Author: Karthik Suresh

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The significance of 46

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What we believe is significant is heavily conditioned by the media and what it chooses to focus on.

The BBC website, for example, now changes little from day to day. A few new stories come on that are shocking or terrifying, while other stories that are popular because they were shocking or terrifying show up day after day.

It gets harder to think independently when everyone is shown (roughly) the same collection of material from news sources as everyone else.

Search tools cause you to focus on what you know – because it is a little difficult to search for what you don’t know, or what you aren’t aware of yet.

One approach to deal with this is Edward De Bono’s random-word technique, described in Think! Before it’s too late.

Find a random word, for example by opening a book at random and pointing at a page with your eyes shut, and then see where that word takes you.

This may seem a little absurd at first. Its main benefit, however, is that it opens up a new line of thinking, something you may not have considered before.

The book closest to me is “The Weekenders: Adventures in Calcutta”. The word that came up, or number rather, is 46. Where will that take us?

Some interesting places it turns out.

Code 46 is a movie that came out in 2003, a futuristic romance story where the characters are genetically incompatible.

The 46 degree halo is a rare ice crystal halo that forms when sunlight enters ice crystals.

Expedition 46 to the International Space Station ran from December 11, 2015 and ended March 1, 2016 and is significant because Tim Peake was on board, the first British European Space Agency (ESA) astronaut to fly in space. The mission patch shows the Union flag prominently because of this.

The Mark 46 (Mark XLVI) is the forty-sixth Iron Man Armour and appears in Captain America: Civil War.

Directive 95/46/EC of the European Parliament talks about personal data and the movement of such data.

The Model 46AS food waste disposer is an entry level disposer for smaller households.

The only slightly sinister sounding Division 46 of the American Psychological Association looks at how to use psychology in media communications and technology. That’s not scary at all…

The KC-46A Pegasus is a widebody air to air refuelling tanker.

In 2015, Americans checked their phones 46 times a day.

And finally, and rather delightfully, Organism 46-B is a 14-legged giant killer squid discovered in the Arctic that is now being weaponised by the Russian military.

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What will you do when it starts to rain gold?

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UK markets are at a high right now. The FTSE is in the region of over 7,300.

At its peak in 2007, the FTSE was at 6,700. So it’s around 10% higher than that.

At the end of 1999, it was at nearly 6,800.

So that means one of two things:

  1. We are significantly overvalued and due for a crash. In 1999 you had the tech crash, and in 2008 the financial markets crash OR,
  2. History is not a reliable indicator of the future and something else is going on.

What are the reasons behind the current highs in markets?

Cheap money has flooded the economy for several years. Low interest rates mean that money doesn’t earn a return sitting in banks and so the price of everything goes up.

In the UK, the fall in sterling has meant that companies that make a lot of money in foreign currency see higher earnings, and that has given a boost to the FTSE in particular, where about 70% of income is from outside the country.

If you look at fundamentals, you might think that the underlying economy remains weak. There is a problem with productivity. Increases in earnings are starting to lag the increase in valuations.

Are we due a crash?

Some people don’t think so. Not yet anyway.

Although the UK market is at a high, with the price/earnings ratio of the FTSE 100 at around 30, the Cyclically Adjusted Price Earnings (CAPE) was around 14 at the start of the year.

The high PE is partly because many partipants had poor earnings last year.

The CAPE is supposed to be a better indicator of what is happening over a cycle and at 14 (20 in Q4 2016).

Robert Schiller, the Nobel prize winning inventor of CAPE argues that from this level, stock prices could still perform strongly for a few years.

If markets have been distorted over the last 10 years because of QE, then perhaps we can’t take current highs as a signal of overvaluation and there is still plenty of room for markets to rise.

So what could happen now?

It’s been 10 years since the last crash. This time 10 years ago, we didn’t know that markets were going to blow up the way they did.

We knew that certain markets looked like they were good value and made particular decisions about them.

Some decisions were never made. Investments on autopilot simply carried on regardless of market conditions or opinion.

We don’t really know much more this time around. Markets could go up higher. They could crash.

And some markets look like they could be good value.

In his 2016 shareholder letter, Warren Buffet set out what he hoped to do.

He had no plans, he said, other than to “dream big and be prepared mentally and financially to act fast when opportunities present themselves”.

And here is the important bit, given where we are right now as an economy and with BREXIT around the corner.

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”

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Putting inflation in context – what does 2.9% mean for us?

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The Consumer Prices Index (CPI) reached 2.9% in May 2017. This brings inflation back to levels last seen in 2012.

Goods and services have become more expensive in the UK following the BREXIT vote and the start of exit talks.

The pound has weakened and prices have risen.

