| by Mixner Strategy |
- DISRUPTIVE TECHNOLOGIES
- Smaller companies have an edge. Open source hardware. Speedo
eclipses Nike. Starbuck’s growth plan.
PAST DISRUPTIONS ECHO TODAY
- Lehman Brothers, again. Long Term Capital Management resonates
today. ADM. Tea Pot Dome. Lincoln’s pragmatism.
DISRUPTIVE ECONOMIC DEVELOPMENT
- World-size port – in Baja? Will it pencil out? Air quality at the ports –
threat or opportunity?
DISRUPTIVE GROWTH STRATEGY
PURE DIGITAL’S DISRUPTIVE TECHNOLOGY: SMALLER COMPANIES HAVE
AN EDGE
BARE BONES. Light weight-three buttons only. Affordable-$120 versus $340
industry average. Shy - there’s a word to describe a new product. Sales in the first
year of one million units versus six million for the whole camcorder industry (Jana).
What’s the product? Pure Digital’s Flip camcorder.
Disruptive technology? Yes. Why? There’s a question.
Sony owns the business. They invented light weight as in the first Walkman. They
just forgot that people weren’t interested in a new feature. They were interested in
a simple camcorder that would take simple movies that could be simply shown on
the Internet.
The Flip isn’t as good. The paint is cheaper. The lens probably isn’t as good.
Nobody cares. They probably don’t notice, as most of the video shot with the Flip
is ending up on low-res outputs like a laptop.
Sony takes it’s time, relatively. Innovation is progressing more rapidly at Pure
Digital.
They were able to ship a million units in the first year with no trouble - and not
troubles, as well. Pure Digital started in the throw-away-camera business. Simple
things that got thrown away quickly. Their customers said they wanted a throw-
away camcorder. It ended up being not quite throw-away, but close. New products
are coming out quickly.
The Flip is so simple, you can’t up-grade it. No additional memory sticks to worry
about.
It’s low tech as the Flip works on regular batteries. No bricks or cords.
No cords to down-load the movie. The USB “flips” out at the press of a button,
thus the name. Nothing to lose. Nothing to go find when you’re ready to see your
production.
The Flip software actually isn’t cutting edge at all. It’s not perfect. It’s just good
enough to do the job. Most people are satisfied with what they get for the price
they paid.
Evidence of disruptive technology:
- Simple
- Cheap
- Faster to market with new up-grades
- Maybe not quite as good as what out there, but useful.
- One or two unique features that pique folks interest, probably based on
very good design elements.
Oprah raved about the Flip on her show. Rosie O’Donnel likes the Flip as well
(Jana).
Think simple for your next new product.
- Christensen, Clayton M. The Innovator’s Dilemma. When New
Technologies Cause Great Firms to Fail. Harvard Business School Press.
1997.
Christensen, Clayton M. and Michael E. Raynor. The Innovator’s Solution.
Creating and Sustaining Successful Growth. Harvard Business School Press.
2004.
Jana, Reena. incase: How the Flip - a bare-bones digital camcorder-grew
from a simple idea to a contender among giants like Sony.
BusinessWeek. 28 April 2008. 76. http://www.businessweek.
com/magazine/content/08_17/b4081076893508.htm
OPEN-SOURCE SOFTWARE – AND HARDWARE
Open-sourcing your software makes sense. So does open-sourcing your hardware,
and your services, too.
Why do it? Open-sourcing is tough to make money at, per se. Where the profits
come from is the knowledge you gain by being the center of the action relating to
your project, whether it be software, hardware or services.
The competition is busy modifying their products or services to keep up with
market needs. If you use the open-source community properly, you will focus on
disrupting the marketplace with innovations they see as worthless to their market.
A good example right now is the blogging community. The mini-blogs are starting
to win share because they allow your posts to gain notoriety in the search engines,
something the blogs made impossible long ago what with their large outputs from
professional sites that the amateur, personal user may no longer compete with.
Take a current product or service (like blogs) and improve on it (with a mini-blog)
in a way that incumbents won’t take the time to respond to. While they’re focusing
on making money, you focus on building share even while your profits are small or
nonexistent.
- Cook, Scott. The Contribution Revolution. Letting Volunteers Build Your
Business. Harvard Business Review. October 2008. 60.
Thompson, Clive. Build It. Share It. Profit. Wired. November 2008. 166.
SPEEDO’S DISRUPTIVE OLYMPICS
We all know Speedo for their sleek racing swimwear designs from way back when.
We also know that Speedo made Michael Phelps’ swim suit at the recent Olympics
where he won all his medals. What we probably didn’t realize was that Nike also
made swimwear for the Olympics, but it just wasn’t as good as Speedo’s. In fact,
some of the swimmers sponsored by Nike were allowed to use Speedo equipment
(Associated Press).
Speedo’s been around a long time. They’ve probably made changes to their
products in a sustainable fashion, meaning that they make incremental changes to
increase utility and speed, but didn’t shake things up too much. Until now. Their
new swim wear really shook up these Olympics with demonstrably successful
changes that won medals. Sustainable changes mean slow, incremental changes.
