Urlocker On Disruption

*Update* More Than You Know: Book Reviews, Podcasts

Our interview with author Michael Mauboussin last October proved popular. To introduce readers to Mauboussin's new book, More Than You Know: Finding Financial Wisdom in Unconventional Places  (NEW: Expanded and Updated 2007 Edition) Here are several resources:

**New Update: Podcast interview with Author Michael Mauboussin on NPR's Science Friday show Aug. 17, 2007, 16:49 min. (Download mp3, Science Friday website.)

**Best Business Books of the Year, BusinessWeek: "Finally, a fun read that draws insights from a wide range of scholarly disciplines."

Book Excerpt: Chapter 1: Be The House

Not Book Excerpts, But Close:
On Streaks: Perception, Probability, and Skill, from the Consilient Observer, Mauboussin's newsletter at CSFB, Vol. 2, Issue 8, April 2003.
The Janitor's Dream: Why Listening to Individuals Can Be Hazardous to Your Wealth, from the Consilient Observer, Vol.1, Issue 18, June 2002.

Podcasts and broadcast interviews:

• Good: NPR's Money Matters show (4:37): A quick hit.
• Better: WrittenVoices.com in either WMA or MP3 format (16:39)
• Best: The Invisible Hand Podcast Episode 21 (41:00): A thoughtful and thorough interview by Chris Gondek, who brings an investment and management point of view to draw out a good discussion with the author.

Book Reviews:
BusinessWeek: **** "The Good: Draws investing wisdom from many disciplines, from cognitive science to fractal math. The Bad: Brief essay chapters at times allow for too little discussion of complex matters.The Bottom Line: Its insights sparkle--and it's even a fun read.

Bloomberg News: "Mauboussin is at his best when exploring investment psychology. Humans, like zebras dodging lions, have innate physiological responses to threats: Our blood pressure rises; our short-term memory improves... As an adjunct professor at Columbia Business School, Mauboussin maintains an academic aloofness throughout. Nowhere do we learn how Legg Mason might have applied these highbrow concepts to the gritty business of buying and selling."

Other info:

• Author interview by Columbia University press
  
• Author interview by The Motley Fool
  
• Book description and table of contents by the Global Investor Bookshop
• Expectations Investing Mauboussin's first book, with Alfred Rappaport. A related website includes excerpts.

Q&A: Francis McInerney, Doomsday Prophet & Turnaround Artist

Francis McInerney's new book, Panasonic: The largest corporate restructuring in history, looks at the successful turnaround of Matsushita, a global giant known to many as Panasonic. McInerney is a management consultant with an uncanny ability to frame complex issues in the simplest terms of customers and value.

I've known Francis for 20 years and he is one of the great thinkers.

He accurately foresaw and published the reasons for the downfall of AT&T and the implosion of the telecom sector years before it happened.  I wanted to learn about the turnaround of Matsushita and Francis's role in it.

Q: Can you describe the scene at Matsushita as you saw the conglomerate in the mid '90s and touch on what put the company in that position? Maybe compare it to some U.S. or global corporations that have been in trouble that people are familiar with, like IBM pre-Gerstner or AT&T in the '90s, or even Sony today.

The problem at Matsushita was that everything was a problem.  If you can name an operation, any operation from accounting to sales, you can be sure that it was messed up from one end to the other. 

You can put all of these under one umbrella: institutionalized isolation from customers.  For example, to name a few things:

- half a dozen public companies used the Panasonic name and had no common strategy.
- several of these competed against each other.
- there was no customer contact outside Japan and no system for getting it.
- sales people worldwide were supposed to force-feed distributors with products designed in Japanese factories but for which there was no clear demand.
- given these four points, there was no brand.
- the entire edifice from pencil sharpeners to factory automation equipment and semiconductors was supported by one hit product at at time, like VHS, then DVD etc.
- the company had no dominant share in any market except batteries.
- the wireless division, a big success in Japan, refused to sell in North America and missed the cellular rush.
- when the hits stopped coming, the poor financials in all the other areas were immediately exposed.
- the company was caught in a huge legacy trap -- too many long-cycled analog products in a short-cycled, computer-driven age where price-performance is everything.
- morale was terrible.
- management was frozen, like deer in the headlights.

I was asked by the Japanese press to explain what went right.  I turned over my business card to the blank back side and said there was too much space there to write it down. Big Shokku.

At IBM, by contrast, Gerstner had three powerful things going for him:

1. IBM's sales DNA was still there and could be restored.
2. IBM was in only one business, computers.
3. Processing demand was, and is still, growing as are the applications for processors.

In addition, the bulk of sackings at IBM preceded him.  The IBM brand was not dead or even close to it.  Unlike Kirk Nakamura at Matsushita in 2000, Gerstner had a lot of CEO experience and took a decade to get the job done at IBM.  The company was also smaller than Matsushita when he came on board.  So, smaller, simpler, sales DNA, and more time.

AT&T got into trouble and never got out of it.

Sony has yet to begin to change.

Q: What would your advice be for Sony CEO Howard Stringer?

My advice to Howard Stringer is simple:  set the inputs of cash conversion -- days in inventory, receivables, and payables -- in advance, and force the company's divisions to meet those numbers.  Set inventory days, for example, at 20 by the end of two quarters.  Then, half way to the goal, reset them to 10 by the end of the first year,  at the end of the two years make sure that inventory days are equal to Apple's -- four. Success for Sony would be to look like Apple.

