The Challenge Dividend

I'm Picking The Giants - UPDATED: I was right!

(Giants win 17-14 - I was right!)

Sports provides a rich field to explore concepts of The Challenge Dividend.  They are a public display of competition driving improvement - both in the quality of plays and players, and the entertainment value for the fans.  From time to time I have used this blog to either prove a Challenge Dividend concept by looking back on a sporting event - or to predict a future game.  Last Spring I predicted incorrectly that the heavily-favored Florida Gators would not win the NCAA Basketball Championship.  And despite my very public bad call, I'm ready to prognosticate an upset again: The New York Giants will win the SuperBowl.

I know, I know, probably a pretty dumb call.  The wisdom of the betting crowd has pegged the Giants as 12-point underdogs as of Wednesday morning.  But I think a few Challenge Dividend elements might come into play.  Here's a few areas where challenge could drive improvement, and be the winning edge in a match of two skilled teams.  Call it a "Challenge Dividend Tail of the Tape":

• Challenged During the Year: The Patriots haven't been challenged enough.  All season long, the Patriots were a situation in which they were playing with their backs against the wall.  They mainly blew away opponents throughout the year.  And when they were in close games, there was little real pressure to say, win or not make the playoffs.  The Giants didn't have an easy path, and even had to play in the Wildcard game.  They had to win 10-straight games on the road to get into the playoffs, and many of their games were see-saw battles.  Edge: Giants.

• Pressure To Win: The team with the most pressure to win (or not lose) will be driven to work harder and focus more.  The Giants have nothing to lose.  As underdogs, everyone is expecting this team to go down. The Patriots have everything to lose.  They will lose all of this season's history and glory if they fail to become the first 19-0 team.  They would go from heroes to zeros  Edge: Patriots.

• The Opportunity for Glory: The Patriots have already been to the mountaintop several times.  Aside from a few rookies and veterans, this team has achieved their moment in the sun multiple times.  The legacy of Brady and Belichick is set, win or lose.  On the other hand, the 19-0 glory is something unique and maybe inks them in the history books as the best ever.  Meanwhile, the Giants have all the pressure of New York's tough fans and media, and haven't gotten this far since the Jeff Hostetler era.  Eli Manning and Coach Coughlin have still not proven themselves on the national scene.  This is a close one, but Slight Edge: Giants.

When I analyze this game I'm reminded of my Freshman year at Duke University (1991), when our basketball team met the undefeated UNLV Runnin' Rebels in the semifinals of the Final Four.  You may recall that this UNLV team was also undefeated coming into the game, had beaten Duke by 30 points in the championship game the previous year, and had a roster that included four future NBA picks. 

But Duke had the Challenge Dividend on its side: it sought its first championship in school history, it played close games all year long, and its coach and players didn't want to be embarrassed like the previous year.  Coach K put together a unique defensive approach and the game was close all the way through.  Under its first close contest of the year, UNLV was in new ground - and got nervous under the pressure.  The result: A Duke upset for the ages and it's first championship two days later.

There are many, many other factors to consider when picking this game. Everything from analysis of their regular season contest, to Brady's boot, to the flu bug sweeping the Giants locker room.  I don't think the Giants are a lead pipe cinch by any means, but in a close game, the Challenge Dividend could make the difference.

Postscript: Before the Duke/UNLV game in 1991, street vendors were already selling t-shirts emblazoned with "UNLV Back-to-Back / Undefeated Champs".  After Duke's upset, the most popular shirt on campus was this "Dewey Defeats Truman"-like keepsake.  Interestingly, The Boston Globe is already selling pre-orders for a book celebrating the 19-0 season. 

Non-Profit Challenge Assessment

I read an interesting perspective the other day on shifting careers from the world of public-sector employment into the private business world.  In BusinessWeek's October 1, 2007 issue, Jack and Suzy Welch answer a question about making such a career move.  Their advice: it's tough as hell.  They share a few tips on how some challenges in government work can drive improvement, while a lack of challenge can hurt one's prospects.

The bad news is that since governments face no competition, there is less drive to improve and excel as seen in the harsh reality of today's economy.  First, government unions work hard to protect jobs, so unless you do something really bad, you are guaranteed lifetime employment and a nice retirement/pension package.  Second, since the organization itself is guaranteed to be in existence, there is no market pressure for improvement.  There is no need to recognize and advance the best & brightest, there is no competitor that will take your customer away if you are slow to respond.

