Dilbert Transforming Organizations- what not to do

 

What is Culture? Chapter from my book- FREE READ

 CHAPTER 1- WHAT IS CULTURE?

What is Culture? Culture is everything we are. Everything we think, feel, love, hate, eat and do is Culture. When we are born, our slate is empty; Culture fills in the blanks. You are a product of your culture; then, as you mature, you make judgements based on what has been shared, shown and taught to you. You yourself can’t change culture; you can only change how you feel about it and what you do about it. Culture is the bedrock; you and the rest of society can only change what the structures on top of the bedrock look, feel and act like. Ronald Inglehart (the guru of modernization and cultural change) and Wayne E. Baker, In an article entitled, Modernization, Cultural Change and the Persistence of Traditional Values” in American Sociological Review of February 2000 state it clearly:

“The broad cultural heritage of a society-Protestant, Roman Catholic, Orthodox, Confucian, or Communist-leaves an imprint on values that endures despite modernization.” 

Culture is learned and shared from generation to generation. 

Culture affects what we eat, where we shop, what we buy and don’t buy.

It is important to note and remember that the cultural influence that makes us who we are is not singular such as national or ethnic. It is almost always multifaceted, depending on our influences and environment. For example: Ray Mazzili was born and raised in Brooklyn, New York. How many cultures influence him (answer at bottom, don’t peek before you guess). *

Most important, our culture affects how we perceive other cultures. Therefore, our own culture and the perception of others’ can be manipulated to bad ends if misunderstanding, ignorance and hate is applied. This can affect political outcomes and the stability of a society.

Everyone’s culture is most important to them; to understand someone, you must first understand their culture. Misunderstandings lead to bad relations and bad decisions; the bottom rung of misunderstanding is ignorance, and ignorance leads to fear. Fear leads to bad relations, missed opportunities, and, at its worst, can lead to hostility, violence and death on a singular or mass scale.

Let’s go with what is probably the worst and best-known example of the consequences of cultural manipulation, causing ignorance and fear: Hitler’s persecution and mass murder of the Jews in WWII. Hitler knew more about the Jews than most people gave him credit for; he may have even had some Jewish in his ancestry. But, feeling inadequate to control the Jews as they stuck together and showed better acumen than most, he milked the German culture by inciting the German people’s burnt pride and anger from WWI by focusing it on hate of the Jews with lies and misunderstandings (something like the “China Virus”). The result was catastrophic on any scale.

We have already seen the consequences of prejudice, fear, and consequent exclusion of the Chinese population in the US from the mid-nineteenth century until 1965 (legislatively) and until today (mentally). After the presence of COVID-19 In the US was revealed to the public in March 2020 (the government knew in January), racist incidents against Asians spiked and continue unabated. Supported by official rhetoric, some people adopted the idea of the “China Virus.” Even if the virus started in China, what exactly did Chinese and Chinese Americans who lived in the US have to do with the pandemic? Wouldn’t they be equally vulnerable to its effects? 

Regarding the Pandemic, NBC News reported on April 28, 2020, in an online article entitled, “Over 30 percent of Americans have witnessed COVID-19 bias against Asians, poll says”:

“The National Republican Senatorial Committee sent a memo directing campaigns to blame China when asked about failures in the Trump administration's response to the pandemic. "Don't defend Trump, other than the China Travel Ban — attack China," says the memo, first reported by Politico.

President Donald Trump and other Republican politicians have repeatedly referred to COVID-19 as the "Chinese virus."

"I think the Republican strategy is to deflect blame and scapegoat and rile up their base," said Russell Jeung, a professor of Asian American studies at San Francisco State University who is also involved in the Stop AAPI Hate tracker. "A clear consequence of using terms like 'Chinese virus,' of making China the central campaign strategy, is putting Asian American lives at risk." 

So, tell me, how is this different from what Hitler did in 1930’s Germany? Culture can bring people together, but it also can be a convenient target for politicians and other bad actors. Better yet, how does this public display of Nativism and Xenophobia help US-China relations? As stated before, and make no mistake about it, it is not a subject we can disregard.

Let’s review:

Culture is learned, through active teaching and passive habits;

Culture is shared, meaning that it defines a group and maps its needs;

Culture is symbolic, meaning that simple and arbitrary signs define the group;

Culture is patterned, meaning that the cultural norms and symbols show up in every walk of life for that group;

Culture is adaptive, which helps people in that cultural group to explain their everyday lives and those of their friends, family and nation;

Culture is passed from generation to generation. 

