Big Red Horseshoe - Vanderbilt Owen MBA Students on Business Strategy

What Say You, Mr. Friedman?

A big part of the MBA experience is pondering the role of the corporation. Should they follow the advice of Milton Friedman and concern themselves only with generating profits for shareholders? Should they take a more philanthropist role and increase social welfare while returning value to shareholders? This is always a lively debate, to say the least.

As I prepared to leave home this morning, I caught on MSNBC a blurb about a meeting of corporate leaders to discuss charitable giving and the roles of corporations. There was a brief interview with former Goldman Sachs chairman John Whitehead, though I can't find video on MSNBC's web site. But I did find a press release with the heading, "World business leaders, UN officials discuss contribution corporate philanthropy can make to global anti-poverty goals, at ECOSOC special event." Here's an excerpt:

Mr. Whitehead noted the coincidence that this morning, 50 chief executive officers of the biggest companies in America had met to exchange ideas and experiences about their corporate giving.  They had pledged to increase the amount of money they spent on non-business activities to meet the Millennium Development Goals.  Encouraged by that meeting, he predicted that United States corporations were going to come a lot closer to meeting their Millennium Goals obligations than the first five years had indicated. Over the last 60 years, American corporations had realized that they not only had a responsibility towards their stockholders, but also to their employees, customers, suppliers and the communities in which they did business. 

Here's coverage on the event at Reuter and The Economist. This passage from The Economist is a perfect description of the gap between corporations' goals and the effectiveness of their giving:

Speaking to his fellow chief executives on February 25th, Sidney Taurel, the chief executive of Eli Lilly, said that good corporate philanthropy has three key components. First, it should be “integrated in a robust strategy of corporate social responsibility. Simply writing checks really is a waste of shareholder dollars.” Second, it must effectively address real needs, “which means we have to measure the impact of the grants we make. That requires tracking outcomes rather than activities.” Third, corporations must “report to the public on what we’re doing to fulfil our social responsibilities.” This is both to share good ideas with others and to “honour our contract with society.”

This is right, but it is also the exception. According to the CECP’s Mr Moore, a new survey of chief executives found that 90% of them felt they had a responsibility to give to the community, and to be personally involved in leading their community focused activities. But only 20% of them were satisfied that they had achieved or surpassed their goals in this area. Mr Moore hopes this number will rise due to what he describes as a new “competitive market in corporate citizenship.”

I think Friedman's view of corporate responsibility can work in today's environment. Since people -- consumers, employees, stakeholders -- today expect corporations to be active socially, corporations will maximize shareholder value when they concern themselves with social/environmental causes. Aloof, isolated corporations will be punished by consumers and investors for ignoring what others believe is their inherent responsibility to society. Those non-business activities, it will turn out, are in fact good for business.

The World Is Spikey?

It would be hard to pass up an opportunity to post something about Thomas Friedmann's "The World Is Flat," which has been assigned twice in my two years at Owen. (Since I bought it when first released, I have twice skimmed the rather large book.)

A post at Kids Prefer Cheese gives us an opportunity to consider whether or not Friedmann was right, and what implications it has on corporations and remote businesses. (The post is about a chapter in Tim Harford's The Logic of Life: The Rational Economies of an Irrational World.) I'll start out with this humorous passage from Matt Taibbi review of "The World is Flat" at the New York Press:

Thomas Friedman in possession of 500 pages of ruminations on the metaphorical theme of flatness would be a very dangerous thing indeed. It would be like letting a chimpanzee loose in the NORAD control room; even the best-case scenario is an image that could keep you awake well into your 50s.

So I tried not to think about it. But when I heard the book was actually coming out, I started to worry. Among other things, I knew I would be asked to write the review. The usual ratio of Friedman criticism is 2:1, i.e., two human words to make sense of each single word of Friedmanese. Friedman is such a genius of literary incompetence that even his most innocent passages invite feature-length essays. I'll give you an example, drawn at random from The World Is Flat. On page 174, Friedman is describing a flight he took on Southwest Airlines from Baltimore to Hartford, Connecticut. (Friedman never forgets to name the company or the brand name; if he had written The Metamorphosis, Gregor Samsa would have awoken from uneasy dreams in a Sealy Posturepedic.) Here's what he says:

I stomped off, went through security, bought a Cinnabon, and glumly sat at the back of the B line, waiting to be herded on board so that I could hunt for space in the overhead bins.

Forget the Cinnabon. Name me a herd animal that hunts. Name me one.

That is one funny book review. Read the entire thing.

Anyway...here is a blurb from the interpretation on chapter seven of Harford's book (titled "The World is Spikey") which may get you thinking that America's entire workforce may not be farmed out to developing countries or the exurbs of Atlanta.

