Blue Sun

How quickly can a leopard change its spots?

The Dec 17th edition of the Wall Street Journal profiles the cultural changes Ed Zander will have introduce at Motorola (sorry, pay subscription required). Unless employees truly fear for their jobs, changing a company's culture is probably the most difficult action a manager can undertake. In fact, it's often more lip service than action. Case in point - Carly Fiorina at HP whose aggressive operational promises included changing HP's notoriously slow-moving culture. So how's she done? In my opinion, not well. Carly has been able to meet reduced expectations, but that's primarily been by manipulating the reported earnings of individual operating segments.

So why is it so difficult to change culture? Is it that inertia is the most powerful force in the universe? Maybe. But I'll take the liberty to consider some of the management concepts I've learned in my 3 semesters at Wharton.

One of the Wharton's true gems is the course Competitive Strategy (currently listed under its archaic 1960s title of "Strategic Planning and Control") taught by one of Wharton's top professors, Nicolaj Siggelkow (website with cv and research ). A protege of Michael Porter, Harvard Business School's competitive strategy guru, Prof Siggelkow is so highly regarded by students that many who couldn't get into his class attended it anyway for no credit -- going at 9AM(!) no less, a time not in most students' calendars. Prof Siggelkow would likely argue that the difficulties new managers face in changing a culture lie in 1) the tight bonds formed between activities within a company, 2) the commitments firms have made to customers, suppliers and markets and 3) compensation plans for executives and mid-level managers. In essense, the firm has made these significant internal and external commitments, and undoing these is a tremendous hurdle. Witness all the firms who decided that they were "going direct" to imitate Dell, only to upset their sales forces and distributors. What happened? They eventually decided it was not in their strategic interests to mimic Dell.

Of course, there are executives who have been able to change cultures. Frequently, they have entered situations where there was an internal undercurrent for change, but prior management chose not to address it. A current example would be that of McDonald's and its new CEO, Jim Cantalupo. Whitney Tilson, founder of the Tilson Funds and columnist, awarded Mr. Cantalupo his CEO of the Year award for successfully implementing such changes (side note: Whitney Tilson has been a great advisor and resource for Wharton students interested in investment management -- thank you Whitney). Bruce Nelson, CEO of Office Depot came in and completely revamped how the company measured its performance, focusing on cash flow generation as opposed to revenue growth and market share. In the process, he eliminated a number of unprofitable units. The result? The stock tripled! A more drastic move, but one that lit a fire under employees.

Ed Zander faces quite a task at Motorola. The company was once both incredibly innovative and strong on execution. Legendary investor Phil Fisher profiles the company as a long-term holding in his classic investment book, Common Stocks, Uncommon Profits. But times have changed. Under the recently departed CEO Chris Galvin (grandson of the founder -- nepotism at its finest), Motorola lagged competitors in both innovation and execution. Increasingly, Motorola's products were late to market and features trailed those of competitors. Customers lost faith in the the company's brand. Losses mounted. Galvin could not make the tough choices for fear of hurting people inside the company. Finally the board sacked Galvin and decided to spinoff its highly cyclical semiconductor business.

Now Ed Zander has his burning platform to come in and institute some change. How he tackles the company's culture will likely be the deciding factor in his success.

Citrix Systems buys Expertcity

Expertcity, the company behind the GoToMyPC application, agreed to be acquired on Thursday by Citrix Systems for $225 million in cash and stock. GoToMyPC allows remote users to access and easily use their desktops through another computer. It is also one of the few applications I can think of that attracted more than 100,000 subscribers and consumers actually paid. Consumers paying for internet-based applications... shocking I know.

