On Humility

Last Sunday, the Gospel was one of my favourites. The Pharisee and the tax collector go up to pray. In essence, the Pharisee says “Lord, I am good, reward me”, while the tax collector says “Lord, I am wretched, save me”. It is not hard to work out who got the more favourable response.

The story reminds us of humility, a lovely virtue. It is one of the troika of Humour, Humility, Humanity, that I use all the time, for example in assessing the candidates to be our new choir director. Last time I blogged on HuHuHu I self-assessed at one and a half out of three, and someone commented that was arrogant. Maybe true, and indeed humility was not the one and not the half.

Humility can be confused with modesty and deference. While “Lord, I am wretched, save me” is admirable, “Lord, I am ignorant, teach me” might be even better or at least more useful. (There you go, I am even claiming to better St Luke, or even Jesus. Not so humble, Graham).

Modesty and deference have a habit of becoming self-fulfilling. If we do not recognize our own strengths, if we do not volunteer to take the lead sometimes, then our capacity to do good and to improve can be compromised. If a team needs to achieve a task and we have relevant skills, it is counter-productive to hide them out of modesty. A good team has meaningful contributions from everyone, and one can recognize a strength and utilize it without losing humility.

Deference is even more dangerous, since it can become a substitute for thinking or acting and an excuse for abrogation of responsibility. If the boss must always be right, many of the opportunities to learn have been lost.

The same is true in families and in societies at large. It is right that we honour our elders, but that should not mean that we defer absolutely to them. The risk is that no one learns. The elders become excessively sure of their own expertise, while the rest do not even try to understand the issue.

I have connections to three countries prone to flooding, and it is instructive to examine the difference in approach. In the USA there is the denial of arrogance. Here is the Pharisee at work. We are a great nation so we will be fine. Even if we are not fine, we will respond well. Climate change cannot exist, in part because we are God’s chosen people. We are right, so he will reward us.

The Philippines show the opposite extreme, closer to the tax collector (though the analogy is ironic, since one thing The Philippines certainly needs is the ability to collect more tax). Typhoons, earthquakes and floods strike every year, killing many and destroying the lives of many others. Yet little is done to improve defences, just a lot of praying. There is a fatalism preventing action. Corruption does not help either, but a less humble nation, rather a less deferent nation, would not have put up with things as they are for so long.

The Netherlands lies largely below sea level, and a hundred years ago used to be subject to the same frequency of death from flooding as the Philippines is today. But they did something about it. The Dutch have become the world’s leading water engineers, and have built dykes, barriers and everything else to make their coastline safer. Still, they remain humble enough to devote a lot of budget to continuous improvement, and never to declare victory over nature. By many measures you would not describe the Dutch as humble, certainly not compared with Asians, but I find some definitions and preconceptions of humility rather misleading.

In my experience, the most humble people on earth are the Swedes. There is a civility, a willingness to learn and a respect for other people that is a delight to be among. Some find Sweden dull and formal. I found it humble. It is no coincidence that Scandinavians lead many international well-being tables.

Norwegians can be more nationalistic than Swedes, but still have much to teach the rest of us. The national response to the Brevik outrage was superb. Last month, I read that Brevik is now enjoying the chance of education in prison. “Who are we to deprive him of the right to learn?” was one quote. Humility often comes with an unwillingness to condemn or judge, even in the most extreme cases.

This contrasts with some attitudes in the US. We often read of outrages in the US: this year has seen the Boston bombings, Washington navy yard shootings and the woman losing it in Washington. One conclusion must be about a society with too many guns, but there are other similarities. In each of those cases, the police killed or injured the perpetrators in a questionable way. I believe the Washington woman was unarmed. The surviving brother in Boston was holed up in his boat, severely injured, and no longer a threat.

Now, I allow for more than a little fear in law enforcement officers in these situations, and mistakes do happen, but training should keep them to a minimum. What was really striking was that in none of these cases, nor in many smaller ones I have seen on the news this year, has there been any questioning of excessive force by police. That is very different in Europe.

At its heart, this is the Pharisee at work again. In the eyes of the American public, and probably the police too, these people had foregone their human rights by their actions. There is a self-righteousness about such a mindset. We are right, and should be protected. Violate our principles and face the consequences. That is a dangerous way to think. It can leads to many unwelcome places, starting with the dysfunction of congress.

In foreign policy it is worse. What is amazing in the debate about big brother NSA is that Americans, even senior ones, do not seem to consider how they must look to their allies. As the guy said yesterday, the actions may indeed be legal and professional. That does not make them right. Or humble. Drone policy and Guantanamo Bay start from the same dangerous premises.

