Category Archives: Business

Amazon’s potential army of Drones – what’s the point?

Posted on by

Amazon wants to deliver packages to you in 30 minutes via drone. While the convenience might be pretty awesome. I’m not sure how good of an idea this is going to be. I also think that this points to a broader push for Amazon. In the past Amazon has mentioned how they had plans to sell groceries locally and deliver rapidly. This is currently in beta test with only two cities involved, LA and Seattle. Depending on the size of these drones this will make delivery of groceries much easier and reduce the risk for goods to thaw while waiting for the resident to come home and get the groceries. Furthermore, if these drones are really good, Amazon could time the delivery of the groceries based on when the customer wanted them to arrive at their home. Let’s say you place the order in the morning, but know you won’t get home until around 6:30, you could ask Amazon to deliver the goods around 6:30 so you could just bring them in the house and start cooking.

A few years ago there were some rumors that Amazon was planning on going to brick and mortar stores while everyone else is going more web, web, web. These drones that are in the video do not look like they have the farthest range in the world, which means for a place like my home town about an hour north of Pittsburgh by car and if there was a distribution center in Pittsburgh (there’s not, but there is one in Allentown), the drone would need to fly close to 120 miles per hour. That doesn’t seem likely for these things. They don’t look like they have the speed, they are clearly designed for shorter ranges than that. Additionally, implementing these drones would require significantly more distribution centers throughout the US. Distribution centers work best when there is a need for high volume, high speed, and high variety at least in many distribution models. However, if Amazon were to use retail stores as part of their distribution network and looked to use the stores as the location where the drones would send goods from, this makes a lot more sense. Retail stores aren’t really there to be retail stores, but micro distribution centers.

This would impact the types of items that would be a candidate for Air Prime in many locations, for instance cities with Stores only would have a much smaller list of applicable items. Cities with distribution centers near by would likely have any item up for Air Prime that would fit on the drone.

This is still 4-5 years out from being deployed, so why is Amazon showing this off now? Well, bad press recently. There have been several articles that came out this past month about how horrible the distribution centers are in the US.

All said though, I think these drones point to continued interest in providing different approaches to brick and mortar stores as well as grocery stores. I think it will start out small and grow from there. Amazon will likely build out some stores first with a similar function to Best buy where you can pick up in the store. In later store deployments they will have options for Air Prime and pick up in store for certain items. It will certainly change things for Amazon workers and will change the way the distribution centers are managed. They may simply become hubs with a lot more being pushed out closer to the end customer.

Minimum Wage, labor, and economics

Posted on by

Last night on the twittars I had an invigorating discussion related to minimum wage, the mobility of labor, and the economics. The basics of the argument started over the fact that in MA minimum wage will be slowly going up from around $8/hour to $11/hour. $8/hour already is pretty good for the US where the federal minimum wage is closer to $7.25/hour – which is an annual salary of $15,080 (poverty line for an individual is $11,490/year). Obama is proposing to raise the national minimum wage to $10.10/hour or $21,008/year and MA’s eventual minimum wage at $11,440/year. If minimum wage had kept up with productivity gains seen throughout the economy a study argues that the minimum wage should actually be $22/hour or $45,760.

The unfortunate thing about minimum wage jobs is that you typically don’t work 40 hours per week, in fact places like Wal-Mart try to keep employees under 30 hours per week to avoid the requirement of paying any healthcare benefits (at least 1/3 of Walmart employees are limited to 28 hours/week). This requires minimum wage employees to have two or three jobs which creates an extra layer of uncertainty for scheduling of work and getting from one location to another using public transportation. (as a side note WalMart is holding a food drive for their employees)

Why don’t they move to another location that pays better for a job though? There are a couple reasons, first moving is expensive. Even if you’re renting on both ends a cross country move costs several thousand dollars. You have to put money up front for a deposit, go without pay for some period of time as you transition between jobs, you need to move your stuff, and finally, many places won’t hire you if you don’t live there, but you can’t rent unless you have a job. It’s even worse if you own a house, and the worst case is a house that’s underwater.

