is preferable to the realities of tariffs. In recent tweets on auto companies, he’s already changed his language to a “border tax,” from tariffs.

    I think the risks of such a dramatic tax change are too great to justify the teardown. I’d prefer to see corporate tax reform proceed in a revenue-neutral way, with reduced rates and a shift to territoriality funded by changing the treatment of pass-throughs and by aligning the characterization of profits to tax authorities and capital markets. On the individual side, I think a significant expansion of the earned-income tax credit, unification and simplification of various credits and deductions, and a new top bracket for individuals making more than $1 million would help enormously.

    How does Trump’s business background condition his policy preferences and methods? It’s critical to realize that real estate development is quite unique in business, and the traits that allow you to succeed, to the degree he’s succeeded, in that field are not necessarily representative of the traits required elsewhere in business.

    Real estate development requires much more sharp-elbowed negotiating, coalition building between organizations, and marketing savvy than most types of business. It also tends toward monumental efforts rather than incremental change. Those skills might help him quite a bit in the Washington of today. Unfortunately, they could also result in a tweet-driven assemblage of hollow gestures (saving jobs via jawboning) without any real substance.

    These interviews have been edited for length and clarity.

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    Northwestern Medicine scientists showed for the first time that non-invasive brain stimulation can be used like a scalpel, rather than like a hammer, to cause a specific improvement in precise memory.
    Precise memory, rather than general memory, is critical for knowing details such as the specific color, shape and location of a building you are looking for, rather than simply knowing the part of town it’s in. This type of memory is crucial for normal functioning, and it is often lost in people with serious memory disorders.

    “We show that it is possible to target the portion of the brain responsible for this type of memory and to improve it,” said lead author Joel Voss, assistant professor of medical social sciences at Northwestern University Feinberg School of Medicine. “People with brain injuries have problems with precise memory as do individuals with dementia, and so our findings could be useful in developing new treatments for these conditions.”

    By stimulating the brain network responsible for spatial memory with powerful electromagnets, scientists improved the precision of people’s memory for identifying locations. This benefit lasted a full 24 hours after receiving stimulation and corresponded to changes in brain activity.
    “We improved people’s memory in a very specific and important way a full day after we stimulated their brains,” Voss said.

    The paper was published Jan. 19 in Current Biology.

    The research enhances scientific understanding of how memory can be improved using non-invasive stimulation. Most previous studies of non-invasive brain stimulation have found only very general and short-lived effects on thinking abilities, rather than highly specific and long-lasting effects on an ability such as precise memory.

    The scientists used MRI to identify memory-related brain networks then stimulated them with non invasive electromagnetic stimulation. Detailed memory tests were used to show that this improved spatial precision memory, and EEG was used to show that these memory improvements corresponded to indicators of improved brain network function.

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    Jack Ma, one of China’s most successful and richest entrepreneurs, has responded to America’s growing globalization backlash, arguing that the superpower has benefited immensely from the process – but that it has largely squandered its wealth.

    “American international companies made millions and millions of dollars from globalization,” Ma – the founder of Alibaba, the world’s largest online retailer – told participants on the second day of Davos. “The past 30 years, companies like IBM, Cisco and Microsoft made tons of money.”
    The question is: where did that money go? It was wasted, Ma explained.

    “In the past 30 years, America has had 13 wars at a cost of $14.2 trillion. That’s where the money went.” He also questioned America’s decision to bankroll Wall Street after the 2008 financial crash, arguing the money would have been better spent in other areas.

    “What if they had spent part of that money on building up their infrastructure, helping white-collar and blue-collar workers? You’re supposed to spend money on your own people.”

    It’s not globalization – and everything that comes along with it, like free trade and outsourcing – that’s to blame for America’s woes. It’s the way the country’s elite managed the process.
    “It’s not that other countries steal American jobs; it is your strategy – that you did not distribute the money in a proper way.”

    But it wasn’t all doom and gloom in the session. In fact, Ma remains hopeful that globalization can still be a great force for good – for both the US and China. It just needs to be reformed.
    “I believe globalization is good, but it needs to be improved. It should be inclusive globalization.”
    Ma thinks that should be achievable – and he says President-elect Donald Trump is on board with him. “He’s open-minded and he’s listening,” he told participants.

    The two men met recently in New York and had a lot more in common than might be expected.
    “We spoke about how we can help small American businesses sell their products in China and Asia through our network, which can create a lot of jobs for them.”

    For all the talk of trade wars between the two economic powerhouses, Ma says that’s unthinkable, and thinks they would instead benefit from working together on this more inclusive form of globalization.

    “China and the US will never have a trade war… It would be a disaster for both countries and the world.”

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    These days, most companies are awash in data. But figuring out how to derive a profit from the data deluge can help distinguish your company in the marketplace. 

    Image credit : Shyam's Imagination Library

    The possession of rich amounts of data is hardly unique in today’s world. Indeed, data itself is increasingly a commodity. But the ability to monetize data effectively — and not simply hoard it — can be a source of competitive advantage in the digital economy.

    Companies can take three approaches to monetizing their data: (1) improving internal business processes and decisions, (2) wrapping information around core products and services, and (3) selling information offerings to new and existing markets. These approaches differ significantly in the types of capabilities and commitments they require, but each represents an important opportunity for a company to distinguish itself in the marketplace.

    Theoretically, companies can pursue more than one approach to data monetization at the same time. In practice, adopting each approach requires management commitment to specific organizational changes and targeted technology and data management upgrades. Thus, it’s best to identify your most promising opportunity and start there. In doing so, you will enhance your data in ways that will accelerate subsequent efforts related to the other approaches. More importantly, you’ll build your company’s capacity for monetizing its data.

    Improving Internal Processes

    Using data to improve operational processes and boost decision-making quality may not be the most glamorous path to monetizing data, but it is the most immediate. Executives often underestimate the financial returns that can be generated by using data to create operational efficiencies. Companies see positive results when they put data and analytics in the hands of employees who are positioned to make decisions, such as those who interact with customers, oversee product development, or run production processes. With data-based insights and clear decision rules, people can deliver more meaningful services, better assess and address customer demands, and optimize production.

    When Satya Nadella became CEO of Microsoft Corp. in February 2014, he urged employees to find ways to improve the company’s processes with data. Within sales, executives believed that, with the right tools and systems, they could improve the productivity of their salespeople by 30%. To do so, Microsoft’s sales leaders sought to deploy tools that would help salespeople spend more of their time engaging with customers — and in more effective ways — by arming them with key computed insights such as how likely a sale is to close and when.

    To deliver actionable insights, sales executives first had to define shared concepts (for example, what is meant by “a lead”). They then needed to locate data sources that could be used to calculate performance. They quickly learned that sales data was located in too many different systems to easily create a comprehensive snapshot of a salesperson’s business. Within a year, they created a new, integrated customer system that could produce 360-degree views of Microsoft’s relationships with corporate customers, including what those customers bought, what issues they encountered, and how the company engaged with them.

    The new system saved 10 to 15 minutes per sales opportunity by eliminating the need for Microsoft salespeople to manually search for and prepare data. The system also helped sales executives more accurately manage their pipelines; it used predictive analytics and machine learning to compute the likelihood of a successful sales engagement based on data that the salesperson provided about an opportunity. For example, buying and deploying enterprise software is complex and often requires a partner’s involvement, so the system may calculate a higher likelihood for success when customers already have partners involved. Information about an opportunity’s likelihood of success, along with suggestions on how to advance engagements along the sales pipeline, helped salespeople prioritize their leads and act in ways most likely to achieve their goals. Over time, Microsoft salespeople learned how to forecast more accurately (for example, the accuracy of forecasts regarding global accounts has risen from 55% to 70%), which has led to better sales-pipeline data and, in turn, improved pipeline management.

