When Will We Stop Blindly Pissing Away Money Down the R&D Rat Hole?

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Let me start by saying that I am a physicist and have been involved with many of the leading U.S. research facilities over the years — Los Alamos National Laboratory, Sandia Laboratories, just to name two.  I also directed the Socrates Project under the Reagan administration.  So the quick knee-jerk reaction to the title that “I don’t understand research and development or the value of technology” holds no water at all.  Please don’t even try to argue this point.
Research and development (R&D) does not equate to a competitive advantage in the marketplace or on the military battlefield.  Knowledge for knowledge’s sake is a worthwhile pursuit.  Totally agree.  But it is conceptually flawed and detrimental to the objective — being competitive — when companies and governments use the need to increase economic and military might as justification for higher expenditures on R&D.  But yet this is the rapidly rising battle cry among the leading thinkers in Congress, the Pentagon, academia, think tanks, and the press — “Raise R&D funding levels, and America’s future will be secured.”  How so far from the truth.
One highly critical set of decision makers who suffers from this R&D is the key to competitiveness thinking is the leadership in the office of the Secretary of Defense.  But this was all avoidable.
In the late 1980s, I “assisted” in writing legislation that would force DoD out of this R&D is the key to competitiveness thinking.  As a member of the intelligence community, working directly with the U.S. Congress was considered a hanging offense.  But I was willing to risk it because I foresaw that DoD thinking in this manner would lead to the massive dilemma that DoD is now at a loss to address — the rise of China as a military threat and the almost total erasure of U.S technology leadership on which our military strength is based.

The legislation mandated that the Secretary of Defense develop and present a Department of Defense technology strategy to Congress every year.  It was a process that would force DoD out of its R&D is the key to competitiveness thinking.  The legislation passed, and for all intents and purposes, lies dormant and unexecuted to this day.

But let me go back to the beginning of the story — The Socrates Project.

Throughout the 1980s, I was the Director of the Socrates Project within the U.S. intelligence community.  I also initiated the program.  The Socrates Project had a two-fold mission.

1/ Utilize the full range of intelligence to determine the true underlying cause of America’s declining economic and military competitiveness, and then 2/ use this understanding to develop the required solution.  We were fully successful in both aspects of our mission.

What we determined (and covered in our last blog but is worth restating) was that the cause of the decline was America’s shift from technology-based to finance-based planning that began at the end of World War II.

In finance-based planning all decision-making is based upon manipulating the acquisition and utilization of funds, and the final measure of success is how well we optimized the fund exploitation to achieve the objective — generating a profit.

In technology-based planning, the foundation of all decision-making is the outmaneuvering of the competition in the acquisition and utilization of the technology.

How effectively an organization or a country outmaneuvers the competition in the technology exploitation fully dictates the level of other resources and how they must be utilized to generate a competitive advantage.  The other resources include but are not limited to manpower, natural resources, time and funds.

Where technology-based planning starts with the foundation of maneuvering in technology for a competitive advantage that then dictates the rest of the business plan, finance-based planning leaves technology exploitation, which dictates competitive advantage, to chance.  The manipulation of funds, which is the focus of finance-based planning, often leads counter to generating a true competitive advantage in the marketplace or the military battlefield.  The finance-based planning organizations of the U.S. pride themselves in being highly effective in what equates to rearranging the deck chairs on the Titanic.

What is competitive advantage?