Expertcity was a portfolio company from the first Dawntreader Fund, prior to the merger with SoundView. Ed Sim, a SoundView managing director, worked closely with Expertcity for nearly five years, helping transition the company from its original business model to its current evolution and success with GoToMyPC. The company is great example of two common misperceptions about venture capital investing:

1) that venture capital is all about allocating cash to innovative technologies in large markets
2) great companies are born overnight by following a perfectly conceived business plan

In reality, these could not be further from the truth. VC investing is not formulaic. Throwing money at cool technologies with large projected markets will not determine the success of an investment. As Ed writes about Expertcity in his blog Beyond VC, Expertcity was originally not successful, but through smart management and outstanding execution, became a valuable company. In many aspects, venture capital investing is no different from any other -- finding good management teams. Good management will find ways to create value for sharholders. As simple as it sounds, finding those outstanding managers is the truly tricky part of investing.

Duke vs. Texas

Had the great fortune to go to yesterday's Duke - Texas game at Madison Square Garden. This was easily the best I've seen the team play in a long time... probably since the 2001 national championship game against Arizona.

Against Texas, Chris Duhon really shined. There have been high expectations for Duhon since Jay Williams left for the NBA... and maybe he's finally capably stepping into Williams' shoes. Though he'll never be able to be the scorer Jay Williams was, Duhon could be a better passer and surely get more people into the offense. The Texas game perfectly reveals Duhon's ability. He was great at getting everyone the ball at the right time and made several brilliant passes, most notably his dish to Luol Deng on the fast break. Perhaps the best sign of how well Duhon ran the team was that there were 6 Dukies in double-figures.

As dominating as the team was on offense, the defense was equally strong. Hopefully this is a sign of performances to come.

Back from Finals

Ok, I'm back after a week of Wharton finals and job interviews. I should be posting regularly during my winter break.

Common sense and the cost of reputational risk

I've been struggling with something for a few weeks now that was exacerbated by last weekend's BCS selection of the #2 and #3 teams playing for the national title over #1. Why do people and institutions completely ignore common sense? This is the same question I have thinking about with the current mutual fund scandal (Heartland Advisors is the most recent one).

The only answer I can come up with is that people -- acting as individuals and executives in institutions -- misprice the cost of risk to their reputations. Or maybe more accurately, they price that risk at zero. Consequently, they don't factor in how harm to their reputation will hurt their ability to achieve their goals, or even survive, in the future.

Example 1 - Mutual Fund Scandal
In the case of the mutual fund scandal, fund executives allowed favorable customers to market time trades in their funds to the detriment of other shareholders. And while market timing is not illegal in most situations, when you have in your marketing materials and regulatory filings that you will not allow such actions because they hurt other shareholders, it becomes illegal. So these funds and executives who profitted in the hundreds of thousands of dollars risked hundreds of millions - or billions in the case of Putnam. And in the end, the risk to institutional and personal reputations prevailed. The reputational risk has been extraordinary. Putnam has lost more than $15 billion in assets under managment and the CEO lost his job (rightly so!). And maybe the most egregious examples is Dick Strong of Strong Funds -- a man who lost hundreds of millions of dollars of value in his firm for the great opportunity to earn seven hundred thousand for friends and family.

Example 2 - Bowl Championship Series

Help me understand this. How is an institution whose sole purpose is to get a unified national champion not have the consensus #1 team in the country according to the historically two dominant not playing for the title? Yet the #3 team in both those polls is playing despite not even winning its conference championship. Now the BCS uses five or six other obscure polls and incorporates a quantitative measure to come up with its strength of schedule. And this is probably the right process when there is some confusion over who is the #1 team in the country. So the BCS, rather than come out and declare that a change to the system should be made this year by doing the common sensical thing of having #1 in the polls play the consensus #2, chooses to go ahead with the game. Maybe in the short term, i.e. 1 year, this will keep the BCS relevant. But in the longer term, the BCS has rung its own death knell. The risk to the BCS's long-term reputation is far greater from not coming out and saying that in this year, they should make a change, than to own up to the inadequancy in real time.

