Marina Gorbis's Blog, page 1567

The Problem with Price Gouging Laws

When I meet people at parties, I'm often asked, "What do you do for a living?" After sharing that I help companies improve their pricing strategies, many smirk and flippantly retort, "Oh, ripping off the consumer." Sometimes, when I'm not in the mood to share my more benevolent philosophy of offering consumers a selection of pricing options, I simply reply, "As long as the product is not an absolute necessity, everyone always has the right to say 'no.'" This response seems to neutralize criticism and most people nod in agreement.

But what if products are absolute necessities, such as critical supplies after a natural disaster?

Many states have anti-gouging laws that curb price increases during disasters. In California, for instance, the maximum that retailers can raise prices after an emergency is 10%. Since this minimal upcharge won't effectively temper demand, limited supplies end up being rationed on a first-come, first-serve basis. While many view this policy as "fair," gouging laws have two key drawbacks:

Encourages Hoarding: Those lucky enough to be at the front of the line tend to buy more than they really need. These "just-in-case" purchases — an extra loaf of bread or perhaps filling up both cars with gas — exacerbate a shortage. In contrast, doubling the price will make customers think twice about buying another gallon of milk, for example, thus leaving supply for those who didn't arrive at dawn.

Discourages Businesses from Boosting Supplies: If prices are capped, there's little incentive for businesses to hustle to increase supplies. It's costly to find and transport extra products in hazardous conditions. If these extra costs eat up the profit associated with a fixed retail price, Adam Smith's invisible hand won't work; there's no financial carrot. As a society, we want incentives, for instance, that divert gas tanker trucks from neighboring unaffected states to disaster areas where fuel is in short supply.

A well-known gouging case involves the invisible hand actions of John Shepperson. After the Hurricane Katrina disaster, John bought 19 generators, rented a U-Haul truck, and drove 600 miles from Kentucky to Mississippi. In return for his efforts and risk, he hoped to sell the generators at double his purchase price. Instead, he was arrested for price gouging, spent 4 days in jail, and the generators were confiscated. It's a tricky issue: while Mr. Shepperson's morality can be debated, his initiative would have unequivocally added supply and made some people better off. We all are charitable, of course, but how many of you would have rented a truck and driven twelve hundred miles round trip to sell generators for the price you purchased them?

To be clear, I did not come up with the above points (hoarding, discourages boosting supplies) — economists commonly use them in price gouging discussions. In fact, I paraphrased these arguments from papers written by two economists associated with the Federal Trade Commission (a government agency whose mission includes preventing business practices that are unfair to consumers), David Meyer and Michael Salinger. It's interesting to note that a past FTC Chair, Deborah Majoras, is on record as being against Federal gouging laws.

This long-simmering "hold vs. raise prices" debate is polarizing. I've found that no amount of persuasive argument can change one's views. As a society, we are at stalemate on this issue. The good news is there is another option which bridges these two opposing points of views.

Consider the following hybrid policy. During states of emergency, price gouging laws go into effect. However, federal and state governments provide subsidizes to retailers on essential products such as gasoline, primary food stuffs, and relevant construction materials. This combination of price controls and subsidies yields a best of both worlds scenario during emergencies. Prices are kept in-check and just as importantly, there are financial incentives for retailers to entrepreneurially boost stocks.

How could this be implemented? Many states have tax holidays where certain products are not taxed. The same process/technology that identifies products sold at retailers which fit the tax holiday guidelines — and then reports it to governments so they aren't taxed — can be used to identify essential products sold during emergencies. This reporting will trigger subsidy payments.

Most politicians favor price gouging laws during a disaster over allowing market clearing prices — it's a safe and seemingly fairer pricing choice. As a consequence, shortages and the accompanying personal miseries/health risks are inevitable. While I am rarely a fan of government subsidies, in this case — when used in conjunction with price controls — they provide both a political and economic remedy to a life-affecting pricing dilemma.

One Microsoft. Four Ways to Integrate Fiefdoms.

One Ford. One Apple. Now one Microsoft. Last week, Microsoft CEO Steve Ballmer unveiled a restructuring designed to unite the organization behind a single strategy and create high-value experiences for their customers.

Many more organizational structure changes are likely to come. Why? Because digitization has passed power to the consumer, pressing companies to pull together their old decentralized profit and loss fiefdoms to produce experiences consumers find compelling. As Ballmer wrote in his memo to Microsoft employees, "We will see our product line holistically, not as a set of islands."



But changes in organizational structure get you only part way there. Ballmer acknowledged as much when he went on to say, "The final piece of the puzzle is how we work together."

Achieving speed and customer centricity depends on a crucial ingredient that's often missing: integration. It's the job of a leader to create it.

Integration has two parts to it. The first is to get various functional silos and P&L centers sharply aligned with the specifics of customer requirements. The second applies to the multiple channels a consumer might use as part of that experience — for example, for a bank these would include a website, an ATM, and the lobby of the local branch. The person in charge of online banking might want a different offering than the person leading the branch offices, just as an engineering head might want a different set of product features than a manufacturing VP. Integration means taking into account all of those points of view and making the right trade-offs to give consumers a total end-to-end experience better than the competition.

Structure divides; leaders integrate. Transforming an organization into a synchronized high speed decision-making body is no picnic. In my experience, only a few leaders, such as Ford's Alan Mulally and Apple's Steve Jobs, have succeeded in making this crucial transformation.

