The International BS Book Club IV – Brewing up a Business

You may have noted a more than passing interest in beer around here. I do tend to drink a bit of the stuff, but I am also intrigued by the emergence of smaller, craft brewers in recent years.

While in Copenhagen back in 2007, I stumbled across this book at an excellent microbrewery that I frequented on more than one chilly afternoon. I raced through the front half over a couple of visits, and subsequently ordered my own copy on my return to Oz. And finally I got back around to finishing last week.

The book is an autobiographical account from Sam Calagione, founder of one of the US’s most successful small-scale breweries, Dogfish Head. This brewery (motto: off-centered beer for off-centred people) was, at one point, the smallest commercial brewery in America. It has subsequently expanded considerably, with a strong focus on extreme beers (which can mean high alcohol, lots of hops, odd flavours or all of the above). Such a story is certainly worth hearing.

Calagione is a one-time college lit major, and clearly has an inquisitive mind, an ability to digest and apply ideas, and a strong capacity to weave a coherent tale. This book thus becomes much more insightful than the typical business bio one sees on airport bookstore shelves.

I’m not usually one for motivational stories of entrepreneurship, simply because I find such works tend to lean towards mis-attribution of cause and effect (especially through the lens of hindsight e.g. I did this and I think it worked, so you should do the same) and often showcase highly idiosyncratic experiences.

This book falls for few of those traps and instead offers strong analysis and a clear message for budding brewers and niche businesses more generally. Calagione integrates a lot of pretty mainstream strategic management concepts (environmental analysis, the importance of unique resources, value chain decisions, specialisation, diversification) and explains them in a non-academic, non-technical fashion, fleshed out with fascinating (and often outlandish) tales from the brewing coalface.

Calagione has a pretty neat take on his experience, and the lessons for entrepreneurs. He considers what he does alt.commerce (as in alternative, like alt.country music). His business is all about expanding a niche. The firm succeeds by delivering a truthful and resonant product and experience (i.e. customers become fans and advocates). By the end of the book, Dogfish Head is still fielding more orders than they can supply (despite considerable expansion), and has certainly become a cult producer of beer, rum and soap(!), as well as running three restaurant/brewpubs. Offering $20 beers becomes viable!!

I can highly recommend this book to budding entrepreneurs, strategic management professors and beer-nuts (the aficionados, not the snacks). For more on Dogfish Head’s extreme brewing see this excellent article from the New Yorker magazine, and this video interview:

The International BS Book Club III – The Black Swan

The Christmas break has provided the opportunity to catch up on some books that have been on my “to read” list for a while. First of these is Nassim Nicholas Taleb’s The Black Swan. The book is subtitled “The Impact Of The Highly Improbable”, and offers some very thought-provoking arguments about the way we should think about opportunities and threats.

Taleb is a bit of a financial wiz who has parlayed his wealth into a bit of a Renaissance-style thinker lifestyle. His prime concern is with the issue of chance and randomness.

The thrust of his work is that too often we believe we understand probabilities, and even more concerningly, ascribe the Gaussian bell-curve to them. As such, we underestimate the likelihood of extreme events occuring and thus neglect to “price them in” to our models of the world. We also overstate our capacity to learn from the past, and too readily try and build post-hoc rationalisations of occurences based on loose theories.

His Black Swans are highly improbable, impactful events that we didn’t see coming. Among his examples are the World Wars, the rise of religions, of the internet, of Google, of Harry Potter and the September 11 attacks. Now, many of these have been explainedafter the fact, but Taleb argues that these events were not predicted beforehand and would have been deemed almost infinitely unlikely.

The book is a fascinating read. Taleb is enormously self-confident and delights in tearing down the tall poppies in a variety of fields, from philosophy to mathematics, economics to finance. His arguments are quite powerful and intriguing. I will leave to you to read through it and untangle his mathematical and philosophical arguments. Here’s the opening chapter. Below is a short clip of Taleb explaining the ideas.

Taleb has received enormous publicity in recent months, as his soothsaying has been proven very correct with regard to the financial crisis (not just because this event was pretty much unforeseen, but rather because his criticisms of risk models used by hedge funds were so accurate). His own fund has been highly successful (and counter-cyclical) He has got less coverage than he should have regarding the historical and artistic dimensions.