Cities are expensive, and that expense is above and beyond paying the necessary rents to gain access to their unique amenities. Cities are marked by knowledge spillovers, a positive externality ... where human capital grows faster when one is around more humans. And the internet, rather than reducing the positive effects of cities on productivity, actually enhances them. Thus, rather than subsidizing rural areas, perhaps we should consider subsidizing cities.

Luckily for Tim and his prospective book sales, he tells this story in a much more entertaining way than I just did. But I still have some questions, suggestions, and quibbles.

The claim is made that salary differences don’t match up with cost of living differences and the reason for this is knowledge spillovers, but it is not spelled out exactly how that would work. An alternative seems to me that zoning restrictions create these big rents and pre-existing property owners are sucking a lot of the consumer surplus out of people with high valuations on cool experiences. There are a lot of experiences that are simply unavailable outside of a big wealthy city.

Such as the presence of Vermeers, for starters. And then this paragraph:

In discussing the advantages large cities have in producing quality services (another reason why mechanical cost of living comparisons are not very accurate), I would suggest that Tim consider work like Murphy Shleifer & Vishny’s “The Allocation of Talent” which shows how the most able entrepreneurs will run the largest firms (which for services would be located where the largest populations are concentrated).

Miscellaneous 'Shoe: Coke Acquires Tea Company, Wal-Mart Opens Banks in Mexico

-- Coke has taken a 40% interest in Honest Tea. More noncarbonated growth for the biggest seller of sugar water in the world. (Okay...high fructose corn syrup and water, and articificial sweetener and water.) This acquisition is considerably smaller than last year's purchase of Glaceau, maker of Vitamin Water, and we probably won't see 50 Cent pitching Honest Tea any time soon. Browse the Honest Tea site.

-- Hulu is hosting Super Bowl commercials after the game. That's called added value. If you haven't tried Hulu yet, sign up for the private beta and maybe you'll get an invitation. It's a great service. The videos are at this page, and a few commercials are being shown at the Hulu blog, so everybody will be able to see them. That's a great way to get eyeballs before Hulu exits beta.

-- Viktor Schreckengost, Master of Product Design, Dies at 101. According to the obit, Schreckengost's impact on the U.S. economy was more than $200 billion.

-- Wal-Mart finally gets into banking...in Mexico, not the U.S. Its first consumer bank opened in Toluca. Eighty more are on the way this year.

--  There are a few decent kernels of wisdom in this NFL-themed article about  hiring talent at BusinessWeek.com. (Side note: I'm glad the Super Bowl is over so football-related stories will stop showing up in business publications.)

"Most business leaders—like most NFL teams—can only dream of achieving such sustained high performance, in part because they don't take the time to really align their talent to drive their business strategy. Instead, they view talent management as an HR-driven initiative with little direct involvement of top leadership and separated from the explicit requirements of the business. Rather than start with strategic context, they focus first on individual talent."

-- Everybody's talking about Microsoft's bid for Yahoo. Some think it will be bad for Silicon Valley startups. Here's a well-crafted position by Marc Andreesseen that says an acquisition would have no impact on Silicon Valley M&A.

-- Related: Flickr users are protesting the potential deal by uploading protest images. (Flickr is owned by Yahoo.) That's what I call a passive protest -- but par for the course in the Internet era. View the photo pool here.

Common Guy Vs. Trendsetter

Fast Company has an article on Duncan Watts, a former Columbia University researcher who is at Yahoo! while on sabbatical. It's mandatory reading for any marketing MBA because it tells of Watts' research into how word-of-mouth spreads from one person to another and mainly because it challenges some popular notions in marketing. What he found was that regular people are just as good at setting trends as trendsetters and that the likelihood of a hit is a function of how susceptible that society is at any given time. 

Watts set the test in motion by randomly picking one person as a trendsetter, then sat back to see if the trend would spread. He did so thousands of times in a row.

The results were deeply counterintuitive. The experiment did produce several hundred societywide infections. But in the large majority of cases, the cascade began with an average Joe (although in cases where an Influential touched off the trend, it spread much further). To stack the deck in favor of Influentials, Watts changed the simulation, making them 10 times more connected. Now they could infect 40 times more people than the average citizen (and again, when they kicked off a cascade, it was substantially larger). But the rank-and-file citizen was still far more likely to start a contagion.

Why didn't the Influentials wield more power? With 40 times the reach of a normal person, why couldn't they kick-start a trend every time? Watts believes this is because a trend's success depends not on the person who starts it, but on how susceptible the society is overall to the trend--not how persuasive the early adopter is, but whether everyone else is easily persuaded. And in fact, when Watts tweaked his model to increase everyone's odds of being infected, the number of trends skyrocketed.

Malcolm Gladwell ("Tipping Point," "Blink") chimes in and Steve Levitt ("Freakonomics") is mentioned. Go read it!