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Laszlo Bock on Building Google’s Culture

Much has been written about what makes Google work so well: their ridiculously profitable advertising business model, the technology behind their search engine and data centers, and the amazing pay and perks they offer.

My experiences investing in and working with startups, however, has taught me that building a great company is usually less about a specific technical or business model innovation than about building a culture of continuous improvement and innovation. To try to get some insight into how Google does things, I picked up Google SVP of People Operations Laszlo Bock’s book Work Rules! (also available from Google Books)

Bock describes a Google culture rooted in principles that came from founders Larry Page and Sergey Brin when they started the company: get the best people to work for you, make them want to stay and contribute, and remove barriers to their creativity. What’s great (to those interested in company building) is that Bock goes on to detail the practices Google has put in place to try to live up to these principles even as their headcount has expanded.

The core of Google’s culture boils down to four basic principles and much of the book is focused on how companies should act if they want to live up to them:

  1. Presume trust: Many of Google’s cultural norms stem from a view that people are well-intentioned and trustworthy. While that may not seem so radical, this manifested at Google as a level of transparency with employees and a bias to say yes to employee suggestions that most companies are uncomfortable with. It raises interesting questions about why companies that say their talent is the most important thing treat them in ways that suggest a lack of trust.
  2. Recruit the best: Many an exec pays lip service to this, but what Google has done is institute policies that run counter to standard recruiting practices to try to actually achieve this at scale: templatized interviews / forms (to make the review process more objective and standardized), hiring decisions made by cross-org committees (to insure a consistently high bar is set), and heavy use of data to track the effectiveness of different interviewers and interview tactics. While there’s room to disagree if these are the best policies (I can imagine hating this as a hiring manager trying to staff up a team quickly), what I admired is that they set a goal (to hire the best at scale) and have actually thought through the recruiting practices they need to do so.
  3. Pay fairly [means pay unequally]: While many executives would agree with the notion that superstar employees can be 2-10x more productive, few companies actually compensate their superstars 2-10x more. While its unclear to me how effective Google is at rewarding superstars, the fact that they’ve tried to align their pay policies with their beliefs on how people perform is another great example of deviating from the norm (this time in terms of compensation) to follow through on their desire to pay fairly.
  4. Be data-driven: Another “in vogue” platitude amongst executives, but one that very few companies live up to, is around being data-driven. In reading Bock’s book, I was constantly drawing parallels between the experimentation, data collection, and analyses his People Operations team carried out and the types of experiments, data collection, and analyses you would expect a consumer internet/mobile company to do with their users. Case in point: Bock’s team experimented with different performance review approaches and even cafeteria food offerings in the same way you would expect Facebook to experiment with different news feed algorithms and notification strategies. It underscores the principle that, if you’re truly data-driven, you don’t just selectively apply it to how you conduct business, you apply it everywhere.

Of course, not every company is Google, and not every company should have the same set of guiding principles or will come to same conclusions. Some of the processes that Google practices are impractical (i.e., experimentation is harder to set up / draw conclusions from with much smaller companies, not all professions have such wide variations in output as to drive such wide variations in pay, etc).

What Bock’s book highlights, though, is that companies should be thoughtful about what sort of cultural principles they want to follow and what policies and actions that translates into if they truly believe them. I’d highly recommend the book!

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Reading About a Childhood Hero

HannibalI took advantage of this past holiday weekend by catching up on some reading: in particular, I finished a book by Richard A. Gabriel on a childhood hero of mine: Hannibal – The Military Biography of Rome’s Greatest Enemy (also available on Google Books)

Quick primer for those of you not in the know/not as enthusiastic about Hannibal as I am :-): the Carthaginian general Hannibal fought in the Second Punic War – the second of three major wars between the two great Mediterranean powers of their day: Rome and Carthage. These wars were among the first true “world wars” that the world saw – in terms of bringing great powers to war and in terms of sheer devastation of life and property– and set the stage for Rome to eventually take over the entire Mediterranean.