Disruptive changes shake things up. It looks like Speedo had a disruptive change
going on as their latest upgrades helped swimmers in their suits win more medals.
The most interesting part of the story is yet to come: apparently, Nike is
abandoning the swimwear market and leaving it to Speedo (Associated Press). It
looks like Nike wasn’t able to effectively out-perform Speedo in the engineering
department where it counted. Nike left a market to a smaller, seemingly more
innovative company. It’ll be interesting to see if and when they return.
- Associated Press. Nike to exit elite swimwear market. New York Times. 22
September 2008. http://www.nytimes.com/aponline/business/AP-Nike-
Swimwear.html
SMALL BANK’S DISRUPTIVE OPPORTUNITY
Everything was fine, until everything on Wall Street was not fine. Now two old
players in the investment banking business are more bank, less investment.
Goldman Sachs and Morgan Stanley, after resisting change and insisting all was
well, have changed their stripes and are now regulated bank holding companies
(White). Less risk. Lower rewards. That’s Wall Street today.
In parallel, as the investment banks become less investment and more bank, the
remaining investment bankers are looking to build market share. Jefferies &
Company and Evercore Partners are thinking of becoming more dominant in the
new Wall Street (Story).
The rules have changed. The deck has been re-shuffled, disrupted. Disruptive
strategies have pretty set processes, although they aren’t sometimes obvious.
Simple as compared to complex strategies make more sense. Warren Buffet said
back in 2003 some of the derivatives he was looking at “weapons of financial mass
destruction (Serwer, 24).” I think that pretty well describes some of the products
that failed in the last couple of months.
Cheap launches are more likely to succeed.
Speed to market is a good indicator of future success for technology companies. It
might be a predictor for service companies as well.
Disruptive companies might actually not be as good as their competition. They’ll
have fewer bells and whistles on their products, but they’ll be simple and easy to
understand.
Innovation in tech products does show, usually in unique design features that make
the experience easier or more fun. Making a service product more fun makes it
easier to use if done correctly.
The bigger investment banks are becoming more commercial and will probably
leave opportunities for smaller investment banks to grow. Some people say the big
companies will retain their business; others say the little guys have a chance (Story).
It seems to me that, if handled correctly, the smaller investment banks will succeed
if they follow the disruptive strategy game-plan. The first step? Take the little deals
the big banks have abandoned. Move upward from there. Already doing the
smaller deals? Add complexity – and profits – by continuing to move upstream.
- Serwer, Andy and Allan Sloan. The Price of Greed. Time. 29 September
2008. 32.
Story, Louise. As the Giants of Wall Street Topple, Smaller, Nimbler Rivals
Move In. New York Times. 23 September 2008. http://www.nytimes.
com/2008/09/23/business/23streets.html?_r=1&ref=business&oref=slogin
White, Ben and Louise Story. Last Two Big Investment Banks Reinvent
Their Businesses. New York Times. 23 September 2008. http://www.
nytimes.com/2008/09/23/business/23streets.html?
_r=1&ref=business&oref=slogin
STARBUCKS STRATEGY: MORE THAN LOCATION
Gap is a specialty casual retailer; Old Navy is a value-oriented family store; Banana
Republic is a moderately priced designer retailer (Rubinfeld, 299).
You knew that already. But Gap, Old Navy and Banana Republic didn’t know that
until Paul Pressler left Disney and moved to Gap Inc. His first move was to clearly
define the core values of each of the brands.
Once you know what the value of your retail operation is, now figure out how to
turn your brand’s values into growth. Rubinfeld plotted out the growth of
Starbucks early on in his tenure during the period when Starbucks grew from one
hundred to four thousand stores. Values first, yes; then lay out a framework that
takes those values to the mundane of such issues as store daily opening and closing.
Starbucks uses demographics to choose locations. Then it examines the parking lot
of suitable locations. Oil on the tarmac? Good. That’s evidence of lots of traffic
which helps build sales. Cluster your stores. Budget opening properly. They’ve
thought of it all (Ehrenfeld, 7).
Innovation is part of all this. Your insights - especially in retail - define your
innovation path (Rubinfeld, 300) :
Prove you have the license to expand the category or enter a new one by planning
far in advance.
Time your entry properly. Now, what with the changing financial statistics related
to recession, might be a good time to dust off old plans and re-examine the
possibilities that you have had time to consider before. Things, obviously, will turn
around eventually.
Finally, if you are abandoning your current demographic or expanding in to a
related one, make sure your plan - and your products and facilities - make enough
room for profits in the new one.
- Ehrenfeld, Tom. Starbucks and the Power of Story. How the coffee retailer
uses its own narrative to brew global success. strategy+business. 10 October
2008. http://www.strategy-business.com/press/article/08211?pg=0
Rubinfeld, Arthur and Collins Hemingway. Built for Growth. Expanding
Your Business Around the Corner or Across the Globe. Wharton School
Publishing. 2005.