All competitive advantage is a matter of satisfying the customers’ needs better than the competition, where the customer needs are defined from the customers’ perspective and covers the full range of their needs.  This goes for both commercial and military competitive advantage.  If you are not excelling at satisfying one or more customers’ needs, no amount of slick marketing, branding, or financial optimization — Financial shell games — matters.  The organization is going to die.  Or in the case of DoD, be totally ineffective.
Outmaneuvering the competition in the acquisition and utilization of technology is a multi-faceted, fluid, on-going chess game played with the technologies of the world.  Winning at this technology chess game requires a technology strategy.  When I use the term “strategy,” I am not using the simplistic, conceptually flawed term that is traditionally passed off as “strategy” in the business community.  Strategy is not the same as a vision statement, a target list of products or services, a road-map, an exercise in consensus building, or glorified trend analysis that really belongs at the racetrack.
In the case of a technology strategy, the limited resource is technology, where technology is properly defined as any application of science to accomplish a function.
A technology strategy consists of a coherent set of offensive and defensive technology acquisition and utilization maneuvers.
The set of technology acquisition maneuvers consists of the full range of means to acquire the technology that the organization requires, and prevent or hinder the competitor from acquiring the technology that it requires.  At some points in time, the technology strategy may be executing maneuvers to acquire technologies for the organization, while at other times, it will be executing maneuvers to retard the competitors from acquiring technology, and at other times it will be doing both.  Research and Development (R&D) is just one of the mechanisms in the full set of technology acquisition maneuvers.  But when this one mechanism is used, it is both very precisely and accurately targeted and is done in a systematic coherent process interconnected with a full range of precisely planned offensive and defensive acquisition and utilization maneuvers.
Just executing the one mechanism of R&D is extremely costly and highly ineffective for generating and maintaining a competitive advantage.
The U.S. using R&D as the sole means to address technology exploitation for a competitive advantage makes it a one-trick-pony knuckle-dragging Neanderthal event next to a modern agile fighter with a full range of fighting techniques and weapons at his disposal.   The Neanderthal may get in one or two good hits, but the modern fighter will consistently outmaneuver him until he is fully exhausted, and then he is simply and unceremoniously eliminated.
So, from Socrates’ intelligence-based view, who was the modern agile fighter?
It was then and now has developed into the China we know today.  China was executing very aggressive, highly coherent countrywide technology strategies that, if left unchecked, were guaranteed to enable China to evolve to sole super-power status faster than any country in history.
It was seeing the utter futility of the DoD R&D approach to technology exploitation, and China’s aggressive technology strategies that caused me to risk my neck and career to draft the legislation that would transform DoD into the agile, multi-faceted fighter needed to ensure our military super-power status and contain China’s aggressive technology-based strategies for military, economic and political dominance.
The legislation passed but has never been executed. Since then, as we all can see now, China has gone from barely being on the Pentagon’s threat radar and even then only because of its massive manpower and communist government to, by some people’s estimates, being the #1 threat to the U.S. with that threat rapidly growing by the day.
Is R&D important?  You bet it is — We have some of the best researchers and research facilities in the world. But R&D is only effective when it is a coherent element in a complete, holistic technology strategy to achieve and sustain competitive advantage.
We need to stop being the Neanderthal before it’s too late.  We must evolve or expire.

By Michael C. Sekora – Past Director of the Socrates Project, President of Quadrigy, Inc. affiliated with Operation U.S. Forward

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The Activist Investor: A True Ally of Corporate Governance

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Activist investors: Publicly listed companies fear them. Corporate governance pundits generally do not trust them. Retail investors quietly applaud them, and most laymen do not understand them. However, it is clear that in today’s complex corporate world, we need them. Activist investors may be the only players in the game that can effectively “Occupy Wall Street”.

We have entered the twilight zone when it comes to corporate governance. The zone where many Boards bury their head in the sand when it comes to breaches in compliance, as in the case of HSBC and the tax evasion scandal of February 2015. Certain Boards passively bow to the dictates of executive management, throwing all accountability on the corporation-as-entity, with no individual responsibility. All other stakeholders, from shareholders, to suppliers, to workers, to humble taxpayers are left to peck at what is left of net worth after the share price dives, and are left to fork out money for regulation and reconstruction.

To be fair, in the recent past activist investors have been noted for short-termism. Short-termism is the process by which an activist fund may coerce target companies to conduct strategies that may yield high profit in the short term, but that may be detrimental to company performance in the long term. For instance, it is common practice for activist funds to demand significant reduction in Research & Development activities; yet, R&D is needed for long term competitive and innovative advancement. Most activist fund activity increases the stock market price of the target company. However, best practice professionals argue that the temporary increase in share price is misleading and cannot offset long term business hazards that occur if the activist investors short the target company’s stock. There is truth in this belief. However, we need to take a closer look at activist investors’ strengths when it comes to financial strategies and business growth.

Bernard S. Sharfman in his Columbia Business Law Review article Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value does an excellent job of delineating the benefits of shareholder activism and Board governance. The author’s main premise calls for an integral approach to investor activism in Board decision making, as opposed to the present “Authority Model” that exists within Board and executive management’s line of communication, a model that excludes shareholder participation and creates a passive acceptance of managerial decision making as ultimate, without proper analysis and foresight. Poignant highlights from Sharfman are as follows:

  • Shareholder activism can be defined as “any action(s) of any shareholder or shareholder group with the purpose of bringing about change within a public company without trying to gain control.” – In its essence, shareholder activism is more inclined to correct core business discrepancies before the market reads any sign of trouble via share volatility.
  • Value investors such as Warren Buffett are lauded in the industry while activist investors such as Carl Icahn and the Vanguard Group are called out for short-termism. However, Sharfman clarifies that while value investors cannot practice activism based on their own long holding period strategies. In reverse, activist funds impede their own shareholder wealth creation if they have long holding periods, since their strategies are based on intervention.
  • Since most activist fund strategies are based on intervention, activist investors can be viewed as financial engineers that can offer very timely and effective financial restructuring advice to a Board. Such advice may not come from executive management caught in day to day operations and so may not have an adequate view of the broad financial picture. It sounds humbling, but in reality it may work to a company’s advantage to have a short-termism in financial engineering from an actual shareholder.
  • The threat of a proxy contest may be the most important weapon the activist hedge fund has in its arsenal to effect change. While activist investors have become notorious for proxy contests, the authors found that only 13% of hedge fund activism resulted in proxy contests. Thus, the simple idea of a proxy contest may be enough to spark strategy change at the Board level.
  • The Board of Directors must have a strong outside director composition to allow investor activism to work in a positive fashion for long term company performance. A non-executive director stronghold on a public board gives the Board more authority to listen to both the dictates of activist investors and executive management, and so allows broader decision making for company strategic direction.

Consider activist investors as the best devil’s advocate. A company can hire an independent consultant to assist the Board in setting strategic direction; however, an activist investor literally has more to lose with company profit at stake! And these investors are the savviest investors in the industry – as bullying as their tactics may seem, they are top financial engineers that can truly structure profitable companies. Many companies are embracing the activist investor style of C-Suite leadership. The Vanguard CEO William McNabb has advocated forming a “Shareholder-Director Exchange” to have clearer communication between activist investors and Boards, to facilitate such financial engineering and prevent negative market reads in a proactive manner. Former Texaco CEO and Director of Abbot Laboratories Glenn Tilton further encourages public boards to be one step ahead of shareholder activists in terms of strategy and risk management expertise. Prevention is better than cure.

Carl Icahn has defended his position as activist investor, saying “I look at companies as businesses, while Wall Street analysts look for quarterly earnings performance. I buy assets and potential productivity. Wall Street buys earnings, so they miss a lot of things that I see in certain situations.” Activist investors challenge companies’ core competencies. However, they challenge Wall Street’s investing myopia as well. Devil’s advocates they may be, yet the activist investor may well be the true change catalyst for practical, no frills, efficient corporate governance.

Bebchuk et al. 2015. “The Long Term Effects of Hedge Fund Activism.” Harvard Business Law Discussion Paper. Columbia Law Review. Pages 1064 – 1154.

Harvard Business Review. 2015. “Your Board Should Think Like Activists.”

Sharfman, Bernard S. 2015 “Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value.” Columbia Business Law Review. Pages 103-139.

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Is the Intellectual Elite Out of Touch with Reality?

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It has been a central conceit of the progressive movement since the early 1900’s that simply getting enough smart people together will cure all our problems.

This is the approach of technocracy — rule by experts.  We tried it.  Wilson and his ilk “solved” the problem of world peace after WWI, Kennedy and his brain trust “solved” the Bay of Pigs crisis with Cuba, Reagan and his A-Team of savvy business people “broke down” the Soviet Union, George W. Bush and his close circle of neo-cons “prevailed” over evil in the Middle East.

All of them with their elite “Ivy leaguers” thought they were going to redraw the maps of the globe.  All what they did was create a bigger mess than ever in every single corner of the globe…. We’re still cleaning up the mess in the Middle East caused by acts of hubris and years of “rookie” foreign policy. We now have practically every country in the world on our back resenting our actions after having lost all trust in us to say  the least…. and this is just the beginning.

Other examples — ones that some would rather forgot — include the progressive eugenics movement, the attempt to purify the blood lines and improve the race via forced sterilization, birth control, etc….  Fortunately for us it never took off as much in the United States as it did in other countries.

It is high time to wake up and start realizing that very smart men, with PhD’s and holding distinguished chairs at elite universities does not mean that all intellectuals are wrong, but it does mean that mere academic pedigree is an insufficient credential for developing public policy.

The conservative position is that tradition embodies the collective intelligence — the best of what has been thought and done — over generations, and it deserves to be given its due weight, that human social systems are extremely complex and that unintended consequences often outweigh good intentions.   This does not mean that we never change, but it does imply that we imperfectly understand how society actually works and that human nature is not infinitely malleable.

Conservatives are not opposed to intelligence, but they lack the naiveté needed to trust that intelligence alone solves real-world social/political problems.  Ultimately we must relate to each others as persons, as real flesh and blood individuals, not as abstractions of the intellect.  Where society has lost touch with this it has caused the greatest misery.

As Thomas Sowell’s book, “Intellectuals and Society” states:.