    Wrapping Information Around Products

    Most companies have opportunities — often quite significant ones — to enrich their products, services, and customer experiences using data and analytics, a phenomenon that we call “wrapping.” Companies are wrapping their offerings with data to escape commoditization and satisfy increasingly hard-to-please customers — with the goals of generating sales increases, higher prices, and deeper customer loyalty. FedEx Corp. was an early exemplar of wrapping when it introduced online package tracking as a free service in the 1990s. Now examples abound as companies bundle reporting, alerts, and other information to add value to products ranging from credit cards to health monitors.

    Wrapping is a creative exercise in which companies identify what problems their customers have and then find ways to solve those problems using data and analytics. For example, Capital One Financial Corp., a diversified bank based in McLean, Virginia, learned that many of its credit card holders are concerned about fraudulent transactions but find the task of examining every charge to be tedious. So the company helps customers identify fraud more easily and more quickly by displaying merchant logos and maps with each transaction in online statements. The visual cues jog cardholders’ memories about whether they made a purchase or not. As a result, customers are more satisfied with the credit card and more likely to use it more often.

    Johnson & Johnson has discovered the value of providing pattern identification to users of its health-monitoring products, including those for diabetics. The company offers its OneTouch Verio Sync Meter customers historical reporting on their blood glucose levels along with tools to help them understand patterns of changes. The reporting is intended to help customers identify the possible causes for the glucose level variations and thus identify behavioral changes that can result in healthier living.

    Wrapping activities are best viewed as extensions of a company’s product management processes. This means offering data and analytics to customers at the same level of quality as the core product. Doing so requires comparable levels of scrutiny and control. Most companies don’t manage and cannot deliver data and analytics in this way. In fact, exposing data to customers could reveal quality problems and a lack of analytical sophistication. Thus, in most cases, wrapping requires companies to “up their game” in their information capabilities so that wrapping doesn’t damage their reputation or undermine their value proposition. This effort may entail heavy investment in data-quality programs, advanced computing platforms (for instance, Hadoop), or data-science talent.

    Selling Data

    Many executives are eager to sell their company’s data, convinced that it has inherent value and can generate important new revenues for the company. We caution that selling represents the hardest way to monetize data, mainly because it requires a unique business model that most companies are not set up to execute. Yet it can be done to potentially great effect under the right circumstances.
    State Street Corp. is a Boston, Massachusetts–based financial services company that reported $10.4 billion in 2015 revenue. It provides products and services to institutional investors such as mutual funds, corporate and public retirement plans, and insurance companies.

    In 2013, State Street announced a new information-business division called State Street Global Exchange that would combine existing State Street data and analytics capabilities with new research to develop information-based solutions that clients would be willing to buy independently of the company’s core services. State Street established a new division for the information business in recognition of its unique business model needs — something the company had not done in 30 years.

    Even though it started out as a discrete unit, State Street Global Exchange focused on developing products that were tightly associated with State Street’s core business. For example, State Street is one of the largest administrators of private equity assets, which means that it collects data about the financial capital that is not noted on a public exchange; this kind of data is of great value to markets that require an accurate representation of the private equity industry. State Street Global Exchange appreciated that the data was not automatically monetizable. Executives secured permission from 3,000 private equity clients to aggregate and anonymize that data — and then created an index that conveyed the financial performance of the private equity industry.

    State Street leaders realized that they would need an entirely new operating model to support the information business. For one, sales processes had to change because, although State Street Global Exchange often sold to State Street clients, a buyer of Global Exchange products was frequently a different person or cost center than the kind of buyer traditional State Street products attract. In addition, the information business required salespeople with different selling experience and skills in selling stand-alone data and analytics-based products.

    State Street understood that establishing an information business is hard and takes time. State Street Global Exchange had to learn to achieve balance between maintaining key ties with State Street (to create benefits from being a part of the larger organization) and responding quickly to new markets and new needs. Executives believe that State Street Global Exchange is gaining significant traction with its clients — and that their commitment will pay off. But we caution that such a model is not easy to replicate. Other companies should think carefully about the operational capabilities, investment, and commitment required to successfully sell data.

    The Importance of Accountability

    Chances are you have two major obstacles to monetizing your data. The first is the accessibility and quality of your data. Our research has found that only about a quarter of companies offer employees and customers easy access to the data they most need. You can’t monetize data no one can use.
    The second obstacle is lack of accountability. All three approaches to data monetization require committed leaders who can redirect the behaviors of employees to deliver an important new value proposition.

    Your inclination may be to solve the data quality issue first with big investments in new infrastructure. We propose that addressing the second issue of accountability will create urgency and commitment to addressing data quality issues — and so we recommend starting there.
    Data monetization through process improvement requires strong process leaders. These leaders systematically use data to analyze the outcomes of existing processes and test hypotheses about proposed improvements. At Microsoft, for example, sales managers designated specific people to reshape and institutionalize new ways of selling. Process leaders are ultimately responsible for the design of best practices, the capture of the right data, the availability of tools, and the training of all staff regarding how to use data to do their jobs.

    Data monetization through wrapping requires strong product leaders. These leaders treat the data that accompanies a core product or service much like any other product innovation — they hold it to the same quality standards. At Capital One, product leaders know the value of adding a data or analytics feature to a credit card because they predict — and then track — the lift in revenue from the information as well as the cost of providing it. Product leaders assemble teams to design experiments and methodologies that help analyze the impacts of information features and make appropriate adjustments.

    Monetizing data by selling it requires a strong business-unit leader. That leader, in turn, must assemble a team that can launch and grow what is for most companies a new line of business. The head of that business will start by ensuring the value of the data and related services to potential customers. But the business head and his or her team must also design data, analytics, and dashboards to monitor the business and enable rapid response to new business opportunities.
    Each of the data-monetization strategies requires new processes, new skills, and new cultures to generate maximum returns. Companies with data-monetization experience have learned that it is insufficient to simply put data and tools into the hands of employees. Microsoft refined goals, cleaned up data, honed reports and algorithms, grew talent, and changed habits. Capital One and Johnson & Johnson reshaped product-management talent, platforms, and capabilities. State Street redesigned its organization and created a new profit formula that would generate stand-alone revenues from information.

    Impressive results from data monetization do not transpire from single “aha” moments. Instead, they stem from a clear data-monetization strategy, combined with investment and commitment.

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    Some companies are using product teardowns to dismantle silo culture in product development.

    Engineers and purchasers love product teardowns—the practice of dismantling products into parts as a way to spark fresh thinking. Few manufacturers, however, elevate the practice above Skunk Works status, and many executives pigeonhole it as a tactical exercise in cost cutting. Some companies, however, are throwing open the doors of their Skunk Works labs and using teardowns as opportunities to increase cross-functional collaboration. Along the way, they are saving more money, capitalizing better on customer insights, and improving the revenue potential of their products.

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    Startups in developing economies are addressing local problems through creative technologies and solutions. For large global companies, the prospect of working with such startups is appealing — and complicated.

    For large global companies, forging effective partnerships with high-potential startups is easier said than done. The very traits that make such startups potentially complementary as partners also make it difficult for large companies to engage with them in the first place. Multinational corporations often struggle even to identify promising potential startup partners; startups, for their part, find it difficult to identify and reach the relevant decision makers within the often-confusing hierarchies of gigantic multinational companies.

    The challenge, for both sides, is all the more vexing in emerging markets. Furthermore, most academic studies of the challenges that large companies and entrepreneurial ventures face in partnering — and the solutions the studies suggest — focus on mature markets, such as the United States and Europe. Far less is known about how multinational corporations should engage with startups in emerging markets such as China and India — even though those markets already boast the presence of prominent multinational companies such as Amazon, Google, IBM, Microsoft, and SAP.

