The Challenge Dividend

Incentives for Aid

For decades the wealthy nations of the world have sent dollars to developing countries in hopes of triggering improvement.  Unfortunately, these dollars have been a colossal failure.  But today governments with tighter budgets and individual donors with business backgrounds are driving improvement by using incentive and results-based giving.

From 1955 to 2004 more than $1 trillion in aid and subsidies went to developing nations.  Huge loans to Africa were made and forgiven long before Bono took up the cause.  However improvement has been negligible.  In Nigeria, for example, incomes went down by 10% from 1975 to 1994 in spite of boatloads of aid.  Studies show that much of the money goes to bureaucracy (in donor and receiver countries), debt service, and corrupt officials.  Obviously the answer is not bigger blank checks.

As an alternative, individual donors and even the U.S. government are beginning to demand more return on their charitable investments.  One recent example is the U.S. Millennium Challenge Corporation (MCC).  The MCC was set up in 2004 with bipartisan support and a $1 billion starting budget.  The budget is awarded to applicant nations based on their embrace of policies that are consistent with growth and eventual self-sufficiency.  These policies range from free-market reforms to environmental protections.

One example comes from a press release announcing funding to Zambia:

"The Board of Directors of the Millennium Challenge Corporation (MCC) approved a two-year $24.3 million Threshold Program with the Republic of Zambia to fight corruption and improve government effectiveness. The program’s three-pronged strategy in combating corruption focuses on preventing corruption in targeted government institutions, improving public service delivery to the private sector, and improving border management of trade."

Recently a study (via Marginal Revolution) confirmed that the MCC is directly leading to improvement among recipients compared to a control group.  The aid is acting as a positive incentive ("challenge") for laws and investments that have a better chance of making long-term change.

This focus on incentives and ROI is happening in several other ways - especially among dot-com billionaires who are demanding the same kind of performance in their charity dollars as in their business investments.  Bill Gates, Gordon More, and Michael Dell all have funded charity groups that closely watch where their money goes and reward groups that produce results.  Pierre Omidyar, the founder of eBay, created a market-based giving system in which individual donors chose to fund specific projects and watch the progress.

I believe a focus on "return on charitable investment" will be an incredible force of improvement because it will challenge developing nations and aid organizations to deliver results.  Best of all, it will teach them the market-based skills that will help them make the leap from charity cases to global competitors.

UPDATE: The BBC reports that the Dutch government is halting aid to Kenya due to concerns over corruption.  I expect that the more governments and other donors take this kind of public stance against corruption and for results, the more pressure there will be to force change.

Winners Learn From Their Losses

This week I discovered the Ad Age “Small Agency Blog” a fairly new entrant to the blogosphere that offers the most honest and accurate inside view of the advertising industry I have seen in some time. Recently author Noelle Weaver wrote about “Learning from Losing” – a lesson anyone from the agency business would agree with and further proof that challenge leads to improvement.

The competition for new business has been one of my most amazing experiences since moving from the client side at P&G to advertising agency management almost two years ago. The pitch process itself challenges each individual, the pitch team, and the entire agency to be their best. The emotions run from frustration to exhilaration as you make your best effort to impress a room of strangers and beat our three to five other world-class teams. And that’s just leading up to the actual presentation.

There is nothing close to the test of new business on the client side. For an agency each pitch is a three to four week challenge that makes you and your entire team better. You test creative boundaries, apply strategic thinking to new industries, and search for the little edge that might help you stand out. And while winning is priceless, as Noelle says, some of the best lessons actually come from losing:

“I always believe that with each new business pitch you head into you learn something new. If you don’t, then your pulling a routine and you’re head is not in the game. Our agency learned a few new tricks this time around. We learned a new way to present competitive intelligence. We learned a new way to work together to get to the strategy. And we learned that what clients say is just as important as what they don’t say [but you know to be true about their biz].”

On a more macro level, there is something very powerful in an economy that allows “losers” to get back in the game and try again. This philosophy is part of what makes the U.S. economy great. By and large, our laws and culture allow those who fail to get off the mat and try again. For example, our fairly liberal bankruptcy laws have been credited with encouraging economic growth. Meanwhile, the attitude in Silicon Valley is that entrepreneurs who fail are actually more valuable since they have learned powerful lessons (and are more hungry to succeed).  And don't forget Martha Stewart's comeback.