CANCER WARS: COMPETITION VERSUS COLLABORATION
OLD WAY: compete with other cancer researchers for scarce funds. Focus on
cancers with big populations of effected folks. Don’t share results because
someone may use those results to get funds for research you want for yourself and
your team. The result? Solving the cancer problem takes longer than it should.
Some people with “unpopular” cancers die before their time.
NEW WAY: Communities in the health care battles create a business plan that
focuses on measurable results from efforts supported across the scientific
disciplines. Scientists collaborate on results instead of compete for funding.
Collaboration takes a different form: the funding sources essentially hire scientists
with the different skill sets and set them to work with scientists from other
laboratories, all of them focusing on a broader problem (or specific problem if it
makes sense) than would normally be addressed. Divisions within the community
lessen. Collaboration ensures that crucial data is shared earlier. More people live
longer.
The final product isn’t a scientific paper. It is a result. A treatment is produced
rather than a paper.
Funding sources are taking note by using a Silicon Valley approach. They’re “paying
for profits” (Saporito, 5) instead of waiting around. The focus on delivering a
working pharmaceutical has reduced development time from a deca de to four
years in certain instances. Specific, targeted cancers with limited populations
especially benefit from the targeted approach.
Ultimately, it is uncertain whether the new approach to cancer treatment is the right
way to go. The focus on communication, sharing of information, and collaboration
in an engineering and biological environment hopefully will yield results faster than
today’s norm.
- Saporito, Bill. He Won His Battle With Cancer. Time. 4 September 2008.
http://www.time.com/time/magazine/article/0,9171,1838776,00.html
INTUIT HARNESSES ITS CUSTOMER’S IDEAS
Scott Cook, the co-founder of Intuit, talks about a very specific add-on to the
TurboTax website that some of his managers didn’t expect to work very well. It
was simple, actually, a Q&A community built in the the 2007 version of TurboTax
on-line (Cook, 67).
Five weeks into the Q&A’s test period, they were ready to score it a success. In
2008, they added another section to the site, a user review section. Expectations
were for complaints. Didn’t happen. The vast bulk of the responses were positive
(Cook, 67). Good news.
Why do folks contribute (Cook, 68)? They don’t realize they are. They want their
practical solutions implemented quickly. Interaction is its own reward. Reputation
enhancement. Expression. Give back to your community.
Finally, what are the keys to making you community enhanced site work better - or
to get your at-work community to happily contribute (Cook, 69)? Take your time.
Don’t expect a lot early on. Celebrate your successes. Use the process to
experiment. Let folks “vote” on what they like best and find most useful.
This could be a bottom-up process - seek buy-in from the whole organization only
after you’ve had some successes.
We’re thinking of applying this process to two opportunities:
Creating a red team web site to respond to economic development opportunities
where no response is a normal response.
Creating a community of communities who are inundated with abandoned homes
because of the mortgage crisis with the ultimate goal of managing the sales process
of abandoned homes so they end up being owner occupied, not renter occupied.
This ensures that the community will grow healthy - and more valuable - more
quickly (See Rundle).
What opportunities do you see?
- Cook, Scott. The Contribution Revolution. Letting Volunteers Build Your
Business. Harvard Business Review. October 2008. 60.
Rundle, Rhonda L. California Officials Try to Avoid Second Housing Hit.
Wall Street Journal. 7 October 2008. A8. http://www.wsj.
com/article/SB122334317101810201.html
BUSINESS PLAN PITCH: FOCUS ON THE NON-VERBAL
PITCHING A BUSINESS PLAN? Consider (Business Briefing, R2):
- It’s hard to fake excitement about your plan. Make sure it shows.
- If they can’t wait to break into your conversation, they’re listening. Listening
is good. - If they are mirroring your gestures, that’s a good sign. Mirroring is innate.
Everybody notices what’s going on. Take advantage of it. - People can read your fluidity, the consistency of your presentation. Practice
far in advance. People notice.
The bottom-line: Face-to-face dialogs are where the decisions get made.
If you are attempting to work via email, reconsider your strategy. Spend more time
at the water cooler.
- Executive Briefing. The Power of Nonverbal Communication. Wall Street
Journal. 20 October 2008. R2. http://online.wsj.
com/article/SB122426675804545129.html
OUT OF A BUST, A PRESCRIPTION
TWO KEY FACTS (Engardio, 23):
The assumption that innovation and productivity alone will sustain the American
standard of living may prove erroneous.
Real incomes have declined over the last decade, even as productivity increased.
TWO INTERESTING SOLUTIONS:
Look for more state - and international support for - investment in production
capacity in growth industries like autos (yes, there is growth coming), nanotech, and
renewable energy.
That support will likely flow to companies in GDP producing industries: you’ve got
to make something to survive.
TWO INTERESTING OPPORTUNITIES:
Position your company as a problem-solver in industries that will support high-
paying, high technology jobs that create wealth.
