critical management thinking

8/12/2019 Critical Management Thinking

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Critical Management Thinking 4/2/2014 6:12:00 AM

The Logistics of the Roman Grain Trade

How do complex markets work?

Series of political, economic, & social systems Financing source, controls, hierarchy/division of labor, & physical

infrastructure

Why do they work?

Theres a need for good that arent produced there (Rome couldntproduce enough food on its own)

Someone finances them and builds infrastructure (necessarysystems)

How do they evolve?

Rome (capital) was enormous

1MM people by 1stcentury CE Largest city world had ever seen (and would see until London in

1800s)

One big challenge to sustain a huge population is food! AverageRoman needed 3,000+ calories/day

o Based on 1MM people, Rome needed to provide ~3.0Bncalories daily

o Because of the lack of modern-day agriculture techniques, theamount of food is simply amazing!!

Had many broad & well-paved roads (infrastructure)

Cities relied on the surrounding area (catchment area) to provide food for

population

But was very small & had low yields near capital of Rome Land transport was very expensive so this provided a natural

boundary for many cities

Boats were the only way to transport long-distances (remained trueuntil modern-day)

o This is why all large pre-modern world cities are port-cities


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o Reliability of transport was difficult, even by boat~ All cities until London 19thcentury were capped at

~100k people because of these constraints

Food Choices:

Olive oil has high weight to calorie ratio so became a staple Wine also has high weight to calorie ratio shipped all over empire Wheat comprised ~80% of average caloric intake

o Best yields were in Northern Africa (better climate) so ~75%of all wheat consumed in city of Rome was from here!

Rome succeeded based on political, military, economic, & social conditions

Certain regions developed specialized production There was trade across the empire Lots of opportunities with ag. Surplus but also complex challenges

Wheat - not the easiest crop to grow (esp. in Italian climate) or ship

Requires suitable soil & adequate rainfallo North African yields were much higher than Italian yields!

Requires annual minimum rainfall of 400mm (15.7inches) Heavy and bulky to move around it easily shifts and is heavy (so

requires special containers) basically only possible by ship exceptfor very short distances

Molds and rots easily (needs cool and dry conditions)Key Factors:

Maintaining controls (carefully counting sacks & measuring quality) Formalized hierarchy of labor (with specialized workers &

supervisors)

Physical infrastructure that was specially devoted to storage anddelivery of grain (established process to move along grain)

o Large quantity of grain was movingo Transport over large distanceso Changed hands between many middlemeno Ships designed to transporto Ports & Roads systems


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As the empire expanded, it could draw on resources from territories it

conquered.

Taxes paid in kind (actual goods) Cash (gold & silver)

o Empire used tax revenue to purchase supplies for the centero Monetization was key to help goods & cash flow freelyo Helped increase the division of labor and growth of Roman

world

o Helped increase integration of the empireLand grants were given to Roman citizens in conquered provinces

Generated wealth and income for the elite They financed trade and brought goods from periphery to center

Overall pattern of trade was weighted in the direction of Rome (despite the

existence of other large cities)

They absorbed surplus of both goods & money at the expense ofother locations

Egypt was a perfect supplier to the Roman empire

Ideal climate with regularly fertilized soil & abundant irrigation Built-in river highway Ideally located port

Trade was done through a Network of private merchants

Financing & Organizing the Grain Trade:

Financing largely came from small, powerful elite with disposablewealth (senators & knights)

Trading/organizing came from merchants (typically came fromdescendants of slaves, or slaves themselves)

These operations were like modern corporations

Silent partners provided capital (like shareholders) Companies signed contracts, maintained accounts, & paid dividends


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o They were responsible for the arrangement of delivery ofgrain

They owned or subcontracted ships (most important!) Had huge physical infrastructure Network of agent (local buyers, logistical staff,

overseers)

Joined together in a trade association Some companies depended on inter-personal networks, but some

existed beyond the lifetime of the original owner

Informational Uncertainty:

Info was highly constrained to local context Eventually a courier service was established over much of the

empire but it was expensive, slow (horses), and mostly for govt.

Typically, limited information would create undercapitalization andsystemic inefficiencies but not the case for Roman Empire!!

Firms used hierarchical structure to manage operations betweenfirm & market

o Principal-agent problem must have been very severe withlimited info and slow info flow

o But Roman system was able to develop ways to use themarket efficiently

Signed binding legal agreements System of quality control & weights verifications

introduced supervision at critical supply chain points

Grain merchants banned together to get assistance andsupport from the state (from elements like weather o/s

their control)

Paper Trail receipts across entire process Merchants used networks of trust within the organization

o Freed slaves were essentially part of the network of thewealthy family that freed them

o Responsible people who intervened throughout the processalways acted in the best interest of the organization via a

shared reputation mechanism


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Role of the State:

Interested and involved in the grain trade to supply food to theRoman army and the city of Rome

Invested in considerable infrastructure like large-scale facilitates Incentivized grain trade

o Promoted construction of larger ships through tax incentiveso Allowed monopoly of grain trade - Merchants had special

advocacy groups to represent their interest with the state

(exclusive right to trade grain)

o Was the largest single purchaser of grain (maybe subsidiesfor 30-40% of population)

Class Discussion:

Sheer size of the city was impressive it was the only enormouscity in an un-ideal location (Exceptional Outcome)

o Means market was operating at near-optimal efficiencies Primary problem: Asymmetric information (one side has no

information- which would typically mean there would be no market)

If theres a market without information, you need to give it information

Market starts at farmer (who has all information at first) Quality of information between farmer and first buyers transaction

is good first purchaser will make sure the grain is high quality

o guards against adverse selection (choosing poorly)o no moral hazard (risk your undertaking isnt your own)o info in goods in cart has complete information with it

Quality of information remains good and complete throughout thechain when one buyer is purchasing from another person for their

own needs

Transaction costs o get so huge across the market because people are charging a

premium to purchase each time (since its their own personal

risk)

o complete information is very expensive! (which means marketcant function because its too expensive)


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Romes Solution:

Companies / Hirearchy (Vertical Integration)o This tells us why there are firms efficient response to a

transaction cost problemo Cheaper to put people on salary than have them negotiate

each individual transaction because risk premium is no

longer theirs!

Companies create another problem: principal-agent problemo Someone has to capitalize the firm and make it happen

(principals

o Other people have to carry out the activities (agents) They might not negotiate as well for the company as

they would for themselves

If they have a relationship, then they might do thetransaction even if its not good!