I personally learned this lesson when starting off in New Business at P&G. My first assignment was to launch the Fit Fruit & Vegetable Wash brand. It failed miserably and became the joke of the company for years. But I took this failure as a personal learning opportunity and dedicated myself to cracking the code on new products. A few years later, I was able to apply these lessons as Brand Manager on Mr. Clean, where we launched successful new products like Mr. Clean Magic Eraser and Mr. Clean AutoDry Car Wash. This turned around the Mr. Clean brand after years of sales declines. I know that if I had not learned the lessons from failure, these products would not have been nearly as successful.

Net, failure can be crushing, but there is usually a second or third chance. And chances are the lessons you learn from failure will actually give you an advantage over the competition.

My Pick for HD-DVD vs. Blu-Ray - UPDATED

UPDATE: The Format war continues almost 18 months since this original post.  The week, Paramount and Dreamworks switched to exclusively distribute high def discs in HD-DVD format.  The war is far from over, but HD-DVD seems to be winning; Adams Media Research projects there will be 409,000 HD-DVD households by the end of 2007, versus 298,000 Blu-ray. 

A fresh format war is breaking out over this Spring's launch of new video players that use a high-definition format for the growing number of HDTVs in living rooms around the globe.  This kind of public fracas is prime blogging material for The Challenge Dividend, so let's look at the tale-of-the-tape.

In one corner stands HD-DVD, a group backed by Toshiba, Microsoft and others, that already struck first blood by launching last week.  In the other is Sony's Blu-ray group, backed by Philips, Panasonic, Pioneer, and Samsung.  Sony comes into the battle still nursing bruises from its loss in Betamax vs. VHS, as well as failed attempts in new, proprietary formats like Minidisc and UMD. 

The stakes are very high, so the war will be fought on many fronts.  Format developers are fighting for sales of the machines and a share of royalties on every machines and disk made. Movie studios are closely involved as well since this represents their next revenue gravy train.  All those "regular" DVDs will need to be traded up for HD versions (right?).  And game systems from Xbox (HD-DVD) and Sony (Playstation 3) will be incorporating them for improved gaming.  Here's my take on where they stand:

HD-DVD Edge:

• First to market - this gives the format the benefit of leading in consumers' minds, retailers' shelves, and media coverage.  In addition, these companies get a jump start in learning from the market and can already start tweaking design and production to reduce costs.  Lower costs will drive lower prices and wider consumer adoption.
  
• Consumer-friendly technology - This is mainly in the branding.  Buyers already understand "DVD" and "HD".  So "HD-DVD" is a no-brainer, while "Blu-ray" might sound a little intimidating.  Even the wires and boxes are much simpler.  Toshiba adapted blue laser technology to a common DVD player, while Sony's design is much more exotic and complicated.
• Lower cost  - Toshiba's first player arrives with a $499 price tag.  This is much steeper than today's $50 DVD players at Wal-mart, but significantly below the predicted $1000 Blu-ray versions.  My bet is that most consumers will believe both formats are equivalent, thus a $500 price difference will be hard to justify to oneself (or one's spouse!).

Blu-Ray Edge:

• Capacity - Blu-ray has about twice the capacity of HD-DVD.  This may allow for more features on fewer discs.
• Movie Studio Backing - Although each side has studio backing, the Blu-ray has more support - including every studio except Universal.  Sony itself owns a major movie studio.
• Technology - For tech fans and home theater buffs the Blu-ray is a much sexier proposition.  Blu-ray is designing for the high-end customer first and will take prices down for the mass market over time.

Intangibles:

• Sony - This company has not had a hit since the original Playstation and has experienced a series of misses, notably the complete strike-out on MP3 players.  Sony is betting the company on Blu-ray and bringing in its gaming and movie studio divisions to help support its launch.  This could create a positive synergy or critical mass to put it over the top.  Alternatively, it could mean an internal political minefield.  In MP3 players, for example, Sony's music division helped squelch the release of a non-protected music player (like iPod), because they feared it would encourage illegal downloads.  So far, the commitment to release Playstation 3 with Blu-ray has led to launch delays and high costs.  Therefore, Sony could lose the gaming system war to Microsoft/Xbox as well as the HD system war.
• Relevance - Do consumers really need another DVD player just for HD quality?  Ever heard of DVD-Audio?  After filling their libraries with DVD disks and rooms with DVD players there might not be much interest in moving to another system just for slightly better quality.  Further, in another year or two we may have broadband that is fast enough to download HD movies.  On the other hand, a growing number of consumers are buying HDTV and are willing to upgrade the DVD players they bought years ago. 