“If you have an elite that thinks the voters are stupid, then the voters end up just being their political plaything. Notice as well that the political effort to hide details from voters influences how the policy is implemented, which is going to have both intended and long-term unintended consequences.  If voters try to make an intelligent argument, they are rebuffed and suppressed, because the elite think of themselves as the smartest people in the room, and they don’t want anyone contesting them”.

Precisely what’s happening today during the 2016 Presidential elections. Anyone outside the “elite Establishment” is a plain idiot who does not know what he/she is talking about. Anyone inside the “beltway” is someone we should closely listen to… How far from the truth.

Another issue I have with the intellectual elite is that they don’t engage in quality leadership.  They think that just saying what the research says is correct is sufficient for leadership and governance.  However, with a large diversity of population, you have to more directly engage in cultivating relationship and explaining policy.  You never liked it when you parents just dictated policy versus explaining it.  Voters are no different.

Leadership, particularly at large scales like government, isn’t about telling people what to do, it’s about bringing people with you.  If you aren’t bringing people with you, you functionally aren’t leading.

Communication is a key part of politics in our age.  And the relational and EQ piece of the overall leadership package is critical if you want to be a real representative of the people.

The intellectual elite are generally significantly smarter than average, but they also tend to (depending on how you look at it) either underestimate the difficulty of solving large complex problems, or overestimate their ability to reason through them.

Their egos write checks their intellects cannot cash.

My hope would be that political leaders one day develop the good judgement to know when to call on intellectual elites and when not to.

I would say we do want an intellectual elite contributing to society, but we would benefit a lot from more epistemological humility from many of them.

Share your thoughts….

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Harvard Business Review: Candid Arrogance or Just Plain Stupidity?

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A few years back, I was in Hsinchu, Taiwan, (aka “Science City”) lecturing on technology strategies to 35 vice presidents and senior executives of one of the world’s largest and most prestigious Taiwanese high tech corporations. As we began to dig deeper into the true definition of “strategy,” a member of the audience asked for my view of the Harvard Business Review. He asked the question because we were discussing the difference between true strategy and what the business world usually passes off as strategy.

I immediately responded to the question by calling the Harvard Business Review a Trick-of-the-Month club. I explained that one month, HBR will say that the key to a company’s success is for it to totally focus on the customer. Two months later, the HBR will say that the key to success is to totally ignore the customer to avoid always being stuck in the present. In neither case does the HBR explain why the approach is sound, nor does the writer connect to any of HBR’s other previous “nuggets of wisdom.” I shared that I’ve noticed that in most cases, these “nuggets” are nothing more than isolated and superficial observations that HBR’s contributors and writers base upon fragmented, anecdotal information. HBR treats readers as nothing more than fat, dumb frogs willing to blindly jump from lily pad to lily pad, not caring that they have no ability to know which pad will be strong enough to support their hefty weight.

After I finished my answer, the entire room of white-shirted executives erupted in uncontrollable laughter. I was shocked and taken back because I didn’t think my answer was that funny, and from my experience, I thought I had just pointed out the obvious. On the next break, I pulled aside one of the executives whom I knew and asked him why that comment about HBR had gotten such a strong response. He smiled and said, “When we talk with American corporate executives about competitiveness and strategy, they tell us to faithfully read the Harvard Business Review. They act as if it is at the forefront of all the latest thinking and wisdom. But when we look at HBR, we see nothing more than a rambling bunch of disconnected tricks. And we are confused. You are the first American to actually state what we see. And you stated it as if it were obvious to everyone and no big deal. That is why your comment received such sincere laughter. You just confirmed what we all know.”

The reason Harvard Business Review can only address competitiveness and strategy, as a “bunch of disconnected tricks,” is that the foundational premise on which the publication addresses these two is incorrect. And it is not a matter of the premise needing updating to realign its focus (e.g., putting a higher priority on R&D) or to add another term (e.g., the gig economy). HBR’s entire premise is false, and we must discard it.

U.S. business schools share the premise that financial manipulation (i.e., finance-based planning) is the foundation for all decision-making for all functions within an organization private or public. In finance-based planning, the basis of all decision-making is the effective acquisition and utilization of funds — fund exploitation. In finance-based planning, the measure of success is how well the organization optimized fund exploitation to accomplish the objective. (The objective can be maximum profit or ROI, increased market share, or in the case of the military, a new tank.) But in all cases during the process, the bottom line question is, “How efficient are you or were you in your exploitation of the funds?” Organizations mistakenly either equate financial efficiency to competitiveness or ignore the need to be competitive.

