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In Defence of Suburbia: Part II
Posted on
Saturday 1 November 2008
By Dr. Bruce M. Firestone, Entrepreneur-in-Residence, Telfer
School of Management, University of Ottawa and Adjunct Research
Professor, School of Architecture, Carleton University and Professor Ben
Gianni, Associate Professor, School of Architecture, Carleton
University
A Brief History
It wasn’t that long ago (and the condition still exists in certain
cantons of Switzerland, for example) that if you didn’t own land, you
couldn’t vote in civic elections or even represent yourself at town hall
gatherings. Power was tied to ownership of land so it is not surprising
that as the middle class started appearing in western nations and
elsewhere, their first ambition tended to be land ownership.
They soon found that lands in the centre of towns and villages tended
to be monopolized by the upper class and that rural lands tended to be
in the hands of the nobility. To own land, they needed to be close to
their places of business and work but to afford it and to find a ready
supply, they needed to move out from the city centre.
Land ownership brings with it not only the ability to influence civic
decisions but also brings with it: a sense of self respect, the equity
to start or further capitalize a business, a sense of renewed
citizenship, a feeling of permanence and belonging, the respect of
others and an escape from the vagaries of rent increases imposed by
Landlords as well as forced eviction should the Landlord want the
premises for his or her own family or for other reasons such as land
speculation and land assembly for redevelopment or other purposes.
There is a close connection between human rights and property rights
that is not well understood. Former Canadian Prime Minister, Pierre
Trudeau, recognized this; he attempted to include property rights in the
Canadian Charter of Rights and Freedoms but, ultimately, he was not
successful.
Canadian Provinces, which are the near equal of the Federal
Government in Canada’s federal system of government, effectively vetoed
this—they did not want anything to stand in their way as they laid claim
to the exploitation of natural resources beneath private property.
(Natural resources are a Provincial responsibility under the original
Act that created Canada (the BNA (British North America) Act)).
So Mr. Trudeau had to give up on securing property rights in the
repatriated Canadian Constitution, otherwise, Canada’s Constitution
would still remain at Westminster and ultimate authority for the
nation’s laws would still be determined by the British Privy Council.
Many dictators have intuitively understood that if you wish to take
away an individual’s human rights or that of a group, first make them
homeless. By taking their property without due process of law (or by way
of the imposition by civic authority through the process of eminent
domain), they are closer to losing their liberty and maybe their lives
as well.
To say now to a new generation of young adults that their dream of
owning a suburban property should be dashed and that they should focus
solely on owing a downtown apartment or condominium, may not be entirely
fair. Thomas Jefferson’s vision was that a country of citizens would
also be a country of landowners. Most people today would still
(intuitively) agree with this view, not just in North America but in
most developing nations as well.
Now many of suburbia’s critics today speak highly of the blessings of
greater density. They feel that higher densities would: make public
transit more practical, enhance the ability to live and work in the same
neighborhood, make cities more compact and easier to service, cost less
for municipalities to operate, reduce the environmental footprint, be
more interesting places to live and work and shop and play.
But what many may be forgetting is that there is such a thing as
over-densification. To live in New York City, circa 1899, was not an
entirely pleasant experience for most of the citizenry. Manhattan alone
housed over 300,000 horses in vertical stables; they closely co-habited
with humans, who themselves were often housed in tenements that were
unbearably cold in winter and hot in summer, were fantastically
over-priced, were subject to violent crime and unimaginable cruelty of a
type not well understood by residents of towns and cities in North
America today. They lacked access to park space and sports and
recreation facilities of any type. They were also a major source of
disease.
No wonder that folks decided to leave as soon as they could afford to
do so. What made that possible was first the horse drawn streetcar
followed later by the electric streetcar—the automobile simply
accelerated a trend that had already begun. In fact, the spread of
railroads had caused satellite towns to springs up which were basically
suburban in nature: few jobs and lots of commuters. Jobs followed later.
Another factor behind the rise of the suburb was the desire for the
separation of home and work. Clean air, clean water, access to parkland,
the ability to own reasonably-priced property, escape from disease,
crime and slum Landlords all played a part in the rise of the suburbs.
But the ability to escape from the shadow of the workplace was an
important psychological factor too.
Developers have found that a residential development right next to a
major employment hub does not necessarily fill up with buyers working in
that hub; people want a commute of some duration to de-stress before
they arrive home.
Suburbanization was interrupted by the Great Depression of the 1930s
and the Second World War. After the War was over and as automobile
ownership became even more commonplace, the process speeded up. The
freedom that the automobile conveys on its owner—to go from any place to
any place at any time—is not new. In fact, if cars became unavailable
or unaffordable, the horse drawn carriage would make a swift comeback.
People want the ability to go from any place to any place at any
time. Life would be much poorer if the ability to meet friends, do
errands, visit face to face about a business matter or shop at a
specialty store were completely limited to the schedule of mass transit.
After the War was over, people married and had (by today’s standard)
large families of four children or more. They owned one or more private
vehicles and wanted to enjoy the benefits of homeownership. The suburban
home answered those needs at an affordable price.
Of course, the US and Canada didn’t sustain bomb damage during the
war as many European nations did. Hence, our governments did not need to
intervene as directly to rebuild the core. Their goal was, instead, to
find a quick and effective solution to the post-War housing shortage
and to get as many sectors of the economy involved in producing it.
Governments in North America were not directly responsible for
building or maintaining the housing stock and that is what most people
preferred. Moreover, the 25 and 30-year mortgage term meant that house
was paid off by retirement (i.e., by the time owner’s income dropped).
Affordable ownership became its own form of social safety net.
Despite the years of New Deal in the US, it was the search for other options that private developers were responding to.
In fact, European countries are now struggling to figure out what to
do with large amounts of government built housing stock. Some North
American cities are faced with the same challenge.
They need to turn more of it over to the private sector and get
ownership rates up. Amsterdam’s housing stock, for example, was around
90% rental in 1990. The Dutch middle class was not happy. Government
built rentals may be a good short term solution but most nations find
that it is not acceptable in longer term.
Public housing tends to deteriorate faster and need more repairs to
meet safety and health standards than privately owned housing.
Governments are not widely known to be efficient at the doing of things
so one could conclude that private owners (with Landlords or sitting
owners) would use scarce capital more efficiently.
An explicit decision by governments (US and Canadian) to leave as
much of the provision of housing as possible to the private sector has
left North America with less of a public housing problem. C. D. Howe, an
American who became one of Canada’s great post War Cabinet Ministers,
announced in Parliament in 1946 that: “It is the policy of this
government to ensure that as large a portion as possible of housing be
built by the private sector.” And so it was.
A Case in Point
Even today, it is hard to see how a couple would house a family in a city centre in an apartment, especially a large family.
A village, town or city is a survival machine (bringing the greatest
benefits to the greatest number) and so is a typical suburban home. In
fact, each home is a type of factory. The rapid urbanization of the
planet is probably one of the factors that is helping to return some
areas of the planet back to a wilderness state. We have only look to
what happened to the residents of Phnom Penh when the Khmer Rouge forced
over 3 million people into the countryside in less than a week.
Hundreds of thousands died and the country side was devastated as
hungry, desperate people denuded huge sections of forest in search of
food and fuel.
Today’s home is a place for multi tasking. A typical suburban home and grounds could be used as:
a. survival machine for the inhabitants;
b. office work and employment;
c. teaching (of children);
d. warehousing (storage);
e. laundry service;
f. place of domestic employment;
g. research (if you have a home office and you happened to be a Professor, for example);
h. writing;
i. retailing (home based businesses);
j. sports and exercise in a fully equipped gym;
k. entertainment;
l. communications;
m. light manufacturing (home based businesses);
n. packaging (home based businesses);
o. consumption of large quantities of data, electricity, natural gas,
food, clothing, gasoline, beverages, water, paper, oil, windshield
wiping and other automotive fluids, office supplies, school supplies,
art, furniture, bedding, camping equipment, sports equipment, gardening
supplies, packing materials, and more;
p. the home consumes services such as snail mail, couriers, faxing,
email, browser, Internet, telephone, flyers, local newspapers, national
newspapers, coupons, social networks, door-to-door salespeople and
petitioners;
q. restaurant (meals served to guests);
r. parties;
s. events;
t. handicrafts;
u. tool room;
v. repair shop;
w. hobbies;
x. education;
y. gaming;
z. mating, caring and feeding babies;
aa. school;
bb. library;
cc. dance studio;
dd. art gallery;
ee. personal grooming;
ff. clothing repair;
gg. pet grooming and housing;
hh. and much more.