So, why is Hannibal a childhood hero of mine? Well:

  • He is the son of one of the greatest Carthaginian generals from the First Punic War – Hamilcar Barca — who, legend has it, made a young Hannibal swear to “never be a friend of Rome” (holy comic book origins, Batman!)
  • He was a superb commander of men: whereas the Roman armies were made primarily of Roman citizens, Hannibal’s army consisted of people who spoke many different languages and had vastly different fighting styles: Carthaginian, Spanish, North African, Gallic tribesmen, Italian, Greek, etc.
  • His army had elephants! I know that’s not too unique, but seriously – ELEPHANTS!
  • He executed one of the boldest and most daring moves in antiquity, marching a massive multicultural army from Spain across the Alps and the Pyrenees into Italy.
  • Then, for 15 years, he fought legion after legion in enemy territory, only once receiving very limited supplies and reinforcements from Carthage.
  • One of those battles he fought was the famed Battle of Cannae – one of the greatest military victories ever achieved. There, Hannibal’s army of ~50,000 faced a Roman force of ~80-90,000. Despite being outnumbered, Hannibal crushed his Roman adversaries with a brilliant enveloping maneuver – losing some 5-8,000 soldiers (10-20% of Hannibal’s forces) while killing some 40-60,000 (50% of Rome’s forces) and capturing another 5-10,000! Among those killed included one of Rome’s two consuls (the equivalent to a Prime Minister or President), a previous consul, and a number of Roman Senators! In the course of three quick battles ending at Cannae, Hannibal’s forces had killed an estimated 100,000 Romans – believed to be 20% of Rome’s military age population.

I’ll admit, its not the most kid-friendly hero to have 🙂 but when it came down to it, I was amazed by his life. It takes uncanny ability, stamina, and boldness to be able to operate within enemy territory for 15 years and still win victory after victory.

GP Route of Hannibals invasion of Italy

Its with that enthusiasm that I picked up Gabriel’s book. While I think it’s a wonderful book for anyone who is deeply interested in Hannibal and military history (like your humble blogger), this is not really a biography intended for popular consumption. The book should really be thought of as an academic close read of the works of Livy and Polybius, the two Romans who wrote the most detailed account of the Second Punic War – pointing out where Livy/Polybius’s nationalism or their lack of attentiveness to detail probably led to inaccurate or revisionist accounts of what happened. Its in those moments that the author is simultaneously the most compelling (as Gabriel clearly shows off his amazing knowledge of military history and of the ancient world) and also the most frustrating (as it interferes with the narrative of Hannibal’s life in the name of the academic purpose).

With that said, ancient/military history buffs will appreciate the attentiveness to detail from the author (and his dismantling of many commonly held beliefs about Hannibal’s failure such as the lack of naval control/siege equipment), and Hannibal devotees (which may just be me :-)) will appreciate the author’s almost stream of consciousness way of describing what must have been going through Hannibal’s head as he made decision after decision.

In particular, Gabriel’s dissection of why Hannibal was doomed to failure was very compelling. To Gabriel, Hannibal made a number of key mistakes. First, he did not understand that Rome did not view war the way that the Greeks did – where a large defeat or two on the battlefield would lead to one side capitulating – Rome viewed war as a life or death situation – there was no room for negotiation unless they were winning and there was no room for capitulating. Period. Secondly, he did not understand that he was just one front of a grander geopolitical chess game between Carthage and Rome: Carthage was not especially interested in Italy (it would never realistically be able to hold its territory there even if it gained it), it was interested in preserving its holdings in Spain and in the islands of the Mediterranean. It was those two errors which doomed Hannibal to failure especially once Rome realized it could not keep throwing legion after legion at Hannibal and waged a war of attrition.

So, ultimate verdict: this is great if you’re a military history buff or really want to get into the details of Hannibal’s exploits, but there are likely much more accessible reads if you just want to learn a bit more about Hannibal’s life/Punic Wars.

(Image credit – Summa Gallicana)

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The Making of an American Capitalist

buffettIf you’re interested in investing, regardless of your investment philosophy/strategy, you should be interested in Warren Buffett, potentially the most successful investor of our time. And, if you’re interested in Warren Buffett and investing, you should read Roger Lowenstein’s biography: Buffett: The Making of an American Capitalist.