Use that positioning to team with the government in high capitalization industries.
Look for more government regulation in financial industries and manufacturing
industries. If the government is going to provide subsidies, they are going to require
new efficiencies that increase productivity - and GDP.
- Engardio, Pete. Forget Adam Smith. Whatever Works. BusinessWeek. 27
October 2008. 22. http://www.businessweek.
com/magazine/content/08_43/b4105022816429.htm
PAST DISRUPTIONS ECHO TODAY
THE FIRST FAILURE AT LEHMAN BROTHERS
I FOUND a list of the “best non-fiction business books ever written” back in July
(Nocera), not knowing that the list promised some amazing - and timely - reading. I’
ve read about containers on ships, the movie business (twice), the New York
Times, the sixties, the eighties, the nineties, you name it, it’s in the list.
IT SCARED THE DAYLIGHTS OUT OF ME
So, the latest book (Auletta) is scaring the day-lights out of me, I’ve got to admit.
Our savings are tanking in the stock market, and I am reading a very exact
description about the first time Lehman Brothers failed, in fact, the time Lehman
Brothers first left its partnership business form and was purchased by another
entity after 134 years of continuous operation in New York City.
Yes, I lived through this when it was in the papers back in the eighties. I suppose I
remember a few of the facts. Maybe I do a little bit. But I never knew the story,
the real story about what happened. Auletta makes the case that it was greed that
brought Lehman Brothers down. For me, the first failure of Lehman wasn’t about
greed, it was about power.
Lewis Gluckman saw what he assumed was weakness in the current Chairman,
Peter Peterson. He pushed, and he pushed, and he pushed until Peterson was gone,
and he was in charge, able to do what he darn well pleased. Gluckman forgot a
couple things. Yep, he’d been a wonderful Mr. Inside - he knew how to run the
operations side of things. He thought that was all that mattered.
Wrong.
Mr. Outside - Peterson - was just as, if not more, important as he brought in the
business and expanded what they already had. Some bad bets, combined with a
downturn, put Lehman on the ropes within months after Gluckman’s successful
“coup” forcing a sale after nine months of Gluckman’s tenure.
Amazing, sad, scary - all at one time. And the story isn’t that different from this go
around at Lehman. It is clear that history does provide guidance, if only we took
the time to remember it.
One last thing: the crisis today with Lehman Brothers isn’t the second time around.
Things went south in the early nineties as well.
Maybe if they keep “practicing”, they’ll finally get things right.
We’ll see.
- Auletta, Ken. Greed and Glory on Wall Street. The Fall of the House of
Lehman. Warner Books. 1986.
Nocera, Joe. The Best Business Books Ever? New York Times. 17 July
2008. http://executivesuite.blogs.nytimes.com/2008/07/17/the-best-
business-books-ever/?hp
PANIC IN ACTION: THE FAT TAIL STRIKES LONG TERM CAPITAL
MANAGEMENT
“... SOCIAL PANICS OCCUR when large groups can’t discern reliable sources of
advice from unreliable ones (Cloud, 15).”
“In the middle years of this decade, we had negative real short-term interest rates.
And that really means free money, which really distorts the system. Capitalism is
premised on the idea that capital is a scarce commodity rationed with a price
mechanism. ... People all over the housing and financial service industries figured
out ways to lever themselves up way too far (Bartiromo, 22).”
“In the case of Fannie Mae and Freddie Mac ... Their massive lobbying machines
thwarted every legislative attempt at reform (Rickards).”
“The problem is that Wall Street and regulators relied on complex mathematical
models that told financial institutions how much risk they were taking at any given
time, ... a colossal conceptual error: the belief that risk is randomly distributed and
that each event has no bearing on the next event in a sequence (Rikards).”
“Since we have scaled the system to unprecedented size, we should expect
catastrophes of unprecedented size as well (Rikards in Crovitz).”
Flip a coin. What are the odds that it will be a heads? Fifty percent. We all knew
that. And we’d be right, at least most of the time.
The folks who make financial models for investment strategies have basically
assumed the same thing. Every event is not related to any other event. Flip a coin.
It’s fifty-fifty whether it will be heads or tails. Every time. That’s the assumption.
More complex situations muddy the math, but, basically, statisticians have always
operated under the assumption that events were not related. They used those same
assumptions when creating complex financial models to predict whether an
investment would pan out. Most time, they were right.
Long-Term Capital Management made that assumption in the nineties. Trying to
predict the volatility of the market, they assumed that volatility was a constant and
could be predicted, or at least managed (Lowenstein, 68). They predicted that a
group of bonds were good investment, even in an extremely volatile market. They
invested on that assumption, big time. Not only did they invest their cash, they
borrowed money to invest. That’s called leverage. It is supposed to be a good thing
in the right hands.
LTCM was sure that the investment was a good one, even as the volatility
increased. The effect of the volatility, especially as other investors abandoned the
investment, was that their leverage effectively increased. Now leverage can be
good. LTCM’s leverage at its peak was one hundred to one (Lowenstein, 191) - one
dollar invested of their money, ninety-nine dollars invested of someone else’s
money, money they would ultimately have to repay. Leverage is great if things go
well. Leverage is not so great if things go wrong.
