The Challenge Dividend

The Spoils of Success: Republicans

The Series:
Does lack of challenge lead to poor performance, or in worst case, failure?  I contend that when you look across the field of champions both past and present, they do, in fact, fall when their power is at its height.  From ancient Rome to Enron, defeat is often born in the jaws of victory.  Previous examples covered here include Apple, Google and Starbucks.

Today's Entry: Republicans.
I try to stay away from presenting my personal political preferences here, and for full disclosure I'm somewhere in the Moderate camp, switching between Republicans and Democrats on key issues.  But this blog will never shy away from showing how organizations of all kinds fare in terms of their reaction of pressures (improvement) or excess of power (failure).  Building on recent examples from the business world with Apple, Google and Starbucks, the recent actions of the Republican Party show that the "Spoils of Success" can affect any type of organization.

Clearly the Republican Party satisfies the first test of this series: they have been extremely successful of late.  For the first time in my lifetime, this single party has control of the Executive, Legislative and Judicial branches of federal government.  Red states outnumber Blue states. Taxes are down.  Religion is up. 

But as someone said long ago, "absolute power corrupts absolutely."  And there is no doubt that the Republicans' power is corrupting them (quite literally!).  Here's a few examples of the twisting impact of unchecked power, many of which run counter to the Republicans'  historic core beliefs:

• A pre-emptive war in Iraq that is costing billions of dollars and producing few positive results.
• The Medicare prescription drug act.  One of the biggest government giveaways at a time when more people are retiring than ever.
• A growing list of investigations, indictments and convictions of Republican lawmakers.
• The launch of vast new bureaucratic departments like the Department of Homeland Security.
• Aggressive "redistricting" of electoral regions to guarantee more Republican seats.

Perhaps what is most fascinating about this case is that the Republicans were in a very different position not long ago.  Back in 1994 the Republicans introduced an innovative "Contract with America", which was a promise of steps they would take if put in charge of Congress.  The Contract had some very progressive and unique solutions to challenges at the time.  The Republican party drove for term limits, a stop on wasteful spending, and limits on big government.  Their innovative approach swept them into power during Bill Clinton's first mid-term election, giving them a majority in the House for the first time in 40 years.  This was a story of the underdog under extreme challenge building a innovative solution that voters embraced.

The irony is that less than 10 years later the Republican party gained the full control they dreamed of back in 1994.  But instead of sticking to a "contract" they have built up a bloated bureaucracy.  Now the party's biggest fear is their voter base is so disenchanted that they will not show up to vote for Congress in November.  Some Republicans even publicly hope the current crop of candidates lose this Fall so that a signal is sent and there is a return to core beliefs.

Now it might be the Democrats' chance to turn the tables.  So far, they have criticized well, but have not put together an innovative platform comparable to the Contract with America.  But if they win enough one-on-one challenges in congressional races across the country, we may see Republicans back in the underdog position in 2007.

I believe that if the Democrats gain control of Congress, it will unleash the power of the Challenge Dividend, giving the American people a more balanced approach and more control on the corrupting effects of power.

While this series is ended for now, I'll keep returning to the topic in future posts.

The Spoils of Success: Starbucks

The Series:
Does lack of challenge lead to poor performance, or in worst case, failure?  I contend that when you look across the field of champions both past and present, they do, in fact, fall when their power is at its height.  From ancient Rome to Enron, defeat is often born in the jaws of victory.  Previous examples covered here include Apple and Google.

Today's Entry: Starbucks.
Like Apple and Google, Starbucks is on an incredible hot streak.  The company has cracked the code on delivering "legal crack" (fancy coffee) to consumers throughout the world.  While its 11,000 locations vary a bit, it by and large has outstanding products, a great environment to relax in, and a friendly staff that remembers your name and order after a week of visits. 

Meanwhile, the company excels in relations with its employees and communities.  It offers full health benefits and stock ownership to any employee that works more than 20 hours a week.  It plays a role in many local, national and global causes.  And although some complain that Starbucks hurts the small coffee house, research suggests that when a Starbucks moves in, the little guys actually see a sales lift.  But in terms of the "mass" market for the out-of-home coffee fix, no other company is close to matching Starbucks in terms of growth and profitability.