    To understand how multinational companies have partnered successfully with startups in emerging markets, we undertook a study in three major emerging market economies: India, China, and South Africa. (See “About the Research.”) Our research uncovered four key factors that multinational companies confront in such partnerships in emerging markets. We also unearthed four strategies — one corresponding to each of the factors — to help global companies engage with startups in emerging markets more effectively. (See “Key Factors in Partnerships With Startups in Emerging Markets.”) While some factors may be more potent than others for a given multinational corporation, all four of these strategies are worth paying attention to. They are mutually reinforcing, interrelated strategies and should be viewed holistically rather than in a piecemeal fashion.

    About the Research

    We conducted more than 30 interviews between September 2015 and March 2016 with entrepreneurs and managers from six multinational corporations in the information technology sector across three emerging markets: China, India, and South Africa. At three of the multinational companies (IBM Corp., Microsoft Corp., and SAP SE), we conducted interviews in all three markets; at two (Amazon Web Services Inc. and Google Inc.), we conducted them in China and India; and at one (VMware Inc.), we conducted interviews in China only. These multinational companies varied in terms of their age.

    Three were established pre-internet (IBM, Microsoft, and SAP) and three in the internet era (Amazon, Google, and VMware). Additionally, two corporate venture capital managers — one from Intel Corp. and another from Qualcomm Inc. — were interviewed, to obtain a complementary point of view from an equity-based engagement perspective. Our focus in the study, however, was on non-equity partnering through startup engagement programs such as Microsoft’s BizSpark, IBM’s Global Entrepreneur Program, and SAP’s Startup Focus program. We deliberately chose to study multinational companies with a strong record of startup engagement. The purpose of the interviews was thus not to compare more versus less successful multinationals but rather to understand how successful ones adapted their startup engagement strategies in 
    emerging markets. 

    Strategy 1: Compensate for the immaturity of the entrepreneurial ecosystem. The first key factor is the immaturity of the entrepreneurial ecosystem. Specifically, most emerging markets are afflicted by constraints and “voids” in their institutions. One of the people we interviewed referred to this as the “last mile” problem: Getting things done is a challenge in nations with poor access to reliable information, weak property rights, and unsound governance. In these settings, competition is potentially dysfunctional — and can be lacking in fair play. Weak institutions make contract enforcement unreliable and necessitate the development of trusting relationships to ensure that partners deliver on their promises. What’s more, the lack of a robust entrepreneurial ecosystem makes it harder for multinational companies to identify high-quality startups; compared with their counterparts in mature markets, startups in emerging economies more often lack the legitimacy or resources to gain access to multinational corporations.

    In general, multinational companies that want to partner with startups in emerging markets must bear a greater burden to compensate for deficiencies in the entrepreneurial ecosystem. Notwithstanding some remarkable success stories in China and India, emerging market startups generally need some hand-holding from global multinational partners, given their lower levels of technical know-how. Several global companies we studied provide this support by supplementing their global startup programs with localized content that was tailored to the particular emerging market. A case in point is IBM’s Global Entrepreneur Program in China. An important facet of the Global Entrepreneur Program around the world is free access to various IBM software technologies. In China, IBM localized this feature by also providing access to training — helping developers boost their skills to global standards.

    Another worldwide feature of IBM’s Global Entrepreneur program is its SmartCamp initiative, a contest that provides startup entrepreneurs with the opportunity to make a pitch to prospective investors. In China, this feature is localized in several ways: For example, startups also receive introductions to reputable incubators. In addition, IBM uses China-specific social media tools such as Sina Weibo and QQ in its community-building efforts. What’s more, there’s a separate Global Entrepreneur module for monthly activities in China. These include forums on particular vertical markets (say, health care or education), company visits, and face-to-face mentoring sessions with technical experts.

    Indeed, mentoring startups is an important component of a number of multinational corporations’ startup engagement programs. High-quality mentors are scarce in emerging markets, so some multinationals make a strong effort to cultivate mentor networks — and contribute to the mentoring process themselves. Microsoft’s enhanced BizSpark program in South Africa is one example. Globally, BizSpark provides young startups with free access to Microsoft technology; in South Africa, which has a comparatively weak entrepreneurial ecosystem, Microsoft augments this offering by providing mentoring support, tailored to startups according to their stage of development.

    Key Factors in Partnerships With Startups in Emerging Markets

    Our research suggests four key factors — and four strategies to address them — that global companies should keep in mind when seeking to partner with startups in emerging markets.
    Many multinationals are engaging with startups. But how should they do so in emerging markets, given the special constraints and opportunities of these settings? 1. Immaturity of the entrepreneurial ecosystem 1. Compensate for deficiencies IBM’s enhanced startup program in China
    2. Appetite for entrepreneurship 2. Commit resources to tapping the entrepreneurial energy Microsoft Ventures’ accelerator programs for startups in emerging markets
    3. Outsider status of Western multinationals 3. Work with local groups Amazon Web Services’ support of an incubator initiative in China
    4. Access to novel innovations 4. Coinnovate with startups SAP’s coinnovation labs in emerging markets

    Strategy 2: Commit resources to tapping the entrepreneurial energy in emerging markets.

    A second key factor is the appetite for entrepreneurship in emerging markets. Notwithstanding their constraints, emerging markets have opportunities aplenty. In some cases, innovative, successful growth companies have spawned startup ecosystems in emerging markets; consider the agglomeration of software and gaming startups in Hangzhou, China, in the vicinity of the well-known e-commerce company Alibaba Group Services Ltd. The increasingly mainstream appetite for entrepreneurship in emerging markets was apparent when NDTV, one of India’s leading television news channels, announced that six startups with $1 billion valuations (so-called “unicorns”) were its collective “Indian of the Year” for 2015. Another factor contributing to increasing interest in entrepreneurship in emerging markets is the role of returnees from mature markets. One study found that a sizable proportion of returnees coming from the United States back to China and India intended to start new businesses.

    Perhaps also relevant is the inevitable slowing of growth in emerging markets, including China, which makes the potential for self-employment through entrepreneurship important. Notable in this regard is China’s entrepreneurship policy initiative, announced in 2014 by Premier Li Keqiang. The title of the policy roughly translates to “entrepreneurship by the populace, innovation by the masses.”
    Some multinational companies are responding to this opportunity by prioritizing emerging markets. For example, in 2012, when Microsoft launched its Microsoft Accelerator initiative, a program providing support and training for high-potential startups, the program included a focus on emerging markets: Two of Microsoft’s first four accelerators were located in Bangalore and Beijing. Microsoft’s focus served as signals of commitment and interest to local startups in emerging markets. Importantly, the actions led to meaningful measures in these locations to bolster entrepreneurship.

    In Bangalore, for example, Microsoft Ventures has leveraged the “10,000 Startups” initiative of the National Association of Software & Services Companies (NASSCOM), a trade association for the software industry in India. Specifically, Microsoft Ventures has become a sponsor of the “10,000 Startups” program, along with prominent peers such as IBM, Google, and Amazon Web Services. Furthermore, in addition to its own accelerator in Bangalore, Microsoft Ventures has an extended portfolio of activities in India through its #CoInnovate program.

    The #CoInnovate program has three elements.

    First, a “partner in acceleration” initiative helps other actors, including key Microsoft customers, with their own startup engagement. For instance, there is now a GenNext Innovation Hub in Mumbai that is a joint initiative between Reliance Industries Ltd., a Mumbai-based conglomerate, and Microsoft Ventures. Second, a “market access” program facilitates go-to-market strategies within key verticals, where promising startups participate in events targeting the CIOs and CTOs of key Microsoft clients. Third, a “high-potential” program enables venture capitalists or corporate partners to nominate high-potential startups to participate in the #CoInnovate program. CanvasFlip, a startup based in Hyderabad, India, which creates fast, clickable prototypes for mobile apps, is a case in point. A venture capitalist brought this startup to Microsoft’s attention, resulting in its entry into the Bangalore accelerator.