LTCM’s market began to collapse with the collapse of Russian bonds in 1998.
Their leverage foretold their ultimate demise. It was underlined by the fact that
when LTCM bet, they bet big. Their bets were so big, in fact, that they couldn’t
unload them on the way down, because that unloading would have moved the
markets even lower, yet. Ultimately, it took a near $3 billion investment to right
LTCM. It survived. Everyone was supposed to remember that events are not
independent. Panic ruled the bond market on a day when LTCM assumed it
wouldn’t. They couldn’t abandon their positions quickly enough and got left holding
the bag. It was a huge bag filled with bad investments.
THE FAT TAIL DEFINED
One last thing about LTCM’s assumptions. They assumed that the bell curve of
their variable went to zero out at the positive and negative extremes based upon
their rationale that their assumptions were independent of other assumptions. They
were wrong. Only approximately ninety-nine percent of the time do variables have
zero percent extremes. In times of panic, their extremes fall to one percent, not
zero. That means that, inevitably, their projections will be different than they
expected. When they’re wrong, and they’re leveraged (at one point, LTCM was
leveraged one hundred to one – if their investment went down a dollar, they lost
one hundred dollars), the losses are huge. Just like they were in 1998 - and in 2008.
That feeds panic.
What’s that got to do with the fluctuations in the market in the last couple weeks?
Bad information caused the markets to fall rapidly as folks assumed they were
better off out of the market rather than waiting to see how things would shake out.
Bad management of interest rates led some financial firms to create a market in
mortgages that they shouldn’t have been allowed to create.
People bought too many of the new mortgages, then abandoned them when the
markets made their investments in their homes worthless.
The market grew huge faster than was expected, so huge, in fact, that no could get
out without going bankrupt.
And bankrupt they went.
We’ll see how it all shakes out. Looks like someone is going to make a huge
investment. I suspect it will be you and I.
We all panicked. We all lost - big time.
- Bartiromo, Maria. Blackrock’s Peter Fisher On When the Pain Will End.
BusinessWeek. 20 October, 2008. 21. http://www.businessweek.
com/magazine/content/08_42/b4104000808352.htm
Cloud, John. The Moment. 10/06/08. Time. 20 October 2008. 15. http:
//www.time.com/time/magazine/article/0,9171,1848734,00.html
Crovitz, L. Gordon. The 1% Panic. Wall Street Journal 13 October 2008.
A17. http://online.wsj.com/article/SB122385689217827341.html
Lowenstein, Roger. When Genius Failed. The Rise and Rall of Long-Term
Capital Management. Random House. 2000.
Rickards, James G. A Mountain, Overlooked. Washington Post. 13 October
2008. http://www.washingtonpost.com/wp-
dyn/content/article/2008/10/01/AR2008100101149.html
ADM’S VALUES GO WILDLY AWRY
The financial crisis we are witnessing today is fed by greed, lack of leadership, lack
of controls, and a whole lot more. All this has happened before, even at some of
the most well known and respected companies in America. Sometimes, it is hard to
remember that well-respected people were making all sorts of bad decisions,
decisions that sometimes led to personal and business failure.
Archer Daniels Midland Company has been a well respected pillar of the chemical,
food and agricultural community for a long time. Things were wrong there in the
early nineties. ADM’s story is important because it reminds us that, while things
have gone wrong today what with the financial mess we are experiencing, they have
gone wrong in the past as well. That this has gone on in the past is not a pretty
reality exactly.
The story boils down to this: a president of a division at ADM was stealing from
the company to the tune of about ten million dollars over some years. To cover his
tracks, he made up a story about someone from abroad threatening his family -
and called the FBI. The FBI investigated, and, to continue to cover his tracks, the
president reveals a whole series of illegal indiscretions the company has made and
that he was privy to: price-fixing on an international scale and theft of company
funds on a large scale (Eichenwald,30).
The story is intriguing and interesting. The facts are proven. People went to jail.
Careers were ruined. That’s all well and good. The message of all this, while blatant,
is subtle at the same time. Let’s call it the “slippery slope” we are all so used to.
At ADM a culture grew in which both theft and price-fixing were accepted.
Everyone did it. No one objected. It appears that some people left, but not many.
The FBI was astounded that one person would reveal so much - the president of a
division, no less - and further, that no else in this very large scheme even
considered saying “This is wrong, we’ve got to stop,” much less called the FBI.
Some of the players were internationally known business leaders with contacts very
high in the federal government. OK, greed played a role. The “I deserve more -
this is a good way to get it,” mentality grew too large. Lots of people participated.
This book should be required reading for all sorts of managers. Business schools
should require it. Why? Because it reminds us all how easy it is for things to go very
wrong in the management of a company. It happened to ADM. It can happen to
your company, or mine, as well.