As I said earlier, the bedrock culture doesn’t change much; what occurs are adaptations of the bedrock culture to meet current situations and environments. For example, as we will examine in the next chapters, China culture is significantly based on a 2000-year-old Confucian ethic. Confucianism still guides the patterns of behavior in China and always will. Even Mao, try as he might, could not unseat the Confucian culture and replace it with Communism; the fact is, he himself and his own thought process was inescapably a product of Confucian culture. Today, as China emerges in a tailored economic solution entitled, “Socialism with Chinese Characteristics,” we will see that the Confucian culture still rules the peoples’ thought process, but new rules and behaviors have been grafted on top of it to justify and facilitate actions in today’s environment. Confucian culture also guided the success of countries like Singapore, Korea, Hong Kong and Taiwan; there will be more on this later in this section based on my work in graduate school (my master’s thesis).

As it applies to policy and propaganda, the power of culture is such that it can be applied to create “historical memory” which rallies people to nationalism or nativism or xenophobia based on cultural bias. One writer asks, “How do we explain the rapid conversion of China's popular social movements from the internal-oriented, anti-corruption, and anti-dictatorship democratic movements in the 1980s to the rise of external-oriented, anti-Western nationalism in the 1990s?”  

The policymakers in Beijing well understand the power of culture to create collective misinformation leading to prejudice and worse: 

“powerful collective memories, whether real or concocted, can be at the root of conflicts, prejudice, nationalism, and cultural identities. Smith (1986) believes that ethnic, national, or religious identities are built on historical myths that define who is a group member, what it means to be a group member, and, typically, who are the group's enemies. Smith (1996, 383) also argues that "one might almost say: no memory, no identity, no identity, no nation.” 

These myths attempt to create “chosen trauma” which succeeds by "transferring it from generation to generation; history and memory issues tell grandparents and grandchildren who they are, give countries national identity, and channel the values and purposes that chart the future in the name of the past." 

What such stories, tales or myths, despite their veracity, hope to accomplish, and it looks like they are very successful at, is historical enmity. A group's "chosen trauma" consists of experiences that come "to symbolize this group's deepest threats and fears through feelings of hopelessness and victimization." The word chosen fittingly reflects a large group's unconsciously defining its identity by the trans-generational transmission of injured selves infused with the memory of ancestors' trauma.” 

What is the political aim of these efforts? “political leaders as well as many citizens have a vested interest in retaining simple narratives that flatter their own group and promote group unity by emphasizing sharp divergences between themselves and other groups. They are highly resistant to histories that include the presentation of the other side’s point of view.”  This has happened during the entire history of the US and China, as well as almost any nation’s relations with any other at some time.

This historical enmity and local chosen trauma finds itself into the children’s minds through textbooks, and thus passes to the next generation without dispute or verification. One writer says,

 

“Many studies have demonstrated that ethnocentric views, myths, stereotypes, and prejudices often pervade history textbooks.”  So children grow up prejudiced based on intentional misdirection and ignorance. I remember clearly that my students in Wuxi showed me their textbooks, which were intentionally constructed to provide the wrong information. As an example, the supply/demand curve in economics was positioned upside down to show that supply influenced demand, not the other way around. To their credit, they were happy to accept an alternative point of view once it was clearly proven; this is the hope we should retain, that cultural myths can be declawed once people open their minds.

Because culture is so embedded in the population, it is vulnerable to manipulation; but it also is the key to success in relationships if it is done from a benevolent and honest mindset.

But what about economic growth? Does the process of economic growth and modernization change culture? My answer and the consensus of the minds who have studied this throughout their career is no. This is not to say that economic growth does not change people’s attitudes toward the environment and government, but it does not change the basic culture of the nation or group (religious groups can have their own culture as well).

As such, if culture is the bedrock of how people see the world, it will be culture, not economics or politics, that will determine the course of history and nations, friendship, alliance or conflict; all of those are a result of the culture of the people and the influencers. The late Samuel Huntington, who is remembered for his 1993 groundbreaking work entitled, “The Clash of Civilizations?” wrote presciently in that piece, 

“It is my hypothesis that the fundamental source of conflict in this new world will not be primarily ideological or primarily economic. The great divisions among humankind and the dominating source conflict will be cultural.” 

It is important for a student of culture, and for us on this journey, to understand Huntington’s viewpoint. Why? Because it will help us understand and define the problems and challenges facing US-China relationships—as well as international relationships be they US, China or other, throughout the globe.

Let’s understand how Huntington defines global groups, which may or may not be countries. He says that it is no longer relevant to divide countries by their stage of development, nor in terms of their political or economic systems. Rather, he says, countries should be grouped in terms of their “culture and civilization.”