Doing this will force to the surface all the structural challenges Sony faces.  But, it will put the onus on the business heads, not Stringer, to fix these fast.  In the Japanese system those who resist can easily be invited to ply their trade elsewhere.

Even so, getting to where Apple is now in two years is enormously risky.  At Apple's current growth rate it will be as large as Sony in only eight quarters or so and with a product/service portfolio a fraction as large.  Stringer should expect this to be very hard and that he will meet with strong resistance.

Q:  Today Matsushita has dramatically improved. How was it that Matsushita CEO Kirk Nakamura was able to proceed with this dramatic transformation without dishonoring the achievements of the company's founder Konosuke Matsushita, a brilliant self-made man who had literally written the book on the company?

My concept was to remind people of what Konosuke did:  constantly redesign the company using whatever means were available to get physically closer to his customers than were his competitors.  This effectively gave permission to Kirk to do the same thing using today's IT.  Kirk thus painted himself as being more like the founder, not less.   When I go to Japan, people constantly thank me for reviving the founder's vision.

Q: What are the parallels that apply in corporate America, because this "ossification" problem as you describe is certainly not a unique Japanese experience, is it?

Ossification in the U.S. is rarely founder-driven in the way it can be in Japan.  Take the auto industry.  The problem is the same as it was for Matsushita:  institutionalized isolation from customers.  But this has nothing to do with Sloan or Ford.  It has to do with state franchise laws that make it it illegal for the car companies to do in retail what Apple did.  As a result, all the talk in the press is about largely irrelevant issues like labor and health care costs.  This is not to say these are not important.  But without firm control of cash wait states, you have no way of knowing if they are important and if they are, how important they are.

From this I have derived a new rule:  The purpose of all businesses is to use the latest IT to eliminate the wait states of cash in the system.  This holds from the medieval fairs of Europe to the Internet.  It is what every successful operation from Ryan Air to Apple and Wal-Mart is focussed on.  And on what GM and so many other ossified companies around the world are not focussed.

Of the large telecom carriers still in business, most are access carriers.  Verizon had many opportunities to use my system but the complexities of blending managements from three companies in succession  -- NYNEX, Bell ATlantic, and GTE --  with competing agendas made my views a minor item in the scheme of things.  The same can be said of the new AT&T.

I don't advise BT Group and Comcast.  But they are stellar performers and fit my model well.

Interestingly, Lucent spent the last two years of its independence tightly focused on my principles and had begun to turn its core financials around. With Alcatel, this will no longer be possible because of the policy requirements of the French government.

Q: I don't want to do you an injustice by oversimplifying the soccer ball business model that you brought to Matsushita. It is heavily influenced by the cash operating principles pioneered by Dell. Can you expand on it, as applied at Matsushita?

Actually, the model is very simple.  It says that the faster you turn a sale into cash without burning up your supply chain (by jury-rigging your payables) the faster your operations must be.  Since speed comes before size in determining cash generating capability, and therefore whether or not you can scale up profitably Wal-Mart style,  your cash conversion cycle is your critical management tool.

The implications of the model, however, are far from simple.  My own text on how to use it runs over 200 pages and covers everything from manufacturing operations to brand and M&A due diligence.

One example:  If you use cash conversion data as an input to management decisions -- set inventory days in advance the way you set IC yields in advance on a production line -- rather than as end of pipe data that comes as a result of other factors, you immediately expose all the places in your operation where cash literally stops moving.   The application of the latest IT in identifying and eliminating these cash wait states is extremely complex and impacts everything from sourcing at one end of the value chain to customer service at the other.  The result of managing these data to very fine tolerances is Brand Superiority, the ability to affect outcomes in your markets

Once you successfully apply IT to cash conversion, moreover, you can pound slower competition for years, regardless of your size, or theirs.  This was Dell's major insight and it allowed the company to inhale all the operating free cash flow in its markets with impunity for a full decade until others started to catch up.  DEC, then Compaq, and almost HP imploded under the strain.

The model says, therefore, that you can take on, and destroy, companies many times larger than your own, if your cash wait states are significantly fewer.  Simply put, cash wait states are destiny.

Regardless of all other things -- industry, market, geography, size of company -- operations with few cash wait states look hollow:  all their operations and assets are on their surfaces, as it were, where they interact with customers directly.  Like all spheres, these companies -- I call them Soccer Balls because of their architectures -- are topologically flat. 

This makes them super responsive to changes in market conditions, almost to the point of appearing to anticipate the future.  They cannot, of course, but for those farther back in the pack, this appearance can be quite convincing. "How does Jobs do it?"

Q: Was there any situation where Matsushita faced the tough decision to disrupt itself, or in your words, to disintermediate itself?

The darkest days for Matsushita came during the tech stock crash of 2001 that set sales back seven years -- about $7.5 billion -- and wracked up losses almost as large.  The company came close to bankruptcy and the shock to everyone who worked for it, an icon of stability in Japan, is hard for us in the West to grasp.  This shock enabled senior management to rip through the fabric of the company with a scythe.

