It takes a movement

In my previous posts I have thanked Toronto Public Library for introducing me to books through their Discover shelf and then sending me down a rabbit hole of more books that were referred in those books. This post is a nod of thanks to my local Milton Public Library where on the Discover shelf I found “Chasing New Horizons: Inside the First Mission to Pluto” by Alan Stern and David Grinspoon.

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The book is about a group of scientists and engineers at NASA who spent “decades of their lives, dreaming, scheming, planning, building and flying the one and only spacecraft to Pluto“.  It can be classified  as a popular science book yet the book contains many a lessons for people working in corporate world. It may never make the “best business books” long list much less a short list as it is not about running a profit making enterprising led by a mercurial CEO. However, the book is chock full of case studies in career management.

This post will be the first of a new series of posts that I intend to write on lessons (mainly as applicable to corporate world) that I derive from books. Initially I intended to write a post similar to found on the blog 25iq.com but then I realized if I waited to collect my thoughts about all the lessons I learnt from the book, it will take me forever to write one post. As such, I decided to make it a series with each post dedicated to one or two lessons. This will also make me a prolific blogger 🙂 .


Alan saw Pluto as the obvious next place to explore, and he sensed that it was a good time to see if he could drum up support for that exploration among planetary scientists.

He wasn’t quite sure how to do it, but Alan thought that a good first step would be to gather Pluto scientists together in a highly visible scientific forum. At the time, there were only about one thousand active planetary scientists, and most attended the annual spring and winter meetings of the American Geophysical Union (AGU), where scientists congregate for a week to attend “sessions” of talks organized around different topics. Alan and a few colleagues decided that they would organize a technical session about new discoveries and insights into Pluto, and would propose this to the committee arranging the upcoming spring AGU meeting, in Baltimore in May of 1989.

Then they put the word out to the community of scientists doing research on Pluto to “vote with their feet” by submitting research talks and attending the session to show interest in a possible mission to explore Pluto.

It is all good and well to come up with a new idea but as in new ideas in national politics, you cannot do it all alone in a large bureaucratic corporate organization. You have to drum up support not only from your colleagues but also have to get other stake holders excited about the new initiative. You need to start a movement by getting action oriented individuals across the organizations to buy in to your idea. Once you have gathered sufficient people who have bought in the idea, use every platform available within and outside the organization to take it to stake holders and decision makers.

How could they rally the planetary scientific community to show NASA that a Pluto mission had broad support? They brainstormed ideas and formed a plan to build cred and buy-in. They scribbled action items on napkins. One was to publish a special issue of the Journal of Geophysical Research showcasing the research results from that day’s AGU Pluto session. Another was to work to excite the people they knew at NASA Headquarters, to follow up on the idea of sponsoring a mission study. They would also start to recommend Pluto mission supporters for the various committees that advise NASA about planetary mission priorities. And they would organize a letter-writing campaign to cajole colleagues to contact NASA and express support for a mission.

Nowadays companies are very conscious of their public image and follow closely trends social media. One can also push the organization to accept new ideas (well they arent exactly new but if the organization isn’t implementing them they are new of the organization) such as sustainability, diveristy, social responsibility etc by raising the issue on Twitter or Facebook pages. Needless to mention, as in NASA, one should work within the rules and parameters of working in the organization and should not run afoul of corporate policies or employment contract.

As the aforementioned quotes show, the plutophiles used every forum, platform and resource available to them and bring about a change in the bureaucratic giant that is NASA. Based on the success of the campaign,  NASA gave a go ahead for carrying out a study for Pluto exploration.

Self Supply Tax and Rebate for residential rental construction

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We reach out to banks regularly to finance construction of rental building. Due to the high turnover as well as fast growth at the banks, there is a new analyst doing the grunt work financial and credit analysis of our construction proforma number. Whereas all other cost figures are pretty straight forward to understand, I have found analysts to be flummoxed by the self-supply HST number. Initially they reach out to their seniors in the banks who explain it to them as best as they could. Then the analysts reach out to me to confirm their understanding and I tell them that they have understood it wrong. So here I try to explain the concept of self-supply HST when it comes to construction of rental building.

What is Self Supply HST ?

From the Canada Revenue Agency website,

If a builder constructs or substantially renovates a residential complex that is:

  • a single-unit residential complex,
  • a residential condominium unit, or
  • a multiple-unit residential complex,

and subsequently supplies

  • the single-unit residential complex,
  • the residential condominium unit, or
  • a residential unit in the multiple-unit residential complex

by way of lease, licence or similar arrangement for use by an individual as a place of residence, the builder is deemed to have sold and repurchased (i.e., self-supplied) the residential complex at its fair market value generally

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when the unit is first rented. In the case of a multiple-unit residential complex, such as an apartment building, the builder is treated as having sold and repurchased the whole of the residential complex, i.e., the whole apartment building, at its fair market value generally when the first unit is first rented.

Why Self Supply HST ?

From the same website

The self-supply rules … apply only to “builders” and their purpose is to remove the potential tax advantage a builder would have in constructing or substantially renovating a residential complex and then offering the residential complex for rent or appropriating it for the builder’s personal use. A person who is not a builder who wanted to do the same would have to purchase the new or substantially renovated residential complex in a completed state from a builder and would have to pay GST/HST on the purchase. In the absence of the self-supply rules, the builder who constructs or substantially renovates a residential complex would generally experience a competitive advantage through tax savings on the non-taxable value that is added to the residential complex, such as the value of employed labour, financing costs and profit which would otherwise be realized through the sale price established by a builder who sells the residential complex.

Let’s take a simplified example

Say a builder constructs a residential rental complex at a cost of $100 Million and its market value is $200 Million. The builder would have paid $13 Million (at the rate of 13% comprising of 8% of Ontario provincial tax and 5% federal tax) as tax on the costs. Now if a REIT buys this from the builder, the REIT will have to pay $26 Million as tax.

