HermannM

Archive for the ‘Interesting’ Category

What Black Entrepreneurs Can Do To Fix Silicon Valley

In Business, Entrepreneurship, Interesting on November 1, 2011 at 1:09 am

I hate blogging. I haven’t blogged in over two years and there’s a reason for that. But an issue has emerged that is too important for me to sit back and watch unfold without offering a dose of perspective. You don’t need a Twitter fight to recognize that Silicon Valley exhibits bias in its investment decisions. And, while it’s great that CNN has made waves with previews of its upcoming show on the subject, you don’t need cable TV to tell you that, either. I could quote statistics or hide behind anecdotal accounts of who-said-what to-whom and when, but the end result is still the same. Silicon Valley has a race problem. The question before us is: what do we want to do about it?

I was proud when I read Dylan Tweney’s post about fixing the problem. It was refreshing to hear someone with clout acknowledge publicly what most Americans know, but hesitate to discuss. What also surprised me was his willingness to call out his peers who question or deny the existence of a problem. He showed great leadership in paving a path towards reconciliation across racial lines. I felt compelled to do the same in the spirit of cooperation. The truth is, Silicon Valley’s race problem wasn’t born in the Valley, it is really just a reflection of the last vestiges of America’s 400 plus race problem. The issues are deeper than we think and if we’re going to address it, we’re going to need to do it together. So the following is my advice to black entrepreneurs (existing, budding and otherwise) on what they need to do to fight racism in Silicon Valley.

Consider the history. Although we live in a post-racial society, Silicon Valley social DNA was formed many years before President Obama was ever elected. The majority of venture capitalists are in their 40s or older, which means they attended college during the tumultuous 1970s and 1980s. My undergraduate experience was rife with racial tension and it seemed like every few years, a new issue would occur to deepen the wedge of social distrust. The Stuart murder, the King beating and the Simpson trial all played a role in shaping our racial views and social alliances. While most people have moved on intellectually from that, our emotional networks and spheres of influence take longer to adjust. Just as African American students might have banded together at the “black table” for lunch, so to did our white counterparts who also dined and socialized in an unforced but segregated manner. College was never the melting pot it was designed to be. And divisions that formed along racial lines then, only widened once we got into the workplace. This explanation doesn’t excuse the racial isolation we experience. But it may help explain the reason blacks and whites remain divided on the role of race and bias in the decisions made on Sand Hill Road.

Lighten up. Some of the hostility we’re experiencing now is a tension arising from people who struggle to make sense of what they observe, relative to what they’ve long believed to be true. Don’t react. Let people work out their issues in the absence of public scrutiny. What disappointed me most about CNN’s interview with Michael Arrington was it captured an awkward moment without giving him a chance to reconcile any conflicting views on race, many of which had just emerged when he was introduced to a house full of black entrepreneurs. That moment created a great sound bite from which to generate buzz for the documentary, but I found it to be an irresponsible piece of journalism. When I say lighten up, what I mean is you need to give people time to process your existence, especially if it conflicts with the steady reinforcement of traditional images they’ve experienced of black people and of entrepreneurs. Mistakes are going to happen and black entrepreneurs will do themselves a disservice by succumbing to knee-jerk reactions.

What may sound like ignorance to you may very well be a moment of naive honesty for others. Don’t look for negativity where it doesn’t exist. Not everybody is against you, although it may seem that way. The temper of the times has changed and people from all backgrounds recognize the vulgarity of outright racism. When someone makes a comment that may be construed as insensitive, consider the context. As an example, being called “articulate” is, more often than not, an uninformed but genuine complement. Accept it as such. And let people make their mistakes. Over time, you’ll learn to discern the hateful comments from the ones borne of unfamiliarity. You’ve got to believe there is long term value in letting the other guy off the hook.

Be In The Present. When in Rome, do as the Romans do. And when in Silicon Valley, do as they do there too. Whether we admit it or not, we carry our culture with us and many aspects of black culture are counterproductive to our success. So we have to leave it behind. When I was growing up, my mother told me I had to be three times as smart as my schoolmates and four times as smart as colleagues to get ahead. What resulted is an over-achiever with a perfectionist attitude. This is something I fight hard to overcome. In entrepreneurship, great is the enemy of good enough. The time it takes to get a project from 20% to 70% is half the time it takes to take it from 70% to 90%. When speed of execution matters, we have be comfortable with projects at 70% of its theoretical potential. I heard someone say that “if you’re not embarrassed by your first release, then you released it too late.” I never understood what that meant until I finally released a beta version of HomeShopr. It sucks but it’s out. I’m actually proud to not be behind a LaunchRock Splash page as so many ventures remain.

