Leadership Lessons

Transformational Leadership Lessons from Lee Kuan Yew, Singapore’s Founding Father

June 24, 2019 By Nagesh Belludi 3 Comments

Almost all leaders take office with an ambitious vision for their country or their organization, but only a few ever succeed in transforming that vision into reality. Lee Kuan Yew (1923–2015,) the architect of modern Singapore, was one of them.

Leadership Lessons from Lee Kuan Yew, Singapore's Founding Father

Lee was one of the most competent leaders the world has ever seen. An incorruptible Cambridge-educated lawyer, he was an autocratic pragmatist—a strong-willed, visionary leader who “got it done.” Under his leadership, Singapore metamorphosed itself from a tropical backwater with few natural resources to a first-world metropolis in just one generation. Today, Singapore’s per-capita GDP in terms of Purchasing Power Parity is the third highest in the world.

There is also a darker side to the Singapore story, however. The island-nation’s prosperity came at the cost of a rather authoritarian style of government that sometimes infringed on civil liberties. In a 1986 National Day Rally, Lee defended,

I am often accused of interfering in the private lives of citizens. Yes, if I did not, had I not done that, we wouldn’t be here today. And I say without the slightest remorse, that we wouldn’t be here, we would not have made economic progress, if we had not intervened on very personal matters—who your neighbour is, how you live, the noise you make, how you spit, or what language you use. We decide what is right. Never mind what the people think.

Singapore is not quite a dictatorship, but neither is it a full democracy. Its political system is skewed to let Lee’s party dominate the country’s polity. In an interview with CNN’s Fareed Zakaria, Lee asserted, “It is not the business of the government to enable the opposition party to overturn us.”

A vast majority of Singaporeans today will overlook these civil-liberty concerns in the context of the country’s socio-political stability, public security, world-leading and affordable healthcare, free education, good housing for all, and high employment.

Singapore’s spectacular success is accepted as evidence, sometimes lamentably as justification, as with Rwanda’s Paul Kagame, that a vibrant economy and sustained prosperity could blossom only under a totalitarian government. Singapore’s achievement is not likely replicable in its entirety elsewhere.

Over the last several months, I’ve read a few biographies and evaluations of Lee and his political leadership, including the memoirs The Singapore Story: From Third World to First (1998) and One Man’s View of the World (2013.) Here are a few key leadership lessons that Lee had to teach.

Vision, structure, and determination are paramount to efficacious leadership. Lee was a brilliant, clear-eyed, far-sighted statesman. Singapore’s political stability, rapid economic growth, and its raising affluence between 1959 and 1990 were not accidental, but the result of his dynamic leadership and disciplined social engineering. In The Singapore Story (1998,) he writes, “The task of the leaders must be to provide or create for them a strong framework within which they can learn, work hard, be productive and be rewarded accordingly. And this is not easy to achieve.”

Leadership entails tough, unpopular decisions. Lee was not afraid of being out of favor. “I have never been overconcerned or obsessed with opinion polls or popularity polls. I think a leader who is, is a weak leader. If you are concerned with whether your rating will go up or down, then you are not a leader. You are just catching the wind … you will go where the wind is blowing. And that’s not what I am in this for.” He famously forbade the sale of chewing gum to keep Singapore’s streets clean. He maintained capital punishment and caning. Singapore’s vandalism rules drew worldwide attention in 1994 when American teenager Michael Fay was caned for damaging cars and public property, in spite of appeals for clemency from the US media and government, including then-President Bill Clinton.

The litmus test of great leadership is results that matter. Many take issue with Lee’s methods, but few dispute the results he achieved. He was a pragmatist with devotion to no particular ideology. He once contemplated, “I was never a prisoner of any [socio-political] theory. What guided me were reason and reality. The acid test I applied to every theory or scheme was: Would it work?” and “The acid test is in performance, not promises.”

Nurture a meritocracy. Lee’s commitment to meritocracy is a hallmark of Singapore’s national identity—social mobility is rooted in hard work and contribution regardless of ethnic differences. He devoted resources to cultivate an excellent education and health system, and developed a high-quality teacher workforce—all to maximize people’s potential. According to Lee Kuan Yew: The Man and His Ideas (1998,) he wrote, “It is possible to create a society in which everybody is given not equal rewards, but equal opportunities, and where rewards vary not in accordance with the ownership of property, but with the worth of a person’s contribution to that society. In other words, society should make it worth people’s while to give their best to the country. This is the way to progress.” In recent years, though, the debate over rising social inequality has led to some reproach of Singapore’s meritocracy.

Attract and retain superior talent; pay them well. A key contributor to the wealth, stability, efficiency, and cleanliness of Singapore is its civil service—it’s one of the most proficient and least corrupt bureaucracies in the world. The government’s transparent policies have been a powerful enticement for people, businesses, and investments. Singapore has some of the highest paid civil servants in the world. The country is not content to let its top graduates all go straight to the private sector, so it pays what it takes to get them. Prime Minister Goh Chok Tong, Lee’s immediate successor, told Singapore’s parliament on 3-Dec-1993, “If we do not pay ministers adequately, we will get inadequate ministers. If you pay peanuts, you will get monkeys for your ministers. The people will suffer, not the monkeys.”

One’s accomplishments become one’s legacy. Having a broad picture of the effect you want to have on the world will help you pinpoint the actions necessary to achieve it. Explaining his legacy, Lee wrote in Hard Truths to Keep Singapore Going (2011,) “I have spent my life, so much of it, building up this country. There’s nothing more that I need to do. At the end of the day, what have I got? A successful Singapore. What have I given up? My life.”

To judge leaders by their methods alone is to underrate their successes. While considering Lee’s legacy, one needs to acknowledge his achievements while refusing to close one’s eyes to certain lapses. Lee’s many critics considered him authoritarian—he imposed media restrictions and used detention without trial and defamation suits to quash critics of his government. Discussing a political opponent in Lee Kuan Yew: The Man and His Ideas (1998,) Lee justified, “If you are a troublemaker, it’s our job to politically destroy you. … Everybody knows that in my bag I have a hatchet, and a very sharp one. You take me on, I take my hatchet, we meet in the cul-de-sac. That’s the way I had to survive in the past.” Lee was unapologetic about his heavy-handed style of governing, seeing it as necessitous to get Singapore to where it got.