Lowenstein’s biography is not “official” in the sense that Buffett did not go out of his way to authorize or support it. But, despite this (and maybe even because of this), it does a great job of delving into the psychology of the “Oracle of Omaha.” It doesn’t pretend to fully grasp the inner workings of Buffett’s mind (otherwise, I believe Mr. Lowenstein would be better suited investing full time in the stock market rather than writing biographies! :-)), but by diving into Buffett’s childhood and by closely examining what the individuals/companies who interacted with Buffett had to say, the book does a great job at painting with broad strokes a hint at Buffett’s character and thinking style.

Rather than the image of an entitled baron or a megalomaniac with a god complex that one might expect from someone with Buffett’s investment record, the biography portrays an insecure and, at times, painfully awkward person who lived in the same house for decades, seemed to subsist entirely on Cherry Coke, hamburgers, and steaks, was (and probably still is) a remarkable cheapskate, and found it difficult to communicate with his family. And yet, what is particularly inspiring is that these very human, “Main Street” traits seemed to have been at the core of his success. Where “more sophisticated” investors chased new gimmicks involving leverage and options and forecasts, Buffett stuck with very simple ideas, like making sure you have a “margin of safety” before making an investment, being patient, and not venturing out into things he did not understand. And, while those other “more sophisticated” investors came and went, Buffett has stuck through year after year delivering impressive results.

More so than that, while Lowenstein doesn’t paint Buffett out to be a saint – he is interested in making money after all – I was amazed by the degree to which Buffett has seemed to retain a moral character that so many financiers have not. Case in point: the end of the book covers Buffett’s takeover of Salomon Brothers after it was embroiled in a Treasury bond scandal that could have seen the firm collapse. Buffett played a major role in helping to save the company, instituting practices which many in the industry (and even at the firm) viewed as naïve – practices which I think shareholders today need to implement such as bonuses tied to actual performance, a willingness to be truly open book with regulators, and a desire to not just “not cross the line” by employing huge legal teams, but to genuinely stay “way, way away from the line.”

Heck, I’m still shocked Buffett does all of his own taxes!

But, coming back to what I took away from the book as the reasons for Buffett’s success, I saw four overarching themes:

  1. Keep it simple. Buffett’s entire investment philosophy seems to break down into three fairly simple ideas: (1) companies have an intrinsic value that their stock prices will ultimately reflect, (2) the market can be thought of as a manic-depressive named Mr. Market – on his manic days, he quotes very optimistic prices, but on his depressed days, he quotes very pessimistic prices – who doesn’t take offense if you ignore him, and (3) its hard to precisely determine a company’s intrinsic worth, but when that number and the number Mr. Market quotes are far apart, you have a “margin of safety” to make a decision. None of these ideas are particularly complicated or require extremely sophisticated analysis, and the allegory of “Mr. Market” feels more folksy than Ivy League-MBA-quant-heavy-investment-guru. Yes, there is certainly sophisticated thinking and math behind evaluating intrinsic worth, but in reading the book and even in reading Buffett’s essays, you find that his thinking often boils down to other folksy tenets like when he explained one of the main reasons he invested in Coca-Cola, “if you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”
  2. Be consistently honest and moral. I think the book, and the general investing community, focus too little on this. One reason Buffett was able to buy (or at least buy large stakes) in so many companies and inspire loyalty from those who worked with him was that people liked him because they knew he was consistently honest and moral. Its how he was invited on the board of the Washington Post despite the CEO’s initial fear of him as an investor who wanted to take over the company. Its how, in the 1980s, he was able to get into companies who wanted to avoid the aggressive and hostile overtures of the corporate raiders of that generation. And its how he was able to maneuver through the handful of times he or one of his acquisitions had to deal with legal trouble. Hard to dig up skeletons when there aren’t any, and its hard to mistrust someone who will probably always be straight with you.
  3. Be patient. If there’s one thing I’ve observed its that Buffett is remarkably patient. Many of the assets he buys/invests in, he holds for years (and in some cases, he has never let go of or sold). He is also willing to take the time to thoroughly understand a business before jumping in rather than simply jump in on a “hot stock tip” or because the stock price seems to be on an upward trend. But, and what is potentially the most important, he is willing to wait until all the conditions are right before jumping in. In the case of Buffett’s Coca Cola investment, although the stock price had been cheaper before Buffett bought in, Buffett was waiting for the right management with the right focus on growing shareholder value to be set in to invest.
  4. Read everything. One thing which Lowenstein referred to over and over again was the degree at which the CEOs Buffett invested in were surprised at how well Buffett understood the underlying business and the issues facing it. Granted, Buffett seemed to read financial reports and statements for fun, but I think the key takeaway there is that nothing can replace solid fundamental research.