Also, THERE IS NO SUCH THING AS STEALTH MODE. A common behavior amongst African Americans is to keep their ideas close to the vest. This usually occurs out of fear of it being ripped off or out of doubt that it’s worth discussing at all. In either case, this line of thinking is counterproductive. If you’re operating under the radar, most VCs will assume you lack the confidence to stand by your convictions. As a result, they won’t, and shouldn’t, waste their time with you. And you will have made a bad first impression from which it takes time to recover. Be present and be willing to sometimes make a fool of yourself. There is no shame in having made a bad assumption. If you recognize it quickly and pivot, you won’t be penalized. The myth of the perfect idea is simply that. Your startup has flaws, my startup has flaws, they all do. But the quicker you subject yourself to the scrutiny of the market, the quicker you’ll gain external feedback, identify any major flaws and refine the idea. Don’t lock yourself out of that valuable feedback loop.

Expand your network. If you know another startup founder, ask them for feedback on your startup. The best advice I get is from other founders who want me to succeed. Don’t be afraid to ask for an introduction to others; most people have at least one contact to share. Then go talk to them and so on. Over time, you’ll develop a robust network, some contacts you’ll keep for yourself, some you’ll share. From time to time, it also makes sense to network beyond your comfort zone. I call this venturing into the “unknown unknowns.” The easiest way is to attend a meetup and talk to total strangers. Meeting people is not an art, it is a science and anyone can do it. When I walk up to someone I don’t know, I just look them in the eye and say name name, that I’m working on a digital grocery list and I ask the magic question, “What do you do?” That is usually enough to get a conversation started. A great place to engage new people is at a co-working space. I am also a big fan of meeting strangers via office hours. The bottom line is, you have to be comfortable striking up conversations with total strangers and converting them into allies. The more people you know and the more who know you, the more likely they are to extend certain courtesies they wouldn’t extend to a stranger.

Temper your expectations. Horny men & women have sex on the first date, VCs don’t. If the first time you meet a VC is the day you pitch to him or her, don’t expect them to write you a check; it doesn’t matter how great you are. Very few VCs invest in points, they invest in lines. So help them construct a two-dimensional data set that best describes you. Many investors attend tech events, meetups, pitch nights and demo days. These are the best times to speak with them and establish a first data point on their radar of possible deals. If you see them on a panel, ask an interesting question. If they blog, tweet about a contradiction you’ve observed. Be smart and get noticed. By the time you’re ready to pitch, you won’t be pitching to a total stranger, you’ll be pitching to a stranger who might have heard of you. It’s a start.

Get noticed. If you really want to get noticed, get out in front, way out in front. Every tech community needs leaders to run the myriad of events that holds it together. During Internet Week, or Social Media Week, or Entrepreneur Week, Blogger Appreciate Week or I Hate This Week Week, plan one of the events. Investors say they’re not impressed with entrepreneurs who waste time managing a meetup group but there is merit in demonstrating a willingness to lead and an ability to execute.

Respect the source. The funding bottleneck for most African American entrepreneurs occurs at the seed through Series A stage of capital raising. Unfortunately, these are the riskiest stages and there is no community reinvestment imperative in venture investing. If an investor’s source of funds is from the sale of a business or from generational wealth, they are under no obligation to invest it in a racially diverse or representative manor. Charity and guilt are poor arguments for justifying an investment decision… so don’t suggest them. Unless you’ve got pictures of the investor in a compromising position, you’re only left with making the strongest business case possible to attract investment dollars. This requires you to refine your concept even further, prioritizing pain points, layering feature sets, developing multiple revenue models, accelerating scalability and incorporating defensibility measures every step along the way. If you’re not familiar with any of those words, please consider attending my Art of Pitching workshop next spring (#shamelessplug).

Stay the course. Even if you do all the things mentioned above, there is no guarantee you’ll get funded because, as we stated above… Silicon Valley has a race problem. The hardest part of entrepreneurship is knowing when to pivot, when to give in and when to stay the course. This is largely a function of the size of your wallet, the strength of your support group and the depth of your convictions. But if you choose to stay to course, please know you’re not alone. I am in the same boat with you and so are many other entrepreneurs, black and white.