What does he mean by a “civilization?” A civilization is a group that may or may not transcend national or international borders, such as Muslim, Jewish, or Chinese civilization. The cultural entity to which a civilization belongs “is thus the highest cultural grouping of people and the broadest level of cultural identity people have short of that which distinguishes humans from other species.”  This thesis gives a higher meaning to culture than a national identity and strengthens my thesis that culture is the highest indicator and driver of personal and international relations.

It also means that a diaspora does not erase culture; in time cultural influences may be mixed, but never erased. The Chinese diaspora does not make the wanderers and immigrants un-Chinese because they are no longer in China; in some cases there may be mixing of cultures, as we saw in The Joy Luck Club, but the native culture is always at the core. The same with the Jewish diaspora (we saw this in Peony), Lebanese diaspora (more Lebanese live outside of Lebanon than inside), etc.

Huntington goes so far as to quote Lucian Pye (a leading political scientist and Sinologist)  as saying that China is “a civilization pretending to be a state.”  He groups the globe into the following civilizations: “Western, Confucian, Japanese, Islamic, Hindu, Slavic-Orthodox, Latin American and possibly African.”  He goes on to say that, despite and because of the world becoming a smaller place, despite economic and political changes, that civilizations stand tall regardless of national boundaries. Specifically, with regard to China and Chinese, he asserts that culture underpins the trading relationships in Chinese Asia more so than economics, certainly more so than politics. When we consider the success of China, Taiwan, Hong Kong, Singapore and the Chinese minorities in Thailand and Indonesia, this becomes clear. And the love-hate relationship between China and Vietnam has everything to do with their shared Confucian culture. 

It should be plain and clear now that if culture drives a civilization, a people and a nation, rather than economics or politics, this is where we need to start in building policy. But before we start, we need to learn and understand. 

So how do countries and leaders make policy? They may think that they are doing so for ideological reasons, but they are obeying their civilization’s cultural imperative—and trying to position it with others for mutual benefit. OR, in the case of bad actors, to manipulate the culture in order to reach their own political goals, regardless of the national good. All policy is rooted in culture. You should already believe that; read on for more evidence.

• FOUR- Italian, American, New York and Catholic

Studying the Stones: Learning a Centuries-old Chinese Grand Strategy from the Game of Go

 

 

The two oldest games in the world are Chess (about 800 years) and Go or Weiqi (about 4000 years). Why study the oldest game in the world (other than if you want to play it)? Here are several reasons:

1. The differences in the game objective and effective tactics between the two gives us a keen insight into the differences in strategic philosophy between China and most of the Western powers;

2. As with any business or political environment, learning your competitor or opponent’s thinking gives you a leg up on winning and protects your Moat from invasion;

3. If Weiqi is the core Chinese Grand Strategy, or one of them, learning it will give us more insight that can be used in negotiations;

4. The strategy upon which Weiqi is based can be very effective in general, not just with China;

5. Learning something new that your opponent may know that you don’t makes you stronger (if you do it without prejudice).

So what is this game about and what does it have to do with Grand Strategy? The strategy of the game is based on the teachings of Sun Tzu, who is recognized globally as a master strategist whose principles are equally as important and effective as they were 2500 years ago.

Quick summary of the game: The game is played on a board with gridlines forming a space of 19 x 19, 13 x 13 or 9 x 9 (the more spaces, the more the level of difficulty). The pieces are black and white stones, all of which are exactly the same. Once the pieces are placed on the board, they do not move. The play space looks something like what is pictured above.

The objective of the game is to capture more territory than your opponent; also, when they are properly surrounded, opponent’s pieces may be captured, in which case they are removed from the board by the capturer. The game ends when either no more moves are possible or one player resigns. The player with the most territory plus captured stones is the winner.

What, then, does the game have to do with Grand Strategy?

Before we explore that, let’s look at the main difference between Chess and Go. In chess, the pieces can be moved on the board; they have defined movement patterns, and the winner is determined by who captures the opponent’s king first;

In Weiqi, all the pieces are the same and they are placed on the board and then not moved unless they are captured. The goal, as stated before, is to capture the most territory and, in order to succeed, surrounding the opponent so their movements are limited.

In chess, while there are many strategies available, the choices are limited and strategies can be named or defined based on the situation; in Go, there are literally unlimited strategies available. Each game, depending on the situation, requires a different strategy.

While both games require that one player’s strategy is better than the other, Weiqi requires a more deliberate strategy which may develop slowly and include many sub-strategies, such as diversion or distraction. In general, success at the game is generally known to be based on two things: balance and judgment. To that I would add patience; an impulsive or aggressive strategy may work in chess, but it has very little chance of success in Go.