This doesn't mean people in government jobs are inferior or cannot provide world-class service.  My uncle has put decades into a government agency (that I'd rather not name), and he truly cares for the citizens he interacts with.  At the same time, he confirms that there is almost no incentive for good service and hustle. 

But the Welches report that there are some positive skills that government workers develop because of the challenges inherent in their careers.  The chief example is that they are forced to learn how to motivate people with very few tools (i.e. money, promotions or threats). 

This reminds me of a friend who started his career as a 23-year-old working in a soap plant in New Jersey, managing a group of forty-something union guys.  He learned to motivate them with humor, pride, and teamwork - even when he had to close the facility down.  Today he is the best people manager I've ever worked with, and he is rapidly rising at one of the top health care companies in the world.

Guest Post: Refugees Win

(Today features a guest column by my Dad, Robert Gilbreath.  If you like this, be sure to buy his new book, Compel).

I saw them swept overboard, saw them drown on their way to their new world. They were Hungarian Refugees, the time was 1956 and I was just a kid, watching all this from the bridge where the ship's captain struggled to keep our overcrowded craft afloat.

Fleeing their soviet captors, thousands ran across the Iron curtain then. My father was assigned the task of escorting them across the English Channel. A huge storm, boiling out of the North sea overtook our ferry as soon as it departed Calais, France for Dover, England. These men and women, jammed onto a small craft, held tightly to their possessions and their tools. They'd just left their towns, farms and universities in panic. They'd left behind friends, neighbors, positions, known environments, and roles that gave them respect and dignity. Now they were humble refugees, restricted to one hand bag, on a threatening sea. Everything was in chaos, everything was changing for them. Inside those single bags, most brought tools of their trade, to ply their uncertain futures. They held them tightly, abandoning all else.

Three Essential Tools

In his classic rock anthem Refugee, Tom Petty sings "Somehow, somewhere somebody must've kicked you around some." Most executives can relate to the sentiment, having been buffeted by downsizing, mergers, razor-sharp cost cutting and overwhelming technological change. I've found the ones who survive, who take their organizations into new worlds with confidence and competence cling tightly to three essential tools. They are not as tactile as traditional tools, but they are quite real, and just as valuable.

* A Map. They begin with a fixed destination in mind, usually expressed through a vision of some kind. An aspirational, achievable picture of the future. Something that compels them and their followers, pulling them into the new. But after the vision is achieved, three more landscapes must be charted: the decisions needed to carry it out, the actions that result in real change, and the reinforcing, sustaining extension of change lessons that make a company not only adapted to new circumstances, but adaptive--ready for continuous change, flexible, adjustable, fit for the future.

* A Memory. When the pain of transformation is being felt, when the goal seems to recede into abstraction, leaders need to remember why they began the journey. They need to remind the group of the inadequacies of the past, and the high cost of doing nothing. A good memory helps fight the sag in the middle of most change efforts, when the price of changing is real and the payoff is not. Reminding each other that the good old days were not so good overcomes the allure of the past. Leaders make the future alluring.

* A Moral Compass. Not all changes can be foreseen, nor their consequences planned or anticipated. Judgment is constantly required, along with course corrections and tough decisions like: Should we abandon the quest? Should we sacrifice some aspect of the vision? Should we slow down, consolidate, or forge ahead with renewed vigor? The consequences are often immeasurable, they don't fit on spread sheets or lend themselves to cost-benefit quantification. Decisions along the path of change are subjective, ethical, moral. Without a moral compass we can easily go astray, doing what's easy or economical, but what's wrong.

You Don't Have to Live Like a Refugee

That's the refrain from the Tom Petty song. It's a call for dignity and self-esteem, but when facing change it's the wrong advice. Sometimes it pays to live, and think, like a refugee. To remember those huddled masses embarking from the port of Calais, into the swirling sea of another time. And to remember their prizes: the tools they chose to take with them.

Their value and their necessity came to a small boy, squinting through the streaming glass of a ship caught in a tempest. They are gifts of sorts, handed down through time and circumstance by a group of courageous change masters--people moving from the comfortable into the uncertain; facing the future with trepidation, but also with hope and confidence in their ability to confront, and conquer change; and clinging to the future they would build with their liberty, and with their tools.

We should follow them, learn of change, and master the tools it requires: a map to chart the course, a memory to know why the journey is vital, and a moral compass to guide us through the storm.