Now, under utility theory all that won’t matter because it’s a sunk cost. It’s the cost of doing business, all that matters is the amount of money you’ll gain on the other side. Now, if we were all perfectly rational “Econs” that would work, however we’re Human and we don’t think that way. According to Prospect Theory we are extremely loss adverse and would much rather have a small chance at a with with a worse downside than a guaranteed downside. For example, we’d rather have a 10% of winning $0, but 90% of losing $1,000 than automatically losing $900. From Utility theory or expected value they are the same, but from Prospect theory they are very different. This drives our behavior when it comes to relocating for jobs, and is especially true when you’re unemployed. Because your baseline is set at your previous salary, you’d rather wait and risk making no money than taking a job that’s more than 10% less than your previous salary. From an “Econs” perspective this is irrational as you should take any job that’s offered to you, because it’s more than $0. This theory can be applied to corporations as well. They are risk adverse in many cases. In one way this manifests is through the controllable costs of employees salaries. In many cases managers will let employees go or hire employees at a lower salary than deal with something that’s a sunk cost.

Prospect Theory FourFold, Thinking, Fast and Slow Daniel Kahneman

Furthermore, corporations are under pressure do to short term requirements of the market to continually beat the previous quarters. This pushes activities in to the lower right quadrant, which also negatively impacts innovation and employee salary.

Based on the rationality here, should we increase minimum wage? Based on both Utility theory and Prospect theory companies would dramatically reduce the number of employees they have to avoid a sudden massive loss. Companies should move or relocate elsewhere, however, many studies have shown this simply isn’t the case. I think that this can be explained by something else that’s unexpected, unemployment benefits help the economy grow. According to a Moody’s study several years ago and another talk a single dollar of unemployment benefits creates between $1.64 – $2.00 of economic activity. This is because it creates demand that otherwise would have been missing. It’s likely that the higher salary of people that are making minimum wage generates additional demand for goods and services that otherwise would have been unable to be fulfilled.

I believe, this is why Switzerland is looking into providing a living wage of $2,800/month or $33,600/year. It’s a way of being both moral (not allowing citizens to starve and live on the street), but also stimulate the economy to continually grow. The idea of lower taxes is to put more money into the economy so people will spend more money. However, there are a lot of people out there that don’t benefit from this all that much because they already pay little to no taxes (40% before 2007). Providing tax relief doesn’t help this portion of the economy. Providing a higher minimum wage would provide relief for them, but a tax on corporations, but would be recouped through additional demand. A living wage provides relief, but a tax on the broader public, but would be recouped through additional demand.

In the first case, people are working and providing a service to a corporation for the salary they earn. In the second case, there’s a higher chance of free loading – however I see no reason why you can’t put requirements on accepting the money such as community service, using the money for education and training, or volunteering somewhere.

Do these thoughts address every issues we’ve seen regarding minimum wage? No, but it’s helps frame the discussion a little bit and hopefully addresses some of the concerns. I believe that much of debate comes from non-rational sources, such as the economic theory you fully support. Prospect theory, Behavioral Economics, and Evolutionary Economics are disdained or unknown by Libertarians and Conservatives which paint a very different picture on the economic policies we should enact than neo-classical economics. Which puts this to something closer of a religious battle than a logical rational debate, because these theories are incommensurate with each other in the same way that Newtonian Physics and Relativistic Physics were to each other. It’s either one or the other not both.

Edit: I miscalculated on the salaries for minimum wages. I have corrected them.

Intellectual dishonesty in corporate America, CEO Salaries

Posted on by

Apparently CEOs are upset that the Security and Exchange Commission is going to require calculation of CEO pay based upon median salary of all employees rather than Mean or average. They argue that this would burden them with unnecessarily complex calculations. This of course is an absurd statement. Let’s do a thought experiment to walk through the difference between averages and medians.

You, a friend and Bill Gates get on an elevator, your current net worth is $100,000, your friend’s is $200,000 while Bill Gates is somewhere near $60 Billion. The average net worth of the three of you would be $20 billion, while the median is $200,000.  The difference in ratio between these examples are staggering. In the example of averages, Bill Gates is only 3:1, while in the second example it’s 300,000:1. Major difference correct? This example is specifically designed to highlight the massiveness of the differences between averages and medians.