Firms are a principal-agent problem that has more-or-less beensolved

o Managers jobs are to reduce principal-agent problems infirms

They implement controls / feedback to monitor &diminish the principal-agent problem

This makes sense because you cant supervise themdirectly on a day-to-day basis

o This only works if information can travel well or you trustthem completely

In Roman times, the slavery relationships allowed themto work

Their Companies were possible because the formerslaves and their descendants

Wealthy Romans didnt want to be part of thetrade business because it was dirty/below

them

the slaves had incentives to serve as agents tomaintain the reputations of their former owners


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and themselves (would take the name of their

former owner) - TRUST

Slaves werent the same concept as we use now(just didnt have citizenship)

Even though there was no information available,the trust was so huge, that the companies were

still capitalized

It was like a family companyThere is no such thing as 100% alignment of interests.

Maybe Roman market wasnt 100% efficient, but it was highlyeffective because it worked for so long. So there must have been

strong trust in this market.

Money wouldnt have flown into the market if there wasnt at leastsome high level of trust on the level of returns

Wal-Mart versus Costco:

Employees at both do relatively the same types of work Theres a huge difference on employee retention

o Costco = ~90%o Wal-Mart = ~10%

The huge divergence is because of:o Pay & Incentives = very generous at Costcoo Company culture

Why does Costco pay their employees twice as much as Walmarts? o It was unionized initially and kept that model while

expanding

o Unions are about raising costs and we think this reduces theability to maintain competitive advantages but in this case,

its not true!

o Theres a shared reputation at Costco (versus Walmart) whichencourages self-monitoring among employees

Overall Summary:

Companies solve situations with high transaction costs


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however, because of the principal-agent problem, you need sometype of monitoring of the employees

Rome solved this by trust/reputation which aligned incentivesenough for capital to be invested

Agency Costs

Up-or-Out Reviews

Meritocracy cant promote a lot of people just because you likethem

Clear rules and steps for employees (transparent evaluation) Fosters competition among employees / motivation Constantly rejuvenating companys talent Sends positive market signals we only have the best with us (to

work for you!)

Productivity of employees is generally higher because you havehigh incentives to perform!

On the other hand, sometimes this type of reviews is not beneficial!o As soon as old CEO left Microsoft, the new management

changed the review system away from this!

o Most peoples objectives in this type of system is to not getfired. Because theres a lot of reputation risk with beingfired (makes you look bad to be fired there who will hire

you?)

People typically avoid negative consequences Especially reputational risk

o Results of desire to avoid reputational risk = agency costs Lowers risk appetite Reduced collaboration and teamwork No talent clustering (because you dont want 1 of the

top workers to be let go)

Firms may suffer from ability to mobilize internalknowledge

Encourages people to actively drag others down Incentivized to leave early / look for other opportunities

(so dont have reputational signal)


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Were looking to reduce agency costs, by having this type of ranking. But

employees primary motivation is to minimize their reputational risk, which

increases agency costs.

If this is the case, why do firms still do the forced ranking? (Thereis no study to show statistically that this is a good thing to do.)

o Firms only do things to optimize their output There are some anecdotal stories about negative impacts of this

system.

If one firm in the industry does it then others try to imitate themto not lose their competitive advantage.

Based on the Roman Emprires Grain Trade it looks like trust is akey success factor in maintaining a strong market.

We have to think of management decisions from every point of view

not just top down!!

Something catastrophic happened in Roman Empire that made the entire

market collapse quickly (not gradually). Possible reasons:

Lose source of trust or confidence (its binary its either there ornot there)

o Political crisiso Loss of confidence in currency

had to constantly expand their territories to bring newresources to sustain the Capital

This meant there were higher military expenses thatRome had to control their territories

They had to pay the soldiers, but they couldnt justprint more money (gold/silver standard)

The money started making money with less and lesspure gold/silver in them to keep up with

Roman empire had a constant need for growth which was unsustainable.

In our own society, growth is the key benchmark for managerialsuccess (there are no other benchmarks for companies to measure

themselves by)


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But is it a reasonable, or even good factor, for us to consider? Doesit create optimal management outcomes?

o Sometimes maybe its probably perfectly acceptable to staywhere you are

Since the 1930s, firm longevity has halved.

Could be because of market efficiency the waste or bad firmsare forced out of the market

Could also be because over the past 40 years, weve put in morepolicies to engage their demise

o Maybe its okay for us to have firms that dont last that longo But we dont have that conversation we just think growth is

the best policy

Too many of us think that growth is the best policy at any costbecause thats what we need to happen

You can choose to accept an argument but only after you evaluate

the alternative and outcomes.

Innovation:

Do Reading on the Box Musical Assignment (just first movement) Compare it to the first movement to any with Hyden or

Mozart

Go to GoogleBooks and type in Innvoation choose a bookand read a few pages with the preview function to see

what author says is compelling about this book

THE BOX

1.What does innovation mean as a concept and as an experience?2.How can we recognize it?3.Does innovation have to be about something different, unknown,

new?


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4.Is innovation necessarily a good thing?Value of the shipping container isnt in the physical object but how its

used

Its at the core of a highly-automated system for moving goods withminimum costs & complications

Container made shipping cheap, which changed the shape of the global

economy.

Destroyed Old Economy/System:o No longer required waterfront communities to unload shipso Waterfront activity declined significantlyo Manufacturers didnt have to spend extra money to be in

urban plants simply to be closer to suppliers & customers

o Old ships faced huge adaptation costs Built new Economy/System:

o New ports were built in different harbors (Seattle/Malaysia)o Small towns could entice companies with cheap land and low

wages

o Exporting became plausible: Poor countries could realisticallysupply wealthy countries far away

Workers lives changed, too:

Positiveso Lots more choices of goods to purchaseo Increased competition between suppliers quickly generated

new products @ low prices boosted standard of living

around the world!

Negativeso Global economy meant mobile-companies had higher

bargaining power and workers had far less

o Work policies in China could impact US workersAmazing things about ships to me:

Only need a crew of 20 for a huge ship of 3,000 40-foot containers Cranes can unload 30-40 boxes an hour from ship to dock


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Extremely efficient know exactly where to put each box and atwhat time so that trucks/trains can take them to their next stop!

o Its become so efficient that for many purposes, freight costsdont really effect economic decisions

o Before shipping containers, costs were higher than tariffsTerrible for customs inspectors & officials

Since nobody opens the containers, they dont know whats inside(beyond a manifest listing its contents)

No easy way to check opening just shows a wall of boxesContainers not only reduced costs, but also saved time!