    Strategy 3: Work with local groups to overcome the limitations of outsider status.

    The third factor is the outsider status of Western multinational companies. While multinationals normally face unfamiliar conditions in foreign markets, the deficits in their knowledge base vis-à-vis local conditions are magnified in emerging markets.10 This challenge can be compounded by ignorance at corporate headquarters if headquarters executives fail to heed warnings from local subsidiary managers about the importance of understanding local conditions.11 Another challenge is the multiplicity of stakeholders that Western multinationals face in emerging markets, where they are often held to higher standards than domestic companies are — and expected to produce socially relevant outcomes, not merely economic ones.12 The upshot is this: Western multinationals usually find it takes longer for them to shed their outsider status13 in emerging markets than it does elsewhere. Consequently, it is a greater challenge to screen and identify allies in general — and startup partners in particular.

    What’s the solution? Amazon Web Services Inc., which entered China later than other well-known Western multinationals such as IBM and Microsoft, decided to partner with DreamT incubator, a newly established organization working closely with local governments in Shanghai, Beijing, and Chongqing. DreamT is run and managed by an independent entrepreneurial team, with some government support and incentives. It is branded as being “powered by” Amazon Web Services. For Amazon, this is a China-specific initiative that helps signal a commitment to the Chinese market — but does not require Amazon to build the support infrastructure from scratch, all by itself. Moreover, the effort is aligned with the Chinese government’s priority to support entrepreneurship. In addition to common incubator services — mentoring, marketing support, and introductions to venture capitalists — startups in the DreamT incubator gain access to Amazon cloud technologies and business services, as well as training to make the most of these technologies.

    Multinational companies that are relative newcomers to an emerging market could take a page from Amazon’s playbook, using existing actors to build a bridge between themselves and local startups. In other words, multinationals can combat the challenge of outsider status by building upon and complementing the work of reliable local actors.

    Strategy 4: Coinnovate with startups to access novel technologies. The fourth key factor in emerging markets is proximity to novel technologies. While Western multinational companies may have originally been attracted to emerging markets by their lower cost base and large market size, there’s an additional enticement: tapping innovative technologies. For example, “frugal innovation,” which entails the creation or modification of low-cost products and services, has emerged across myriad sectors in China and India since — despite those countries’ growing affluence — they remain home to large low-income populations. Western multinationals may be able to leverage such technologies in advanced markets. What’s more, in countries such as China and India, there’s a growing shift from imitation to innovation, and some of the innovation is quite different from what global companies have access to in advanced markets.

    In spite of — or perhaps because of — the constraints of emerging markets, some startups solve local problems by developing creative technologies that are unavailable in advanced markets. For example, Qualcomm Inc., a developer of wireless technologies based in San Diego, California, worked closely with Mango Technologies Pvt. Ltd., a startup in Bangalore, India, that developed software for low-end mobile phone handsets. Eventually, Qualcomm acquired the technology, using it in emerging economies with large rural markets.

    In addition, global companies can tap innovative technologies through coinnovation initiatives in emerging markets. For instance, the enterprise application software company SAP SE, based in Walldorf, Germany, has coinnovation labs in China and India (as well as a number of other locations around the world) through which it works with local partners. Although this program is not specific to startups, some of the partners are smaller, entrepreneurial companies.

    SAP employees who work at the coinnovation labs grow their innovative skill sets. SAP, in turn, gains the ability to transfer that know-how across geographical borders when the employees move on to other positions and opportunities. For example, an SAP manager who had moved from Shanghai to Johannesburg, South Africa, which at the time did not have an SAP coinnovation lab, championed the creation of one there.

    Reproduced from the MIT Sloan Management Review

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    The Chinese telecommunications company Huawei recently has made significant inroads into European markets using a strategy of innovation partnerships with customers and governments.

    Image credit : Shyam's Imagination Library

    Emerging markets such as China and India have become the growth drivers of corporate R&D initiatives from all around the world. Although there is growing evidence that Chinese companies are shifting their innovation focus from cost savings to knowledge-based research, the view by many in the West remains that companies based in emerging markets are not ready to take over the role of leading innovators from their Western competitors. As a result, Chinese multinationals have been at a competitive disadvantage, particularly in strategic technology industries.

    What can Chinese multinationals do to overcome Western barriers to entry in strategically important technology industries in which “Made in China” or “Designed in China” are viewed as negatives? What dynamic innovation capabilities — or, put another way, what culturally specific processes — should companies focus on to gain acceptance in the competitive global marketplace?

    To answer these questions, I studied Huawei Technologies Co. Ltd., the Chinese telecommunications company that has recently made significant inroads in Europe’s mature and strategically important telecommunications industry. (See “About the Research.”) Huawei, which is based in Shenzhen, is one of the first Chinese multinationals to be competitive in the West in a strategic technology industry, making it a potential role model for companies in China and other parts of Asia that hope to transition from being a follower to being a market leader.

    To achieve its position, Huawei has aggressively pursued a strategy of joint innovation with leading European customers and governments. In this article, I will discuss how Huawei worked closely with European customers to develop joint innovation capabilities. In the process, the company was able to emerge as a leader in telecommunications in Europe.

    About the Research

    This article is based on a five-year study of how Chinese technology companies have upgraded their capabilities in the European Union.i Not only had Huawei become a leading telecommunications equipment provider and a leader in terms of its number of patent applications, competitors were recognizing its innovation collaborations with European telecom operators as best practice. To understand the origins of Huawei’s success, I studied the company’s development from 1987 through its emergence as an influential competitor in the European Union. With the help of two research assistants, I conducted 56 semistructured interviews with Huawei managers, competitors, policymakers, lobbyists, and customers in China, the European Union, North America, and Latin America, and reviewed materials such as company histories, annual reports, internal documents, and other reports. We explored how Huawei managers were able to convince customers in China and Western Europe to choose their services and products over those of established competitors and how it developed its innovation capability.

    Huawei’s Joint Innovation Capabilities

    Indian companies such as Bharti Airtel Ltd., a telecommunications services company headquartered in New Delhi, have demonstrated the importance of adaptive partnerships with suppliers and customers in emerging markets. What sets Huawei apart are its joint innovation capabilities and the conditions that prompted and are still fueling their development. (See “The Building Blocks of Huawei’s Joint Innovation Strategy.”)

    The Building Blocks of Huawei’s Joint Innovation Strategy

    Huawei has relied on a combination of practices as the basis of its joint innovation strategy. These building blocks have been effective in both emerging and developed markets.
    Innovate from the periphery to the center • Build an independent R&D path via customers with challenging needs
    • Develop partnerships with governments
    Target customers with challenging needs before mainstream customers • Start by building quality partnerships with customers with challenging needs
    • Use customization to lock in the relationship
    Focus on innovating with customers • Think in terms of joint innovation pull rather than technology push
    • Solve customer problems through joint innovation centers

    Although a common Western view is that China’s culture of innovation is constrained by cultural and political forces, the reality is that China has a strong entrepreneurial side. Many Chinese entrepreneurs have aspirations and innovation leadership goals that are aligned with their North American and European counterparts. Less than a decade after the company was founded in 1987,

    Huawei announced that it wanted to become one of the world’s leading players in telecommunications. From the beginning, it has recruited talented engineering graduates from top Chinese universities with competitive salaries and employee bonuses, and it has made a point of investing 10% or more of its sales in R&D projects as a way to compete with Western competitors.
    Huawei has effectively turned some of the core values from China’s Cultural Revolution, such as self-criticism and constant struggle, in the direction of competition8 while also tapping into more modern Chinese social values to advance innovation. For example, success and ambition are highly valued in China, yet Chinese employees tend to be less focused on receiving personal credit than their Western counterparts and more willing to admit to failure. Huawei, which had 2015 revenue of $60.1 billion, has reinforced its values with employee ownership and a bonus-driven management structure.