When I taught in China in 1990, my students introduced me to the game. Needless to say, I didn’t have the patience to play it well; when I restarted playing online recently, it was clear that patience was a virtue that I still did not have enough of (although more than in 1990). The American spirit of git er done does not equip the player to win at Weiqi. There is no doubt that, in the game of Go or business or life, sometimes patience is the best strategy. So what is the strategic basis of the game of Go and how does China apply it in their Grand Strategy?

To begin, the game is based on the teachings and principles of Sun Tzu. For example, his principle of “Win All Without Fighting” encourages a diversionary or stealthful strategy that the opponent may not recognize or understand until it is too late. “Deception and Foreknowledge” encourages the player to learn as much about the player as she can and never let the opponent know what your plans are; this may dictate some moves that are specifically designed to mislead or confuse the opponent as to the real plan (if there is one- in Go, very rarely does what you thought in the beginning of the game lead to success, because your opponent is also thinking). “Shape Your Opponent” would encourage the player to induce the opponent to follow, rather than lead—and they may be following in the wrong direction. 

At times, Western strategists have used this type of maneuver in battle. The most famous one happened before D-Day in WWII, where the Allies created an elaborate ruse to convince Hitler that the landing would take place at Calais. So this type of strategy has been used in the West, but in China it forms the core. 

This type of strategic thinking not only forms the core of Chinese military and geopolitical strategy; it is embedded in the culture. In Amy Tan’s The Joy Luck Club Waverly says,

"we're two-faced," explaining, that means "we're looking one way, while following another. We're for one side and also the other. We mean what we say, but our intentions are different" (266). And having twice the faces can, in turn, mean twice the number of possible advantages. 

The game of Weiqi and the principles upon which it is based will create knowledge and understanding (experience if you try the game) in every facet of interaction with Chinese: Geopolitical, business, personal.

A more in-depth study of the game reveals a main Sun Tzu principle upon which it is based called Shi. 

David Lai, a faculty at the US Air War College, wrote an article in 2004 entitled, “Learning From the Stones: A Go Approach to Mastering China’s Strategic Concept, SHI” in which he demonstrates with the use of pictures of Weiqi games in progress how this concept originated and how it is played out on the board (and in reality).

Lai describes shi as ““the alignment of forces,” the “propensity of things,” or the “potential born of disposition,” that only a skilled strategist can exploit to ensure victory over a superior force. Similarly, only a sophisticated assessment by an adversary can recognize the potential exploitation of “shi.” 

He further explains that Shi, which constitutes a chapter in Sun Tzu’s famous The Art of War, consists of four key aspects:

1. The idea of qi and zheng- Zheng is the given; the known knowns that can be revealed by position, overt action, history, geography etc. Qi, on the other hand is a hopefully ingenious variation whose variety and possibilities are endless, as in the board game. (all six Sun Tzu principles—see footnote-- put together in an ingenious and irresistible way)

2. The second aspect is about unleashing an irresistible power which would not have been expected by the foe (he uses the example of a hawk striking its prey- a decisive strike). (Win all without fighting)

3. The third aspect is about creating a favorable situation with which to gain one’s objectives. (deception and foreknowledge)

4. The fourth aspect is about taking and maintaining the initiative (shape your opponent)

How does China put this into practice in its geopolitical strategy? In the Game of Go App Blog, Matthew Chalifant has written an article entitled, “Surround and Conquer: Geopolitical Strategies Influenced by Weiqi (Go)” He points out that the Western world perceives strategy as a game of chess, and that China is playing an entirely different game.

He says about the psyche and principle behind Weiqi: “Originating from China, Weiqi has infused itself into the Chinese psyche. Nearly every aspect of Chinese strategic thinking is deeply influenced by Weiqi. The principle (sic) strategy in Weiqi is to surround your opponent with overwhelming control over territory. The ancient wisdom in Weiqi, is in how to do that well. Secretly the true battle is not against the opponent, but within yourself as a participant.” 

Hearkening back to Sun Tzu, the author characterizes the patient strategy as akin to “a frog in boiling water.” By the time the frog realizes what is happening, he is boiled frog. He characterizes this strategy as Salami Slicing. “Salami slicing places an emphasis on incremental gain over time rather than total immediate gain. Take a little now and have a little more later. It is a slow boil type game as with the frog in hot water. Perform it too fast and become noticed, move too slow and the gain is hardly profitable, but take at just the right rate and your opponents will be none-the-wiser.” 

The strategy China used to grow to its current power lies in expertly and sometimes unnoticeably slicing the salami. While American Presidents like Bush, Clinton, Obama and Trump were in arrogant ignorance of what the ramifications of what was happening in China, or arrogant denial, China is at the top of the heap globally now. Not totally their fault- neither they nor anyone who worked for them was trained to recognize the strategy of our key trading partner, later competitor. President Biden, forced to recognize this, is out to prove that the US is not the boiled frog. Does he have the horses?