The ONS points to a rise of 7.7% in electricity prices during the year. Food and alcohol, clothing and footwear, furniture and household goods and recreation and culture are all showing their highest rate of increase for 12 months.

What can inflation tell us about what is ahead for the economy?

Not very much it turns out. Inflation is a lagging indicator of economic activity, and it is only after a trend is underway that it starts to move significantly.

Where it does have value is in telling us where there might be potential hotspots.

For example, imported goods are clearly going to be more expensive because of the weak pound – and the four categories with the highest inflation rate are all dependent on imports or global prices.

That tells us to watch the exchange rate carefully if our business depends on global markets.

Inflation is expected to continue rising for the rest of the year, peaking at over 3%.

As the increase appears to be mostly due to exchange rates it is unlikely that interest rates will be increased in the short term.

What it also means is that households will have less money after they have paid for more expensive goods and services, and this is already showing up in lower levels of household saving.

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When is it a good idea to think differently?

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Two roads diverged in a yellow wood, wrote Robert Frost, and taking the one less travelled by made all the difference.

When is it wise to follow the crowd and when is it not a good idea?

Crowds are good at particular kinds of thinking. In his book The Wisdom of Crowds, New Yorker staff writer James Surowiecki talks about three kinds of problems that crowds are particularly good at solving:

  1. Problems of cognition: These are problems which will have a solution at some point. How many cars will sell next quarter? How likely is it that a new drug will get approved?
  2. Problems of coordination: How should a group of people behave? for example, how do buyers and sellers trade fairly? How should people drive safely in cities?
  3. Problems of cooperation: How is it possible to get people who are focused on their own interests to work together? How can we tackle problems like pollution, climate change or tax policy?

Crowds can also be extremely unwise. This usually happens when the rules they should follow break down, communication fails to moderate behaviour and you get things like a riot or stock market bubble.

Interestingly, a crowd seems to fail when its members start to think the same way. This is the essential cause of stock market bubbles and has been seen over time, from tulips to houses.

When everyone starts to believe that the price of something will always go up, you get irrational exuberance, and a bubble that eventually bursts.

The paradox is that wise crowds integrate individual judgements to produce a group judgement – but in order to reach a good judgement, each member of the group needs to think and act independently.

Organisations that want people to reach better decisions should encourage diverse and independent thought and action.

Individuals who want to make better choices should not be afraid to disagree and contest ideas and options. We think better when we think independently.

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What kind of organisation do you work in?

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An organisation’s success depends on the nature of its relationship with its customers.

How customers view your company is key to how they choose to interact with you.

Thinking of an organisation only in terms of its staff, its products or its processes can hide important strategic aspects from you.

The model in the picture is adapted from this TED talk by Guy Kawasaki and this paper by Lepak and Snell and shows how customers treat organisations based on how they perceive them.

1. Efficient organisations: High Value but not Unique

Organisations that produce something of value are going to have a market for their products.

Their customers, however, have a choice between many suppliers. For example, car insurance is much the same between providers.

Your supermarket shop is going to have more or less the same things between major supermarkets.

In this quadrant, the winners are the ones with the lowest delivered price, which means they are the most efficient and with the lowest costs to deliver their service.

Customers are likely to go through tendering to work with organisations in Quadrant 1 and pick the cheapest one that does all the things they need.

One more thing about this quadrant – if you reduce your costs by becoming more efficient, the customer benefits in the form of lower prices but you don’t keep the savings in the form of higher margins.

This is why textile mills in the developed world went out of business. All the investment they put into reducing costs resulted in lower prices for consumers, but the companies themselves remained low margin and unattractive businesses and eventually closed down.

2. Contract based organisations: Low Value and not unique

If customers think that what you do has little value and is not unique then they have no incentive to work with you on anything other than a contract basis.

For example, many companies think of cleaning services just as something that needs to be done, but there are many companies that can do it.

The chances are that they will agree a contract with a cleaning company. That contract will continue as long as the facilities stay clean and the terms of the contract are fulfilled.

Over-delivering against the contract may not result in anyone noticing, but under-delivering – having facilities that are dirty – will probably result in complaints and having the contract terminated.

3. Stuck organisations: Unique but of low Value

Your organisation may produce something unique, but unless there is a market and customers perceive value in it, you are likely to be stuck with early adopters and find it hard to get more customers.

Many products fall into this category – there are now museums of failure to products such as Harley-Davidson Perfume.

In the city of Ann Arbor, Michigan, GfK Custom Research North America has a storehouse of failed products ranging from microwaveable scrambled eggs and TV dinners sold by Colgate to Clairol’s Yoghurt shampoo.

