Secrets of their success
What separates the legendary CEO from the chronically dissatisfied cubicle dweller? It's not innate talent, argues Tipping Point author Malcolm Gladwell in his new book.
By Jennifer Reingold, senior writer
Last Updated: November 19, 2008: 7:41 AM ET
Malcolm Gladwell's new book demystifies the "outliers."
P&G and Goldman are good examples of companies that think talent should be something you develop, not something you acquire, says Gladwell.
(Fortune Magazine) -- In the business world, managing talent is one of those topics that are both overanalyzed and misunderstood. What separates the legendary CEO from the chronically dissatisfied cubicle dweller?
In his provocative new book, Outliers: The Story of Success (Little Brown), Malcolm Gladwell makes the case that the answer isn't innate talent. New Yorker writer Gladwell, also author of The Tipping Point and Blink, sat down with Fortune to talk about Bill Gates' lucky break, why Asians are good at math, and why some of us aren't destined for success - but still can make it big.
Fortune: What exactly is an outlier?
Gladwell: It's a technical term for a phenomenon that is outside normal experience. Scientists use it all the time when they are graphing data. You've got a nice little bell curve, and then you have a couple of things that are way out here. Well, this book is about people who are way out there.
F: How did you become interested in this topic?
G: I was interested in writing about success. I just became convinced that our explanations [of what drives it] were lacking. We have the kind of self-made-man myth, which says that super-successful people did it themselves. And we have a series of other beliefs that say that our personality, our intelligence, all of our innate characteristics are the primary driving force. It's that cluster of things that I don't agree with.
The premise of this book is that you can learn a lot more about success by looking around at the successful person, at what culture they belong to, what their parents did for a living. Successful people are people who have made the most of a series of gifts that have been given to them by their culture or their history, by their generation.
F: Talk about Bill Gates. The mythology is that he was spontaneously drawn to computers. But you say that's not the case.
G: Bill Gates has this utterly extraordinary series of opportunities. When he's 13, it's 1969. He shows up at his private school in Seattle, and they have a computer room with a teletype machine that is hooked up to a mainframe downtown. Anyone who was playing on the teletype machine could do real-time programming. Ninety-nine percent of the universities in America in 1969 did not have that.
Then, when he was 15 or so, classmate Paul Allen learned that there was a mainframe at the University of Washington that was not being used between two and six every morning. So they would get up at 1:30 in the morning, walk a mile, and program for four hours. When Gates is 20, he has as much experience as people who have spent their entire lives being programmers. He has this incredible headstart.
F: What link does practice have to success?
G: The 10,000-hours rule says that if you look at any kind of cognitively complex field, from playing chess to being a neurosurgeon, we see this incredibly consistent pattern that you cannot be good at that unless you practice for 10,000 hours, which is roughly ten years, if you think about four hours a day.
F: You also talk a lot about culture. How does it affect math skills, for example?
G: We give kids from around the world the same set of math tests, and every time we get the same results: America is just below average, and then at the very, very top are Singapore, Hong Kong, Japan, South Korea, and Taiwan. It occurs again and again.
There's an ultimately unconvincing argument that this has to do with IQ. I think what it has to do with is culture. Asian culture has a profoundly different relationship to work. It rewards people who are persistent.
Take a random group of 8-year-old American and Japanese kids, give them all a really, really hard math problem, and start a stopwatch. The American kids will give up after 30, 40 seconds. If you let the test run for 15 minutes, the Japanese kids will not have given up. You have to take it away.
I argue that this has to do with the kind of agriculture pursued in the West and the East going back thousands of years. I have ancestors who were peasant farmers in Western Europe in the Middle Ages. They probably worked 1,000 hours a year, if that. In the winter, they slept. They drank a lot of beer.
These Asian cultures are all wet-rice agricultural economies. Growing rice is this extraordinarily complex, labor-intensive activity that requires not just physical engagement but mental engagement. So a farmer in 14th-century Japan or 14th-century China was working 3,000 hours a year - three times longer. I know it sounds hard to believe, but habits laid down by our ancestors persist even after the conditions that created those habits have gone away.
F: You share a fascinating story about culture and airline safety.