What can the US do about it now? The article recommends, “The single thing we can do is learn how to play Weiqi. As China grows in influence and eminence, it will become all the more necessary for the West to comprehend how China, and the East in general, processes geopolitical variables.”

This is the main theme of my book, “The Culture Factor: Understanding the Plain Truth About US-China Relations:” The US cannot win the competition for geopolitical dominance without truly understanding what’s in the heart of China’s culture and how it plays out in strategy. Weiqi is it, can be understood all rolled into a simple game. That said, there is little chance of President Biden or Mitch McConnell or Charles Schumer etc. sitting down to learn the game. 

So who will help? Those of us who have been ignored or, like my book, not PC enough to be taken seriously, but who understand the game. Again, what is the chance of that? 

In academia and in business, gamification has become a popular vehicle for learning and creating scenarios and strategies. Over and above their role in understanding China, the strategies taught by Sun Tzu are very effective on their own.

Will you start playing the game?

China, Russia, Ukraine and the World-The Plain Truth As I See It

 

The news these days is full of stories about Russia’s invasion of Ukraine. Companies are trying to look good (or not look bad or complicit) by making statements and, in many cases, taking actions to separate their businesses from Russia.

And, of course, there are the sanctions. Many of Russia’s assets frozen, Russian Ruble and banks crashing. Yet that seems not to stop Putin’s war. So what will stop it without mass destruction? I think the world agrees that Putin will never say, “oops I made a mistake” and quit. Sanctions will make things worse and worse for Russia, which will likely piss off Putin more and more.

Even if Putin realizes this was all a big miscalculation, and even if more and more Russians and Ukrainians die, this war will only end when Putin gets to save face.

What complicates the situation more, yet is presented as a possible solution, is the show of alliance between China and Russia, which was timed to coincide with the Olympics and predate the war by a short time.

Recently, columnists and writers commenting on the situation have said that a. China realizes it may have made a faux pas and b. China is the best hope of a solution in the near term. 

So what’s the Plain Truth of the situation for China? Let’s put ourselves in Xi Jinping’s place for a couple of minutes and think it through. We can look at it in terms of Good News and Bad News:

a. The Good News is that people will reduce their rhetoric about demonizing China and Xinjiang, etc. because next to Putin, China looks angelic. 

b. More Good News is that It might have a positive long-term effect in cutting the bullshit between the US and China because both sides will realize that cooperation and collaboration without the political posturing is good for them and good for the world, especially if it groups Russia with the North Koreas of the world.

c. Some Bad News is that if China continues to sit on the sidelines and say nothing about the situation, it will be put into the same political corner as Russia.

d. More Bad News is that China, which had hoped to divide and conquer during the Trump Administration when he alienated everybody, has seen the West, NATO and the World come together as has not been seen since WWII. This is a major deterrent to thoughts about invading Taiwan.

e. Even More Bad News is that, as China’s economy slows down due to the crash of real estate and the negative effects of China’s Zero Covid policy on small businesses, it needs to be more export-driven than ever. Never good to alienate your customers is pretty much a given in the global business world.

Thomas L. Friedman, the New York Times columnist, in his opinion piece, “The Cancellation of Mother Russia is Underway,” suggests that China could join the rest of the civilized world (other than India) in the Boycott and even Sanctions on Russia because Russia’s action is undermining China’s mantra of stability (and for the reasons above); this, he suggests, would be too much for Putin and he would back off. Sorry, Mr. Friedman, my opinion is (and I so hope I am wrong) this is never gonna happen. I will explain why later.

Friedman does make one excellent point which can be our f. Much more Bad News is that the boycott is not just coming from nations, but from private actors as powerful as BP and Airbus. That is not a good prospect for China, which still depends on Western companies for equipment, grain and employment of its citizens, to say the least.

Shuli Ren, writing in Bloomberg Opinion, in her article “Why China Won’t Help Russia Around Sanctions,” also suggests that the fragility in China’s economy would prevent any bold actions that would endanger its export business and economically damage its population. That is true, but knowing China, I can say that is only true for the Known Knowns; the Known Unknowns part tells me that, if China wants to help Russia, we all may never find out.

Andreas Kluth, also writing for Bloomberg, mentions China’s “unsustainable doublespeak” regarding Russia (there was a source article for this but gated content got me and I refuse to open any such business model) and suggests that intervention would get China off the hook.