I witness the same when I read otherwise thoughtful articles in Time about various foreign policy dilemmas, for example about Iran or Syria. Various sensible options are put forward, some belligerent, other cautious. One thing I never read is a policy which considers addressing the grievance of the other side. Why are these people “enemies of the USA and its interests?” It would be a good question to ask. Yet it never is.

“Oh Lord, it’s hard to be humble when you’re perfect in every way”. It is worth looking up the lyrics of that lovely ironic song, made famous on the (American) muppet show years ago. I know I have a lot to learn about humility, and I slip backwards more often than I make progress. Even though I find Asian attitudes do not always promote my ideal of humility, being among my Asian relatives certainly provokes positive thoughts about humility in me.

And the Gospel helps too. I don’t believe a lot of the bible literally, but the most important thing for me that the concept of God gives is the humility of remembering ones own smallness, ignorance and powerlessness. If things are going well, it always pays to remember that. The deacon gave a nice homily on the Gospel on Sunday, though at the time I felt he missed some opportunities to make some points about judging, referring to examples from his own nation.

But then I realized that very thought was dangerous. It was what the Pharisee would say and think. Whenever I have my periodic rants about the USA, I will try to remember that Pharisee and return to learning mode. Lord, I am ignorant, teach me.  

e-Cigarettes, a Business Case Study for our Times

What is the best business to be in?

I’ll define the question a bit more carefully. For the purposes of the question, I don’t mean fun or work-life balance or dinner party bragging rights or fame. I mean as a long-term investor or perhaps as a prospective long-term employee.

You might think of Apple or Google and answer something about technology. True, these companies have grown immensely in value and are still buoyed by huge potential consumer growth. But history tells us that such sectors are tough, because change is ever-present and new competitors are always at the gate. Blackberry would acknowledge that point.

A better answer is Oil and Gas. Exxon has been up there for generations among the leading market cap statistics and as a good employer.

I have another answer. True, you need to swallow a few scruples before working there. But hear me out. Think about tobacco. The competitive landscape is unchanged for years. Returns are predictable and strong, and even somewhat counter-cyclical. If you can accept the fact that you work for a group of serial killers, the benefits are pretty strong.

To understand why tobacco, and Oil and Gas for that matter, have been such strong industries, despite a paucity of growth, you can use one of my favourite business models, that of Porter’s five forces. The model analyses industries according to five forces determining resilience of performance. Internal industry competition lies in the middle, and the other four forces sit to the North, South, East and West.

The first force, to the North, is barriers to entry. Oil and Gas has huge barriers to entry, since to play you need monstrous amounts of capital or access to vast oil reserves. Not many new oil majors appear, and that benefits the incumbents. In IT, barriers to entry are generally limited, unless a player can build a massive scale advantage, for example Google in search. Tobacco has large marries to entry because of the regulatory requirements new players would need to satisfy to become licensed operators.

To the West is the power of customers, or more accurately players further down the supply chain. If customers are few and powerful, they will extract the value rather than you. Companies like Intel struggle to retain leadership mainly because their customers (people like Apple) exert such power. But Apple itself has a great market from this perspective. So does Exxon, except in downstream markets like France where intermediaries have taken the power. In tobacco, the intermediaries are a multitude of small shops and end consumers have even less potential to exert power. Perfect.

To the East are suppliers, or upstream supply chain players. One limiting factor for Exxon are the countries owning the resources. For Apple, rare metals can be a limiting factor. For tobacco, suppliers are plentiful and lacking power. Perfect again.

In the centre is internal competition. Here, growth potential can be a nuisance, because it can lead to lots of firms all competing for so called first mover advantage and little chance to grow margins. “Where there’s much, there’s brass” is a wonderful saying, because it is true that industries with less cachet or visibility often generate good returns. Tobacco fits this category, but there is an even bigger factor in its favour. Government duties make the product expensive, and a consequence is low price elasticity. Reducing the price by 1% to the consumer would not boost sales much, but would destroy margins, so players don’t compete much on price. In the rest of the marketing mix, they are pretty-well banned from competing, such are the restrictions on advertising, promotions, packaging and so on. When you hear tobacco executives bemoaning these restrictions, don’t believe a word of it, they love them, so long as the playing field in any market is level.

So far we have a perfect picture for the tobacco industry. The market is set to generate high margins even without collusion. Marketing budgets can be small, indeed mainly the PR involved in ensuring level playing fields for regulation, and trying to combat smuggling and illegal duty-free sales. Growth is slow, but there are always emerging markets and growth is not everything if capacity can be managed down. But now we come to the fifth box in the model.

Until now, substitutes were another win for big tobacco. Regulation defined the product tightly, so one cigarette became much like another. And the addictive qualities of the product meant that customers were very unwilling to substitute, even to things like nicotine patches. If a class had looked at the five forces and judged which of the five was the strongest fortress for big tobacco, they may well have chosen the southern corner of the model.