Format Winner: HD-DVD.  I think this "war" will be over soon after it starts.  In what is essentially parity technology, always bet on the simpler design and lower cost.  I predict that Blu-ray will have further delays both in initial launch and production line ramp-up.  This will also mean more returns and negative word-of-mouth.  By this Christmas, the studios will move quickly to the system that has sold the most units.  And nimble/humble Blu-ray backers like Samsung and Panasonic will cut their losses to get a share of HD-DVD rather than protect rival Sony.

Big Winner: The Consumer.  While these big guys fight it out, we consumers get to enjoy the fruits of the battle.  This includes lower prices, better technology, and a variety of options.  Sure, some will suffer by investing in the losing system, but chances are in a few years the price will come down to a point that this lesson will be quickly forgotten.

"The Big Loser": Sony.  The company that is betting everything on Blu-ray has a good chance of losing more than the HD player battle.  Sony's main fault is a failure to put the consumer in the center and design for his or her needs.  Instead, Sony is using its divisions to push a format that might lose.  If Sony's gaming division were a separate company, I don't believe it would accept a 1-year delay versus Xbox to incorporate the costly and complicated Blu-ray technology.  And its movie studio business would probably like to hedge its bets on both Blu-ray and HD-DVD.  Both could be seriously hurt by their inability to act as independent decision-makers.

This will be a fascinating market to watch over the next 12 to 24 months.  I'll keep tracking the battles in this space.  Please go ahead and leave your own predictions in the comments section below.

Be the Worst Player on the Court

My buddy and recent subscriber Josh Kaufman sent me an article today that alludes to my personal philosophy and the thesis of this blog.  (On a side note, one of the benefits of readers is that now I've got a few other eyes on the lookout for relevant examples!).

Anyway, Josh sends a blog entry from Steve Yegge a long-time Amazon employee who made the move to Google in 2005.  Steve relates his experience and describes "Google's Secret Weapon".  The "weapon" is Google's recruiting strategy, which has turned typical recruiting on its head.  Instead of searching for the best-and-brightest, Google now has so many bright people that others are drawn there to be a part of something special and to be challenged by each other.  As Steve puts it:

"Google is apparently unique in the industry in that they're treating recruiting as a network effect, similar to auctions or operating systems.  Smart people go where smart people are, which enables them to launch cool stuff, which attracts more attention, and suddenly you have a feedback loop.  At some point, enough smart people want to work there that it's not simply enough to be smart; you have to market yourself."

So not only are the best drawn to Google, but they have to work even harder to be selected to join the company.  The challenge of joining the best group of people makes the best applicants work harder to stand out.  And once there, they challenge each other be even better.

This example reminds me of a personal story that really led to the insight of this blog.  Back in my college days at Duke University, I played a lot of pickup basketball.  At Duke, the pickup courts are unofficially ranked according to skill level.  On the "A" court, only the best play - from time to time including NCAA champion players like Christian Laettner and Bobby Hurley.  The system ended with the "D" court, which was in the next gym over and mainly hosted guys who were (ahem) learning how to play.  Since the guys waiting to play get to pick their teammates, they scout the best talent to pick from the "losers" of the game in progress.  In other words, you didn't last long on the "A" court unless you had some talent.

After four years of moving between these courts, I noticed something interesting.  On those occasions where I was lucky enough to get on the A Court I played some of my best ball.  I ran the court ahead of my defender and posted and passed well.  When down in the D Court, however, I tended to play pretty poorly.  I missed layups and let my guy get position too often.  Why would I play better against good competition and worse when I was the best one on the floor?

I rose to the challenge of tough competition and the spotlight of the A Court, as well as the pressure to play well or not play again.  Meanwhile I played worse on "D" because it wasn't as challenging and I knew I would get picked again if I lost.  In other words, I discovered that I played better when I was the "worst" player on the court.

"Being the worst player on the court" or the "dumbest guy in the class" has become somewhat of a philosophy of life for me.  It drove my desire to get into the best business school I could and move to a challenging place like New York City.  It drove my move to Cincinnati to join P&G, the best marketer in the world.  And it drove me to leave P&G to join some of the smartest people I know and join a scrappy advertising agency that is targeting Fortune 100 clients.

It is definitely more work when you're the dumbest guy in the room.  You always have to work a little harder and never really rest.  But, again, it has made me better.  And you know what?  It's more fun, too.

Define Your Enemy

For a challenge to drive improvement and success, it needs to be specifically defined.  In regards to competitive challenges, we cannot properly adapt or invent unless we have a clear picture of who the competition is and why he is winning. 

The need for a specific, known enemy is explored by Jonathan Rouch in the National Journal.  Rouch suggests that "The War on Terror" defines the threat our country faces too broadly. 

