The disruptive impact of information ½ life.

The disruptive impact of information ½ life.

 

 

Following on from a previous post about the value of information, it seems relevant to ask how long any value created lasts.

We are all familiar with the notion of the ‘1/2 life’. The time it takes for radioactivity of an element to decay by 1/2. Uranium 238 has a 1/2 life of several billion years.

What about the 1/2 life of information?

The 1/2 life of a daily newspaper is arguably 1 day, today’s news is ‘tomorrows fish wrapper’. For 99.9% of blog posts, and most other so called ‘content’, it is about 2 seconds. This seems odd in what is supposedly the ‘Information age’, why is the life so short in most cases, and what make the difference for the 0.1%?

The answer seems to be: It depends on the utility of the information, which is partly a function of the ‘friction’ or resistance which is applied to its transmission.

Businesses, and most institutions are structured to be top down in functional silos, a system that evolved before digitisation of information arrived at our inboxes. This enabled the scaling of effort and the most efficient allocation of resources. A 20th century solution to the challenge of information transfer and leverage.

In the 21st century, with digitisation, the structures of the 20th century are redundant. They are simply too slow to be competitive in an environment where the action happens at digital speed on the ‘front lines’ of customer interaction. It takes too long for the siloed decision making processes to work. Customers will now move quickly to someone who is able to satisfy their need on the spot.

We have to turn our power structures upside down, and give the front lines the authority to make on the spot decisions within a much broader remit than was previously the case.

This creates huge complications for organisations, as the status quo is upset. The power people at the top have worked to achieve all their lives is diluted, and for those at the bottom, suddenly they are being tasked to take decisions that last week were being referred up the chain.

There is a driver of activity, always present, but to date well in the background for most. This is the ‘operating rhythm’ of the market in which they compete. When their decision cycles are slower than the operating rhythm of the market, the market will go elsewhere, or at the very least, opportunities will be lost.

Getting ‘inside’ the operating rhythm of your market, being able to respond quicker than the market reacts, is an emerging key to strategic success.

The 1/2 life of information is now in the hands of others, those who really count, by being customers.

That is why the OODA loop, conceived by US fighter pilot John ’40 second’ Boyd in the 60’s is so relevant to 21st century competition.

 

 

How should accountants treat investments in the future?

How should accountants treat investments in the future?

 

 

We make many types of investments in the future, brand building, capability development, process optimisation, building the foundations to scale, and significantly, R&D.

Each is aimed at generating future cash flow.

The management and strategic challenge is how we justify investments today in something that may or may not occur tomorrow.

In relation to R&D, we have a specific dilemma, in both private and public sectors.

Capitalising R&D is a problem, as it makes us very sensitive to the sunk cost syndrome. We have real trouble walking away from it when the outcomes are not as expected, and the experiment is clearly a failure.

R&D is experimental, most things you try will not work. When you have capitalised them, and they do not work, you have a balance sheet write-off to explain. In this situation, the propensity of humans to resist an admission of being seen as having been wrong is heightened.

Much better to expense it, then there is no sunk cost to write off, fewer egos and personal agendas to be managed, although the sunk cost syndrome is alive, powerful, and often hidden in jargon.

On the flip side, research is long term, and needs the certainty of long-term funding. It should be immune to the vagaries of the short-term profitability fix, that typically stalks expenses.

Take the marketing investment in brand building as the prime example.

Building a brand takes a long time, is incremental, and sensitive to short term fluctuations and changes in direction that can be influenced by the profitability this quarter, the demand for a discount from a significant customer, or a change in personnel. Being an expense makes investments in marketing the target for a short-term fix for a short-term problem, at the expense of the long term.

There is no right answer to the question, it always ‘depends’ on something.

For example, private enterprise typically has a much shorter time frame than government, and therefore, does less of the long-term exploratory science. By preference they take the output of publicly funded labs and apply it to problems they see in the marketplace.

Somewhat cynically, we see the time frame of government as being the election cycle. However, almost all the key discoveries in the last 75 years that I can think of have evolved in one way or another, from publicly funded science. The irony is that such funding is subject to annual budget pressure. In this country that has resulted in public science being gutted over the last few decades, which erodes the foundation of innovation.

I did not answer my own question, and it remains a key one to be considered. However, despite the recent announcements by the Albanese government, I suspect we are circling the drain.

 

 Header photo: Monticello dam drain glory hole. USA

 

 

8 things the leader of an SME can learn from a dead genius.