Make Friends Now with the People You’ll Need Later

June 10, 2019 By Nagesh Belludi Leave a Comment

Addison Schonland of the commercial aerospace consulting firm AirInsight describes how the 737 MAX hullabaloos have exposed shortfalls in Boeing’s crisis communications and public relations:

The MAX crisis demonstrated to everyone in aerospace media how poorly Boeing was prepared for the recent crashes. More importantly, Boeing was unprepared for the onslaught of information that started to flow freely after the crashes. … In the absence of communications from Boeing, subject matter experts, whether highly qualified or not, become media stars overnight. An information vacuum cannot exist in today’s 24-hour news cycle and the Internet. The demand for information is great, and somebody will fill the vacuum.

The fact that Boeing had to clam up about the crashes for legal reasons is well understood. But the lack of transparency about design decisions, how the company made trade-off choices when creating the MAX, and issues related to the certification process left Boeing exposed.

Rival Airbus has traditionally reached out and established relationships with the aerospace media:

Airbus spends a lot of money once per year inviting the media to an event it calls “Innovation Days”. A week ago, at the most recent event, there were 130 media members from almost every country. Airbus briefed the media on both their products and plans …. Airbus provided access to the key leaders so attendees could speak with them and ask questions, with unrestricted Q&As with C-Suite executives who stayed for a substantial period of time.

Airbus clearly has an ROI. From the perspective of an attendee, and having attended several, is that the media comes away from the event informed. But more importantly, attendees feel they understand what Airbus is doing.

Airbus, through these events, communicates with the trade and news media. This communication provides attendees with, de minimis, a sympathetic view. If Airbus had suffered the two crashes, we believe the press would not have attacked the company the same way it has Boeing.

Schonland highlights how such a web of relationships becomes indispensable during a crisis, whether the crisis is self-inflicted or caused by external events:

By not being more open Boeing has helped create a gap between itself and much of the media. … Boeing has lost any control of the [737 MAX disaster] story. Whatever Boeing does provide now is seen as biased and self-serving—there is little goodwill from the media. When [Boeing CEO] Dennis Muilenburg goes on television for the rare interview, he does not come across as well as he might. Why is that? Because everything he says is now filtered through a non-sympathetic, hyper-critical lens.

Boeing needs to invest in the small army of trade and press media that cover the industry—not just a handful of selectees. This small army provides crucial perspective en masse during a crisis and fills the vacuum with educated views and perspective.

Businesses that fail to develop such goodwill or simply lose their way with regard to public relations become vulnerable to condemnation and backlash. This can result in a wide-ranging loss of credibility, as has transpired with Boeing and its leadership.

Idea for Impact: Invest in formal and informal relationships with key external constituents who can help your business—and personal—interests. The Guanxi tradition in the Chinese culture has it just about right in placing a huge emphasis on building social capital through relationships. From Wikipedia,

At its most basic, guanxi describes a personal connection between two people in which one is able to prevail upon another to perform a favor or service, or be prevailed upon, that is, one’s standing with another. … Guanxi can also be used to describe a network of contacts, which an individual can call upon when something needs to be done, and through which he or she can exert influence on behalf of another.

3G Capital and the Fringes of Cost Management // Summary of Bob Fifer’s ‘How to Double Your Profits in 6 Months or Less’

April 24, 2019 By Nagesh Belludi Leave a Comment

3G Capital’s Playbook: Look at EVERYTHING—There are No Sacred Cows in Cost-Cutting

Brazilian private equity firm 3G Capital's Playbook for Cost-Cutting: Zero-based Budgeting During the past decade, the achievements of the Brazil-based private equity group 3G Capital have drawn attention to the aggressive cost cutting methods outlined in management consultant Bob Fifer’s How to Double Your Profits in 6 Months or Less (1995.)

3G has raised the profitability of its acquired businesses by sacking thousands of workers, shutting down factories, simplifying operations—even using cheaper ingredients. In Israel, the 3G-controlled Heinz was forced to rebrand its iconic ketchup as “tomato seasoning” after a cost cutting-inspired shift to GMO-derived constituents. 3G’s playbook, however, encourages increasing budgets for strategically important business functions—for instance, Kraft Heinz has increasingly expanded spending on advertising and product improvement.

At every 3G-run company—Anheuser-Busch InBev, SABMiller, Heinz, Kraft Foods, Burger King, Tim Hortons, Popeyes,—the “zero-based budgeting” accounting tool forces managers to justify all claims on their organizations’ financial resources. As I noted in a previous article, this method forces managers to justify every line item on a team’s budget as if it were new a claim for an entirely new project, instead of merely being carried over from the prior year:

Zero-base budgeting advocates say that it detects inflated budgets and unearths cost savings by focusing on priorities rather than simply relying on the precedent. Managers secure a tighter focus on operations by justifying each line-item in their budgets, thereby reducing the money they allocate to the lowest level possible. Managers can also contrast competing claims on their ever-scarce financial resources and therefore shift funds to more impactful projects.

How to Double Your Profits has become a must-read for all managers affected by any 3G deal. This obscure book, purportedly written in just 15 hours, was also a favorite of such business luminaries as Sanford Weill (of Citigroup,) Bob Lipp (Travelers Insurance,) and Jack Welch (General Electric.)

3G’s methods have upended an entire industry known for characteristically lower profit margins. The specter of being acquired by 3G has forced Unilever, General Mills, J.M. Smucker, Nestle, Pilgrim’s Pride, Phillip Morris, and other consumer staples companies to implement sweeping cost cutting programs.