But then, a couple of years ago, came electronic cigarettes. Look out for them, you start to see them advertised and displayed more widely. They look like cigarettes, packaged more attractively. You smoke them like cigarettes, and they contain nicotine. But there is no ash, no lingering odour, and few carcinogens. Clever innovators had used chemistry to create a cigarette product that didn’t make you a social pariah or kill you.

To understand the brilliance of this, use another favourite model of mine, blue ocean strategy. In this one, attributes of a product or experience are listed down the side, and the various competitive offers ranked for each attribute. In most industries, everyone offers something similar. In big tobacco, the differences would be narrower than a tobacco paper. The innovator’s trick is to look for the unfilled area, the blue oceans.

For smoking, the attributes might be the shape of the object, how it is smoked, the addictive nicotine, the ash, the health “benefits”, the odour, the social aura (positive and negative), the price, distribution, promotion, packaging and so on.

The main blue ocean would be the health factor, followed by odour, without losing the nicotine. Why then, do smokers are generally not able to switch long term to nicotine patches? The answer has been the smoking act, the comfort of the repetitive hand to mouth action. It may seem strange if you are a non-smoker like myself, but I can relate to it. I am a terrible fidget, chewing biros and fingers and so on. No patch, no social shame, no admonishment from mothers past and present can stop me.

So the inventors have achieved the blue ocean without compromising the key attributes to maintain. Brilliant.

The next elements of this emerging case study are about what happens next. There is little consensus on how to regulate this new sector. All my regular publications have run articles about it, but there is little specificity about any recommendations.

It is a tough challenge. Is this new product a savior or a monster? On the plus side, it can save untold lives, now. Surely anything that can wean smokers from their peril must be a good thing? But will these new objects actually act as a Trojan horse? Perhaps they have their own toxicity, so far undiscovered? Worse, teenagers could become hooked on the newly available and affordable product and then graduate to the “real thing”. What to do?

There is more heat than light in the discussion. Some people, many of them ex-smokers, have developed such a hate for nicotine and cigarettes that they only see evil. The proponents, including shopkeepers eyeing a new income stream, no doubt exaggerate the benefits. And big tobacco itself has fearsome lobbying power, power they have a long track record of misusing. At the same time, all the major cigarette companies are scrambling to develop their own e-cigarette and/or buy out the current suppliers.

It is fascinating, and worth watching over the coming years. If I were a business school teacher, I would be storing up articles and developing an angle for my case study, for it has everything, including emotion. Five forces is a great explanatory model, but Porter would never have denied that change can still emerge, with the blue ocean model a fine way of seeking it. And the dismal modern science of regulation, so necessary but so imperfect and so spoiled by lobbyists and ignorance, has a wonderful new challenge to observe.

Finally, what other heavily regulated sectors, protected by the very regulation they purport to hate, could succumb to a blue ocean substitution? Drugs are an obvious potential case. What about alcohol? What about social things like abuse? Can we somehow tame abusers by giving them what they need without causing the destructive harm? Surely that is a more promising avenue than the current medieval practices of denial, condemnation and retribution. 

If it ain't broke, DO fix it

The expression “If it ain’t broke, don’t fix it” is one of my least favourite. It is an open invitation for complacency. Often, the stable times offer the only opportunity to prepare for stormy times ahead. Once the storm breaks, the fixes often fail.

I was reminded of this maxim this week when the US government ground to a halt. No one could say they didn’t see it coming. Congress has been dysfunctional for some years now. There was a time when the threat of a deadline would lead to a last minute compromise. Then things got worse, and the compromises still happened but all they did was to push the can down the road. Finally, things got so bad that deadlines had no effect. First the sequester, now the budget, next the debt ceiling.

It is unseemly and pathetic. As someone slightly to left in European politics, I find myself almost off the scale to the left in the US, so I blame the Republicans, perhaps too easily. Holding the government to ransom over Obamacare now is like a soccer team refusing to play because they lost the previous year. They did not like the bill but it was passed, and then contested again in the presidential election last year, where it passed the test of public opinion a second time.

But there is a wider truth here beyond the posturing. We need to look at the causes not the symptoms.

Some causes come from long-term trends. The USA has a serious competitiveness problem. It spends more than it earns. So the debt gets bigger. And the fixes available get harder to swallow. Crisis follows crisis. And the debate becomes more and more strident.

This is common in business or sport too. There is a popular maxim that only in a crisis can problems be truly addressed. Some Shell managers used this as a weapon. They would publicly threaten to sell or close businesses, and hope that this would bring the local leadership around to take some tough decisions. It can work, but more often I saw it fail: the fixes were superficial and actually stored up even worse problems later.