8 things the leader of an SME can learn from a dead genius.

 

One of Charlie Mungers better known quips was: ‘All I want is to know where I am going to die, so I’ll never go there’. He avoided that place assiduously, but last week, after 99 years, Charlie went there.

Perhaps by mistake, perhaps because even he recognised it was time, a very long innings behind him. However, he leaves a mountain of wisdom accumulated over that extended period, most of it as ‘wingman’ to Warren Buffett. While it was a partnership with Buffett as Chairman and Charlie as Vice chairman, Buffett credited Charlie as being the brains behind the strategic insights and wisdom that made Berkshire Hathaway such a profit powerhouse.

So, what can a local SME, struggling for visibility, relevance, and cash in an increasingly homogeneous and competitive market where size really does matter, learn from him?

Simplicity. We humans tend to complicate things. It is not usually deliberate, rather it is a function of our limited perspectives, reliance on others, uncertainty, risk management, and a host of other drivers we all feel. Charlie advocated simplicity. Break a problem or situation down into its component parts, and deal with them one at a time. Others might call it managing by first principles. Einstein noted that things should be ‘made as simple as possible, no simpler.’

Over the weekend I was reading through the updated Australian building codes trying to understand the complexities of the recent changes.  One of my clients must ensure the products he sells into the building trade not only comply, but he needs to explain to his builder customers the application of the codes to his products. The codes are so complex, differing across state jurisdictions, that builders who are bound by them often knowingly ignore them, relying on their suppliers. The codes are simply too complex for a small builder to ensure currency is maintained, amongst the other tasks necessary to keep their businesses nose above water.

Simplifying decision making processes by ensuring that the boundaries of authority, responsibility and accountability are clearly delineated through the business, is a goal to which we should all aspire.

Focus. Competing priorities means nothing gets optimised, and often many tasks do not get completed. Focussing attention on the things that really matter and giving them undivided attention for as long as the problem or opportunity warrants is a key lesson from Charlie.

Focussing also frees up our most valuable resource: time. By deliberately ignoring distractions, and leaving the lesser issues to others, or ignoring them completely, frees time to concentrate on the most important things, those that in the long term will deliver the greatest return.

No SME client I have ever worked with has been able to clear their desk sufficiently to devote the time and energy they should to the long term strategic foundations and health of their business. They simply wear too many hats, and often have difficulty delegating, assuming there is someone to whom they can delegate. The smaller the business, the harder it is, as those to whom delegation can be made, and the cash to pay for it, are in short supply.

The discipline required, both personal and in the business culture nurtured is enormously challenging.

Think and act for the long term. When you think and act short term you inevitably find yourself whipping around like the end of a bullwhip. Logistics managers understand the ‘Bullwhip effect’ better than most, as they see it every day in their supply chains. However, it is just as potent in the management of every other facet of a business. Seeing and responding primarily to the short-term fluctuations usually just compromises your ability to adjust strategically to the long term drivers of success.

Circle of competence. Many consultants have made a business out of advising clients to ‘stick to their knitting.’ It has been so prevalent it has become a management cliché. A circle of competence as Charlie saw it is a wider concept. While you are sticking to what you know, you are also seeing opportunities to leverage what you know in other domains.

This idea also applies to those stakeholders with whom you engage. By ensuring there is overlap in the circle of competence each brings to the table, you widen your own. This is at its core a strategy for successful collaboration.

Incentives. Understanding the power and application of incentives to shape behaviour enables individuals and groups to optimise the outcomes for which they are responsible.

For years we have seen research report after research report articulating the reality that after the basic needs of life, food, shelter, and companionship are satisfied, individuals start to respond to a range of other incentives. Some will sacrifice money for free time, others seek public acknowledgement of effort, security of what they have becomes more important than risking it for some possible future benefit. The list of drivers of individual behaviour goes on, and it is never just about money.

A friend who runs a successful bookkeeping business has recently gone to a four day working week. Several of her staff were against it, and subsequently left. The significant majority were happy to do their hours in four days, with Friday off. Productivity has jumped, as there is several hours each day when the phones are not ringing, causing distractions, so tasks are completed quicker, and with less processing errors. Contrary to the expectations of some, clients have also embraced the change, and remaining staff love having Fridays free to get on with their lives.