G: Korean Air had more plane crashes than almost any other airline in the world for a period at the end of the 1990s. When we think of airline crashes, we think, Oh, they must have had old planes. They must have had badly trained pilots. No. What they were struggling with was a cultural legacy, that Korean culture is hierarchical. You are obliged to be deferential toward your elders and superiors in a way that would be unimaginable in the U.S.
But Boeing (BA, Fortune 500) and Airbus design modern, complex airplanes to be flown by two equals. That works beautifully in low-power-distance cultures [like the U.S., where hierarchies aren't as relevant]. But in cultures that have high power distance, it's very difficult.
I use the case study of a very famous plane crash in Guam of Korean Air. They're flying along, and they run into a little bit of trouble, the weather's bad. The pilot makes an error, and the co-pilot doesn't correct him. But once Korean Air figured out that their problem was cultural, they fixed it.
F: So let's broaden this out. Are there lessons in this book that are applicable to the business world?
G: Yes. Instead of thinking about talent as something that you acquire, talent should be thought of as something that you develop. Procter & Gamble (PG, Fortune 500) is a great example of a company that does that and has prospered as a result. Look around Wall Street, or what's left of it today, and you'll see lots and lots and lots of people from Goldman Sachs (GS, Fortune 500). That's not a coincidence. It's because they took their mission to invest in people seriously.
F: Should people be expected to take the issue of developing talent seriously right now, in the middle of a crisis?
G: Paradoxically, this might be the perfect time. When it's easy to make money, you have no incentive to think about development of talent. Now, you're forced to. At least that's my optimistic hope.
Thursday, November 20, 2008
Tuesday, November 18, 2008
What Caused the Big Slide in Oil Prices - hint it's not supply and demand
Friday, Nov. 14, 2008
What Caused the Big Slide in Oil Prices
By Ari J. Officer
On July 11, when the price of crude oil peaked at $147.27 per barrel, SemGroup, a major oil distributor based in Tulsa, Okla., was only a week or so away from a potential $5 billion payoff. Instead, the company imploded. And soon afterward, so did the price of oil, dropping some 60% in the subsequent months to a recent price below $60.
Clearly, demand for oil didn't fall that much, but the price of oil isn't set by demand alone. It's the product of an extremely volatile mixture of speculation, oil production, weather, government policies, the global economy, the number of miles the average American is driving in any given week, and so on. But the daily price is actually set — or discovered, in economic parlance — on the futures exchange. In late June and early July, speculators in oil futures battled each other, suspecting that a top was near. In the ensuing weeks, oil would come crashing down to earth as traders everywhere — including hedge funds, banks, and pension funds — unwound their positions. And as SemGroup demonstrated, getting the timing wrong on this great unwind can have catastrophic results. (Read "Iraq's Pain at the Pump"
SemGroup was short oil. Massively. That is, it had bet the price was going down by contracting to sell millions of barrels of oil it did not own at a future date, on the assumption that the price would fall and SemGroup could supply the barrels at a lower price and pocket the difference. Three days after oil peaked, as it still threatened new all-time highs, the New York Mercantile Exchange (NYMEX) called margin on SemGroup, forcing the firm to put up more cash collateral to back its losing positions. Unable to raise the capital, SemGroup sold its entire crude oil futures position the very next day to the Barclays investment bank. SemGroup posted a $2.4 billion loss in the process, forcing it into bankruptcy.
Given that SemGroup lost that much money as oil prices soared, it must have amassed a short position of at least 100 million barrels of crude — that's about five times what the U.S. has on hand at any given moment. Had SemGroup bought back the oil on the open market, oil prices would have continued to skyrocket, feeding off the frenzy. Fortunately for consumers, Barclays was ready to assume SemGroup's position.
But there's far more to oil's big price plunge. SemGroup, of course, was now out of business, and as similar behavior came to a halt at other firms, oil lost its upward momentum. Enter the financial crisis, which dealt the finishing blow. The dollar had weakened during the first revelations of the mortgage crisis, but as that crisis spun out of control into an international credit crisis, the currency markets favored the U.S. dollar. Since oil is traded internationally, as the dollar gained value, the price of oil in dollars had to come down. A weakening dollar played a role on the way up; a strengthening dollar on the way down. But the Euro has only dropped 20%, and oil three times that. So currency is not the whole story, but certainly a major trigger. (Read "Four Steps to Ending the Foreclosure Crisis".)