Q: The book is about the dramatic turnaround of Matsushita. In your career, you had close relations with senior executives at Lucent, at AT&T, at BellSouth, Qwest, Worldcom, at Nortel etc., in fact at virtually every major player in the global telecom industry, many of which today are shadows of their former selves. Why is this not the story of the dramatic turnaround of AT&T or Lucent?

This is a hard question to answer. 

It is easy to say why Kirk Nakamura picked up on my thesis.  His company was in deep trouble as was his country.  He liked the idea and it made sense to him.  It was logical.  He did not have a lot of time and had to act quickly. What he read in my first book, Beating Japan, in 1994 were proof points enough for him.

But why did so many in telecom not use my system?  All the major players in the industry certainly had access to the idea. 

It's hard to remember now, but all were doing very well during the period from the break up of the Bell System to the crash of 2001 -- just short of two decades -- and none saw the need for radical change, regardless of how logical. I remember being thanked at Siemens for "thinking outside the box" and asking myself what the hell box these guys were looking at.

It takes a very strong CEO and a sense of real crisis to make such moves.  Michael Dell and Steve Jobs, for example.  And John Chambers when he took over Cisco.

When the crisis hit telecom in 2001, many companies were wiped out or shrank to the point of vanishing.  Others merged.  There were frauds.  Some cases, like Qwest, are still before the courts.  The whole generation of management that I had spent a career cultivating simply vanished.  To their replacements, I may have seemed too much associated with the Ancien Régime. 

Unlike Dell, Jobs, and Chambers, none had the advantage of market growth on which to ride the structural changes I advocate. 

At Siemens, which was unusually stable during the entire '82-'06 period, most of the people I knew are in jail or have been arrested in recent months for a widespread bribery scandal.  So, that stability appears to have been bought.  My focus on identifying and managing the touch points of cash in a business would have exposed too much and put these executives at risk.  So it was a non-starter. 

Q: What books are you reading these days?

Richelieu by Philippe Erlanger
De la culture en Amérique by Frédéric Martel
Les Gaules, by Alain Ferdiére

I know this may look odd, but as I get longer in the tooth I've decided to stop reading English and see if I can't turn my second language into something approximating real fluency. 

Permanent Innovation: 10 Principles, and 1 Free E-book

Author Langdon Morris offers 10 principles of innovation, as summarized by Fortune's Business Innovation Insider blog. Morris's goal is to help companies make innovation a matter of strategy that has a predictable method and becomes a management habit.

1. Innovation is essential to survival, and all innovation is strategic;
2. There are four types of innovation (e.g. incremental, breakthrough);
3. The longer you wait to begin innovating, the worse things will get;
4. Innovation is a social art - it happens when people interact with one another;
5. Innovation without methodology is just luck;
6. All four strategic innovation viewpoints are critical to success;
7. Great innovations begin with great ideas;
8. Ready, aim, aim, aim, fire;
9. Prototype rapidly to accelerate learning;
10. There is no innovation without leadership.

Morris is an innovation consultant. His latest book, self-published Permanent Innovation, is available free as an instant download. It's 255 pages. Be prepared to offer an email address.

**Other Views/Late Addition**

VC Paul Graham lists 18 mistakes startups make.
I don't like to get too serious on management-think. So on a lighter note, here's a top-10 list of business myths, including #1: A brilliant idea will make you rich.
Guy Kawasaki's Top 10 list of lies of entrepreneurs, a brilliant compilation, including #1: "Our projections are conservative."
Geoffrey Moore's Top 10 list of innovation myths, including #8 "We need a Chief Innovation Officer.  (Like a hole in the head,)" and #7 "We need to be more like Google. (Not on your life.)
The Disruption Group lists the results from disruption, including new revenue streams and sustainable, high return on equity.  The website also has a CEO Guide to the Benefits of Disruption (pdf)

Q&A With Michael Mauboussin, Prospector of Wisdom in Unconventional Places

Michael Mauboussin is chief investment strategist at Legg Mason Capital Management and adjunct professor of finance at Columbia. A veteran of Wall Street, Mauboussin is known for bringing unconventional ideas and ways of thinking into new contexts.

Michael wrote More Than You Know: Finding Wisdom in Unconventional Places (NEW: Updated and Expanded 2007 Edition) as a guide to help investors escape the myopia of Wall Street. We thought this unconventional approach to wisdom would be equally stimulating for business managers and executives and so we share our interview with Michael Mauboussin, in which we spoke about innovation, ideas and authors.

Q: Michael, what was the event in your life or the stock in your portfolio that convinced you that a multi-disciplinary approach was the best way to go? After all, most stock market players and business people end up in very narrow fields of expertise.

A: I started on Wall Street twenty years ago with a liberal arts background with no formal training in business. So I was never burdened with the knowledge of how things work. Early in my career I read Al Rappaport's book, Creating Shareholder Value, which made an enormous amount of sense to me. He argued that Wall Street's simplistic focus on earnings and earnings growth was suboptimal. His work encouraged me, from an early stage, to take a different approach.

I also read intensely early on including lots of finance, competitive strategy, and the approaches of great investors. I recognized pretty quickly that what mattered to the market and what great investors did didn't fit very well with most day-to-day activities on Wall Street.

I then went into a phase where I started to read actively outside of investing -- lots of science, including evolutionary theory, complexity theory, and psychology. Around that time I first met Bill Miller, who was (and is) way ahead of me in taking a multi-disciplinary approach. Bill helped shape my curriculum and introduced me to the Santa Fe Institute, which is dedicated to multi-disciplinary research.