If you’re interested in investing or a biography of one of the world’s most fascinating and successful people or just want a cool look at the inside of a few decades of business, I’d highly recommend the book.

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Making Macro Manageable

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On the advice of one of the members of the little investment club I am a part of, I picked up David Moss’s book A Concise Guide to Macroeconomics. I wasn’t expecting much, having taken a few introductory economics courses in college and being a casual economics aficionado, but I gave it a shot.

And, I think that the subtitle “What Managers, Executives, and Students Need to Know” is simultaneously very appropriate and a dramatic underselling of the book. Moss’s writing style and his very direct, conclusion-oriented (as opposed to “scholarly”) overview of basic macroeconomics makes the book not only accessible to people who need a working understanding of economics but not the extra academic theory, but also a great reference.

Now, if you’re an economic genius, or have even just taken basic economics, then you’re not going to learn anything earthshattering from the book, but what you may get out of it which could be just as valuable is a different way of thinking through or of explaining macroeconomic concepts.

Case in point: I had never thought of “the job of a pension system is to divide national output between active workers and retirees.” While this is a simple and obviously true statement, Moss uses that underlying “framework” to explain why moving existing Social Security/pension plans to an IRA (stock-based) retirement system is unlikely to fundamentally solve anything:

Although all of us are accustomed to thinking that we can sell our financial assets for cash at a moment’s notice and then use the cash to buy goods and services, this obviously wouldn’t work if everyone tried to do it at once. If a large number of senior citizens liquidated their financial assets at the same time, in order to buy needed goods and services, they would soon find that the proceeds were much smaller than they had expected. Simply giving the elderly more pieces of paper – more stocks and bonds – does not guarantee that there will be more output for them to consume in the future …

The key question from a macroeconomic standpoint, therefore, is not whether the senior citizens of tomorrow have IRAs or traditional Social Security benefits, but whether they (or others) reduced their consumption to prepare for their eventual retirement. Unless savings are increased today, the division of output between active workers and retirees will be no less onerous tomorrow, regardless of whether we have a fully funded pension system based on individual accounts or a traditional pay-as-you-go system based on payroll taxes …

The amount of output a country produces is its ultimate budget constraint, regardless of how many stocks or bonds or Social Security cards may be floating around. Unless its output grows, a country cannot give more to its retirees without giving less to its workers.

Maybe you didn’t hear anything new there – and if so, pat yourself on the back as you are far smarter than I am – but I was blown away by the simplicity of Moss’s explanation of what is a very complicated problem. Mind you, he doesn’t have an answer to out-of-control entitlement programs like the one the US has, but being able to break this down only pages after explaining the different things that make up and affect GDP (national economic output) was impressive to me. And the cool thing is that Moss does this several times, explaining, for instance, why boosting monetary supply (i.e. when the Federal Reserve cuts interest rates) may have a certain effect on the exchange rate in the short-term but a different one in the long-term and how an “unsustainable current account deficit” (i.e. huge trade deficits) might look like a “high degree of investor confidence” at first.

If you’re interested in macroeconomics casually or as a business-person who needs a better grasp of it in his or her job, I’d highly recommend the book.

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Origins

I recently finished a book: Origins: Fourteen Billion Years of Cosmic Evolution.

As I’ve noted several times on the science & technology blog BenchPress: I am a sucker for astrophysics. Unlike most areas of scientific inquiry, humans have almost no real capacity to touch or directly measure astronomical phenomena. For phenomena outside our galaxy, its practically inconceivable that humans will ever be able to visit them. Consequently, almost everything we know about our cosmos comes from humans being extremely curious, observant, and resourceful. To me, it’s a sign of the highest form of human technical ingenuity and scientific deduction that we can achieve.