Leaders who want to adapt should consider the following lessons:

1. Understand that 2% of the people in your organization have tremendous impact on the other 98%. I call this the rule of 98/2. Silos have nurtured people with narrow expertise and perspective; so, in many companies, the 2% is ill-equipped for integration. Make sure the 2% have the distinctive skills and personality constructs required. These include the attitude and drive to deliver a winning customer proposition and the ability to synchronize different viewpoints and make the right trade-offs. Pay particular attention to the values of the decision makers. Collaboration must be in their blood. This is a difficult if not impossible shift for those who have been running their own show.

2. Design "integration mechanisms" and operate them with rigor. You as a leader must be hands-on in creating a rhythm for integration. In creating One Ford, Mulally brought his top team together every Thursday. Attendance was mandatory. Most of the team he inherited is intact, yet the divisiveness of fiefdoms that originated with Henry Ford has now disappeared. The weekly discussions have kept the team on the same page strategically and operationally. COO Mark Fields now runs this mechanism. Apple's consumer-friendly innovation and Wal-Mart's quick inventory and price adjustments were the result of similar mechanisms masterfully run by Steve Jobs and Sam Walton respectively.

3. Be sure key performance indicators and incentives reinforce synchronization and integration. Basing a portion of compensation on common goals fosters collaboration.



4. Cultures change when leaders repeatedly and consistently intervene to correct deviant behaviors. It requires discipline and skill to continually demonstrate the behaviors and values conducive to integration and to promptly resolve any underlying conflicts. Through joint work, attitudes get reshaped and energy gets created. Those who cannot adapt begin to opt out.

Companies that lack speed and fail to deliver the right consumer experience on a timely basis can go over the cliff very quickly, as some have already done. It is essential to build the new core capability of integration, starting from the CEO throughout the organization.

Free Coal in China's North Contributes to Lower Life Expectancy

Heavy reliance on coal for heating and manufacturing in China's north has contributed to a 55% higher level of disease-causing airborne particulates there than in the south, says The New York Times. The 184-micrograms-per-cubic-meter differential has health consequences: Life expectancy in the north drops 3 years for every additional 100 micrograms per cubic meter above the south's average. The Chinese government has for years maintained a policy of free coal for heating in the north.

Innovation Isn't an Idea Problem

When most organizations try to increase their innovation efforts, they always seem to start from the same assumption: "we need more ideas." They'll start talking about the need to "think outside the box" or "blue sky" thinking in order to find a few ideas that can turn into viable new products or systems. However, in most organizations, innovation isn't hampered by a lack of ideas, but rather a lack of noticing the good ideas already there.

It's not an idea problem; it's a recognition problem.

Consider some well-known examples from history. Kodak's research laboratory invented the first digital camera in 1975 but didn't pursue it. Instead they paid virtually no attention as Sony developed a different prototype and stole the future of digital photography out from underneath them. Xerox developed the first personal computer, but didn't invest enough in the technology and allowed Steve Jobs and Apple to snatch the opportunity away. The US Navy rejected 13 submissions from William S. Sims regarding an innovative new firing method. It wasn't until Sims appealed to President Theodore Roosevelt that his improved method was recognized.

These aren't just fun examples of smart people and established companies being hilariously wrong, they actually reflect a bias we all share — a bias against new and creative ideas when we're faced with even small amounts of uncertainty. That's the implications of a study published last year by a team of researchers led by Wharton's Jennifer Mueller. The research team divided participants into two groups and created a small level of uncertainty in one group by telling them they would be eligible for additional payment based on a random lottery of participants. The researchers didn't give many specifics around how their chance for additional payment would work, just that they would find out once the study was completed. It was hardly an earth-shattering proposition, but it was still enough to yield some feelings of uncertainty within the group.

The participants were then given two tests. The first test was designed to gauge their implicit perceptions about creativity and practicality. Participants were shown two sets of word pairs and asked to select their preferred phrase. The pairings were created by combining words that reflected creativity (novel, inventive, original) or words that reflected practicality (functional, useful, constructive) with words that conveyed a positive (good, sunshine, peace) or a negative (ugly, bad, rotten). So in each round, participants would chose their preference from phrases like "good original" or "bad practical." The second test was designed to explicitly survey their feelings toward new, creative ideas. In this test, participants were simply asked to rate their feelings toward creativity and practicality on a scale from 1 to 7.

The researchers found that those exposed to a small amount of uncertainty said they valued creativity, but actually favored the practical word pairings over the creative pairings. In a follow-up experiment published in the same paper, participants in the uncertainty condition were even presented a prototype for an innovative new running shoe and rated it as significantly less viable than the control group.

If such a negative bias against creativity is present in times of uncertainty, it might explain why so many notable innovations were initially rejected. The implications for today are particularly relevant, as few executives would claim that they're not working in an uncertain industry. The same uncertainty that triggers the need for companies to innovate may also be triggering executives to be rejecting the discoveries that could help them gain a competitive advantage. The ideas that could keep company alive are being killed too quickly.