"After four and a half years, the Civil War was over, World War II was over, and the Revolutionary War was winding down. The Cold War lasted four decades, but everyone understood from the beginning that the enemy was a particular ideology, communism. The current war, plainly, is a more muddled affair. In last month's National Security Strategy, the administration declared, "America is at war." But who precisely is the enemy? "Terrorism." And "terrorists." And "terrorist networks." As in: "a terrorist enemy that is defined by religious intolerance." Factions of the Irish Republican Army might qualify."

A growing consensus is forming around the idea that we are really fighting Jihadism - or "violent Islamic imperialism".  The debate will probably continue for some time, but both Democrats and Republicans are beginning to align on the need for a more focused description of our current global challenger.  Otherwise, we are left without clear strategies and victory is impossible.

A specific enemy helps better focus your country, company or organization.  It gives your group something to watch closely, and progress is easier to measure.  Further, there is hope of ultimate victory against a specific enemy.

For example, the Pepsi brand has an easier time developing specific strategies to fight Coke, which shares a similar target market and taste appeal.  It can judge success weekly by watching market share.  And while neither will likely destroy the other, there are often decisive battles for shelf space and in taste tests.  As you can imagine, Pepsi's approach would be much cloudier if it looked at all drinks in the supermarket as competitors.

Similarly, Amnesty International has a clear enemy: nations that violate human rights, in particular through torture.  AI can measure its success by tracking incidents of torture worldwide over time.  And it specifically targets and helps free individuals like Feliciando Pineda, an indigenous leader in Honduras.  A clear enemy and discrete, obtainable goals helps motivate donors and volunteers.

The better you know your enemy, the more innovative you will become, and the better your organization will be.  Hate your enemy, but love that he improves you.

It's BAD to Be the King

Seth Godin starts the week with a point that hits to the heart of my Challenge Dividend thesis: being the "king" in a market often leads to downfall. 

Kings lose the motivation of challenge and start counting the money instead of focusing on the next play.  But a few leading companies have kept their lead by continually building challenge into their operations.  For example:

• Bill Gates keeps Microsoft paranoid through a series of memos aimed to awaken the company to new challenges.  This started with "The Internet Tidal Wave" in 1995 and more recently an email focusing the company on the Services model.
• W.L. Gore, the maker of innovative materials like Gore-Tex, spins off new divisions each time a group reaches 150 employees.  And project leaders compete with each other to lure team members.
• Caterpillar entered the Japanese market because it knew the intensity of competition in this market would make the company stronger globally.
• GE redefined its markets in a broader way that in effect shrank market share.  This focused the company on new possibilities and new hills to climb.

There are benefits to challenges.  Challenges drive your company or organization to improve and innovate.  Challenges "pay dividends" in the form of better financial performance for the company and improved products and services for the customer on the sidelines.

If your organization is the comfortable king, now is a good time to start introducing challenges.  Chances are you won't have to look far.

Women Challenging Men...Great!

One of my favorite speakers and entrepreneurs, Guy Kawasaki, points to an Economist article that suggests that despite continued cultural barriers, future economic growth will be driven by women. While it might seem a stretch, even the “battle of the sexes” proves my point that challenge leads to improvement.

A society or household where one gender dominates is no different than a monopolistic industry. In both cases, there is no balance of diverse, “competing” perspectives. And as a result, a warped product rises. I think the best evidence is seen in Middle Eastern nations where women have few rights compared to men. These countries are more likely to embrace violence and radical beliefs. And they are less likely to form strong, free governments or economies. Why? Maybe in part because their wives are not allowed to keep their husbands' egos in check. 

Men and women have some differences, and these differences should be embraced. Our differences mean that we get more perspective in decision making, for example. I know personally that my wife’s council helped me avoid some rash career choices. Research even shows that married men make more money than single men, due in part to the benefits of a partnership.

The good news is that women's opportunities are continually improving. In the West, companies are embracing more female-friendly work structures in order to retain valued talent. Developing nations, too, are being forced to adapt. In China, a one-child policy and selective abortions mean there will be an extra 30 million unmarried males 15-34 by the year 2020. This is already giving Chinese women the power to drive change. For example, they are rejecting practices like arranged marriages.

As a father of two daughters and a believer in balance, I say bring on the woman's world!

Competition in the Company Off-Site

As this blog develops, I hope to sprinkle my "serious" posts that link to global business and politics  with a few insights from my daily life.  Here's one...

Today my company broke out of the usual office routine for a day-long culture-building off-site.  As usual, we worked hard/played hard and learned a little more about how to take our company to the next level.

