Tuesday, November 16, 2010

MBA Rankings, a pinch of salt and a tomato

Any reasonable person knows to be weary of any ranking, after all there is usually some subjective criteria by which the position in the ranking in judged. For example, how does one determine wealth ? Is it cash in the bank, assets, potential assets etc.

The same care should be taken with MBA rankings, which often have a very strong weighting towards salary increase. You should be aware that this might be the reason many MBA schools are keen to recruit young students (their potential earnings can only go up !). Also watch out for fluctuations in exchange which may cause disproportionate salary increases when adjusted to the US dollar (or British Pound). Another often considered factor is the International flavor of the course, but many of us have dual nationalities and this figure can easily be fudged. Faculty members qualifications and academic contribution is also often weighted, again there are various ways in which this figure can be fudged.

All in all, you should not choose and MBA by it's ranking unless you are concerned with the fact that a prospective employer may be interested in the ranking of the university you attended (which would be very unfortunate indeed).

Tuesday, November 9, 2010

Misusing models

Interestingly, having in my last post posted a model, the issue I want to address in this post is the misuse of models. Firstly, let's consider what a model is and what it is not. A model is really an abstraction of reality, in most real-life situations it is impossible to capture all the parameters that influence any social phenomena. So for example, in economic growth there are far to many variables that impact economic growth. We can create some simplified model, which helps us attempt to capture at least the most important variables and suggest a way in which the economic growth mechanism works. Note, this is not a theory, a theory is an attempt to explain the workings of a mechanism whereas a model is only a simplification of a mechanism (see Mario Bunge for more discussion on this).

When one person or organization create a model, it is with a particular context and set of assumptions in mind. If they create a model which is valid for all contexts and situations and does not rely on any assumptions, then it is a theory. In social-science or business there are very few theories and even fewer that survive scientific rigour, there are however, many, many models.

We often see models being applied to help with the organization of ideas, and usually to help in some decision making process. However, as models become applied, their application often ignores the assumptions and the context on which they were founded. 

Consider the following model, called the Delta model above. The model suggests that there are two main business strategies, differentiated products and cost. With modern bundling a business can achieve customer "lock-in" (i.e making customers more dependent on a variety of bundled services, thus reducing turn). If a business strategy is able to achieve this "lock-in" then it can position itself away from product and/or cost leadership, potentially reducing R&D spend and increasing margins. This is a very simple model, with a number of key assumptions. One key assumption is that Porter's generic strategies hold true (let's assume they do). 

Recently in a strategy meeting I saw the head of strategy produce this model, for explaning the strategic choices available to the company:
This would appear to be the exact model, previously described. But with a subtle difference, the top vertex has become "customer service" and the model was presented as a way for the company to position itself as either "best product", "lowest cost" or best in "customer service". Fundamentally, this is very different to the previous Delta model and makes a new assumption that pursuing customer service is a valid strategy (something that Porter might disagree with).  Did this model come out of mis-applying the previously described delta-model ? The meeting went on to describe how they would aim to be the leader at customer service, however they ignored a few very basic points: (1) they are selling a commodity and therefore products and service cannot be separated, (2) when selling a commodity, you cannot potentially separate products from cost. If (1) and (2) are really true then the entire model, and the basis on which their strategy was defined collapses into a dot (literally). 

I have no idea, whether I am right or not. Only time will tell. However, I am very certain that I often see models misapplied or applied in contexts for which they were not designed. This does not in itself cause a problem, unless the assumptions made for the original model become fundamental to the outcome.

