Archive for the ‘New Economy’ Category
The Market and Maslow
Sunday, March 30th, 2008We haven’t seen such a mess on Wall Street since my grandfather was a teenager. Fortunately for these titans of capitalism, our activist Federal Reserve has stepped in to – at least temporarily – stem the tide of a bank run that threatened to collapse more than one investment bank. Bear Stearns didn’t dodge the bullet and ended up trading for little more than 2% of what it was worth a year ago. Cynics are suggesting that the whole investment banking culture and the very nature of capitalism is at fault here, but I beg to differ. I believe Dr. Abraham Maslow and his iconic and idealistic human hierarchy of needs can shed some light on why some investment banks are peak performers and others are now virtually out of business.
As I outlined in my book, PEAK, there are three essential business themes that come from my interpretation of Maslow’s humanistic hierarchy: SURVIVE at the base of the pyramid, SUCCEED in the middle of the pyramid, and TRANSFORM at the peak of the pyramid. This “Transformation Pyramid” helps explain why some companies like Toyota with its eco-hybrids or Apple with its revolutionary iPods transform their industries while others like Sears or General Motors languish barely in a survival state. Investment banking would seem to be an industry that is deeply divorced from the feel-good humanism espoused by Maslow. But, a PEAK-focused comparison of the industry leader, Goldman Sachs, with the virtually bankrupt, Bear Stearns, proves that this legendary approach to human behavior can even be predictive of which investment banks flourish and which fail.
Just a week before the Fed and JPMorgan shocked the market by taking over a crippled Bear Stearns, Goldman Sachs announced to the world that they were making a $100 million donation to give at least 10,000 women a business education and, more broadly, to develop and enhance business education programs in the developing world. Amidst all the wealth on Wall Street, no firm has generated more charitable foundations than Goldman Sachs. This gift – which was the largest U.S. corporate donation since 2000 – is a reflection of why Goldman Sachs was recently profiled by Fortune as the #1 Admired Company in the Securities industry. Furthermore, the company is consistently listed on the “100 Best Companies to Work For” list and was the first investment bank to adopt an environmental policy back in 2005.
No doubt, investment bankers are motivated by money. But, unlike most of their brethren, Goldman Sachs has created a culture that has transcended that bottom of the pyramid goal in life. The company has nine key leadership principles (not one of which uses the word “money”) including “act with a profound sense of integrity and fairness” and “promote meritocracy by welcoming and leveraging differences.” So, those are just words, right? No, Goldman has used these principles to create a transformative culture that has allowed the company to outshine its industry the way few companies do. Stephen Friedman, former co-chairman of the firm and now a director, says, “There is no mystery, no secret handshake. We did a lot of work to build a culture in the 1980s, and now people are playing on the balls of their feet.”
This culture – while competitive and money-driven like the rest of Wall Street – has focused on creating a collegial environment, serving their clients with an eye to long-term relationships, and making a difference in the world. The company creed has not purely been about making money. Goldman has become a breeding ground for successful leaders from the current US Treasury Secretary Henry Paulson to the White House Chief of Staff Joshua Bolten to the head of the World Bank Robert Zoellick to the Governor of New Jersey Jon Corzine. Goldman isn’t just transforming the industry, they are creating a culture that breeds leaders who want to change the world.
And, in a “karmic capitalist” kind of way, this transformative approach to investment banking has led Goldman to get it right in the recent credit meltdown when the rest of Wall Street got it desperately wrong. Goldman Sachs just experienced its best year ever. While their competitors are awash in losses, Goldman’s revenues grew 22% and they had record profits. Their most recent quarterly earnings represented the 11th quarter in a row that Goldman exceeded analysts’ estimates of how successful they would be. Like Southwest Airlines, Harley Davidson, and Whole Foods Market, Goldman Sachs has proven that they can be the leader of their industry by transcending the base survival needs that most companies never get beyond.