From my vantage point, if I were Xi Jinping, the signs would read as a problem and opportunity at the same time. Doing nothing might do nothing, depending on the course of events without China’s involvement, and doing something would ingratiate me to nations like the U.S. who are my biggest customers and with whom my relationship has suffered, to say the least. The best part of that is the economic and political squabbles that China has with the US and others are easily solved—much easier than solving Putin.

But the problem goes much deeper for Xi and it, as always, is a fundamental cultural problem:  After appearing in world headlines as Putin’s Buddy, condemning him and his actions, while clearly explainable from a political standpoint, would cause Xi Jinping to lose face. It has been clearly established by historians that one of the reasons Mao sent Chinese troops into Korea in October 1950 is because he was afraid that, after just taking over the country a year earlier, that he would lose face as a leader and appear to be weak.

This, by the way, is also Putin’s problem. Even if he fully recognizes his mistake, he won’t quit until the rat in him saves face.

Double problem, and probably one of the most difficult to solve. Am I the first one to mention this as a key factor? I hope not.

That, my friends, is the Plain Truth as I see it.

©Michael Serwetz 2022

Luxury Brands and Ethics: Expectations and Reality

(This is the fourth in a series of articles about the Luxury Market. The previous three may be found on my blog at www.isourcerer.com: Are the Roaring 20’s Back?, Meet the HENRYs and Gen Z. The previous three covered the nature of the luxury market and its target customers. One clear point that emerged from those articles is that the luxury customer demands a certain level of social responsibility and ethics from their brands. This article explores the picture of ethics among luxury brands and the customer’s expectation profile. )

In a Forbes article from January of last year entitled, “Luxury Turns From Conspicuous to Conscientious in 2021: Challenges and Opportunities Ahead,” the author explores the role ethics will play in the customer’s purchases and loyalty.

The author, Pamela Danziger, states that, regarding expectations, 

“Once luxury consumers emerge, they will dig deeper into the meaning and purpose of brands that they choose to connect with, looking for brand values that match their own. 

It means more than just brands taking a stand on the environment, sustainability and socially-responsible business practices, along with support of cultural values like gender, race, sexual orientation and income equality.” 

That said, luxury brands are starting from behind in terms of customer expectations regarding social responsibility and ethics. Danziger further states:

“As good as these ideals sound and important as they are, there is an inherent disconnect for an industry that at its roots is made for the ‘haves’ to suddenly be concerned about the ‘have nots.’” 

A 2019 scholarly article in the Journal of Cleaner Production by Elsevier goes deeper into this situation by conducting a study of luxury customers based on hypotheses that sing the same tune. They state that luxury brands are perceived to be less ethical than “sincere” brands and carry a “sophistication liability.” 

However, regarding luxury brands’ social responsibility efforts, they state that “companies invest more in CSR activities to improve consumers' perception regarding brand ethicality and attain their support.”  But, if consumers suspect this, they dislike this practice and will not reward the brands with their purchases or loyalty.

So, are luxury brands like Kering and LVMH being treated unfairly, the victim of an inaccurate social perception? What is the truth about their CSR activities? 

First let’s take a look at what they might say. Here is quote regarding human trafficking, debt bondage, forced labor from their 2021 Human Rights Policy:

“Forced labor, human trafficking, debt bondage and other forms of slavery are strongly prohibited in our supply chain and are considered breaches for which we have zero tolerance. The unlawful practice of forced or compulsory labor constitutes an element that would nullify any business relationship between Kering and its Houses and a business partner.

In particular, we expect that our business partners do not retain workers’ identity documents, do not withhold wages, prohibit recruitment fees paid by workers themselves and do not impose restrictions on workers’ freedom of movement. 

Vulnerable groups, such as international or internal migrants or illiterate workers, are particularly exposed to these risks and require special attention.” 

The report clearly outlines some of the most critical human rights issues in the supply chain: Forced labor, labor bondage and recruitment fees, abuse of vulnerable groups. While the report claims to advise follow up on the status of these policies, in my view it clearly puts the responsibility on the supplier in this and other sections by repeated use of phrases like “we expect.” Do they carefully investigate these issues before doing business? After engagement, do they monitor the social compliance of the supplier? Or is it to easy to excuse the supplier’s bad behavior by saying “we told you what we expected?” How about, instead, saying that “we will thoroughly vet our supply chain and not do business with any resource who either engages in or probably engages in these practices?”

It seems that Luxury Brands don’t follow up on their words, and don’t make it a priority to vet and monitor their supply chains. The 2021 Apparel and Footwear Report by KnowTheChain provides clear evidence of this.  