    In the early days, Huawei’s strategy in China was to target rural townships far from the centers of power and multinational attention. Local operators, hotels, and factories needed customized networking gear and central office switches that could operate under local conditions such as poor transmission quality (and even rats chewing electrical wires). Because Huawei was not able to obtain capital from banks or government at that time, its earliest R&D efforts focused on working with its local customers on customized, cost-effective solutions. By taking the time and making the necessary investments to address their requirements, Huawei was able to overcome barriers to entry that typically stood in the way of private companies in China. Local bureaucrats operating far from the centers of capital and power began to see Huawei as an important vehicle for public-private cooperation.

    Through its work with local operators in China, Huawei learned how to collaborate successfully with partners (including governments) to provide customized telecommunications equipment. Eventually, it was able to leverage this capability to gain a foothold with China’s largest telecom customers in the major cities. Huawei’s CEO and founder, Ren Zhengfei, who came from a rural town and was an engineer and scientist in the People’s Liberation Army, has attributed the company’s approach to innovation to two very different main influences: the principles of the Chinese Cultural Revolution and the customer-centric views of former IBM Corp. CEO Louis Gerstner.1

    A Three-Stage Strategy for Europe

    In order to make inroads in Europe, Huawei has typically relied on the same strategy it used to build its market position in China: (1) offer customized technologies that meet the practical needs and resource constraints of target customers; (2) build customer loyalty by enhancing practical innovation with longer-term joint innovation partnerships; and (3) enlist the support of governments, universities, and other industry stakeholders by customizing further innovation investments to their priorities, so as to be viewed as a “model citizen.” (See “Huawei’s Three-Stage Approach.”)

                                                                                                                                                              While the first two stages are sequential, the timing for the third stage varies depending on the
    particular innovation context and the barriers to entry in the specific market. Some markets, such as the United States, have been especially difficult to penetrate, as will be discussed. Regardless of the exact chronology, the three stages often overlap, as Huawei’s innovation experience in both China and Europe demonstrates.

    Stage 1: Offer customized technologies that meet the practical needs and resource constraints of target customers.

    Anticipating significant customer and government barriers to entry in Western European markets, Huawei starting sending employees there beginning in 2001. Even with direct support from top management, Huawei had a difficult time persuading European operators that a Chinese company was capable of producing anything but simple products — especially the state-of-the-art, high-tech equipment they sought. The first breakthrough occurred in 2004 with Telfort B.V., a mobile telecommunications provider based in Amsterdam. At the time, Telfort billed itself as a no-frills challenger to the established norms of the mobile industry. Lacking the financial strength of bigger operators such as London-based Vodafone or Paris-based France Télécom (now Orange), and looking for a way to go up against established equipment suppliers such as Ericsson and Alcatel-Lucent, Telfort was willing to make a bet on Huawei’s products.13 Huawei demonstrated a refreshing willingness to listen closely to Telfort’s requests and find smart solutions to its unmet needs. By working closely with Telfort, Huawei was able to produce a distributed base station that cost less and required less energy to operate than traditional ones.

    Winning over customers such as Telfort was no easy feat. To do so, Huawei had to present a low-risk alternative to what the established vendors provided. It achieved this by offering free testing and technical support. The hardware itself was often priced significantly below that of established competitors.14 What’s more, instead of limiting service to typical Monday through Friday business hours, Huawei promised service availability 24/7, with equipment transportation, installation, and maintenance at no extra charge.

    Huawei’s innovation model has been closely tied to its heavy investment in R&D. The company has typically invested more than 10% of its revenues in R&D during the past 15 years, outspending its European competitors in absolute terms. Given the relatively low cost of Chinese engineering talent, Huawei is able to assign more engineers to projects than its competitors can. For instance, even when the company had its first conversations with prospective customers in Western Europe in 2000, it employed 10,000 university-trained engineers. Today, it employs more than 50,000 developers and engineers, more than any of its Western competitors. In its attempts to be seen as best of class, Huawei made huge investments in technology testing, and it has encouraged employees to get involved with the major standardization bodies. Through these actions, Huawei has communicated the emphasis it places on quality while still offering custom solutions that are configured to meet the needs of individual customers.

    Build customer loyalty by enhancing practical innovation with longer-term joint innovation partnerships.

    On its own, Huawei’s customer-centered perspective was only able to take the company so far. Indeed, the company had to work hard to counter the perception that its products were not up to the quality of those made by competitors. Huawei began to downplay that it was the least expensive provider; while offering highly competitive prices, it emphasizes its ability to mobilize its large numbers of technical people to design and implement smart solutions quickly.

    Huawei’s innovation strategy began to pay off in significant ways after it signed a deal in 2005 with Vodafone, one of the largest mobile telecommunications companies in the world. Eager to gain an edge against Telefónica in Spain, Telefónica’s home market, Vodafone looked for an equipment supplier that could help it build a large number of third-generation wireless network base stations using the UMTS (Universal Mobile Telecommunications System) standard. It selected Huawei over leading competitors to provide the radio-access part of the network. What distinguished Huawei’s winning bid from those of others was only partly price; it was also the speed of execution. Huawei helped Vodafone build and install 10,000 base stations within one year, two to three times faster than competitors.

    In 2011, Telenor Group, a large Norwegian mobile telecommunications company that operates in Scandinavia, Eastern Europe, and Asia, became another Huawei customer. Telenor wanted to build a high-speed wireless base station in one of the most remote and frigid parts of Norway. Other equipment providers shunned the project due to the extreme working conditions, the tight schedule, and high overhead costs, leaving Huawei as the sole bidder. Huawei used the project to showcase the practicality of its latest network solution, which supported multiple mobile communications standards and wireless telephone services on one network. At the same time, the company demonstrated the flexibility and customer-centricity of its engineers and its ability to perform under adverse conditions. Using a wide range of transportation modes (including helicopters and snowmobiles), Huawei engineers completed the 4G wireless base-station project faster than expected.

    Huawei was able to formalize its relationships with leading European operators such as Vodafone and Telenor by establishing what it calls joint innovation centers, which provide a collaborative environment for managing the customer-supplier relationship and remove some of the long-term uncertainties. Joint innovation centers provide a platform for Huawei and its customers to work through complex issues together.

    Rather than undertaking several projects at once, joint innovation centers focus on one problem at a time. Representatives of the telecom operator and Huawei come together to explore problems and potential solutions. Input from senior management on both sides is an important part of the process. Such high-level involvement helps build trust, which is reinforced by clear rules for protecting intellectual property and sharing risk.

    To appreciate how joint innovation centers work and how they can enhance strategic partnerships with operators, consider the way Huawei collaborated with Vodafone in 2006 and 2007 to develop a radio-access technology to enable mobile telecommunications operators to support multiple mobile communications standards and wireless telephone services on one network. To manage this project, Vodafone’s global network director and a director of Huawei’s enterprise management team brought their teams to Madrid twice a year, where they reviewed progress and determined what to do next.
    The Vodafone and Huawei engineers had identified a looming strategic problem: Vodafone needed to retire 110,000 2G sites over the next three years and replace them with equipment to support the next generation of mobile technology. Realizing how disruptive the transition might be for Vodafone and its customers, the team proposed investigating a less complicated (and less expensive) way to achieve the network upgrade, using software rather than hardware; the steering committee agreed to invest substantial resources.

    The project involved significant risks for both companies. Although there was the possibility that Huawei could neutralize the technological threat that loomed over 2G network owners, doing so would require significant investment at a time when its role in the European network infrastructure was extremely limited. For Vodafone, there was a question of whether casting its lot with Huawei, a relative upstart, was a prudent move. As the industry wrestled over the future industry standard, no doubt there were safer moves. At this juncture, the two companies recognized that they needed to move beyond the traditional supplier-buyer model to embrace joint innovation.

