We all like to hear a resounding “yes” in response to our questions. But sometimes, a “no” can get us what we really want…
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We all like to hear a resounding “yes” in response to our questions. But sometimes, a “no” can get us what we really want…
Podcast: Play in new window | Download
The essence of a strong brand is differentiation in a way that makes customers want to use your product or Service. JetBlue has announced a decrease in legroom and increase in baggage fees in an attempt to boost lagging profits. All I can say is, “idiots.” The entire key to branding is to have strong differentiation from your competitors. In Airlines, the only differentiators are where you fly, your prices, and your service experience.
For JetBlue, service experience has long been a serious differentiator. I would go far out of my way to fly JetBlue instead of other airlines, and I’d pay more, because the experience was just so nice. The fact that the fares were competitive was nice, but I would have paid a premium for the level of service I got.
So now that profitability is lagging, how does JetBlue choose to respond? By attempting to maintain low price position and moving towards a low service position too. Heck, what are commodities for, if not as a dying place for once-strong brands who bow to the short-sighted idiocy that has become the financial markets.
The current JetBlue executives should have their salaries and bonuses clawed back in five years if this does, indeed, herald the beginning of the end of a once-strong brand.
Why do companies fail to learn from their mistakes?
With so much riding on success, you would think that companies would be better at learning. Amazingly, it seems as if they fight tooth and nail against learning, often with disastrous results. The reasons, however, make a lot of sense. And once you understand the reasons, you just might be able to make a difference. If not, at least you can feel self-righteous when the insanity starts.
Few of us think much about learning when not in school or in a training environment. But learning doesn’t just happen; it takes reflection and thought. Reflection time used to be built into the world. It took three weeks for a head-office communication to arrive via Pony Express, allowing ample time to ponder and rethink decisions. Now we have overnight letters, junk mail, e-mail, voice mail, fax, cell phones, 30-second-delayed stock quotes, and the expectation that responding immediately is far more important than responding thoughtfully.
Organizations rarely build in time to do thoughtful learning, and when they do, that time is the first to go when emergencies beckon. When we built the original Quicken VISA card, we scheduled a learning debrief and documentation time. But long before the project’s end, other demands squeezed all the slack out of the schedule. The learning review was the first to go. If you don’t do it deliberately, learning won’t happen.
Implementing insights from a learning review is tough. Learning means behavior change. Organizationally, behavior change is daunting.
Think about what organizational change is: It’s changing structure and processes. At the very least, a lot of people must change how they work. Responsibilities, roles, and reporting relationships change. And that’s just in the easy case; learning that your phone system is the bottleneck in your customer service department may demand reworking physical plant and equipment in several locations. Getting the affected people together to coordinate can take weeks. Then new systems must be designed, built, and documented, and everyone must be taught how their jobs have changed. Then there’s still a learning curve for the new procedures. People get up to speed at the new ways of doing things, and only then has the business “learned.” And, oh yes, this all happens in spare time, because the normal workload is still present and has to be carried for the business to survive.
Part of changing the systems and structure is changing the people. A reorg can be done on paper in an afternoon. But changing just one person is hard, even when he or she understands the need for change (Yes, my doctor said to lower my intake of saturated fats, but those cookies at lunch yesterday were so good I just had to eat … six … of them). Ultimately, organizational learning is doomed to failure unless people can learn.
For starters, a lot of learning breaks down because it’s never communicated. Telling someone “Now you report to Sally and your department is no longer sales, it’s account relationships.” still leaves them to figure out how their day-to-day job has changed. They weren’t necessarily privy to the learning discussions, and can’t do anything meaningful without more information about the changes and the context.
Context answers the question “Why is this happening?” It’s especially important when motivating people. People like things to stay the same. But when we find out why the request was made, it suddenly makes sense. Without knowing the “Why?” most change just makes life difficult with no obvious payoff … thus, resistance.
Even if people understand the changes, they may not have the skills for the new job. When Microsoft learned that security matters to customers, Bill Gates proclaimed that all programmers would spend two months just fixing security problems. A great goal, to be sure, but the programmers had spent their careers building systems without regard to security. How can we expect them to suddenly develop the expertise to find—much less fix—any but the simplest security flaws?
And as with any change effort, Microsoft is starting with workers who uniformly lack the skills being developed. Over time, organizational priorities shape the work force. Security-conscious engineers never had a chance to develop their skills at Microsoft, so if they really cared they left years ago for companies more aligned with their style. Those who stayed are the ones who thrive in the “get it out the door and capture the market” mentality. So the change is starting with the employees least likely to intuit how the changes should happen.
Money can come to the rescue by training people. For a simple skill, it can be quick and easy. But training for large skills must be developed, delivered, and practiced. No matter how much we “thrive on chaos” and jump “into the vortex,” new habits take time to develop. Humans only change at a certain rate and we’ve never figured out how to speed that up. The world may change faster than ever, but people just don’t.
The ones who most need to change, however, are the managers. As the organization reshapes itself, resources will shift. That means money and people. Budgets will get slashed. Empires will topple. Even if everyone else is willing, one recalcitrant manager with the right budget authority can halt a learning effort in its tracks. Managers must let go and support the learning for it to happen. Being human, they can have as much difficulty changing their behavior as everyone else.
By now, I’ve probably convinced you that organizational learning is hopeless. But take heart: now that you know why learning is hard, you can deliberately make it easier.
Organizational learning isn’t easy. There’s no perfect solution. Despite the many reasons why learning is hard for individuals and even harder for organizations, it’s just a behavior that can become a habit. Develop the learning habit. Practice moving learning into individual action. Help people change and grow. Over time, the very forces that make change hard will come to your aid: those who don’t like learning will gradually leave, and you’ll attract a culture of people committed to learning. Even when an organization fights it, strong, dedicated action can at least produce pockets of smart business savvy.
Any ideas about how to capture lessons learned for a knowledge base—i.e. getting colleagues to NOT fear repercussions of admitting ‘mistakes’ and/or admitting what they did not know?
First, the Truth: most of us are afraid to admit mistakes or ignorance for good reason. Culturally, we don’t tolerate mistakes. Since first grade, we’ve been scolded, punished, given poor grades, passed over for promotion, ostracized, and belittled for our mistakes. 2003’s most popular TV series is “American Idol II.” The first several episodes were a countrywide mockery of talentless pop-star wannabes who at least had the courage to take a risk in front of 250 million people. Their reward? Public ridicule.