One possible solution to this "idea killing" problem is to change the structure ideas have to move through. Instead of using the traditional hierarchy to find and approve ideas, the approval process could be spread across the whole organization. That's the approach Rhode Island-based Rite-Solutions has taken for almost a decade. Rite-Solutions has set up an "idea market" on their internal website where anyone can post an idea and list it as a "stock" on the market, called "Mutual Fun." Every employee is also given $10,000 in virtual currency to "invest" in ideas. In addition to the investment, employees also volunteer to work on project ideas they support. If an idea gathers enough support, the project is approved and everyone who supported it is given a share of the profits from the project. In just a few years, the program has already produced huge gains for the company, from small incremental changes to products in whole new industries. In its first year alone, the Mutual Fun accounted for 50 percent of the company's new business growth. More important than the immediate revenue, the idea market has created a culture where new ideas are recognized and developed throughout the entire company, a democratization of recognition.

In addition, it's a system based on the assumption that everyone in the company already has great ideas and the market just makes them better at finding those ideas. It's not an idea-solution; it's a recognition-solution.

Case Study: It's My Turn

It seemed as if there was never a good time for Susie Gordon and Antonio Barile to talk. The couple — co-owners of a Milan-based manufacturing company, Bottoni, and the parents of two girls, aged three and five — had their hands full.

"It's my turn to stir!" screamed Camilla, their youngest, after her sister, Lucia, grabbed the spoon from her hand. Antonio was helping the girls make pancakes with the mix their grandmother had brought during her last visit from the United States. He took the spoon and returned it to Camilla. Lucia immediately fell onto the floor in tears.

(Editor's Note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you'd like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and email address.)

Antonio tried to ignore her. "So you said there was something you wanted to discuss?" he said to Susie, who was pouring a cup of coffee.

"Yes, but maybe we should wait until later, when it's quiet," Susie said over the girl's wails.



"That could be a month from now," Antonio said, smiling.

He grabbed a second wooden spoon from the drawer and handed it to Lucia, while Susie divided the batter into two bowls, so each girl could stir.

"So much for teaching them to share," she said. She paused, then launched into the speech she'd been mulling over for months and had finally perfected in the shower that morning. "I guess I'll just come right out and say it. I'm ready to go back to work. I'm feeling disconnected from the business, from our employees. I miss being in the thick of it. But it's not just about me. I really do think the company's at a stage where it could benefit from having an operations person running it. You've done a great job of hiring new managers, keeping our existing customers, and signing up new ones, but now we need to streamline our production and improve quality to meet their expectations. And the girls are at a good stage, too, much more self-reliant and active than they were even six months ago. It's a perfect time for their dad to take over."

"What are you saying?" Antonio said.

"I want to trade — like we planned," Susie answered.

"When?" he said, turning his attention to the pans on the stove.

"I was thinking October 1," she said.

Antonio spun around. "That's less than two weeks away!"

"Right, that seems like it would be enough transition time. I'm not a complete stranger to the business. Honestly, Antonio, why do you sound so surprised? This is the deal we made. I'd do some time home with the kids and then you would. And it's been five years."

"I'm five!" Lucia shouted.

"Yes, sweetie," Antonio said. Indeed, he and Susie had planned this all out over a long dinner just a few months before Lucia was born. Two years prior, they had left their respective jobs at Siemens and taken ownership of Bottoni, a family-run maker of buttons, snaps, zippers, and fasteners that supplied Italian clothing companies. They had bought the company with their own savings and some bank debt, but no investors, just them.

It was the realization of a dream they'd had ever since their days together at Insead: to find an entrepreneurial opportunity that would let them move back to Italy, closer to Antonio's family, and live a quieter life. And when they learned Susie was pregnant, they decided it would make perfect sense for Antonio to take the lead at Bottoni while Susie stayed home with their baby. He was a native speaker, understood the Italian work culture better, and had a background in sales. He could build the business, and Susie could lend her engineering expertise when needed. Then, when Susie was ready — or when the business needed her — she would step in and take over as CEO. Antonio had liked the idea of taking some time off to be a stay-at-home dad. They were all smiles and laughter over dinner that night.

Now, standing in their kitchen, Antonio looked shell-shocked and Susie seemed annoyed. "Is there a problem?" she asked, starting to raise her voice.

"Honey," Antonio said, "I'm not saying that I won't do it. I just need to think it through. I know we've talked about it off and on, but it didn't feel real until now. It would be such a big adjustment — for me, you, the girls, the employees —"

Antonio was interrupted by another scream. Camilla had stuck her spoon in Lucia's bowl, and Lucia had retaliated by smearing batter in Camilla's hair.

"Lucia Barile!" Susie said sternly. "Time out."

"Let's talk about this later?" Antonio said, scooping Camilla off the floor.

"OK," Susie said, "but soon."

It Wouldn't Work

A half hour later, Antonio was showered, dressed, and driving in his Fiat minivan to the Bottoni offices. He was relieved to be out of tantrum range and to have some quiet time to think.

Susie was right. They had an agreement. And he understood why she wanted him to honor it. She was a great manager, a great leader. He had loved watching her at Siemens — four promotions in four years. That's one of the many reasons he'd wanted to marry her, to buy a business with her. And there was no question Bottoni could benefit from having her take a more hands-on role, especially now with the customer base it had developed. The business was on stable footing.

But could he really follow through on their deal? Step down as CEO to become a stay-at-home dad?

He was already such an involved parent, far more so than his father had been or any of his friends were. He was always home by 5 PM, did all the grocery shopping and cooking, and made a point of never traveling on weekends.

And he was knocking it out of the park at work. He and Dante, the company's sales manager, had secured several huge accounts in the past year. They were an amazing team, and although Dante genuinely liked and respected Susie, he'd made it clear that he regarded Antonio as his only boss. He knew that most of the staff felt the same way.