From tax perspective, building a residential complex gives substantial tax advantages compared to buying a ready built residential complex. The purpose of self supply rules is to eliminate this tax advantage.

Note that the self-supply rules that apply to a supply of a residential complex are triggered only if the supply is by way of lease, licence or similar arrangement. The self-supply rules are not triggered if the supply of the residential complex is made under an agreement of purchase and sale.

In simple words, self supply tax is only triggered if the builder is renting out the newly constructed/renovated units.

When to Pay Self Supply HST ?

In the case of a newly constructed or substantially renovated multiple-unit residential complex or addition to a multiple-unit residential complex, the builder must generally self-assess GST/HST on the fair market value of the whole of the substantially completed multiple-unit residential complex or addition when possession of the first unit is given under a lease, licence or similar arrangement as a place of residence of an individual.

So in our proforma modeling, using the aforementioned example, $26 Million self supply tax is paid on the day building is completed and first unit is rented out.

What is the Fair Market Value ?

the fair market value represents the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact.

So how does one estimate the fair market value of the building yet to be constructed in the proforma. One way is to ask an appraiser to provide us with a fair market value or the building “as completed” or “as stabilized” and use that to arrive at the HST value.

Alternatively, this is how I estimate the fair market value

  • In the rental proforma, calculate the stabilized NOI which is the annual NOI for Year 2.
  • Discount it by 2% rate (for inflation, turn over and rent increases during the year) to bring the NOI value one year.
  • Divide it by prevailing cap rate of 4.5% to arrive at the Fair Market Value.
  • HST is calculated by multiplying Fair Market Value by 13%.
  • The FMV is usually divide by Net Saleable Area (NSA) or Net Rentable Area (NRA) of residential units to arrive at FMV of each unit which is required to calculate NRRP rebate (as explained in following section).

New Residential Rental Property (NRRP) Rebate

At the same time, we also apply for the rebate under NRRP rebate program. One can consult with their tax advisor or visit the CRA website GST/HST new residential rental property rebate to find out more about how the rebate is calculated. To summarize,

Builders in Ontario are charged 13% HST on their self supply, which consists of a 5% federal tax and 8% provincial tax. The NRRP rebate in Ontario essentially kicks back 75% of the Ontario portion of the HST, which maxes out at unit value of $400,000. This results in a maximum rebate at a provincial level of $24,000 ($400,000 x 0.08 x 0.75) per unit. Federal rebate pays back 36% of the Federal portion of the rebate for units with a maximum rebate of $6,300. However, if the unit is valued at more than $450,000 no rebate is available. Based on the type of units constructed it can be substantial amount up to 50% of the self supply HST amount. For example, in our above example where $26 Million cheque was written to CRA, depending on the type of units build, the rebate could be as substantial as $11 Million. Thus the net HST to the builder would have been $15 Million ($26MM self supply – $11MM NRRP rebate).

As to timing of receiving the rebate, it varies. Builders usually apply for the rebate as soon as they file the payment. I generally model that the rebate is received at the end of lease up period. In reality, it could be later or earlier.

Proforma Modeling Consideration

From construction financing as well as cash flow perspective, it is imperative that the timing difference between payment of HST and receipt of rebate is understood. I have seen many a loan documents as well as proformas wherein the builder has modeled the net HST amount. This leads to a cash flow squeeze right around the time when the building is complete, all the credit limits are fully utilized because the bank approved a $15MM amount for the net HST amount whereas the builder ended up writing a cheque to $26MM to CRA and it will be some time before the rebate cheque is received from CRA.

 

 

 

Managing Up By Reading Books

I don’t have good things to say about the self help genre. It is not that I don’t read those books. I do, I have found most of such books to be comprised of sweet syrupy advice that one can easily pick up from Business Insider or Forbes click bait articles such as 5 Things Super Successful People Do Before 8 AM. There is a whole industry of the likes of Tony Robbins, Tim Ferris, I am sure there are many more (Daniel Pink?) who churn out books and seminars of advices. The best take down of Tony Robbins I read was in Susan Cain’s amazing book Quiet: The Power of Introverts in a World That Can’t Stop Talking where she goes on to attend one of Tony’s self help seminars.

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I browsed through Tim Ferris’s best selling Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers while in a book store and realized that he is publishing unfiltered information as given by his guests (titans of the industry) on his radio show. What really put me off was his interview of some bodybuilding junkie who raved on about taking exotic supplements and chemicals and Tim published it in his book without verifying the science behind it, if any. I know of a few people first hand who paid a heavy price in terms of their health for these body building supplements and here is Tim pushing the same as Tools of Titans.

While I am on trashing mode, I recently borrowed When: The Scientific Secrets of Perfect Timing by Daniel Pink.  The author has a style similar to Malcolm Gladwell in that he has interesting bits of anecdotes and academic research summaries but the message of the book could be condensed into a three to four page article. Based on the hours I wasted going through the book without getting anything worth remembering in return, I may never again pick up another Daniel Pink book.

Despite the fact that I dislike the genre, I keep reading it. I do it in the hope that one of these days, I may come across a book that will have advice that will stick with me and probably help me improve or at least point out my weaknesses in my approach and even if I don’t improve on those, at least I am cognizant of my weaknesses.


right stuffWhenever I am reading a book which I find compelling and author refers to another book, I usually place a hold for them at the Toronto Public Library. This has enables me to read a lot of books without breaking the bank. This brings me to the two books The Right—and Wrong—Stuff: How Brilliant Careers Are Made and Unmade and The High Potential’s Advantage: Get Noticed, Impress Your Bosses, and Become a Top Leader I recently read back-to-back as the library delivered them to me together. High potential advantageI don’t recall which book led me to these two books but I found them to be deserving of the recommendation and I can truly classify them as belonging to “self improvement” genre. They had quite a few takeaways some of which I remembered. I also made a note to re-borrow the books in couple of years time to see if I can squeeze more takeaways out of them. Don’t be taken aback by their title as I believe that to be click bait to persuade you to pick up the book when browsing through a bookstore or a library and I myself have picked up many a shitty books intrigued by the front cover, blurb on the inside flap and praises on the back cover. But these two are excellent and I am contemplating purchasing these two books so that I can have ready access to them or make notes in the marginilia.