Sometimes we get the message that mistakes are OK. A well meaning, understanding person—usually from the Human Potential movement—says in a soft, caring voice, “It’s not a mistake, it’s a learning opportunity.” Two days later, the team member who didn’t make the mistake is promoted to team leader. It was a learning opportunity, all right. The learning was, “Don’t screw up, follow the rules, and we won’t punish you. You’ll take home your weekly paycheck, get your gold watch at retirement, and all will be well.”
Society’s message is, “Don’t admit mistakes or bad things will happen.” Before people will embrace their not-knowing, you have to make it safe, even desirable, to take risks.
Look first to your reward systems. Most organizations reward outcomes: sell the most, get promoted; meet your ship date, get a bonus; meet your earnings projections, get an analyst’s stamp of approval. The rewards come from reaching an outcome, no matter how it was reached. Imagine Laurie, a shoe salesperson for OutcomeCo. Laurie’s sales tactics work on just 1 percent of the customers. Fortunately, the territory is flush with that 1 percent, so meeting quarterly targets is a breeze. Laurie is motivated to milk the 1 percent, rather than take risks to capture the other 99 percent.
And why should Laurie take risks? Risk taking by its nature produces missed targets much of the time. The solution is to reward the learning process as well as the targets. Imagine LearningCo, where the bonus is based on helping the company move faster toward its goals by gathering useful information, developing better ways of doing things, or identifying what not to do again (mistakes). In LearningCo, Laurie is rewarded for capturing the 1 percent, but is also rewarded for noticing market trends, trying cool new sales tactics that don’t work—no doubt involving unicycles, French horns, and a powdered wig—and inventing cool new products that may someday take over the market.
People do what you pay them for, so pay them to learn. Add personal risk-taking plans to your yearly reviews. Ask, “Are you taking enough risks? How can I help you take more?” Applaud in public (and in private!) when someone fails at something wildly, audaciously new. Celebrate whoever has the wackiest new ideas. Otherwise, time spent thinking outside the box is also time spent thinking outside-the-bonus-structure. Given the choice between outside-the-box poverty and inside-the-BMW business-as-usual, don’t be surprised when people choose the BMW.
It’s hard to reward learning in an outcome-based culture; it takes real strength of conviction. Are you willing to pad your schedule with time for failures and experimentation? Will you step up to the plate and give a larger bonus to someone who learned and failed than to someone who reached an important outcome through sheer luck?
A software company rewarded their flagship product’s manager with a Hawaiian vacation when the product shipped. Since the flagship product accounted for 70 percent of the company’s revenue, the manager was given whatever budget and staff he requested to insure success. He had no need to learn; he could just commandeer more resources. Other managers—whose projects were cannibalized without notice for the flagship project—learned to streamline their development and ship on time with limited resources. Taken at face value, it sounds reasonable to reward the flagship manager more than the other managers, yet he contributed much less to the organization’s ongoing strength and capability. By not rewarding the other managers for their learning in a difficult situation, they eventually lost many of their good performers.
Once the organization structures support risk taking, support the behaviors one-on-one. When you see or hear someone pushing the edge of their thinking, step up and ask questions to push further. Brainstorm with them, and walk the example of encouraging people to push their (and the organization’s) edge. When someone has an idea that could lead to great learning, help her pursue it by giving her time and resources.
Also watch how others treat risk taking and mistakes. If you overhear someone making fun of someone else’s mistake or missed targets, ask them, “I wonder if the mistake was because they were trying something new?” Start exploring in conversation whether those present are taking enough risks. If you’re greeted with cynicism and incredulity, “If we did that, we’d just get fired and lose our bonuses,” celebrate! People are handing you their specific objections to risk taking. You can then ask simply, “What would have to happen for you to feel safe enough go out on a limb and try?”
Even with one-on-one support for your people, it’s safest to structure project reviews as a review of facts. In fact, there’s no need to make a retrospective personal. Limit analysis to an examination of what did and didn’t happen. Keep personal responsibility out of it, and bring in personal commitment only when the team begins exploring the future. Once learning becomes commonplace, people will become comfortable owning their part in what happens.
At project reviews, the team will assume that its own behavior was flawless. The ubiquitous “they” was the source of all problems. “They” delivered materials late. “They” passed restrictive legislation. “They” didn’t provide the needed direction or focus. A team must get “they” out of its system before considering its own part in what happened.
Have everyone gather together facing a whiteboard (so it’s “us” vs. the whiteboard), and make a big list of everything that went wrong, no matter whose fault. List facts without judgment. If specific people are mentioned, remove the blame and just describe circumstances. “Bob handed in the report late” would become “Report handed in late.”
Then make a second list of all the good things that happened. Be specific. “We supported each other” is too vague. “We stayed late and took on each other’s work in order to meet a tight deadline” is just about right. At the end of this exercise, you’ll have a list of specific actions that can serve as a jumping-off point.
For each “bad” action, ask the team:
For each “good” action, ask:
What you’re after is team learning. If Bob handed in a report three weeks late, the only question that mentions Bob is the question, “How can the team help Bob get the report done on time?” By discussing facts and framing the team’s involvement as one of future joint responsibility, you are shifting from a frame of “Who did what right/wrong?” to “What happened, and how can we help it happen better next time?”
Cultures—learning or not—become self-fulfilling prophecies. If your company has a conservative culture, it’s probably full of people who self-selected not to take risks and not to admit mistakes. Shifting that culture means addressing fears with substance: make sure your organization supports risk-taking in its rewards and performance measures. Model that support in your daily interactions. And even then, you’ll get the best learning when you carefully separate judgments from facts, and keep people engaged in finding solutions rather than rehashing blame. Our society does a great job of squelching learning instincts, but with patience, care, and precise communication, you can make it safe for a group to re-create a culture of learning and exploration.
The managing director heads an organization with three vice presidents under him. For the last two years the company has been run this way and has been successful in turning around.
With reorganization on the agenda, it is proposed that one of the vice presidents be appointed as the CEO. This has led to resentment among the other team members. The fallout has been demotivation horizontally and vertically. What could be a “win-win” solution for this issue?
Ego, ego—who’s got the ego? Power, control, ego, and pride seem to account for the lion’s share of business behavior. Emotions at the top are propagated throughout the ranks; problems below may simply reflect problems at the top. So let’s start at the top in fixing the situation.
It sounds like what you really want is a healthy company. A healthy company needs a healthy executive team, and we all know what that looks like: The CEO has the respect and cooperation of the team. The team works well together, with each member bringing their top strengths and competencies to their jobs.
You need to align your executives behind a common vision of what a healthy executive team is. Gather your quarrelsome veeps for a heart-to-heart behind closed doors. They need to clear the air and then align behind a team they can all fully support.