Saturday, November 6, 2010

Towards a theory of economic growth

A couple of years ago, whilst attempting to complete a masters degree in Business Administration 
I somewhat naively attempted to create a model linking entrepreneurship to economic growth. I began a 3 year quest to read all I could about entrepreneurship and economics. It become apparent early on, that academics simply do not agree on what entrepreneurship is. Furthermore modern economic theory has very little to say about the entrepreneur. I found this to be somewhat confusing, being a simple engineer, I expected there to be at least some basis on which to build an economic theory based on entrepreneurship. Afterall, it would seem evident from our current and historic experience that entrepreneurship (if we agree on what it is) generates economic growth. Almost every nation has a host of policies trying to stimulate entrepreneurship, however, academics did not seem to have a very good idea of how this growth worked. I presented my model for my dissertation, however, it was promptly dismissed. No matter, I wish to continue my process of discovery and continue the work I have started. 
I won't attempt here to provide all the references that led me to this model (which, I am happy to admit is far from explanatory). However, influential works by Schumpeter, Baumol , Kirtzner, Penrose, North, Chandler,
Aldrich, Audretsch, Casson, Mintzberg,  Shane & Venkataraman and Fleck - amongst others, were influential in my studies.
The first issue to overcome, was the question of entrepreneurship: what is it ? Some say innovation, others say it is simply starting an enterprise which survives for more than X years, others claim that growth is key, or that organizations are formed. This raises questions, for me, I wondered if the people selling drinks on the beach were entrepreneurs (they seemed quite creative) or were they simply distributors for the large drinks companies ? Eventually I settled on the view, that entrepreneurship is the process of "opportunity recognition".  This is an interesting view, as it relates entrepreneurship to a process, means that it can occur within an organization and does not restrict it to be innovative or stipulate the creation of an organization.
Levels of analysis are often confused in much of academic literature, I wanted to relate the individual to the societal, so I chose three levels of analysis - individual, group and societal. I also liked the approach by population ecologists who relate the formation of organizations to population ecology. Survival of the fittest, variation and all those lovely things we learn in school biology. This seemed to be a reasonable basis on which to construct the model. 
 I am lucky to have lived and worked in 4 countries on 4 continents. I have seen how the social institutions are different in each, which lead to a further curiosity in how these institutions might influence the availability of opportunity for the entrepreneur. There is no question in my mind, helped by the wonderful work by Sen, that opportunity is simply not distributed through society and especially in those societies where the institutions do not promote equality. At the time I was living in Brazil, which provides a very tangible example of the above. 

Institutions are responsible for the development of knowledge and skills, they importantly impact the symmetry of information and define the social bureaucracy or processes. Added to this are the coordination function that institutions provide. Two main functions are associated with coordination, incentives and enforcement. Oliver (1992) discusses both of these in terms of the deinstitutionalization process.
The outputs of the institutions lead to cooperation (or lack thereof). Cooperation here is used in the very general sense. For example setting up a company, requires that the entrepreneur understand the process (information), that he has sufficient ability to do so (knowledge), that it is worth his while to do so (incentives) or that he will deemed deviant if he does not (enforcement), this requires a certain amount of cooperation between the various institutions involved in the bureaucratic process. For example in the UK, companies house deals with this process, they send an information pack and forms. One is required to submit certain forms and documentation and establish a “business” bank account, furthermore one is required to register with the inland revenue for tax purposes. 
The bureaucratic process requires cooperation between all the institutions involved, alignment of systems and processes to make the registration process work (see my article on archetypes of bureaucracy). In other economies there is a miss-alignment of these bureaucratic process which makes the task slow and complicated (as in Brazil, according to the 2006 Worldbank report ). Cooperation here also refers to the cooperation required between firms and institutions to develop, for example, new products, services and knowledge.
The main output from the process of cooperation is legitimacy on the one hand, and when it leads to innovation of some form, opportunity for the entrepreneurial process. Consider an economy where the entrepreneur has applied for planning permission and progressed through the bureaucratic process, once granted his endeavours are legitimized to some extent. Consider the application for a bank loan, again, the successful completion of the process legitimizes the opportunity and hence the entrepreneurial process.
Cooperation is a necessary condition for sustained innovation Of course innovation may occur as a “flash in the pan”, but this is not the sustained innovation being discussed here. It is necessary as it drives innovation, without competition all business environments would be favorable (a monopoly for example)  and there would be very little need to innovate. Competition has the further effect of influencing the social and economic institutions. Look at how industry impact legislation (and visa versa) this is usually (although I admit not always) brought on by competitive environments where industry feels in necessary to lobby for new legislation or controls.
Importantly, growth creates more growth. Aside from human, financial and other capital that flows in times of growth, sentiment is positive. As is evident from the recent economic downturn, pessimism goes a long way to stifle growth.

By now, you may be bored. I would ask that you share your comments and look forward to them.

Thursday, November 4, 2010

Can over-tweeting be bad for your Health ?

I have been following quite a few very good Tweeters, some provide me with a daily digest of really interesting information. Then there are the ones that provide me with nothing at all and yet others that are amusing. Irrespective even the good ones can get to a point where they are over-tweeting. What is most relevant, what is the optimum number of tweets to keep peoples interest and when have you gone too far ? I think there is a fine line between interesting and annoying and getting it right in terms of both content and volume could be the key to generating happy tweet-fans ....

Would it be sensible to set yourself tweet quotas, e.g 1 tweet per hour or 50 tweets a day ?