Bear Stearns is a company that never transcended the base of the pyramid. Even on ultra-competitive Wall Street, Bear Stearns was an outlier with sharper elbows than most. Money wasn’t just important. It virtually represented a religion. Bear Stearns’ legendary Chairman Ace Greenberg said they were looking for people with PSD degrees – poor, smart, with a deep desire to become rich. William Smith, a former Bear Stearns employee, in an NPR interview, recently suggested what happened to the firm was karma as it was the only Wall Street firm that didn’t assist in the 1998 bailout of Long Term Capital Management. Smith says, “Bear Stearns operates on their own…and they don’t believe in the greater good. They believe in Bear Stearns and that’s ultimately what brought them down. No one came out of the woodwork to help these guys. As a matter of fact, it was the exact opposite.” In fact, in the wake of the dot-com crash in 2000-2001 when Wall Street took a tumble, Bear Stearns was the first firm on the Street to lay off staff, ultimately giving pink slips to nearly 1,300 people.
Bear Stearns wasn’t a bad place. In fact, there was a diverse family there of misfits from all demographics, as they weren’t as WASPy as the old blue blood firms like Morgan Stanley. They were a scrappy underdog. Sure they had the occasional scandal, but possibly not any more than any other Wall Street firm. But, what was missing was a sense of firm aspiration that helped Bear Stearns execs see beyond the base goal of just making money. People are comparing the firm to Enron with their hyper-focused mercantile culture and psychologist Alden M. Cass, who counsels many Wall Street executives, says “Among employees, I am seeing a similar sense of distrust as we witnessed after Enron.” Not a surprise. These Bear Stearns employees lost their life savings over the past month and when your sense of value as a human comes down to how many zeroes you have on your personal balance sheet, it’s got to be disorienting to wake up and realize you’re broke – in more ways than one. That’s part of the reason why – to their credit – the firm has hired a set of grief counselors to help their employees get through this troubling time.
It’s hard to imagine an idealist like Maslow having a message that could resonate on Wall Street, especially during these times of fear. But, one need only look at two companies – one that aspired to longer-term, higher goals and one that got trapped in the transactional trenches – to understand that peak-performing companies are not full of robots. Investment bankers will never be confused with saints, but Goldman Sachs proves that transformative companies that seek their peak look for ways to “be all they can be” (as Maslow and the U.S. Army used to say) in a manner that creates long-term profits and sustainability.
Is There a Hierarchy of Needs in Home Development?
Wednesday, January 2nd, 2008I became a born-again Maslow nut during the post-dot-com, post-9/11 period that we Bay Area hoteliers like to refer to as the “five-year hangover” starting in January 2001. After five years of phenomenal times for Bay Area hotels, we experienced a bubble burst heard round the world. Suddenly assets became liabilities. Someone once told me that all businesses have a start-up phase, a throw-up phase, and a grow-up phase. My goal in 2001 was to graduate to the grow-up phase as quickly as possible.
Burning the midnight oil reading Maslow and his iconic Hierarchy of Needs gave me the confidence to take a contrarian path in the hotel industry wreckage that was 2001-2005. Rather than purely living in trench warfare for half a decade, we decided to focus on the higher needs of our employees, customers, and investors. Creating peak experiences for these three constituencies helped us to create peak performance for my company. And, almost exactly seven years later, our annual revenues are triple what they were back then.
OK, how does this relate to residential real estate? I was scooping sun-dried tomatoes on my spinach salad at the new Whole Foods Market that moved into my ‘hood (thank you John Mackey!) when a business colleague came up and slapped my back. Given that I don’t have too many back-slapping friends, I immediately recognized the fraternizing embrace as a real estate developer I’ve known for years. He told me he hasn’t been sleeping well for months because all of his residential real estate developments were going “sideways.” Wasn’t that a movie a few years ago about drinking a lot of wine? Now I understand the reference. But, and this is the honest to God truth, he said he’s been reading my book PEAK and he’s now sleeping so much better. I wasn’t sure how to take this. I have a few books bedside that are my trusted version of Sominex. Fortunately, that wasn’t what he meant. He said, “Now I understand the pain and suffering you were going through a few years ago and why the Hierarchy of Needs was your savior. I’m applying your Maslow theory to my little debacle and it’s amazing how relevant it is and how easy it is to teach everyone in my company about this.”