- Eichenwald, Kurt. The Informant. A True Story. Broadway Books. 2000.
TEA POT DOME REVISITED: OIL BOOMERS – SCOUNDRELS OR SAINTS?
The Civil War made a lot of people rich, John D. Rockefeller among them. He
started as a trader in commodities (salt, clover seed, timothy seed and pork) and
ended up a wealthy man. He was still in his twenties (Chernow, 71). During that
period, Rockefeller learned one crucial technique, namely, how to make the
railroads compete for your business. Since his commodities business had lots of
shipping needs, and there were a myriad of railroads available - too many, really, as
a shakeout had not yet occurred - Rockefeller attained the lowest price possible on
his company’s shipping. While later in life Rockefeller would shun debt financing of
his business’s growth, during the Civil War period he borrowed as need be. His
lenders became his mentors, always helping him focus on the need to repay every
loan he took. Yes, it was serious business for Rockefeller, but at the same time a
joyous business. It was, truly, fun (Chernow, 68).
During the same period that Rockefeller was building his business,
he was also building his life. He married and began to grow a family. Just as
importantly, he build a serious relation with his church, becoming an unfailing
supporter of his church (the Erie Street Baptist Mission Church) in Cleveland
(Chernow, 77).
Rockefeller formed alliances with the railroads to secure kickbacks on his and
others shipments of oil from the oil regions and refinery regions of Western
Pennsylvania and Ohio to the East Coast, and then on to the world. The key word
here was kickbacks. Since there weren’t laws yet against such kickbacks,
Rockefeller didn’t mind plunging ahead with them no matter what his competitors
thought. Depending on your point of view, Rockefeller became, even this early in
his career, either a religious homebody living a saintly life, or a scoundrel living on
the spoils of other’s work. As he retired thirty or forty years later, it still wasn’t
clear, and, basically, we still have a choice to make about it all. The government,
finally, with the anti-trust legislation and court challenges and wins, forced the issue
and broke up the empire that Rockefeller so carefully created. Rockefeller became
a philanthropist - Churchill recognized Rockefeller for his generosity and
discernment in science (St. Louis Post Dispatch) - who supported universities all
over the country. There was one final, saintly act that is forgotten, even in today’s
tumultuous financial markets. It was Rockefeller, in combination with federal
money directed by Theodore Roosevelt, that turned the tide in the panic of 1907.
J. P. Morgan got most of the credit. Rockefeller, quietly, supplied a lot of the funds
that staunched the panic (Chernow, 544).
By order of the U.S. Supreme Court in May 1911, Standard Oil broke into thirty-
four separate companies. We’re not going to analyze here how well that split-up
actually worked, as the entities were still owned by the same stockholders. There is,
however, an interesting fact buried in the thirty four new companies created.
Standard Oil of New Jersey inherited refineries, oil tankers, and marketing
apparatus. It did not, however, inherit any oil to refine, ship or market. That spelled
opportunity for another producer who had a lot of oil with no place to sell it
(Davis, 77).
Edward L. Doheny had been developing oil fields in Mexico. In 1910 and 1911 his
company had a couple gushers, a lot of oil, and no where to sell it. Standard Oil of
New Jersey became one of the buyers for the Mexican oil, saving Doheny’s
company during the early development of the new fields in Mexico (Davis, 77).
Rockefeller’s was a circuitous story with ups and downs all along the way. Doheny’s
wasn’t much different. Revolution in Mexico ultimately made Doheny’s ownership
of the oil fields risky, as the Mexican government was interested in nationalizing
them. In support of the Tampico oil fields, the U. S. Navy blockaded the port of
Veracruz and supported American interests. The U. S. wanted the oil (Davis, 96).
Now, the Doheny story would have been a good Los Angeles boy makes good
story except for one debacle that happened in the twenties, the Tea Pot Dome
scandal. While finally found not guilty to all the counts against him, Doheny had
hoped that his professional career wouldn’t be judged by on scandal. It was not to
be. Donheny spent his last years in declining health. In contrast, Rockefeller
targeted a one-hundred year life. He died in 1937 at ninety-seven, feeble, but bright
to the end (Chernow, 674).
- Chernow, Ron. Titan. The Life of John D. Rockefeller, Sr. Random House.
1998.
Davis, Margaret Leslie. Dark Side of Fortune. Triumph and Scandal in the
Life of Oil Tycoon Edward L. Doheny. University of California Press. 1998.
Gold, Russell. Market Slide Puts a Spotlight on Big Oil’s Cash Hoard. Wall
Street Journal. 7 October 2008. B1.
St. Louis Post Dispatch, 8 July 1936.
LINCOLN’S PRINCIPLED PRAGMATISM
Stephen Douglas was re-elected to his third term as Illinois’ Senator in 1858,
beating Abraham Lincoln in a tight election.