By the time Charlie Munger's speeches about mental models came out in Outstanding Investor Digest in the mid-1990s, I was primed. I have always had the feeling that a multi-disciplinary approach has to be the most intelligent way to invest at least given my temperament. Being influenced by brilliant investors like Miller and Munger only added fuel to the fire.

The mental models approach is not easy, because it requires a substantial time investment with uncertain payoff. You may read something in another field that has no relevance to what you're working on in the portfolio, at least no relevance today. But the accumulation of ideas sets the stage to make connections that can be hugely useful in improving decision-making.

Finally, I can't emphasize enough how important psychology is in all of this. I can teach students how to do a cash flow model or conduct a competitive strategy analysis, and they'll be competent. What's much harder to teach is how hard it is to be a successful investor from a psychological perspective. Great investing is very unnatural, and incentives can create a huge barrier to success.

Q: Tell me how you profited from this. Show me the money!

A: Truth be told, I have spent most of my professional career learning and teaching about investment process, first as an analyst and later as a strategist. I have never run money on behalf of others.

I suspect that whether someone benefits from my work has a lot to do with how they approach investing. I can say that many people over the years students, peers, and even competitors have told me that my work has helped them be better investors.

My role at Legg Mason Capital Management is to help assure we have the most robust process possible. I'm hopeful -- my money's riding on it -- we'll deliver superior results over time.

Q: One section of the book looks at innovation and you refer to the number of building blocks for innovation, saying this will lead to more success and more failure for companies. What do you mean by that and what does this imply for CEOs and other managers? No more stability?

A: People sometimes perceive innovation as coming from a brilliant inspiration in the shower. If you break down innovation, it more resembles the recombination of idea building blocks. The Wright brothers combined cable technology, bicycle technology, and Bernoulli's principle to cobble together the first flying machine. No building blocks, no airplane.

If this approach to innovation is correct, the rate of innovation will accelerate as we have more idea building blocks and we can recombine them faster than before. Scientific advancement, storage technology, and computers --fueled by Moore's Law -- pretty much assure the table is set for continued, rapid innovation.

The implication is the period companies can sustain competitive advantage will shorten over time. Researchers have already validated this finding empirically. So yes, change is coming, and it's coming faster than it used to.

Just to balance the comment, however, it's worth noting that there is a spectrum of companies and innovation affects them to varying degrees. Some industries, like waste management or beauty salons, are likely to see much less innovation than other industries, like telephony or nanotechnology.

Q:  The Corporate Strategy Board and Clayton Christensen's work both help us understand that large companies often stall out in growth. What should executives do as a company gets
large? And should investors just flee growth companies after a certain number of years when everything looks great, or is there a smarter approach? (If we look at Microsoft, Cisco, Yahoo, the argument for fleeing looks compelling.)

A: There are two distinct parts to this question. The first is, What executives should do as a company gets large? The ultimate litmus test of a management's quality is capital allocation. Managers should work hard to identify and invest in projects or businesses that can earn above the cost of capital. And such a process requires understanding the process of innovation. But when a company can't find attractive economic opportunities -- and note the standard is value creation, not earnings per share growth -- it should return cash to shareholders. There is no shame in being an extremely well-run company that generates cash consistently.

Q: Ok sure, Michael, but rare is the CEO humble enough to admit the best option is to hand back the money. It is perverse logic, but many CEOs would consider this a shaming defeat. Your thoughts?

A: There's no doubt many executives feel this way. But the CEO is the ultimate steward of capital. The executive should make every effort to find attractive projects on behalf of the owners. However, when those opportunities are exhausted, returning capital is the right thing to do.
Over many generations, more executives have been guilty of overinvesting than of underinvesting.

The investor's standpoint is somewhat different. The key for an investor is to find stocks where the expectations for the company's future financial performance are unduly low. Following a period of extended growth, investor expectations tend to overshoot what is realistic for the business. But large, slow growth companies can be attractive provided the expectations reflected in the price are sufficiently modest. Indeed, a lot of large capitalization companies in the U.S. reasonably fit this description today.

Q: What is the best piece of advice that you have for finding wisdom in unconventional places?

A: If you're involved in financial markets, there is basically no end to your learning. There's always another facet of your game you can improve, whether it's learning about more companies or industries, better understanding psychology, or freshening up on the latest academic theories.

My advice is very simple. Identify some important topics, for example evolution, psychology, complexity theory, figure out the books in the field that will provide you with a good understanding of the topic, and delve in. Allocate time to reading, and read actively -- pay attention to your thoughts and try to make connections. Not every topic will offer an idea spark immediately. But over time and with some diligence, you will invariably start thinking about problems in a richer way.

Next, I'd recommend Amazon.com as an incredible resource. The recommendations they provide and threads you can follow are very impressive. I frequently spend time exploring books on Amazon.com, and have found many gems that way.

Finally, I make a point of asking smart people what they are reading. I'm always happy to leverage the knowledge and insights of people I respect. Often people not only give you good recommendations, they'll give you a quick summary so you can judge quickly whether you want to delve in yourself.

Q: Bill Miller, CEO of Legg Mason Capital Management, is arguably one of the best investors on the planet with an exceptional 15-year record of beating the market. What have you learned from him about business?