Suddenly, I realized that what we’d experienced in hotels seven years ago was being repeated for home developers, investors, brokers, and, certainly, home owners. The bubble bites, doesn’t it!? But, my conversation with this developer was truly enlightening as it’s one more piece of evidence to suggest that this PEAK theory is relevant to all kinds of industries. Let’s first examine the problem.
The problem is the bubble has burst, which means that home buyers have moved from the fright of not buying quickly enough (for the last few years, waiting six months could cost you 10% in a price increase) to the fright of whether buying a home in this marketplace is a prudent investment. So, based upon the idea that people need their base survival needs addressed first, smart home developers are first and foremost figuring out ways to communicate the safety and intelligence of making the investment. One clever developer I know created a forty year line graph showing the ebbs and flows of Los Angeles residential real estate values and then the specifics around their neighborhood. What this graph demonstrated was the idea that values do go up and down – this isn’t the first time there’s been a marketplace devaluation. But, the neighborhood graph of values showed that this particular area had held its values historically better than the overall metro market. So, in essence, this developer was trying to allay the survival fears of the home buyer to say, “I know you have worries about home values, but this is a safer bet given that this neighborhood has performed better over time.”
But, just addressing a buyer’s survival needs isn’t enough. As my developer friend told me, “We have become much better listeners. The second level of your Customer Pyramid suggests that customers make a commitment when they have both their expectations AND their desires met. Rather than dropping our prices like all of our competition is, we’ve chosen to add value or provide upgrades to the homes that specifically address the desires of the customer. A year ago, we might have charged them an extra $10,000 for hardwood floors. Now, we provide it for free. We try to have our salespeople come up with three desires per customer that we can translate into value. We show these prospective buyers just how much they’re saving on these upgrades, but it also means we aren’t cheapening the values in the neighborhood. In fact, we’re improving the values because we’re creating better homes.”
So, I asked my colleague, “I understand how you address the two lowest levels of the Customer Pyramid – expectations and desires – but how do you address the “Unrecognized Needs” of the customer to create the self-actualized experience that is found at the peak of the pyramid?” He said he was still trying to figure that one out. Since then, I’ve given it some thought. Why not make a special offer to the prospective buyer: as icing on the cake, we will offer you $5,000 to be used in one of the three following ways: (a) we throw you the most over-the-top housewarming party, anniversary, or birthday party for you and all your friends in your home, (b) we give you a $5,000 credit at Best Buy for you to buy whatever kind of home entertainment system or technology you want, or (c) we donate $5,000 to the charity of your choice in your name. While other developers will drop prices at the drop of a hat, you can create a memory or something of real value by “investing” your $5,000 in a manner that truly makes a difference for the buyer.
If you’re in the residential real estate field or just own your home or condo, just remember Winston Churchill’s line (although Winston wasn’t particularly Maslovian): “When you’re going through hell, just keep going.” As I learned with the hotel biz, “this too shall pass.” Rather than fighting in the trenches every day and just dropping prices as your solution to get sales traction, consider how you can appeal to the higher needs of your prospective customers. I promise it will differentiate you in the marketplace. In a time when everything has become commoditized, differentiating yourself and your product is the sign of a peak performer.
Adam Smith and Abe Maslow: Conscious Capitalism
Sunday, August 12th, 2007If you’ve been following my musings, you know I’ve got a healthy appetite for readin’ and writin’ (not as big of a fan of ‘rithmetic). I particularly appreciate off-beat books that look at business or the world from a unique perspective. That would be a good way to describe Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue, written by doctoral student Jonathan Wight a few years ago. Quite often, the Gordon Geccos (remember Michael Douglas in the movie WALL STREET) of the world use Adam Smith’s “invisible hand” of capitalism to describe the benefits of laissez-faire capitalism. There’s an underlying message that is somehow attributed to Smith – who many see as the father of capitalism: “greed is good” and selfishness helps everyone live up to their true potential and get what they need.