Maybe they could split the workweek so they could both be home some days and at the office the others? Or find child care until the girls were in school?

He thought about his father, who had owned a business similar to Bottoni and warned him many times about making promises to his wife that he couldn't keep. At the time, Antonio thought his father was being a chauvinist and kept trying to explain that he was a different kind of Barile, one who actually wanted to be home with his kids. But his dad was right. He hadn't thought through how trading with Susie would actually feel when the time came.

Not the Easiest Job

Susie was relieved to have a moment to herself. The girls were playing in the yard, peacefully for the time being. She sat down at the kitchen table and opened her laptop. Alessandra, Bottoni's head of operations, had sent her some revised process sheets. They'd been talking about revamping the production line for the K1 fasteners. As she was looking over the details, she couldn't help feeling that this was what she'd gotten an MBA to do. She certainly hadn't gotten it so she could mediate between two squabbling children and wash piles of dishes. She felt like a cliché for being disillusioned with the life of a stay-at-home mom, but her work was important to her, and she didn't want to squeeze it into these stolen moments.

Bottoni needed her now, too. Alessandra, her closest confidant at work, told her so frequently. Antonio had done a fantastic job of transitioning the business from the former owner, bringing in new managers, growing the customer base, increasing prices, and paying down debt. But it was time for the technical and detail-oriented leader to step in. She was ready to up their quality and efficiency game. There was no way that Antonio could do that.

And besides, they had made an agreement. They'd shaken on it — as business partners, not spouses. How could Antonio even think of reneging?

Of course, she understood Lucia and Camilla could be tough. Who wouldn't find it easier to be at the office, drinking coffee, talking with other adults, being productive, getting positive feedback? But Antonio was a great dad, much more energetic and easygoing than she was. And they'd agreed that the girls could benefit from real day-to-day quality time with both parents before they went off to school to be shaped by teachers and friends.



Camilla came running in, claiming that she was starving. Of course it had only been an hour since breakfast, but Susie gave her an apple and sent her back outside. What was it her mother had said when she told her about the deal with Antonio? "Men can't plan for next week — never mind years from now." She'd urged Susie to stay at work, act like his equal from day one. But it was important to Susie to spend those early years with the girls; she wasn't second-guessing that decision. Yet maybe she was naive to think that it would be easy to step back into the company — and that Antonio wouldn't have any problem stepping out.

What's Fair Is Fair

Later that day, Antonio arrived at Varese Park, near the family's home. He heard Lucia's and Camilla's cries of "Papa! Papa!" before he saw them on the swing set. They both jumped off and ran to give him a hug. He found Susie on a nearby bench and was relieved to see her smiling.

"Now might be a better time to talk," he said, as the girls ran back to the swings.

"I don't know what there is to talk about," Susie said, her smile disappearing. "I've been thinking about it all day, and we had an agreement. This trade is something we both wanted."

"I've been thinking about it, too, and I'm not sure anymore. I'm not sure I'm ready."

"Of course, it seems scary. I get that. But so did moving to Italy, buying Bottoni, having kids. You always need me to nudge you into big decisions. So, here's your push."

"We have other options, though," he said. He'd talked about it with Dante earlier, and they had come up with the idea that he and Susie would share the position, be co-CEOs.



Susie shook her head. "That might look good on paper," she said, "but it would never work in reality. It would be too confusing. The staff would always be wondering who to go to, or even worse, they would just go to whoever they could get a better answer from. And where would the kids be in that scenario?"

"What about that day care where Adalina's kids go?" he suggested cautiously.

"No, no. That's not fair. You don't get to outsource parenting when it's your responsibility," she said. "We moved here and bought our own business so we could have a slower life, never have to work a 60-hour week again, and could take time off to be with our kids without any career repercussions for either of us. You're going to love being with the girls."

"You obviously don't." Antonio regretted the words as soon as they came out of his mouth.

"That cuts deep," Susie snapped. "Of course I do, but I also love working."

"So do I," Antonio fired back.

They sat there for a moment, both stewing.

"So what do we do?" he said. "It's clear we can't both get what we want. Why don't we ask the staff what they think? Or the girls?"

Susie knew better than to lay into him. Instead, she paused and took his hand in hers.

"Honey," she said, "this is up to us. And it's my turn."

Question: Should Susie and Antonio trade roles as they'd planned?

Please remember to include your full name, company or university affiliation, and email address.

Do Commodities Speculators Make Things Cost More?

Commodities trading, Adam Smith wrote in 1776, was a boon to efficiency and a foe to famine. It was also extremely unpopular, especially in years when harvests were poor (he was writing specifically of trading in corn).

The popular odium ... which attends it in years of scarcity, the only years in which it can be very profitable, renders people of character and fortune averse to enter into it; and millers, bakers, mealmen, and meal factors, together with a number of wretched hucksters, are almost the only middle people that ... come between the grower and the consumer.

Since then, trading in corn and other commodities has gained in respectability — thanks in part to arguments and evidence mustered by economists following in Smith's footsteps. But the suspicion that commodities trading is dominated by wretched hucksters or worse (I don't know what "mealmen" are, but they sure sound bad) has never gone away, with David Kocieniewski's epic examination in Sunday's New York Times of an aluminum storage business owned by Goldman Sachs offering the latest bit of evidence. Kocieniewski describes forklift drivers moving aluminum from warehouse to warehouse in Detroit to profit from rules set by an overseas metals exchange, while delivery times to actual users of aluminum have stretched to 16 months and aluminum prices have been pushed up by the equivalent of a tenth of a U.S. cent per aluminum can.