Douglas supported popular sovereignty, “the doctrine under which slavery in the
territories was to be determined by the settlers of the region (Ecelbarger, 28).” This
countered the Dred Scott v Sanford decision of 1857 which said, basically, that
slavery was permitted throughout the territories. In 1854 Douglas had pushed
through Congress the Kansas-Nebraska Act which repealed the Missouri
Compromise “and opened territories and future states west of the Mississippi River
to slavery” (Ecelbarger, 5).
Lincoln saw all this and responded in his own way. He was a member of the new
Republican Party, a party which had two wings with divergent views on slavery, one
abolitionist and the other supporting popular sovereignty. He saw the need, if this
new party was to be a truly national party, to somehow bridge these two points of
view with a third point of view that could unite the Republican Party enough for it
to indeed elect the next president. While Lincoln wasn’t saying it publicly yet, he
wanted to be that next president.
In a speech in Chicago in March, 1859, Lincoln placed himself between the two
extremes, coming out against slavery, hoping not that the states could decide
individually about slavery (popular sovereignty) or that it be allowed everywhere
(Dred Scott), but that it would “dwindle to extinction” (Ecelbarger,29) naturally.
The real hope of Lincoln’s principled pragmatism was, of course, that the
nominating Republican convention for the presidential election in 1860 would
realize that Douglas’ ambiguous position on slavery would make him an “un-
Republican” candidate for the 1860 election, leaving the field to Lincoln.
Lincoln’s position between the extremes both for and against slavery ultimately won
him the nomination. Pragmatism won. So did the country. Not a bad strategy.
- Ecelbarger, Gary. The Great Comeback. How Abraham Lincoln Beat the
Odds to Win the 1860 Republican Nomination. Thomas Dunne Books.
2008.
DISRUPTIVE ECONOMIC DEVELOPMENT
IF THEY BUILD THE PORT, WILL THE SHIPS COME?
Think tiny. That’s the size of Punta Colonet, a hamlet 150 miles south of Ensenada
on the Baja Pacific coast.
Think huge. That’s the size of the container port - and the investment at $4-billion -
the Mexican government plans to install in Punta Colonet.
Big names are involved too. It is said that Carlos Slim Helu, the world’s second
richest man, is interested in bidding on the project. He’s teamed with the Mexican
railroad and mining company Grupo Mexico and Ports America Group, a port
management company from New Jersey.
“The goal of the project is to make Mexico more competitive,” says Miguel Favela,
head of Mexican operation for Ports America (Dickerson).” They envision a city of
200,000 surrounding a port with a capacity of 2 million shipping containers a year,
compared to LA/Long Beach’s 15.7 million last year (Dickerson).
The big risk? The port has to hook up to American rail systems somewhere. The
railroads are mum about whether they’ll get involved.
- Dickerson, Marla. Mexico plans huge Baja port for U.S. trade. LA Times.
28 August 2008. http://www.latimes.com/business/la-fi-mexico28-
2008aug28,0,844963.story
Mexico wants to build a port in Baja to compete with the ports in Long Beach and
Los Angeles. Dickerson nicely lays out all the positives and negatives.
So why would anyone build a port south of the border for the American market?
We don’t have the financial numbers. I’ll bet that they pencil out OK for the right
investor, especially given the forty-five year term of the lease on the harbor. Deep
pockets are involved. Maybe we accept that. Now comes the hard part.
Why would the shippers want to use the port? Since the inception of the
containerized shipping industry in the fifties and its growth in the sixties and
seventies, things have changed. What was once a growth industry has matured into
a commodity business. Changes are occurring, of course, but they are coming
slowly. Prices for shipping a container will likely remain fixed unless there is a
change in technology that allows for more profitability for the lucky early adopters
of the new technology.
A rough timeline of the changes in the industry shows changes in the container
itself, the crane used to pick it up and either place in on or off the ship, the
technology imbedded in the ship, the size of the ship, the speed of the ship and the
ship’s likely fuel economy. Quite a list.
The containers have gotten larger year by year. The early ones were six and a half
feet tall. I notice that they’re now nine and a half feet tall. Looks like the length has
stayed constant at forty feet. The container itself is not likely to change too much,
especially in a way that effects a Mexican port. Perhaps, the containers could get
even larger than they are today - say fifty-five feet long versus today’s forty feet -
but that would require huge investments in cranes at every port the ships call at.
The trucks would need a change. Finally, who is going to fill up a fifty-five foot
long container?
Cranes are crucial. They’re the key element that trap a ship in port, a losing
proposition for the ship owner who isn’t making any money unless the ship is under
way to the next port. That means two things: there have to be enough cranes. The
cranes that are available must be fast a both unloading a ship, and loading it.
Mexico could compete here if they buy the newest, best cranes and keep them up-
graded.
Ship technology continues to evolve. Early ships were converted WW II tankers.
No longer. The ships are behemoths. The interactions between the cranes and the
ships are computerized to ensure that the correct containers are swapped at the
right time and that the ship is trimmed properly (flipping in port used to be a
problem, way back when) at all times. There may be a place for more growth in the
size of a ship, but it is my bet that the best place for improvement is in fuel
economy and speed. That means hull design - and maybe even surface designs -
that reduce drag from water and air might increase profitability.