Below are the some of the key takeaways for me. Other people reading the books might home in on other points. I have a feeling that these two books will be classics and one may benefit from re-reading them at the each stage of one’s career. So without further ado, my takeaways:

Don’t Make It All About Yourself

During your usual conversations with your boss/manager, it is important to not focus on how to grow your own career (“what I need to do to get the next promotion?” etc.) but rather focus on how to grow the company. This hit close to home with me as during my 15+ years of career I don’t recall ever talking about how to grow the company. It is not that I haven’t helped my employer’s grow (I have mostly been in business development or relationship management so my career has been about helping the employer grow) but I have always approached employer growth as a means to an end for personal growth (i.e. promotion). What the books recommended that one should try to re-frame the conversations and the mindset to focus about the company’s growth.

Try To Make Your Boss’s Job Easier

Don’t ask your boss for more work or assignments for yourself but rather ask him how you can make his workload lighter or take on some of his work so that he has more time on his hands to focus on matters that he wants to focus on.

Get A Diversified Experience

This can be challenging. The books say that it behooves a well rounded executive to have a diversified experience. Most of the time it requires a lateral move into an area way out of your comfort zone. Authors did highlight that there are numerous CEOs who made it to the top despite being in the finance function throughout their life (I am in finance) however it is easier to be led astray when one’s entire perspective of the world is through the prism of Excel sheets and P&L statements.

Not Complain About Other Departments / Groups

Easier said than done. Having worked for considerable time in Corporate Banking and Investment Management business development roles, Risk department has always been a bane even if not individually but collectively. Though there is always an appreciation of the role played by Risk department but more often than not, it is always the Risk department that doesn’t understand the changing market and standing in the way of glory. Similarly, there are projects where one has to depend on other departments to provide information on timely manner but due to the other departments having different priorities, they may not be giving the project what you feel is its due importance. When the job doesn’t get done on time, the easier way would be to blame it on the other department (and rightly so). The books suggest that this is taking the easy way out and not great for personal development. One needs to learn how to get the work done from other department but more than that take personal responsibility for not getting the work done.

Always Going For Sexy Assignments

Who doesn’t want to work on “challenging”, “sexy”, “creative” and  “big bang inducing” kind of stuff.  You can wear it around as a badge and it looks great on the CV. But there is a tendency for always volunteering for the sexy stuff and looking down or being disinterested from the mundane boring stuff. Businesses manage their payroll mainly through the mundane stuff and these slog-fest, boring, going-through-the-accounts and reading-dry-legal-documents is what sets up the organization as a well oiled machine capable of taking on those big bang sexy projects.

Asking For Feedback

After every meeting, conference call or a presentation, ask your manager or colleagues for feedback on how did you perform. As per the books, initially you might get the feel good fluffy feedback but if you keep on asking, eventually people will realize that you are genuinely interested and will give you honest feedback. It also helps on how you frame the question i.e. instead of asking “How did I do?”  ask “What could I have done differently to make it better?”. The latter question gets you better insights .


As I saiImage result for HBRd earlier, I build my reading list from what the authors of the book I am reading recommend or reference in their work. The books referenced the excellent Harvard Business Review article Managing Your Boss quite a few times. It is a seven page article, it’s a classic and a recommended read. It says that one of the ways to become a better manager is to find out what are your boss’s objectives and help him realize them. Some times the way you are trying to achieve your objectives may be running counter to the boss’s objectives.

 

Competing like crazy makes you mediocre

Frameworks to make your brand stand out from the crowd

This is the third post in a series. The first was The Four Horsemen of Silicon Valley, followed by How ideas can be turned into path breaking innovation. Amazing how one podcast can lead you down the rabbit hole with so many books and ideas.

Different: Escaping the Competitive Herd is written by Youngme Moon, Professor of Marketing at Harvard Business School. The author sets the stage with a visit to the a department store’s shampoo section where one is spoilt for choice. If the variety of brands, colors, aromas, etc aren’t enough to confuse one, the shampoos are further augmented with such labels as “new”, or “new and improved” or if that is still not enough “new, improved and with added (insert a name of a plant or organic based ingredient)” etc. We are so used to this sight that we ignore all the augmentations and go for the shampoo we have been buying for years. The author points out that with shampoos, we know what we want. What if it was a new category? One would be confused to no end. Say you are in a market for a new TV. We no longer go for our parent’s trusted Sony. In a showroom, TVs are stacked from one corner of the wall to the other, each with a new or slightly different feature, all priced in similar range, with similar warranties. You could spend a lifetime comparing and deciding between them. In addition, you would read customer reviews online (there are always a few one or two star reviews that can put you off that brand forever) as well as various tests done by different tech publishers. If you are anything like me, after being totally confused now, you may finally ask the sales person “Which one do you recommend?” and come home with whichever brand he recommended provided there is a warranty behind it. This is what the author of the book was driving at. According to her, that competing brands have done so much feature augmentations that the brand name has almost become invisible. Brands exist to differentiate themselves from others yet we are at a point in quite a few of product categories that brand name doesn’t matter anymore. The book talks about how we come to this pass and how to differentiate oneself from others in such a scenario.