The article is less clear about what brought this on. Is it bad rules set by the London Metal Exchange? The involvement of banks such as Goldman and J.P. Morgan in the metals trade? Or is the problem simply that speculators have taken over the market for a crucial commodity?

It is certainly true that investors, dismayed at the prospect of low returns for stocks and bonds for years to come, have poured money into commodities over the past decade. Markets that existed mainly for the convenience of industry have become dominated by exchange-traded funds, hedge funds, and investment banks.

By Adam Smith's reasoning, this shouldn't be a bad thing — people of character, or at least fortune, are getting into the trade. And the consensus among economists has for decades been that commodity speculation clearly serves a useful purpose — so more of it can't hurt, right?

The evidence on this is, frustratingly, not nearly as conclusive as one might hope. The most famous studies have had to do with trading in onion futures, which the Chicago Mercantile Exchange launched in the 1940s and Congress banned in 1958 after a precipitous boom and bust. Agricultural economist Holbrook Working proposed at the time that this presented the opportunity for a natural experiment: if onion prices were more volatile in the absence of futures trading, then the trading probably served a useful economic purpose. If not, then maybe it didn't. The first post-ban study, published in 1963, did indeed find such an effect, and has since been cited widely by economists and editorialists. A 1973 followup, however, was inconclusive.

When economist David S. Jacks of Simon Fraser University reviewed this evidence a few years ago along with before-and-after data from when futures trading in various commodities started, he still concluded that "futures markets are systematically associated with lower levels of commodity price volatility." So, on balance, having a futures market appears better than not having a futures market.

What this doesn't tell us, however, is whether certain kinds of commodity futures and spot markets are better than others, or certain kinds of traders are better than others. There's at least some evidence from the great commodities boom of the past decade that the new dominance of financial investors has made a difference, and not necessarily for the better. Three recent research findings:



Marco J. Lombardi of the European Central Bank and Ine van Robays of Ghent University found that "financial investors did cause oil prices to significantly diverge from the level justified by oil supply and demand at specific points in time."

Lucia Juvenal and Ivan Petrella of the St. Louis Fed found that speculative forces began to drive oil prices in 2004, "which is when significant investment started to flow into commodity markets."

Ke Tang of Renmin University of China and Wei Xiong of Princeton University found that prices in non-energy commodities have begun to move in tandem with oil prices, and have become more volatile.

None of these studies blamed speculation for causing all or even most of the price movements. It seems pretty clear that the big rise in oil prices since 2003 has been driven by fundamental forces of supply and demand. But the new commodities market participants may have made things worse, as Kocieniewski's aluminum findings seem to show.

So what's the solution? I'm guessing it has something to do with adjusting the rules of the game. Commodities-trading rules and customs that date back to the pre-financial era may not fit the more aggressive tactics of hedge funds and investment banks. The London Metals Exchange is already in the midst of changing its warehousing rules, with hard-to-foresee consequences. The Commodity Futures Trading Commission has started using new powers granted it under the Dodd-Frank Act to go after traders whose behavior it deems abusive. And in general, we're in the early stages of a long struggle to put the financial sector back in the position of servant of the economy rather than its master.

Speculation is, on balance, a good thing. But more of it isn't necessarily always better — and it's too important to leave entirely in the hands of the wretched hucksters.

The Innovation Mindset in Action: Sir Peter Jackson

Peter Jackson is a game changer who transformed the practice of filmmaking. Like Jerry Buss, who revolutionized basketball, Jackson and other effective innovators share a common set of qualities that we call the innovation mindset: they see and act on opportunities, use "and" thinking and resourcefulness, focus on outcomes, and act to "expand the pie." Regardless of where they start, innovators persist till they successfully change the game.

As an only child, Jackson was often left to entertain himself. His parents bought him an 8-mm movie camera when he was 8 years old. At 16, he left school to work as a full time photo-engraver, saving as much money as he could for film equipment. He began making short films with his friends. These were amateurish horror movies, but they won and had a cult following.

Jackson saw a unique opportunity in making hit movies with special effects that would keep people mesmerized in their seats. He got his first break with the Lord of the Rings (LOR) trilogy.

Jackson used "and thinking." He wanted the highest quality movies AND the lowest cost, so he made all three films in the LOR trilogy simultaneously. Hollywood's regular practice is to shoot movies in a trilogy one at a time, minimizing financial risk in case the first one flops. Lessons learned from the first movie can then be applied to the next, and cash flows from early films can be used to fund subsequent ones. Jackson, however, thought that shooting the trilogy in one go would decrease costs and improve quality. If all three films were shot simultaneously, sets would need to be built only once, rather than built up and brought down three times. Shooting the trilogy simultaneously would avoid the costs of actors' potential salary increases over time, especially if the first film proved a hit, and would also prevent characters from aging (or even dying) between one film and the next. New Line Cinema knew this was a gamble but had faith in Peter Jackson's vision and capabilities, trusting that the series would appear seamless if the three films were shot at once.

Jackson managed what may have been risks in others' eyes by being resourceful and focusing on outcomes.