A: Bill embodies the mental models approach. His interests and ability to learn are seemingly boundless. And he constantly relates what he learns back to markets, back to portfolios. He's shown me that basically everything you learn can be applied to being a better investor.

He's also an example of why temperament is so important. He's very even-keeled and focused. He's also very rational, and doesn't suffer from loss aversion in ways most people do. I'd argue a large part of his temperament is innate; but he's also created an environment that supports his approach.

Ideas are Bill's currency. He's constantly on the lookout for ideas that can help him gain insight. That pursuit of good ideas is certainly something I've tried to learn from him, irrespective of their source.

Q: Michael, I enjoyed our chat. Thanks very much. By the way what are you reading these days?

A: I've enjoyed a number of books recently. The first is Donald MacKenzie's An Engine, Not A Camera. An economic sociologist, MacKenzie suggests that while we perceive economic models as describing economics (a camera), the models themselves help shape economics (an engine). The best real-world example is the Black-Scholes options pricing model, which changed options-pricing overnight.

David Warsh's Knowledge and the Wealth of Nations is a also a great read. Warsh traces our understanding of increasing returns from Adam Smith to the work of the book's main protagonist, Paul Romer. The Origin of Wealth, from Eric Beinhocker, is another noteworthy title. At 500 pages, this books is not light reading. But it's probably the most detailed description of non-equilibrium economics out there. Eric was very inspired by the Santa fe Institute, and that shines through.

Two psychology books have also caught my attention. The first is Daniel Gilbert's Stumbling On Happiness. While ostensibly about happiness, Gilbert entertainingly explains how our minds recreate the past, partially create the present, and project the future. In every case, the mind takes shortcuts and uses tricks, all of which are very relevant to understand as a decision maker. Finally, I's mention Judith Rich Harris's No Two Alike. Harris is a controversial figure in psychology, but she lays out an interesting theory to explain individual personality differences.

** Other Resources **

Author podcasts, reviews and book excerpts of More Than You Know.

Mental Models Investing: Focus Investing explores Charlie Munger's approach to Mental Models in this 22-page report.

Mauboussin on Strategy: Legg Mason's strategy page includes a sign-up for the Mauboussin on Strategy newsletter and an archive of recent issues.

Video: How do you compare? Mauboussin explores the elements of comparative decision-making in this short video for Legg Mason.

Charlie Munger's articles, speeches, audio interview and other resources and Poor Charlie's Almanack, a collected book of Munger's musings.

The Disruption Group lists the results from disruption, including new revenue streams and sustainable, high return on equity.  The website also has a CEO Guide to the Benefits of Disruption (pdf)

Book Excerpt: The Change Function

I found some interesting online resources that explore Pip Coburn's new book, The Change Function. I think this is an important book because it challenges many traditional approaches to tech development.

Chapter One excerpt is a available below and at Coburn Ventures.

Intro excerpt (19 pages).

It's a good read in Coburn's breezy self-dialog style of asking simple but profound questions.  Coburn observes that the traditional approaches of creating and marketing new technologies honed in the past 40 years were incomplete because they ignored users' concerns and fuelled hatred and mistrust for technology.

For another angle, there is a good podcast with Coburn created by bookseller 800-CEO-Read in which he challenges the traditional engineering approach of milking Moore's Law to deliver new technologies at lower prices. Instead, technology suppliers need to consider the user's total perceived pain of adoption vs the user's crisis, he says.

Here is an online presentation (with many links) on some of Coburn's thinking, from www.changethis.com, a group of optimists dedicated to calm online dialog.

We also did a Q&A with Pip Coburn a short while ago.

Book Excerpts: The End of Medicine

I found a couple of online excerpts from Andy Kessler's new book, The End of Medicine. This book offers an outsider's view of frontline doctors and how new technologies can disrupt medicine as we know it. You'll get a quick take on Andy's take on medicine, and how it hasn't changed much in terms of frontline diagnostics in many years, from these excerpts.

Here's one, at Steve Sjuggerud's Daily Wealth, an investment-oriented website.

Cupertino could as easily be on the outskirts of any major city as it could be in Silicon Valley. Apple Computer is around here, but it’s mostly forgettable three or four story office buildings surrounded by gas stations and retail strip malls. It was like a tour of virtue and vice. For every Fitness Center, Jamba Juice and Holistic Center that I passed there was a Taco Bell, Carl’s Jr. and cigar store.

I pulled up next to a Mercedes S55 AMG - maybe it’s the doctor’s – and sat in the parking lot of a few minutes. My heart was pounding, and the butterflies in my stomach were migrating up to my throat. I was having trouble swallowing, let alone breathing. It wasn’t too late to bail.

Full excerpt here.

Here's another excerpt from the AlwaysOn Network, a Silicon Valley think-site:

"OK, nothing in that one, let’s keep going.” Dr. Solon Finkelstein was cranking through these at a pretty good clip. About a minute each.

The light box seemed like something out of the 1970’s. Films were clipped in two rows to some white flexible plastic. Dr. Finkelstein would hit a button and a motor would whir and the films would move to the left, wound onto some spool buried in the machine and a new set of films would roll into view.

“I’ve been doing these since 1967, you know. Not much has changed. Oh, the film is better, but the rest of this…” he waved his hands in front of the contraption.