The report establishes two indices of apparel companies’ human rights efforts in the workplace. The first is a “benchmark score” on a scale of 0 to 100 which documents known efforts by the company to become involved in and remedy the key issues; the second is a “worker-centric” score which are “the indicators that focus on due diligence processes based on worker participation and on concrete outcomes for workers.”

The results of their work are particularly disturbing, but they take the time to point out that luxury brands as a group are not at the top of the list; in fact, they may be at the bottom. They state in particular:

“Luxury apparel companies score particularly low, at 31/100. Italian luxury fashion house Prada’s score has worsened over time, scoring a mere 5/100, while peers such as the French luxury goods company Kering (41/100) and the German brand Hugo Boss (49/100) have improved significantly since 2016. Also among the bottom five companies in the benchmark is US-based Tapestry (16/100), the owner of Coach and Kate Spade. No luxury company disclosed a process for responding to allegations and only two disclosed outcomes of remedy for workers in their supply chains, including reimbursement of recruitment fees.” 

Combining the two indices, the report lists the total scores of the companies it studied. The top of the heap is populated by brands that are not luxury brands by any stretch. The top four are Lululemon at 89, Adidas at 86, PVH at 74, and the Gap at 70.

The best showing for a luxury brand is Burberry at 53, followed by Hugo Boss at 49. Going down the list, Kering is at 41, Hermes is 24, LVMH is 19, and Prada is a 5. 

As a group, luxury brands average 31 against a 43 for Footwear and 47 for Apparel Retail. 

Further, they make the point that companies in general with market cap >$50 billion were particularly deficient in supply chain transparency, citing the fact that “LVMH and Hermes disclosed little to no information on the locations of their supply chains.” 

So where will luxury customers turn to satisfy their aspirations and prosocial goals? My view is that the winners in the future will turn to a different breed of luxury brands, startups and those whose social goals are part of their DNA.

A January 2021 report entitled “The 26 Most Sustainable and Ethical Luxury Brands” points out companies that are a different breed of cat. They were founded to market artisanal, environmentally-friendly luxury products and that is the core of their business model. Some examples are: 

So Good to Wear, which designs cashmere garments made by a fair-trade factory in Nepal. “Its knitters are well-trained, well-compensated and work under fair and safe labor conditions.” 

Another that practices transparency in their supply chains is Maggie Marilyn, who 

“prides itself on being transparent and shares on its website details of all its makers, suppliers, and where possible, farmers.” 

Granted that these brands are small, infinitesimal compared the LVMH of the world. So what good does their presence serve to solve the huge problem that exists and which is not being addressed by the giants? Two answers: 1. As they grow, their DNA will not pivot to where the others are; and 2. The more of these ants start to prosper and gain the attention of customers, the more the big brands will have to take note. Nothing, repeat, nothing, will get the attention the big luxury brands except the realization that their customers are going elsewhere.

Understood that may take some time to happen, or it may not—that is an unknown unknown; but if we believe it will-and I do—it becomes a known unknown. Not if, but when.

What really will push the timeline along is if some global brand gets the point and starts really making some efforts that will get the attention of its competitors. The same Ecocult report praises Gucci (Kering) and says, “The brand is committed to environmental benchmarks and guarantees that it will make 95% of its raw material traceable. Gucci is also committed to the sustainability objectives set out by the parent company Kering, which states several sustainability strategies including reducing its environmental footprint and choosing responsible and well-managed supply sources. “ And the best part is it offers some advice: “If you’re looking for a recognizable luxury logo that is more ethical than the rest, then Gucci would be the way to go.”  

There is an incredible amount of work to be done before anyone can claim that luxury brands as a group are ethical and that their impact on their supply chains is positive in terms of human rights. But, in the meanwhile, Danziger in her Forbes report offers one piece of advice which I think is a critical marketing point: We started this journey with the realization that consumers have a built-in negative attitude toward ethics in the luxury world. So, if your logo and brand on display in a garment, handbag, or shoes screams greed and irresponsibility, why not tone it down? 

She says, “True luxury whispers. It doesn’t scream.” 

That is really good advice. Let’s see who follows it.

(Not done yet. Lots more to write about luxury. Watch this space for my next piece)

©Michael Serwetz 2022

 

Gen Z: Up Next, Bigger than Ever?

But not without issues

(This is the third in a series of articles about today’s Luxury market and consumer. My last article, “Meet the HENRYs” focused on the Millennials as a luxury market consumer. Now we turn to GEN Z, who will follow Millennials into the workplace. Will they surpass Millennials as a target consumer segment?)

In 2015, Goldman Sachs issued a report entitled, “What If I Told You?” which as one of the “tells” said that “Gen Z will be larger and more influential than Millennials.” Numbers for this generation have ranged as high as 90 million, but there are unique attributes, which we will review below. 