Your executives must agree on the goal that’s really before them: creating a leadership structure that lets the turnaround continue and flourish. They’ll be tempted to include a goal like, “reach an accommodation where we three get what we want.” While that’s win-win for the individuals involved, it neglects the fourth player: the greater life form known as The Company. The company’s health affects everyone else working there. Keeping the company well fed and happy is more important than the personal whims of the vice presidents.
In the book Good to Great (HarperCollins, 2001), Jim Collins’s research shows that business leaders build the greatest companies when they put company interests ahead of personal interests. If each VP defines winning as “I get to be CEO,” then win-win is impossible. But since your VPs are surely great CEO material, they all know that a healthy company is the goal, not personal status and power. So make sure they abandon the goal of win-win and instead shoot for healthy leadership structure.
Your executives should keep one thing in mind: If the CEO slot hasn’t actually been awarded yet, their behavior now is part of their audition. If they’re tanking company morale because it looks like they won’t get the job, they’re demonstrating their unfitness for the position.
The brutal truth, part one: When three people vie for the top spot, two won’t get it. Period.
The brutal truth, part two: The execs must work as a team and support each other. If they won’t, some of them will have to go—and it won’t be the CEO. All three were happy being VPs when they joined; it’s their elevation of one to CEO that’s causing the problem. The passed-over execs need to find a way to support the new corporate structure or leave. There’s no place in an executive suite for members who won’t do their job.
(Oh, yes… If they leave, don’t give them severance! By punting on the hard work of forging a strong team, they’re not earning their salary, much less anything more. You don’t want to send the message that divisiveness is a great way to collect a golden parachute.)
If they decide they want to stay and forge a strong team, it’s time to help them redesign their attitude.
Your executives may spend their time posturing rather than facing the tough emotions that underlie the situation. They need to confront and resolve the real emotional issues in order for the team to function.
Sometimes, just the chance to voice disappointment is enough. Emotions are often most troublesome when they don’t get to run their course. We may consider some emotions (discouragement, worthlessness) so mortifying that we never learn to acknowledge and move past them. But blocking an emotion before listening to it rarely lets us move on gracefully.
Ask your execs to use their feelings to get to their underlying motivations. This can get into sensitive stuff, so they can do this privately and just bring the result to the meeting. Have them recognize and acknowledge their feelings about the situation. Then have them ask, “What is this emotion trying to tell me?” They can follow this thread to find the real issue underlying the bad morale. That issue can then be brought to the group for discussion.
This section is based on my experience with emotions, not on any therapeutic or counseling models. I’m assuming your morale problems come from “everyday” emotional reactions. Severe emotional issues may require therapy. Here are some examples on how I might respond to these emotions.
I feel jealous. Jealousy means someone else has something that you want. Wallow in it for a few minutes, and then realize that someone else’s good fortune isn’t your misfortune. Behind jealousy is “I’m not getting what I deserve.” Sadly, that might be true. Welcome to reality—life isn’t fair. Maybe you deserved the CEO spot, maybe not. Either way, jealousy isn’t healthy for you or the team. You were happy as a VP before. Be happy now. If you can’t, consider therapy or coaching. The issue for the group: how to make sure that each person feels he or she is getting the rewards he or she deserves.
I feel betrayed. Betrayal means someone didn’t fulfill a promise. Who promised what? Be precise. If the board promised you’d be CEO and they didn’t follow through, you may have a legitimate complaint. If a board member mentioned you were in the running, you may have read a promise into that. Talk through the promise and subsequent events with your alleged betrayer and clear the air. Often, however, betrayal is a neat smokescreen for emotions like discouragement or worthlessness, which may be more awkward to confront.
I feel discouraged/small/worthless. Feeling discouraged means you aren’t getting results, and you’re internalizing the cause. Does being passed over for CEO mean you’ve hit your competence limit? Not at all! Promotions are only vaguely related to competence, even in the best of times. We’re raised to believe that every little thing that does (or doesn’t) happen to us directly reflects our ability as human beings. The real world is more complex and usually a lot more arbitrary. If three equal candidates compete for one job, two must be passed over. It’s not about competence; it’s about only having one job opening. The issue for the group: how to identify the executives’ competencies and meld them into their jobs.
I feel contempt. Contempt comes from believing that someone is incompetent in an area you’re super-competent. If you think the new CEO is an incompetent boob, you won’t buy in to the direction, strategy, or tactics he or she is setting. It’s time for persuasion! The issue for the group: Make sure the strategy reflects the entire team’s expertise and buy-in. Spend some time airing doubts, questions, and concerns. Create something that you can believe in. If you can’t, though, it’s time for separation. An executive’s job is to help a company succeed. While the current CEO’s plans may not guarantee success, executive friction, in-fighting, and sabotage will virtually guarantee failure.
I feel hopeless. Hopelessness just means you’ve stopped anticipating future success. So start now! Create a rich image for yourself of how you can make your current position a job that really lets you shine. The issue for the group is how to make that happen.
I feel anger. Anger means you feel threatened. It often comes from fear: fear of survival, of being unworthy, of loss, etc. Dig around for the underlying fear. You can handle some fears on your own. If you feel your survival is threatened, a little financial planning may make it obvious that a $200,000 salary is a tad above the poverty line. Some fears can be brought to the group. If you fear you’ll lose respect because you weren’t promoted, the issue for the group would be: How can you be sure you are still portrayed and treated respectfully?
I want more money, status, and control. Who doesn’t? If you can’t marry into it and didn’t get this promotion, stop griping and start building. Complete the turnaround and help grow the business. Growth brings more money, status, and control automatically. If that’s not enough, reopen compensation negotiations. If you’re only in it for the cash, it’s worth rethinking the fit between you and the company. The past few years have given us dozens of examples where executives who care only about the dollars can kill the business faster than any competitor.
Once level heads have prevailed, everyone has to ask the hard questions: Can I support the new CEO’s plans and strategies, and can I commit wholeheartedly to my current position as I do so?
If anyone answers “no,” it’s time to start negotiating graceful exits. At the end of the day, an executive who can’t get behind the company must be traded in for a better model. They’ll make decisions for their own best interests, and not for the business’s long-term benefit. “It’s all about me” behavior can be fine at manager or director levels but, especially during troubled times, it can tear your company apart at the leadership level.
Your situation is a tough one. The vertical morale problems will probably be OK once the top levels get sorted out. But this is a case where it’s not about what’s rational; it’s all about emotion. The top team has to settle its issues and back the CEO to heal any rifts in the company. The CEO has been chosen. Strong emotions are natural, but the solution is to use them to identify issues that can be addressed, and then move on. Whining changes nothing, and certainly doesn’t build a healthy company. It’s time for the team to buy in or say “bye-bye.”