The challenge brands face that any feature introduced by one brand can easily be copied by competing brand. Hence, “new and improved with oil of quinoa seeds added” for a P&G branded soap can easily be offered by Unilever if the sales show that there is a demand for this type of soap. Any spurt in sales that P&G experiences in the first few months will gradually come down to the equilibrium level once Unilever introduces a similar feature. But product and marketing managers at companies will continue to augment their products with new features followed by other competitors copying it with the result that you are faced with store shelves full of soaps that all have similar features with no meaningful differentiation between them.

The author shared a insightful example of what happened when her students unintentionally followed the same behavior.

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We can very much see this in our daily lives as we strive for being a “well rounded” student, employee or a leader because that is how we are measured. According to the author, excellence comes from being lop-sided (as opposed to being well-rounded) yet all of us are trained to aim for well-rounded-ness. Similarly, when marketers and brand managers do focus groups, market research, surveys for their products, they strive to get an A+ in all the categories i.e., try to come up with a well rounded product.

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The author points out that adding so many features becomes a pointless exercise after a while adversely affecting company’s bottom line.  On a mobile phone or TV screen, you can increase the resolution to such an extent that the consumer’s eyes cannot register the difference yet brands are forced to do it at a significant cost because the competitor is offering this feature as a standard.

She proposes a couple of strategies namely Reverse Positioning and Breakout Positioning to breakout of this vicious circle which are explained later. I liked this book and the following book as the authors are humble enough to admit that there is no sure shot way of success. The multiple strategies mentioned in the books are just frameworks.

If you are in a Dogfight, Become a Cat” is by Leonard Sherman who is a professor of strategy at Columbia Business School and also moonlights as a management consultant. If you have read as many strategy books as myself, you will notice that all strategy books have the same few success stories that provide you with a framework. Every book you read talks the same old cases and you start to wonder whether it was sheer luck that led to success of these companies and then management consultants came along and tried to fit them into “a formula for success” that they can sell as part of their consultancy gig. The above two books plus all other strategy books are based around on the following examples:

  1. P&G vs Kimberly Clark (Pampers vs Huggies)
  2. Harley Davidson H.O.G. (Harley Owners Group) and/or Saturn Car Club
  3. Post It notes by 3M
  4. IKEA
  5. Reincarnation of Apple under Steve Jobs

These businesses achieved the successes without having management consultants or a tried and tested framework at hand. Afterwards management consultants came along, made case studies of these selected events and then tried to sell them as part of their strategy services. Recent books add cases about Amazon, UBER and AirBnB etc but I have yet to read a book wherein a management consultant was brought in and she applied the recommended strategies which resulted in a breakthrough successes repeatedly.

This brings me to a small digression (I hope it remains small) into Michael Maubossin’s
The Success Equation: Untangling Skill and Luck in Business, Sports and Investing“. I read it in 2014 and the lessons have remained with me since. Maubossin is widely read, a numbers guy,  and very insightful writer of investment research. In the financial and investment universe, there is a saying that a rising tide lifts all boats i.e., when the economy is doing good, all asset managers whether in equity, fixed income, private equity, alternatives etc. appear like geniuses. Under such a scenario, how can we figure out whether increase in asset values we are seeing is due to the skills of asset manager or is it because due to sheer luck, asset manager found himself in the right asset at the right time. Maubossin’s book is about how does one go about figuring this out as contrary to what people may think, it is very difficult. It is made more difficult as what he describes as “paradox of skill” which can be illustrated as follows.

In fund management industry, every company e.g. Vanguard, BlackRock, DynamicFunds, Fidelity, PIMCO etc is employing immensely talented Ivy League economics, business or quant graduates who are bringing best practices and new approaches to investments in each of these organizations. From consumer perspective, the performance on absolute basis is increasing (we get wide variety of products to invest in and lower and lower fees compared to previous years) but from the fund manager’s perspective, performance on relative basis is actually shrinking. One year in a particular category, Vanguard funds may do well and in the following year, BlackRock funds may do well (though this difference may be in few basis points). With both fund managers using state of the art technology for investing and army of highly talented asset manager and offering similar products, there may be some element of skill in the performance differential but luck is starting to play a bigger and bigger role.

The problem happens when we start misidentifying the role of luck in performance as skill. This is what these strategy books do. In “If you are in a Dogfight, Become a Cat“, the author does start with the premise that managers have been taking strategies as promoted by such books as Jim Collins’ Built to Last: Successful Habits of Visionary Companies and Clay Christensen’s The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change) as gospel. According the author, manager’s are not fully to be blamed as the authors of these books have been running successful consultancies by prescribing their theories. However, to really read a take down of these strategies, one has to read Maubossin’s The Success Equation: Untangling Skill and Luck in Business, Sports and Investing

Perhaps the best-known book about this method is Jim Collins’s Good to Great. Collins and his team analyzed thousands of companies and isolated eleven whose performance went from good to great. They then identified the concepts that they believed had caused those companies to improve—these include leadership, people, a fact-based approach, focus, discipline, and the use of technology—and suggested that other companies adopt the same concepts to achieve the same sort of results. This formula is intuitive, includes some great narrative, and has sold millions of books for Collins.

No one questions that Collins has good intentions. He really is trying to figure out how to help executives. And if causality were clear, this approach would work. The trouble is that the performance of a company always depends on both skill and luck, which means that a given strategy will succeed only part of the time. So attributing success to any strategy may be wrong simply because you’re sampling only the winners. The more important question is: How many of the companies that tried that strategy actually succeeded?