But like many other organizations in the history of business and politics, it appears that Starbucks' success is beginning to spoil it.  The previous examples of  Apple and Google showed that market power can lead to arrogance in the form of poor customer service.  But for Starbucks, its arrogance is flowering in a series of ill-conceived services; in particular, its ongoing failures in the world of entertainment.  Some examples:

• Joe Magazine.  The company's first foray into culture came in the heyday of 1999 with this joint effort between Starbucks and Time.  There was plenty of good writing and artwork.  Zero coffee mentions.  It lasted for 3 issues.
• Oprah's Book Club.  Starbucks partnered with the goddess of media to co-produce/sell her book recommendations along with other books that fit the "Starbucks lifestyle".  After two years of poor sales, the partnership and book sales ended.
• Hear Music Media Bars.  Starbucks has a deep conviction that people hanging out in its stores might like to spend time listening to CDs and burning their own.  The company at one point had plans to expand the concept from 45 test stores to 3,0000 across the U.S., at a total cost of $57 million.  BusinessWeek suggested that each store would have to sell 1,600 self-burned discs a year to break even.  But failure is evident and plans are being scaled back.  Former Starbucks marketer, John Moore, noted that at his local Austin, Texas test store the setups have become free music services for studying college kids.  Other critics point to the fact that consumers can select their own music at home and add it to their iPods, while CD burning is "out".  As expected, Starbucks wisely pulled the plug on the concept.
• Akeelah and the Bee.  Starbucks partnered with Lions Gate to spend $20 million in marketing alone for this feel-good movie from a few months ago.  The critics liked it but the film has drawn only about $17 million at the box office.  You can be sure to see even more marketing and DVD boxes at the sales counter soon, but that won't add up to much more success.  Fans of the company are left wondering why they bother (see open letter from Church of the Customer blog).
  

Starbucks' success seems to be leaving it starstruck.  The company that touts its coffee expertise and great service is distracting both its customers and employees with these entertainment forays.  Maybe it's a clever move to set the company up as winners in the media revolution.  But my guess is that these are personal interests by its founder, Howard Schultz.  This quote from BusinessWeek in 2004 convinces me:

"We are much more than a retail store. Much more than a coffee store," Schultz says. "We are becoming alternative distribution."

Schultz is often at the center of these moves into entertainment and he vigorously defends them.  It is possible that he is tired of growing the traditional coffee business and is looking for his next personal challenge.  Company founders and CEOs have a penchant for seeking new challenges just like anyone else.  Unfortunately for shareholders, the result can be wasted investments and failed mergers.  This is especially the case when Boards of Directors fail to check the power and decision making of the CEO.

My only hope is that Starbucks keeps its friendly staff and my favorite Venti Hazelnut, and keeps the clutter of CDs and movie posters out of my face.

 

UPDATE: Just this morning I stopped at 'bucks on my way to work as it was opening.  The barista offered me a free pastry of my choice ($2.25 value).  Great example of both great service AND cross-promoting a very relevant new product!

Next post: The Republicans.

The Spoils of Success: Google

The Series:
Does lack of challenge lead to poor performance, or in worst case, failure?  I contend that when you look across the field of champions both past and present, they do, in fact, fall when their power is at its height.  From ancient Rome to Enron, defeat is often born in the jaws of victory.

Today's Entry: Google.
In last week's post this series started with an examination of arrogance on Apple's part just at the height of its iPod success.  Today we take a look at another technology brand that is white hot with success, Google.

The story of Google’s success is actually a textbook example of the Challenge Dividend in action.  Before its launch in 1998, the online search market was dominated by brands like Yahoo! and Alta Vista.  But search was still a frustrating experience for most people, thus leaving an open challenge for a better way. 

That challenge was met by Larry Page and Sergey Brin, who used a novel approach.  They harnessed the power of millions of links to determine the relevance of pages.  So popularity became a way ot filtering out the most relevant sites.  Further, in 2000 they introduced a pay-per-click, auction-based ad model to turn search into a business both for Google and millions of small and large companies.  The company's core philosophy, "Do No Evil", has even been a unique approach to building a strong culture amid massive growth.  The world has certainly improved because of Google’s approach to the search challenge. 

Today, Google is untouched in the search market.  It has a 60% share of global search, up from 50% in 2005.  The company is moving quickly into search and advertising models across print, video, and audio.  It is using its swollen stock price to acquire entrepreneurs’ technology and the best and brightest programmers in the world.  The company seems unstoppable.