Combined with computers, they made Just-in-time manufacturingpossible

o HUGE cost savings and reductions in inventories Despite the lack of economic expansion drivers (that typically

stimulate the economy) in 1966, volume of international trade in

manufactured goods grew twice as fast as global manufacturing

production.

o Can be attributed in a main party to the drop in freight costsTransportation Revolution:

Lower rail freight rates increased ag. Productivity, knitted Northtogether before Civil War, and made Chicago an economic hub

o Innovation (refrigerated railcar) made meat affordable foraverage households

o Passenger car & trucks shaped urban development Shipping container had a similarly large effect in stimulating trade &

economic development

How does innovation help employ labor & capital more effectively to produce

more goods & services.

New technology, by itself, has little economic benefit Innovations in early-stages are ill-adapted to wide range of uses to

which theyre eventually put.

Resistance can impede their adoption


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o People may avoid commitment until future is more certain Benefits are from entrepreneurs who discover ways to put

innovations to practical use especially from organizational

changes through which businesses reshape themselves to take

advantage of the new technology Once this happens, change occurs very rapidly

Transportation costs were only considered in economics since 1990s

When transportation costs are high, manufacturers main concern isproximity to customers

As transportation costs decline, they can relocate to reduce othercosts

Prior to Shipping Containers,

Loading and unloading ships was dangerous & hard-labor work!o Highly labor-intensiveo Lots of injuries/deaths! (3x as many as in construction!)o Labor was also unpredictable (choosing gangs each day)

Corrupt system requiring kickbacks from workers Lot of uncertainty around wages & hours worked

Formed waterfront cultures; unwelcoming to outsiderso Lots of people were related to each other so very protectiveo Hard work, but paid better than most other jobs for workers

not finishing high school

o Frequent strikes Liberty Ships cheap US ships built small so less cargo would be

loss if sunk by German sub

o Biggest cost item for ships was the wages of the longshoregangs could amount to of ocean voyagesexpenses!

o Odd-shaped ships required experienced workers to fill themappropriately so nothing would break or capsize the ship in

bad weather

Antagonistic labor-management relationship caused 2 problems:

Theft


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o Especially after trade of higher-value products grew postWWII

Intense suspicion of employers / resistance to anything that mighteliminate jobs

o This lead to unions insisting on specific contract languageo Made workers much less efficient

Solution: Put things in boxes and move them easily!

Railroads adopted to containers in early 1920s Transferring containers was much easier than individual goods

o Loose freight cost $0.85/tono Containers cost only $0.04/ton

Railways started changing the way they charged for shipping byweight

o Commission ruled that railroads couldnt charge less to carrya container than to carry the equivalent weight of the most

expensive commodity inside the container

o This made containers no longer make economic sense on railsNext generation of containers was terrible

Some didnt have any lids or were not easily loaded They were often small (inefficient) American containers were made of steel (good protection/enormous

cost)

Based on ship designs, less items could fit onboard!Shipping Industry felt little pressure for change - change came from an

outsider Malcom McLean

The Interstate Commerce Commission wanted to keep industry stable

regulating body over roads and railways that controlled almostevery aspect.

Any major change required hearings at which other truck lines &railroads could object

Inefficient system only authorized cargo could be transported(meaning trucks sometimes had to return empty)


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McLean found ways around obstacles

Purchased carriers with attractive routes (versus trying to goaround obstacles to win a new route)

Leased truck lines versus purchasing them Found ways to lower costs (truck lines could only underprice

competitors if costs were lower)

Started worrying about increasing highway congestion & that domestic ship

lines could potentially undercut his trucking business

Thought about putting truck trailers on ships and ferry them up anddown the coast

To circumnavigate the ICCs regulations, created a new companyand purchased a shipping company to follow this idea.

Size of the containers was chosen because the ships length wasdivisible by 33.

o They were at least 7x larger than existing containers at thetime

Lots of protests by rail and trucking industries said that takeoverof Waterman without ICC was violation of the Interstate Commerce

Act

Malcom understood the core problem that shipping industrys business was

moving cargo (versus sailing ships)

This helped him come up with his idea that was a new way ofhandling freight

Innovation on Google Books - Managing Innovation: Integrating

Technological, Market, & Organizational Change by Joe Tidd & John

Bessant

We always eat elephants confidence in taking on challenges normally

seen as impossible for companies our size (grounded in a culture of

innovation)


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Innovation is driven by the ability so see connections, to spot opportunities,

& to take advantage of them. Opens up new markets and offers new ways

of serving established & mature ones.

Technology often plays a key role. New technology or old technology innew ways.

US refused to recognize copyrights from Europe; only after we had enough

technology & innovation ourselves did we start enforcing IP rights.

Origins of Innovation Channels/Processes Outcomes

Imagination Market Profit

Ideas Opportunity Advantage

Accidental New Markets Growth

Technology Dissemination Survival

Knowledge Executable

Connections Need

Contextual Project

Failure Costs

Creativity

Unconventionality

Agility

Values

Disruptive (radical)

Incremental

Risk

Least agreement Some agreement Most agreement

Social acceptability of failure is important

As firms become bigger and bigger, they become more risk adverse (good at

stability & predictability)there are no real obvious structural way out of

this.

This means theyre less good at innovating, in general.


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Ability to take risks is diminished because firms are hierarchieso The willingness to take risks is reduced in this structure

Risk correlates to information

The more you go out, the less information you have, the riskier thedecisions likely are

Theres lots of modeling built in to a lot of the innovation books. Or steps on

how to be innovative.

Firms that arent attempting to grow and take advantage of newsituations have a doubtful future

Theres some disagreement among people for the channels/processes

Some people say you need to focus on your clients Others say you cant listen to them they dont know what they

want (i-pod)

Theres more disagreement about origins of innovation

People can find any idea and find contradictory arguments aroundthem

Because of this, its hard to know what innovation actually isMany firms commit to innovation (even though they dont exactly know what

it is) because otherwise they wont survive.

Beethoven replaced melody with a motif

It shows a sense of urgency or constant flow Hes writing a symphony without any opening melody He created something entirely new by re-thinking what hes trying

to achieve.

o It took him 2 years to come up with the 5th symphonyo Innovation, therefore, by definition is hard! otherwise we

devalue innovation

Box Class Discussion:


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Cost & efficiency Converted labor-intensive market to automated market Globalized world increased competition

o Companies have to worry about competition from all over theworld (prior just localized competition)

o Need for global managers (the reason were here is maybebecause of the shipping container)

Consumers have changed as a resulto More options/reduced costso Increased standard of living for us (from lower priced goods)

Consumers usually indifferent the location of production

Consumer indifference to origin is relatively new Companies have a huge amount of pressure to source production

from the lowest cost place possible.