Every Expense is Evaluated to Be Cutback Unless It Contributes Directly to the Bottom Line

How to Double Your Profits obsesses about cutting costs by any and all means possible. Every corporate resource is a cost-center that must be pared down to the bone—unless it’s a strategic function. When it comes to marketing, for example, the author recommends outspending the competition in both good and bad times.

Seventy-eight brief chapters (“steps”) deal with every possible drain on time, money, and people in the modern corporation: reducing layers of management, cutting the amount of time managers spend in meetings, shrinking corporate expense accounts, eliminating first-class air tickets, getting rid of pointless reports, and so on.

Focus on profits. “We’re here to make a profit. In fact, we’re here to make as much profit as we possibly can. Profit is the most accurate, most all-encompassing measure of whether we truly are the best. … Profits benefit all of us … when the profits slow down, we all suffer.”
Run a true meritocracy. Set expectations about how performance will be measured and what rewards will accrue to what levels of performance. “Within any level or group of employees, there must be wide disparities in salary, tied to demonstrable differences in performance and contribution to the bottom line.”
Avoid paralysis by analysis, make decisions faster. “Superb managers are instinctual, making the right decision most of the time based on limited data. The quantification that less-skilled managers insist upon is in fact illusory: They wind up making decisions based upon that which can be quantified rather than that which is important. Most of the critical variables in any business decision can only be judged and evaluated based on experience and instinct, not quantified.”

Much of the advice is effective, if predictable, but some suggestions are clearly crooked:

Step 24 / Declare Freezes and Cuts: “Send a letter declaring an across-the board 3% reduction to suppliers. Make sure the letter is from someone high up and intimidating….(after getting the bill) deduct 3% from the bill and say, ‘Didn’t you read my CEO’s letter? Are you trying to get me fired? “
Step 37 / Accounts Payable: “Never pay a bill until the supplier asks for it at least twice. You’ll be surprised: A few suppliers will take as much as two years before they finally get around to asking for their money.”

But Then Again, There is only so Much Fat to Cut out: The Crisis at Kraft Heinz

When discharged without due forethought, elements of Fifer’s cost-cutting mindset could lead to corporate myopia and an utter disregard for such intangible assets as human capital, brand value, and corporate philanthropy.

Certainly, in businesses with substantial cost inefficiencies and bloat, cost-cutting can produce considerable gains in profits, but even with these firms, gains will be time-limited, because there is only so much fat to cut out.

Cost Cutting and The Crisis at Kraft Heinz Aggressive cost-cutting has been blamed for the recent travails at Kraft Heinz. Over the last three years, Kraft Heinz’s fading return on invested capital and decreasing sales point toward a leadership team that has been giving precedence to near-term cash flows to the detriment of its long-term competitive position (“moat.”)

With the expansion of cut-price private-label brands, consumers are no longer remaining devoted to brands like they once did. Kraft Heinz’s roster of products is less appealing to customers than it used to be, and cost cutting hasn’t helped—Kraft Heinz has invested just 2%–3% of its sales on brand spending, as against 7%–9% at comparable consumer goods companies.

Recommendation: Fast Read ‘How to Double Your Profits’

Bob Fifer’s How to Double Your Profits in 6 Months or Less, even if out-of-date and brash in style, could help drive systematic cost-consciousness in large firms that have bloated cost structures in the hypercompetitive business environments.

Entrepreneurs, managers, and employees will find in How to Double Your Profits many ideas for establishing a culture where every employee feels liable for adding value to the organization’s bottom line. The key takeaway lessons are:

Determine which costs are strategic (costs that bring in business and improve the bottom line) and over-invest in those processes as long as they are effective, i.e. producing better results. “Place the burden of proof on justifying costs, not on eliminating them.”
Avoid over-quantifying and over-analyzing processes and results, particularly when the extra precision will not have any bearing on business decision-making.
Consider business processes as a means to an end—a focus on business results should trump a focus on business processes. In other words, focus single-mindedly on business results.

Complement with Francisco Souza Homem de Mello’s The 3G Way (2014) and Cristiane Correa’s Dream Big (2014)—informative books on 3G written by Brazilian business journalists who’ve covered 3G and its founders over the years. Warren Buffett, who regularly teams up with 3G Capital, recommends these books.

Creativity by Imitation: How to Steal Others’ Ideas and Innovate

October 22, 2018 By Nagesh Belludi 1 Comment

Emulating others’ ideas is an underappreciated learning tool. Many creative innovators set forth as remarkably astute mimics of others. “Good artists copy, great artists steal,” prods a creator’s maxim often misattributed to Picasso.

Imitation is a leading pathway to business innovation, even if being an imitator is anchored by a sense of derision. Ever more businesses are nicking great ideas wherever they can obtain them—in their own industries or beyond. Hospitals have adapted safety and efficiency procedures from the military and the airline industry. Aircraft manufacturers have adopted the car industry’s lean supply chain management concepts. Ritz-Carlton, the luxury chain of hotels and resorts, runs the Ritz-Carlton Leadership Center that has helped trained its legendary cult of customer service and employee empowerment best practices to managers from companies across industries.

Creativity by Taking Existing Ideas: Applying Them in a New Context

The most prominent example of innovating by imitation is Ford’s development of the automobile assembly line—a system Henry Ford copied (and improved) from the Chicago meat processing business.

Henry Ford’s relentless ambition to build his Model T a high-volume-low-cost automobile, together with his engineering knowledge and manufacturing experience provided the leadership and creative environment that nurtured the development of the moving mechanical assembly line. Today, the moving assembly line is the epitome of manufacturing. Almost everything that is now industrially manufactured—automobiles, aircrafts, toys, furniture, food—passes down assembly lines before landing in our homes and offices.

The genesis of the moving assembly line is in the American agricultural products industry. During the late 18th century, the movement of grains changed from hand labor to belts and later moving hoppers.

Innovation by Imitation: Many Innovations Come from the Outside

By 1873, Chicago’s meat-processing industry adapted belts and hoppers to transform beef and pork production into a standardized, mechanized, and centralized business. After cows and pigs travelled to their fate in train cars from farms throughout the Midwest, they were dropped into hoppers and killed. Conveyor belts then moved carcasses past meat cutters, who progressively removed various sections of the animal, cut them into appropriate sizes, and repackaged and dispatched processed meat across the United States.