But, again, success might be spoiling this one-time underdog, and it is making moves that are reminiscent of the another powerful technology market leader, Microsoft.  Many of its (mis)steps are duly covered on a site called Google Watch.  Here are two that I think point to bigger problems:

• Click-fraud is a growing concern, but Google seems to be doing little to reduce it.  "Click-fraud" happens when people click on ad words just to drive up the advertising revenue.  There are stories of hundreds of people in China clicking all day to pump up revenue on suspicious sites.  The Click Fraud Network reports that this represents 12% of all clicks, and is growing.  But Google seems very slow to react, especially to the victims of this global crime.  Recent stories here and here by Robert Cringely suggest that Google is doing little to investigate and compensate its customers for questionable clicks.  At "best", Google is being arrogant or not ploughing enough of its billions in profit into customer service call centers.  At "worst" Google is reasoning that 12% of its revenue would disappear if they ended click fraud.
• Google is battling the U.S. government.  Last fall, the U.S. Department of Justice requested search logs from Google, AOL, Yahoo! and Microsoft in hopes of gaining information to defend an Internet pornography law.  Only Google chose to fight the request in court; not as a proud step to protect users' privacy, but in order to keep its company secrets private.  One of these secrets came out when the company later confirmed that it had complete histories of its users' searches on file.  This was an unexpected privacy surprise from its millions of daily users, and has led to further "big brother" fears.
• But is conceding in China.  While Google's lawyers are battling the Justice Department in Washington, the company is willingly adapting to China's demands to censor certain information in order to retain access to this fast-growing economy.  For example, Google China regularly blocks searches about Falun Gong and repression in Tibet.  The company claims it was a hard decision that ultimately was made on the belief that it could do more good with limited access in China versus no access at all.  However its philosophy of "Do No Evil" has been severely tested and weakened.

Regardless of your take on the politics and complexities of these examples, it does begin to show a trend of arrogance.  I believe that any company with a soaring stock price, dominant share, and a shiny office stocked with the best-and-brightest dining on gourmet lunches will tend to lose its focus and lose control of its ego.

Time will tell.  But for the consumer, the good news is that Google is only as powerful as long as its search engine is the best user experience.  And there are hundreds of large companies and individual programmers working day and night to build the better search experience.  They, too, want a piece of the good life that Goolge has now.  Either way, we win.

UPDATE: On 7/27/06, Google announced that it would start showing its customers how many clicks it identified as suspected "click fraud" and removing these costs from their bills.  Likely mounting pressure on this core issue to their business led to this improvement

Next Post: Starbucks.

The Spoils of Success: Apple

Usually in this space I have shared examples of how challenge drives improvement.  But does lack of challenge lead to poor performance, or in worst case, failure?  I contend that when you look across the field of champions both past and present, they do, in fact, fall when their power is at its height.  From ancient Rome to Enron, defeat is often born in the jaws of victory.

In the next several blog posts I will show case studies of recent winners that end up losing just as their power is at its height. 

Let’s start the series with Apple.  No brand in the world is hotter than Apple right now.  After nearly sinking in the mid-1990s, the company saw the future of portable music and developed a gorgeous and effective piece of technology – the iPod.  (how many?) unit sales later, the company has revolutionized the music world both with its ubiquitous players and iTunes music store.

At this point, Apple has virtually no serious challengers in the music market.  Many electronics makers have equal or better technology, but they have had little progress in standing out.  And some online music stores have more selection or more versatile formats, but iTunes reigns supreme.  Further, the combination of iPod and iTunes “locks in” users to both, and prevents challengers from breaking in.

Today, as Apple is celebrating its success and the failure of challengers with a flurry of hit TV commercials, the company is committing the tell-tale sins of a dictator.  For example:

• Back in late 2003 when the iPod was still fairly new, the company had several complaints about batteries that would barely hold a charge.  The company's policy was that it did not replace the battery, and that its valued customers should simply buy new iPods.  It took a major viral video to get this policy changed.
• 9-year-old Shea O'Gorman sent a hand-written letter to Steve Jobs with suggestions on how to improve her beloved iPod Nano.  Three months later, she got a letter from Mark Aaker, Senior Council of the company's Law Department, telling the third-grader that Apple doesnt accept unsolicited ideas.  Tears and a full description of the event by her parents soon followed.
• France now believes Apple has too much power in its iTunes+iPod arrangement.  The government of France has passed a law that would force online music stores like iTunes to sell an open music format versus Apple's proprietary version.  France represents less than 5% of Apple's music sales, and the company is considering pulling out of the market altogether.
• Finally, Apple is now in the cross-hairs of sweatshop investigators.  A recent report suggests that its Chinese suppliers pay only $50/month for 15-hour days, among other charges.  While this is still an investigation, similar charges have weakened the Nike, Walmart and Kathy Lee Gifford brands.