The correct premise is that maneuvering technology to generate a competitive advantage is the foundation for all decision-making. How effectively an organization out-maneuvers the competition in the acquisition and application of the technology fully dictates the amount of other resources and how they must be utilized to generate a competitive advantage. The other resources include but are not limited to funds, manpower, natural resources, etc…

It is a fact that when dealing from the finance-based perspective, American companies see nothing more than an almost infinite number of disconnected market factors. As a result, the best that these companies can ever achieve from this view are fleeting insights on how some of these factors may correlate to support a competitive advantage. These “insights” mistakenly then become “principles,” and companies who elevate these “insights” erroneously refer to their new “principles” as “strategy.”

In contrast, the technology exploitation foundation (i.e., technology-based planning) abides by the laws of physics. The result is that it is a logically consistent, closed-set environment with no discontinuities.

Take the following simple example. Two young baseball players back years ago wanted to figure out how to hit one out of the park.

The first started observing some of the major league players who went long. He looked at the players’ weight, height, age, attitude, type of bat used, how their coach motivated them, if they used chewing tobacco and if so, what type, and their weight-training schedule. He then compared and contrasted what he observed, threw in a few statistics, and got some insights, (conventional U.S. business approach).

The second young player started with the laws of physics (e.g., Force = Mass x Acceleration, Torque = Moment Arm x Force) and used these laws to examine what he then knew to be the pertinent attributes to determine how players optimize all the variables at their disposal (according to the laws of physics) to generate maximum force at the correct angle and at the correct time.

After all their work, the first player determined that he must chew Red Man, weight train on Thursday nights, be 5′ 11.5″, weigh 195 lbs., and have a coach that hollers allot to be able to hit pitches out of the park.

The second player focused on skeletal alignment, strengthening the flexibility and power of the correct muscles groups, and keeping correct foot placement and weight distribution to generate maximum torque on the swing. Guess who knocked it over the back fence?

The bottom line is that if U.S. companies and America wants to be competitive and rebuild economic health, they must abandon finance-based planning and adopt technology-based planning.

They must move beyond a faulty, fragmented hit-and-miss approach with disconnected market factors that hope on a good day to deliver a competitive advantage in the marketplace and begin addressing the foundational structure — technology exploitation — that acts in a highly logical fashion and dictates how a competitive advantage can be won and lost.

History is written by the winners.

By Michael C. Sekora – Past Director of the Socrates Project, President of Quadrigy, Inc. affiliated with Operation U.S. Forward

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Smart v/s Wealthy

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While you may think that being smart, motivated, and talented would logically make you wealthy, unfortunately, this is often not the case.

Smart and talented people often have a flair for the unusual, complicated, or different. They don’t like to follow the KISS principle (keep it simple, stupid), which is required to make money.

So, being smart or talented isn’t going to help you unless you can use those smarts to figure out a way to simplify those tasks that will make you money. This isn’t easy, because it goes against everything that you have ever done and is counter to how you were taught to think. However, it is necessary for a business to succeed and why smarts and talent alone don’t predict entrepreneurial success and hence wealth creation.

Too much to lose… and, with the most to lose, a wide range of other options available, and the penchant for more intricate, complex endeavors, don’t be surprised when the person “Most Likely to Succeed” from high school ends up in corporate America and one of the more average students finds success in his or her own business.

So what are the basics to know to make real money?

  1. Don’t get a salary. A salary will never make you money.
  2. Don’t try to save money by not buying stuff you need. That’s a myth. The best way to save money is to make more.
  3. Empower quality people by introducing them to each other. Introduce them and stay out of the way. This is real networking. Not fake networking where people hand business cards to strangers.
  4. When you have wealth, never invest more than 5% of your wealth in any one idea.
  5. Don’t enter regulated businesses or the ones with lots of competition. Enter a business with a monopoly. This means high profits, high perks, great education.
  6. Be around people who love you and whom you love. Eliminate people who bring you down.
  7. Look everywhere for what is hidden. The people who understand the wealth creation process hide the money very carefully. The people who don’t know have TV shows about it.
  8. Lose the bad habit of engaging in zero sum competitions with other smart people. Many smart people tend to flock to fields which are already saturated with other smart people. Only a limited number of people can become a top investment banker, law partner, Fortune 500 CEO or humanities professor. Yet smart people let themselves be funneled into these fields and relentlessly compete with each other for limited slots. They all but ignore other areas where they could be even more successful, and that are less overrun by super-smart people. Instead of thinking outside the box, smart people often think well within a box, a very competitive box that has been set up by other people and institutions to further someone else’s interests at the expense of the smart person.

Now that you know, go create the wealth you deserve … and maybe then I can start calling you “real smart”.

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