The meat processors’ task was disassembly (as opposed to putting together automobile parts in Ford’s plants.) Each worker had a specific, specialized job. Production moved swiftly. The American writer Upton Sinclair famously described this industry’s ghastly working conditions in his acclaimed novel The Jungle and said, “They use everything about the hog except the squeal.”

Chicago Slaughter Houses Were the Pioneers of the Moving Disassembly Line Before Henry Ford Started His Assembly Line

In the early 1900s, when Henry Ford wanted to keep Model T production up with demand and lower the price, Ford’s team explored other industries and found four ideas that could advance their goal: interchangeable parts, continuous flow, division of labor, and cutting wasted effort. Ford’s engineers visited Swift & Company’s Slaughterhouse in Chicago and decided to adopt the “disassembly line” method to build automobiles.

The introduction of the moving assembly line process in 1913 enabled increased production up to 1,000 Model Ts a day and decreased assembly time from 13 hours to 93 minutes. Additional refinement of the process, thanks to reliable precision equipment and standardized shop practices, shortened production time radically: within a few years, a new Model T rolled off the assembly line every 24 seconds. First produced in 1908, the Model T kept the same design until the final one—serial number 15,000,000 rolled off the line in 1927.

Auschwitz-Birkenau and Victims of the Holocaust

Sadly, just as Henry Ford copied the Chicago meat processing and perfected the moving assembly line, the Nazi apparatus copied Ford’s methods of mass production to massacre six million people. While Midwestern butchers processed the livestock carcasses, the Nazis systematically handled corpses of the victims of the Holocaust. Nazi operatives removed victims’ hair, clothing, shoes, gold teeth, hairbrushes, glasses, suitcases, and anything of value to be repurposed for the Reich. The atrocities of this inexpressibly shocking disaster are on display at the train tracks and the museums of Auschwitz-Birkenau, Poland.

Formal Strategic-Benchmarking Programs

Smart businesses have formal strategic-benchmarking programs to achieve significant efficiency improvements: they pinpoint the strategic capabilities that matter most to their businesses, seek out companies or businesses that currently manage those capabilities best, and try to copy and deploy those capabilities as rapidly as possible. But time is of the essence for the success of these undertakings, as the management guru Tom Peters warns,

I hate Benchmarking! Benchmarking is stupid! Why is it stupid? Because we pick the current industry leader and then we launch a five-year program, the goal of which is to be as good as whoever was best five years ago, five years from now. Which to me is not an Olympian aspiration.

Imitation is a Key Characteristic of Highly Creative People: The Case of Steve Jobs Copying from Xerox

One of the key characteristics of highly creative people is their exposure to and experience with working in several related domains. They are very good at crossing domain boundaries, relating their creativeness in new and perhaps unexpected ways, and adapting knowledge into new domains. The following case of one of history’s most famous innovators illustrates this distinguishing characteristic.

Steve Jobs of Apple introduced the revolutionary Lisa computer in 1983. It featured such innovations as the graphical user interface, a mouse, and document-centric computing. Jobs had taken—and refined—all these inventions from Xerox’s PARC research labs and introduced by Xerox on its commercially-unsuccessful Alto and Star computers in 1981. The biographer Walter Isaacson writes in his best-selling Steve Jobs: “The Apple raid on Xerox PARC is sometimes described as one of the biggest heists in the chronicles of industry.” Isaacson cites Jobs: “Picasso had a saying—‘good artists copy, great artists steal’—and we have always been shameless about stealing great ideas… They [Xerox management] were copier-heads who had no clue about what a computer could do… Xerox could have owned the entire computer industry.”

Idea for Impact: Borrow Ideas from Others and Combine Them with Your Own Creativity

Interestingly, many “benchmarking” exercises in the world of business—even academia—do not come “top-down” out of strategy. In other words, innovations by imitation are typically not driven from the top down. Instead, they materialize from everyday operational challenges—those painful experiences that send managers scuttling for solutions in a hurry.

Look outside your industry. To improve your creativity, try spending time researching other smart companies—even those outside of your industry. Learning directly from other companies is a useful, underutilized form of research for finding ways to improve performance.

Attend to developments at your competitors and in other industries. Look for potential opportunities that have been discovered elsewhere. Avoid the “not invented here” syndrome—don’t reject other’s great ideas. Keep an open mind.

I Admire Business Leaders Who’re Frugal to an Extreme

October 4, 2018 By Nagesh Belludi Leave a Comment

Business folks are rarely frugal, especially when they’re on their clients’ dime or using nameless stockholders’ funds.

I admire businesspeople and companies that are frugal to an extreme and are obsessed with reducing waste. Here are three prominent examples of leaders who’ve successfully inculcated frugality in their companies’ cultures.

Walmart founder Sam Walton was famously frugal and lived a humble life right up until his death. He drove a red 1985 Ford pickup and said, “What am I supposed to haul my dogs around in, a Rolls-Royce?” On business trips, Walton required Walmart’s buyers to lodge two to a hotel room, eat in family diners, and even bring pens from the hotel rooms for use at “home office.” One of their travel goals was to limit expenses to less than 1% of their purchases. Walmart did not have a corporate jet until they had $40 billion in sales. Walton wrote in his biographical Made in America: My Story (1992; my summary,) “A lot of what goes on these days with high-flying companies and these overpaid CEO’s, who’re really just looting from the top and aren’t watching out for anybody but themselves, really upsets me. It’s one of the main things wrong with American business today.”

Amazon is obsessed with reducing waste. From the very beginning, founder Jeff Bezos built a company focused on providing value in terms of prices and customer service. A micromanager, Bezos audited all corporate expenses when the company was much smaller and reproved everything not warranted for delivering value to customers—no first-class travel for executives, no color printers, office desks made from wooden doors, etc.