The book Origins is a great exploration of this which, as its title suggests, goes through some of the most deep scientific questions humans can ask: how did the universe come to be? how did the stars come to be? how did the planets come into existence? how did life come into existence? can there be life “out there”?

And given the nature of the questions, who better than People Magazine’s sexiest astrophysicist Neil deGrasse Tyson to help answer them? Tyson, in addition to being an accomplished astrophysicist, is one of the public faces of science – oftentimes appearing in the media and on shows like Comedy Central’s Colbert Report and The Daily Show (see below for one of my favorite clips with Tyson):

 

While the book falls a little bit short of “accessible to every layperson”, for anyone who has taken high school physics and has a passing interest in astronomy, this book is not only very easy to digest, it provides just enough depth that the reader can appreciate that concepts as fantastical as Dark Matter, the cosmic background radiation, and the flatness of the universe have a strong scientific basis built through a series of very reasonable, methodical, and ingenious set of experiments and observations.

As anyone with a real appreciation for science knows: science is much more about the process of discovery – the Eureka’s that oftentimes reveal deep and rigorous insights about the universe and not memorizing textbooks full of equations and “facts”. Rather than present a set of statements about astronomy, Tyson nails presenting that exploration aspect of science. He doesn’t simply say that the Big Bang resulted in a cosmic background radiation of ~2.7K – he points out that a Ukrainian physicist hypothesized that such a radiation existed years before it was possible to measure it and even estimated it at ~5K – amazing considering it was just based on some “back of the envelope” math. Tyson points out that it wasn’t “true” astronomers and physicists who finally built a device capable of measuring the radiation, it was some researchers at Bell Labs who were trying to build a microwave-based communications system and it wasn’t until the “real” astronomers stumbled on a paper that described some bizarre “excess antenna temperature” that seemed to come from “everywhere” that they realized that Bell Labs had inadvertently discovered the best evidence we have for the Big Bang.

If that sort of scientific storytelling in an area as rich and deep as astrophysics is appealing to you, I’d recommend getting the book.

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Innovator’s Delight

imageKnowing my interest in tech strategy, a coworker recommended I pick up HBS professor Clayton Christensen’s “classic” book on disruptive innovation: The Innovator’s Dilemma. And, I have to say I was very impressed.

The book tries to answer a very interesting question: why do otherwise successful companies sometimes fail to keep up on innovation? Christensen’s answer is counter-intuitive but deep: the very factors that make a company successful, like listening to customer needs, make it difficult for successful companies to adopt disruptive innovations which create new markets and new capabilities.

This sounds completely irrational, and I was skeptical when I first heard it, but Christensen makes a very compelling case for it. He begins the book by considering the hard disk drive (HDD) industry. The reason for this is, as Christensen puts it (and this is merely page one of chapter one!):

“Those who study genetics avoid studying humans, because new generations come along only every thirty years or so, and so it takes a long time to understand the cause and effect of any changes. Instead, they study fruit flies, because fruit flies are conceived, born, mature, and die all within a single day. If you want to understand why something happens in business, study the disk drive industry. Those companies are the closest things to fruit flies that the business world will ever see.”

image From that oddly compelling start, Christensen applies multiple techniques to establish the grounds for his theory. He begins by admitting that his initial hypothesis for why some HDD companies successfully innovated had nothing to do with his current explanation and was something he called “the technology mudslide”: that because technology is constantly evolving and shifting (like a mudslide), companies which could not keep moving to stay afloat (i.e. by innovating) would slip and fall.

But, when he investigated the different types of technological innovations which hit the HDD industry, he found that the large companies were actually constantly innovating, developing new techniques and technologies to improve their products. Contrary to the opinion of many in the startup community, big companies did not lack innovative agility – in fact, they were the leaders in developing and acquiring the successful technologies which allowed them to make better and better products.
But, every now and then, when the basis of competition changed, like the shift to a smaller hard disk size to accommodate a new product category like minicomputers versus mainframes or laptops versus desktops, the big companies faltered.