The home of the future may be designed quite differently with this
functional program in mind. It will almost certainly have much greater
bandwidth and more people will work at least some of the time from
‘home’. They will ‘goggle’ into the metaverse and participate in
conferences by avatar and in stereo space (the 5th Migration). (We
should not underestimate the power of technology and reform to create
solutions.)
There will be room for adult children and elders living under one roof but with independent access to their space.
Employees will be able to come to the home and work there when necessary.
‘Granny’ flats in the backyard, apartments in the basement or in the attic or above the garage will become more commonplace.
Suburbs will evolve—they will become denser and be subject to more intense uses.
Density will increase, that is there will be more of the same type of
activity taking place on one lot: more residents per hectare. But
intensity of use will increase too as different types of uses (e.g.,
employment and residential uses) become co-mingled and this becomes
commonplace.
It makes little sense to invest huge sums in suburbs not only for
built forms but also for the infrastructure that supports suburbia and
then use the structures only for sleeping.
For a family of two adults, six children, one nanny and one elder
living in a suburban home in Ottawa, Canada with three rooms being used
for office work, the costs look something like this (circa 2008):
Capital
10 residents
3 work-from-home jobs
13 residents and jobs
$725,000 value of home
$ 55,769.23 capital cost of accommodation per person-worker
6% interest rate on mortgage
25 amortization
($363.55) principal and interest per month per person-worker (assuming 100% financed)
Operating
$ 6,000.00 tel
$ 4,000.00 elect
$ 4,500.00 gas
$ 7,000.00 property taxes
$ 3,500.00 insurance
$ 2,800.00 misc
$ 27,800.00
$ 2,316.67 per month
$ (178.21) per person-worker per month
Total
$ (541.76) per person-worker per month
Factoring in all capital and operating expenses, the cost per person-worker comes to around $540 per month.
A comparable urban home (if one could be found to accommodate such a
large and diverse family) would cost around $940 per month per
person-worker, a significant increase.
Sustainability
Perhaps we are seeing suburbs at an early stage of their development.
Suburbs have been around for more than a century but that is not a
significant amount of time in comparison with the 100 centuries that
humans have been building cities. It represents just 1% of the time
since humans began living in villages and towns so perhaps a few more
centuries will see some quite radical adjustments.
By retrofitting suburbs to allow for greater density and intensity of
use, as well as allowing more varied uses including office and retail
and industrial structures to mix in with the mono-cultured suburb which
became the norm after World War II, the suburb can be redefined and
resurrected and resuscitated and reused.
Sustainability needs to become a concept that embraces the idea that
we are designing systems of interconnected functions. What’s the point
of designing a home to efficiently accomplish all these tasks if zoning
By-laws prohibit work-from-home businesses?
The NIMBY (Not-In-My-Backyard) movement is powerful. It is based on
two human emotions: greed and fear. People are fearful that any change
in their neighborhood (like allowing people to work from home) will
negatively affect their property values and they are greedy to see their
property values increase.
There are many serious environmental concerns on this planet but
someone who is working from their home is not one of them. There are
hundreds of other examples of this type of behavior, which resists
change and compromises efforts to move our communities to higher levels
of sustainability.
In California, people have additional incentive to add solar
collectors and wind generators to their home or place of business. Any
power they generate, that is surplus to their needs, can be pumped into
the public grid and their meter will run in the reverse direction: that
is, they are compensated for their power. What’s the point of investing
in these types of technologies in, say, Ontario, where reverse metering
is not allowed?
We have to recognize that a large part of the challenge to increasing
the level of sustainability is to convince people and their
institutions to change policies and regulations, not just improve
technology and technical prowess in how we build things and do things.
It is interesting to hear criticism of suburban design as wasteful of
land and resources when zoning By-laws often enforce maximum densities,
minimum parkland and open space requirements, large front yard, side
yard and rear yard setbacks, restrict uses to single family homes only,
use winding, curvilinear street patterns that increase the distance and
time between any two points as does restricting left turns and using one
way streets and even preventing citizens of one town or suburb from
driving on the streets of a neighboring town (yes, this is done by not
allowing traffic to cross a street and proceed straight ahead!), impose
limits on home employment uses, disallow corner stores or offices within
the community, etc.
Those very people (town planners and municipal councilors) who impose
such constraints then turn around and decry the result. They are not
usually the ones who inhabit the poorer sections of town. They are also
often the ones who live in areas that are close to the core and in what
used to be considered suburbs. These people have forgotten that their
hugely valuable homes that give them the large yard of a suburban home
and the privacy of the suburban home are now considered ‘urban’ simply
because the city has spread out and enveloped them,
The automobile suburb successfully distanced itself from the
industrial city. Success was in direct proportion to distance from the
industrial core. The pattern derived from the railroad suburbs of 19th
century. Those who could, moved out. Personal mobility was a sign of
wealth. Meanwhile, immigrants lived within walking distance of mills (in
polluted river valleys). Or they lived in the eastern parts of North
American towns because winds tend to be westerly and, hence, industrial
pollution moves from west to east.
One of the arguments often cited as a reason to abandon the suburbs
is that they are subsidized by the urban resident. Most new suburban
roads, water mains, sewer lines and other infrastructure in cities in
North America are paid for by the private developer who builds there.
These costs are presumably passed on to future homebuyers. In addition,
most developers must pay development charges (DCs) when they secure a
building permit. Those DCs are ‘hook-up’ payments; they pay for larger
waste water and water treatment plants, for schools, for more libraries
and other requirements that are beyond the four corners of the
sub-division. The argument that suburbs are a negative fiscal drag on
cities is a specious one—a) cities would not have to pay anything for
anyone if they didn’t exist at all, b) the actual fiscal argument is far
from settled and c) there is no reason why suburbs can not be built
with much greater densities and intensities if developers were allowed
to do so by their political masters and by existing residents.
If anything, today’s new suburbanites are paying a higher share of
the costs to create new suburbs than their parents or grandparents did.
By putting in place these DCs (mostly beginning in the 1980s), municipal
leaders (if they owned a home and, of course, most did) in effect voted
themselves a one-time increase in the value of their homes and imposed
new costs on new homeowners. Young people are over-represented amongst
this group and this brings up the question of intergenerational equity.
The marketplace can and will make adjustments as long as appropriate
governmental policies and incentives are in place and they have the
courage to implement them. After all, any system taken to its logical
(and sometimes illogical) conclusion may produce unexpected consequences
and need adjusting.
In many ways, suburbs are more sustainable than cities: a) they are
more stable in the long term, b) cities can be overly subject to change,
c) they have less air pollution and congestion, d) they are more
resistant to terrorist attack. History shows us that the most stable
communities in the urban landscape were the railroad suburbs that were
built in late 19th century and early 20th century. The middle class and
our financial institutions like stability. The city centre is one of
the primary realms of speculation and change, not stability. (The other
is, of course, the fringe of a city where agricultural uses and urban
uses often come into conflict and change is endemic.)
As cities push farther out, the need is for a different model—namely,
a village model rather than a typical subdivision. New eras require new
approaches. Centers of employment will be distributed throughout a
city-state. Commuting times will drop. Higher fuel prices will encourage
this trend.
Count Our Blessings
In many developing nations and, even some European countries, they
greatly envy the suburbs of North America; they love the ability to own
your own home, to be in a place that is quiet, to be free of a
Landlord’s influence and much more. They don’t want to be indentured to a
Landlord for life. Unlike many European countries where homeownership
was limited to the wealthy, building at high volumes on inexpensive land
brought ownership within the reach of middle class.