Thriftiness is at the heart of the Brazilian private-equity group 3G’s operating model. 3G is notorious for pressing the zero-base budgeting method of cutting operating costs at companies it acquires. Julie MacIntosh’s Dethroning the King (2010) has an interesting story about 3G-run InBev CEO Carlos Brito‘s first visit to Anheuser-Busch’s St. Louis headquarters after InBev purchased the American brewer in 2008:

To honor Brito’s visit and pay him the respect it felt he deserved as the soon-to-be new chief, Anheuser-Busch arranged for him to stay in a suite at the cushy Ritz-Carlton. The Ritz wasn’t Brito’s style, though, especially since he was just about to start indoctrinating Anheuser-Busch’s staffers to InBev’s frugal way of life. He had flown commercial into St. Louis from New York’s LaGuardia Airport.

He had someone call back and say, “No, no no, I’ve already reserved a room at such and such a place—like the Holiday Inn,” said one InBev insider. “I think that’s when it probably, for the first time, hit home in St. Louis that things were going to be different.” Rather than hitching a town car or helicoptering in to Anheuser-Busch headquarters from his hotel on Tuesday morning, Brito accepted a ride from [Anheuser-Busch President] Dave Peacock.

While on the subject of leaders and indulgence, I’d like to mention private jets, those symbols of corporate indulgence. Corporate jets were famously ridiculed when the CEOs of General Motors, Ford, and Chrysler flew them to Washington DC to seek government bailouts in 2008. General Electric’s former CEO Jeff Immelt’s was disparaged recently for flying around the world with a needless “backup jet” in case something happened to the corporate plane he was using. But a corporate jet isn’t an indulgence for a big company, it is a business necessity. Having used corporate jets during a previous job, I can swear that flying commercial is relatively counterproductive and costly. In the 1990s, Warren Buffett, the poster boy of thriftiness, reluctantly bought a private plane. He christened it “The Indefensible,” but within a few years, renamed it “The Indispensable.”

The Dramatic Fall of Theranos & Elizabeth Holmes // Book Summary of John Carreyrou’s ‘Bad Blood’

September 10, 2018 By Nagesh Belludi Leave a Comment

Bad Blood: Secrets and Lies in a Silicon Valley Startup (2018) is Wall Street Journal investigative reporter John Carreyrou’s remarkable exposé on Theranos, the former high-flying Silicon Valley tech startup founded by Elizabeth Holmes.

Theranos formally dissolved last week after a high-profile scandal revealed that the company not only deceived investors, but also risked the health of thousands of patients.

A Gripping Narrative, A Charismatic CEO, and A Big Fraud

In 2015, Theranos was one of Silicon Valley’s superstars. Valued at some $9 billion, Theranos claimed an out-and-out disruption of the $73-billion-a-year blood testing industry. Elizabeth Holmes pitched a revolutionary technology that could perform multiple tests on a few drops of capillary blood drawn by a minimally invasive finger prick, instead of the conventional—and much dreaded—venipuncture needle method.

The Story of Theranos and Elizabeth Holmes received much adulation by the media Theranos has its origins in 2004, when the brilliant Holmes, then a 19-year old Stanford sophomore, dropped out of college to start the company. Her missionary narrative swayed just about everyone to believe in the potential she touted.

Over the years, Theranos attracted a $1 billion investment, an illustrious board of directors, influential business partners (Walgreens, Safeway, Cleveland Clinic,) and significant amounts of adulation by the media—all of this lent credence to Holmes’s undertaking. She was celebrated as the youngest, self-made female billionaire in the world.

Nobody Asked the Hard Questions

Theranos’s castle in the air started to crumble in October 2015, when Carreyrou’s first Wall Street Journal article reported that the company was embellishing the potential of Theranos’s technology. Based on past employees’ disclosures, the article also cast serious doubts on the reliability of Theranos’s science. Behind the scenes, Theranos performed a majority of its blood tests with commercial analyzers purchased from other companies.

The persistent question in Carreyrou’s Bad Blood is how the many smart people who funded, endorsed, defended, and wrote about this company never set aside their confidence in Holmes’s persuasions and looked beyond her claim of “30 tests from one drop of blood.”

Without much independent due diligence, Theranos’s supporters possibly assumed that everyone else had checked out the company, its founders, and its science. Theranos got away with its actions for as long as it did because no one could conceive of the idea that the business would simply lie as much as it did.

The Story of Theranos and Elizabeth Holmes Appeared so Promising That Everybody Wanted it to Be True

Bad Blood also draws attention to Silicon Valley’s many failings, including the cult of the celebrity founder. Holmes’s smoke and mirrors was enabled by the notion of a “stealth mode” in which many Silicon Valley startups operate to protect their intellectual property. Theranos never proved that its testing technology really worked. It was performing tests on patients without having published peer-reviewed studies, getting FDA certification, or carrying out external evaluation by medical experts.

Carreyrou acknowledges that Holmes’s initial intentions were honorable, even if naïve. What triggered Holmes’s downfall was the characteristic entrepreneurial “fake it till you make it” ethos—it inhibited her from conceding early on that her ambitions were simply not viable.

When things didn’t go as intended, Holmes exploited the power of storytelling to get everyone to buy into her tales. She continued to believe that the reality of the technology would catch up with her vision in the future. Trapped in a web of hyperbole and overpromises, Holmes and her associate (as well as then-lover) Sunny Balwani operated a culture of fear and intimidation at Theranos. They went as far as hiring superstar lawyers to threaten and silence employees and anyone else who dared to challenge the company or expose its deficiencies.

Book Recommendation: Bad Blood is a Must-Read

Every inventor, entrepreneur, investor, and businessperson should read Bad Blood. It’s a fascinating and meticulously researched report of personal and corporate ambition unraveled by dishonesty. This page-turner is a New York Times bestseller and is expected to be made into a movie.

Beware of Key-Person Dependency Risk

September 7, 2018 By Nagesh Belludi

Key-Person Dependency Risk is the threat posed by an organization or a team’s over-reliance on one or a few individuals.