What I hope comes that out of the current debate is a widespread acknowledgement of a problem and a comprehensive strategy for addressing it. Amidst the initial hostility, I am encouraged by an air of unity that is fighting to emerge. The economics also favor greater inclusion. Venture capital returns have slid in recent years. I strongly believe the lack of diversity in the pool of ideas that get funded plays a role. While there may be an economic imperative for Silicon Valley to change its ways, it isn’t going to happen over night. But I believe it will happen. The question is how long will the current base of investors continue to hide behind a veil of bias to avoid admitting that the best ideas don’t always emerge from the usual suspects, namely young white males. Only time will tell.

The Human Mind

In Interesting on May 9, 2010 at 5:35 pm

The Human Brain

Try to read this sentence.

For help feel free to toggle between

Real | Not Real

Olny srmat poelpe can raed tihs. I cdnuolt blveiee taht I cluod aulaclty uesdnatnrd waht I was rdanieg. The phaonmneal pweor of the hmuan mnid, aoccdrnig to a rscheearch ppaer at Cmabrigde Uinervtisy, it deosn’t mttaer in waht oredr the ltteers in a wrod are, the olny iprmoatnt tihng is taht the first and last ltteer be in the rghit pclae. The rset can be a taotl mses and you can still raed it wouthit a porbelm. This is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe. Amzanig huh? yaeh and I awlyas tghuhot slpeling was ipmorantt!

Mission, Vision, Values & Goals

In Business, Entrepreneurship, Interesting on May 3, 2010 at 3:56 pm

I joined an organization that is in the process of redeveloping its vision statement, mission statement and goals. Two questions came up when presented with the current mission & vision statements. The first was “what is the difference?” and the second was “which supports which?” One member of the group responded that the vision supports the mission; most others in the room nodded in agreement. I disagreed with the consensus but kept my mouth shut for the time being. Well, I am on the committee that was charged with the task of developing the mission statement, vision statement & goals, milestones and statement of values. The following is a summary of the definitions I’ve received so far.

  • Vision. An exercise of this sort begins with a vision statement, a declaration of an organization’s tangible expectations for the future. This statement should be developed first because it reveals the intentions of the organization under which one or more strategies for achieving it can be developed. The mission statements support a vision and so they go hand-in-hand. A key aspect of a vision is that it is developed in the interest of the beneficiary of the organization, not in the interest of the organization itself. A good vision statement is a memorable, forward looking, passionate, vivid, hopeful, motivating and compelling description of the state of things as it will one day be.
  • Mission. Once a vision for the organization has been established, a mission or strategy for getting there can be developed. A good mission statement gives rise to a purpose, a direction and/or a strategy that is easy to understand and can be easily adopted by those in charge with developing underlying actions, initiatives and objectives. Whereas a vision statement answers the question “What”, a mission statement answers the questions “Who”, “Why” & “How”. It is expected that over time, an organization’s mission can change while the vision remains the same. Visions, however, can also change, at which point its mission will necessarily change.
  • Objectives. While a vision speaks to intentions and a mission speaks to purpose, an organization’s objectives speak to its actions. When properly drafted, all objectives support a mission which in turn leads to a transformation of the organization in accordance to a vision. Whereas the mission statement is broad, objectives are specific. At the time of development, they should be achievable, observable and measurable. Observability and measurability allow for the development of milestones that monitor progress, identify inefficiencies and alert to the need for course corrections along the way.
  • Values. Often overlooked is the need for a statement of values, which provides a framework for decision making within an organization. Properly drafted, a statement of values reveals an organization’s belief system and allows decision-makers to apply those beliefs in weighing the need for tradeoffs.

This is as much as I’ve got for now and invite comments. If there is anything that was said here that doesn’t make sense or requires clarification, please feel free to comment below or send me a note via twitter. Wish us luck in this exercise.

The Hmaun Mnid

In Interesting on May 1, 2010 at 5:33 pm

The Human Brain

Try to read this sentence.

For help feel free to toggle between

Real | Not Real

Only smart people can read this. I couldn’t believe that I could actually understand what I was reading. The phenomenal power of the human mind, according to a research paper at Cambridge University, it doesn’t mater in what order the letters in a word are, the only important thing is that the first and last letters be in the right place. The rest can be a total mess and you can still read it without a problem. This is because the human mind does not read every letter by itself, but the word as a whole. Amazing huh? Yeah and I always thought spelling was important!