Full excerpt here.
Book info here.
Author info here.

**Late Additions: Two podcasts **
Podcast with Andy Kessler with Podtech.net's John Furrier.
Podcast with Kessler hosted by Glen and Helen at InstantPundit.com

 

Interested in writing a guest-column on disruption? Contact The Disruption Group here.

Q&A With Andy Kessler on the Disruption of Doctors

Andy Kessler is a former tech guy, former Wall Street analyst, former hedge fund manager. He has written three books on the investment world, chock full of hilarious and revealing stories, insightful analysis and wisecracks.

In pursuit of the next big investment score, he wrote The End of Medicine: How Silicon Valley (and Naked Mice) Will Reboot Your Doctor, published this week. It  has Kessler's trademark bawdy stories and acid observations, but it is an outsider's examination and diagnosis of an industry that looks poised for change.  We traded emails with Andy to learn a bit more.

 

Q: Andy, what got you interested in looking at the medical business and what got you to thinking that it is ripe for disruption?

I've spent over 20 years tracking the technology business for Wall Street, as an analyst and then as an investor.

The only thing I really learned was to find the silicon. Once you find a market that is attacked by silicon, you only have to wait for big markets to come into being from nothing. Silicon gets cheaper every year by 30%, it halves in price every two years. If you find something that works today, but is too expensive, then wait a bit and the fireworks start.

I was bored looking at traditional markets, computing, telecom, wireless, even music and video. I drifted around for a while, sniffing at other interesting things when I learned that a friend was diagnosed with cancer, by accident, as he had banged his head skiing and an X-Ray and CT scan showed a tumor on top of his neck. A brother-in-law had a heart attack. I wondered if silicon could be found in medicine to be able to detect disease much earlier. I was astounded by what I found.

Ripe for disruption is an understatement. $2 trillion a year is spent on healthcare in the U.S. and it is quickly on its way to $3 trillion. Doctors drive medicine and are a large component of costs which rise by double digits each year. If silicon can make its way into diagnosis, perhaps costs could stop rising and at the same time provide better care.

Q: Are doctors to become the bank tellers of their industry, to be replaced by better, smarter, automated processes or online procedures that customers would prefer to deal with?

Think about what happened to telephone operators. Switches came along and performed their function better and cheaper. Eventually, switching happened so quickly, telephone calls could become cheap and ubiquitous. A machine embedded the intelligence of the operator.

Same for bank tellers. A slightly more complicated task, ATMs embed the intelligence of the teller into silicon and software and lower the cost of transactions.

Same for auto mechanics. They fix the problem, but silicon diagnoses what is wrong with autos today, embedding the intelligence of the mechanic into the system. At $60-75 per hour charged by service stations for labor, the payback for an automated diagnosis system is quick.

The same thing happened to stock traders…So why not doctors. I went for a physical and my doctor took my blood pressure, looked into my ears and the took out a rubber hammer and

banged my knee. $440 for nothing. Was I going to have a heart-attack? He couldn't tell me. Could I have a tumor the size of a golf ball on top of my neck? No way to tell looking in my ears. He was flying blind.

But new technology exists to do powerful diagnosis, and embed the intelligence of front line doctors into silicon and software. 256 slice CT scans that turn into high resolution 3D images that can be flown through looking for atherosclerosis to avoid heart attacks. Biomarkers and molecular imaging, all silicon based, will be able to detect unique proteins from cancer cells five years early. This will change what is spent on chronic care by huge amounts.

The trick is to get down the learning curve and make these tests cheap and routine.

Q: Ok let's cut out doctors. I am all for that. But they do a lot of thinking, don't they? Just like equity analysts. Can we really automate doctors? While we are at it, can we automate stock picking and eliminate analysts? Apart from in commodities, analysts don't scale well either.

First, not all doctors. Just the front-line doctors.

My friend had a tumor the size of a cocktail olive found on the top of his neck, by accident. If he hadn't banged his head skiing, he would probably be dead right now.

The idea is to look inside each of us. Front line doctors, internists, family doctors, can't do that. They can only guess.

Nature is the screen for heart disease and cancer. When you have a heart-attack, the system declares that you have arteriosclerosis. Couldn't you have told me ahead of time and avoid the midnight ambulance ride?

Cancer is worse. You piss red or your shoulder hurts or you’re throwing up dinner and after exhaustive tests, they find a tumor and declare you have six months to live and even chemo and wonder drugs are a long shot.

Using technology, we can scan for all sorts of proteins in our blood and do a much better job of finding cancer early. Five years early. Doctors can't do that. There are no symptoms. They would never know. But cheap technology can know. Smaller, cheaper, faster, better. In this case it is cheaper and better than doctors.

The security analyst comparison may not work, but the trader comparison does. You can trade in milliseconds huge blocks of stock anonymously, while using a trader requires phone calls and paper trails and confirms and moving the market, etc.

Specialists on the NYSE and doctors may be in the same boat: Progress bypasses them.

Q: Maybe this question is too simple, but from a customer's point of view, what is the broken part of the medical business and what might be the easiest way to fix it? Ie Convert the macro observations into a business idea.

Doctors are human and don't scale. Get them out of the equation and you have a business that can get smaller, cheaper, faster, just like everything else silicon valley touches.