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The books listed here are all books I have found valuable. They have either enabled me to accomplish more in my life, or given me important ways of approaching problem solving, management, business, and life. The books are listed by topic. Books which fall into more than one topic are listed under each topic.
Stever’s book, It Takes a Lot More than Attitude…to Lead a Stellar Organization.
Made to Stick is a book about stories. Specifically, stories that are memorable, and what makes them memorable. In an amazing–and I’m sure unplanned–coincidence, their framework is memorable, as it spells “SUCCESS.” Messages that stick are simple, unexpected, concrete, credible, emotional, stories. Though each of their points seems like common sense, the power of their framework comes from having the checklist so you can make sure to bring every one of the tools to bear on crafting a memorable message. The book is easy to read, fun, and has lots of examples. It’s a real keeper.
This is the book that introduced the concept of marketing “positioning.” It approaches brand building and marketing dominance in a powerful way. Ries and Trout look at the psychology behind product recognition, and lay out some simple principles for building strong, enduring brands.
This book is good for marketers, and probably even better for non-marketers. It’s very readable, makes a ton of sense, and sure matches what I’ve noticed about the world. I am not at all sure that traditional marketing curriculae make senses or correspond much to the real world. Many, many Internet companies need this book badly. Some of the multi-million dollar brand-building efforts out there are … scary, to say the least.
Order “Positioning: The Battle for Your Mind”
Book about branding and how to build strong brands. Speaking of branding, the title is clearly building on the successful 22 Laws of Marketing by Ries and Trout.
This book was written after Ries and Trout ended their collaboration. It lays out succint principles about brand building and marketing in an updated format from the early Ries & Trout books. The book is in late-20th-century checklist/sound byte format. Great for traveling, when you want something you can read when you have 5 minutes free at a time.
Order “The 22 Immutable Laws of Branding: How to Build a Product or Service into a World-Class Brand”
An excellent book which will walk you rigorously through the steps you need to turn an idea into a real business plan. The 1995 edition is a workbook which gives you the questions to ask to find out if your idea is a true business opportunity. If you do, indeed, have a business opportunity, the book then steps you through the creation of all major sections of a business plan.
Teresa Esser brings an engaging, funny perspective on entrepreneurship from the men and woman of Boston’s entrepreneurial community who are (and sometimes aren’t) building great companies.
Order “The Venture Cafe: Secrets, Strategise, and Stories from America’s High-Tech Entrepreneurs”
Gladwell presents many of the ways in which people do and don’t make excellent snap decisions.
Some conversations just aren’t easy to have. Whether it’s because you let someone down, or they let you down, or the news is unpleasant or whatever… This book lays out a framework for having the conversation and is packed with specific tips for helping things go smoothly.
For all people managers and anyone who ends up having to mediate difficult situations, this book is a must-read. It’s written in clear, concise English, and has great content that I haven’t seen presented elsewhere.
Order “Difficult Conversations: How to Discuss What Matters Most”
This is a somewhat dry book, but quite good. Ekman spent several decades studying the relationship between emotion and facial expressions. He looked across a wide range of emotions, across many different languages and cultures. With a variety of pictures, the book illustrates and distinguishes the involuntary muscle movements that accompany strong emotion.
Order “Emotions Revealed : Recognizing Faces and Feelings to Improve Communication and Emotional Life”
Frogs into Princes presents many of the underlying concepts in neuro-linguistic programming. The sections most useful to businesspeople: establishing rapport and understanding and using communication styles.
Pat Heim lays out the rules of politics step-by-step. This book is aimed mainly at women and concentrates on how men and women are brought up differently, and those differences come out later as political behaviors in organizatons. In fact, the book is pretty good for anyone who doesn’t quite get the rules by instinct. Dr. Heim is a bit wordy in places, but the content is worth the read.
Order “Hardball for Women: Winning at the Game of Business”
Ever complained? Ever wanted to do something but just weren’t doing it? Kegan and Laskow guide you through a process of changing the language you use to think about issues to uncover the unconscious assumptions that drive (and override!) your behavior. The techniques work, and work well! I’ve used them with clients and with my own issues, and very quickly have developed an understanding of the beliefs and assumptions I’m making about the world that are holding me back.
While the book is great at helping you uncover your Big Assumptions, it falls down a bit at telling you what to do with them. The authors’ message seems to be, “understand and appreciate your mental dynamics and eventually breakthrough insight will be achieved.” For better or worse, I’m action-oriented once mental dynamics are uncovered, and would have liked more guidance on how to address my Big Assumptions.
(That’s why I’m a fan of cognitive psychology and neuro-linguistic programming. Both are pretty good at helping you change, once you’ve found your core beliefs.)
Order “How the Way We Talk Can Change The Way We Work”
Dr. Seligman discusses the phenomena of optimism and pessimism, and how one can explicitly adopt each attitude where it’s most needed. The book includes detailed discussions of the business, health, creativity and productivity effects of optimism and pessimism. The reading can get a bit dry at times; Seligman sometimes gives more background than needed about the politics of the scientific world, but the results are worth it. This book presented a (scientifically-validated) framework for understanding how to shape your attitude and what effects you can expect.
For business leaders, understanding optimism and pessimism is not academic. Too much pessimism and people won’t perform well, persistance will lag, and things grind to a halt. Too much optimism and a brick wall just might be headed your way at 1,000 miles per hour [Seligman says there is considerable evidence that pessimits, despite all their problems, are more accurate judges of reality than optimists]. You’ll need to master both to be able to motivate your workforce, keep them going through tough times, yet do so in a way that’s responsible and real.
Order “Learned Optimism: How to Change Your Mind and Your Life”
The appendices that form the second half of this book present the best summary I’ve ever seen of using language for artful communication. The book itself concentrates on presenting a model of how Milton H. Erickson, widely considered one of the best medical hypnotists in history, used language to help people make powerful changes.
Order “Patterns of the Hypnotic Techniques of Milton H. Erickson”
This book presents several common fallacies in how we make decisions, snap judgments, and let irrational forces guide us to do, well, really stupid things. Most of what’s covered in this book has been covered elsewhere as well, but I found this presentation unusually accessible. Several of the concepts were framed in a way that had instant action implications for me. For example, people care as much about fairness of process as goodness of outcome. Knowing that, I can now take care to use full transparency and participation in designing the process, as well as making actual deciisons.
Order “Sway: The Irresistible Pull of Irrational Behavior”
Two experts in business management show how to avoid the ten common pitfalls that trap decision makers. The book is based on research into social and coginitive psychology and managerial decision making. The authors do a superb job of translating the results into practical “how-to” information that you can use immediately to improve your decision making.