Overall, some of these issues are Apple's doing, while others are a result of Apple's growing perception as a powerful monopolist.  Apple is still a great company and brand, and I, for one, couldn’t imagine life without my iPod.  But these examples show how the lack of challenge in the music market is turning this lovable underdog brand into a global bully. 

Next post: Google.

"Death Tax" Revisited

A few weeks ago I posted that the Estate Tax, or "Death Tax" as opponents cleverly branded it, was a good law because it helps drive fair competition in our society.  In short, just because your parents were rich, you shouldn't get a free pass through life; and those who inherit great wealth often are not challenged enough to live a full life.

On June 11 the Senate failed to secure the 60 votes required to pass a permanent repeal of the Estate Tax.  Most analysts chalk it up to the Democrats looking to give President Bush another black eye heading into the elections in November.  While I am happy it survived, my friends at Cato are not.  This is one rare area where we disagree.  They make a good point, however, in a recent blog post by Chris Edwards:

"There are 52,000 estate planning lawyers in the United States. Let’s say that half of their time is spent on the estate tax, or about 1,000 billable hours a year each. And let’s say that their billable rate is $200 per hour.  What you get is an estate tax lawyer industry of about $10 billion annually. If you added in the costs of all the estate tax accountants, IRS administrators, the estate tax portion of the life insurance industry, and other workers, the costs of estate tax paperwork could be as high as the amount the government collects from the tax – $28 billion annually."

Although we disagree on the law, at least we agree that its loopholes lead to inefficiency.  And in the end the rich find a way to pass their earnings along to the family.  On a macro level, this story shows that any time government attempts to change the world, it usually fails.

A Little World Changing

Prospective authors have many goals for success in their writing, in addition to simply “getting published”.  For many, these include topping the best seller lists, winning awards, and turning their work into speaking engagements and long-term book deals.  While I wouldn’t turn any of these success measures down, my ultimate goal is simply to spread the message of the Challenge Dividend such that it actually improves the world. 

Long ago (I think while writing admissions essays for college) I decided that the meaning of life for me was to “figure out how the world works, and use the lessons to improve it.”  Since then I have always used this mission as an influence on career choices, travel, hobbies, reading, and even friendships.  A few years later, I read A Study of History by Arnold Toynbee.  His books unveiled a deep pattern in history: challenge led to improvement in the development of civilizations.  For example, he attributed the Europeans' rise to a tough environment and lots of regional warfare.

As I devoured his thesis my mind raced to other examples where it seemed to hold, from the origin of the species to capitalism to my personal life.  What’s more, I could not find anyone who had tied all of these separate examples into a single theme.  Maybe I didn’t have all the answers to life, but I  seemed to have discovered one insight.  Years of reading and research later, I now have a Word document with over 750 pages of examples and notes.  Making it public in this blog is one step closer to my goal.

“Changing the world” is a big goal, of course, and I will admit that my odds are pretty low.  But this week something special happened that gave me hope.  I was having a conversation with one of the  people who work in my group.  I wanted to understand her work habits and strengths so that I could provide coaching.  A smile came across her face and she said, “I just figured out that your blog perfectly captures my work style.  When I am fully loaded with challenging work, I do my best.  But lately I’ve been slow and dropped some balls.”  I was speechless with surprise and pride; better yet, it helped us figure out the best way to harness her energy.  It made my year.

Projecting this single story to the rest of the world through a single book or blog is still probably a stretch.  But in one small way I have reached my ultimate goal of improving the world; and the fact that it worked for one person gives me just enough hope to keep spending my nights and weekends pursuing this lofty dream.

Quickies From Cato

While I don't subscribe to any one political party, the philosophy that fits best with The Challenge Dividend is probably Libertarianism.