WANTED | Civil Engineers

In Engineering, Haiti, Interesting on April 29, 2010 at 4:04 pm

Engineers Without Borders | Rebuild HaitiÉcole le Bon Samaritain (Good Samaratin School), located in Carrefour, is in need of a civil engineer who is specialized in structural damage assessment. Should the damage prove adverse to repair, an assessment should include an estimate to repair the structure or to rebuild it from scratch. Currently, the extent of damage from the January earthquake is unknown.

This assessment is needed before the school can be re-opened the school and the staff can guarantee the building won’t collapse with children inside. This safety precaution is of utmost importance.

Ecole le Bon Samaritain was founded in 1996 by Rev. Jean-Elie Millien, an Episcopal priest, and his wife Mona. Both are retired and have permanently relocated to Haiti. The school provides a K-5 education and a hot meal along with basic healthcare and hygiene to children in Waney, a 25,000 person community in Carrefour, Haiti. For more, click here.

ACTION REQUESTED. If you are interested in volunteering, please send a message to Danielle Millien, who oversees logistics and communications for the school or Vanessa Rios, who coordinates NYU’s Public Health Action Group and is responsible for following up on the delivery of the volunteer engineer(s) to the site. Thank you.

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Professor Hermann Mazard is a Haitian American adjunct professor at NYU-Poly, the engineering school of New York University. Engineers Without Borders is a non-profit humanitarian organization, established to partner with developing communities worldwide in order to improve their quality of life, providing sustainable engineering designs to those who need it.

When Technology Works Against Us

In Interesting on November 24, 2009 at 4:13 pm

With the holidays approaching, many people will travel to be with their loved ones while others will turn to technology to maintain relationships. Facebook and Twitter do a good job of keeping people updated as to the rollercoaster of emotions their friends undergo. I ultimately believe these technologies serve a public good. However, I question whether these technologies are really effective in bringing people closer to one other.

I am a firm proponent of marriage and family and would love to explore the role of technology in the family setting. The answer might have seemed obvious until witnessed this commercial the other day.

I was shocked Verizon would support this messaging to sell us on its flagship product, the Hub Telephone System.  The problem isn’t the technology, it’s the people. I applaud the mother for trying a new recipe to feed her family. The son, on the other hand, leaves much to be desired. When I was growing up, my mother would have beat my ass had I spoken to her in a similar tone.  His resistance to a meal he’d never heard of smacks of arrogance.  I felt a slight ethnic slur as he enunciated “PAH-elle-ah” in lieu of the proper  “pi-Yay-ah” phonetic. His emphasis on the word “ever” revealed a subtle dynamic in the relationship between mother and son. The dominance of the child over the parent was further reinforced when she acquiesced by calling for pizza delivery. If this is this America, we are headed in the wrong direction.

This commercial highlights the tearing apart of American families; it would be naive to look to technology to sew us back together.  Technology is nothing more than a vehicle for communication. It works if we use it and even then, we have to use it constructively.   Let’s not forget that we are the key ingredient in the recipe for harmony and unity in this otherwise uncertain world.

As we gather around the table this holiday season, let us all think about how we treat each other, how we view each other and what barriers we still maintain. We have only one life to get it right, lets make every moment count.

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Postmortem. The Verizon Hub was discontinued in September 2009. May the technology and this commercial rest-in-peace.

Desperate Housewives

In Business, Interesting, Marketing, New York, Sports on September 14, 2009 at 1:32 pm

"I feel like shoving this ball down your fuckin' throat!"

Serena Williams using a tennis prop to express herself

Amidst a lot of hullabaloo, Kim Cleijsters won the US Open; why hasn’t anyone congratulated her? The weekend headline should have been about the triumph of a first time mother who returns to the workforce and regains championship form. Her achievement should be a celebration for all women who struggle to balance family and career. Procter & Gamble, Kraft Foods and CafeMom should be lining up to sign her to an endorsement deal. But that is not likely to happen. Instead, we are left to read about a superstar athlete who lost her cool after finding herself on the wrong side of an unjust penalty.  The following is my post-mortem on an unfortunate incident that ended terribly wrong. Or did it?

Was Serena wronged?

Yes, in fact the line judge who so ineptly called a foot foul should have been issued a lifetime ban from the USTA.  She is not fit to judge a dog contest much less a world class tennis match. Good riddance.