Many of these products were unique but perceived as having low or poor value and were withdrawn from sale within weeks or months because no one would buy them.

4. Growing organisations: Unique and with high value

Organisations that do something unique and are thought of by customers as delivering value are likely to be able to maintain higher margins than others, invest more into their businesses and attract more customers than their competition.

Apple is probably the poster child for this category. The company is sitting on $250 billion in cash as it brings in profits every quarter of over $10 billion.

This happens becuase its products are unique and it has customers that love what it does and are prepared to pay a premium to buy its stuff.

Warren Buffett has made a career out of buying businesses that have above average earning power – and credits managers with being able to get extraordinary results from ordinary businesses.

Summary

In summary, how your customers see what you do is crucial to getting the relationship right with them.

If you do something that is currently seen as low value and not unique, the only option, if you want to grow, is to work on changing your customer’s perception of what you do.

On the other hand, if you can deliver the best service, at the lowest price, working in a contract based business or in a business where you are the lowest cost provider can still work for you.

The place you don’t want to be is where your ideas are unique but no one wants to buy from you.

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How to think outside the box

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What does it mean to think out of the box – to be able to come up with new ideas and be more creative?

In this TED talk Professor Giovanni Corazza, a faculty member of the University of Bologna and founder of the Marconi Institute of Creativity, talks about how you can become more creative.

The key to thinking out of the box is to understand what the box is – in your mind – and what it means to think out of it.

All thinking is in your mind – you can’t think out of your mind.

Instead, what this means is that creative thinking is being able to go from what you know to what you haven’t thought of yet.

Being able to cross from one type of state of mind to the other is the essence of being creative.

How do you go about doing that?

The first thing is to realise that most thinking is convergent – we think about what we know and use existing knowledge and tools to approach situations and problems.

Our brains are designed to jump to conclusions quickly – a good evolutionary survival mechanism. You don’t want to be considering all the facts about whether that is a tiger in those bushes.

We also look for evidence that confirms our initial conclusions. There is a flash of orange, the bushes are moving, it must be a tiger.

We then act based on that evidence – climb a tree, run indoors, get away from that tiger.

The thing with creativity is that you have to remind yourself to go through a process of divergent thinking.

Divergent thinking is a way to be creative by exploring many possible solutions.

It asks you to take a more spontaneous, less rigid approach to the tasks, to play with ideas, to be willing to tolerate the absurd, the illogical, the risky approaches.

Above all, it asks you to be open. It’s only when you are open that you have the freedom of mind to think creatively.

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How to make your innovation a success

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How do you know what kind of innovations will succeed and which ones will fail?

This is a question addressed in Stuffocation: Living more with less by James Wallman.

Wallman is a cultural forecaster, and uses five questions to ask whether an innovation is likely to catch on.

1. Is it better?

Is the innovation actually an improvement over what was there before?

For example, was the Walkman let you listen to music on the move. The iPod was a better tool for the same job.

2. Is it simple?

Is it easy to understand the innovation?

Is it clear how you can use it to make things better for you?

3. Is it compatible?

Does the innovation work with the rest of your life?

For example, DVD cases are a different height to CDs cases, typically because the cases used to sit on the same shelf as VHS tapes.

4. Is it easy to use?

Can you actually use the innovation easily.

For example, an electric toothbrush makes the act of brushing much easier. The same goes for washing machines.

5. Is it remarkable?

Is the innovation remarkable in the sense that other people will take note of how it has improved your life?

According to Wallman, if the answer to each of these questions is “yes”, the innovation is more likely to succeed.

There should be a health warning though – there are quite likely to be innovations that were better, simple, compatible, easy and remarkable but they failed to succeed.

This list of criteria could be based on “survivor bias”. We look at things that have succeeded and assume that they have these features in common.

Aiming to create innovations, however, that use this list as a checklist is unlikely to make things worse.

What you also need to succeed is a good dose of luck.

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How to become more effective by reducing set up time

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In his book Sun Tzu and the art of business Mark McNeilly talks about how important the idea of set up time is to the military.

There isn’t much point if you ask for air support or artillery support in the middle of a firefight and it turns up a few hours later.

As a result, the military focus on getting into position fast and getting started. A trained artillery battery can move its guns and start firing at a different position in six minutes.

If you think of an operation – something you need to do as having a start and finish point, the time it takes to get from the beginning to end is the cycle time.

The set up time is how long it takes you to change from what you are currently doing to the new thing you need to do once you start.

In manufacturing processes, it is now understood that reducing set up times is important because it lets you respond to customers faster and reduce the assets you have to use.

In actual time, the set up time may only account for 5 or 10% of the total time, but it has a huge impact on how effective the rest of the process is – and the experience your customer has of working with you.