Libertarians believe that people should be free to do whatever they want as long as it does not hurt others.  Similarly, I believe that a free market and free people have the most power to take on challenges, innovate and succeed.  And if there's an organization that represents the Libertarian way, it is the Cato Institute.  Based in Washington, DC, Cato's mission is to advance the principles of limited government, individual liberty, free markets, and peace.

As a result, I've been spending a lot of time with the Cato Institute's relatively new set of blogs. I recently found two specific eye-opening posts to share here:

First, as an update to my recent post on how insurers are beginning to post the prices they have negotiated with hospitals, now the federal government will be publish Medicare's prices. So today one can find the county-by-county prices paid for more than 30 hospital procedures. It's a modest effort, but again might lead to a move toward consistent, comparable, and lower prices for all.

Second, Cato points out a new restriction on personal freedom, as the state of Washington is about to make online gambling a felony punishable by up to five years in prison.  I had to re-read the story three times before I could believe that playing poker online in your home can now put you in jail for the same amount of time as child pornographers.

Just another case of the "moral majority" imposing its beliefs on the rest of us?  Nope.  Instead, it seems the bill was pushed heavily by the state's existing, highly profitable casino and horse racing businesses.  Fearful of the challenge of online gambling, these businesses have sought protection from government rather than focusing on how to compete fairly and win.

Many thanks to the Cato Institute for working heroically to further the cause of free competition and personal liberty.  I'll keep cheering their progress and highlighting their best work here.

Oil Demand Dropping as Prices Up

My main takeaway from my Economic major at Duke University is the law of one downward diagonal line marked "D" and an upward diagonal line marked "S".  Yep, the Law of Supply and Demand.  In my classes we used this simple model to explain everything from the market for guns and butter to illegal drugs and football bets.  But one real-world market seems to have defied S + D: Oil.  Especially in recent months, rising gas prices make a lot of people angry, but they seem to keep flying in planes and filling their SUVs.

However new data suggests that the challenge of high gas prices is causing improvement in the form of greater efficiency and conservation.  In today's Wall St. Journal, Saudi Arabia's oil minister says that the country is starting to have trouble selling all of its oil inventory.  It seems that $70/barrel prices are leading some customers to actually cut back on their demand.  Iran is even storing billions of gallons of excess capacity in hopes that demand returns.

The further good news is that while oil demand is declining, the global economy keeps on growing at a strong pace.  This is exceedingly rare and especially seen in the U.S..  We should celebrate that we can grow a strong economy while conserving fuel.  According to the Wall St. Journal:

"Typically, oil use rises along with economic activity and prosperity. But a 4.8% growth in the U.S. economy in the first quarter of this year, the fastest rate in 2½ years, wasn't reflected in oil demand growth, the IEA said. America's oil use fell 1.4% in the first quarter this year from a year ago...the U.S. trucking and airline industries, major consumers of petroleum, were using fuel more efficiently. Airlines, for instance, reduced domestic departures and increased load factors."

I'm actually a big fan of rising gas prices.  The higher the challenge of fuel prices, the more dollars will be invested in new solutions, and the more businesses and households will have incentive to conserve.  At minimum, we would reduce pollution and decrease our dependence on foreign oil.  At best, we have a chance of reaching a technological breakthrough in clean energy development - all without a single government law or incentive.

In fact, I believe gas taxes should be lifted to a point that includes the cost of the War in Iraq, among other actual costs of bringing fuel to our country.  After all, the real and total costs of protecting a foreign oil supply should be reflected in prices.  Short of a military draft of all men and women under 21, perhaps only a large gas tax would serve as a massive, personal impact on everyday citizens. This in turn would make the rationale for war and occupation hit home, and we would challenge our politicians to be much more careful about creating expensive and deadly global conflicts.

NASCAR's Weekly Challenge

I've had a sudden burst of comment and trackback activity around two recent posts about driving, so it's time to continue the trend...

This time of year is a sports fan's dream: Major League Baseball is heating up, the NBA Finals have arrived, golf and tennis majors are upon us, and the Stanley Cup is up for grabs.  But in my opinion the sport that owns this time of year, and the sport most linked with The Challenge Dividend, is NASCAR.