From that profound yet seemingly innocuous observation grew a series of studies across a number of industries (the book covers industries ranging from hardcore technology like hard disk drives and computers to industries that you normally wouldn’t associate with rapid technological innovation like mechanical excavators, off-road motorbikes, and even discount retailing) which helped Christensen come to a basic logical story involving six distinct steps:

  1. Three things dictate a company’s strategy: resources, processes, and values. Any strategy that a company wishes to embark on will fail if the company doesn’t have the necessary resources (e.g. factories, talent, etc.), processes (e.g. organizational structure, manufacturing process, etc.), and values (e.g. how a company decides between different choices). It doesn’t matter if you have two of the three.
  2. Large, successful companies value listening to their customers. Successful companies became successful because they were able to create and market products that customers were willing to pay for. Companies that didn’t do this wouldn’t survive, and resources and processes which didn’t “get with the program” were either downsized or re-oriented.
  3. Successful companies help create ecosystems which are responsive to customer needs. Successful companies need to have ways of supporting their customers. This means they need to have or build channels (e.g. through a store, or online), services (e.g. repair, installation), standards (e.g. how products are qualified and work with one another), and partners (e.g. suppliers, ecosystem partners) which are all dedicated towards the same goal. If this weren’t true, the companies would all either fail or be replaced by companies which could “get with the program.”
  4. Large, successful companies value big opportunities. If you’re a $10 million company, you only need to generate an extra $1 million in sales to grow 10%. If you’re a $10 billion company, you need to find an extra $1 billion in sales to grow an equivalent amount. Is it any wonder, then, that large companies will look to large opportunities? After all, if companies started throwing significant resources or management effort on small opportunities, the company would quickly be passed up by its competitors.
  5. Successful companies don’t have the values or processes to push innovations aimed at unproven markets, which serve new customers and needs. Because successful companies value big opportunities which meet the needs of their customers and are embedded in ecosystems which help them do that, they will mobilize their resources and processes in the best way possible to fulfill and market those needs. And, in fact, that is what Christensen saw – in almost every market he studied, when the customers of successful companies needed a new feature or level of quality, successful companies were almost always successful at either leading or acquiring the innovation necessary to do that. But, when it came to experimental products offering slimmer profit margins and targeting new customers with new needs and new ecosystems in unproven markets, successful companies often failed, even if management made those new markets a priority, because those companies lacked the values and/or processes needed. After all, if you were working in IBM’s Mainframe division, why would you chase the lower-performance, lower-profit minicomputer industry and its unfamiliar set of customers and needs and distribution channels?
  6. Disruptive innovations tend to start as inferior products, but, over time improve and eventually displace older technologies. Using the previous example, while IBM’s mainframe division found it undesirable to enter the minicomputer market, the minicomputer players were very eager to “go North” and capture the higher performance and profitability that the mainframe players enjoyed. The result? Because of the values of the mainframe players as compared with the values of the minicomputer players, minicomputer companies focused on improving their technology to both service their customer’s needs and capture the mainframe business, resulting in one disruptive innovation replacing an older one.

image The most interesting thing that Christensen pointed out was that, in many cases, established companies actually beat new players to a disruptive innovation (as happened several times in the HDD and mechanical excavator industries)! But, because these companies lacked the necessary values, processes, and ecosystem, they were unable to successfully market them. Their success actually doomed them to failure!

But Christensen doesn’t stop with this multi-faceted and thorough look at why successful companies fail at disruptive innovation. He spends a sizable portion of the book explaining how companies can fight the “trappings” of success (i.e. by creating semi-independent organizations that can chase new markets and be excited about smaller opportunities), and even closes the book with an interesting “ahead-of-his-time” look (remember, this book was written over a decade ago!) at how to bring about electric cars.