    This also involved sorting out the intellectual property rights issues that may ensue from the codevelopment of a distributed base station. As part of their agreement to work together, Huawei and Vodafone agreed to protect each other’s intellectual property in the domain they were working in. After two years of development and several meetings, Huawei delivered the first updated network in 2008. The solution increased wireless coverage by 25%, reduced the number of required base-station sites by 40%, and reduced the total cost of ownership by one-third.

    Between 2006 to 2012, Huawei and Vodafone teamed up on six joint innovation centers. Although the solutions Huawei and Vodafone develop have been geared toward solving particular problems, they have greatly expanded Huawei’s global solution capabilities. In 2011, the two companies saw an opportunity to link the joint innovation centers together, thereby enhancing Huawei’s capability to provide more efficient global solutions to Vodafone and new customers.

    By 2016, Huawei was partnering with a list of leading European telecom operators that included Vodafone, Deutsche Telekom, BT, Orange, and Telefónica in 18 joint innovation centers; in all, it had 34 innovation centers around the world. “The joint innovation centers really changed perceptions of Huawei from being a follower to being a leader,” a senior executive at Ericsson said. Huawei’s approach was so successful that competitors such as Ericsson established joint innovation partnerships of their own to develop practical and long-term innovations.

    Stage 3: Enlist the support of governments, universities, and other industry stakeholders.

    The success of Huawei’s approach to innovation has also depended on being accepted by governments and larger industry players. Although it’s common for multinationals to try to gain the favor of governments in the countries they seek to do business in by offering to build local manufacturing facilities, hiring well-connected local representatives, or launching PR campaigns, Huawei has gone to considerable lengths to present itself as the kind of partner European governments could work with.

    During the global financial crisis and the subsequent recession, for example, the company maintained high levels of investment in R&D in Europe and became a champion for major innovation projects. To consolidate its market position in Europe, it set up a special public affairs and communications office in Brussels whose job is to frame the company’s investments in terms of how they advance the efforts of European governments and industry players to meet the global innovation challenges of the 21st century. In 2013, Huawei pledged to create 5,500 new jobs in Europe by 2019, which would increase its number of employees in the European Union by more than 50%.

    One of Huawei’s new initiatives is a R&D center in Belgium that will spearhead and coordinate research around standards for 5G telecommunications from 18 R&D sites in Europe. Another is a collaborative effort located in Munich, Germany, called Openlab, which aims to work with partner companies such as Intel and SAP to drive innovation in areas such as the internet of things, cloud computing, and big data.

    Huawei’s expansion in Europe follows a pattern that closely resembles the one the company used to build its position in China: Start at the perimeter and work toward the center. In Europe, Huawei initially targeted business opportunities in the United Kingdom and Hungary. Both governments seemed open to hedging their bets away from European Union companies and toward China and China-based companies. A big break came at the end of 2005, when Huawei was awarded a contract to provide transmission equipment to BT to upgrade its network. In selecting Huawei as a European supplier, BT gave Huawei an important boost in the European Union.

    Huawei has also benefited from its ties to Hungary. In 2009, the company chose to locate its European distribution center in Hungary, and in 2011 it invested in a logistics center there, serving Europe, North Africa, Russia, and the Middle East. In the wake of these investments, Hungary has been instrumental in promoting broader acceptance of Huawei by other EU governments.

    Huawei’s relationship with France has been more challenging. A 2012 report on cyberdefense by the French Senate recommended prohibiting the use of Chinese routers in either French or European telecommunications infrastructure.

    In response to France’s security concerns, Huawei in 2012 vowed to become more transparent; among other things, it promised to divulge its source codes to the French and European governments. In 2014, the company also took an unusual position with regard to French taxes. At a time when global companies such as Google Inc. were being criticized for not paying their fair share of taxes to the French government, Huawei France decided to forgo some of the tax benefits it might have claimed (from R&D credits and losses). Huawei also made a commitment to invest $1.9 billion in R&D facilities in France by 2018, which was expected to generate about 2,000 new technical jobs through direct hires and sourcing from the French tech ecosystem made up of local suppliers, universities, research centers, and startups.

    Reproduced from MIT Sloan Management Review

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    Digital tools can be used in many different “right” — and surprising — ways to add value to an organization.

    View enlarged Image    

     Image credit : Shyam's Imagination Library  

                                                                                                                                                               Many different fields of study — such as psychology, human-computer interaction, and ecology —
    have employed the concept of “affordances.” The term refers to the different possible actions that someone can take with an object in a particular environment. For example, someone can interact with a beach ball by batting it in the air, letting it float in water, sitting on it, or popping it. The importance of affordances is the shift in focus from the characteristics of the object to what one can do with an object in a particular situation.

    The concept of affordances can be particularly useful when applied to digital technologies in organizations. It overcomes many of the key mistakes companies make when trying to update their organizations to compete in an increasingly digital environment.

    Having the Technology Is Not Enough

    Perhaps the most fundamental implication introduced by the concept of affordances is the shift from the characteristics of the technology itself to what your company can actually do with it. Digital technologies only enable possible actions for people and organizations to engage in; they do not make those actions happen on their own. Simply owning or implementing digital technologies is not enough to derive business value from it.

    This insight may sound obvious, but it is stunning how often managers forget this simple fact in practice. They either believe that the mere adoption of the latest technology will improve their business prospects, or they focus all of their efforts on implementation without applying the time or resources to make the types of organizational changes needed to benefit from the possibilities the technologies offer.

    For example, one company adopted Twitter in order to be more responsive to customers, but it kept existing processes in place — processes that required multiple approvals before publicly responding on behalf of the company. This negated the benefit of Twitter because it limited the way the technology could be used to respond quickly to customers. This example may be egregious, but it is common for companies to adopt digital technologies without considering how work needs to change to take advantage of the benefits they enable.

    There Are Many Different ‘Right’ Ways to Use Digital Technologies

    Just as a beach ball can be used in a number of different ways, so can digital technologies enable a number of different possible actions within organizations. One of Twitter’s greatest strengths (and a reason many people and companies find it confusing) is the multiple possible actions it can enable. Some companies — many of the major media outlets, for example — use Twitter as a means of broadening the reach of their content. Others, such as Delta, JetBlue, and KLM, use Twitter as an effective customer service tool, enabling them to support customers in a very fluid service environment. Still others use Twitter as a business intelligence tool. Companies such as Kaiser Permanente used data generated by companies on Twitter to identify areas of improvement in business operations, and T-Mobile used it to identify competitors’ weaknesses to inform their business strategy. The concept of affordances brings the question of how a particular technology will be used within an organization to the forefront.

    The Most Valuable Applications Aren’t Always Known in Advance

    The affordance literature also introduces the concept of “hidden” affordances, which describes possible actions enabled that are not necessarily known in advance, which is also true of digital technologies in organizations. For example, one company adopted an expertise identification tool to help determine who in the organization needed knowledge. The tool analyzed digital content generated by employees and automatically generated knowledge profiles for them. Although the intention of the technology was to make others in the organization aware of what knowledge employees possessed, the greater impact was in helping employees understand what knowledge they possessed that was most valuable to others. This often differed considerably from their formal roles or how the employees thought they were most valuable. In another organization, the same technology had a very different unanticipated impact, helping improve the performance of women, lower-rank, and newer employees. The technology democratized access to knowledge in the company, access that had previously been controlled through the social networks of senior male employees. Recognition of hidden affordances helps keep managers aware of unexpected or unanticipated benefits of digital technologies that may not have been considered in advance.

    A Digital Organization-Affordance Cycle

    The final benefit of an affordance view of digital technologies in organizations is the recognition of a mutually dependent relationship between the organization and its digital technologies. Digital technologies can change the organizational environment of which they are a part, creating the

    possibility of a new set of affordances. Organizations can also implement or emphasize new features in the digital technologies, as the most valuable affordances they enable become more apparent. An affordance perspective suggests that digital transformation, rather than a linear progression, is a recursive process in which technologies and the organizational environment mutually influence one another over time. Digital technology creates new opportunities to work differently, and working differently creates new opportunities to infuse technology into the work process.