As you can see in the chart above with a skewed distribution there will be a gap between the median and mean. We hear this routinely when people discuss home prices, they are always discussed in medians, because the average price of a home is positively skewed by millionaires in most cities. Like the one above.
So what would the difference in salaries be if salaries are calculated off of median rather than means? Well, let’s use some real numbers, in 2004 the US the average annual income was: $60,528 while the median was $43,318 (source wikipedia). We’ll look at the extremes for ratio difference compared to these numbers, the JC Penny CEO earned 1795:1 the mean worker, so his salary could have been: $108,647,760 for the Mean compared to $77,755,810 or $31 million less (obviously the mean and median salaries for JC Penny’s employees are lower than the median or mean values for the US). On the lower end the CEO for Agilent Technologies earn a measly 173:1 or (mean) $10,471,344; (median) $7,494,014 or $3 Million more. 
Limiting CEO salaries based on the median means dramatically less money for the CEO. It also highlights disparity in numbers of people that are making really low salaries. I would imagine that for a company like McDonald’s or Wal-Mart the median salary for employees is between 20-30k/year, which would drive down the maximum salary well down if the limit is something like a ratio of 100 (median of 25k*100 = 2,500,000). 
The true concern of the complexity comes from not the new method of calculating the maximum ratio a CEO can earn using medians – especially as it’s built into excel (=average()/=median() ) and nearly all financial tools, but in the complexity of creating compensation packages to get around that law. If the law is strictly implemented where there is absolutely no wiggle room where all stock options, bonuses, and base salary cannot be above some set ratio on the median salary, then the only way to pay CEO’s more is to shift that median up. This would impact profits and most likely profit margins. A way around this would be to outsource manufacturing and exclusively design in the US thus shifting up median salaries. It will be interesting to see how CEOs and leadership address this.
Otherwise they might have to make a lot less money per year and save shareholders a lot of money.

How you feel at work

Posted on by

We know that work sucks most of the time. The question is why? My wife and I have been pondering this question quite a bit lately because of her high levels of stress. She’s basically working all the time and has little expectation of being rewarded beyond a raise and the yearly bonus everyone gets based on the performance of her company. Being on call 24/7 with tools that consistently go down as a new employee immediately creates problems. No matter what you do you feel like you’re a failure. This is where the quality of your manager can really step in to make you feel better about the job you’ve been doing. According to a Danish study this is what causes work driven depression, not the amount of work you’ve left to do. I completely agree with this. I know that I’ve gotten depressed when I’ve had minimal work to do and had been successful with my work because I had a bad manager (he was giving raises to the women in the group he obviously had a crush on). When your managers have poker faces and basically treat you the way they expect to be treated, no awards, recognition, and more work with less time for a job well done are causes of serious workplace depression.

The article doesn’t really provide many ways to address these problems. However, from my experience I know that there are some definite ways to address this type of depression. First, look for co-workers that inspire you and can motivate you. Get peer recognition and make sure you recognize your peers that you feel are doing exemplary work. In many cases companies have spot awards – use them regardless if there’s money associated or not. The recognition really makes people feel good. Furthermore, as more of your peers begin to show recognition it will actually put pressure UP to your manager to do the same. The manager will be the aberration of the group and will likely want to conform, especially if manager sees improvement in the organization.

Work with cross-functional teams. You are more likely to get rewarded when you work on projects with larger scopes. This provides several benefits for you, first you learn more about the organization than just your silo. Second, you are able to see how other leaders treat their people and if you like how a leader in a different group treats their people, you should consider moving in that direction. This will enable you to develop new skills and potentially learn the skills you need to get into a job you find more interesting and full filling.

Finally, if you don’t find something that makes you happy at the company you’re with leave. Not without another job lined up, but start looking for the types of jobs that you want and try to find out what type of manager you’d rather work for. In many jobs you can move around enough to learn what you like and what you don’t like. I suggest moving around within a company, then looking elsewhere. Develop the skills you can while you’re at your current job and try to find something you’re excited about.