All this ship design doesn’t effect Mexican ports any more than American ports,
unless there is some way to equate ship design with port utility. American ports are
becoming more and more environmentally conscious, so Mexico may be able to
take advantage of that, at least for the short term. Alternatively, the ship owners, or
the shippers themselves (the ones that own the product in the containers), may be
able to make a case to their customers that an environmentally friendly port helps
them. Mexico has the opportunity to build green technologies into their port that
exceed American technologies - and that reduce costs or time in port for shippers.
The California ports need help getting the containers to the trains. Congestion
seems to be great between the ports and the train hubs in the Inland Empire of
Riverside and San Bernardino Counties. If Mexican operator can negotiate with the
rail roads to place an adequate train hub at the port, that could create an
advantage, enough to reduce crucial shipping costs. Time is money, after-all. In this
time of security checks at borders, it seems that a technology solution for speeding
the containers over the border could make the Mexican proposal sensible.
Since some of the rail lines in Mexico will probably be new, there may be speed
technologies that could be built into them as well as into the trains themselves. Fuel
economy is still important as is speed to market. Some changes might be possible
especially if the infrastructure is newly constructed with new, “buried” technologies.
Mexico may be able to add fuel to the ships to the equation. If they were able to
fuel ships cheaply while they are in port, there may be pennies to be saved, enough
to tip the balance toward the Mexican location. Same for the trains.
The Long Beach/Los Angeles ports are up and running. Yes, they are making
continual improvements. If the Mexican port was able to make all the suggested
changes add up to reduced shipping costs - and reduced time in port - they might
have a case for creation and expansion of their proposed port.
If we think of all this from the US side of the border, the same suggestions apply.
If the trains can’t cross the border, the Mexican port can’t pencil out. Alternatively,
the US ports can make environmental and efficiency changes that increase the
odds that their ports are cheap enough and speedy enough to hold their current
clientele and attract others.
A lot of pencils are going to need pushing on this deal before it is done. The
shippers may perceive savings in dropping containers in a Mexican port. The
investments to make that happen will be large - and risky - for all sides.
- Dickerson, Marla. Mexico plans huge Baja port for U.S. trade. LA Times.
28 August 2008. http://www.latimes.com/business/la-fi-mexico28-
2008aug28,0,844963.story
Levinson, Marc. The Box. How the Shipping Container Made the World
Smaller and World Economy Bigger. Princeton University Press. 2006.
LA PORT’S PERFECT STORM: LOWER VOLUME, COMPETITION FROM
ABROAD AND NOW, AIR QUALITY
Containers - lots of them - come into the US through the Ports of Long Beach and
Los Angeles. From a national point of view, the ports dominate west coast
container shipments arriving from Asia.
Key points:
Shippers will go where the costs are cheapest and the down time to unload cargo in
port is shortest (Levinson).
Baja California is considering building a multi-billion dollar port south of Ensenada
in Baja, California (Dickerson).
Local authorities, the Air Quality Management District if I am not mistaken, are
beginning to ban older, more-polluting trucks from servicing the harbors (to pick
up incoming containers) because they are polluting the air (Roth).
Trumping the billion dollar investments in the LA ports by the Mexican
government and its contractors to build an entirely new port without green
restrictions is an iffy proposition in a down economy.
Less pollution and less traffic flowing through the LA region is perhaps the only
positive outcome of a Baja port. In the short run, a successful bid to build a port in
Baja is a disaster for the middle-class truck drivers servicing the LA ports.
What should the ports do?
One solution is to slowly wind down. That’ll will take some time as the investments
and infrastructure are huge and not easily - or sensibly, I know - abandoned.
The other solution is to turn the problem - regulation leading to higher costs - into
a marketing opportunity.
Make sure that every shipment through the ports is branded with the green port
label.
Make sure the shippers know about the green port label.
Make sure ultimate consumers know about the green label, so much so that they
demand green labeling on everything they buy.
The Ports have a choice:
Wind down now or sometime in the future or
View things as a very large marketing opportunity and act accordingly - now.
Given the large investments already sunk in the ports, I suggest the later.
One last thing about green labels: they only last so long before everyone else - the
other harbors - have a green label of some sort of their own. While the label may
work for a while the harbor’s task is never done. After the green marketing effort,
they need to address other things, like pay to employees (why do they always come
first), technology to speed handling of containers, train and truck technologies, and
other things to speed containers off the ships and on their way to consumers.
- Dickerson, Marla. Mexico plans huge Baja port for U.S. trade. LA Times.
28 August 2008. http://www.latimes.com/business/la-fi-mexico28-
2008aug28,0,844963.story
Levinson, Marc. The Box. How the Shipping Container Made the World
Smaller and World Economy Bigger. Princeton University Press. 2006.
Roth, Alex. Two California Ports Will Ban Older Trucks. Wall Street
Journal 29 September. A32.
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