    Shifting toward an affordance view requires managers to shift from thinking about digital tools themselves to a focus on what the tools help companies do differently. As managers think about whether these changes in how work happens will add value to an organization, they will be able to more easily consider what legacy technologies fulfill similar tasks, and whether these different systems will complement or compete with one another. 

    Reproduced from MIT Sloan Management Review


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    India is ranked at the sixth spot, behind China and Japan, in a list of eight great powers for the year 2017 by a leading American foreign policy magazine which is topped by the US. The list is topped by the US, whereas Chin and Japan are at tie for being on the second spot. Russia (fourth) and Germany (fifth) are the other two countries ahead of India. Iran is ranked seventh and Israel is on the eighth spot. "Like Japan, India is often overlooked in lists of the world's great powers, but it occupies a rare and enviable position on the world stage," The American Interest magazine said in its latest annual report of eight great powers.

    India is the world's largest democracy, home to the second-largest English-speaking population in the world and boasting a diversified and rapidly growing economy, it said. On the geopolitical front, India has many suitors: China, Japan and the United States are all seeking to incorporate India into their preferred Asian security architecture, while the EU and Russia court New Delhi for lucrative trade and defence agreements, it noted. "Under the leadership of Prime Minister Narendra Modi, India has deftly steered its way among these competing powers while seeking to unleash its potential with modernising economic reforms," it said.

    According to the magazine, despite internal problems in the aftermath of demonetisation, and the Pakistan scare, India found its footing elsewhere in 2016. "Long hesitant to pick sides, New Delhi took several clear steps this year to deter a rising and aggressive China, announcing that it would fast-track its defence infrastructure projects in the Indian Ocean, amid fears that China was trying to encircle India with a 'string of pearls'," it said.

    "Likewise, Modi explored new naval cooperation with both the US and Japan, and signed a host of defence deals with Russia, France and Israel to modernise the Indian military," it observed. "From the Middle East and East Africa to Southeast Asia, India is making its presence felt in both economics and security policy in ways that traditional great powers like Britain and France only wish they could match," The American interest said.

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    Digital innovation is giving rise to new business models. Uber and Airbnb are household names today, when not so long ago we were all learning about the sharing economy. The regulations don’t always evolve as quickly as technological change — at least that’s the perception. So what should policy makers and regulators do? Wharton legal studies and business ethics professor Kevin Werbach, who wrote a policy brief about the topic for the Penn Wharton Public Policy Initiative, recently shared his insights into that question with Knowledge@Wharton.
    An edited transcript of the conversation appears below.  

    Knowledge@Wharton: In your article, you mentioned something called the Internet of the World. Can you tell us what that is?

    Kevin Werbach: There’s something big going on, and it’s a bigger trend than most people realize. There are three trends, and each in and of themselves is significant. One is what we often call the sharing economy — it’s really more the on-demand economy. It’s not just about sharing resources, but services like you mentioned, Uber and Airbnb, which give on-demand access to resources. The second piece is the Internet of Things — all kinds of devices, billions of devices getting networked. And the third is big data and analytics — the ability to understand and manipulate trends coming out of all those devices.

    What those three things together mean is that all of the world, potentially, is networked. It’s not just that you go somewhere to a computer or you go to your phone to get access to information. It’s that potentially everything is a generator of data, and all that data can be integrated and analyzed and processed and manipulated. What that means is the kinds of trends and the kinds of developments that we saw online are now happening offline. They’re happening to things and physical objects in the world, as well.

    Knowledge@Wharton: You point out that the scale of on-demand services is potentially much greater than the legacy industries they challenge. How so?

    Werbach: There’s this kind of cheap talk about new technologies disrupting old technologies. And actually, the theory of disruptive innovation — which goes back to Clayton Christensen and Harvard Business School — is a serious academic theory, but far too often people in business and entrepreneurship and in the media use the word “disruption” as just kind of a synonym for new technology. And the reality is, it’s not that you have one market, and suddenly a bunch of new companies come in a replace that market.
    “I’m arguing for an openness and a recognition that ‘regulation’ isn’t a dirty word.”
    Often what happens — and this is what we’re seeing with things like the on-demand economy — is that the new markets are different. So it’s not that Uber takes the taxi market and every taxi gets replaced by an Uber driver. In fact, Uber has put out some numbers for the past several years that show that the scale of the market they’re tapping into is actually much bigger.

    What that means is, [the existence of on-demand services firms] is not just a competitive threat — and certainly it is a competitive threat to the incumbent industries — but it’s creating something new. It’s unlocking latent demand that the previous approaches didn’t reach.

    Knowledge@Wharton: You also pointed out that throughout the different technological waves since the 1990s — we went through ecommerce, social media, now mobile– regulations have always been seen as an enemy of innovation. But you say that this digital dichotomy is actually misunderstood. Can you explain that?

    Werbach: There’s two pieces to it. One is the term that you referenced that I use in the paper — the digital dichotomy. That is a misunderstanding that the online world is inherently different from the offline world. The reason that’s not true is what I said at the beginning. Increasingly, there is no difference, even if you’re using a physical thing.

    So take the Uber example — and it’s such a perfect example. [It’s] a physical person driving a physical car, but from your standpoint running the app and pushing a button and saying, “Make a car appear” — it’s as though that’s something that’s in cyberspace. It’s as though it’s something digital. It’s an extension of the software infrastructure of Uber, even though it’s a physical thing, a physical person driving a physical car.

    We tend to assume that there is one set of rules for the real world, and there’s one set of rules for the digital world, and that’s a mistake because, increasingly, there is just the world. Software technology, networks, all these trends, and what I call the Internet of the World are affecting everything. So that’s the first piece: the assumption that we can just ignore the rules of the physical world because we need totally new rules for the digital world.

    The larger issue, though, is this question of innovation and regulation. And again, there’s this common assumption that innovation needs to thrive with no regulation, and any time government gets involved, that’s a check and a drain and a block on innovation — and that’s not really the case.
    What I talk about in the article you referenced and the larger law review article it’s based on, is that if you go and look at the history of how the internet developed, how electronic commerce developed in the 1990s, a surprising amount of the time it was government action actually facilitating innovation, and the emerging startups actually pushing for that government intervention to help create a more innovative marketplace.