Was Serena right to argue the call?

Yes. At her level, she has the right to expect decency from the officiating crew. She is not a novice to the game. Bad calls impact performance which in turn impact endorsement negotiations. As the highest grossing female athlete in history, she has the right to protect her earning potential from the squintingly lack of attention afforded the line judge.

Should Serena have used profanity in lodging her complaint?

It’s debatable. John McEnroe was extremely effective in using profanity to call attention to judicial indiscretions that might otherwise have been swept under the rug. His antics have also set the tone for an illustrious career after tennis. On the other hand, her choice of words were vulgar and unbecoming;  I would have preferred for Serena to responded differently when playing the sport of kings in the county of Queens.

Was the USTA right to fine her?

Absolutely! In fact, the $10,500 fine may not have been enough.

Should we still be talking about it?

Again it’s debatable. Serena Williams is extremely popular among young girls and her actions matter. It is interesting that on the same weekend that Serena stood up for judicial fairness, Peggy Olson’s character on “Mad Men” walked into Don Draper’s office to demand equal pay. By design or circumstance, we may be witnessing next wave of the women’s movement as confident women exercise their deserved authority.

In New York alone, the oft maligned candidate for the office of Manhattan District Attorney, Leslie Crocker Snyder (left, with husband Fred), is on the eve of taking the top job in law enforcement. Running in the same Democratic primary, Melinda (“I told him to stick it”) Katz (below) may very well win the nomination to become the city’s next chief financial officer. However attractive we may find them, their looks do not define them. Both women have abandoned a Betty Boop approach in favor of a confident presence, fact-based analysis and decisive actions to define their careers. In a country that failed to pass the Equal Rights Amendment, women are taking matters into their own hands with neither apology nor reservation. Could Serena’s assertiveness be viewed in a similar light?

There has been talk of further sanctions against Serena and if that occurs, it will only reflect a failure of our compassion for someone who made a mistake. In all, many mistakes were made. But the only real loser was the quiet woman who showed up, did her job and won the match. For this, Kim, we should all be sincerely sorry.

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I AgreeI Disagree | I’m Not Sure

Obama-to-Congress: Go Deep!

In Healthcare, Interesting, Politics, Sports on September 5, 2009 at 1:14 pm

I am a huge fan of football and I can’t wait for the start of the 2009-10 season.  In one year, the Jets, my Jets, lost a Hall of Fame quarterback to injury, retirement, indecision, free agency; fired their Mangenius head coach; and parted ways with standout receiver Laveranues Coles. Ten years ago, I would have written off the season, calling it a rebuilding year. But the NFL has changed. The Jets, instead of rebuilding, may only be reloading. I won’t participate in conjecture and speculation but the early talk is that of the Jets winning the AFC East and perhaps even making it to the Superbowl. One can only dream, right?

That dream, however, has a fighting chance of becoming a reality because NFL rules, which are a reflection of NFL values, dictate so. The league used to be dominated by a few teams but this is no longer the case.  The championship returned to the city of Pittsburgh but there are no guarantees the Steelers will even make the playoffs again.  Is this progress? I don’t know… but what is happening in football is as American as the proverbial “apple pie.”

There are less dynasties in the NFL because the league has instituted policies, many of which resembling socialism, to protect the viability of its brand. The college draft, salary caps and free agency transfer power from the ‘haves’ to the ‘have less’ or ‘have nots.’ The net result is a game that is fairly played, less disparity between the best and worst teams and a national hope that any team can beat any other on ANY GIVEN SUNDAY.

Compared to MLB, the NHL & the NBA, the NFL appeals to a wider audience, is watched more frequently, generates more revenues and grows much faster. Football viewership has expanded from once on Sunday locally to 2 games locally and 3 nights per week nationally. Its national games are bid on by 7 television networks and countless other local TV and radio stations. Off-the-field coverage has expanded from highlights during the evening news to integrated networks of out-of-home-, television-, radio- and print-media channels. In 2010,  league expansion will add 4 more teams in Orlando, LA (finally), Portland & San Antonio. In short, the NFL is its own mini-economy and football has become America’s game.

Just as I am excited about the upcoming season, I have counterparts from first place Pittsburgh to 0-12 Detroit who are equally anticipating a competitive season. It is nothing short of amazing that the NFL’s embrace of a few seemingly socialist policies can have a positive impact on a capitalist economy.