Postscript:

In a recent survey of immigrant communities in the United Kingdom, the Hungarians topped the list as most prosperous. One of these young men went on the United States, and to found a company. His name is Andrew Grove, former Chairman of Intel. In his autobiography, Swimming Across, he details this trip, and thanks those who helped him make it. I was there.

Robert D. Gilbreath

Taxing Commuters Not Gasoline

Most free market economists (like me) would agree that a tax on gasoline to fund road construction is a great way to make sure that the costs of a resource are borne by the users.  Those who use the roads more burn more gas and thus pay more tax.  Interestingly, in this case the challenge of high gas prices is not perfectly leading to improvement in either traffic or tax collection, but technology has an answer.

As reported in the September by USAToday, the growing problem with gas taxes is that commuters are finding ways to decrease the tax that they contribute by purchasing more fuel-efficient vehicles or using Ethanol, which has a lower tax rate.  Meanwhile the costs of road construction materials and labor continue to rise.  And the amount of commuting nationwide has increased non-stop in the past few decades.

But some states are starting to experiment with technology that allows commuters to be more accurately taxed for the miles they drive, rather than the gas they use.  Starting in early 2008, six states will experiment with "road pricing."  A few thousand drivers will agree to outfit their vehicles with a GPS system that records how much time they spend on the roads and will tax per mile used.  Meanwhile, they will be able to deduct their spending on gasoline taxes.

Of course privacy fears will be stoked by anything beyond a test.  Today's GPS sensors can measure vehicle location within 3 meters and determine speed within 1.5 MPH.  But in one test in Oregon, 91% of testers said they would continue with the program.  Many agree that the system is more fair than a gas tax or sales tax.

Tomorrow's technology and further experimentation could lead to further improvement.  For example, like in Singapore today, we could see commuting prices vary according to time of day (higher during heavy traffic to discourage congestion).   

It might be several years before governments move to a system like this.  The Marginal Revolution blog predicts that early movers will be private, business-owned roads.  Private investors will be intrigued by the market based pricing system, and consumers may choose to give up access to their data in return for a faster commute. 

R.I.P: Car Haggling

One-by-one the modern economy and the Internet are improving the world by picking off age-old business models that put too much power in the hands of one party.  One example is how challenge is driving improvement in the process of car sales.  A recent article in BusinessWeek reports that more and more dealerships are dumping the haggle process and moving to fixed price sales.

Anyone who has bought a car in the past few years knows how unfair the process of buying a car can be.  Simply put, the dealers hold an unfair number of cards in their hands.  We spend a few weeks once every 3-5 years thinking about buying a car, a very stressful situation.  The dealer (like a blackjack dealer) plays the game 8 hours a day and knows all the buttons to push.  They have developed a system that preys on our mindset, distracts our attention, and uses baiting and switching to screw us for a few extra bucks.  A few people, like my Dad, love the haggling process, but most people dread it.  We know we're going to get screwed and just do what we can to limit the damage.

But the power of the Internet is upsetting the landscape in consumers' favor.  We can now look up what a car costs the dealer, get easy access to impartial comparison data, and ask multiple dealers to bid for our business from the comfort of our living rooms - then go pick up the winning vehicle in the color we want.

As a result, an increasing number of car dealerships are skipping the haggling process and moving to fixed pricing.  Not only do 65% of consumers prefer this format, but the results are turning out to be a winning proposition for the dealers as well.  Benefits include:

• Win with women.  They are now making half of all purchases, and can't stand haggling with mostly-male salespeople.
• Saves time.  Buying with haggling takes 4.5 hours on average, versus 45 minutes in a fixed price environment.  Today's consumer is too busy to wait.
• Fewer sales people needed.  The number of managers needed in the back-room are cut in half since they are not needed for the haggling game (described in frightening detail here).  At an average salary of $150,000 per year this can add up.
• Lower advertising costs.  Those Sunday ads are gone with fixed prices.  This can save $300 per car sold.
• Greater loyalty.  Haggling creates buyers' remorse and outright anger against the dealership who  screwed you for every possible penny.  One dealer reports that repeat rate has doubled since moving to fixed prices; and 70% are coming back for (highly profitable) service, up from 40% before.

While new brands like Scion and import leaders like Toyota and Honda seem to be moving faster to fixed prices, you might not be surprised to hear that the domestic Big Three are late to the party.  GM, Ford and Chrysler have too many dealerships as is - which means the first local dealer to go fixed price is undercut by neighboring rivals.