I highly recommend this book to anyone interested in the technology industry or even, more broadly speaking, on understanding how to think about corporate strategy. While most business books on this subject use high-flying generalizations and poorly evaluated case studies, Christensen approaches each problem with a level of rigor and thoroughness that you rarely see in corporate boardrooms. His structured approach to explaining how disruptive innovations work, who tends to succeed at them, why, and how to conquer/adapt to them makes for a fascinating read, and, in my humble opinion, is a great example of how corporate strategy should be done – by combining well-researched data and structured thinking. To top it all, I can think of no higher praise than to say that this book, despite being written over a decade ago, has many parallels to strategic issues that companies face today (i.e. what will determine if cloud computing on netbooks can replace the traditional PC model? Will cleantech successfully replace coal and oil?), and has a number of deep insights into how venture capital firms and startups can succeed, as well as some insights into how to create organizations which can be innovative on more than just one level.

Book: The Innovator’s Dilemma by Clayton Christensen

(Image credit: hard disk drive) (Image credit: David and Goliath)

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The Essays of the Oracle of Omaha

image I recently finished reading The Essays of Warren Buffett: Lessons for Corporate America, a great collection of some of multibillionaire Warren Buffett’s greatest writings on business as collected and introduced by Lawrence Cunningham, and would highly recommend it to anyone who wants to know a bit more about investing or business or both.

The book is organized into 8 “chapters”, with each chapter containing a series of excerpts from Warren Buffett’s writings, which as far as I can tell are mostly from the annual reports that Warren Buffett prepares for his company Berkshire Hathaway (I wonder if he writes personal financial reports…). The chapters discuss Buffett’s views on a number of topics, ranging from corporate governance to mergers and acquisitions to accounting to discussions of how investing should work.

Reading the book will give you an interesting look at the mind of one of the most successful investors of all time, but while I valued that insight, I think I was most impressed by three things:

  1. I was amazed at how approachable and “folksy” Buffett’s writings are. Instead of relying on complex jargon and consultant-speak, he speaks in plain English, oftentimes using funny analogies or stories (and sometimes even Biblical/literary parables) or extremely nerdy puns to make very simple points. Case in point, to explain the irrationality of some companies who seem to always pursue that “one magical acquisition” which will take them to success, Buffet writes:

    “In the past, I’ve observed that many acquisition-hungry managers were apparently mesmerized by their childhood reading of the story about the frog-kissing princess. Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations. Initially, disappointing results only deepen their desire to round up new toads. Ultimately, even the most optimistic manager must face reality. Standing knee-deep in unresponsive toads, he then announces an enormous ‘restructuring charge’. In this corporate equivalent of a Head Start program, the CEO receives the education, but the stockholders pay the tuition.”

  2. I was impressed at how consistent Buffett has been. It’s rare to find a politician, let alone a businessman, who has had the consistency of values and strategy that Buffett has had. You can take any essay from any chapter of this book, regardless of when it’s from, and, other than mentions of specific years or specific political/cultural references, you would not be able to tell what year that essay had been written. His core message and beliefs on corporate governance, mergers & acquisitions, and especially his investment philosophy have not changed.
  3. I was especially impressed at Buffett’s humility. Most executives seem to always desperately crave the spotlight and credit for positive things which have little to do with them and to deflect blame for things which are. I can’t fault them for that, as their salaries and jobs are highly dependent on the perception that they are capable stewards who do not make mistakes. But, Buffett takes a different approach. In many an essay about Berkshire Hathaway’s success, Buffett attributes the credit to the managers of the businesses Berkshire owns, oftentimes noting that his job is only to pick good businesses to own and that it is the managers and the businesses themselves that drive success. In essays about Buffett’s missteps, he freely owns up to them. In multiple essays, he has owned up to holding on to his textile business for too long or not exiting General Re’s derivatives business fast enough. Buffett even goes so far as to explain mistakes that he had made which nobody outside of Berkshire’s leadership team would know about (i.e. investment opportunities he could have made but passed on).

While I definitely learned a great deal about business and how Buffett thinks of the market, I think the most important learning that I took away from the book is what Buffett calls the “Noah principle”, and it is something I will aim to try to adhere to for the rest of my life:

“Predicting rain doesn’t count, building arks does.”

(Image credit – Book cover from Amazon)

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POWER trip

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I recently read The Race for a New Game Machine, a new book which details the trials and tribulations behind the creation of the chips (which run on the POWER architecture, hence the title of this post) which powered Microsoft’s Xbox360 and Sony’s Playstation 3 next-gen gaming consoles.