Jerker Denrell, a professor of strategy at Oxford, calls this the undersampling of failure. He argues that one of the main ways that companies learn is by observing the performance and characteristics of successful organizations. The problem is that firms with poor performance are unlikely to survive, so they are inconspicuously absent from the group that any one person observes. Say two companies pursue the same strategy, and one succeeds because of luck while the other fails. Since we draw our sample from the outcome, not the strategy, we observe the successful company and assume that the strategy was good. In other words, we assume that the favorable outcome was the result of a skillful strategy and overlook the influence of luck. We connect cause and effect where there is no connection. We don’t observe the unsuccessful company because it no longer exists. If we had observed it, we would have seen the same strategy failing rather than succeeding and realized that copying the strategy blindly might not work.

Collin’s was big on vision and mission statements. Personally I would credit him with the bringing in the vision/mission revolution into every organization. Over the course of my career, I have been part of multiple internal group discussions wherein we tried to come up with the best fluff for our employers. The book Good Strategy Bad Strategy: The Difference and Why It Matters by Richard Rumelt had a good critique of this revolution but hardly anyone has heard of this book much less read it. Some of the examples from the book:

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Here is the template of most such exercies and results:

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One of the companies that followed Collins’ mantra to the tee i.e. Enron died an ignominious death. Probably Enron was also affected from paradox of skill i.e., all the success till its downfall was attributed to the highly skilled manpower Enron recruited. Yet no one asks that didn’t Enron tick all the boxes required to run a visionary, world-class  company following Collins’ advices as well as Christensens’s by having many subsidiaries which innovated and disrupted. Finance curriculum has something akin to under sampling of failure. it is called “survivorship bias” but it is mostly used for performance measurement of funds, asset classes etc. However, when it comes to corporate strategy, financial sector is as guilty as other industries.

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Coming back to If you are in a Dogfight, Become a Cat, the book has a very good anecdote that I haven’t read elsewhere so it is worth mentioning. My guess is a management consultant led Honda down this path but since the author didn’t mention any consultants, let me not bring in my biases. In US, Honda wasn’t doing as well among the young generation. So Honda decided to carry out a marketing research for a new kind of car targeting the summer youth. They took cameras with them and went to beach parties as well as events like X-Games taking pictures, making videos, conducting focus groups to determine what are the aspirations of this demographic. What features they like i.e., roof should be able to carry surf boards, cup holders should be able to hold large size drinks, interior should be roomy enough as the guys like to hang out and travel together in a same cars plus it should have some off road capability. Honda got the designers to design the shape and curves of the car to appeal to this demographic. The result was Honda Element introduced in 2003.

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It was a failure. It had better than expected sales in the first year but it was followed by tanking sales in subsequent years. The analysis showed that most of the cars were being bought by older generation of upper income tiers because of the safety and reliability it afforded. The target demographic, the surfing kind with offroad driving aspirations, didn’t have the income to afford this car. The 9 to 5ers with their steady income wanted boring sedans or family SUVs.

Honda was taking a page out of Christensen’s book. The New Yorker magazine did an amazing analysis of the “disruption” mantra that has become so pervasive on account of Christensen’s book and consultancies in the excellent long form piece titled The Disruption Machine: What the gospel of innovation gets wrong. (Highly recommended piece to be read in full)

Things you own or use that are now considered to be the product of disruptive innovation include your smartphone and many of its apps, which have disrupted businesses from travel agencies and record stores to mapmaking and taxi dispatch. Much more disruption, we are told, lies ahead. Christensen has co-written books urging disruptive innovation in higher education (“The Innovative University”), public schools (“Disrupting Class”), and health care (“The Innovator’s Prescription”). His acolytes and imitators, including no small number of hucksters, have called for the disruption of more or less everything else. If the company you work for has a chief innovation officer, it’s because of the long arm of “The Innovator’s Dilemma.” If your city’s public-school district has adopted an Innovation Agenda, which has disrupted the education of every kid in the city, you live in the shadow of “The Innovator’s Dilemma.” If you saw the episode of the HBO sitcom “Silicon Valley” in which the characters attend a conference called TechCrunch Disrupt 2014 (which is a real thing), and a guy from the stage, a Paul Rudd look-alike, shouts, “Let me hear it, disss-ruppttt!,” you have heard the voice of Clay Christensen, echoing across the valley.

……..

The theory of disruption is meant to be predictive. On March 10, 2000, Christensen launched a $3.8-million Disruptive Growth Fund, which he managed with Neil Eisner, a broker in St. Louis. Christensen drew on his theory to select stocks. Less than a year later, the fund was quietly liquidated: during a stretch of time when the Nasdaq lost fifty per cent of its value, the Disruptive Growth Fund lost sixty-four per cent. In 2007, Christensen told Business Week that “the prediction of the theory would be that Apple won’t succeed with the iPhone,” adding, “History speaks pretty loudly on that.” In its first five years, the iPhone generated a hundred and fifty billion dollars of revenue. In the preface to the 2011 edition of “The Innovator’s Dilemma,” Christensen reports that, since the book’s publication, in 1997, “the theory of disruption continues to yield predictions that are quite accurate.” This is less because people have used his model to make accurate predictions about things that haven’t happened yet than because disruption has been sold as advice, and because much that happened between 1997 and 2011 looks, in retrospect, disruptive. Disruptive innovation can reliably be seen only after the fact.

………

The handpicked case study, which is Christensen’s method, is a notoriously weak foundation on which to build a theory. But, if the handpicked case study is the approved approach, it would seem that efforts at embracing disruptive innovation are often fatal. Morrison-Knudsen, an engineering and construction firm, got its start in 1905 and helped build more than a hundred and fifty dams all over the world, including the Hoover. Beginning in 1988, a new C.E.O., William Agee, looked to new products and new markets, and, after Bill Clinton’s election, in 1992, bet on mass transit, turning to the construction of both commuter and long-distance train cars through two subsidiaries, MK Transit and MK Rail. These disruptive businesses proved to be a disaster. Morrison-Knudsen announced in 1995 that it had lost three hundred and fifty million dollars, by which point the company had essentially collapsed—not because it didn’t disruptively innovate but because it did. Time, Inc., founded in 1922, auto-disrupted, too. In 1994, the company launched Pathfinder, an early new-media venture, an umbrella Web site for its magazines, at a cost estimated to have exceeded a hundred million dollars; the site was abandoned in 1999. Had Pathfinder been successful, it would have been greeted, retrospectively, as evidence of disruptive innovation. Instead, as one of its producers put it, “it’s like it never existed.”