I'm not in the market for a new car today, but after reading this article I actually have less dread for when that day arrives.  But for now I'll keep squeezing every last mile out of my '99 Honda Accord.

Blog War: The Gadget Geeks

Fortune magazine provides more proof that challenge drives improvement with a story on the battle between dueling gadget blogs - Engadget and Gizmodo.  Both sites are high-traffic players in the still-new realm of blog journalism.  They have grown to monthly visitor levels of 10 million and 8 million, respectively, through an obsessive focus on providing breaking news about the latest electronic gear industry. 

The rivalry started in 2004 when Gizmodo founding editor, Peter Rojas, left after being refused a piece of equity from its owner, blog holding company, Gawker.  He founded Engadget soon after and was determined to re-create his previous success, now with an ownership stake.  Rojas drove Engadget to take risks, and he scored major product scoops and an interview with Bill Gates. 

Engadget overtook Gizmodo in traffic levels, which in turn forced Gizmodo to take its game up a notch.  It hired Brian Lam, a prize gadget-reviewer from Wired magazine, and managed to break the news of the Playstation 3 and Wii launches on the same day. 

In interviews, the sites' editors agree that competition has made both better.  According to Brian Lam:

"We're like two samurai in the movies.  We might respect each other's skills, but in the end we have a job to do, and one of us is going to kill the other."

And as these two blogging samurai fight it out for years to come, not only their sites and traffic will improve.  In fact, I believe their battle is already elevating the entire industry.  They are actually inciting a broader war within the electronics industry by publishing news, hacks, and reviews.  This reporting makes consumers better armed in choosing which product to buy,  and how to further enjoy what they have.  This rewards the best products, punishes the worst, and pressures the manufacturers to innovate further.   

However one watch-out is that this rivalry has already led to at least one major error.  At the Consumer Electronics Show last week, some guys from Gizmodo thought it would be funny to walk around the convention floor with a device that universally turns off display televisions.  From walking the floor myself I can tell you that this would cause extreme havoc for the men and women laying their butts and jobs on the line to show their wares, including working through the holidays to prepare for this critical event.  As one comment said perfectly: "Have fun getting advertisers after this."

(Thanks to Seth Godin for the find)

Music Now DRM Free

Almost exactly a year ago, on February 6, 2007, Apple's Steve Jobs wrote an open letter to the music industry asking for it to move to a model in which it sold music that was free of Digital Rights Management (DRM) copy protection.  At the time, I wrote that it was a brave but smart move for Jobs to essentially ask music companies to sell music that was not forced to be played on an iPod. 

Apple immediately began selling DRM-free music from industry upstart, EMI, but many of the other labels criticized Jobs' letter.  But over the past few months, other record companies have gotten on board - and this week, the final player, Sony-BMG, has agreed to make its music available DRM-free.

Analysts say that a main driver has been the 9.5% fall in album sales in 2007.  The record companies are growing desperate.  Further, I'm sure that the Apple/EMI experiment proved that consumers would pay more for the benefit of flexible file ownership.  And, as expected, the move is already resulting in more competition for Apple.  Warner is selling its DRM-free music through Amazon.com, and the open format could create music businesses for Facebook and MySpace.

It's another reason to love Steve Jobs - and proof that challenge drives improvement.

Blu-Ray the Winner? - UPDATED from CES (again)

I've been continually covering the battle for the the next generation video format - HD-DVD vs. Blu-Ray since April 2006 here and here.  My original call was that HD-DVD would win, and since my original post the two sides have been basically even in console and disc sales.

But last week many analysts predicted that Warner's decision to back Blu-Ray exclusively ended the war for good.  Warner was the last big studio to pick its horse, and with its large catalog of movies it could tip the scales Blu-Ray's way.

However I'm not ready to concede that my prediction is incorrect.  First, the war is still not over.   Many months and years are ahead for this market and the HD-DVD crowd has too much at stake to give up.  Second, the story here is not necessarily HD-DVD vs. Blu-Ray but rather "next generation discs" video versus current DVDs and other new formats.  And while Blu-Ray may win in the format contest, it could be a Pyhrric victory.  Both formats are far from hitting critical mass of consumer interest and console sales.  The players are expensive and the difference in quality can be difficult to notice.  Further, consumers have just spent the past decade building up their traditional DVD collections - and I don't think they are ready to scrap these discs and start over for a small improvement or more bonus features. 