It was a bottom up phenomenon in North America where the right
combination of private initiative by developers and a willing market of
increasingly wealthy consumers produced a lucky generation. It might
not have worked in countries where land was scarce and car ownership was
lower but mass suburbanization was quite effective in North America.
Developing nations understand the power of home ownership to create a
sense of belonging and a sense of citizenship and a buy-in to the
nation’s laws. Also the number one source of startup capital for new
business formation is home equity. Developing nations recognize that it
is the rise of the entrepreneur class in places like China and India,
their unshackling from onerous regulation and bureaucracy and the
release of trillions of dollars of home equity that brought about those
economic miracles and the rise in living standards there. It was not
five year, government-mandated plans, government sponsored great leaps
forward or centrally planned economic strategies that brought those
nations out of intense poverty.
Leading development economist, Hernando de Soto, speaks to these
issues and encourages governments everywhere to create the legal
mechanisms for home ownership even recognizing informal towns as
important economic generators when private land ownership is protected
and encouraged.
Every square foot of our planet’s land area is claimed by one
government or the other. If anything, today’s new suburbanites are
paying a higher share of the costs to create new suburbs than their
parents or grandparents did. In the past, the costs of collector roads,
water mains, sewers and all manner of municipal infrastructure were
shouldered by the city as a whole—the costs were buried in the general
tax rate paid by all. Most cities today force developers to install all
the services within new sub-divisions at their cost plus the
municipalities charge each new homeowner a DC (Development Charge) which
contributes to the cost of off-site infrastructure. By putting in place
these DCs (mostly beginning in the 1980s), municipal leaders (if they
owned a home) voted themselves a one-time increase in the value of their
homes and imposed new costs on new homeowners. Young people are
over-represented amongst this group and this brings up the question of
intergenerational equity.
One hundred centuries ago, if you didn’t like your tribal chief, you
could take your family and friends and move on. Today, more nations are
putting up fences to keep their neighbours out. And many local
politicians want to do the same—put up a fence around their cities and
not allow anyone out. Perhaps we will become poorer than our forebears
of ten millennia ago.
Many city centres can be frightening places with legions of homeless,
crime and deserted streets after the office crowd goes home at night.
They are not necessarily the best places to bring up the next generation
of business, political and social leaders.
The argument that suburbs are brain-numbing environments has not
panned out. Top students tend to come from suburbia. Many leaders
(political, business and institutional) tend to come from suburbia. The
pursuit of excellence, respect for law and other cultural values are
supported by suburban residents.
With rising wealth comes the demand for more housing choices. In
fact, the post modern economy is more about providing choices and
alternatives than ever before. For the first time, it is possible to
mass customize products and services through the intervention of the
Internet. It hardly seems likely that fewer choices in housing forms is
the direction most people want to go in.
North Americans should give themselves more credit: both for what
they have built and for their ability to find creative ways of
addressing issues arising from their creations. As cities have spread
out, they have also pushed higher at their core, all else being equal.
One of the least understood urban phenomenon is that suburbs and
urban cores are in a symbiotic relationship. If that were not true then
Manhattan would have the same density as Toledo. Not everyone wants to
live in an apartment above a pub. Some want to live in a quiet suburb.
Happily, some do. People in the suburbs employ a legion of
advisors—financial planners, lawyers, accountants, consultants, bankers
what have you. They need office space. The people in the suburbs and
those financial planners, lawyers, accountants, consultants and bankers
go our for dinner, they go shopping, they go to films and plays, they
attend the opera and festivals. People who work in retail jobs, for
example, may, indeed, want to live in an apartment in the city centre
above a pub. To make it affordable for them, the urban form is compelled
to change—buildings need to go higher and spaces need to be smaller to
make more efficient use of a scarce commodity—land and to increase the
yield. This keeps prices lower than they otherwise would be.
City centres that look like downtown Chicago or Manhattan don’t come to be in a vacuum; they exist because suburbs do.
There is a big difference between saying suburbs were built wrong
(which is probably not true) and saying that things should be done
differently now (which we probably should do). Social changes are
producing a new kind of demand for compact, transit-oriented
development. This is a good thing. But we cannot conclude from this
that suburbanization was necessarily bad.
Arguably, the apotheosis of industrialization was personal mobility.
We can decrease dependency but we can’t deny people the opportunity to
own and use cars as they choose. Perhaps the goal should be to make it
more of a choice and less of a necessity. The question today is not how
to get rid of suburbs but how to make them more diverse without
compromising their stability.
Many of the suburbs circa the 1950s and early 1960s already
accommodated change and transformation over time. The combination of
relatively small homes on relatively big lots meant that owners could
buy in affordably then expand their house as they accumulated funds and
their families grew. More recently, many are being knocked down and
replaced with doubles and other more dense built forms.
It’s true that newer suburbs (from the 1980s onwards) seem to be less
flexible. Houses are much closer together and lots are smaller. This is
a function of higher land prices, higher infrastructure costs, higher
taxes and the need for affordability.
Density makes better use of road and sewer infrastructure but does
not translate to walkability or diversity with respect to uses and
demographics. They may just end up dumping larger numbers of people out
onto feeder roads (“traffic sewers”). The changes need to include
policy ones to get a better design, more mixing together of different
uses and, hence, produce more sustainable communities.
People won’t just stand there and allow their suburban lives to go
down the tubes. They will densify the suburbs (for example, the City of
Ottawa took a tentative step in that direction allowing in-home suites
to be built everywhere (notwithstanding what current zoning By-laws say)
except in the Village of Rockcliffe Park.)
They will (eventually) allow granny flats, duplexes, triplexes,
doubles and other forms of densification to take place. If people can’t
afford their suburban homes any longer, they will rent out rooms, build
in-home suites, add granny flats, add apartments in the attic or above
their garages, whatever it takes to make the economics work better. They
will also intensify the suburbs—there will be much more work from home
so these expensive buildings will be used day and night.
If there is enough pressure, they will turn hideously land intensive
uses such as golf courses (which are ecological nightmares too) into
urban farms or add industrial greenhouses to their homes.
Car pooling and mass transit use will increase. The personal mobility
and freedom that a car represents won’t go away but the size, motive
power and frequency of use may change—there is a reason why people had a
horse and buggy even when they had access to horse drawn streetcars.
Points to point journeys, as discussed above, are just much more
convenient and efficient with individual transport alternatives.
A higher overall density is required before mass transit can be made
to make sense. Suburbs needed time to grow, mature and become denser.
We’re now in a position to consider alternatives to the car. The
pattern of the transit network may be significantly different than what
we might have put in place had we built mass transit system 50 years
ago.
The problem is not entirely one of form: it’s the covenants and
restrictions that limit how suburban properties can be used and
occupied. These policies are the greatest threat to suburban
intensification.
Different mixes of uses and levels of density require different
approaches to community design (coupled with changes in zoning,
covenants and NIMBY attitudes). Promoting diversity is not just as
simple as building a few high-rise housing projects on the periphery;
we’ve already learned that lesson. If designed properly, diversity can
benefit all. New Urbanists have done much in this regard.
The opportunity to build Greenfield developments in new ways and also
to consider creative approaches to suburban intensification is a
challenge that architects and developers and urbanists are keen to take
up.
Toronto tried to restrict development to the corridor form Oshawa to
Mississauga (in hopes of strengthening the role of transit) but the
effort backfired and sent development northward where land was cheaper
and regulations fewer. Ottawa tried to contain the city by putting a
greenbelt of protected lands around the entire community only to see
development jump to more distant and expensive (to service) suburbs.
Studies in England show that, despite increased commuting times, most of the middle class would prefer to move further out.
The range of choices has been redefined by the emergence of the condo
market. Single family detached homes now appeal to a narrower market
sector. The marketplace has become more diverse and sophisticated.
It’s the emergence of these new choices that make new forms of
communities possible.
But having said this, who wants to deny a person’s right to their
‘little cabin in the woods’? Is a utopian search for a middle
landscape—the best of both the urban and rural worlds—wrong?
Copyright. Dr. Bruce M. Firestone and Professor Ben Gianni, Ottawa, Canada. November 2008.