Many of the people I’m connected with on social media, such as the KBMOD crew have been able to do this, but not all of them have been able to. I hope they’re able to do this soon, I know that my wife will be doing the same over the next few months. Work takes up too much of your life for it to suck that badly. Move on, if you had a failing review a company would do the same with you, why shouldn’t you do the same if you’re company’s failing you?

New Economy vs. Old Economy – Creative Destruction

Posted on by

My last post on this the New Vs. Old triggered a far to brief conversation at work about creative destruction and when it’s “right” for creative destruction to occur. I felt that this was an interesting tact for approaching this sort of conversation. My colleague pointed out that when new businesses challenge laws that are in place just because you have to question if that’s “right” or not.

First, what is creative destruction? I wrote about this over two years ago, so I’ll forgive you not remembering. Essentially, it’s whenever new businesses figure out new innovative ways to provide a service or technology that causes the previous service to be obsolete. Today, it’s more popularly described as “disrupting a market.”

So, looking at creative destruction and the laws that spring up around a given industry I believe that on the extreme there are only two types of laws. Those that protect the consumer/public/end user/employee and those that protect the industry. That’s not to say that this isn’t a gradient where the impact of a given law flows from protecting the public to the industry or in fact does both.

For example, Copyright used to protect both the people that produce music and the public. It did this by guaranteeing a state sanctioned monopoly for a short time period and upon expiration the public would then own the work. This enable the creation of the music industry and helped artists grow and make money. It wasn’t perfect for either party, but it worked fairly well. We all know of stories of starving artists that died and then their works became popular. Well, currently those works still make someone money and that isn’t good for the public. Now copyright lasts as long as 70 years past the death of the original artist. This clearly is no longer protecting the public but is protecting the industry. I would argue that with how far the pendulum has shifted it’d be moral to try to push the boundaries of these laws and creatively destroy the industry. This is currently happening with the copyleft movement.

In the last blog I wrote about AirBnB and discussed Uber in the one before that. These are very different than the music industry. Most cab companies have something called a medallion, which is something like a certification of quality for the vehicle and the cab driver. These are very expensive and have essentially a dual function of protecting both the public and the taxi industry. Uber is challenging these laws because it is a “ride sharing” program where you hail a person going in the direction you are, pay them some money and move on. The purpose of the company is to reduce expense of moving around a big city like San Francisco, increase the competition of the market, reduce the number of cars on the road, and to make money a different way. Depending on your point of view it’s breaking the law. It’s being sued and will likely continue to be sued.

Is it “right” for this company to operate this way? Well, there’s the argument that you don’t have to use Uber at all, so if you’re concerned about the safety aspect you’re mostly covered. Since it’s a personal vehicle the general public is at no more risk than if the car was driving around with one person rather than two. The person is already on the road and likely would have been anyway, so if they suck at driving you’re no more or less safe. However, it’s still possibly in conflict with the law. It’s a new way to hail a “cab” and the taxi companies are having problems adapting to the competition. So is it right or wrong? In this case, I don’t really know. I think that it’s “Right” that a company is forcing taxi companies to evaluate how they do business and to challenge the laws that are in place to protect the taxi industry. I think there could be risks to the public, but they aren’t huge.

There’s another aspect that I haven’t talked about in this model though. A company like Yellow cab has subsidiaries in many different cities. While Uber is an application and it’s “cabs” are in any city where a person is a member. There’s a huge network effect benefit for Uber, they need to do little to no extra work and they can grow into new markets. Uber doesn’t control which markets they enter to some extent or how quickly they grow in a given market, they can grow as fast as the market can support the growth. Yellow Cab has a much different growth potential and can’t enter new markets as easily. If Uber is able to service an under serviced area shouldn’t we support that? Isn’t that “right.” Furthermore, with this rapid growth model it’s nearly impossible to know what laws they are going to be in conflict with until it’s already in the market. Ignorance of course is no defense, but it removes some of the intentional aspects of the creative destruction.

I think that there are certainly moral questions that need to be asked around new businesses and business models. We should continue to ask them and work to make sure that if a new company is disrupting and industry the result is equal or greater protection to the public and a balance between changing laws that protect incumbent industry and the new entrant.