The key-person has sole custody of some critical institutional knowledge, creativity, reputation, or experience that makes him indispensable to the organization’s business continuity and its future performance. If he/she should leave, the organization suffers the loss of that valued standing and expertise.

Small businesses and start-ups are especially exposed to key-person dependency risk. Tesla, for example, faces a colossal key-man risk—its fate is linked closely to the actions of founder-CEO Elon Musk, who has come under scrutiny lately.

Much of Berkshire Hathaway’s performance over the decades has been based on CEO Warren Buffett’s reputation and his ability to wring remarkable deals from companies in duress. There’s a great deal of prestige in selling one’s business to Buffett. He is irreplaceable; given his remarkable long-term record of accomplishment, it is important that much of what he has built over the years remains intact once he is gone. Buffett has built a strong culture that is likely to endure.

Key Employees are Not Only Assets, but also Large Contingent Liabilities

The most famous “key man” of all time was Apple’s Steve Jobs. Not only was he closely linked to his company’s identity, but he also played a singular role in building Apple into the global consumer-technology powerhouse that it is. Jobs had steered Apple’s culture in a desired direction and groomed his handpicked management team to sustain Apple’s inventive culture after he was gone. Tim Cook, the operations genius who became Apple’s CEO after Jobs died in 2011, has led the company to new heights.

The basic solution to key-person dependency risk is to identify and document critical knowledge of the organization. (Capturing tacit knowledge is not easy when it resides “in the key-person’s head.”) Organizations must also focus on cross-training and succession planning to identify and enable others to develop and perform the same tasks as the key-person.

Idea for Impact: No employee should be indispensable. A well-managed company is never dependent upon the performance of one or a few individuals. As well, no employee should be allowed to hoard knowledge, relationships, or resources to achieve job security.

How to Buy a Small Business // Book Summary of Richard Ruback’s HBR Guide

June 26, 2018 By Nagesh Belludi Leave a Comment

Beyond the capital markets and startups, I’ve been exploring buying a suitable small business to invest in and operate. To inform myself with the process of searching and valuing privately-held establishments, I recently perused Richard Ruback and Royce Yudkoff’s resourceful HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company (2017.)

The authors of this HBR Guide teach a popular Harvard Business School class on “acquisition entrepreneurship.” Their curriculum trains self-employment-inclined MBA students to search, negotiate, and buy an established business and become an entrepreneur-CEO within a year or two.

According to the authors, MBA students are drawn to their class by the prospect of a meaningful leadership responsibility earlier in their careers, as opposed to slowly climbing the corporate ladder or taking on the great risk of starting a company from scratch and establishing a viable business model.

The first section of the HBR Guide to Buying a Small Business can help you decide if entrepreneurship is a good match to your temperament, lifestyle, work-experience, and career ambitions. The largest part of the book provides a comprehensive roadmap for all aspects of acquiring a business—bankrolling the search process, deal-sourcing, managing risk, organizing equity- and debt-financing, running due diligence processes, structuring the purchase, and closing the deal. The final section of the book discusses changing the leadership over and transitioning into operating management.

Reflection: Is Acquisition Entrepreneurship Right for You?

Self-employment is not for everyone. Entrepreneurs need to be smart, driven, business-savvy, self-motivated, strategic, resilient, persuasive, and be able to deal with uncertainty.
On top of the challenges of self-employment, acquiring and operating a small-business will require reaching out, projecting self-confidence, and persuading people you don’t know—business brokers, financiers, investors, regulators, sellers, employees, and customers.
During your exploration of what business to buy, you’ll have to quickly learn about unfamiliar industries, markets, and companies. As a leader, you must be able to develop cross-functional expertise quickly.

Searching: A Full-time Job in Itself

Plan to commit full-time for six months to two years to raise funds from financiers, identify and vet potential acquisition targets, and negotiate with sellers on a realistic purchase price. Afterward, plan for no less than three more months to perform due diligence and complete the transaction.
“When you are seeking out a business to buy, you might face months when you work 12 hours a day and simply not find a desirable prospect. It’s a frustrating experience with lots of effort and no reward.”
Arrange for debt and equity financing from potential backers and risk-sharing partners. Contact affluent folks in your network and investors who specialize in small-businesses. The networks of people you bring together to help your mission can also lend a hand during the deal making and the due diligence processes.
To find potential businesses to buy, try reaching out directly to businesses whose owners may be inclined to sell. Engage small business brokers (there’re some 3,000 small business brokers and intermediaries in North America,) or comb through databases of small businesses for sale.
For potential sellers, look for business owners who, after building their firms over the decades, are approaching retirement and don’t have an inheritor interested in running the business. Many aging business owners are determined to ensure that their businesses live on.

Seek Enduringly Profitable Businesses: Recurring Customers and Predictable Revenue

Look for “enduringly profitable businesses”—stable, slow-growth companies in dull-and-boring industries (such as sandblasting, equipment maintenance, industrial repair and overhaul, window-cleaning, service-providers) in small, defensible niche markets.
Seek businesses whose business-to-business customers are unlikely to switch vendors because the product or service their customers buy isn’t a big part of the costs of their business. Consequently, they’re not motivated to shop around for lower-cost vendors and squeeze margins.
Focus on businesses with yearly revenues of $5 million to $15 million and cash flows of $750,000 to $3 million.
Avoid promising start-ups and risky turnaround opportunities; “it is tempting to imagine buying a troubled business or one with uneven performance, because the purchase price would be very low. But we strongly advise against it, because you’ll have to reinvent the business model and doing so is a very difficult and risky endeavor. Instead, buy a profitable business with an established model for success—one that is profitable year after year.”
Avoid high-growth businesses because “high growth means that your new customers will quickly outnumber your existing ones. Because new customers bring new demands, there are many ways to get in trouble. New customers are, well, new; they have no loyalty to the company and no history. High growth requires great management effort. It also absorbs money rapidly, and raising that money puts a strain on the business and its owner. A rapidly growing firm also attracts competitors, which see the expanding market and the opportunity to attract new customers. So, in a high-growth business, you could work hard and still fail if you cannot keep pace with your competitors. And even if your business survives, you might find that competition has forced you to sell at low prices, so you enjoy little financial reward after all. Making this all the harder, the seller will demand a much higher price for a business that has the potential to grow quickly.”
Avoid technology-driven companies (they face shifting customer needs and therefore demand constant reinvention,) cyclical business, and businesses with well-established competitors.
Small business-owners usually don’t hire large consulting firms or investment banks to sell their businesses. Their businesses are too small to appeal to private equity firms. “We think it makes sense to buy a business with between $750,000 and $2.0 million in annual pretax profits. … At the upper end of our size range—$2 million or more in profitability—we find that institutional investors, like smaller private-equity firms, start to become interested and that competition raises the purchase price, reducing the financial benefits of owning the business.”
“EBITDA margin (EBITDA/revenue) ≥ 20% for services and manufacturing or 15% for distribution and wholesale”