What does consumer choice look like 40-50 years from now?

Do we assume that people will continue to being indifferent toorigin? And only motivated on price?

Sir. Dyson (advocate of British manufacturing and then suddenlyrelocated company to Malaysia) s example shows we probably do

just mostly care about price.

Why does the shipping box happen when it does?

Post WWII economic growth (growing consumer markets) Expanding trade

o Trade as diplomacy after WWIIo US developed close ties with allies through economic

relationships

High cost of using the market Congestion on in-land transportation routes Nature of vessels Labor costs / disruption Nature of competition was changing Malcom was in the right place & right time


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What makes a good innovator:

1. Relentless focus on cost-cutting2. Rule-breaker3. Identified needs4. New perspective logic of trucker to market of shipping5. Vision6. Determined / Single-Focus7. Capacity for risk

This costs so much money though, that it will usually only happen through

government intervention

Govt. needs to invest in the new ports, new facilities, etc Govt. has some political risk (issuing bonds, etc) but they still did

it because:

o Something catastrophic was happening in the marketo Main problem = human agency of the people who made the

market move.

Slow, inefficient Accidents STRIKES

You cant factor these costs into your pricingstructure because theyre unpredictable

Unpredictability leads to instability These ideas to go on strike happened locally

(versus globally)

You wouldnt know if people were going tobe at your port would stop or be on strike

Now decisions for doc workers is takennationally

Even though the market costs were high, ittolerable because everyone had high costs

(nobody had competitive advantage)

Beyond the success of the innovation, the doc workers failed

From the point of the union, this situation was the worst possibleoutcome.


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Their issue was that they failed to adapt to the rapidly changingenvironment

o Not only did they not adapt, but also they made the marketless efficient and less optimal and accelerated their demise

o They didnt see that this change was comingADAPTATION is critical (innovate is one type of adaptation)

Adapt or Die Innovation is 1 way to deal with a changing market-place (but not

always the best)

Its innovationAdaptation in the context of a changing circiumstance

Doesnt prescribe a specific right outcome You do what you need to do to have an optimal outcome at the

end

This could mean getting smaller, divesting, shutting downbusinesses

Even if its the best possible outcome enhances the firms abilityto remain competitive and move forward

Adaptations problem is that its not the buzz-word formanagement you dont want to get smaller!

Innovation in the management context is about growing and getting more

profits, etc

This isnt always possible for companies It costs a lot of money in strategies that might not work (e.g.

Research in Motion)

Growth frequently isnt the answer so if its our only focus, thenwell end up with sub-optimal results.

HOUSING MARKET

There was a housing bubble in 1988

Buyers were influenced by an investment motive They had strong expectations about future price changes in their

housing markets


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They perceived little riskHome purchase decisions driven in large part by emotion & casual word-

of-mouth

Houses are sticky downwardo When excess supply occurs, prices dont immediately fall to

clear the market

o Sellers have reservation prices, below which they tend not tosell

o This is connected with a belief that prices never decline & withsome underlying parameters of housing bubbles

Homebuyer behavior in 4 Metropolitan Areas, 1988 & 2003

LA, SF, & Boston have experienced 2 boom cycles and a bust overthe past 20 years

o They had run-ups in prices which started off slowly,accelerated for a period, and then slowed as it approached

the peak

o Home price increases outpaced income growth Milwaukees price index was very different it had a steady climb of

5.6% annually

o This is the same as the growth in income per capitao Over the entire cycle, Milwaukee did about as well as LA

(prices tripled), but not as well as Boston (increased 5x) or SF

(prices quadrupled)

The effects of declining mortgage rates on cash costs of buyinghomes

o In 1995 (beginning of run-up), the 30-year fixed = 8.8%; by2003 = 6%

o This kept the monthly payment required to buy the medianhome from rising faster than incomes

o The ratio of annual payment to income / capita fell in CA andWI (stayed flat in MA)

Housing as an Investment


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Tendency to view housing as an investment is a definingcharacteristic of a housing bubble

o Expectations of future appreciation of the home = motive forbuying

o Deflects consideration from how much one is paying forhousing services

o People buy for future price increases, instead of for thepleasure of occupying the home

o This idea is further enhanced if buyer perceives thatinvestment is very low risk

In 3 of the 4 markets (not Milwaukee), there was moreperception of risk in the 2003 survey than in the 1988

one

Exaggerated Expectations, Excitement, & Word of Mouth

People expected average annual growthof ~15% In 2003, fewer people thought it was a good time to buy a home

because prices may be rising in the future

o But they thought there was a risk that delay may mean notbeing able to afford a home later

General indicators of the defining characteristics of bubbles werestrong in 2003, but less strong than in 1988

Simple (or Simplistic) Theories:

Simplistic theories are powerful Most people dont perceivethemselves to be in a bubble, even at the height of the bubble!

o Desirable R/E just naturally appreciates rapidlyo Housing prices have boomed because more people want to

live in that location (people thought in glamor cities; not

Milwaukee)

o When closing prices are above asking prices, people seem tothink its a sign of a crazy boom that suspends the economic

laws of supply & demand

Popular beliefs


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Interest Rates = a dominating theme for people at heights of bothbooms

o Although this was a big topic, there wasnt any quantitativeevidence that they pointed to

Declines in stock market led to appearance of R/E bubbleo People had a flight to quality and sought safer investments

in R/E

o On the other hand, a falling stock market could have anegative wealth effect on home buying decisions

o People mostly said that the change in the stock market hadno effect on their decision to buy a home

Perhaps this is because they would have bought somehome in any event

o People thought R/E market doesnt lose value, where stockmarket is very volatile

Largest Holder of US Debt:

Largest = Federal Reserve (holds about 24% of the total US debt since 2008)

Second Largest = US Social Security (~15-20%) China (~10% of US Debt)

General perception is that China is the largest debt holder. Why is there a

complete & gross misperception?

News & Media Coverage!Well over 90% of entrepreneurship is covered by small business owners, but

when you ask people what they think of inentrepreneurship, its more

likely Steve Jobs

So when we read that entrepreneurship activity is responsible forx% of job creation, is that good?

o Probably not because they dont have any incentive to payyou more than the market minimum wage or give you any

benefits

So why, when we think of entrepreneurship, do we think of SteveJobs instead of these small business owners?