How many times have you asked for something to be done and its taken days before the request starts to work its way through various layers and eventually reaches someone’s desk who is going to actually do something with it?

Perhaps focusing on set up times for knowledge based organisations could be the best thing they could do to dramatically improve their responsiveness and customer satisfaction.

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The essence of competitive strategy: build a moat

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Strategy in business is about focusing on the actions and responses of competitors.

That is what Professor Bruce Greenwald says in his book Competition Demystified. Bruce Greenwald teaches at Columbia Business School and is perhaps the leading academic authority on value investing, the method followed by Warren Buffett and outlined by Benjamin Graham.

The core concept of competitive strategy is based on Michael Porter’s theory that Five Forces tell you how attractive a sector is for business. These are Suppliers, Buyers, Competitors, Substitutes and Potential entrants.

The Five Forces framework makes it easy for business people to spend a lot of time looking at their markets and making plans.

The book says that executives make the mistake of thinking that any plan to get new customers, cut costs or do something that takes time and money is a strategy.

Instead, a strategy should be thought of as only those plans that focus specifically on the actions and responses of competitors.

Why is this important?

It’s because the price at which you sell something tends to head towards cost in a commodity market. If what you do can be done by anyone else, the market price of that thing you do will quickly fall to the cost of doing it, making your margin zero.

The more exposed you are to competition, the easier it is for someone else to start what you do, the fewer the buyers for your service – the more quickly your margin will drop.

The way to maintain a high margin is to focus on how you can create and protect an advantage for your business. As Warren Buffet would say, what is your moat? What is the thing that surrounds and protects your business from competitors who want to take your market share.

Strategy is all about making the playing field less level by doing something your competitors cannot. As a result, strategy is all about your competition – where are they playing, what are they doing, and where should you put your efforts so that you can make it harder for them to replicate what you have and do?

If you can’t protect yourself, then the only thing to do is to be as efficient as possible. Forget the competition and focus on reducing your costs.

If you can, then focus on creating a moat.

The same strategic process applies to individuals. If anyone can do what you can do, your wages will stay low as you can be replaced easily.

If what you do is unique and hard to replicate, you will be more valuable and be paid more.

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Why don’t we make rational decisions under pressure?

For a long time we assumed that humans are rational creatures and operate on the basis of rational self interest.

The basis of traditional economics is that people make rational decisons. It assumes that people make a choice that gets them the most benefit and is in their self interest.

Much philosophy is based on logic. The idea is that you can arrive at the truth through logic and dialogue, that the truth is somehow independent of how we think and feel.

These views of human behaviour are changing as we learn more about behavioural psychology.

Logic ran into trouble in 1931 when a mathematician called Godel figured out that you couldn’t prove everything with maths.

In essence a general sense any system based on axioms and deduction, such as arithmetic, would contain within it statements that can “neither be proved nor disproved”.

What this means is that you can’t argue that something is “true” purely using logic and maths because there will always be something within that framework of knowledge that you need to “believe”.

So, logic starts to experience problems when it comes to explaining the complexity of human behaviour. Economic logic has run into that problem – the kind of behaviour predicted by traditional economics is something people just don’t do.

For example, ask people if they would rather be paid £100k and all their friends be paid £200k, or if they would rather be paid £80k and all their friends be paid £60k.

The rational choice, the one that maximises benefit is the first choice. But most people will go for the second choice because they think about what the benefit to them means when compared to what others get. In essence, value is relative and not absolute.

One reason for this is that our brains were not “designed” to be logical. Evolution didn’t design us or decide what attributes to give us.

In Daniel Levitin’s book The Organized Mind he describes how the brain was not engineered. Instead he says that “The brain is more like a big, old house with piecemeal renovations done on every floor, and less like new construction”.

The human brain is a concoction of systems – from the lizard brain that runs away, fights and reproduces to the pre-frontal cortex that allows us to think about the future.

Biology has more to say about why people think and act the way they do these days than does economics and philosophy. We can look inside the brain and understand the structure of memory and decision making better than ever now.

For example, we know that when people are stressed, their brains revert to lizard mode.

Any organisation that wants to make better decisions needs to make sure that their people don’t operate under stress. That is guaranteed to get the lizard brain operating and will result in decisions based on fear or violence (flight or fight).

It’s almost impossible to switch from lizard mode brain into thinking brain when you are under pressure.

The only way to operate is to decide ahead of time what you are going to do and then follow that plan.

We need to work at being rational – it’s not something that comes naturally in all situations. The rational thing to do is assume that we are always going to default to decisions based on fear or aggression and we need to work on improving our decision making.