This book is a wonderful companion to Influence by Robert Cialdini.
Order “Decision Traps: Ten Barriers to Brilliant Decision-Making and How to Overcome Them”
A real research-based book on superb management techniques! The Gallup organization looked at 80,000 managers across 400 organizations and did extensive statistical research to figure out what the truly high performing managers did differently from the merely good managers. The results are often counter-intuitive, and this book presents them all.
One of the most intriguing notions in the book is that people’s behavior patterns don’t fundamentally change, and the best managers find ways to fit employee behaviors to jobs, rather than trying to develop “weak areas.” This result is explored in depth in the sequel, “Now, Discover Your Strengths.” Check out this book. I learned a lot from it, and given that it’s actually based on extensive, statistically sound research, its advice is likely to produce results.
One warning: the book is dry in places. It was clearly written by statisticians, not by great business writers. So skim the boring parts. The gems are well worth it.
Order “First, Break All the Rules: What the World’s Greatest Managers Do Differently”
Gilovich explores a number of ways in which humans reason incorrectly and reach faulty (though often emotionally-satisfying) conclusions. He draws examples from phenomena where people develop strong belief systems unsupported (and often contradicted) by data: ESP, UFO sightings, winning the lottery, etc.
This book, along with Influence by Cialdini and Decision Traps by Russo & Schoemaker make a great trilogy for anyone interested in understanding how we’re miswired.
Order “How We Know What Isn’t So”
This book outlines social psychology phenomena which are responsible for all kinds of irrational behavior. This book is a must-read for marketers, to learn compliance tactics that will manipulate the masses into mindlessly buying their combination electric toothbrush / toenail clippers.
For managers and leaders, this book gives important insight into the origins of motivation, and how you and those around you might be influenced by the marketplace, the media, and your competition.
For everyone, Cialdini points out several ways in which our mental “shortcuts” interferes with our ability to make good decisions.
This book is a good companion to “Decision traps.”
What a great book!
My background is in engineering and science, then business. As an engineer, I really liked that there’s a “right answer.” Or at least, there are clear wrong answers (the bridge will collapse if we make it out of tissue paper, period). In business, things aren’t so easy. Most situations have too many factors to identify, let alone consider deeply. Shareholders interact with managers who interact with technology and customer service people and engineers and operations and … it’s tough to know how to think about all this.
Make Your Own Luck lays out a 12-step process (hmm…) for taking risks. Some of the steps sound simple: Know your big goals before you begin, so when you make bets in your life, you’re betting on what you actually want. Sounds obvious? Yeah, but in my own work with executives, I’ve found that people easily lose sight of their real goals(1). The power from Shapiro and Stevenson’s approach comes from having a rigorous checklist to consider when making risky bets.
Some of their tools help evaluate risks that I’ve never known how to tackle. For example, the authors reject the conventional wisdom that “reward requires risk,” and give us “prediction maps,” a tool for identifying low-risk, high-reward opportunities. Simple, elegant, and practically useful.
Their other big new tool is “uncertainty grids.” Uncertainty grids let you quickly test your plans against combinations of uncertainties to realize whether you’ve unconsciously anchored yourself to a single scenario, or whether your plans can survive multiple uncertain events.
The writing style is fun, with thought experiments between the chapters, a final chapter of scenarios to analyze using the 12 steps, and haiku or other verse at the start of each chapter. I found it a pleasant change from the overly heavy style of most substantive business books, and it was an easy read cover-to-cover that did justice to its excellent content.
(1) Being a professional, of course, I never, ever lose sight of my own goals. *grin*
Nudge is one of those books I like so much that documents all the little things that cause us to make decisions, and how to influence them without resorting to such inconvient things as, say, logic. Nudge talks about how the way we present and frame choices (our “decision architecture”) dramatically changes the way we finally decide.
The material is mostly different from the decision fallacies literature. The authors cover things like physical presentation of choices, deferred gratification, structuring complex choices, incentives, and deferred contribution plans. Examples were drawn from very real, relevant examples like helping people choose health plans wisely, organ donation, and presenting fuel estimates to make it easy for people to understand environmental impact.
Order “Nudge: Improving Decisions about Health, Weath, and Happiness”
The best book I’ve ever read on rigorous decision making. As much as I like to believe I make decisions based on data, I don’t. I gather lots of data and then ignore it all and rely on my gut.
Hammond, Keeney, and Raiffa outline a structured process for making decisions that can help reduce uncertainty and increase the likelihood that you’ll make better decisions under uncertainty with incomplete data. Like anything else, you have to practice to get good at their technique. But once you’ve learned how to make a high quality decision, many of the techniques begin to become second nature.
Order “Smart Choices: A Practical Guide to Making Better Decisions”
Order “Sources of Power: How People Make Decisions”
This half-philosophical, half-practical book does a superb job at presenting a challenging, engaging perspective on how to create community and openness in (workplace) groups. Block gives specific questions that can be used in bringing a group together and transforming a conversation into one of responsibility and accountability.
Order “The Answer to How is Yes”
Tony Buzan has written several books bringing recent discoveries in brain science to practical application. His various books concentrate on speed reading, increasing comprehension, and improving your memory. In this book, he brings his understanding of the brain and applies it to leadership.
This book lays out a simple framework for making effective decisions. The real power of this book is that it addresses the emotional side of decision making as well as the rational side. Whether you make decisions based on your head or your heart, this book will help you learn to use the other. Written by the co-author of the One Minute Manager, Yes or No is a quick read.
My recommendation is to start with Yes or No and use Johnson’s framework for a while. Then read Decision Traps to learn how to avoid common mistakes your brain makes. Then finish up with Smart Choices: A Guide to Better Decisions, which will give you very high-powered research-validated techniques for beating a decision to death.
Order “Yes or No: The Guide to Better Decisions”
Keith Ferrazzi started life as a working class child. He learned early that opportunities came as much through who he know as through what he knew. So he began cultivating relationships as one of his life cornerstones. By his 30s, he was the Chief Marketing Officer and youngest partner ever proposed at Deloitte & Touche. Shortly thereafter, he became the youngest Chief Marketing Officer at a Fortune 500 company.
Keith’s book is part autobiography, part “how to” manual for networking. I ran into Keith when we were both presenting at a conference in mid-2004. I applied a few of his principles and they worked. Well. I became such a convert that I went to work with him for several months. Watching him in action is … astonishing, to say the least. He is truly one of the most amazing networkers I’ve ever met.