Stock prices, too, began to tumble as talk of bailouts and rescue plans permeated the media. The price of oil began to fall, and speculators had to put up more money for margin, but their other investments were simultaneously declining. Thus, they were forced to close out their long positions and sell oil. As everything spun out of control, everyone wanted out: a full liquidation. Even diversified investors tend to hold long positions in commodities as inflation hedges. Losses in stocks forced these long speculators to liquidate their positions in all commodities.
See TIME's Pictures of the Week.
See the Cartoons of the Week.
With speculators' positions massively leveraged, holding only a fraction of the value of the oil they had purchased, they scrambled to cover losses. Not only did oil prices go down, but other assets also declined significantly. The farther oil prices went down, the more de-leveraging and liquidation had to occur to cover these losses. The financial crisis was the spark; de-leveraging, the fuel. A chain reaction occurred as traders who had bought oil saw their money disappear in oil and other losing investments. And with a credit crisis looming, major players interested in maintaining a long position could not raise capital to cover margin requirements.
This de-leveraging also occurred among investment banks. The failings of major financial institutions have directly fueled the decline in oil prices. Many banks' internal commodities trading funds — Citigroup, for instance, owns Phibro, a major commodities trader — have generated excellent returns over the past few years.
Translation: the banks were long oil and likely helped effect high oil prices. But with these banks failing, and prices already declining, they too closed out those long positions and helped bring prices lower. Oil prices may have risen on panic, and fear may have played a role in their recent fall. The mechanism of the fall, however, was a massive liquidation.
Where, might you ask, does demand and supply of the commodity come into play? Maybe in an economics textbook somewhere. Perhaps the credit crisis will slow demand somewhat, but certainly not enough to split the price in half. True, recession may be upon us, and that might help justify lower oil prices, but that fear is not the real story behind the fall itself. Remember: it was not great prosperity that doubled the price.
This is not the story of oil as a commodity, but instead the story of traders who transact in the future price of oil. These are the same traders who previously brought this price to record highs. The price of oil went up tremendously; the price of oil crashed. Unfortunately for consumers, the story is not over yet, and we're just along for the ride.
What Caused the Big Slide in Oil Prices
By Ari J. Officer
On July 11, when the price of crude oil peaked at $147.27 per barrel, SemGroup, a major oil distributor based in Tulsa, Okla., was only a week or so away from a potential $5 billion payoff. Instead, the company imploded. And soon afterward, so did the price of oil, dropping some 60% in the subsequent months to a recent price below $60.
Clearly, demand for oil didn't fall that much, but the price of oil isn't set by demand alone. It's the product of an extremely volatile mixture of speculation, oil production, weather, government policies, the global economy, the number of miles the average American is driving in any given week, and so on. But the daily price is actually set — or discovered, in economic parlance — on the futures exchange. In late June and early July, speculators in oil futures battled each other, suspecting that a top was near. In the ensuing weeks, oil would come crashing down to earth as traders everywhere — including hedge funds, banks, and pension funds — unwound their positions. And as SemGroup demonstrated, getting the timing wrong on this great unwind can have catastrophic results. (Read "Iraq's Pain at the Pump"
SemGroup was short oil. Massively. That is, it had bet the price was going down by contracting to sell millions of barrels of oil it did not own at a future date, on the assumption that the price would fall and SemGroup could supply the barrels at a lower price and pocket the difference. Three days after oil peaked, as it still threatened new all-time highs, the New York Mercantile Exchange (NYMEX) called margin on SemGroup, forcing the firm to put up more cash collateral to back its losing positions. Unable to raise the capital, SemGroup sold its entire crude oil futures position the very next day to the Barclays investment bank. SemGroup posted a $2.4 billion loss in the process, forcing it into bankruptcy.
Given that SemGroup lost that much money as oil prices soared, it must have amassed a short position of at least 100 million barrels of crude — that's about five times what the U.S. has on hand at any given moment. Had SemGroup bought back the oil on the open market, oil prices would have continued to skyrocket, feeding off the frenzy. Fortunately for consumers, Barclays was ready to assume SemGroup's position.