Now that I have taken all the digressions, we come to the conclusion __ how do we stand apart from the crowd. The author of If you are in a Dogfight, Become a Cat gives us three frameworks to differentiate oneself from the crowd. These are not mutually exclusive frameworks. Rather there is a significant overlap between them.

Framework 1: Breakaway and Reverse positioning

He derives the first one from Youngme Moon’s book Different: Escaping the Competitive Herd which I had skipped earlier to avoid repetition. Reverse positioning refers to dumbing down the product by stripping away certain features and offering that as a value proposition.

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Breakaway positioning refers to adding features from a different category such that the product now becomes a different product altogether.

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Framework 2: Blue Ocean Strategy

Blue Ocean Strategy is a marketing theory from a book published in 2005 which was written by W. Chan Kim and Renée Mauborgne, professors at INSEAD and co-directors of the INSEAD Blue Ocean Strategy Institute where they argue that leading companies will succeed not by battling competitors, but by systematically creating “blue oceans” of uncontested market space ripe for growth. The strategy represents the simultaneous pursuit of high product differentiation and low cost, thereby making competition irrelevant. The other ocean is red  because competitors are having a bloody battle over a stagnant or shrinking market share.

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Framework 3: Disruption Innovation

Expanding on Christenson’s famous term of art coined in his book The Innovator’s Dilemma: a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.

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Conclusion

I hope the explanation of three frameworks make the title of the book If you are in a Dogfight, Become a Cat self explanatory i.e., when competition has become a dogfight (intense bloody competition over similarly features products), it is wise to become a cat (introduce a different category of product or create a new market).

Both the books Different and If you are in a Dogfight, Become a Cat are recommended as their is much to learn in these books. In addition, I recommend you pick up The Success Equation: Untangling Skill and Luck in Business, Sports and Investing (I might as well re-read it again).

Tailpiece

What all these strategy books agree on is that Apple is in a class apart as it has been able to disrupt its way into smart phones and differentiate itself in such a way that on one hand you have iPhone (running iOS) and on the other you have the Android phones (Samsung, LG, Xiaomi, Pixel etc). And despite having lesser features than many Android phones, still commands 90% of the profits of smart phone sector.  Apple’s genius is explained well by the following ad from its competitor Samsung yet suckers (including myself) keep throwing money at buying an overprice phone.

Capture

How ideas can be turned into path breaking innovation

Overcoming the forces that stand in the way of creativity

I promised a review of “Different” and “If you are in a dogfight, become a cat” in my last post. When I went to pick those books up at the Toronto library, the “discover” bookshelf (a bookshelf near the checkout kiosks where the library puts up underrated books to see if they can pique your interest) at the library was displaying “The Medici Effect” written by a Harvard Business School graduate Frans Johansson about how idea generation happens.

It had an intriguing blurb and praised by former Chairman and CEO of Apple (that should have been a red flag) and a foreword by his HBS professor Teresa Amabile. I thought this book cannot be bad. Guess what, I was wrong. I have updated the saying to “Never judge a book by its cover, its preface, its blurb, the praises or the pedigree of the author.”


Slight digression. When Nassim Taleb of “Black Swan” fame published his next book “Antifragile: that gains from disorder”, Josh Brown of Ritzholtz Wealth Management wrote a satirical post on his blog titled “Selected Passages from Nassim Nicholas Taleb’s ‘Antifragile’”.

The post went viral. Taleb was so thin skinned that he complained to his publisher, Josh Brown had to take down the post and apologize to Taleb. Someone copied and pasted the post on their own website, hence it is saved for posterity (You can read the archived version here, highly recommended). Anyway, over time Taleb developed a thicker skin and some sense of humor and his latest book Skin in the Game has the following as praises. One can see that Taleb has matured between the two books (read the last one if you are short of time).


Back to “The Medici Effect”. The whole book could have been condensed into two chapters of total 30 pages. The book is full of anecdotes and meanderings to drive home the point that as we become more specialized in our subject areas/careers/fields and the world continues to become more complex, maximum creativity and breakthrough ideas will happen where people from disparate fields come together to collaborate and bounce off ideas. For someone who doesn’t have diverse pursuits or interests, the book may come across as insightful but for someone who reads widely, the book consisted of usual anecdotes and stale lessons drawn from them.

The book had two interesting suggestion to generate ideas but they were excerpted from different books. One was about “Assumption Reversal”, a method to find an out of box solution for a problem that seems intractable. Needless to mention, I have requested the book at the library. Hopefully, I will get some original ideas there.

The other idea was about “taking a thought walk.” Unfortunately, I forgot to note down the name of the book it was picked up from.

I shouldn’t have been this upset __ I mean I read a lot of books that turn out a disappointment and I left them half way or three-fourths of the way__ but I guess I am upset because I read it till the end with the expectation that there will be a payoff but as it turned out, it was all for naught.


However, if one really wants to learn about creativity, I highly recommend “Creativity Inc.” by Ed Catmull.

It can be thought of as a biography of Pixar Animation Studios but it is much more than that. It is about how creative organizations work, how they foster creativity, the challenges they face when they grow (as creativity doesn’t scale with the growth of organization) and become burdened with bureaucratic processes but more than that, it is not a prescriptive book. In addition, it is also a book about running an organization.