The other cause I would highlight in the USA is the broken political system. It has been a strength to have the executive, two houses of congress and an active supreme court, providing checks and balances to reduce the risk of extreme decisions. Why does it not seem a strength now?

One fundamental cause is because most house members are not incentivized to find good solutions for the nation but only to pander to extreme positions within their own party. The reason is that most congressional districts have become uncompetitive because of boundary changes. In a two party system without adequate supervision, it is been possible for Democrats and Republicans to cluster their own voters into safe seats. Then the primary system means that the biggest risk to a sitting member comes from their own party rather than the wider population.

This may seem a geeky point to make, but in my view it is critical to understand the dysfunction. Parts of the system have radically different goals to other parts. Crisis response only works when goals are sufficiently close to resolve issues and make good decisions. The prognosis becomes scary. No matter how bad the crisis becomes, players are likely to dig their heels in deeper and deeper. Even a potential historic reconciliation with Iran could become a victim.

This leads me to propose a four-box model. On one axis plot whether things are going well or going badly, on the other whether trends are likely to make things better or worse.

Then if things are going well and trends are supportive, you are allowed to use the “don’t fix it” maxim. If things are going well but trends are negative, that is the moment to fix things, especially the fundamentals such as governance models. If things are going badly, but trends are supportive, then have the patience and courage to leave things alone. Finally, if things are going badly and trends are negative, you have the crisis. It may be too late already. Be selective in recognizing feasible fixes with staying power, or else exit or retrench.

The challenge comes in recognizing the trends. It is usually easy to see if things are going well or badly, but trends require some analysis. If a strategy department provides nothing else, this analysis is essential. Always focus there.

Then, having completed a diagnosis of which box we are in, each presents its own challenge, except the happy land of a good performance and positive trends.

Fixing things during good times requires honest analysis and brave leaders. Those few countries to have fixed their pension systems in time deserve great credit.

It can be just as tough to stay the course when good solutions are in place but results have not yet emerged. In Shell, we had just started to make our European organization a strength when we were made to go global. There was time to embed and harvest the previous change. In this box, continuity of leadership and management of expectations is critical.

The crisis box needs other skills. Pragmatism is critical, to choose winnable battles and building credibility a step at a time amid chaos.   

What we see in the USA is the crisis box. Unfortunately, as a country, exit is not an option. So we may see a slow spiral of doom. Usually, when politics reaches the crisis box, there may be a war around the corner. The key mistake in the USA was not to fix the fundamentals while the going was good. Allowing the progressive redistricting of house seats has truly come home to roost.

Other examples in politics are the UN, the EU, Britain and France. The UN has had a good 2013, but remains sadly marginal, having lost the game as early as 1951. Common goals are tough to find there, and we could conclude that the very essence of global governance, through countries, has run its course. The EU has become a scape-goat for everything that is wrong at national level. Many opportunities to address inconsistencies were missed in the early years of the Euro zone. Now it can be argued that given the scale of the crisis the EU has performed very well, following the 4-box advice to retrench feasibly, led by the wonderful Angela Merkel. In Britain, the liberals made brave attempts in this parliament to rectify anomalies in the system, but vested interests prevailed. The nation will pay. France has done nothing to address its fundamental lack of competitiveness and the crisis will surely follow.

In companies, look at poor old Blackberry and Nokia, both slow to recognize negative trends and to respond in time, then finding their space to respond effectively had vanished. Kodak remains the classic case study. Amazon and Google seem to be doing well at using the good times to evolve, while questions emerge about Apple. In the UK, Tesco became complacent, but have time to bounce back.

In sports, Manchester United were a byword under Ferguson for renewal during good times, but now may struggle as his legacy is a team that he failed to refresh, just like Liverpool twenty years ago. Lower down look at Southampton as a team that fixed the fundamentals, and may now thrive for an extended period. In other sports, the All Blacks and the New England Patriots are exemplary. You won’t hear “if it ain’t broke, don’t fix it” from Graham Henry or Bill Bellichick.

We can also use the model in our personal lives. Health, especially weight gain, is a good example. For most of us, trends are positive until we hit thirty five or so. Until then we can eat whatever we like with no consequence, but then things turn against us. Using our thirties to establish good practices is much easier than waiting for the crisis and then trying to respond. Similarly, addressing challenges with our kids is possible when then are ten. But start when they are already fifteen and the road back is long.

So think about this four-box model. Which quadrant best fits your skills? It might help you choose a company or a particular job. You can also work out where you need to develop skills, and where to rely on a partner to fill a gap in your skill set.

If only the US leaders and voters had been able to respond in time. Now it may be too late. Last week I heard another terrible slogan, this time at a company. Staring at some bad market research findings, some leaders concluded “it can’t get any worse”. When you hear that one, it usually can, and it usually will. When it comes to congress, we ain’t seen nothing yet.