By being resourceful, Jackson managed to keep costs down to $280 million for all three movies. He insisted on shooting the movie and doing all the animation in New Zealand so he could manage both the quality and the cost, despite Hollywood pressure to use animation studios like Pixar. The result was Weta Workshop—a group of organizations, co-founded by Jackson, and dedicated to special effects for movie and television. Jackson also introduced innovative ways to increase LOR viewership. For example, he made a free video for Air New Zealand to make the "seat belt and related" announcements—using LOR characters. Many who saw it got curious and went to see the movies.

His outcomes and accomplishments were extraordinary: The LOR trilogy made for $280 million grossed $6 billion and won 17 Oscars. Weta has grown to be a well-known animation and special effects company with a special twist on horror, employing thousands of people. With Weta, Jackson achieved his vision of dramatically increasing the amount of work done digitally, without affecting quality. As a result, Weta can digitally create environments, characters, creatures, costumes, weapons, props, and vehicles with animation and real life 3D effects.

In honor of his significant accomplishments and contributions to his country, Jackson was made a Knight Companion of the New Zealand Order of Merit in 2010.

Jackson expanded the pie and completely transformed the movie industry in New Zealand, so much so that Wellington has become Wellywood and filmmakers like James Cameron have purchased New Zealand property. Jackson also expanded the pie by extending LOR's success to others' projects. Ian Brodie, an extra in the films, wanted to write a book about the locations where LOR was shot. Jackson shared all the location details with Brodie and the resulting book, The Lord of the Rings Locations Guidebook, was a runaway bestseller. Jackson allowed Jens Hansen, the local jeweler who made the ring for the movie, to reproduce it. The book and the jewelry expand the audience for the movie, and vice versa.

Sir Peter Jackson is a game changer. He has transformed much more than the movie industry in New Zealand—he has also transformed filmmaking globally.

The Ethics of Using Paid Content in Journalism

In the days of yore, you'd sometimes come across a spread in a tabloid that didn't seem quite right. The typography was off, and the content seemed to make too big a promise: "Revolutionary Formula Lets the Stars Lose Weight without Dieting or Exercise" or "'My Eyesight is so good I can practically see in the dark,' Says Amazed Eye Doctor!" When you put on your reading glasses you might have seen the word "advertisement" or "advertorial" in small print at the top of the page, and felt a little cheated.

Nowadays, marketers are inserting their content in much more effective ways. But that doesn't always mean that they are hiding their provenance. Over the past decade, a new bestiary of ways to get paid-for content directly into the media stream has been developed, some of which directly assign authorship to the company bankrolling them. But what are the ethical lines this paid-for content should not cross?

The public relations and communications company Edelman definitely has a horse in this race, but it has issued a useful paper on the relationship of paid content and journalism, which ends with "An Ethical Framework" that makes some unexpected points.

But before I tell you what I think, I have to do some heavy-lifting on the Benchpress of Disclosure: I did a day of paid consulting with Edelman, working the section that outlines the ethical framework. In addition, I count Richard Edelman and Steve Rubel — Steve wrote the report — as friends. I was frank with them about my discomfort with the practice of paid content, but I still took my fee. And, despite my efforts here to be neutral, I am undoubtedly influenced by my friendship and my paid involvement in the development of the work I'm now commenting on. If these are too many grains of salt for you to swallow, I understand.

Still here? Ok, then let's give it a try.

What the report calls "sponsored content" I prefer to call "paid content." These both can be distinguished from "branded content" — ads designed to look like they're part of the medium into which they've been inserted. These are sometimes called "native advertising," a phrase coined by Fred Wilson that stresses (in the words of Dan Greenberg) "ad strategies that allow brands to promote their content into the endemic experience of a site in a non-interruptive, integrated way."

Personally, I don't want paid content to be part of the "endemic experience of a site." I hate that I literally have to tilt my screen to see the yellow background of Google search results that indicates they're ads. I'd prefer that Google use a fire-engine red background and I'd be willing to bring back the flashing label that says:

"A company paid us to put this here so you'd think it's an honest search result."

I like that Reddit puts a border around links that a sponsor has paid for, that it puts "sponsored link" in bold, and that it includes a "what's this?" button to explain what "sponsored link" means, because we can be pretty certain that the public doesn't intuitively understand this jumbalaya of lingo. And I love that Reddit lets you comment on and upvote or downvote these sponsored links.

The Edelman report sees "three common approaches to sponsored content in the U.S. news media," and anticipates the emergence of more. "Paid syndication" consists of content that the client has paid the medium to insert. "Paid integration" is like product placement for journalism; "the marketer is weaved into a narrative, sometimes overtly." The Edelman report points to BuzzFeed as an example: a "brand's messages are weaved" into the "infectiously popular" posts. Third, there's "paid co-creation," which the report deems a "win for the reader, the marketer and the publisher." "Here an advertiser funds the development and staffing of a new site or section or even an app that currently doesn't exist. The sponsor guides the direction but does not necessarily have day-to-day oversight for the editorial content." The report cites the Forbes BrandVoice program as an example.

My problems with paid content come from asking the obvious question: Does it make the place better or worse? The answer seems clear to me. It puts partisan work that looks like journalism literally next to actual journalism. Even when it is properly labeled as paid for by a company, the proximity of actual journalism can elevate the seriousness with which the paid content is taken. Readers may mistake it for actual journalism if the label is too small or unclear. The wall can be too thin. So, when the Edelman report compares paid co-creation to "a brand naming a baseball or football stadium," I want to reply that when the Washington Redskins take to the field, they're not deciding plays with a concern about offending Fedex.