For part of the event, we took advantage of beautiful, 70-degree Cincinnati weather to do a team-building exercise.  In the exercise we broke into two large teams with a goal to get each member to skip through a jump rope in as short a time as possible.  After a little practice, we organized, remembered how to jump rope, and got a decent time.  With the exercise "mastered" people started to lose interest and whip out the cell phones and smokes.

Moments later, however, one of our team members yelled out that the second group had beaten our best time.  Suddenly everyone focused back on the exercise and we started experimenting with new strategies to bring our time down.  There was no official contest, and certainly no prizes were available.  But we now had motivation to work harder and improve.

Lesson: Most people are hard-wired to work harder and innovate when competition is breathing down their necks.  This automatic response is the legacy of billions of years of evolution.  Those that responded to competitive pressure adapted and survived.   Today's global economy benefits from this legacy, whether in the form of creating killer apps or winning at the company off-site.

Cable TV: Another Inflation Pocket

Building on my recent posts about the rare sectors where prices are rising and innovation has stalled (health care and college), low and behold another ugly example raises its head - Cable TV.

A recent BusinessWeek article describes the plight of national phone giants like Verizon and AT&T who are facing a town by town battle for the right to provide TV service.  As expected, the cable companies are plunking down lawsuits and lobbying dollars to block this new competitive threat. 

Farther down in the article we  see the evidence of a lack of competitive pressure; according to the Consumers Union, cable TV bills are rising at twice the rate of inflation.  Such price inflation, hand-in-hand with no significant improvement in service quality, is prime evidence of the lack of competitive pressure.  Cable bills are up, while the plasma TVs attached to the cable boxes are plummeting.  Repeat after me: Absolute power corrupts absolutely.

After enjoying the fruits of monopoly power for some time, cable seems very slow to adapt to challenges from new competitors like satellite and the Bells.  While satellite brings prices down and digital feeds are standard, cable companies increase rates and charge an extra $15 to force their subscribers into digital.  And while cable companies fight in Washington to prevent consumers from choosing which channels they have to pay for, satellite companies are beating the pants off of cable in J.D. Power satisfaction scores.

The cable companies seem to prefer to line lobbyists' wallets to keep Bells out of the burbs rather than investing in improved services or features that lock in consumers with loyalty.  Fortunately, legislators listen to their constituents once in a while, especially when it comes to lowering their ballooning cable bills.  Already the FCC and many local municipalities have come out in favor of competition. 

The easier way out for cable is to innovate and improve rather than fight the future.  At the end of the day, whether with cable, satellite, phone or wireless - we consumers will be the winners thanks to competitive pressure.

French Protest Competition (again)

Ten days ago, French youths and union members filled the streets of their country again to protest a new law meant to further allow companies to fire their employees.  This is the latest chapter in a growing failure of the European model of global competitiveness.  But it may signal that the tipping point for change has arrived.

Progress is stalling because of a rigid system that prevents companies from keeping pace with the rest of the world.  The people of Europe are falling behind the nations that have embraced difficult changes.  The Wall St. Journal reports that GDP per capita in Germany, France and Italy is falling, relative to the U.S., to levels below those recorded in the 1970s.

Labor laws in France are notoriously restrictive.  For example, six years ago France imposed a 35-hour work week that studies show costs the country $17 billion a year.  This recent law is aiming to only slightly make it easier for companies to run their businesses as they see fit.  According to the AP:

"Under the current law, it is very difficult to fire anyone unless the company is facing bankruptcy or other dire financial difficulties, or if a worker has repeatedly committed grievous mistakes on the job. Many firings go to the courts, where judges often rule in favor of workers."

The one area where I side with the protesters is in the point that the young have been unfairly targeted by this latest bill.  The bill would allow companies to fire employees under age 26 without reason within the first two years of employment.  Businessweek data shows that the unemployment rate is 21.7% for French 15- to 24-year-olds, compared to only 11% in the U.S. and 12.6% in Britain.  These youths are the future of France, and their energy should be harnessed to power the revolution.  Instead, like at a GM plant today, the union-dominated government has chosen to protect the older and established employees.  And when you have nothing to do, no money, and no one is listening, rioting seems like a pretty good idea.

On the other hand, perhaps these riots will act as a wake up call for the French government.  The reform itself is a positive sign, as is their determination to see it through in spite of ugly protests. Hopefully the people of France will realize that the short-term pain of adopting free market reforms will trigger the long-term benefit of economic growth.

UPDATE: The French government backs down to protests and will now scrap the bill.  I should have known better.  Note to broker, sell France.