I think the main argument in favor of a new disc format is that many people are buying HDTVs, and want to enjoy content in this higher quality format.  Count me as one of those.  However a disc is no longer the only answer.  I have downloaded HD-quality movies to my TV using Xbox Live.  For a few bucks and a few hours of download time, I'm able to watch an HD movie without upgrading to a HD-DVD or Blu-Ray player.  That's possible today - now push forward a few years as more people have one of the many ways of downloading content directly to a game system, cable box or laptop.  Amazon launched a system for this a few months ago, and Netflix is partnering with LG to download directly to a TV set.

Getting back to HD-DVD vs. Blu-Ray, I think the industry has made a collective bad call by going for Blu-Ray.  It's more expensive, more confusing, and has more usage restrictions.  It was built to make money and lock down content for Sony and the entertainment industry, rather than being built for consumer preference. 

UPDATE: I should have waited just a day or two to write this post, as I am now in Las Vegas for the annual Consumer Electronics Show, and can give a better update.  First, the WSJ has now covered the issue and has an article here that mirrors many of my points above.

Second, in seeing the future of electronics myself, as well as the booths for both HD-DVD and Blu-Ray, let me throw out a few related observations:

• There is zero difference in the quality of the two pictures.  HD is HD. 
• Blu-Ray was touting some extra content that could be fit onto a disk.  One showed a video game layered over the movie Alien vs. Predator in which you can shoot the aliens for points.  Interesting.
• "HD" itself is just another step in the progression.  Players are coming that will be even higher quality pictures.  This will necessitate new TVs, new players, and of course new movie disc collections.  This will further frighten consumers to sit this one out.
• Downloading is going to grow faster than I thought.  Above I mention that the Xbox is already an HD player when you download a HD movie over Xbox Live.  This week Bill Gates announced that ABC is making its shows available for download in HD.  Again, why invest in a new $300 player?
• There is other sexy stuff for consumers to spend money on.  The competition for Blu-Ray extends to the plethora of other cool gadgets that will attract consumers' dollars.  There are cool 3-D displays from Texas Instruments, Microsoft's Surface computing platform, and slick new designs galore. 

So, a little bit wiser from my trip to CES, I'm sticking to my guns.  You'll continue to read more here.

UPDATE 2: I just saw news this week that some recently-added features to Blu-Ray - like picture-in-picture, which was added to help defeat HD-DVD - will be inaccessible for people who bought Blu-Ray players early on.  The new software cannot be updated, leaving those most loyal, most vocal early adopters out in the cold.  It's another way in which the pseudo-monopoly of Sony and a handful of movie studios failed to keep the consumer in mind. 

Seniors Doing Their Share, Their Way

I always love to spend time with my wife's grandparents over the holidays.  Aside from a few good games of Euchre (we teamed up for a family record 11-0 game), each visit provides the opportunity to learn a little about what life was like when they were growing up, and a view of the good and bad times they are experiencing now.  They are getting into their late 70s, and still very fit and spry. 

One interesting conversation we had was a discussion about their rising property taxes.  Having lived in the same home since the 1960s, they are clearly aware that the amount assessed on their 3.5 acres in the country has more than tripled over the years.  And since they are basically on a set retirement budget now, this amount can really hit home.  A few days after this conversation, I read that the town of Greenburgh, NY is experimenting with a plan to let seniors work in various local government jobs to earn credits toward their property taxes (which are 3rd-highest in the U.S.).  They are being paid a respectable tax-free $7 per hour.

At a minimum, this would mean small part time jobs like stacking the library shelves or working the phones or reception for city offices.  At best, it may allow retired doctors, lawyers or architects to put some of their high-value skills to work. 

I think this experiment is a great test of a new way to solve the challenge of rising taxes and the aging of our workforce and society overall.  The plan allows seniors another option to repay society, without just getting another free pass or handout.  It also gives them something to do with their free time, and gives society an opportunity to interact with and learn from them.  I would bet that these seniors would get a nice dose of pride at a time when some of them are forgotten or feel they can no longer contribute to society.

Since we were still together, I asked my grandparents-in-law what they thought of the plan.  They thought it was pretty interesting, as long as it was part-time.  We'll see if it will work, but if my focus group of two is accurate, this is a choice many seniors may appreciate.