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Weve distorted the idea of entrepreneurship to the point whereits always something you want to promote & foster

o Its not unambiguously good!o We dont stop to think of what entrepreneurship really means

we just take one small part of entrepreneurship & makethat normative

Stereotypes and past experiences influence our perceptions

universal narrative when we see some cues, then we can usethat to fill in the gaps of what we dont see.

Why does the bible have 3 different versions of what Jesus last words were

on the cross?

Theyre writing for specific audiences and want to tailor theirmessages to the audience! its the stories theyre telling to their

own communities.

Historians can tell a lot about the community where the Gospel waswritten because of the way they portrayed Jesus and his last words

Narratives what are the stories were telling ourselves?

Why did we read this specific housing bubble article?

1) Timing it was published in 2003, which means data wascollected in 2002.

o This is important because the bubble they were talking aboutin the article didnt collapse until 2007ish

o They were talking about traditional mortgages (not subprimemortgages)

2) This article is a private conversation that were privy to listeningin on. Case & Shiller (Nobel-Prize Winner) and Greenspan (the Fed)

on the other side.

o Telling him please raise interest rates, people think theyregetting low risk with higher rate of return this is a very

irrational market and this is dangerous! They need to be

stopped!! You should do something!!

o Greenspan didnt do anything at all-


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They were bringing old tools to a new market This market had a much more effective manner to

disperse risk (derivatives)! So you cant gain insights

from just looking at the past.

Every time the government tried to add moreregulations to protect the market, Greenspan argued

against it because he thought:

This time is different he had told himself anarrative and it became his truth

When you take the core predictors of housing pricing, it showed that housing

prices were increasing more quickly than they should

90% of the homeowners saw their house as an investment

only 10% were actually using it as an investment (renting out)

Opportunity Cost = costs you incur from forgoing the next best alternative

Why did respondents say they bought houses?

Housing Stocks

Long-term Losses

Low-risk Lack of knowledge

Appreciation (13.8% p.a.) High risk

Low interest rates Intangible

Demand volatility

Tangible

Utility

Capital guarantee (sticky factor

dont want to sell it for less than youbought it for)

Rational Investor- if offered the housing investment opportunity (as noted

above) would reject it, because they

know the cost of reducing risk is lower returns


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also know that the potential for the stock market (as its shownabove) with huge losses is very large!

Paradox

Why were people seeing the market this way if it were defyingrational thinking?

How is it that these investors were perfectly irrational theythought that its best to sell low and buy high

Youtube channel look to his channel for more resources

Although this is US based information, its not a US-based phenomenon!

Timing matters for house buyingo If you want to buy a house, but know pricing is going to

decline significantly in 12 months, most people will wait

Where is the information for these people coming from? our Information

Sphere

Experience market has been increasing since 1996 (going up for 6years)

R/E Agents who are trying to sell!!!o Theyre extremely biased because their livelihood is

dependent on your business

o However, if you want to buy a house & you hear stuff thathes saying thats in-line with what you want to hear!

You give him more authority! Media

o Increasingly characterized by news that there are housingbubble conditions forming

o But people arent accessing this media they use more oflocal information

Cultural Discourse Everyone should be buying a house! - Its theAmerican Dream!

Friends & Family people brag / promote their good news stories(dont bring up their failures)

BANKER also incentivized to get your business!


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o But theyre the most important part of this decision influencebecause they have the most money at stake

So they wouldnt lend me the money if it wasnt a goodidea

People place more due diligence / risk assessment tothe banks! it alleviates me from doing real due

diligence

People have confirmation bias when populating their information sphere

They look and value information thats confirming what they wantto hear

In table 9, how often do you talk about your housing purchases?

Honest answer yes (because its a huge purchase, so its a bigdeal to you) 80-90% of people said they are frequently talking

about their housing purchase decision

Theres been a good deal of excitement surrounding recent housingprices have these influenced you? about 40-50% of people said

yes.

So theyre saying theyre creating a lot of hype around housing, butarent impacted by this hype/excitement.

In table 10, response with agreements with theories on Housing Prices

Reason for people to be lining up to purchase houseso This is because theres a panic

Why are the home prices increasing?o Because of demographics, population changes, & interest

rates

These ideas are mutually incompatible Cognitive Dissidenceo This is a characteristic of a market bubble

Participants could sort of tell something was odd/something was happening

with this market.

How are they able to remain committed to their purchasing evenwhen this is completely irrational behavior?


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Responses to what factors drive up housing prices:

Many people in SF said that it was Asian investors/Immigrants in 1988 the Japanese economy had extremely dangerous bubble

territoryo Capital seeking fair value left Japan and went to US to

purchase assets there

o But this was happening all over the country so why was itjust in the SF responses?

SF had a huge Japanese American population theresa pre-disposition for Japanese American to be in the city

Something triggered a reaction (maybe media orsomething else) and that made this factor become very

important in SF

This is an example of a narrativea story theyretelling themselves

It no such a powerful narrative to them, that it nolonger was a story it became the truth!

Management can also be faced with this problem impacted by narratives

they tell themselves

AOL & Time Warner = worst merger in history!!

They wanted to achieve synergies bringing together AOLs onlinepresence with Time Warners content.

o First few years of internet, people would get on, but therewasnt necessarily content for them to view. Huge idea that

content was the biggest problem so people thought as long

as you get enough good content, then you could win!

When they made the decision to merge, the people who evaluatedit, they used a new tool (google) to help them gather information.

o Google helps you find the information you wanto Google makes the content / internet issue irrelevant -

because if you have a robust search engine, you can find the

information and content you need you dont need it placed

right in front of you!!


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o So why did they still do the M&A CEO said that they didnt anticipate Google But Google was already a major force when they

started going the M&A

o They told themselves a story of information/internetconvergence it was part of their information sphere and

once they told themselves this story, they didnt have access

to the idea that their story wasnt right anymore.

We live in a world with an enormous amount of information

The way we deal with it, is packaging it up into stories We need to stop and ask ourselves every once in awhile to make

sure our stories are in fact correct and still valid

Instead of taking things on face-value, you should ask critical questions to

see what the real answer is (without expecting or having a bias of what is

going on)

The wisdom we can have is knowing when we dont know!