Prof Bruce @ 4:14 pm
Filed under:
and
and
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Livable Cities and Neo-Urbanism
and
and
and
Posted on
Saturday 25 October 2008
People are familiar with ‘Buyer’s Remorse’ (when you have
bought something you wished you hadn’t). But what about ‘Seller’s
Remorse’?
I guess it would probably make sense to define ‘Seller’s Remorse’
this way: When you sell a thing and later regret having done so.
But actually, I am seeing a different type of Seller’s Remorse in
this tough economic climate. Sellers are now (sometimes) wishing that
they had a previous Offer back on the table so that they could grab it
and sell!
I often have the chance to advise clients (mostly commercial ones but
I would imagine the same type of thing takes place in residential real
estate—the first Offer is often the highest and best Offer.) A recent
deal for industrial land fell apart over a relatively trivial amount of
money. I advised the Seller that the Buyer was qualified to make an all
cash Offer and that, in all likelihood, the Buyer had reached his limit.
The Offer was at a very attractive number—amongst the highest prices
paid for industrial land in the Ottawa area. The Seller held out for
more.
My sense of things is that most firms (large and small) are generally
better off to do ten good deals that three perfect ones. Entrepreneurs
will instantly recognize this as optimization behaviour, not
maximization behaviour. Entrepreneurs kind of intuitively know this—they
act to optimize their time and cashflow and are not very concerned
about getting the perfect deal or getting the last dollar out of a
client. They know that if they leave something on the table, they are
likely to get those ‘lost’ dollars back in a subsequent transaction and
they are likely to have a chance to develop a long term client
relationship too. I suspect that this type of behaviour enhances long
term profitability.
Greed and fear tend to motivate amateur Sellers—they are afraid that
they may get taken advantage of by canny Buyers and they are also
concerned that there may not be more deals in the pipeline so ‘They’d
better get every last dime out of this one.’
Surprisingly, corporate deal making tends to be more like the amateur
than the entrepreneur. Entrepreneurs tend to be: fearless, confident,
professional. They know that there will be more deals down the road and
they prefer speed over perfection.
Dr. Bruce
October 25, 2008
Prof Bruce @ 12:09 pm
Filed under:
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Pre-selling, Finding New Clients, Keeping Existing Ones
and
and
Rules? There are no rules in entrepreneurship.
Truth/Smart Truth and Charlie Crist, Governor of Florida
Posted on
Wednesday 22 October 2008
There are many reasons why most business people don’t do
very well if they turn to politics—they don’t really know how to spin
stories. They tend to tell the truth, the unvarnished truth and,
frankly, that is not what the media want to hear and will only get you
into trouble.
Charlie Crist, Governor of Florida was asked on CNN yesterday
(October 21st, 2008) why in early voting in his State it could take up
to three hours to get to the voting booth. Given Florida’s history in
past Presidential elections, this is a loaded question. Governor Crist,
fast on his literal feet, said (I paraphrase here): ‘There’s a flip side
to that question. It just shows you how much people in our State want
to participate in this election and exercise their fundamental
democratic right to vote.’
So he turned the question around: he emphasized that delays were due
to: a) a large turnout, b) his citizens’ desire to participate and
exercise their fundamental rights.
The interviewer immediately dropped this line of questioning. Dead. Finished. Caput. Charlie skated away…
A more earnest person would have guiltily looked at the camera, with
his eyes moving left and right and up and down, trying to explain what
he was going to do to shorten the lines, reduce wait times, improve
levels of service, give people heck for not being prepared, etc. etc.
This would have been a more truthful answer but wrong! It would also get the Governor de-elected!
Entrepreneurs and business people need to master this skill if they
want to have any type of media profile and benefit from earned media
(basically marketing by press release) or social marketing (basically,
getting covered by the blogosphere).
It isn’t easy to learn this skill. Look at the difficulty the John
McCain campaign is having explaining away Sarah Palin’s lack of
experience to be Vice President (and possibly, President).
This was the single biggest trump card that Mr. McCain had over his
rival Barack Obama—his obvious and extensive experience, especially in
foreign affairs. He gave it away with his selection of Governor Palin as
his running mate.
But with all the smart strategists in the Republican Party, you would
think they could come up with a better line than: ‘I (Sarah Palin) can
see Russia from my house (in Alaska).’
I thought about it for awhile and this is what I came up with: ‘I
will be able to learn from the best man for the job, John McCain,
something his opponent will never be able to do.’
Dr. Bruce
ps. By the way, this is not a blog entry in support of any political candidate.
Prof Bruce @ 2:34 pm
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Landlord Licensing is a Bad Idea
Posted on
Tuesday 21 October 2008
An Open Letter to City Councillor Marianne Wilkinson:
I am writing to you because: a) you are my Councillor and b) we are
concerned about the idea of bringing in a City of Ottawa By-Law to
license landlords.
We are opposed to this idea for the following reasons:
1. The Residential Tenancy Act of Ontario already protects Tenants to
a high degree and a Landlord Licensing System (LLS) would likely
duplicate Provincial regulation and enforcement.
2. The City of Ottawa already has an enforcement process in place (i.e.,
By-Law Officers) to deal with breaches in the Ontario Building Code
both during construction of new dwellings, during their renovation or
during the normal course of events.
3. Licensing would discourage, in our view, new construction of much
needed new inventory of rental apartments by adding to the regulatory
burden of small (and large) landlords.
4. The supply of in-home apartments, made legal by Mayor Chiarelli and
Council during Mr. Chiarelli’s last term, has expanded the supply of and
is the least expensive form of affordable housing—both to build and to
rent. Anything that discourages small landlords will hurt tenants and
also owners who need the extra rental income to make ends meet.
5. The new bureaucracy that the City would have to put in place to manage the LLS is a needless cost to our rate payers.
6. While I am sure that the intent is well meaning, regulation of this
kind is, at first blush, a way to rid the market of bad Landlords.
However, over time, it will probably have the effect of driving out
small Landlords who may own one or two or a handful of units and, if
they get into a tenant dispute, it will appear that they have a high
percentage of complaints when, in fact, they have a very good track
record but may have had difficulties with one particular tenant. As a
percentage, one complaint if you own three units is huge; whereas, ten
complaints if you own 100 rental units is a smaller percentage but may
well reflect a different reality.
7. Other ‘consumer’ protection agencies such as Tarion Warranty
Corporation (the replacement for the Ontario New Home Warranty Program)
have had the (I believe) unintended effect of eliminating or excluding
the small home builder. The barriers to entry for new home builders are
very high. This has led to less choice for the consumer, higher prices
than would otherwise obtain and an effective oligopoly in many cities
and towns in Ontario where a very small number of builders dominate the
market.
I hope this will be helpful when Council looks at this matter,
Yours very truly,
Dr. Bruce
Prof Bruce @ 10:25 am
Filed under:
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Development Economics and Entrepreneurship
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Livable Cities and Neo-Urbanism
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Property Taxes/Municipal Taxes and Fees
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Speak the Truth, the Whole Truth, Frankly and Boldly
Posted on
Saturday 11 October 2008
Franklin D. Roosevelt spoke these words in his inaugural
address to the US on the 4th of March 1933 as his nation and the global
community faced a bleak immediate future that included the Great
Depression, World War II and the Cold War. During the Great Depression,
unemployment levels in the US were around 35% of the working population
and, if you count underemployment, probably a lot higher.
In today’s ‘crisis’, unemployment rates in the US and Canada are
around 6% and 5%, respectively. If you listen to 24/7 media coverage of
the market meltdown of the last two months, we are headed for disaster,
may already be there and there is little that can be done about it
except try to find the culprits of the mortgage mess so we can blame
someone, prosecute them and put them in jail.
You see the US does not have enough people in jail already—they have
only incarcerated around 3 million people including dangerous public
enemies like Martha Stewart. That is far more than any other nation on
earth and that includes Iran, North Korea, Russia, China and Cuba, all
nations whose governance the current US administration would not
consider admirable.