Understand probabilities. Success requires that we have a picture of what we believe the future will dish up, and we are able to respond today to put ourselves in a position to leverage those future events in our favour better than competitors. Given the only thing we know for sure about the future is that we will not be completely right about it, we need to understand probabilities. The better you can articulate the odds of some future state, the better able you will be to respond positively to it. Charlie was a great believer in what he called ‘Mental Models’. Being a voracious reader, he was able to see situations through a range of perspectives, and equate them to previous known outcomes, thereby giving him the opportunity to shorten the odds of an outcome he felt sufficiently confident to predict, and invest in to leverage.

Understanding your odds offers the opportunity to give yourself an appropriate margin for error for the investment you are contemplating. This applies equally to how you will spend your time today, to a major strategic choice.

Continuous learning.  Charlie never stopped learning, until last week. Much of the time freed up by his focus and personal discipline was spent reading and interacting with those he considered smarter than him in some domain, and satisfying his voracious curiosity. Every situation he saw was considered as a learning opportunity, particularly those that did not go as predicted. They enabled him to add to his wardrobe of mental models with another model through which he could see a situation to understand better the odds, and shape them in his favour.

Every owner of an SME I have ever dealt with understands the implications of the phrase: ‘work on your business not in it.’ Few achieve what they would see as the optimum mix, and it is always the ‘on their business’ that suffers. They are depriving themselves of the opportunity to learn by looking around, compiling mental models, seeing opportunities in other domains, and leading their employees and stakeholders.

Rationality over emotion. Successfully doing all of the above allowed Charlie to make rational decisions, avoiding the attraction of the emotions. He has been the living embodiment of what Daniel Kahneman would call ‘System 2’ thinking. He takes his time, removes the pull of emotion, seeks out the facts, and makes rational choices for the long term.

None of the foregoing practises are stand alone triggers for success. Each influences the others in a range of ways, offering compounding benefits. In taking the long term view of his investment choices, Charlie allowed that most powerful force in the universe, (according to Einstein), compounding,  to deliver for him. An investment of $100 and subsequent reinvestment of dividends in Berkshire Hathaway in 1978 when Charlie teamed up with Warren Buffet would be worth almost $400,000 today. This is an almost 20% annual compounding of value of the investment. It is 25 times the value today had that same $100 been invested in a S&P index fund. This is the effect of patience, long term thinking, and powerful mental models that increase the odds of success relative to other investment choices. Every owner and manager of an SME I have ever seen could benefit from the wit and wisdom of Charlie Munger.

Vale Charlie. If I was having one of those imaginary dinner parties where the most interesting people from history were around the table, you would be there.

 

Header photo: Charlie 5 days before his passing, holding forth in an interview with CNBC

 

 

Why bother to write?

Why bother to write?

 

Last week I was copied on an email one of my clients sent to a now former supplier.

It was polite, respectful, thanking them for their service, and wishing them well. What struck me immediately was that it was not in the ‘voice’ of my client. A moment later, I realised it had been generated by AI. There is nothing wrong with that, AI is a tool, like any tool, that enables leverage to be applied to your time and effort. There are many situations where that leverage is enormously valuable. Not using it to free up cognitive capacity to do something more valuable with your time would be dumb, even irresponsible.

However, writing has a crucial and increasingly unacknowledged role. The generation of wisdom and understanding.

I write a lot. There are almost 2,500 published blog posts on StrategyAudit, a bank of thoughts, ideas, opinions, responses, and a few rants about things I believe in. It is the product of 14 years of reflection, thinking, and understanding.

Writing for me is way more than just putting words on paper, or out into the ether. It is the way I explore, clarify, focus, and reason. It is an essential tool in my thought processes that build understanding. It is also the way those ideas are shared, inviting response, in whatever form it comes, building greater understanding in the process.

Over a commercial life of almost 50 years, I have accumulated a wealth of knowledge and experience, the latter often gained at the expense of some pain. Writing about all this has made it much more real, visceral, and readily available to those few I work with.

The machinations at OpenAI, the sudden firing of CEO Sam Altman, and conflagration that is still unfolding will be a tiny ripple in the exponential process of AI development. It will do little more than create some headlines, and the opportunity for commentators who have no inside knowledge at all to express an unfounded opinion. It seems the fight is, as usual, about money. OpenAI was founded as a nonprofit with a mission to ensure responsible deployment of the emerging AI technology. Potentially a fragile mission in todays world.