But there's far more to oil's big price plunge. SemGroup, of course, was now out of business, and as similar behavior came to a halt at other firms, oil lost its upward momentum. Enter the financial crisis, which dealt the finishing blow. The dollar had weakened during the first revelations of the mortgage crisis, but as that crisis spun out of control into an international credit crisis, the currency markets favored the U.S. dollar. Since oil is traded internationally, as the dollar gained value, the price of oil in dollars had to come down. A weakening dollar played a role on the way up; a strengthening dollar on the way down. But the Euro has only dropped 20%, and oil three times that. So currency is not the whole story, but certainly a major trigger. (Read "Four Steps to Ending the Foreclosure Crisis".)
Stock prices, too, began to tumble as talk of bailouts and rescue plans permeated the media. The price of oil began to fall, and speculators had to put up more money for margin, but their other investments were simultaneously declining. Thus, they were forced to close out their long positions and sell oil. As everything spun out of control, everyone wanted out: a full liquidation. Even diversified investors tend to hold long positions in commodities as inflation hedges. Losses in stocks forced these long speculators to liquidate their positions in all commodities.
See TIME's Pictures of the Week.
See the Cartoons of the Week.
With speculators' positions massively leveraged, holding only a fraction of the value of the oil they had purchased, they scrambled to cover losses. Not only did oil prices go down, but other assets also declined significantly. The farther oil prices went down, the more de-leveraging and liquidation had to occur to cover these losses. The financial crisis was the spark; de-leveraging, the fuel. A chain reaction occurred as traders who had bought oil saw their money disappear in oil and other losing investments. And with a credit crisis looming, major players interested in maintaining a long position could not raise capital to cover margin requirements.
This de-leveraging also occurred among investment banks. The failings of major financial institutions have directly fueled the decline in oil prices. Many banks' internal commodities trading funds — Citigroup, for instance, owns Phibro, a major commodities trader — have generated excellent returns over the past few years.
Translation: the banks were long oil and likely helped effect high oil prices. But with these banks failing, and prices already declining, they too closed out those long positions and helped bring prices lower. Oil prices may have risen on panic, and fear may have played a role in their recent fall. The mechanism of the fall, however, was a massive liquidation.
Where, might you ask, does demand and supply of the commodity come into play? Maybe in an economics textbook somewhere. Perhaps the credit crisis will slow demand somewhat, but certainly not enough to split the price in half. True, recession may be upon us, and that might help justify lower oil prices, but that fear is not the real story behind the fall itself. Remember: it was not great prosperity that doubled the price.
This is not the story of oil as a commodity, but instead the story of traders who transact in the future price of oil. These are the same traders who previously brought this price to record highs. The price of oil went up tremendously; the price of oil crashed. Unfortunately for consumers, the story is not over yet, and we're just along for the ride.
Thursday, November 13, 2008
Failing Like Japan, Let Co's Fail, clear out system to enable growth
Failing Like Japan
By Bill Mann
November 11, 2008
In 1990 I spent a heady summer living in a very rural part of Japan. It was an incredible time to be there, the dawning of the age of Japanese hegemony. Japanese land, which comprised less than 0.1% of the world, was being valued at an estimated $20 trillion dollars, or 20% of the world's wealth at that time. Business leaders the world round were flooding into Japan to study the "Japanese Economic Miracle," and sought to implement its keiretsu and zaibatsu corporate structures.
We were in the middle of nowhere, but all around our little town, land was being chewed up to build golf courses that offered memberships primarily to businessmen from Okayama and Osaka, cities that were each a multi-hour ferry and train ride away. The cost of membership ran in the hundreds of thousands of dollars, and there was a long waiting list.
It didn't last.
The trouble with the Japanese miracle was that its basis wasn't management superiority -- though the country had some of the most admired companies in the world, including Toyota (NYSE: TM) and Sony (NYSE: SNE). Rather, the miracle in Japan was based upon over-loaning from the government to industrial conglomerates, which led, inevitably, to a bubble.
Unfortunately, the after effects of the Japanese bubble persist to this day, and they have deep implications as the American government considers making bailout loans to the Big Three: General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler.