Frankly, it does not matter at all who is responsible for the
subprime mortgage mess; any entrepreneur could tell you that it does not
matter how you got there, it only matters how you find a solution to
the problem. The US has a terrible tendency to want to punish first and
fix later. If you must punish, punish later, fix first.
I have no doubt that comes from the idea that a good cop is like a
Marshall of the old Wild West: Bang, Bang, Bang, “Stop”. Or possibly it
comes from the puritan ethic of the founders of the 13 Original Colonies
who, despite having many admirable qualities were, by natural
temperament, highly judgmental. Anyone who was ‘different’ could be
labeled a witch and burned at the stake.
Well burning people at the stake is not going to solve current financial issues. Leadership is going to do that.
FDR also said in that speech:
“This great Nation will endure as it has endured, will revive and
will prosper. So, first of all, let me assert my firm belief that the
only thing we have to fear is fear itself—nameless, unreasoning,
unjustified terror which paralyzes needed efforts to convert retreat
into advance. In every dark hour of our national life a leadership of
frankness and vigor has met with that understanding and support of the
people themselves which is essential to victory. I am convinced that you
will again give that support to leadership in these critical days.”
Where is the leader today who can speak these words or words that
have the same force, clarity and effect? (You can read FDR’s speech and
listen to an excerpt of it at: https://historymatters.gmu.edu/d/5057/.
It is wonderful to listen to his words and, if you are troubled by what
is happening around you, it will lift your spirits.) Do you think it is
George W. Bush who could say words like these and inspire people to the
same type of effort that got his nation through the three great
challenges of FDR’s time and the time of Ronal Reagan?
I am neither a Republican or a Democrat, nor a Liberal or
Conservative. I tend to agree with comedian, Chris Rock, no one party
can claim to have all the right answers and, anyone who believes that,
is a fool or a leader of fools. (Mr. Rock says it better: “On Crime, I’m a Republican. On Prostitution, I’m a Democrat.”)
In Canada, we faced (in my opinion) a more serious situation in the
early 1990s. Canada’s national deficit was then $42 billion per annum
and the national debt was climbing to an all time high—approaching a one
to one ratio of debt to GDP and the country was perhaps 18 months away
from defacto bankruptcy and an IMF mandate that would have been brutal.
Jean Chretien was elected Prime Minister and Mr. Chretien with his long
serving Finance Minister, Paul Martin, fixed the problem in less than
seven years.
One of the things that Mr. Chretien did was not run around the country screaming: “We are all going to die!” which is what I see many of today’s ‘leaders’ doing.
Instead, Mr. Chretien travelled from coast to coast to coast giving
his ‘Uncle Jean loves Canada, Canada is the No. 1 place in the World to
live, so saieth the United Nations’ speech.
Now I am not really sure if Canada is the best place on earth to live
but it doesn’t matter. As long as the avuncular Mr. Chretien could
convince most Canadians that they do in fact live in a nice place and
that the world was not ending, that was enough to get Canadians going
again. It may not have been as well delivered or as well put as FDR’s
idea that Americans should put forth the effort “to convert retreat into advance” but it worked.
Mr. Chretien backed up his words with action. He announced a $2
billion national infrastructure program after he was elected PM.
Remember, this was when the country had an unprecedented deficit. The
financial pundits of the day told him that it was foolish to spend more
money at a time of national financial crisis but he did it anyway. Sure,
Mr. Chretien and Mr. Martin were reining in spending, reducing
employment in the civil service, getting rid of unproductive programs
and not approving new programs or spending unless absolutely necessary.
But the fact that Mr. Chretien was prepared to invest in our country and
he was giving his ‘Canada is da Best’ speech everywhere, was enough to
get folks here to say to themselves: “Gee, things aren’t really so
bad. If Uncle Jean thinks it is an OK time to invest, gosh, maybe it is.
Maybe I will invest in that new CC machine tool or expand my plant or
replace the windows in my home where the seals have failed after all.”
($5 million of the $2 billion infrastructure program funds ended up
in Scotiabank Place, home of the Ottawa Senators. While $5 million is a
lot of money, it wasn’t a big part of the overall budget for the new
arena which cost about $240 million. But it was an important
psychological boost to all those involved. That was exactly the purpose
of the fund. It almost didn’t matter what it went into. Spread the funds
around and get people moving again. Get them out from under their beds
and out there doing stuff. $2 billion is a lot of money but again, when
you put in into perspective, it is a drop in the bucket in a more than
one trillion dollar economy.)
It sure worked. Canada has run a surplus every year since Mr.
Chretien turned the country’s fortunes around and the nation’s Banks are
rated amongst the most secure on the planet. The country also runs a
trade surplus as a major exporter of energy, resources, technology and
services.
The current US President inherited a large national surplus from the
former administration and the US is now suffering from unbelievable
national deficits and trade deficits that between them amount to more
than $800 billion per year. Oil prices went from below $40 per bbl to
more than $140 per bbl. It should not come as a surprise to anyone that
there would be real world affects on the US when the most important
commodity on earth triples in price in a short time and the twin
deficits rise to unprecedented levels.
Again, it doesn’t matter how you got here, it only matters what you
do about it. It doesn’t help that George W. Bush has been urging
‘ordinary’ Americans to fight the ‘War on Terror’ on the home front and
internationally at every one of his speeches practically to the
exclusion of all other national priorities. ‘Look under your bed every
night or in the closet before you go to sleep, Osama Bin Laden might be
there.’ I personally think Mr. Bush’s search for Bin Laden has been
about as effective as O. J. Simpson’s search for the ‘real killers’ of
his former wife and her friend.
Now I find it surprising that some people, maybe most people, think
their leaders should be ordinary folks just like them. Well, the US has
had eight years of a man of ordinary talents and average achievements
and it is likely that Mr. Bush was the worst prepared person to ever
become President of the US, with the thinnest personal résumé and he is
likely to go down as the: ‘Worst. President. Ever.’ Perhaps John McCain
would make a good US President, you can never be sure about these
things. But Mr. McCain is proud of the fact that he graduated 5th from
the bottom of his graduating class.
He sang: ‘Bomb, Bomb, Bomb Iran’ to the tune of a Beach Boys song to a
friend of his. It was a joke and, frankly, if you were sitting around a
pub with an old army pal and you were an ordinary guy and not a
candidate for the defacto leader of the world, it would be pretty funny.
But for a potential US President, you have to set a higher standard for
yourself. It shows, in my view, poor judgment and we have had enough of
that in the White House over the last eight years.
Mr. McCain’s choice for VP, Sarah Palin also prides herself on being
an ordinary person. Enough with the ordinary already—we need
extra-ordinary leadership in extra-ordinary times. Perhaps Mr. Obama can
provide that. He can not possibly be worse than the current occupant of
the White House.
The US (and the World) needs a change in priorities. From a focus in
the White House over the last eight years on ‘what can I do today to
help the oil industry and large corporate interests’ or ‘what new
international adventure can I get into this year’, the new President in
January ’09 might consider some other things like:
1. health care for all US citizens;
2. education reform and investment;
3. energy production and conservation;
4. green energy and green technology;
5. infrastructure investment;
6. pushing the boundaries of science;
7. exploring space;
8. preserving the environment and reducing population growth;
9. peace on earth and tolerance.
People need to be inspired. They want to be inspired.
Now back to the current financial crisis. People in North America need to ask themselves four questions:
a. Did you eat three meals yesterday?
b. Did you fill up your car this week?
c. Did you get your pay cheque on payday OK?
d. Did you sell any of your stocks or mutual funds in the last two months?
If you answered ‘yes’ to the first three and ‘no’ to the last
question, then what the heck are you worried about? Do you think that
Warren Buffett is not sleeping well in Omaha? Sure he is. He learned to:
‘Buy Low and Sell High.’ If you sell when everyone else is selling and
buy when everyone else is buying, then you are the bigger fool.
Canadian Prime Minister Stephen Harper was right when he said the
current market meltdown provides buying opportunities. Clever people
like Mr. Buffett know this. The Canadian media did not react well to Mr.
Harper’s comment because, people like Mr. Buffett are incredibly rich,
and ‘ordinary Canadians’ are left out. This is, of course, hogwash.