Well, Jonathan Wight did his doctoral studies on Adam Smith and found him to be much more Maslovian in his world view. Consider this passage: “Smith’s model is based upon notions that are intuitive to any parent – that children are driven first by the basic instinct for survival, and beyond that, the basic instinct for approval. Smith takes this one step further, arguing that adults as well as children desire not only pats of encouragement and approval, they desire to be worthy of that approval. People want to be virtuous.” In other words, Wight suggests that Smith believed markets and morals go hand-in-hand and he uses a first person narrator – a fictional economics grad student – who travels across the country with Adam Smith to get his points across.
Here’s an example of a verbal exchange from the book as these two characters meet a third person who describes life in Silicon Valley (while overlooking Big Sur cliffs):
1. “No question, people work hard when their contributions are recognized and rewarded. Stock options are important. But you’ll miss something momentous if you stop there…The secret is this: People work harder when they appreciate themselves for what they have done. When the goal of the enterprise is worthy of their highest aspirations…when you touch someplace deep inside, by having them buy into a dream bigger than themselves. That unleashes the creative spirit, and the mind and heart are integrated. So the company becomes, in a sense, the vehicle for the aspirations of the workers as integrated human beings.”
2. “I thought the company was a vehicle for making profit,” I said remembering Milton Friedman’s and Adam Smith’s injunctions against “do-goodism.”
3. “It has potential for much more than that…when people accept a bigger dream, there’s a remarkable transformation. The workplace becomes alive, dynamic, charged with energy. Profit is the by-product of achieving that higher aspiration.”
So, according to Jonathan Wight, Adam Smith was a “conscious capitalist” just like Abe Maslow. Having written a book about applying Maslow’s “hierarchy of needs” to the workplace and distilling down his five levels of the pyramid to three (survival, success, and transformation), I find it fascinating to read these because #1 basically suggests that employees have base compensation needs (survival) which then move on to their social/esteem needs of recognition (success). But, it’s the meaning/aspirational needs at the top of the pyramid (transformation) that create what Adam Smith might have called an “integrated human being” and what Maslow called a “self-actualized person.”
The next time someone cites Adam Smith as their foundation for why they believe capitalism is based upon the positive virtues of selfishness, please direct them to Saving Adam Smith as Wight passionately pleads for a more compassionate and aspirational perspective on human nature, one that corresponds well with the theories I’ve espoused in PEAK.
A Flock of Seagulls & A Pack of Wolves
Thursday, June 7th, 2007I’m sitting on the plane on my way home from one of my favorite places in the world, New York City. Nearly 25 years ago, I was a young, blond 22-year old living at 86th and Riverside working at Morgan Stanley for the summer. I felt like a country bumpkin who was fascinated by the grandiosity of both the vertical and horizontal visuals. This is where my summer-long landlord told me, “Bucko, there’s thousands of millionaires in Manhattan who’ve made their fortune in exactly the same fashion. They focused on a six square block area, got to know all the real estate values within that area, and spent the rest of their life buying and selling their way into wealth.” Now, it was hard to take this landlord, Stanley, all that seriously as he typically wore a torn white tee-shirt that was three sizes too small and usually had some remnants of breakfast in his needed-to-be-trimmed mustache. But, this wisdom stays with me to today and may be part of the reason I’ve always focused Joie de Vivre on small geographic areas – initially, just San Francisco for our first 12 years, then the Bay Area, and most recently, the whole state of California.
Whenever I go back to NYC, I’m flooded with nostalgic memories from that summer and from the three dozen or so trips I’ve taken there since I lived there. I remember the first time I walked into Ian Schrager’s Paramount Hotel in a just-starting-to-improve Times Square area in the later 80s. I’d just opened my first boutique hotel, The Phoenix (just about 3-4 years after I was living in NYC…hard to believe), and I wanted to come and see what all the hoopla was about. Ian was quickly becoming the entrepreneur most identified with the new boutique hotel trend and the Paramount was his most ambitious project yet with its pill-box sized rooms with the enormous headboards with replicas of art masterpieces printed on them. It almost seems quaint and kitsch given how far boutique hotel design has come since then.