It also has one interesting anecdote about Steve Jobs designing new Pixar HQ. Job was deeply involved in the designing of the new Pixar HQ and he understood that creativity flourished when people from different technical or creative backgrounds come together. He designed Pixar corridors and other spaces such as cafeteria, lounges etc. so that people keep on running into each other for what he called “chance meetings”. According to Catmull, Jobs got so carried away that he wanted unisex toilets but eventually he was convinced to let it go.

If you want to read a book on creativity, I cannot recommend enough you read the one by University of Utah Comp. Sci. grad Ed Catmull i.e., “Creativity Inc.” and not get carried away by Harvard Business School marketing (written by HBS grad, foreword by HBS professor and published by HBS press) by skipping “The Medici Effect”.

Below is an excerpt from the Creativity Inc.

Unleashing creativity requires that we loosen the controls, accept risk, trust our colleagues, work to clear the path for them, and pay attention to anything that creates fear.

Later he goes on to say

And finally this

Sadly all such lessons were missing from The Medici Effect. Creativity Inc. is chock full of such insights and despite being a non-fiction reads like a page turner and lessons, if any, are sprinkled without being prescriptive.


In case anyone is wondering about the title of the book “The Medici Effect”, the author is referring to Medici family of Florence, Italy that patronized artists of all types resulting in Florence becoming a cradle of Renaissance. The “urbanist” Richard Florida promoted a similar theory in his most famous book “The Rise of Creative Class” wherein he suggested by bringing in hipsters, artists, avocado toast aficionados and Mason jar beer drinkers (ok… I made the last two up) and see the cities flourish with creative outbursts.

He was a big proponent of cities as our wealth generators and urbanization as our path to utopia. He followed it up with another book further expounding on the lessons.

After more than a decade of preaching this mantra from every platform from TED talks to international conferences on urban planning and redevelopment, and university platforms as university lends credence, he recently published a new book “The new urban crisis: How our cities are increasing inequality, deepening segregation and failing the middle class”.

That is the lamest mea culpa if there ever was one and his consulting gig, I presume, continues to thrive but now in another direction. The arc of Mr. Florida’s education from “The Rise of Creative Class” to “The New Urban Crisis” provides a much better take down of “The Medici Effect” then my rambling review.


Tail piece: it turns out that those open plan spaces that are supposed to lead to flourishing of ideas and fostering creativity, are not that great

Many open-office designs were adopted also because they were thought by experts to produce a more collaborative atmosphere…..For one thing, workers took increased sick days…Workers also complained of an inability to focus and were generally less content with their work environment, the study said.


Thank you for reading. I promise the next review I write will definitely be about the two books I wanted to write about.

The Four Horsemen of Silicon Valley

Four companies have infiltrated every corner of our lives and are very hard to avoid (or boycott)

It started when I listened to the Masters in Business podcast with Scott Galloway where he was talking his book “The Four” about the four horsemen of technology i.e. Facebook, Amazon, Apple and Google and how these companies are taking over lives. These had already taken over the financial and business press (before Bitcoin arrived and unseated them), remember #FAANG stocks at the beginning of 2016 (the N in FAANG stands for Netflix.) The author posits that Netflix could very well be the fifth horsemen but the book is mainly about the FAAG_Facebook, Apple, Amazon and Google_ the four horsemen. For those who can’t be bothered to read the book, I recommend the below podcast as in it, the author pretty much distills his book into an hour long conversation.

The podcast got me interested in the book and I placed a hold on it at Toronto Public Library website. This post is also a paean to Toronto Public Library system which has allowed me to road so many books that I otherwise wouldn’t have been able to.

I checked out the book in late November. It is a quick read__could have been shorter as in some places author rambles. If he had taken his meanderings out, the book would have been reduced by one third and could have been a quicker read. Nevertheless, it is a good book. I have read 50+ books so far this year (fiction and non-fiction included) in addition to reading long form articles as well as listening to podcasts. However, very few have given me that “a-ha” insight or compelled me to change my opinion or at least look at an issue from a different point of view. As we grow older, we become entrenched in our views despite thinking of ourselves as open to new ideas and perspectives. But this book forced me to alter some of my views and that in my opinion, makes it a good book.

Rather than summarizing the contents of the book, I will put a few snapshots of the different pages of the book.

Acquisition of Disruptive Companies

On acquiring “disruptive” companies by old economy firms, think Walmart’s acquisition of Jet.com, the author summarized it pithily in the following manner.

On the podcast, author was humble enough to admit that when Walmart announced Jet.com acquisition, he deemed it one of the stupidest mistakes by a dying old-economy dinosaur but time has proved him wrong and Walmart right.

Apple

He had a a lot to say about Apple which made me see Apple in a different light i.e., in a world where “software is eating the world” and when everything is moving from “bricks and mortar” to “click and order”or” clickbait”, Apple is holding its own and hitting it out the park despite being in an old world industry of “hardware manufacturing” and “bricks and mortar” retailing. Manufacturing and retail is deemed uncool from Silicon Valley perspective, yet Apple has made it sexy. Author uses this is an opportunity to rant about our search to satisfy our innate need of worshiping a higher authority and calls it a sad state of affairs that we have decided that tech leaders are our new gods.

Amazon

Amazon is taking over the world. We all know it. The insight for me was Amazon is moving into bricks and mortar though it is not obvious right away. I know about Amazon Go (prototypical cashier less store) or “physical” bookstores opened by Amazon in certain US cities or even acquisition of Whole Foods, which most pundits think Amazon will use as drop box location for its deliveries. But Amazon is also making significant investment in warehouses and fulfillment centers. If Amazon continues to promise deliveries in two days, it needs to have those warehouses next to every major city and metropolitan area. Delivery is becoming a major expense line, and to have some control over it, Amazon is increasing its investment in transport sector.