Why Japan continues to fail
In late 1989 the Nikkei 225, Japan's leading stock index, hit an intraday high of 38,957. Today, 19 years later, it's at 8,800. This multi-decade loss speaks to two things -- one, just how out of control Japan's asset bubble was, and two, for the sake of maintaining jobs, the Japanese government has not not made the hard decisions that would have allowed the country to grow.
In the aftermath of the bubble, Japan's government rushed in to prop up its banking system, which was teetering under the weight of nonperforming loans. Rather than letting businesses fail, this has had the effect of propping them up to continue operating. To this day the scope of the problem is still not known.
Without this information, investors both in Japan and outside have made a logical conclusion -- to take their investment dollars elsewhere. Japan's industrial sector has failed to meet its cost of capital over the last 20 years, in large measure because the government has allowed capital-destroying companies to continue to operate. Had these companies been allowed to fail, Japan long ago could have flushed out its system and gotten back on the road to economic health. In the name of protecting jobs, Japan's economy has continued to sputter, punctuated by spectacular bankruptcies in cases where the facade could not hold up. The cost of propping them up has been much, much more economic pain. Japanese call the long economic downturn ushinawareta junen, the lost decade.
Sure, but it's not your job we're talking about
As I look at the pressure being placed on the U.S. government to bail out or even nationalize American auto manufacturers, I see the same faulty logic being used. So desperate is the government to protect these jobs and these massive companies that it is willing to spend taxpayer money to keep Detroit afloat. It might be a good use of capital if the Big Three were thriving companies that had simply suffered from exogenous events that they'd reacted to improperly. But they aren't. These companies are sick and dying, and they have not generated a positive capital return in decades.
It's not as if this were an unpredictable outcome, as I noted in 2003 when GM raised $13 billion in debt to shore up its pension system. To what end would we bail out these companies? To keep them from collapsing? Wake up -- they have already collapsed.
The "end," of course, would be to keep thousands of jobs, particularly in Michigan and Indiana, from disappearing, to keep pensioners from being mauled at a point in their lives when they cannot afford it. These are loyal, good company people. What is happening at the Big Three affects them deeply, and it is both unfair and cruel. To think otherwise would be inhumane. I have some experience here, as my own grandfather's pension withered away as the textile company he devoted his life to collapsed, in no small part because it refused to relocate its factories to cheaper places.
But economic growth only comes when capital is allowed to flow to its most productive uses. I am very sorry, but propping up Detroit's dinosaurs is not productive. They have destroyed capital for a generation. They have too much debt, they have above-market labor costs, they have shown minimal aptitude at developing automobiles that people want to buy at prices that allow the companies to turn a profit. They are losing to Toyota and Honda (NYSE: HMC). Their parts suppliers are, as a group, collapsing, with Dana Holding Corporation (NYSE: DAN) and Visteon (NYSE: VC) teetering on the precipice.
Pain delayed is not pain avoided
There are no good answers here -- none at all. Whichever way we go, there is going to be substantial pain in the American auto industry. But a government bailout of recidivist capital destroyers is a particularly bad idea, as it perpetuates the destruction, and delays capital formation for more productive uses. It is a bitter, bitter pill. Better to let the Big Three take their medicine, attempt to reorganize in bankruptcy and attempt to emerge anew as smaller, more nimble competitors.
At a minimum, it helps keep the Japan scenario off the table. It's been easy to see that the political decisions made in Japan to protect companies and jobs have been destructive. I've often thought that one of the reasons American capitalism is superior is our willingness to allow companies to fail. Now I'm not so sure.
By Bill Mann
November 11, 2008
In 1990 I spent a heady summer living in a very rural part of Japan. It was an incredible time to be there, the dawning of the age of Japanese hegemony. Japanese land, which comprised less than 0.1% of the world, was being valued at an estimated $20 trillion dollars, or 20% of the world's wealth at that time. Business leaders the world round were flooding into Japan to study the "Japanese Economic Miracle," and sought to implement its keiretsu and zaibatsu corporate structures.
We were in the middle of nowhere, but all around our little town, land was being chewed up to build golf courses that offered memberships primarily to businessmen from Okayama and Osaka, cities that were each a multi-hour ferry and train ride away. The cost of membership ran in the hundreds of thousands of dollars, and there was a long waiting list.