I had the privilege of joining NASCAR nation via marketing sponsorships when I worked on the Tide and Mr. Clean brands.  Thanks to the prestigious "hard card", I got access to the pits, drivers' trailers, and garages.  I have been to races from Daytona to Talladega to Phoenix to Indianapolis.  I have enjoyed corporate jet boondoggles, and rain delays in the grandstands.  I have barbecued with drivers' families, drank with owners and announcers, and taken a couple of hot laps at 180 mph. 

By coming into the sport fresh and seeing it up close week after week I have learned a lot.  The most interesting aspect of NASCAR is that every race, every weekend is like the playoffs or Superbowl.  The fans in each city come out for what is often their highlight of the year.  Forty-three drivers compete just to enter the race and secure a spot near the front.  The drivers, pit crews, owners and spotters give everything to shave a few seconds off or add a few horsepower.  Every weekend there is a single winner and 42 losers.  Winning a race is still rare, and many who have driven for decades still never get to Winner's Circle.  Yet the next weekend is a fresh start and fresh opportunity for greatness.

The other major team sports don't come close to this weekly challenge and reward system.  A baseball team, for example, plays three games over a weekend, none of which are crucial to making the playoffs in a 161-game season.  Golf or tennis players who have a bad start are done in the early rounds; and their challenge is spread over four days or a fortnight, rather than four hundred miles in four hours.

Further, stock car racing is unique in that is aims to set every driver and team up with the same equipment ("stock").  Everyone must use the same parts, same fuel, and same setup.  Those that violate the rules are discovered in pre and post inspections (in the "room of doom").  This, too, ensures that competition is based on better driving and teamwork in the race itself. 

And now NASCAR has improved its competitiveness with other major sports further by adding a more elaborate Chase for the Cup playoff system during the last 10 races of the year.  Unlike many sports, NASCAR is constantly adjusting its approach in order to attract more viewers.  The ownership see themselves as competing against the MLB, NBA, and NFL, both for fans and corporate sponsors.  This in turn provides an incentive to improve the sport further.

Of course, NASCAR is an acquired taste, and few people are lucky enough to experience the inside world like I did.  But each day more and more fans around the country are discovering what used to be a red neck ritual.  Perhaps they, too, are falling in love with the intense thrill dividends of this weekly challenge.

Idea: Mileage Feedback to Improve Fuel Efficiency

This is my second consecutive post on using feedback as a form of challenge to improve behavior on the roads.  Last post, my goal was to use a public forum to clean up bad drivers' actions.  This time my goal is to use mileage feedback to clean up the environment.

We all understand the problem that automobiles have regarding high gas prices and their negative impact on the environment.  Many people are demanding broad, expensive solutions like government subsidies for fuel cell development, rebates on hybrid cars, higher fuel efficiency standards, or opening up Alaska for drilling.  But there may be an easier way that simply puts feedback into everyday drivers' hands, thus giving them a form of challenge to lead to huge improvements in efficiency.

The idea comes via "Karl Albrecht from San Diego", writing to BusinessWeek's editors after a story on fuel costs.  Karl's idea is simple:

"Why don't all of our cars now have miles-per-gallon indicators in prominent view of the driver? This instantaneous feedback of driving efficiency could quickly train drivers to operate their vehicles in a fuel-sparing manner. An alarm light or sound, activated by wasteful acceleration, could provide behavior-shaping feedback.  Most modern cars get maximum fuel efficiency at speeds between 35 and 55 mph, so an incentive to drive less than 55 would save huge amounts of fuel nationally and would likely reduce the death rate by 5,000 to 10,000 fatalities a year (as the 55-mph national limit did several decades ago). Such a device could potentially repay its costs within a few months."

I can't vouch for Karl's data, but his hypothesis is absolutely brilliant.  Everyday driving habits have a huge impact on fuel efficiency.  But people have no feedback on how they are helping or hurting the problem.  Similar to my previous post on how feedback helps the golf swing, a simple gauge could show people their real-time efficiency, and lead to habits that reduce fuel, improve the environment, and save a few lives.  And again, the cost is insignificant.

In addition to fuel efficiency, breakthroughs in feedback could help improvement on many fronts.  For example, genetic profiling or ongoing health maintenance might lead to better daily health choices.  And energy that is priced in real time could drive consumers to shift how they use appliances. 

Sometimes we can solve the biggest problems by simply giving information to the people who make decisions every day.