What the media forget is that Mr. Buffett was and still is an
‘ordinary guy’. He is incredibly modest, still lives in a small home in
Omaha he bought when he wasn’t rich many decades ago, drives a modest
car, has given huge amounts of money to charities (especially, the Bill
and Belinda Gates Foundation) and is, from all that I can tell, a nice
person. Mr. Buffett earned his wealth.
In the last 100 centuries of recorded history, very few economies
have ever performed as well as North America’s with employment rates of
94 to 95% over extended periods of time. This enviable tack record is at
risk more from the psychological effects of poor leadership and a
leadership vacuum than anything else.
The US and Canada have together, with help from their traditional
allies, faced down the existential threat of a world dominated by Nazi
Germany or a Communist Soviet empire. You think high oil prices, a sub
prime mortgage mess, a stock market decimated by greed and panic or
30,000 Al Qaeda terrorists are going to end these two great nations? I
think not.
Dr. Bruce
October 11, 2008
Prof Bruce @ 7:55 am
Filed under:
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Value Proposition for a Residential REALTOR
Posted on
Friday 26 September 2008
I work in the Real Estate Brokerage industry and I am amazed
at how poorly most of the industry is at explaining their value
proposition. The FSBO (For Sale by Owner) market is growing and REALTORS
in Canada and the US are losing ground. Now I realize I am biased
because of the work I do, but surely Residential REALTORS (and
commercial ones too—but that is a subject for a separate blog entry) can
do a better job at explaining what it is they do and how they add value
to a transaction.
In my view, most Residential REALTORS do a great job. I can say this
because I do mostly commercial work and I must say I admire the
stick-to-it’ness of most of these folks. They work seven days a week
(most showings are on weekends and evenings), they are always on call
(their clients want 15 minutes or less response time so they are
tethered to their cell phones and email phones*), they drive around
clients they don’t know much about showing them two dozen homes only to
find out that: a) they are not qualified to buy (maybe they exaggerated
their ability to purchase) or b) they find something on their own
(despite sometimes having signed a Buyer Agency Agreement tying them to
their Sale Representative) and put the transaction through the Listing
Agency (not realizing that the Listing Agency is now a dual agent
representing the Seller and the Buyer and not necessarily looking out
for the Buyer’s best interest).
(* A residential REALTOR who was helping me out in a commercial
transaction this summer answered his cell phone on a Saturday night
while sitting around a camp fire after the deal blew up and we needed to
speak with him urgently. I said: “George, you are amazing. No
Commercial Sales Rep I know would answer his phone at this time. I
salute you.” I couldn’t believe his dedication.)
Here is another example. I was at a Sens versus Leafs last year and
with five minutes to go in a tight game, one of my buddies got up to
leave. “Mike, where are you going? The game’s not over.”
“I have a client who wants to meet me at Tim Horton’s at 10:00 pm to
make a counter offer on the home they are buying. Got to go, thanks for
the game…”
Now that is dedication and, if you know Ottawa, Residential REALTORS
are out there at night in 20 degrees below zero doing deals and
servicing their clients.
Commercial people like me have it much easier—our clients get in
early but by 5 or 6 pm, that’s it, they go home and they don’t want to
hear from you evenings and weekends unless it is REALLY urgent.
Now Residential REALTORS aren’t just heroes because they brave cold
weather, waste their gas on clients who are not really serious or get
left at the altar by clients who ditch them at the last minute. They add
real dollars and cents value to transactions.
Here are some of the ways they can do that:
1. A decent Residential REALTOR does dozens of Agreements per year.
The FSBO does only one or two in a lifetime. The Residential REALTOR is
going to have much higher levels of expertise in doing these
transactions, in all likelihood. Most people don’t know that REALTROS in
Ontario must go through six quite difficult courses and exams to become
fully licensed and, if they want to become Brokers, they must do
additional study and examinations. They must get 75% or better to pass
and the OREA College is completely inflexible on this*. Then, every two
years they need to do 24 additional credits. In another generation,
REALTORS will go from being a second career to being a first choice
career and a profession and maybe even a calling. (I know the latter
sounds corny but I certainly enjoy working with clients and I feel good
when a client buys his or her own building for their company and they
walk in and they have realized their dream to own their own real
estate…)
(* Some of my very smart University of Ottawa students are taking
their real estate licenses. Some are scraping through with 75s and 76s.
Some are failing with 74s! So the courses are non-trivial and, in my
view, actually quite good.)
2. If the FSBO fails to sell his or her property and then enlists an
Agency, the likely selling price may be lower because the listing has
become ‘tired’.
3. The Agency has access to MLS.ca and a list of established buyers.
More than half of all real estate transactions are deriving from web
based searches and from existing clients.
4. The chances of not completing the FSBO Agreement is also much
higher. Real estate transactions are the only area of commerce that I
know about where, by law, the Agreement must be in writing. I guess
because of the importance for most people of the sale of their home,
Ontario made it compulsory that these transactions be in writing. Real
estate is tricky and a lot can go wrong*. Introducing the probability of
failure would significantly increase the value brought by the REALTOR
to the transaction.
(* The list of what can go wrong is endless. Conditions that are
waived before building inspections or financings are completed. Chattels
or fixtures that are thought to be included that aren’t. Lawyers who
don’t get the paperwork on time to complete deals. How about an Oklahoma
Offer? Ever heard of those? (The term comes from the Dust Bowl of the
1930s in that State where some smart Yankees fleeced naïve Okies out of
their farms. Read on…) Suppose you get an Offer on your home from a nice
young couple that you think are terrific. You are a FSBO and they need a
‘bit of help’. Will you give them a second mortgage for just a couple
of years so they can buy your home? Sure, why not! So you sell your home
to them for $300,000 with a $75,000 Seller Take Back Mortgage with
interest at 8%, interest only paid monthly in arrears. But what you
don’t know is that you have to specify what is the maximum first
mortgage they are allowed to place on the property. You didn’t know
that. So on completion, they have arranged a 95% first mortgage which
together with their second mortgage that they got from you they have
$360,000 to buy your $300,000; that means, they have an extra $60,000 in
their jeans. If they default, you can repo your house (by a foreclosure
proceeding) or order its sale (through a Power of Sale proceeding) but,
you have to deal with the fact that the mortgages on the property are
now worth more than the home’s market value. God forbid that they used
it for a grow op too. Many grow op homes have to be condemned because of
the uncontrolled spread of mould due to the high humidity levels in the
house. Anyway, this is how sleazy con men defrauded many innocent Okies
out of their farms and walked away with huge fortunes from the
misfortunate of the hardest hit folks during the Great Depression. Use a
professional REALTOR, people.)
5. Legal disputes are also a costly reality: for example, if there
are certain fixtures or chattels or outbuildings in dispute, this can
further increase the value of the REALTOR’s services by avoiding costly
litigation. REALTORS are insured in Ontario to provide the Sellers and
Buyers with additional protection. The FSBO is not insured against these
risks. What if the FSBO takes the deposit and the conditions in the
transaction are not fulfilled? Will the FSBO return the deposit? In the
case of REALTORS, the deposits are in trust accounts, which also happen
to be insured.
6. Legal fees for FSBO transactions may also be higher as lawyers attempt to fix mistakes.
7. The benefits of Agency are likely to be higher for higher priced homes.
8. The Agency also brings other services: for instance, experts on
home staging that cost as little as $260 but can add significantly to
the value of the home. Other experts such as home inspectors, home
appraisers or mortgage brokers can also be brought into a transaction.
10. One other item needs to be mentioned and that is the value of a
person’s time. It takes time to gain the expertise of a REALTOR and also
it takes time to sell a home: to list it, to put it on MLS, to show it,
to draw up the Agreement, to arrange for inspections and financing, to
waive conditions, to provide the lawyers with documents, etc. If a
person’s time is worth $20 per hour or $100 per hour, you have a
significant saving for
homeowners who use REALTORS. Homeowners are often better off using their
time more productively in the things that they do for a living rather
than trying to be REALTORS.