    Knowledge@Wharton: That’s an interesting point, and in your article you also pointed to one challenge for regulators, and that is a lot of these new startups don’t really fit neatly into industry categories. The example you use is Uber versus Skype. Can you go through that example?
    Werbach: I should be clear. It’s not that regulators always get it right. They make mistakes, and they have lots of flaws and lots of reasons why they act in a certain way, and we should definitely criticize bad regulations. But we just shouldn’t assume necessarily that they are bad, and necessarily what startups do is good.
    The Skype and Uber comparison is basically that both of them were companies that when they started were illegal in most jurisdictions. Skype — the very popular internet communications service, originally voice calling, now also video and messaging and so forth, [and] now owned by Microsoft — was illegal in most of the world when it launched, because there were rules saying you could not do a communications service, a telephone service, outside of the existing regulatory infrastructure.
    In the U.S., because of what we did — I was at the Federal Communications Commission in the 1990s, when we had to think about voice over IP (Internet Protocol) — we very deliberately left open the door. Even though things like Skype were outside of the regulatory structure, we made a conscious decision to allow them to develop. And that’s an example of regulators consciously deciding not to impose a whole set of rules early on — when these were nascent technologies — allowing them to grow.
    Uber is similar. Uber is illegal in most of the cities where it operates. And the story of Skype, I think, is a hopeful story. What happened with Skype is that first of all, you had regulators like the FCC in the U.S. that understood these new internet calling technologies were … a way to lower prices and create better service, and [provide] new services and innovation, and so that we shouldn’t rush to impose all the traditional rules on them. And as these companies grew, they were able to work with regulators to address the rules that were necessary.
    Knowledge@Wharton: You believe that government can actually be a positive force in innovative markets. Can you give us more examples of that?
    Werbach: We saw a lot of examples with the growth of the internet and electronic commerce, starting 20 years ago. One of them was the antitrust case against Microsoft. Microsoft was the dominant company in the personal computer [market] and in the operating system market, and lots of start-up companies — like Netscape — realized they wanted to innovate, they wanted to build the internet economy as we know it today. You couldn’t have Microsoft standing there, using its power at the time.
    It’s hard to realize today, with what’s happened — the growth of Apple and the growth of smartphones and so forth — just how much power Microsoft had as a bottleneck. Microsoft controlled access to the PC, and the PC was the only game in town. Had it not been for that action by the government — filing that antitrust case — Microsoft may have been able to warp or slow down the growth of the open internet economy. And it turned out most of the startups were on the side of the government in the case.
    “What stops the algorithm from colluding with someone else’s algorithm behind the scenes to fix prices?”
    [More recent cases include] the fight over network neutrality rules, where lots of startup companies went to the Federal Communications Commission and said, “We don’t want broadband providers — the access providers, the internet service providers or ISPs as they’re called — to stop us from getting into the market, or to basically tax us, and say, ‘you can only get to customers if you pay us this special fee.’” They were actually urging government to act in order to create a more open market.
    Knowledge@Wharton: You also say that on-demand services would bring what you call algorithmic competition policy questions to the fore. Why is this important?
    Werbach: Competition policy — I gave the example of Microsoft — is tremendously important to the digital economy. The Microsoft case was an example where there was a new kind of business model. Microsoft was one of the first to build this platform, network-based business model where Windows benefitted from all the applications on top of Windows, but Windows would always want to ensure that none of those applications would then compete with it. And there were tremendous benefits of that model. You know, Microsoft did great things for innovation, but the Microsoft case put a spotlight on some of the dangers and the downsides.
    What we’re seeing now with these next-generation platforms, these on-demand platforms, is a new twist on that model. Companies like Uber and Airbnb are built on algorithms. They’re built on software that understands supply and demand and matches people on both sides of the network. And again, that’s a tremendous boon for competition and innovation. I’m not saying it’s bad, by any means, but it does put the platform owner in a position of unimaginable control.
    How do you know that what you are paying for that Uber ride is the efficient price? Uber says, “Well, by definition, it’s what the algorithm gives you.” Well, but who controls the algorithm? And what stops the algorithm from colluding with someone else’s algorithm behind the scenes to fix prices?
    Again, we have antitrust doctrines about things like price-fixing, but those are based on people in a smoke-filled room saying, “Okay, you’re going to charge this, and I’m going to charge that.” … Now it’s all happening silently, through software. And so I think this one of the great competition policy challenges of our age is how to prevent those kinds of mechanisms from raising costs and raising prices and hurting consumers, while still allowing flexibility for companies to innovate and do things that, most of the time, actually wind up helping consumers.
    Knowledge@Wharton: That brings us to the point you made in your article about algorithmic cartels. How could those come about?
    Werbach: The algorithms could talk to other algorithms — and we see this already. You look at pricing on Amazon has this platform that allows anyone else to [look in] and set their prices. A lot of companies that are sophisticated set their prices algorithmically. They might say, “Amazon is charging this price. Automatically charge 2% less than Amazon’s price.” So when [the product] comes up, they’re the cheapest price.
    “You get this increasingly complex war between the algorithms, because they’re all basing their prices on each other.”
    What happens is you get this increasingly complex war between the algorithms, because they’re all basing their prices on each other, and so forth. What can potentially happen is companies decide, “Well, no, let’s both agree. We’ll set a price higher, as opposed to competing in a race to the bottom, and we’ll both be better off.” But who’s worse off is consumers. So that’s a concern that we’re starting to see on platforms like Amazon, and it’s more of a concern on these digital on-demand platforms, where again, everything is in software. And we have lots of different actors coming together, and we don’t even know what the mechanism is to get access to the data to see if that’s what’s happening.
    Knowledge@Wharton: How do you regulate that?
    Werbach: First, you start to have a conversation where the regulators say, “Here’s what we’re trying to achieve.” And the companies say, “Here’s what we’re doing.” And you figure out what’s possible. Ultimately, as I said, there needs to be access to the data. And this is a great opportunity, because these new platforms generate tremendous amounts of data. They use the data internally to be more efficient and to provide better service, but if they could provide more transparency of that data, that would give regulators the opportunity to identify what the market performance is. This can be done in a secure way, in a way that doesn’t harm them with competitors and so forth.
    It’s actually making the regulation itself more algorithmic, making the regulation itself more data-driven, which is a healthy and a good thing. And so I think this is potentially the new model we’re going to come to, but it takes the company’s willingness to work together and not to make [sweeping] statements like, “Oh, we don’t need any regulation.”
    Knowledge@Wharton: You mention alternatives to direct regulation, which are self-regulation and what you call co-regulation and delegated regulation. Can you explain the differences among all those?
    Werbach: These are models that actually are used much more widely elsewhere in the world, especially in Europe for things like internet content. There’s a whole variety of different models, but basically they start with the notion that companies individually and industry collectives and industry groups potentially know the most about their market, and if they’re well-meaning, they can come up with mechanisms that achieve the goals of regulators, without government having to be intrusive, or without government having to be inefficient, because regulatory agencies don’t have the data, and they’re not set up to operate in that way.
    The problem is, you need some accountability. Just saying, “Let companies regulate themselves” is meaningless, because there are always incentives for companies to cheat or to game the system or basically help themselves at the expense of the public.
    But there are a variety of mechanisms where, for example, government sets goals and then gives industry opportunities to meet them, report on how they’re doing, and provide transparency of the data. There are mechanisms that basically say, “All right, in the first instance, you have this opportunity to act, but if you don’t act in a way that we find appropriate, then we’re going to intervene.”
    “Nascent, small innovators should have lots of running room, because even a good rule will kill them off.”
    Again, there’s different variations on these mechanisms, but [overall] it’s an approach that says instead of everything starting with the regulator — the regulator says yes or no before anything happens in the marketplace — companies can come into the marketplace, especially new companies.
    Nascent, small innovators should have lots of running room, because even a good rule will kill them off when they’re too small.… I’m arguing for an openness and a recognition that ‘regulation’ isn’t a dirty word.
    Knowledge@Wharton: Any final thoughts for policy makers and regulators?
    Werbach: Regulators have to take action here, too. It’s not that they need to just stay where they are and expect the companies to come to them. Often, there’s lots of legacy in regulation, and some of it is regulators’ fault, and some of it is the fault of, for example, the legislatures that set up the rules. A lot of what we are seeing in these markets is the need for legislative change, for governments to change the structure of the rules, because the rules use terms that no longer make sense, or they have categories that no longer make sense.
    There needs to be a lot of dialogue between industry and regulators and legislators, to say, “All right. Where are these glitches? Let’s fix them.” Regulators need to be part of that and not to just assume that the status quo is the right approach. Regulators also need to be open. They need to go to these companies and say to them, “We have shared goals here. We’re not here to put you out of business, but we care about consumers, and we trust that you do, too. So let’s come up with a solution.”
    It really has to go both ways, and ultimately, this is about trust. There needs to be a mutual process of generating trust between these industries and the regulators, and in a lot of cases, that’s lacking. But I’m hopeful, and I think the examples that we saw with the growth of the internet really are a story about good work on both sides that facilitated this extraordinary explosion of innovation and wealth creation that we saw.


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