THE AGE OF CUSTOMER CAPITALISM

Modern Capitalism had 2 main eras:

1932 firms should have professional managemento management should be divorced from ownershipo instead of owner/CEOs, more firms were run by hired,

professional CEOs

1976 firms should maximize shareholder valueo Thinking was that if firms pursue this goal, both shareholders

& society will benefit

o Argument owners were getting short changed fromprofessional CEOs who were focused on own futures/well-

beings

Now should be a new era: customer-driven capitalism


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But shareholders arent actually better off since they became center of the

business universe

From 1933-1976, S&P earned an average of 7.6% annually From 1977-2008, it earned 5.9% annually (when they were the

focus)

Best way to improve shareholder value is by focusing on customer

satisfaction

Cant have dual objective because companies cant maximize 2different things at once

Shareholder value creation & destruction are cyclical and not under

managements control

Management can push shareholder value up in short bursts, but notin the long-term

Since CEOs cant play this game, they turn it into something theycan win

o To increase shareholder value (stock prices), CEOs have tocontinue to push growth and often in non-sustainable places

Focusing on Customers:

Obvious constraint you cant give everything away for free butyou should maximize customer satisfaction while ensuring

shareholders earn an acceptable RA- ROE

o E.g. Johnson & Johnson focus on customers, employees,communitites, & then shareholders

Why does this work? Because CEOs are free to focus on buildingreal business value rather than on managing shareholder

expectations

MAXIMIZING SHAREHOLDER VALUE: A NEW IDEOLOGY for

CORPORATE GOVERNANCE

Focus in US/UK on maximizing shareholder value = recent (from 1980s)

Decade long boom in US economy impressed European & Japaneseexecutives with potential of shareholder value


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Prior, companies focused on retain & reinvest both people &capital

o Began to run into problems in 1960s and 1970s because of: Growth of corporation sizes through M&As and

internal growth, they grew too big/diverse Central offices were too far removed to make

informed decisions of retaining & reinvesting

Rise of new competitors Japan was able to challenge US in mass-

production industries (cars, electronics, etc)

because of development & utilization of integrated

skill bases

New type of investor institutional investor alsosupported quest for shareholder value

US Banking Sector experienced significant deregulation Made it possible to issue junk bonds to help

finance hostile takeovers of even very large

corporations, which left the new companies with

huge debt burdens

Despite a market crash in 1987, the market made aquick recovery and had been on its longest bull-run in

history which seemed to support this shareholdervalue maximization idea

Lots of layoffs continued, even in 1990s (withconsiderable business cycle improvement)

Job cutting is much more prevalent among largeemployers than smaller ones

Displaced workers suffer real costs (lower wagesonce they were reemployed)

There was an increase in corporate pay-out ratios(dividends)

Companies also sold shares on the market at aninflated price to pay off debt;

Why and how was there a shift from retain and reinvest to downside &

distribute?


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A trend started in 1970s that favored the pay of top managers overpay of everyone else in the corporation

Pursuit of the retain & reinvest strategies permitted lots of differentstockholders to gain

o Workers could get paid higher wagers & have higher stabilityo Consumers could get lower prices on goods they purchased

This lead to conglomerates managers faced a strategiccrossroads:

o They could fine new ways to generate productive gainsthrough retain & reinvest OR

o They could surrender to the new competitive environmentthrough corporate downsizing

Further, the increased segmentation within organizations made itmore difficult for managers to understand what type of innovative

strategies they should pursue & the capabilities of their

organizations

Lots of problems:

Significant cost of job loss Income inequality (much wealth is held in stocks)

o From WWII through 1970s there was stable employment,and high pay, despite the low training & education standards(compared to other global locations)

Lack of investment was a huge competitivedisadvantage for US firms.

Class Notes (3/26/14):

What type of capitalism do we want?Whats good for GM is good for

America & vice versa

Hypothesis: In general whats good for a country should be goodfor the firms that operate in it.

Focus on maximizing shareholder value

Stems from Milton Freemans 1970s article


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o Said under ethical boundaries, companies should do all theycan to maximize value for shareholders/owners

Another article was also written by Jensen & Meckling (1976)o They said there were lower ROA because of higher agency

costs in these large conglomerates

These articles were paid attention to because they were addressing a

problem that firms of that time were perceived to be facing

Typical firms that these articles were addressing were largeconglomerates creates systematic agency problems @ the level of

senior management

o Monitoring and trust networks can help reduce the agencycosts for the lower people

o But who can monitor the people at the top?? The board of directors!! But as a structural organization, boards are terrible

because theyre very overlapped so you cant rely on

them (CEOs of 1 company are board members of

others)

As firms are more and more conglomerate then theagency costs grow larger and larger

o One way they can get external monitoring for thesecompanies is monitoring share price

This is based on information Before, Management didnt worry about the stock

price, because their idea was that investors

dont know the real value since theyre not privy

to the information

Idea markets always price an asset efficiently, giventhe information available - so the share price should

always be an accurate gage

So emphasis from these articles was that management should beputting an emphasis on share price

Why was the context ripe in the 1970s for this?


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o American Economy faced lots of competition from unexpectedplaces (especially Japan!!)

o Stagflation partially because of the oil crisis; stock marketsdeclined (post Vietnam War) & then flat-lined

Many companies P/E ratio was well below book-value(people were valuing them less than their assets on the

F/S were valued)

o This downturn is described in these articles as more than justpart of the business cycle its because the firms arent doing

what they need to do to unlock the value

Share price (external factor)is the best way to monitor& help this situation!!

Theory 2:

In the 1950s heyday of the progressive taxes (the high incomeearners of the 1950s had to pay extremely high taxes ~95% at

highest bracket)

Even at $100k and $200k they had to pay very high taxeso Lots of these people were corporate executives

At the same time, the government starts allowing stock options(taxed as capital gain which are subject to much lower tax rates)

o So this becomes a much more popular way of remuneratingexecutives (before, wasnt used at all during/after 1970s

it became a huge portion of pay!)

o Went from becoming an obscure instrument to a popular toolo But share prices collapse and so these stock options are

basically worthless

These were mostly old, white, unhealthy males sothey didnt have a ton of more time to wait for the

stocks to improve once again

Other Factors:

Nature of shareholding underwent a profound transformation

Prior to 1970s the institutional participation on the equity side wasforbidden (had been instituted in Great Depression)

This restriction was eliminated in the 1970s


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o So more mutual funds and institutional investors came intothe market

o This changes the way investments were seen

Restriction on pension funds for investing in equities were also lifted somore capital was coming into the market

US government also lifts the cap on the interest rate that banks can offer

their customers

This produced the Savings & Loan crisis so instead of offering P+ x%, they were offering extremely aggressive and high interest

rates to attract deposits

o They had to invest in high-risk investments to match theseinterest rates (below investment grade assets)

o Junk bonds were an attractive source of high-interest ratefunds.