11. The Agency saves the FSBO their marketing costs and their costs to join a FOR-SALE-BY-OWNER network.
12. The Agency will do the open houses and showings and negotiating.
It is not easy representing yourself and Canadians especially find it
difficult to tout their own horns…
13. Now when people hear that a home is For Sale By Owner, they
immediately discount the price by 5% (because the client is not ‘paying
any commissions’) and then takes a bit more off so that they have some
negotiating room.
14. Buyer’s will often not feel comfortable representing themselves,
so while they may show up to look by themselves, when it comes time to
present an offer, they will engage a Buyer Rep to do that for them.
15. Of course, the Buyer Rep will ask the Seller if they will pay a
commission but only 2.5% instead of 5% because they are only
representing the Buyer and giving what is known in the trade as
“Customer” service to the Seller.
16. The Seller figures they are still coming out ahead by ‘saving’
2.5% of the Sale Price but they could be fooling themselves—they could
actually be paying the full commission and more because: the price
offered is more than 5% below what they would have otherwise received
because of the strategy employed by the Buyer and their Buyer Rep.
17. Compounding this, they may end up with less money from the
transaction than if they had used an Agency while doing all the work and
taking all the risks.
18. It may also take longer to sell your home if you go the FSBO
route. If you are changing jobs, moving cities, need the money,
whatever, that extra time to sell could place quite the burden on you.
I am sure you have heard the one about the Lawyer (or Doctor) who represents (treats) himself. He has a client who is a fool.
Dr. Bruce
ps. I have summarized the value proposition of a Residential REALTOR
on a spreadsheet. You can download it in .xls format. Here is the URL:
https://www.old.dramatispersonae.org/images/ValuePropositionFSBOVersusAgency.xls
I estimate that for the sale of a $315,000 home, the Agency will
receive a commission of around $15,435 but the Agency will add a total
of around $38,000 to the transaction. So if my calculations are right,
the FSBO is better off to enlist the services of a good quality REALTOR
to the tune of approximately $23,000. The spreadsheet shows the
assumptions I used to get there. You can download it and fool around
with the variable—higher selling prices, lower selling prices, higher or
lower commissions, more or less time spent selling a home by a FSBO,
etc.
E&OE.
Prof Bruce @ 10:01 am
Filed under:
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Value Differentiation and ‘Pixie Dust’
and
Posted on
Sunday 14 September 2008
The only way to boost your take home pay is to increase your
productivity. And by now, just about everyone has realized that in a
global economy, the only way to do that sustainably is to innovate.
Working longer hours for less pay will also boost a nation’s
productivity stats but who wants to volunteer for that duty?
My wife recently introduced me to a new kind of dental floss—it is
sold by a major consumer products company. Their dental floss is caked
with a toothpaste powder. This is so when you floss your teeth,
toothpaste is applied to hard-to-get-with-a-toothbrush areas, namely
your gums between your teeth.
Now this might not sound like, say, the equivalent to e = Mc**2 but,
heck, I wanted to shake the inventor’s hand. If you think eating nice
foods with your own teeth in your 50s, 60s, 70s and 80s (frankly, I am
not counting on anything more than that) would be nice, this is an
important innovation.
And I am sure it is not trivial to do this. Adding toothpaste powder
to a long string isn’t easy: first, it has to stick to the string,
second, dental floss is exposed to a lot of different environments and
the toothpaste powder must not dissolve when the floss gets wet or is
exposed to a lot of humidity and, thirdly, it can’t rot and poison
people if it sits around the store for a while and then in your cupboard
or (worse still) your shower stall.
Now I have read lots of books on becoming more creative and
innovative, and I can recommend a couple of new ones: Think Better: An
Innovator’s Guide to Productive Thinking by Tim Hurson (McGraw-Hill,
2007) and The Black Swan, The Impact of the Highly Improbable by Nassim
Nicholas Taleb (Random House, 2007).
Hurson has a formula that he applies to organizations to help them
become more creative; part of his formula is using Galeforce—writing
down as many ideas as you and your team possibly can in five minutes (at
least 50) to solve a problem you face. By going really hard at the
problem in a short period of time, you prevent group-think from taking
over the session or guess-what-the-boss wants behaviours or satisficing
(settling for the first likely useful idea before you get any other
ideas on the table) or allowing your own or others critical judgment to
suppress ideas by saying things like: ‘that sucks’ or ‘that will never
work’ or ‘we can’t do that because we have never done it that way
before’ or ‘we don’t have the resources to do that’…
Hurson also has a six step Productive Thinking Model that he takes his clients through that looks pretty useful.
But one of the things that I think is missing from his model is
provision for Black Swan events. Taleb’s book’s title is based on the
idea that just because you have seen thousands of swans and all the
swans you have seen are white, that doesn’t mean that there aren’t any
black swans. I think that Taleb’s book will appeal to entrepreneurs a
lot.
I have flown with Go Travel Direct dot com a few times. Their
business model was certainly a sound one in my view. Let people book
charter flights and hotels online; fly from my home town (Ottawa) direct
to their vacation destinations without having to transit through either
Montreal or Toronto (which adds as much as one day to trip times); fly
and stay at nice places for not too much money if you book well in
advance and fly full planes and get cheap hotel rates because you are
delivering a lot of people to the resorts.
They later added to their business model by buying their own airline,
Zoom Airlines. This way, they would have more control over their
schedules and costs (or so they thought).
On the afternoon of August 28th, 2008, Zoom went bust and we have yet
to see what will happen to the older and (I hope) more stable Go Travel
Direct dot com. They have an alternative carrier lined up so maybe they
will hold on. But clearly, the consumer’s confidence in both has
suffered.
I was wondering what could possibly have been done to prevent the
demise of Zoom. The business model absolutely requires people to book
well in advance. It is the only way to be sure that you can fly full
planes. And people who book in advance want certainty about the price
they pay and they want low prices.
But who would have thought two years ago that oil prices would reach
$140+ per bbl? If anyone tells you that they predicted that, they are
probably not telling you the truth. I predicted higher fuels prices over
six years ago (which is why I bought a VW Beetle at the time) but there
is no way that I would claim I foresaw $140 per bbl.
Neither did Zoom*. Their fuel costs went up over $50 million in less
than a year and there was no way they could pass those rising costs on
to their customers. This is a Black Swan event of the first order and
shows you that sound business models can go south in a hurry and
planning can be even more useless.
(* This would make a good case study and I hope one of my student
teams will take this on. If Zoom and Go Travel Direct dot com had
anticipated the rapid increase in fuel costs maybe they could have
built-in an inflation factor into their pricing policies. But I would
guess that if they had done this, they would have lost many of their
customers and actually may have gone bankrupt even sooner. It is a
difficult and possibly intractable problem but, perhaps, some creative
genius student will solve the problem in his or her case study. An A or
A+ awaits the student who can solve this conundrum.)
I suspect that what the US is currently experiencing in 2008 is not
only a Black Swan event but also something that Malcolm Gladwell
described in his book, The Tipping Point. Running (unsustainable) twin
deficits (Trade and National Account) for many, many years, the US has
been courting disaster during George W. Bush’s two terms. Either one by
itself might have been manageable but when combined with a credit
crunch, a housing meltdown, little or no personal savings, enormous
household debt loads including high interest, unsecured debt such as
credit card debt, ridiculous CEO pay levels tied not to long term
performance of their companies but to short term stock market
fluctuations, greed and corruption on Wall Street plus ever increasing
complexity and opaqueness in financial products, sometime this year, the
tipping point was reached and a non-linear event happened.
Anyway, every year between Xmas and New Year’s, I do a bit of goal
setting and planning for the next year. As usual, I did exactly that
between Dec. 26th, 2007 and January 7th, 2008. I sketched out a plan and
put it up in my office where I could see it from my desk. Luckily for
me, no one else could see it. I looked at it again at the end of August
2008 (just eight months later) and it was embarrassing. Every one of my
plans lay in complete disarray—events had overtaken them and there
wasn’t a single thing on my list that had panned out.