A Checklist for Enduringly Profitable Businesses

Initial Filters:

Is the prospect consistently profitable?

Is it an established business instead of a startup or turnaround?

Is it in the right size range?

Is it located in a place you are willing to live?

Do you have the skills to manage it?

Does it fit your lifestyle?

Deeper Filters:

Is the prospect enduringly profitable?

Is the owner serious about selling the business?

Valuing the Company and Negotiating a Deal

Use the company’s past financial information to project future earnings and your return on investment. Then decide on how much you should pay for a small business: “You’ll need to base the offer price on the general range of 3x–5x EBITDA.” Adjust the multiple for profit margins and growth prospects.
Run a primary due diligence—“a focused period of rapid learning in preparation for making an offer. This is when you’ll test the seller’s initial claims and verify the information that has made the business appealing to you. … You’re looking for any reason that you might not want to acquire this business.”
Finance using equity and debt. “Visit banks and approach your investor network to raise money for the acquisition. You should be prepared to provide information about the business and its industry, details on the due diligence that you’ve done, your financial projections, and the deal terms that you are proposing.”
Once your offer has been accepted after negotiations, run a confirmatory due diligence “in which the company’s records will be fully open to you. You will typically have around 90 days to work with your accountant and attorney to check for any inconsistencies and red flags. … This can be an extremely nerve-racking time for both the buyer and the seller, so it’s important to be patient and calm.”

Transitioning into Leadership and Emphasizing Business-as-Usual

As part of the negotiated deal, try to get the seller to stick around for 3 to 6 months to help you in the transition.
“After closing the sale, you should focus on four tasks: introducing yourself to all your managers and employees, meeting with external stakeholders, communicating the transition plan to everyone, and taking control of your cash flow.”
“The most common trouble for small firms under new owners is running out of cash. … So set up a process whereby you approve all payments before they go out, and review your accounts-receivable balances at least weekly. You should also implement a 90-day rolling cash-flow forecast.”
Meet with all the constituencies and reassure them that they won’t see any immediate changes. Lay emphasis on “your overarching goals for the company—for example, excellent customer service, commitment to quality, a satisfying work environment—and encourage people to stay focused on their work.”
Visit every major customer as soon as you can. Keep your ears open for ideas to improve your product- and service-offerings.
Don’t make any big changes early on, get to know the business, and be very respectful of all the constituents—they know more about the business than you do.

Recommendation: Read ‘HBR Guide to Buying a Small Business’ for a Very Good Introduction on How to Buy and Organize Finance for a Business

Richard Ruback and Royce Yudkoff’s HBR Guide to Buying a Small Business is excellent manual for prospective entrepreneurs, employees of small businesses, financiers, and value-seeking investors. You will also become acquainted about interactions with bankers, brokers, sellers, accountants, and attorneys you meet while searching for a business to buy.

Is IBM Becoming Extinct?

April 9, 2018 By Nagesh Belludi Leave a Comment

Change Forces Leaders to See Business Models Afresh and Imagine New Paradigms

The American venture capitalist Guy Kawasaki often tells the following story about the need for entrepreneurs to adapt themselves to emerging market settings and stay relevant.

In the latter part of the nineteenth century, a sizeable ice cutting and trade industry flourished in the US Northeast. Harvesters sawed off blocks of ice from frozen lakes and rivers, and transported and sold them for industrial and commercial consumption around the world. The biggest consignment of natural ice weighed some 200 tons; half of it thawed en route to India, but the remaining 100 tons of ice returned a profit.

In due course, the invention of icemaking machines caused the downfall of the natural ice harvesting industry. Anybody needing ice could purchase artificial ice during any season from ice factories. As a sign of the times, the trade publication Ice Trade Journal changed its name to Refrigerating World.

Subsequently, the emerging popularity of commercial and domestic refrigeration units put the ice factories out of business. Residences, stores, and businesses could make their own ice conveniently and maintain cold storage.

The Best Leaders Anticipate Change and Nurture Their Own Innovations

During the first of the aforementioned disruptions, according to Kawasaki, the ice harvesters did not recognize the benefits of industrial ice-making and did not adapt to the revolution in their industry. Instead, they chose to defend their existing trade—they continued to innovate sawing equipment, invest in efficient storage, and improve their rail- and ship-transportation systems.

Correspondingly, the industrial icemakers of the following generation never embraced or adapted to the emerging advent of consumer refrigeration.

The take away lesson is that many successful companies are so set in their ways that they don’t pivot themselves when they face disruption in their industries.

Successful Companies Can Become Victims of Their Own Success

Kawasaki’s anecdote illustrates how disruption drives many companies into stagnation. Every so often, entire industries vanish into oblivion.

Major economic disruptions can compel companies to question what they stand for. Sadly, many companies choose to defend their existing domains instead of raising their technological edge and reinventing their products, services, and brands.