The most under explored issue in the book is the impact of Black Swans on firms and markets. Taleb tends to view this domain with considerable distaste (there’s that dilettante tendency again). He has far too little to say about how firms might utilise his idea (beyond financial management practices).

There are some clear implications for those in the creative arena and also in biotech (that the scale of “blockbusters” could be enormous and perhaps market-shifting). Also it could be illuminating for firms to consider the likely impact on them of a competitor growing to an extreme size (e.g. Google, Microsoft), or their market expanding extremely fast, or of a unforeseen disruptive technology blowing their business model apart. Of course, none of these ideas a new, but what Taleb argues is that their probabilities are almost inevitably underestimated. Firms may simply be underprepared to deal with them. Building contingency strategies would be a first step towards better dealing with a Black Swan world.

A higher order approach would be to build business models around benefiting from Black Swan events. This seems to work for Taleb in financial markets. The premise is to have most of your funds in low risk, certain return assets, and putting a small proportion in assets with huge upside but little downside. One might argue that this is what some of the big IT firms do in funding small projects (who knows, one could become a Google, a Youtube, or a WordPress), or what pharmas are trying to with biotech (although the downside risks are much higher than Taleb would like I suspect). It is not necessarily the case that firms could get away with this in most industries however, simply as it would be hard to explain the use of funds to accountants, investors etc.

There is a lot to digest from Taleb’s book. There is probably an International Business dimension to all this – Has the complex web of interactions and interrelationships made life more unpredictable for firms? Has the deepening of the pool of firms and markets and products increased the likelihood of outlier firms, products and ideas emerging?

All in all, a fascinating and provocative book. For more reviews, articles etc, check out Taleb’s website.

The International BS Book Club II – Wal-Mart

One of my missions on this Blog is to draw your attention to books that might offer insights into strategic management and international business (see my earlier Travels of a T-shirt discussion). I just stumbled across some notes I’d scribbled down after finishing off Charles Fishman’s The Wal-Mart Effect last year.

This was both an insightful and frustrating read. Wal-Mart are clearly a fascinating case study in terms of their growth over a few decades from a fairly inconsequential retailer in the US mid-west to (perhaps) the world’s largest firm.

Fishman presents a series of examples of businesses and industries that have been substantially affected by the practices of Wal-Mart. He presents a viable and reasonably well-balanced thesis that the influences that Wal-Mart has wrought across the US economy and society are multi-faceted. Several of these influences were quite eye-opening, in terms of the extent to which product prices have been driven downwards, and the willingness of Wal-Mart to share savings with consumers. His discussion of various supplier firms reveals Porter-style bargaining power of a buyer writ very, very large. Not surprisingly some of these firms have been driven to the wall, but others seem to have prospered, and consumers have consistently been rewarded with cheaper products (and often products that are more efficiently designed and packaged). Of course, other retailers have usually suffered in the battle for customers. Fishman provides little recognition that the surviving chains are also beneficiaries of the new efficiencies in their pool of suppliers.

Photo by Neato Coolville

I find the actual structure of the book somewhat tiresome however. There was a strong tendency to repeat and repeat the same points in slightly different ways. It was even more frustrating that the internationalisation of Wal-Mart was given such short shrift. As IB scholars have (often gleefully) observed, Wal-Mart has had some considerable failures in its offshore retail efforts (especially in Germany and Japan), and is yet to substantially translate its business model beyond familiar environs. Of course, on the supply side, Wal-Mart is a very big player, benefiting considerably from the emergence of suppliers in Asia (China particularly).

Turning to the Australian retail scene, one issue warrants consideration: Wal-Mart only captures around 10 percent of the retail dollar in the US market. On my calculations, Woolworths and Wesfarmers (as owner of Coles, Bunnings etc) each account for around 21 percent of the Australian retail market. Shouldn’t there be a lot more fuss made about their collective effect on consumers, suppliers etc down here (beyond gutless government reviews)? Where’s the Fishman-style examination of the Woolies Effect?

To get a further taste of the Fishman book, check out these excerpts.