There are two arguments in favor of paid content that seem to me to have at least some teeth. The first is that paid content can be high quality and worthwhile, following journalistic conventions. It can stay factual and cite sources. This is something Richard Edelman favors. Good. I'm fine with feisty advocacy marketing in which a company makes its case as frankly and honestly as it can. I'd just be happier if the company posted it on their own site.

The second argument in favor of paid content is the one that adds the inevitability to the outcome: many media are desperate for cash. Having these media around directly enhances the ecosystem. So, yeah, maybe paid content brings a systemic benefit... so long as some rules are adhered to. Which brings us to the ethical guidelines proposed by the Edelman report.

Some of the guidelines are obvious: the fact that the piece was paid for has to be prominently and clearly indicated. Edelman says they will "strive to" work with media that support this, although here I'd go Yoda on them and say "There is no strive;" from the day I spent with them, I'd be surprised if they disagree. Likewise, the fifth and sixth guidelines specify that there will be no quid pro quo discussions that attempt to use the financial relationship to influence the media's coverage. To help enforce this, the guidelines say that those who do the media buying will not work with the medium's editorial staff. This is obvious, but it is apparently — and distressingly — not always the case in the industry.

But the guidelines are not just the ones that one would expect.

For example, the third guideline says: "Sponsored content programs will be primarily utilized to amplify that which is owned and/or earned media — not to replace it." That is, paid content should be used to further a discussion that has made its way into the media already, rather than using it as a way to ignite a controversy. This will be hard to enforce in practice both because the line is gray and because it is sooo tempting to buy your way onto the front page. But the intent seems to be to protect the ecosystem from the blatant suborning of journalism, and that's a good thing.

The fourth guideline promises to update news stories to reflect a changing situation, I hope while retaining the original content in one of the standard ways sites do. I think this guideline also means that stories will be corrected when their statements turn out to be factually wrong. If journalists have to do that, so should marketers.

There's a line in the very first guideline that I particularly like, in part because of my personal sideways interest in metadata. (And, awkwardly, it's an idea I suggested.) The industry needs to settle on a clear, unambiguous vocabulary for describing the different ways in which content is paid for. The welter of jargon gets in the way of understanding. And even if the chosen terms are the clearest and bluntest possible, they still should come with a link to a glossary.

Finally, for me, one of the most interesting of the guidelines is #2; "For each piece of sponsored content Edelman produces for news sites, the firm will advocate including the opportunity for the audience to substantively participate in the conversation." This might be in a comment section, but might also entail an AMA at Reddit or some similar forum. If companies follow through on this, it could help to keep paid content honest. Which, if — sigh — paid content is here to stay is the minimal ethical requirement.

Praise Entrepreneurs, Not Cubicle Capitalists

Last week, I observed six senior Fortune 100 executives discussing a desperately-needed digital strategy. They each sported the obligatory hallmarks of business success: expensive Italian suits, carefully manicured hairstyles and company-issued smartphones resting on dark leather compendiums. You could almost smell the overhead. As the meeting progressed, it was clear that these Ivy-schooled individuals were slick, sharp, and well-structured. But when the time came to discuss promising start-ups in their industry, the surprising bitterness began:

"Why are we talking about Company X? I could probably buy them on my credit card."

"We are the kingmakers in this industry. Entrepreneurs should be tripping over themselves just to meet with us."

"I could have joined Company Y in the early days. But I decided to work for a real organization."

As the percentage of U.S. adults involved in start-ups hit a record 13% in 2012, the White House proclaimed that "entrepreneurs are the engine of our economy" [PDF]. But the three-hundred-pound-diet-coke-drinking-pepperoni-pizza-eating-founder in the room is that, in the minds of most American adults, entrepreneurship remains the domain of misfits: an odd pursuit of unwashed nerds that were unwilling or unable to secure real jobs and build "respectable" careers. Said one executive I spoke with: "I struggle to find any value in today's start-ups, because I believe entrepreneurship is all about luck." Another simply proclaimed: "Some choose to make apps and toys. I opted to get a real job." There is evidence of similar pessimism overseas. In a recent study [PDF], just 36% of Chinese students surveyed agreed that "entrepreneurs are popular amongst my friends and family members." Only half agreed with the statement that, "when looking for a life partner for my sibling, we would prefer an entrepreneur over a person who has a job." Even those who actually choose the bumpy path of starting a company often do so out of desperation, not choice. Although start-up ecosystems are surging around the world, it's clear that our negative attitudes towards entrepreneurship require significant reform. Founders, as the Erasure song goes, "need a little more respect."

Instead of rallying behind innovative entrepreneurs, we shower disproportionate reward on the "cubicle capitalists": the salary-heavy, mission-lite brazen careerists who hide behind ever-inflated titles and ascend the corporate ladder with pure personal gain in mind. While writing Passion & Purpose, I met dozens of recent graduates who, rather than applying their newly-acquired knowledge to solve important problems, had prematurely opted to extract value for themselves. Said one young executive: "I had big ideas when I started, but now it's all about getting promoted to partner." Said another: "I know I'm just pushing paper. But I like getting paid six figures for working nine-to-five and ordering room service at fancy hotels." Certainly not everyone who works at a large company fits this description, but most of us know someone who does: the type that creates activity instead of change, engages in endless office politicking and gets more than their fair share of promotions, bonuses and cushy paychecks at a time when the situation calls for bold new ideas. Harvard Professor Deepak Malhotra recently summarized this unfortunate predicament: "If we take more money home than the value we create, we are unintentional thieves. It's really that simple."