When the fundamentals of a time-honored business drastically change, the most successful companies are often the slowest to recognize the shifts and pivot. Well-established in the comfort of routine and stability, they entrench deeper into their tried-and-true formulae. As described in Harvard strategy professor Clayton Christenson’s well-known thesis The Innovator’s Dilemma, the strategic inertia often gets companies with at-risk, but established business models into a state of denial. Consequently, they refute the challenges posed by fiery startups.

Can IBM Beat the Odds?

IBM has fought off a technological and economic disruption once before. During the 1980s, IBM fell from glory, but got reborn as a vibrant corporation after Lou Gerstner became CEO in 1993. He redefined IBM’s businesses, fortified its value proposition, and changed the mindset of the company, its employees, and its customers. As Gerstner detailed in his bestselling biography about IBM’s reinvention, Who Says Elephants Can’t Dance?: Inside IBM’s Historic Turnaround (2002,) this was an astonishing achievement given how deeply-rooted IBM was in its existing, but increasingly irrelevant business model.

At present, IBM is struggling in the midst of yet another digital revolution—one that is exemplified by the commoditization of hardware and the enterprise-adoption of cloud computing. Shackled with legacy business models of older, less-differentiated products and services, IBM has struggled to catch-up with cloud platforms offered by Amazon, Microsoft, and Google.

Instead of reckoning honestly with the growing shift to cloud-based services, IBM has concentrated for far too long on its Wall Street-pleasing financial shenanigans (buying back shares to prop up earnings-per-share, cutting costs, firing employees, reducing tax rates, selling less-profitable operations, and the rest.)

The jury is still out on the long-term success of IBM’s much-ballyhooed Watson platform and its cloud computing initiatives. What makes this cycle of disruption worse is that IBM faces aggressive competitors who are pushing profit margins toward zero in a bid to dislodge IBM’s historical footing in the enterprise IT landscape and to establish dominance.

Lessons from Peter Drucker: Quit What You Suck At

March 1, 2018 By Nagesh Belludi 1 Comment

The essence of leadership is risk- and opportunity-assessment and resource allocation. It follows that one of the persistent responsibilities of leadership is to mull over each individual and organizational endeavor and investigate, “Do we produce results that are meaningful and profitable enough for us to justify investing our resources to this purpose?”

Jack Welch’s Strategy for General Electric: #1 or #2 Businesses Only

When Jack Welch became CEO of General Electric (GE) in 1981, he set out to make GE “the world’s most competitive enterprise.” However, the company was a hodgepodge of many businesses—some unrelated or irrelevant, several unprofitable, and a few at the brink of failure.

Management pioneer Peter Drucker famously advised Welch to ask of each constituent of the GE business portfolio he now presided over, “If you weren’t already this business, would you enter it today? And, if the answer is no, what are you going to do about it?”

Welch’s responded with his legendary dictum that every GE division be—or become—the leading or the runner-up business in its respective industry, or plan to exit it completely.

Welch argued that in many markets, the number three, four, five, or six players suffered the most during cyclical downturns. On the contrary, number one or number two businesses could protect their market share by way of aggressive pricing approaches or by developing new products. Welch’s approach portended the emergence of oligopolies in many industries.

The resultant strategic focus eventually led to an immense restructuring of GE. Welch sold or discontinued dozens of divisions—including computers and time-shares. Over the next decade, he cut nearly one in four jobs at GE, warranting the nickname “Neutron Jack.”

By year 2000, GE had reached dominance or near dominance in most of its business markets across the globe.

Peter Drucker on Strategic Reprioritization

Explaining this method of strategic reprioritization, Drucker wrote in Post-Capitalist Society (1993,)

To turn around any institution—whether a business, a labor union, a university, a hospital, or a government—requires always the same three steps:

Abandonment of the things that do not work, the things that have never worked; the things that have outlived their usefulness and their capacity to contribute;

Concentration on the things that do work, the things that produce results, the things that improve the organization’s capacity to perform; and

Analysis of the half successes, half failures. A turnaround requires abandoning whatever does not perform and doing more of whatever does perform.

Drucker further elaborated on abandonment as the keystone for strategic reprioritization in his Five Most Important Questions (2015,)

To abandon anything is always bitterly resisted. People in any organization are always attached to the obsolete—the things that should have worked but did not, the things that once were productive and no longer are. They are most attached to what in an earlier book I called “investments in managerial ego.” Yet abandonment comes first. Until that has been accomplished, little else gets done. The acrimonious and emotional debate over what to abandon holds everybody in its grip. Abandoning anything is thus difficult, but only for a fairly short spell. Rebirth can begin once the dead are buried; six months later, everybody wonders, “Why did it take us so long?”

Idea for Impact: Assess What Endeavors Must Be Intensified or Abandoned

Don’t do—or continue to do—something just because it’s been a tradition, custom, or habit. Strengthen, abandon, or stay on. Align your efforts with your mission, your values, and the results you want to achieve.

If you abandon something important mistakenly, you can quickly pick up where you left off.

Invest your precious resources where the returns are rich.

Figure out what’s vital and stay focused, even if you have to cut your losses (read about sunk costs.)

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Leadership Lessons

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Key Employees are Not Only Assets, but also Large Contingent Liabilities

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Reflection: Is Acquisition Entrepreneurship Right for You?

Searching: A Full-time Job in Itself

Seek Enduringly Profitable Businesses: Recurring Customers and Predictable Revenue

A Checklist for Enduringly Profitable Businesses

Valuing the Company and Negotiating a Deal

Transitioning into Leadership and Emphasizing Business-as-Usual

Recommendation: Read ‘HBR Guide to Buying a Small Business’ for a Very Good Introduction on How to Buy and Organize Finance for a Business

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Change Forces Leaders to See Business Models Afresh and Imagine New Paradigms

The Best Leaders Anticipate Change and Nurture Their Own Innovations

Successful Companies Can Become Victims of Their Own Success

Can IBM Beat the Odds?

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Jack Welch’s Strategy for General Electric: #1 or #2 Businesses Only

Peter Drucker on Strategic Reprioritization

Idea for Impact: Assess What Endeavors Must Be Intensified or Abandoned

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