Consumers can do their own tests, and then only see specialists when they need them. (No pun on the NYSE, but same concept!)

Q: Cancer is a big killer today, yet doctors and patients will tell you that despite all the advances in chemotherapy, it is still a crapshoot. Did you come across any technologies that might change that?

Mostly, I spent time looking at early detection, the ability to find cancer early enough so that treatment is simple and effective, directed radiation, surgical removal, heating, freezing, melting via directed ultrasound, etc. Detected early, cancer tumors are microscopic, a million cells vs. later stage tumors the size of a cocktail olive or golf ball with a billion cells. These microscopic tumors can be treated without affecting much surrounding cells, almost impossible with later stage larger tumors, hence chemo. So the earlier, the better.

Having said that, I did see imaging techniques involving probes tagged with radiation, that find these early microscopic tumors and  then light them up for PET scans. There is research going on in increasing the radiation dose tagged to these probes, meaning that  they not only find cancer tumors, but directly apply radiation to  them. Interesting, but very early.

Q: Ok let's invest in some medical companies or startups. What are your picks for either companies or technologies to consider?

There really isn't a business model for early detection, not yet.  There is more of a negative for expensive pharmaceuticals and  treatment centers, the day that heart disease, stroke and cancer begin to subside in numbers.

However, sometime in the next several years, as the silicon and software and algorithms developed for early detection begin to get cheap enough, these business models will  emerge, and you will see venture capitalists step up to fund interesting companies and IPOs of the hot new early detection players. 3-D imaging, computer aided detection, biomarkers, molecular imaging probes, nanotech scan devices for antibody chips, these are all areas that we will see companies emerge.

**Other Information**

The Disruption Group lists the results from disruption, including new revenue streams and sustainable, high return on equity.  The website also has a CEO Guide to the Benefits of Disruption (pdf)

Q&A With Pip Coburn, Tech Strategist & Change Artist

Pip Coburn is a technology strategist with a unique perspective on tech, investing and social change.

As head of UBS's global tech strategy from 1999-2005, Coburn had a strong following on Wall Street, for his ideas as well as his irreverent writing.

Now as head of Coburn Ventures, Pip's bi-weekly Waypoints continues to gain currency for its study of change. With the publication this week of Pip's first book, The Change Function: Why Some Technologies Take Off And Others Crash and Burn, we thought it would be worthwhile to pose some questions to Pip on tech winners, tech losers and other lessons about change.

Financial Post Book Review - The Change Function.

Full archive of On Disruption columns published in the Financial Post.

Q: The Change Function centers in part on the pain of technology adoption. Yet pain is not something that technologists or Wall Street investors tend to focus on or even be aware of. What got you started on this?

A: One day I stepped out of the elevator -- after 11 years of thinking about change mind you -- and thought about all those dot-coms that had come visited me and what they must have been thinking as they had gotten off an elevator to see me and I thought: "they were thinking about themselves." Not in an evil way of any sort after all their job was to raise money but rather in a way that made them very poor at "getting" their users.

In a 40 page pitch book there might be only a slide or two talk about the users and they were often pretty big picture in nature.

So I thought that didn't seem so good. I thought the suppliers provided technologies - a necessary condition but in no way sufficient.

It was the users that mattered!

So if we asked a user to adopt a new technology we were really asking them to change a habit and here is where the pain comes in. Our Change Function suggests that a user will adopt a new technology if the level of pain in their current situation is higher than their perceived pain of adopting a possible solution.

Q:  In the book you have a consistent theme, and pardon me if I get this wrong, that its time for tech companies and execs to abandon Moore's law, on price performance, and Grove's law, on 10x disruptive changes. These guys are demigods to an industry. Are you saying they are wrong? Or are these ideas just 10 -15 years past their sell-by dates and nobody noticed?

A: They are not wrong.

But rather their inputs have always been limited to acting as necessary conditions of supply but neither have direct insights into what users want. In previous times the technology industry was so self-absorbed that it got confused that supply was the same as demand! Build it and they will come.

Q: Can you give us an example of a tech co. or a product that was, in your mind, absolutely on the wrong track by sticking with Moore and Grove for too long?

A: Countless products.

A "favorite" of mine is the tablet PC.

Price has dropped, the technology keeps getting "better" but very few people care as we have moved to a society very comfortable with keyboards that feels very little deep need to "write"

Q: In the book, you list some new technologies that seem to be winners, like wireless email or Research In Motion's Blackberry. If we look at the change function as a starting point, what would be some of elements of the next or new crisis points for wireless email users? And since about 6M people have BlackBerries, what is the real pain point for the next wave of adopters?

A: Tough one but…

I think RIM needs the next level of users inside the enterprise to adopt. RIM does not have an unfair sustainable advantage in the consumer space.

So the same elements of "always on/always available" and "you won't miss anything" are important abstracts. Additionally as Clay Christiansen suggested, RIM can market that RIM allows you to be productive in 30 second intervals.

Now the problem is that if consumers bring other solutions to the enterprise from home the market might be encroached. Many responses such as: Make additional office functionality available through the device that can not be integrated otherwise. Meanwhile I would continue to get celebrity endorsements and placements so it remains the Kleenex of the space.

Q: On the side of a tech that looks less promising, you mention RFID. If you were to counsel an RFID company, what advice do you have that could find a crisis for their solution?