I am going to withhold my opinion on the current healthcare debate but I do have an opinion on what is an what isn’t America. On that note, I will conclude with a simple homework assignment… Please answer the following:

If Football = Socialism and Football = America, can Socialism = America?

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I AgreeI Disagree | I’m Not Sure

The Curious Case of Michael Vick

In Interesting on July 21, 2009 at 10:37 pm

This article was written by Lorenzo Chambers, an outstanding tail-back for Dartmouth College, a 2-time recipient of All-Ivy honors and a former member of Team Armani, an American-style football team in Milan, Italy.  Since retiring from professional play, Lorenzo received a NYC Teachers Fellowship to study education; he is currently the Principal at an elementary school, where he inspires young minds to dream beyond the limits society places on them.

In addition to being a fellow NFL enthusiast and Wednesday morning quarterback, Lorenzo is a college buddy and lifelong friend.

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Today is Monday July 20, 2009. I am sitting in a sports bar watching ESPN Fan Nation when the hosts announced the end of Michael Vick’s criminal sentence. The topic discussed was “Should a team hire Michael Vick as their quarterback?”  Both hosts agreed that teams should not take a chance to hire him because he is a marketing nightmare and his ability to lead as a quarterback is questionable. In support of their second argument, they insisted his talent and skills are diminished and his judgment is questionable given his involvement in the dog-fighting scandal.  The following are my thoughts on the matter:

  • Didn’t he just finish serving the sentence for his participation in this crime? If so, it’s over!  I thought the point of a jail sentence was to punish him for his crime. It shouldn’t be a life sentence with no chance to work again. If that’s the case, he shouldn’t have served a jail sentence – just tell him he can never play professional football again.
  • Here’s a free consultation to Vick’s advisors. Regarding the PR/marketing nightmare that your client presents, do not attempt to spin the story. Michael Vick should do two things. First, he should go on a tour to every NFL team that will meet with him and own up to his responsibility. In a face to face meeting with owners, general managers and coaches, he should say that what he did was horrendous, he accepts full responsibility, he regrets it and that it will never happen again.  Next, he should explain why he did it. Where he is from in Virginia, people, especially his family members and friends are poor; they have had to resort to non-traditional sources of income and dog-fighting has been a viable means of earning a living for generations.  It is akin to cock-fighting in some South American countries. This doesn’t make it right but that is the truth.  Because he is wealthy, he felt responsible to provide a way for his friends and family to earn a living. In doing so, he made the wrong choice to not only subsidize their endeavor but to participate in it.  He should say that it will not happen again because the cost of what he did was too high a price to ever pay again in terms of how he has spent the last few months of his time on earth and because of the real possibility that he may never get to do what he loves to do, play football, ever again.  Also, he should say that he is now strong enough to say “No!” to friends and family members who do not have his best interest at heart. I am sure he has no doubt that real love doesn’t mean doing things that put you in jail. Secondly, he needs to go on a national television show, something like 60 Minutes and say the same things.
  • To the people who would condemn Michael Vick to a ban from the NFL for life, where is your compassion for your fellow man? Where is your self-reflection to be redeemed from your own demons?  And what about the hypocrisy that is part of the American way?  For example, why is it okay to hunt deer and bears and whatever other animals that people hunt but you can’t fight dogs?  An argument could be made that at least the dogs had a fighting chance versus the defenseless animals that get shot (for commentary | click here). The point is cruelty to animals should be prevented for all animals.  It can not be selective in nature. Don’t kill the whales, don’t shoot animals for sport, don’t fight dogs.

In the final analysis, the fans on ESPN’s Fan Nation voted 50-50 that teams should take a chance on Vick. I’ll take those odds any day and Michael Vick should get that chance as well.

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I AgreeI Disagree | I’m Not Sure

Comparing Prices before the Grocery Trip

In Business, Grocery, Interesting, Marketing on July 15, 2009 at 4:35 pm

I gave a presentation last week on the business case for HomeShop’s digital grocery list. One of the panelists suggested that we incorporate a price comparison feature that allows consumers to choose a grocery store on the basis of cost of the overall basket. My gut reaction was to resist this strategy but I hear it so often from venture capitalists and advisors that I may have to reconsider. The following thoughts are the initial ramblings of a Confused Enthusiast on what I believe to be the key issues in this matter.