So, here I am at a hotel conference at the Marriott Marquis almost across the street from the Paramount. So, of course, I needed to do one of my investor meetings over at the Paramount just for nostalgia’s sake. Ian no longer owns the Paramount. In fact, Ian no longer operates Morgans Hotel company, the public company that kept Ian’s empire going once he stepped down to do his own thing. Morgans has sold the Paramount, supposedly to the Hard Rock Hotel folks but they are just operating it as is for now. The strangest thing about my 90 minutes in the Paramount was the time warp that this fading boutique hotel exudes. It’s twenty years later and, guess what, the average guest in the still sort-of-cool lobby is about twenty years older than who stayed here back in its heyday. There were a few grandparents hanging out in the lobby…it felt a little like a seniors bus tour had just pulled up. There were clearly some retired German tourists with vouchers. And, I’ll be damned but all they played was great 80’s hits including one of my favorites by the Flock of Seagulls. I guess this is what happens to a boutique hotel that is put out to pasture. A little sad given that probably 100 new boutique hotels have opened in Manhattan since the Paramount opened its doors, but for those of you who have a thing for 80’s music or for people in their 80s, it’s a great little habitat.
I do my cross country trip to this boutique hotel Mecca every early June for this NYU Hotel Investment Conference where I hang out with 2,000 folks who live, breathe, and sleep the hospitality Business. There’s a reason I capitalized the B but not the h. It’s sad but this annual invest-a-thon is stocked like a field with wolves when prey is on the loose. There are no workshops on “How to Kill Your Guests With Kindness” but there are quite a few on “How to Make a Killing in Hotel Investing.” I’m once again nostalgic for that day when people entered this industry because they were people-pleasers enamored with the idea of taking care of guests far away from home. Those people still exist, but they don’t tend to come to these conferences.
Fortunately, I was able to make my way through this pack of wolves using a technique I write about in PEAK. Basically, I believe there are three kinds of investors: transactional investors, relationship investors, and legacy investors. The transactional investors are in the survival mode at the bottom of the hierarchy of needs pyramid. They are purely focused on the metrics of return on investment. There’s nothing wrong with that, but if you’re an entrepreneur like me, that means you need to be careful with these folks as they may have a very short-term philosophy of investing. Up one level of the pyramid is the relationship investor who smartly realizes that the scarce commodity in the long-run isn’t necessarily the deal that makes you a fortune but it’s the relationship with an entrepreneur or company. So, with relationship investors, once you sell a business (or in my case a hotel), the relationship doesn’t end as the investor and the entrepreneur look for the next thing to do together. There are a lot of sheep in wolves’ clothing at this conference….those fellas that will take you out for a drink, smoke a cigar with you, pat you on the back and share a laugh….they’re you’re best friend as they’re trying to convince you they should be your investor, but some of them revert back to the wolf (or the bottom of this Investor Pyramid…just focusing on the transaction) once you’ve gotten in bed together. Thought it was a marriage, came to realize it was a one night stand….an entrepreneur can get jaded if that happens enough. Sounds a little like Sex in the City, doesn’t it?!
Then, there are the legacy investors…the white knights of the conference. As is true in the rest of our lives, white knights are scarce. Legacy investors may be focused on the return on investment and on creating a long-term relationship, but they’re also focused on the long-term benefit that is created by this investment. They are self-actualizing investors because they are able to see what their investment does to make a better world – whether it’s improving a community, creating a socially responsible product, or betting on an entrepreneur who is going to change an industry. White knights were clearly in short supply this year. But, at least it meant I was spending my days hanging out with the wolves.
For those of you who want to learn more about these three kinds of investors, check out chapters 10-12 in my upcoming book PEAK which is available in September but can be pre-ordered now on Amazon.