A: Build your company with a long lift off in mind. Identify niche apps that are crisis points to generate revenue to stay in business from here to liftoff.

Patience and persistence.

Q: Tell me about Coburn Ventures. Is this an independent equity research shop or a tech consultancy or an investment fund or all of the above?  For equity research, I think we would both say, some of the biz has been commoditized.  So what is the crisis you solve and what is the perceived pain of adoption?

We are called "ventures" as in many activities: we provide a way of thinking and decision making that hopefully helps our clients in making great investment decisions.

I think folks are confused about tech, telecom, media and internet investing and the average experience of those covering it may be going down as opposed to going up. I think what we provide is a holistic view of why the changes across the entire space take place and how they are interconnected all the way thru to the stocks in one stop. We are fortunate to have developed a framework that many folks seem to think makes understanding the whole mess easier. We don't know anyone that has had the experience and training to do what we are doing so the direct competition is very very low.  So far as the total perceived pain of adoption goes: we do our best to speak English and eliminate acronyms and hopeful discuss trends in an engaging fashion that connects easily with users.

Those are our hopes.

Q: Pip, I think I have been too boring in my questions. We are both stock jocks in a way, so hit me with a great buy and an undiscovered short and tell me how the change function helped you look at these.

A: Long: Oracle. After 11 years of avoiding the name we went long about a year ago -- the change function helped us see just how large the switching costs would be for enterprises.

Short: Keane. The change function helped us in our assessment of how hard it will be for Keane to execute its hiring and integration plan in India in order to just stay current with other IT service providers with better brands who have been hiring in India for quite a while.

Q: Funniest- weirdest- most captivating tech development you have seen or work you have done this week?

A: Watching YouTube.com -- the video in which scientists dropped mentos into diet coke.

Hard for folks who haven't seen it yet but this is compelling content by almost anyone’s standard....  So-called user generated content is tremendously under appreciated by the investment world but videos like this have created "ah-hah" moments.

Q: I am with you on YouTube. Let's take it further: who gets displaced or destroyed here? Broadcasters? Cable cos? Nobody?

A: Depends on time frame.

Content is routing around distribution steadily -- will take a while but what will be sold by cables will have to evolve across ten yrs. Local broadcasters don't look to have a way out so far as I can see

Q: You are a multi-faceted guy.  Tell me what you learned from your work on the Masiphumulele project in South Africa?

To start on what I saw and learned in a short stay in South Africa is hopeless but maybe I learned when working in one of the townships where 85% of folks live in shacks and 30% have HIV and most kids get one meal a day that after a striking period of discomfort I was able to connect and work and smile and laugh with people and children I had only moments before met. The experience was eye opening.

From a tech point of view the kids were highly interested in cell phones and sending email and cruising the internet.

Q: You are also involved in the Yi-Tan community project.  What is Yi-Tan all about?

A: We like connecting folks as a key part of Coburn ventures. Yi-tan is a community we have helped establish with our great friend Jerry Michalski to bring together tech folks and investing folks once a week to talk about key issues in the industry. Yi-tan itself means conversations about change.

**Other Information**

The Disruption Group lists the results from disruption, including new revenue streams and sustainable, high return on equity.  The website also has a CEO Guide to the Benefits of Disruption (pdf)

Inspired by Harvard's Christensen on Disruption

My eyes were opened when I read Harvard Prof. Clayton Christensen's books on disruptive innovation. 

In reading his books, I developed a better understanding of my work in the past 10 years as an investment analyst. And it shed light on some important questions I probed as a management consultant:

• Why is it that competitors dismissed disruptive innovations as inferior?
• Why did the companies neglect seemingly less attractive markets with better profit potential than less lucrative mainstream markets?
• How could an incompatible or niche market product be more successful than a product designed to appeal to a broad market segment?
• How could companies make the leaps of faith required to pursue unproven markets?
• What were the signs that a new disruptive innovation was taking hold?

I will start with the most recent book first, Seeing What's Next.  Christensen dismisses Wall Street analysts for their inability to see beyond current trends. I think he's right. This is the toughest challenge on Wall Street as in any business.

Extrapolating future scenarios from current trends is a dangerous business and it seldom works for investors.  And it fails miserably as a method to discover the next big thing, which a lot of businesses try to do. 

A new framework for analyzing identifying tech trends is needed and Christensen's theories on disruptive innovation serve as a good starting point, and an inspired way to think about innovation.

** Resources**

An excerpt from Clayton Christensen & Innosight's newsletter, Strategy & Innovation, looked at four industries now facing disruption in a guest column by Michael Urlocker, CEO of The Disruption Group.

Archive of The Disruption Group in the news.

The Disruption Group lists the benefits of disruption, including new revenue streams and sustainable, high return on equity.  The website also has a CEO Guide to the Benefits of Disruption (pdf)

The Innovator's Battle Plan, Excerpted from Seeing What's Next and published in Harvard Business School's Working Knowledge, Sept. 2004

USA Today excerpted Christensen's second book, The Innovator's Solution.

BusinessWeek excerpted Christensen's first book, The Innovator's Dilemma.

Preview videos of author Clayton Christensen speaking to a business audience in Cape Cod, available at the Washington Speakers Bureau.

Amazon.com list of Christensen's works.