It didn't last.
The trouble with the Japanese miracle was that its basis wasn't management superiority -- though the country had some of the most admired companies in the world, including Toyota (NYSE: TM) and Sony (NYSE: SNE). Rather, the miracle in Japan was based upon over-loaning from the government to industrial conglomerates, which led, inevitably, to a bubble.
Unfortunately, the after effects of the Japanese bubble persist to this day, and they have deep implications as the American government considers making bailout loans to the Big Three: General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler.
Why Japan continues to fail
In late 1989 the Nikkei 225, Japan's leading stock index, hit an intraday high of 38,957. Today, 19 years later, it's at 8,800. This multi-decade loss speaks to two things -- one, just how out of control Japan's asset bubble was, and two, for the sake of maintaining jobs, the Japanese government has not not made the hard decisions that would have allowed the country to grow.
In the aftermath of the bubble, Japan's government rushed in to prop up its banking system, which was teetering under the weight of nonperforming loans. Rather than letting businesses fail, this has had the effect of propping them up to continue operating. To this day the scope of the problem is still not known.
Without this information, investors both in Japan and outside have made a logical conclusion -- to take their investment dollars elsewhere. Japan's industrial sector has failed to meet its cost of capital over the last 20 years, in large measure because the government has allowed capital-destroying companies to continue to operate. Had these companies been allowed to fail, Japan long ago could have flushed out its system and gotten back on the road to economic health. In the name of protecting jobs, Japan's economy has continued to sputter, punctuated by spectacular bankruptcies in cases where the facade could not hold up. The cost of propping them up has been much, much more economic pain. Japanese call the long economic downturn ushinawareta junen, the lost decade.
Sure, but it's not your job we're talking about
As I look at the pressure being placed on the U.S. government to bail out or even nationalize American auto manufacturers, I see the same faulty logic being used. So desperate is the government to protect these jobs and these massive companies that it is willing to spend taxpayer money to keep Detroit afloat. It might be a good use of capital if the Big Three were thriving companies that had simply suffered from exogenous events that they'd reacted to improperly. But they aren't. These companies are sick and dying, and they have not generated a positive capital return in decades.
It's not as if this were an unpredictable outcome, as I noted in 2003 when GM raised $13 billion in debt to shore up its pension system. To what end would we bail out these companies? To keep them from collapsing? Wake up -- they have already collapsed.
The "end," of course, would be to keep thousands of jobs, particularly in Michigan and Indiana, from disappearing, to keep pensioners from being mauled at a point in their lives when they cannot afford it. These are loyal, good company people. What is happening at the Big Three affects them deeply, and it is both unfair and cruel. To think otherwise would be inhumane. I have some experience here, as my own grandfather's pension withered away as the textile company he devoted his life to collapsed, in no small part because it refused to relocate its factories to cheaper places.
But economic growth only comes when capital is allowed to flow to its most productive uses. I am very sorry, but propping up Detroit's dinosaurs is not productive. They have destroyed capital for a generation. They have too much debt, they have above-market labor costs, they have shown minimal aptitude at developing automobiles that people want to buy at prices that allow the companies to turn a profit. They are losing to Toyota and Honda (NYSE: HMC). Their parts suppliers are, as a group, collapsing, with Dana Holding Corporation (NYSE: DAN) and Visteon (NYSE: VC) teetering on the precipice.
Pain delayed is not pain avoided
There are no good answers here -- none at all. Whichever way we go, there is going to be substantial pain in the American auto industry. But a government bailout of recidivist capital destroyers is a particularly bad idea, as it perpetuates the destruction, and delays capital formation for more productive uses. It is a bitter, bitter pill. Better to let the Big Three take their medicine, attempt to reorganize in bankruptcy and attempt to emerge anew as smaller, more nimble competitors.
At a minimum, it helps keep the Japan scenario off the table. It's been easy to see that the political decisions made in Japan to protect companies and jobs have been destructive. I've often thought that one of the reasons American capitalism is superior is our willingness to allow companies to fail. Now I'm not so sure.
Subscribe to:
Posts (Atom)