Entrepreneurs, we need you.

The pursuit of entrepreneurship, either independently or within an existing company, is not for everyone. Founders face real challenges. Said one: "I can't get a mortgage - the bank won't even look at me." Another lamented: "My wife divorced me because my business failed." Economists would argue that the high start-up failure rate (over 75%) combined with our loss-averse nature means your son or daughter probably should learn how to defend the status quo. But landing a secure, high-paying job is not an excuse to knock the "misfits": the courageous few entrepreneurs who choose to risk their own careers, reputations, and financial security to improve the world for us all.

The irony in the "entrepreneur versus large company" debate is that all of the latter exists because of the former. Those Prada-wearing executives are so precisely because one or more individuals once took a calculated risk with limited resources at their disposal, and built a company capable of providing secure employment to many. But this isn't about pitting those working on start-ups against the corporate types, nor is it about the merits of joining a fledgling organization versus a large company. Being an entrepreneur is a mindset that can be practiced in any situation and regardless of seniority or prior experience. Whatever your title, you are free to choose progress over process. If you manage others, you have the option to usher in real change by elevating those who display true innovation over those simply seeking a promotion.

For all the founders who were ever discarded by the establishment, know that your contribution is valued. My hope? That the tide turns and we begin respecting the very entrepreneurs on which the world is built.

Five Roles You Need on Your Big Data Team

While many companies obsess about how to turn their data into value, we find they spend too much time on the "data" and not enough time on the "people" side of the equation.

Getting the people side of the equation right, however, is not just about hiring the best talent (though that's important, of course). In our experience, companies overlook two critical items: 1) Identifying the roles they really need and 2) building a "customer-service" mentality in their advanced analytics bureau.

The right team

Big Data talent is a critical issue. By 2018, the United States alone could face a shortage of 140,000 to 190,000 people with deep analytical skills, according to the McKinsey Global Institute. But companies need to spend time upfront to identify the kinds of roles they need to make the Big Data machine run rather than just rushing to recruit math and science jocks. While different companies will have different talent needs, here are five important roles to staff your advanced analytics bureau:

1. Data Hygienists make sure that data coming into the system is clean and accurate, and stays that way over the entire data lifecycle. For example, are the time values being captured the same? One data set might be measuring calendar days in a year (365), another working days in a year (260), and yet another hours in a year (8765). All the values have to be the same so that comparisons are possible. Or have old data fields been populated with new types of data but under the old field names? If this is not addressed in the database, new product data may override old product data, rendering a meaningless result. This data cleaning starts at the very beginning when data is first captured and involves all team members who touch the data at any point.

2. Data Explorers sift through mountains of data to discover the data you actually need. That can be a significant task because so much data out there was never intended for analytic use and, therefore, is not stored or organized in a way that's easy to access. Cash register data is a perfect example. Its original function was to allow companies to track revenue not to predict what product a given customer would buy next.

3. Business Solution Architects put the discovered data together and organize it so that it's ready to analyze. They structure the data to ensure it can be usefully queried in appropriate timeframes by all users. Some data needs to be accessed by the minute or hour, for example, so that data needs to be updated every minute or hour.

4. Data Scientists take this organized data and create sophisticated analytics models that, for example, help predict customer behavior and allow advanced customer segmentation and pricing optimization. They ensure each model is updated frequently so it remains relevant for longer.

5. Campaign Experts turn the models into results. They have a thorough knowledge of the technical systems that deliver specific marketing campaigns, such as which customer should get what message when. They use what they learn from the models to prioritize channels and sequence the campaigns — for example, based on analysis of an identified segment's historical behavior it will be most effective to first send an email then follow it up 48 hours later with a direct mail.

It is important to map the movement of data across the Big Data team and ensure that all data hand-offs between humans and machines have clear owners. This mapping ensures that each person in a given role is held accountable for complete delivery, not just for completing his or her individual tasks.

Developing a client service culture

It's demoralizing to build a product or service that no one uses so the burden is on your team to demonstrate how its models can benefit internal business owners. That requires thinking of the business owners as customers. As any good retailer will tell you, you need to understand your customers to be successful. Have regular meetings with them to understand their needs and get feedback on the performance of the team's models. Always ask yourself, "Who in the business will be helped by my analytics?" and "Do they agree you helped them succeed?"

We also see Big Data initiatives fail because the internal customers don't have confidence in the team and don't trust the models. Trust starts with being transparent. Be completely open about who is working on what. Provide estimates of realistic finish times. Be clear about trade-offs when determining which models to build so your internal customers make an informed decision that will get to the best end product.

To ensure adoption of a service bureau culture, measure personal performance by business success not just volume or speed as too often happens. Track how many new models were used by internal customers to drive new results. Some companies have developed bonus criteria for members of their Big Data teams based on how quickly and broadly a model was adopted by the internal customers rather than how innovative the model was. This approach prevents the classic war of words: "I built a brilliant model. It is not my fault no one is using it!" It also nips in the bud the problem of building analytics for its own sake rather than for business impact.

Creating a successful analytics team requires both the right people and the right culture. When it comes to Big Data, your teams should spend less time worrying about crunching it and more time focused on serving it.