The internet was designed to be a democratizing platform that shifts the balance of power from producers and retailers to consumers.  In the early 1990s, we saw price comparison features on just about every retailing application on the internet.  The prevailing concept was that price margins were so fat on manufactured products that favored the rich industrialists at the expense of poor consumers. Price comparison tools changed the balance of power, transferring producer surplus to consumer surplus.  The reduction in price forced manufacturers to increase supplies to maintain profitability while allowing more consumers to enjoy the benefits of so many manufacturing innovations. No more was this true than in the consumer electronics industry, where very few would dare purchase a plasma TV, camcorder or other gadget or device before consulting MySimon or C|NET. Today, many people consult GasBuddy in advance of filling up at the pump and other industries have implemented price comparison tools as well. As a result, I can understand why so many would consider such a tool for the $750 billion grocery industry.

My initial thought is to resist the deployment of a price comparison tool simply because the industry’s margin structure would not support it.  Let me explain…

In the consumer electronics space, everything is new. At product launch, consumers rarely know much about the products available for sale and this provides manufacturers a great deal of latitude in pricing. The original DVD players sold for $1,600 and people paid that price, especially those who relied on retailers to direct their purchases. When retailer information falls short, consumers can rely on user reviews and feature/price comparisons from independent sources to make a decision. Information, in the consumer electronics industry, has been a game-changer. The net effect has been a ceding of market power from producers and retailers to consumers, eventually leading to lower prices and wider adoption. This could have only occurred in an industry where product knowledge and the power of substitutes were low while profit margins remained high. The grocery industry does not exhibit these characteristics.

Last year, Tide launched its Tide-to-Go stain remover. It was the iPhone of cleaning products: Tide had finally gone mobile. A stain on a shirt can mean the difference between getting a job or not; it would be reasonable to expect the on-the-go stain remover to be priced in the range of an increase in salary. But that didn’t happen. Pricing was severely undermined by consumer expectations and the power of substitutes. P&G could never market the item at a price-point anywhere near the consumer surplus it creates; instead, Tide-to-Go sells for $3 a pen (less than a penny a stain). Were it marketed any higher, Katja Presnal and Jessica Gottlieb would have launched an online “twissy-fit,” the likes of which would surely have caused the carcasses of William Procter and James Gamble to turn, if every so slightly, in their graves.

The repetitive cycle of use and purchase, consumption and replenishment allows consumers to quickly gain knowledge of items sold in a supermarket. When knowledge is high, the power of retailers to raise prices is severely undermined. As a result, the best grocery retailers (including my Mom, may she rest-in-peace) are little more than middlemen who convert inventory risk and location to turn a profit. Caught in the squeeze between manufacturers, who take all the risk in bringing products to market, and consumers, whose brand and product knowledge have a restrictive impact on price, supermarket retailers rarely, if ever, have sufficient margin to ever effectively compete on price against one another. This is why I oppose price comparisons in the supermarket space.

From an economics perspective, let’s consider what would happen if consumers knew the price of their entire shopping basket before the moment of purchase. They would simply go to the store with the lowest price. This, in turn, would force retailers to lower their prices to lure consumers. In the short run, every retailer would be caught in a prisoner’s dilemma where the Nash equilibrium solution would be to drop their prices to the level of variable costs. Eventually, some retailers to go out of business. The few that remained would have to rationalize their product offerings, carrying fewer brands in any one category and limiting excess inventory. The marketplace would begin to experience a higher incidence of stock-out and consumers would be forced to visit multiple stores to purchase all the brands they like. Overall, value would be destroyed once market discipline set in. It’s a nightmare scenario. Having grown up in a retailing family and knowing how hard it is to turn a profit, I wouldn’t wish it on my worst enemy.

Price Comparison for Grocery Shoppers

Price Comparison for Grocery Shoppers

That being said, I am very anxious to understand the opposing view. Perhaps the suggestion was the brain-child of a misguided MBA who puts more faith in the philosophies of Gordon Gekko than Epicurus. Or maybe I am missing a key point. In the UK, there is an experiment underway amongst a consortium of top supermarkets. Tesco, Ocado, Sainsbury and Asda each participate in MySupermarket.com’s price comparison service; I am eager to learn if the venture proves successful and if so, if that business model can be ported to North America. Again, my gut reaction is to resist price comparisons… I guess only time will tell.

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I Agree | I Disagree | I’m Not Sure