Junk bond credit started moving into capital markets Junk bond financing permitted quick & aggressive

corporate take-overs for companies that werent being

run efficiently

Conglomerate firms were threatened becausethey were undervalued in the stock market(because of their embedded agency costs)

What should they seek to do to not be a victim? increase its share price a high enough P/E could

help protect them from a take-over

Started thinking about best way to increaseshare price in the short-term

1990s another article was written (by nerds) that quickly jumped into

modern management practice

Idea of core competence emerged from nowhere to become adominant idea in the firms

o You have to focus on their core resource & get rid of the best(fits into resource-based view of firms)


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o Im going to get rid of all these underperforming assets -this will send information to the market that Im going to be

boosting my Net Enterprise Value which should increase the

share price

Why was diversification so great before and now were morefocused on core competencies?

o In the 1950s & 1960s responsible firms mitigate risks /diversify because firms are there to maintain employment

(if you have lots of types of industries in your business, you

can smooth out the business cycle)

o Now we argue, that you have sub-optimal returns fromdiversification; shareholders should be able to diversify their

own risk

o Theres a preference for moving diversification from company-level to shareholder level

Management principles in 1950s most critical quality emphasized was

leadership!!

Today, we dont think thats the most important quality nowknowledge applicable to your area is the most important!!

Before, MBA gave you general management skills (which allowedyou to work anywhere because you knew how to lead)

Now, MBA gives your existing experience more value (ability to shiftindustries is significantly lower) Prior knowledge = most important

factor

Core Competence Model as a way to unlock value:

Sara Lee in mid 1990s, they went through a lot of de-virtualization they wanted to return value to the shareholders.

o Decided their core competence was the brand They dont need to make cakes they could just take

cakes from other companies and put their brand name

on it


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o They became a brand manager and got rid of all its stuff,instead of branding and distributing

o Share price increased a lot!! It basically disappeared but because it didnt really do anything

anymore, nobody really noticed ito They stripped themselves down too far and had nothing

left!

Who is the shareholder?:

Top 10% richest people- and actually mostly the top 1% wealthiestelite!

o ~80% of all investments are held by the richest 10% of thepeople

o top 1% control ~46% of the investments Instrument by which its done investing via mutual funds

(institutions)

o They have more knowledge & economies of scaleo Job of money managers is to generate the best returns

(based on information available) for their clients

o Money managers having a long-term relationship withcompanies isnt a good idea because theyd be tied into

staying with these companies, even when these companieswere generating sub-optimal returns for the clients.

Its morally inconsistent with the money managers jobas an investor

On the firms side of the equation, this means that theyre in ashort-term battle fighting for capital (because they have no

expectations that investors will stay in their firm)

o Their goal is to give information out to the market thatsupports this goal of having capital!!

o Businesses actively manage their earnings / expectations(give analysts your forecast and then meet them) on a very

short-term basis

o This leads to a short-term mentality for companies theycant have a long-term


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o CFOs are shockingly willing to forego long-term performancefor higher short-term performance!

Owner of the firm = itself at a most basic legal level (limited liability)

Price of the limited liability shareholder has a proxy ownership ofthe company

o You typically get to vote for the board of directors & chooseCEOs but thats a privilege that the company defines &

gives to the investors

o So why should the firm focus on driving value for theshareholders (who are definitionally short-term institutional

investors and behind this, were looking at the top 1% of

society)

The ecosystem of a firm is made up of a lot of long-term partnerso Customers; governments; employees; communities;

Why do we take all of these long-term stakeholders and make themsecondary (or tertiary) to the short-term investor?

Dangers of this way of thinking:

Average CEO is worth 10-30x more now than in the 1950s.o The shareholders approve these salarieso Institutional investors dont vote they just agree with

management

If they make the management another shareholder this ensures that their goals are aligned with

institutional investors

If something bad happens, the investors dont protest because the money manager just clears their position

and moves their money somewhere else

Apples stock price had been increasing gradually then suddenly in 2012,

its price became much more volatile

In 2011, Steve Jobs died and stock prices increasedo People started thinking that apple would start distributing its

cash stockpiles because theyd run out of innovative ideas


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o Steve Jobs hadnt given out any dividends he had been justreinvesting the money

A shareholder sued the company because of the huge amount ofcash balances and said they wanted some of this money

o But this lawsuit was thrown out because there is noprecedent for companies having to distribute their cash

o The most that shareholders can do is elect a board ofdirectors who can choose to have distributions

o In 2012, the stock price was ~$700/share based on 50%continued margins - Apple had to know that this was

unsustainable but didnt say anything to investors

Their success had been because they were focused juston their customers and by this the shareholders were

able to benefit from this success as well.

They cant say dont buy our firm at this level but theyshould because not doing this is management failure

o Apple decided to give back a lot of money to theirshareholders

This isnt good for the company in the long-term This also isnt good for shareholders in the long-term Because this type of decision isnt making the company

better-performing

Companies shouldnt be just vehicles for putting more money into the hands

of the top elite its not an optimal solution / situation for society!

Levels of wealth inequality has spread significantly!!o Instead of raising wages for employees or doing other things

like that, firms are focusing on efficiently transferring money

from the firms to the shareholders.

Does this create strong societies?It should be discarded as a vehicle for corporate governance

Firms should find ways to excuse themselves from this logic of thismarketplace


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CEOs need to be able to say to shareholders if you only want tofocus on ROI, then maybe this firm isnt the best onefor you to

invest in.

THE RISE AND FALL OF NOKIA

Nokias success was based on developing strategic capabilities gained from

competitive advantages in its previous business endeavors & applying them

to new fields adaptability, strategic flexibility, & customer focus

Started as a family-business in the lumber / forestry sector

Turned into a public company after WWI Allowed Nokia to focus on opening new markets & expanding old

ones especially electrical power generation line

1970s-1980s, Finland was Nordic Japan with rapidly developingtelecommunications industry (including Nokia)

o Nokia decided to reach into international markets morebroadly;

o Its key assets = technologies, customer information, brand,reputation, & culture

o Through acquisitions and growth, became large enough to getinternational recognition; but not strong enough to dominatecompetitors

Mid 1980s had 11 different industrial groups, each with ownfuture vision & lots of debt!!

o Divested all non-strategic businesseso Nokia suffered from a collapse of the Soviet Union (which had

been an important market)

o New CEO (in 1992) saw that mobile telephony was going tobecome a major consumer staple

Refocused company around its mobile handset divisionand divested all assets (over several years) not

related

Said product innovation, flexibility, & rapidresponsiveness were KSF


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Nokias Restructuring:

Realized as early as 1997 that future of mobiles would be withinternet integration

o Decided to pioneer in internet-enabled telephony whilemaintaining current position as global giant of mobileheadsets

Seen as a bold, risky move But allowed Nokia to be the early dominant smartphone

player

o Had developed success / growth based on establishing abrand name not technology (which was unsustainable)

Nokia recognized this and centered future strategyaround internet & consumer demand for greater

mobility

A move into the mobile digital economy wasnt easy it required a cash-rich

company willing to increase R&D to service a rapidly-changing market.