The interesting thing that the book reveals is that the same IBM team responsible for designing the Playstation 3 chip (the Cell) with support from partners Sony and Toshiba was asked halfway through the Cell design process to adapt the heart of the Playstation 3 chip for the chip which would go into Microsoft’s XBox360 (the Xenon)!

Ironically, even though work on the Xbox360 started way after work on the Playstation 3’s chip, due to manufacturing issues, Microsoft was able to actually have a test chip BEFORE Sony did.

As the book was written from the perspective of David Shippy and Mickie Phipps, two the engineering leads from IBM, the reader gets a first-hand account of what it was like to be on the engineering team. While the technical details are more watered down than I would have personally liked, the book dove a lot deeper into the business/organizational side of things than I thought IBM legal would allow.

Four big lessons stood out to me after reading this:

  • Organization is important. Although ex-IBM CEO Lou Gerstner engineered one of the most storied corporate turnarounds of all time, helping to transform IBM from a failing mainframe company into a successful and well-integrated “solutions” company, Shippy and Phipps’ account reveal a deeply dysfunctional organization. Corporate groups pursued more projects than the engineering teams could support, and rival product/engineering groups refused to work together in the name of marking territory. In my mind, the Cell chip failed in its vision of being used as the new architecture for all “smart electronic devices” in no small part because of this organizational dysfunction.
  • Know the competition. One thing which stood out to me as a good bestimage practice for competitive engineering projects was the effort described in an early chapter about IBM’s attempt to predict how Intel’s chips would perform during the timeframe of the product launch. I’m not sure if this is done often in engineering efforts, but the fact that IBM tried to understand (and not undersell) the capabilities of Intel’s chips during the launch window helped give the IBM team a clear goal and set of milestones for determining success. That their chip continues to have a remarkably high operating clock speed and computing performance is a testament to the success of that effort.
  • Morale is important. If there was one feeling that the authors were able to convey in the book, it was frustration. Frustration at the organizational dysfunction which plagued IBM. Frustration at not quite ethical shenanigans that IBM played in to deliver the same processing core to two competitors. Frustration at morale-shattering layoffs and hiring freezes. It’s no secret today that IBM’s chip-making division is not the most profitable division in IBM (although this is partly because IBM relies on the division not to make profits, but to give its server products a technology advantage). IBM is certainly not doing itself any favors, then, by working its engineers to the point of exhaustion. Seeing how both authors left IBM during or shortly after this project, I can only hope that IBM has changed things, or else the world may be short yet another talented chipmaker.
  • Move like a butterfly, sting like a bee. Why did Microsoft “get the jump” on Sony, despite the latter starting far far in advance? I trace it to two things. First, immediately upon seeing an excellent new chip technology (ironically, the core processor for the Playstation 3), they seized on the opportunity. They refused to take a different chip from what they wanted, they put their money where their mouth was, and they did it as fast as they could. Second, Microsoft set up a backup manufacturing line in Singapore (at a contract chip manufacturer called Chartered). This was expensive and risky, but Microsoft realized it would be good insurance against risk at IBM’s line and a good way to quickly ramp up production. This combination of betting big, but betting smart (with a way to cover their bet if it went wrong) is a hallmark of Microsoft’s business strategy. And, in this case, they made the right call. The Xbox 360, while not selling as well as Nintendo’s Wii (which incidentally runs an IBM chip as well), has been fairly successful for Microsoft (having the highest attach rate – games sold per machine – of any console), and they had the backup plan necessary to deal with the risk that IBM’s manufacturing process would run into problems (which it ultimately did).

If you’re interested in the tears and sweat that went into designing IBM’s “PB” processing core (it’s revealed in the book that PB stands for PlayBox – an in-joke by Shippy’s team about how the technology being designed was for both the PLAYstation 3 and the xBOX), some first-hand account of how difficult it is to design next-generation semiconductor products, or how IBM got away with designing the same product for two competitors, I’d highly recommend this book.

(Image credit – book cover) (Image – Cell chip)

Book: The Race for a New Game Machine (Amazonlink)

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