Some of Never Eat Alone’s techniques can be found in lots of the networking literature. But I’ve found tremendous value in internalizing his attitudes about giving without keeping score, using my network as a tool to help my associates become more successful, and realizing that it’s possible to do business with friends and make friends with business associates. Never Eat Alone got me thinking of success as a community sport, not just a lone-wolf endeavor.
This book is the finest research-based discussion of what makes people happy that I’ve yet to come across. Seligman quickly moves past the fairly trite (does money even correlate with happiness at all?) into an examination of what makes for truly happy people.
Surprisingly, I was reading this almost as a business book. Happy people make for great culture and environments, which make it easier to attract and retain good people. And it turns out one of the keys to happiness is having the opportunity to contribute in a meaningful way using your best and highest skills. This is a nice complement to “Now, Discover Your Strengths,” which was purely a business book, and it shows that creating an environment where poeple can play to their strengths is not only good business, but also good for everyone as human beings.
Every chapter of the book has an associated online inventory you can take at Seligman’s web site, so it become more than just an examination of what makes happiness—it’s a self-reflective exercise as well.
In this book, Mark Forster lays out reasons why the standard time management systems all fail. He debunks “quadrant 2” planning (important-but-not-urgent), prioritization, do-it-now, touch-everything-once, etc. What he presents instead is a system based on understanding why we resist things we know we have to do, and how we can start doing them while making sure that the urgent and the important all get handled.
Mark’s system is rather unusual, and I’ve found it a bit challenging to retrain myself, but every time I use it, I get more done in 2-3 hours than I would typically get done in 2-3 days.
Combine this with Getting Things Done by David Allen, and you have the best time management / inbox management combination I’ve found.
Order “Get Everything Done and Still Have Time to Play”
David Allen’s book is the best book I’ve ever read on dealing with the overwhelming barrage of incoming email, voice mail, faxes, etc. He lays out a system for dealing with everything in your life and keeping your inbox, desk, and mailbox clear and empty. While I found the book a bit convoluted at times, I’ve been using his system for two years now and it works like a charm. Even when I fall off the wagon occasionally, I can get my life back in order in a couple of hours with this book.
The one failing is that he gives very poor guidance for how to decide how to use your time. The book covers inbox management, but not moment-by-moment action steps. For that, check out Get Everything Done and Still Have Time to Play by Mark Forster, which deals beautifully with the moment-by-moment.
Order “Getting Things Done: The Art of Stress-Free Productivity”
Tony Schwartz and Jim Loehr review how your energy level actually drives productivity. They present research showing that managing energy is more important than managing time in becoming productive. Of course, if you follow their advice, you’ll become much more productive… and will promptly find all that newly acquired free time filled with even more demands from daily life. But hey, at least you’ll experience a period of great productivity.
Order “The Power of Full Engagement”
Michael Neill’s book is a step-by-step guide to adopting an attitude of fun, enjoyment, and joy in your life. Michael puts forth a whole series of techniques and ideas that help you let go of stress and reorient to the things that cause you deeper satisfaction. He is a friend of mine, and I can attest that he is a living model of the principles, as well. Along with Are You Ready to Succeed and The Power of Now, Michael’s book has been one of the most impactful books in my own personal development. (I read it in draft form in mid-2005 and dramatically changed my life and business afterwards.)youcanhavewhatyouwant
Order “You Can Have What You Want (UK edition)”
Michael Neill’s book is a step-by-step guide to adopting an attitude of fun, enjoyment, and joy in your life. Michael puts forth a whole series of techniques and ideas that help you let go of stress and reorient to the things that cause you deeper satisfaction. He is a friend of mine, and I can attest that he is a living model of the principles, as well. Along with Are You Ready to Succeed and The Power of Now, Michael’s book has been one of the most impactful books in my own personal development. (I read it in draft form in mid-2005 and dramatically changed my life and business afterwards.)
Order “You Can Have What You Want (US edition)”
They say that having written goals greatly increases your chances of achieving them. This book isn’t about far-reaching goals; it’s about making the next year of your life the best year you’ve ever had. Ms. Ditzler leads you through a structured goal setting process designed to help you clarify what you want, and set out a path to get there.
Order “Your Best Year Yet: Ten Questions for Making the Next Twelve Months Your Most Successful Ever”
Who to hire is one of the most important decisions facing managers and entrepreneurs. Yet few know how to do it or do it well. A professional psychologist, Pierre Mornell takes a different tack to hiring altogether: he gives tips for designing behavioral tests for candidates, which give you indications of how someone will actually act on the job.
Personally, when I hire people, I do only a so-so job. I tend to be influenced far too much by whether I like the person, and not nearly enough by whether they can/will do the job. This book gave me a whole set of tools to use to make the decision a bit more rigorous.
Order “Forty Five Effective Ways for Hiring Smart!”
Chris Resto, Ian Ybarra, and Ramit Sethi have created an excellent book that helps you romance top recruits as successfully as you romance your top customer prospects (or maybe more!). Written from over 1,000 student interviews, they’ve captured the mindset of graduates at top universities and how to win over the candidates who would otherwise fall prey to the consulting firms and investment banks of the world. They cover the entire recruiting process, from pre-contact to post-hire, with specific how-to information for recruiting on top campuses, reaching top students, and doing it all on whatever budget you have available.
A rather dry book that nevertheless presents several techniques for changing belief systems. The book presents material and then illustrates the material with transcripts from workshops. The emphasis is very much on teachnig therapists to assist others in changing beliefs, but I’ve found that with a bit of flexibility, you can use the techniques to change your own belief systems as well.
Order “Changing Belief Systems with NLP”
This volume is a fascinating introduction to the psychological principles underlying training and behavior shaping. Pryor is an animal trainer, and it turns out that many of the underlying attitudes and theories of animal behavior also apply to humans. Such principles as positive reinforcement, spending time building the trainer/learner relationship, and shaping behavior incrementally are all tools that can be used to build high performing human organizations. For anyone whose job includes motivating people or building culture, this book will provide an excellent set of tools.
This is a great management book for people serious about doing an exceptional job at business. A bit dry, the authors critique what passed for business knowledge (fads, buzzwords, etc.) and point out how much of the conventional wisdom spouted as common sense is, in fact, just plain wrong. The book discusses adopting “evidence-based management” as a way of doing better in business. To get the reader started, they address six dangeous Half-Truths:
* Work and life should be (or are) somehow separate. * Hiring the best people will lead to the best organizations. * Financial incentives drive company performance. * Strategy is destiny. * Change is an imperative! * Great leaders are in control of their companies.