I worry that the world we are leaving our grandchildren (my kids are all making their own way now) is one where superficially attractive output camouflages a lack of real understanding of the drivers of those outcomes.  To overcome this, we should encourage them to read, and write, a lot.  Put down the devices and read books, real ones, with highlighter and pen in hand to emphasise the points of new understanding, and those that need further thought and investigation.

You cannot achieve that by skating over the surface, outsourcing your thinking. Using tools that cannot think is no substitute to doing the work yourself.

 

 

How fast can the development beat of AI become?

How fast can the development beat of AI become?

November 30, 2022, will be remembered as the day AI was unleashed upon a largely unsuspecting world. Dall-E had been around for some months, but it was OpenAI’s launch of ChatGPT that opened the floodgates.

Yesterday, November 6, 2023, OpenAI announced they are launching custom versions of ChatGPT that users will be able to customise for specific purposes.

No coding required, the code-monkeys in the background will be doing that for you.

As is now a common strategy, there will be a ‘GPT Store’ where community developed bots will be made available for sale.

This press release from OpenAI gives the story and provides food for thought.

For those few in businesses who have not spent any time figuring out how to use at least a few of the deluge of AI applications and platforms that have sprung out at us in the last 12 months, better get on with it. Your time will be limited.

 Header: was created by Dall-E in about 30 seconds, including writing the instruction.

Are FMCG brands facing an extinction event?

Are FMCG brands facing an extinction event?

 

 

When I was a boy in this business, back in the seventies, having a brand was table stakes to be in the game. At that time, there were a number of supermarket chains, and every one was stocked with a suppliers proprietary branded product.

There were many types and scale of brands. From the small producers hoping for a modest segment in the market that would provide a living and employment in their modest factories, to the multi-national, mass market giants. There were no ‘House brands’, until Franklins as an experiment ranged ‘No Frills’ margarine, packed by my then employer Vegetable Oils Ltd, which later became Meadow Lea foods.

Over time, the number of supermarkets reduced to the two gorillas and Aldi that we have today, and the number of brands reduced from the many hundreds down to the few MNC brands, with a very few exceptions, which are slowly being squeezed of life today.

If the trends of those 40 years continue, a brand extinction event is getting closer every day.

The latest victim is Sara Lee.

Originally the brand came from the US, and at its height had diversified into a wide range of products from the initial frozen cakes to clothing, and real estate. The Australian business has been through several owners, the most recent being a Dutch company nobody outside the industry would have heard of.

Manufacturers have been their own worst enemies.

They have failed to recognise the long-term impact on their profitability of the increasing power of Woolies and Coles, with the recent addition of Aldi. Retailers do not care about proprietary brands; their goal is their own profitability. If they cannot have your product on shelf, they are just as happy to have an alternative.

Increasingly over the past 30 years that alternative has been a house brand.

When retailers own the shelf space from which consumers pick products, and also ‘own’ the sales margins from half the products for sale, guess who wins. Retailers have used their muscle to squeeze out proprietary brands, taking the proprietary margin for themselves. The stupidity is that manufacturers have aided and abetted this quest to destroy them, by supplying the products and stopping the long-term brand building that made them successful. The funds have been redirected by manufacturers from advertising and brand building back into price promotion. Selling with price being the only differentiator is a sure way to destroy a brand.

To explain the resilience of a few brands, and some that resisted the retailer pressure for years before succumbing, you need look no further than effective, long term brand building advertising. The Vegemite jingle is in the brains of most Australians over 40, and Vegemite persists. Aeroplane jelly is also there, and I would guess the brand could be rejuvenated by a return. Similarly, Meadow Lea is a shadow of its former self, but 30 years after the great ‘you ought to be congratulated’ advertising finished, the positioning of Meadow Lea remains viable, and could be revived with investment.

To explain the failure of FMCG management to continue to invest in their proprietary brands over the years, allowing house brands to take over, you need look no further than the lack of understanding of the contrary dynamics at work.

Advertising is a long term investment, over numbers of years. Advertising is treated as an expense, one that is accounted for on an annual basis in the accounts of businesses. These two contrary forces, when allied to executive KPI’s dominated by accounting thinking, and the increasing power of the retailers to demand discounts as a necessity for distribution has drained the capital necessary for brand investment. The retailers are happy, they have the margin. The short term executive profitability goals of a few executives may be reached, so they are happy individuals. However, the brands have been destroyed, and the long term viability of their manufacturing operations been compromised, in most cases, terminally.

That in a nutshell, leaving aside questions of the operational efficiency of the Sara Lee business, is why it is now on the discount block itself.