The mutual fund scandal and BCS selection process both show how institutions and executives do not think about their reputational risk from certain actions. As a result, they focus far too much on the short-term and as a result, leave an indellible mark on their futures. In essence, they fail to "do right." This lack of thinking about risk to reputation leads to a lack of common sense, and in the end, failure.

Duke vs. St John's

Since Michigan State - Oklahoma went to overtime, ESPN didn't broadcast the first 15 minutes of the first half of Saturday's game. By the time we joined the game, Duke had a lead that they wouldn't relinquish, so I really don't have a lot to contribute to the game.

Shavlik Randolph has continued to impress. His stats (courtesy of Duke Basketball Report) clearly highlight how active he is on the court. Along with Shelden Williams and Sean Dockery, Randolph has led the sophomore class' increasing contribution to Duke's success; hopefully this will help take the burden off of Duhon who at times plays like he's unnecessarily carrying the team on his back. The St. John's game was a true team effort as six Dukies ended up in double figures for points, none having more than 14.

Next game is December 14th at home against Portland.

Finally True Blue: Duke - Michigan State

For the first time this year, my Dukies looked like at Top 10 team in beating Michigan State Wednesday night. Defense was the key to the victory as Duke forced 17 turnovers in the first half by really jumping into the passing lanes. Sheldon Williams and Shavlik Randolph demonstrated that this team will be outstanding if Duhon and the coaching staff focus on running the offense inside-out. Use the big guys to draw double teams and then kick out to the open shooters. Unfortunately, too many times Duke teams work the opposite way by trying to launch 3s without developing an offensive advantage, i.e. an open shot. That's what happened to the team in the Great Alaska Shootout.

Next game is Saturday afternoon against struggling St. John's.

What Robert Rubin and Warren Buffett have in common

Carol Loomis, in the December 8th issue of Fortune, profiles former Treasury Secretary and current Co-Chair of Citigroup Robert Rubin in a fascinating way. Rather than overtly discuss Rubin's extraordinary accomplishments in his corporate and government careers, Loomis delves into how Rubin thinks... thinks about anything and everything. She boils it down to two dominating traits:

1. Rubin approaches any topic with the perspective of -- there are no provable certainties, and

2. Rubin "thinks probabilistically" -- decision-making based on a disciplined weighing of odds and tradeoffs

The first characteristic creates a mindframe that questions all assumptions in an attempt to identify what are the crucial drivers of an argument or an event. This leads directly into the second trait. With an understanding of what the key drivers are, Rubin can more accurately assess the tradeoffs and odds of the choices that are before him.

It is this same understanding of the odds that makes an outstanding investor. Earlier this year, I had the great fortune as a member of a select group of Wharton students to trek to Omaha for 2+ hours with the Oracle of Omaha himself, Warren Buffett. One of my classmates asked Buffett about what commonalities he saw across great investors. Buffett's first response was "thinking probabilistically." For Buffett, this meant evaluating the downside and relative upside of an investment and getting comfortable with the possible scenarios around a move in either direction. The greater the upside with a mitigated downside, the better the option. Much like Buffett, Rubin, as an arbitrageur, executive and government official, repeatedly weighed his odds of success before proceeding.

So that's the guy behind the money

Every now and then there's an interesting show on PBS that grabs my attention... and sometimes I'll catch an episode of the McNeil/Lehrer News Hour for a change of pace. And all these shows receive funding from the John D. and Catherine T. MacArthur Foundation. So who were Mr. and Mrs. MacArthur, and better yet, how did they make their money? A great profile in IBD's Leaders and Success section today.

Disney steps down - when will Eisner?

I've been a Disney shareholder since my Bar Mitzvah 15 years ago. For the last 8 years, this stock has not done much. At the same time, Eisner has become obscenely wealthy without creating commensurate value for his shareholders. He pissed away a ton of cash on getting rid of Mike Ovitz, cruise lines and ABC/ABC Family. Roy Disney is right in his resignation letter that Eisner must go.