In each case, the conventional wisdom just doesn’t hold. For details, proof, and other fascinating tidbits (such as why merit-based pay for teachers and schools doesn’t improve learning), grab this book!
Order “Hard Facts, Dangerous Half-Truths, and Utter Nonsense”
This book present leadership skills framed as the ability to coach employees into their best possible performance. A companion to Development First, this book is about how to help others through the professional development process.
Order “Leader As Coach: Strategies for Coaching & Developing Others”
Two of the world’s foremost social psychologists explore how we distort our lives via cognitive dissonance, commitment and consistency, and self-justification. principles. The authors explore how these principles impact politics, law, medicine, and predjudice. If you’ve read Influence or other social psychology books, you won’t learn about new prinicples here. What you will learn (which is well worth it) is the measurable impact these have on the policies and professions that are critical to our lives.
This is a pretty scary book. There’s substantial evidence, for example, that once someone is convicted of a crime, even DNA evidence and confessions by the true perpetrator won’t change the minds of police and judges.
Order “Mistakes Were Made (but not by me)”
This is the book for the extraordinarily popular course Srikumar Rao teaches at Columbia Business School and London Business School. In the book, Sri examines how our mental models affect the way we approach the world and our success. He does a great job offering new ways to engage our lives that produce more satisfaction and fun. I found this book highly impactful in my own life (along with The Power of Now and You Can Have What You Want).
Order “Are You Ready to Succeed?”
Mark Forster’s books on time and life management are a great read. He starts by noticing that no matter how hard we try, we always seem to fall behind. Then he applies a great deal of common sense, uncommon psychology, and intriguing systems to lay out alternative ways of working that will get everything done. This book, his third, returns to the question of time management, and leads you through simple exercises to confront your limits, your demands, and balance the two so you’ll be able to catch up with your own life.
Michael Neill’s book lays out many different way to achieve happiness. This is a very tactical book in which Michael gives exercises, mental frameworks, and techniques for making yourself happy. In some ways, I find his underlying assumption most powerful of all: that we can feel happy regardless of circumstance, and much of our challenge is simply giving ourselves permission.
Order “Feel Happy Now (UK edition)”
Loving What Is lays out a simple and effective techniques I’ve used for detaching from negative thoughts and reorienting on the positive and on what’s present in the moment by questioning the thoughts you have that keep you in pain. I’ve been training myself to use the four questions automatically, and have been happier, more peaceful, and more forgiving than I’ve been in a long time.
(Except when it comes to “helpful” automated phone trees. But by the end of the century, I will have made my Peace with those, too.)
You can view Byron Katie’s work on YouTube (seach for “Byron Katie”) and at http://www.TheWork.com.
This best-seller has just one message: the more present you are in your life, the most fulfilling and powerful your life will be. The book was transcribed from workshops in which Eckhart mainly answers questions, taking the reader through different scenarios where it would seem impossible to apply “The Power of Now.” In each case, he shows how to remain present yet still effective. I’ve found this to be one of the most personally valuable books in my own development (along with You Can Have What You Want by Michael Neill and Are You Ready To Succeed by Srikumar Rao).
Are you driven/stressed/confused about money? I am. And as much as I enjoy having money, I can’t say my relationship to it is especially healthy.
Reading this book helped, a lot. It’s more than a book to read. The authors lay out a program for figuring out exactly how to maintain your current standard of living, and save enough so you can know the specific date at which you’ll retire with no drop in your standard of living.
Not only has the program been helpful, but the attitudes and beliefs about money that the authors pointed out to me helped me untangle some of my own hang-ups about making the Big Bucks (at which time I quit my high paying job and went to pursue my dreams instead…much less lucrative, but infinitely more rewarding!)
Order “Your Money or Your Life: Transforming Your Relationship With Money and Achieving Financial Independence”
This book helps you put together a plan and tactics for developing in your professional life. It is quite short, but packed with plain-English prescriptions for how to break self-development into small enough chunks that you can actually find time to do it. I use this book with many of my coaching clients.
Order “Development First: Strategies for Self-Development”
This book is a sequel to the excellent “First, Break All the Rules.” It delves much more deeply into the principle that you’ll build much more solid organizations by developing strengths rather than concentrating on shoring up weaknesses.
Buckingham and Clifton used Gallup’s research of over a million people to identify 34 core strengths that you might have. Strengths aren’t skills. Strengths are rooted in talents developed early in life. Talents are behaviors so innate that they come effortlessly and enjoyably. You can ultimately go much farther with your natural talents than with skills you learn. The neat thing about talents is that they’re automatic and they feel good to use. So designing a life based on maximizing your talents is likely to be a lot more fun than trying to learn skills that don’t grab your interest.
The book really doesn’t stand on its own. You must take the web-based StrengthsFinder assessment to identify your strengths, and then read the latter part of the book with your strengths in mind. But be warned: you can take the assessment just once for each copy of the book you buy, and you can’t buy additional licenses without buying the book. (Perhaps the best way to think of this is as a one-time $22 skills assessment with a free book thrown in.)
The assessment was useful to me. Everything it told me, I already knew. In fact, it pointed out characteristics so pervasive in my life that everyone around me will be equally unsurprised. And therein lies the power: it gave me names for strengths that I take so much for granted that I would never have identified them as strengths. And furthermore, it let me know that those are strengths that others may not share. Not until reading this book did I consider that my ability to focus and my achievement-based motivation might be talents others may not share.
Now as for using than information… the book was weak. Very weak. Each skill gets one page of description, and one page of “how to manage someone with this skill.” There’s little to help you appreciate the richness of the model or apply the knowledge in any deep way.
That said, however, find yourself a friend strong in ideation to brainstorm uses for the material, an activator to put the ideas into motion, and a good focus person to carry the ideas out.
In short, the assessment gets five stars and the book gets two stars. The self-knowledge was useful, as was the overarching concept, “You’ll go farthest by building your strengths rather than shoring up weaknesses.” Otherwise, the assessment gave me good information that it’s now up to me to use.
Order “Now, Discover Your Strengths”
This book is required reading at several top business schools, and for good reason. Goldratt lays out an approach for thinking about your business’s operations in terms of operational constraints and measures. He shows why traditional cost accounting skews your ability to manage well, and how many organizational problems come from a misunderstanding of how a well-balanced system operates. If you’re an operational manager, read this! If you’re not an operational manager, please, please, please read this!
In “Bottom-Up Marketing,” Reis and Trout address the need for marketing to be driven as much by tactics as by strategy. They make the case that marketing strategy is intrinsically linked to an understanding of how tactics drive behavior.