Nokia decided for focus on:o Development of a 3G cellular system

If successful, forecasted to have 2Bn+ users worldwideby 2010

Nokia wanted to get first-mover advantage byestablishing strategic coalitions & alliances which had

yet to exist

Given extensive delays in rolling out 3G networks, thiswasnt a successful strategy in the long run

o Mainstream implementation of the wireless applicationsprotocol (WAP)

By 1999, this strategic vision was producing extraordinary results!o In less than a decade, it had become the global leader in

mobile telephony

o Unlike many tech boom companies, Nokias rapidly risingshare price was supported by a substantial increase in NI

o Were aiming for 40% market share! However, the rapid growth was causing strain


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o Growth had challenged its traditional corporate structure &made internal decision making more difficult

o Despite strong R&D investments, it was being challenged byother players (both in MS & Profits) through innovation

oGot new CEO in 2006 who helped the company reinvigorate itself & get

back on track

Early results were promising but growth was primarily inemerging markets (not as much $ to be made there); sales were

flat in Western Europe & America

The introduction of the iphone in 2007 rocked their world (in a badway)

But Nokia didnt even realize that Apple was a serious rival itthought they were expensive phones that dont appeal to business

customers (because no keyboard)

Actually, many of the novelties introduced by Apple were alreadypart of Nokias suite

Challenging times

While the smartphone revolution intensified, the Operating Systemsbecame more and more critical

o Nokia tried to improve theirs but was unable to launch a toptier alternative device

o Sales continued to increase but in emerging markets, wherehandsets had been commoditized

Microsoft and Nokia started a partnership Nokia licensedexclusively Microsofts mobile platform

But Nokia had never had much of a presence in the high-end devicemarket

Class # 9: 4/2/14:

30-40 questions, multiple choice & short answer (80 minutes test time)

broad content of reading & core themes of the classes no computers, no phones paper & pencil


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Also, they built into an aggressive obsolescence into thephones trickle innovation there were lots of small,

incremental product innovations to make the customers

want a new phone every year! (while not pissing offcustomers)

This model still applies today its a longer cyclebecause the devices are more expensive

1990s there were a lot of books saying that Nokia was a hugesuccess story.

o By 1999, they were the largest cell phone provider world-wide.

o More market share than next 3 competitors combinedo They were thinking about what they wanted to do next

Wanted to grab 40% of market share they werealready dominant, but wanted to be even more

dominant

It embraces the core-competences of the firm (wentfrom large conglomerate to a focused company)

But ironically, it initially had a telecommunicationsbusiness because of diversification

What went wrong (class brainstorm):

Lack of focus on user experience Dismissive of new innovation (yeah but they had already done

that)

Poor execution of new technology Failure to adapt Loss of product identity (Focused on increasing sales) Loss of brand mojo (stopped being a cool brand) Misread market Corporate structure Hubris (too much pride) Excessive focus on features/hardware Focused on raising sales volume


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Nokia lost the market for the top-tier market but they really never had a

foothold in that market to begin with. It has always been one of any

number of players in that top-market.

A lot of its focus is trying to get a foothold in this top-tier market The source of lots of the features of phones now is Nokia (touch

screen, music device/stores, navigating the internet, first internet

tablet, apps developed by independent developers)

Timing matters maybe people werent ready or the infrastructure wasnt

developed enough to support these features (e.g. internet connectivity)

Declining profit margins!! 24% in 1999 to 16.5% in 2003!! ~33% decrease

Do we read that as a management problem?o Permitting inefficiencieso Theyre in a market thats undergoing commoditization, so

management has to:

Differentiate itself But they dont have a problem with innovation /

R&D

So why cant they innovate? Improve brand signal Most of their sales were to non-top-level of phones (not

smart phones) and these were the sales that were

commoditizing.

Apple deals with this by just not entering themarket

We have this idea that if you innovate, youre going to do well

But Nokia was trying to innovate for a part of the market that wascommoditizing and these people werent interested in innovation.

Innovation matters at the top percent of the market which theywerent a big player in! All the profits were concentrated at the top


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Nokia wanted to be part of the top market and was innovating forthis segment but their ability to play in this market segment was

very confined!

o They shouldve thought about whether or not innovationwould get them into this new segment.

o Their innovation ate up billions of dollars and go them reallynowhere.

Was their problem internal or external?

Internal Nokia saw it as an internal problem; thought it was amanagement issue they restructured, recommitted to innovation

External - But, it was actually an external problem. If youre in acommodity segment, then thats just the nature of the market it

has nothing to do with Nokia, theres nothing that the company can

do (its not a failure of management) to get back to where they

were

o Improving profit margins to back where they were isnt apossibility for management

o The market is not a problem its just reality. Youre missingthe point if you call it a problem

o The issue is how you choose to address it Instead of recognizing this as market evolution, Nokia

said that it was management problems.

They thought they could return to their higher profitmargins

But having a high profit margin with 40% marketshare in a rapidly commoditizing industry are 2

objectives that are incompatible.

Maybe if they had chosen to focus on thetop market (high profit margin segment)

and a small market share, they could have

been okay with innovation

Management failure was for them to fail to askhow their market would look like! they couldve

looked at other technology to see that the market


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Encourages us to rethink logics of core competencies (should theyhave sold everything off??)

The internal management told themselves a dialogue and they socompletely bought into their story / internal narrative that they had

no access to history and facts about other similar industries prior.

They misread the consumer value of their product so much because of their

internal narratives!

Critical management thinking is about engaging in critical reflections and

understanding what/why true knowledge consists in knowing you do not

know

Over and over the decisions we make that end up terribly isbecause we dont actually know the answers and truth and we

derive incomplete pictures of the information!

We dont want to fall victim to our own assumptions!! Always remember that the true knowledge we have is knowing we

dont know always keep questions at the fore of your mind!


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critical management thinking

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