Needless to mention, this additional growth is coming with increased customer acquisition costs and that Amazon is trying to push consumers towards Amazon Prime subscription model.

I wished I had taken a snapshot of the next page in the book before I returned it to the library where the author highlighted a very import research conducted by him. According to him, when you ask Alexa to place an order say AA batteries for you, Alexa only recommends Amazon’s store brand Amazon Basics batteries and says other types not available. But if you log on to the website, it shows that other brands are available. So as we move from “one click” world to “zero click” world of Alexa and Home pods and Siri, we will be handing more and more decision making power to these horsemen.

Google

With respect to Google, there wasn’t anything snapshot worthy. Google knows more about us then our closest friend, parents, spouse or even ourselves. To wit, if someone is searching for a divorce lawyer on Google, or inquiring about symptoms of a particular disease, Google now knows that she is looking for a way out her marriage or may be afflicted with a particular disease that she wants to keep hidden.

What if someone hacks into Google database and publishes the stuff that you have been searching next to your email and profile. This is like putting all your private interests, fetishes, diseases and fears etc. for all the world to see. Scary.

Facebook

Finally the elephant in the room — Facebook. Facebook has already taken over people’s lives before Farmville and Candycrush came along. More recently, we have the Russians allegedly using it to manipulate the US elections. In addition to being a way to stay in touch with friends, Facebook is also a platform for launching new businesses. I log on to Facebook occasionally once or twice a month mainly if I come across a fantastic Pakistani political meme and want to share it with my network. Every time I log in, Facebook tells me that I have 10+ notifications outstanding. When I click on them, only one or two are from my friends and rest of them are about people in my circle, neighborhood, or some other area that Facebook has determined some how are linked to me, selling goods and services. Facebook has become a big platform for people for sales, launching new businesses and reaching out to new customers. That was my perception of Facebook. Till I read this about how when it comes to news feeds and other stuff, Facebook ignores the moderates and goes for the extremists.

There is more to this book than just what I excerpted above. The book mentioned two more books “Different” by Youngme Moon and “If you are in a dog fight, become a cat” by Leonard Sherman both of which I then requested from the library and have since read but you will have to read about them some other time if I ever get around to writing it.

Converting Color Images to Grayscale

Using NumPy over JPEG images

I was taking a MOOC on Data Science [Fair Disclosure: I have enrolled and started many data science courses but have yet to complete a single one].

Python for Data Science : UC San Diego

At the end of first week of lecture, they taught us that JPEG images are comprised of three dimensional arrays of the shape M x N x 3 with the final dimension comprised of RGB values. By playing with the RGB values we can change the colors of the image. They also have a few lines of code which showed how playing with the numbers increased or decreased the contrast.

This was a light bulb moment. I decided why not use my newfound skills to make the convert an image to grayscale. Googling the query landed me on the following page which told me that in there software they use three algorithms to convert the image to grayscale.

Three algorithms for converting color to grayscale

The lightness method averages the most prominent and least prominent colors: (max(R, G, B) + min(R, G, B)) / 2.

The average method simply averages the values: (R + G + B) / 3.

The luminosity method is a more sophisticated version of the average method. It also averages the values, but it forms a weighted average to account for human perception. We’re more sensitive to green than other colors, so green is weighted most heavily. The formula for luminosity is 0.21 R + 0.72 G + 0.07 B.

So I did a google search for a high definition sunflower image, and tried to apply the aforementioned methods to turn the image into grayscale. I used the following image.

The Original Image (Source: google image search)

I will reproduce the entire code for the first example. For the subsequent example, I will just post the method code.

Average Method

%matplotlib inline
import numpy as np
from scipy import misc
import matplotlib.pyplot as plt
from skimage import data
photo_data = misc.imread("./sunset.jpg")
x,y,z=photo_data.shape ## where z is the RGB dimension
### Method block begin 
photo_data[:] = photo_data.mean(axis=-1,keepdims=1) 
### Method Block ends
plt.figure(figsize=(10,20))
plt.imshow(photo_data)
Converted to Grayscale using Average

Not to bad if I say so myself.

Luminosity Method

Here we take the weighted average

W = [0.2,0.5,0.3] # weights
W_mean = np.tensordot(photo_data,W, axes=((-1,-1)))[...,None]
photo_data[:] = W_mean.astype(photo_data.dtype)
Converted to Grayscale using Luminosity

Lightness Method

It took me a while to work out how to get it to work in a single line of code without using loops.

photo_data[:] = np.max(photo_data,axis=-1,keepdims=1)/2+np.min(photo_data,axis=-1,keepdims=1)/2
Converted to Grayscale using Lightness

BONUS MATERIAL

You sometimes you see images wherein everything is grayscale except one color is brought out. I wanted to see if I could keep sunflowers yellow. RGB code for Yellow is [255,255,0]. So I selected a small section of the largest sunflower and checked out the color codes.

photo_data = misc.imread("./sunset.jpg")
photo_data[495:505,390:405]

It appeared that the Yellow area has minimum value of 210 for R dimension and around 160 for G dimension. So I added a check that if value of dimension is less than 210 and 160 for R and G respectively, then apply the average method:

for i in range(x):
    for j in range(y):
        if (photo_data[i,j,0]<210 and photo_data[i,j,1]<160):
            photo_data[i,j]= np.mean(photo_data[i,j])

I am sure there must be a masking method that achieves the same result more efficiently. But right now For Loop is it.

Obviously, one can easily convert images to grayscale with a click of a button. Moreover, I believe there are existing libraries in Python that do this. But for me it was enlightening to get a peek under the hood (rather trying to build the process) and have so much control over it.