What a great book. Moore asks why so many companies suddenly stall just when they seem to be taking off. He lays out stages of adoption for high tech products, and notes that as a product makes its way into the mass market, the market’s buying behavior radically shifts. Companies who fail to make the shift as well… will fail.
Moore’s experience is in high tech marketing, but I suspect his concepts apply across the board.
Order “Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers”
This isn’t as good as the other Ries and Trout books. Focus is too wordy (not focused enough?), and relies a bit more on simply telling stories. The logic is a bit harder to verify. That said, the basic point of the book is that Focus is good in many areas of running a business.
It took me a year of struggling against my deep desire to preserve all options and keep myself as broad as possible, but I adopted a “focus” attitude towards my own business. Within three months, the business was doing better than I’d ever dreamt. Many of the results were directly traceable to the newfound focus in the business. Now, I’ve found that the more I focus, the more, bigger opportunities arise. Yes, I have to say “No” to some things, but at the end of the day, the focus strategy has created bigger and better opportunities, faster, than anything I’ve done before.
Order “Focus: The Future of Your Company Depends on It”
This companion to Positioning presents how a marketer can think about competition. Once again, Ries and Trout manage to present sophisticated concepts clearly and simply. For example, the book opens with a concise discussin of “The Law of Force.” They show that superior numbers will win on a battlefield, even in the face of higher hit rates by the smaller force. A simple concept, yet often overlooked.
You’ll probably hear people say that Marketing Warfare is outdated, and the New Economy changes all that, yada, yada, yada. Ignore those people. While specific prescriptions may be outdated, the underlying approach to thinking about the nature of competition is right-on.
Al Ries and Jack Trout, marketing strategy consultants, lay out some of the principles of marketing—including the Law of the Mind and the Law of Hype—with many, many examples of what has and hasn’t worked in the international marketplace.
Order “The 22 Immutable Laws of Marketing: Violate Them at Your Own Risk”
A very easy-to-read book giving lots of guidelinens for becoming a high-performing salesperson. This won’t be the only book on sales you’ll ever need, but its short chapters make it good reading when you have a few minutes here and there. I picked up a few good ideas and mindset shifts that could be immediately applied to sales efforts.
Order “How to Become a Rainmaker”
Brandenburger and Nalebuff’s book does a marvelous job making a new brand of corporate strategy accessible: strategy based on game theory. They examine various tactics used in business, such as the “we’ll match lowest price” strategies, and reveal how those strategies can change the industry structure in such a way as to result in the unexpected effect of higher prices. The authors also give rigorous definitions of competitors and complementors, which broadened my thinking about competition and cooperation considerably.
[This is my all-time favorite book on strategy.]
Earlier this week, I began a series of articles on the Harvard Business Review blog site that will deal with the job description of the entrepreneur. The series arose because while people talk a lot about what qualities make up a good entrepreneur, the world is strangely silent on how an entrepreneur should actually spend their time. They always run around like the sky is falling, and they’re busy beyond belief. But doing … what? And how do they know what they’re doing is actually moving the company forward, versus just being whatever activity caught their eye at the moment.
Read my HBR.ORG blog post on Advanced Entrepreneurship: The Entrepreneurial Job Description.
For a CEO job description, see my article on CEO job descriptions.
For a podcast of this article, see my Podcast entry.
What does a Chief Information Officer do, anyway? Most of the descriptions I’ve heard make them sound like a glorified purchaser. “They make sure our systems are up to date.” Mega-yawn. CIOs fill a very important role, it’s just no one knows what. Well, today’s podcast will outline the four things you want from your CIO (and probably don’t get).
Many great leaders have had great advisors. When you’re searching for advisors, where do you go? How do you get them? These slides from Stever’s 1999 presentation at Harvard Business School’s “Cyberposium” might shed some light. Click here to download the slides on using advisors in your business.
At 04:55 PM 7/3/00 +0200, a visitor asked:
Are you familiar with the term EBITDA and do you know:
a). Why it is used as an indicator for new-economy businesses in general?
b). How Depreciations of <Assets directly related to earnings> are handled?
EBITDA stands for Earnings Before Taxes, Interest, Depreciation, and Amortization. It has become wildly popular with the New Economy set. Is it useful? Well… there are many useful financial measurements that are very similar to EBITDA.
EBIAT, earnings before interest, after taxes, is meaningful: it measures raw earning power, independent of financing sources. It measures earnings available to flow to all financial sources.
EBT is a measure of earning power, given current capital structure, but not taking tax management into account. It measures earnings available to flow to the equity holders. When calculating return on equity, use EBT as the earnings number. The return to equity holders is the earnings after netting out interest.
But what of EBITDA? I side with Warren Buffett in considering EBITDA to be a meaningless financial indicator that seriously distorts and misrepresents a business’s earnings. EBITDA has become popular because people want to value businesses which have essentially unviable business models. It’s often been used in biotech, as well, where companies are valued long before they’re shown to be viable enterprises.
The theory is that depreciation is a non-cash expense, and thus should be backed out of earnings before measuring a company’s earning power. However that ignores the fact that cash actually must be spent on assets in order to run the business. Backing out depreciation without adding in cash expenses is akin to claiming that the business’s capital expenditures aren’t relevant in measuring its earning potential. In fact, the very businesses which use EBITDA are typically the ones in which the expenditures are very relevant in measuring the company’s earning potential!
Which would you rather invest in:
The second business will ultimately give you a far better return on your money.
Only where the depreciation or amortization truly represents a non-cash expense does it makes sense to back it out of the equation. When a company is acquired for more than its asset value, the different between the purchase price and asset value is recorded as good will. The good will is then amortized over several years. It does make sense to back out this good will, as it doesnt represent a use of the businesss cash.
Why is EBITDA used in so many new-economy businesses? Many new-economy businesses spend much of their money on hardware and software infrastructure thats capitalized as an asset on their balance sheet. Using EBITDA lets entrepreneurs and their bankers produce a positive number with the big up-front expenses backed out of the earnings calculation. It’s certainly not fraud, simply creative misrepresentation aimed at investors who in many cases don’t think particularly deeply about the numbers reported by a business.
The practice is sometimes defended by claiming that a one-time large development expense shouldnt be used to judge the ongoing attractiveness of a business. But many new-economy businesses have not demonstrated that development is a one-time expense. In fact, technology changes so fast that it is fairly certain that a whole new round of hardware and software purchases will be happening every few years.
All this said, if youre raising money or going public, EBITDA subtleties may not matter. If investors are willing to give you an EBITDA-based valuation, thats their decision. But when using your numbers to actually manage the business, remember that capital expenditures are a genuine cost. Removing them from the equation is wishful thinking, nothing more.