In that time, I had: gotten my real estate brokers license, sold an
existing business, changed jobs (twice) and had to learn to live with
higher interest rates and tighter credit restrictions because of the
melt down in the sub-prime market. Things that were going to get done,
didn’t and things that were going to get built, didn’t either.
That doesn’t mean that 2008 is a write-off; far from it. I work with
really nice people, I am glad I sold one of the businesses so that I
could concentrate more on my University work and my work with the
Brokerage and I hope for better days ahead. When one door shuts, two
more open!
What I am saying is that being more innovative and creative is very
important. I believe that you can learn to be more innovative and
creative. But part of that is learning to take advantage of
unpredictable events—somehow seeing that toothpaste powder and dental
floss go together or that getting my broker’s license would lead to a
completely new situation in my life, a better one.
Entrepreneurs know that necessity is the mother of invention and,
while I wouldn’t wish all of the circumstances I have faced to be
replicated for anyone else, I think you have to recognize that chance
plays a big part in life. Mind you, you have to be open to change, be
able to see how seemingly unrelated things are, in fact, relevant to
each other and be prepared to seize the day.
Dr. Bruce
Prof Bruce @ 11:24 am
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Conditional Probability and the Deal that Fails
Posted on
Sunday 14 September 2008
I read a fun book during the summer (of 2008): Struck by Lightning—the Curious World of Probabilities by
Jeff Rosenthal. In it, he describes conditional probabilities; that is,
you know the probability of a certain set of outcomes at the outset,
when along the way, new information becomes available and it changes the
things.
I instantly recognized this from my years in business as an all-too-common phenomenon: a deal that is thought to be firm, fails.
But first let’s return to Jeff Rosenthal’s work and an example that
he gives that is a good example of conditional probabilities—the Monty
Hall Problem. Say there are three doors that you can open but only one
has a BIG prize behind it. Your choice is purely random and thus you
have a one in three chance of winning the BIG prize. Say that you select
Door 2. The host then gets to select one and he must select one which
does not have the big prize behind it. Say Monty selects Door 3. Do you stick with your original selection or change it to Door 1?
You might think that Door 1 and Door 2 are equally like to have the
BIG prize behind it but conditional probability tells you that,
actually, you are better off switching your guess to Door 1 which has a
2/3 chance of having the prize behind it. How come?
Rosenthal explains it elegantly this way: the original probability
that Door 2 has the BIG prize is 1/3. When the host of the show
eliminates Door 3, that means that Door 1 has a 2/3 chance of having the
prize because we know: a. the prize must be somewhere, b. it can’t be
behind Door 3 and c. the total sum of the probability of the prize being
behind either Door 1 and Door 2 is 1 (or 100%); therefore, the
probability of the prize being behind Door 1 is simply 1 – 1/3 = 2/3. So
you are better off to switch your selection!
Now let’s say you are a REALTOR (like I am now) and you have just had
a deal go firm but it has not yet completed. You think it is likely to
complete; in fact, you are very confident that it will because, in your
experience, 97% of the deals that go firm, do complete.
But in the next three weeks before the deal is closed, the Buyer
calls you once then twice then daily asking for clarifications. Do you
think that the probability of the deal completing remains 97% or has
that probability been affected by the new information (the frequent
Buyer calls) that is available to you?
The Buyer has never actually said that he intends to default but
anyone with any experience would get a sick feeling in their stomach
that something isn’t right. I would suggest that there is a serious risk
of default even in unconditional deals when this happens and, in all
likelihood, every time a Buyer makes a call to ask for an extension of
the closing date ‘because his lawyer isn’t ready’ or ‘because they
haven’t had time to search title’ or ‘their financing is coming but is
not yet in escrow’ or whatever, the deal probability is dropping like a
stone approaching zero in a hurry.
Dr. Bruce
Prof Bruce @ 10:24 am
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Writing, Research and Experimentation
Posted on
Saturday 28 June 2008
Tag lines can be funny, catchy, punny, memorable, important,
unforgettable or they can truly suck. I have been watching a piece of
land being prepared for development for the last year. To meet Ontario
Building Code and sub-division design requirements, they needed to
practically flatten the whole site. (For example, front yard slopes have
to be very low so that, in a major storm, water does not overwhelm the
storm sewers; i.e., a lower slope reduces flow. So any rocky knolls have
to be removed and this site is nothing but rocky knolls.) It looked
like they dug out half the Canadian Shield to do it.
It cost almost $20 million just to get to the point of putting in the
first home. That’s no big deal really but the fact is there is really
nothing left of the original landform. I drove past the site today and
homes are springing up like crocuses on Parliament Hill in the Spring.
What struck me though was their slogan for the new development: “A
Natural Beauty.” It was laugh out loud fuinny, at least to me. There is
not a twig that is left on the site; there is absolutely nothing natural
about the site.
If you are a marketing guru, the least you can do is know something
about your subject. Maybe a site visit would have helped them come up
with a better, more natural tag line.
Now I love the slogan used by a couple of REALTORS I work with,
Margaret Burniston and Elizabeth Greenberg. Their tag line is:
“Marketing Your Home for All Its Worth!” I am also partial to the one I
use for our real estate sales site: “We Sell Lots!” For our mini storage
site, we used: “Outta Site!”
These aren’t the best tag lines ever but they have at least a couple
of meanings each and they are better because at least there is a grain
of truth in them.
Dr. Bruce
Prof Bruce @ 4:55 pm
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Posted on
Monday 23 June 2008
Ask a busy person.
I just had an example of this. I needed some info on a cool project
undertaken by two friends of mine, Joe Kowalski and Jonathan Westeinde.
It’s called Whitewater Village, a luxury cottage resort that is being
sold on the basis of fractional ownership. It is about an hour north of
Ottawa on the last wild and untouched 10 km. stretch of the Ottawa
River. Joe has put together his own ‘National Park’ of more than 4,000
acres and plans to leave the river in its wild state.
I wrote to Joe (owner of Wilderness Tours, Niagara Jet Boating, Mount
Pakenham and other successful ventures) and he wrote back almost
immediately with a complete set of answers.
I asked him how he did this given the demands on his time. He wrote back:
“Thanks for the observation. I operate on the principal of TPO – Touch Paper Once,” Joe.
Don’t procrastinate in business, get it done!
Dr. Bruce
Prof Bruce @ 6:53 am
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Posted on
Wednesday 11 June 2008
Recntly, my wife, Dawn, attended a two day course on “Leadership”. One of the things that stuck was this comment:
“Managers do things right; leaders do the right thing,” Anon.
Now I believe this and have always believed it since I was a little
guy. I can remember being in a room full of people from the age of seven
on and, whenever there was a problem, the whole room would look in my
direction, even the adults, for solutions.
Being a leader is both a boon and a curse; at first, it is just a
natural thing, like having two arms. You just accept it and go on.
Later, as you grow older and reflect a bit more, you begin to realize
it is a bit of a curse too in that: a) people exepct you to have all
the answers (which, of course, no one does); b) it can be exhausting; c)
leaders (aka pioneers) get shot at a lot by the media and by
competitors.
On the whole, I think most leadership skills are inherent in your DNA
but also that you can add to them modestly through lifetime learning
and experience.
I also believe that leaders need some luck and that your storehouse
of luck tends to get used up over time so, at some point, you need to
step back a bit and let others take the lead. This is called mentoring;
that is you stop the doing of things at some point and start helping and
advising others who will lead the next generation.
Dr. Bruce
Prof Bruce @ 10:02 am
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John McLellan, Former President, Bell Canada Speaks
Posted on
Monday 26 May 2008
On Being a Successful Entrepreneur or Intrapreneur
John McLellan, Former President, Bell Canada, ATT Canada, early
employee, Mitel Corp. speaking to students and guests at the Wes Nicol
Business Plan Competition Finals, Fairmont Chateau Laurier, Ottawa,
Canada, May 2008:
1. Add value.
2. Work with intensity.
3. Lifetime learning.
4. Execute.
5. Have great people around you.
6. Achieve your goals.
7. Revise you plan as facts change.
8. Take some risk.
Dr. Bruce
Prof Bruce @ 6:54 am
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Value Differentiation and ‘Pixie Dust’
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