But first, let’s be sure we all agree on the generational delineations. Starting points for Gen Z and ending points for Millennials have varied a year or two, but here I use the latest data based on Pew Research Center’s work:

  

So why should we be excited about Gen Z and what questions are there about their consumption habits?

To begin, Gen Z were “born connected.” In 1997, the internet already existed and was quickly turning to a viable business mode (Amazon started in 1994). After the dot-com crash of 2000 (the oldest Gen Zers were only 3), those survivors formed the core of today’s online marketplace. By any assumption of when Gen Zers started to use the internet for social media and shopping (let’s say 10 years old for arguments sake), the medium was already thriving. So they grew up with a device in their hand and they know how to use it. This is not to say that they are addicted to online shopping (we also know they love the shopping experience, as we will see later), but having a device in their hand all day is in their DNA.

An addiction which represents an opportunity for marketers but a troubling trend for Gen Z, is their mental health based on 5-6 hours or more online every day:

 

Gen Zers were born into a troubling world, and are growing up with phenomena like the above and COVID-19. Does the plethora of social media opportunities make them feel part of a global community and that they are an important part of it? Apparently not:

 

This troubling trend extends to a disturbing increase in suicide rates, especially among girls. CNN reports that “Starting in 2007, the rates of suicide for girls 10 to 14 increased 12.7% per year, compared with 7.1% for boys the same age. A similar trend was seen for teens 15 to 19, with rates of suicide going up 7.9% for girls and 3.5% for boys.” The report also points out that girls may be more vulnerable to the negative effects of social media and cites a JAMA report, saying that “’Compared with boys, girls use social media more frequently and are more likely to experience cyberbullying,’” 

So how does the above influence Gen Zers as customers, given that there sheer numbers are so large and that they will doubtless enter the HENRY ranks in the near future? Some trends in their purchasing outlook continue the trend that was begun by their Millennial elders, but with more emphasis.

Let’s begin with the social profile of Gen Zers. 

• They are the best educated: 59% of Gen Zers were pursuing college in 2017, as opposed to 53% of Millennials in 2002;

• They are more racially diverse than Millennials: 48% of Gen Zers were nonwhite in 2018, as opposed to 39% of Millennials in 2002; the percentage of whites in the age group went from 61% in 2002 to 52% in 2018;

• One in four Gen Zers are Hispanic; these numbers increase in the Western US;

• The median household income where Gen Zers live exceeds that of older generations when they were young, at $63,700;

• They tend to be more liberal than earlier generations and vote in greater numbers.

So here we have a customer who is more diverse, is more educated than older generations, totally connected and sometimes unhappy. How does that affect their purchasing outlook and power?

To begin with, in addition to becoming a consumption powerhouse on their own in the near future, Gen Zers influence the spending of their households now.  The Shelf reports:

“Gen Z commands a remarkable $143 billion in buying power. That’s almost 40 percent of ALL consumer shopping — crazy, huh? Ninety-three percent of parents say their Gen Z children influence their household spending. Another 70 percent of parents ask their Gen Z kids for advice before making purchase decisions. That’s A LOT of influence.” 

Some more highlights from that report:

• Gen Z values Privacy and Security, being more wise to the power and the reach of the global connection;

• Gen Z is willingly loyal to brands who meet their product, price and social expectations;

• Gen Z is working earlier and more than Millennials did at the same age;

• Having grown up during a recession, they are thrifty. But they don’t want fast fashion that disappears into the trash—hence the explosion of the RealReal  and other second hand web sites.

• They are passionate about social issues, hence would look down on companies that exploited workers as in Modern Slavery;

• They prefer authenticity and transparency in marketing;

• While they are at home with shopping online, 81% of the Gen Zers surveyed by The Shelf preferred shopping in store. They are a perfect example of the value of ROPO (Research Online, Purchase Offline) psychology because they value the in-person shopping experience, which makes them the perfect candidate for luxury brands. 

While we have so far focused on the US statistically, we should remember that this is a globally connected marketplace and the purchasing power of Gen Zers in Asia is huge, which will account for 50% of luxury spending by 2025. 

The fact that Gen Zers have grown up with some insecurity makes them even more of a passionate candidate for luxury brands. According to a Crobox report, the Gen Zer fits the psychographic profile of the luxury consumer:

• Luxury purchases are hedonic, releasing dopamine and making the buyer feel good about themselves. For the moment.

• They are impulsive, as gifts or “treats” making the purchaser feel they “can do it;”

• Luxury shoppers give the purchaser a feeling of financial power (even if they don’t actually have it or have it yet);

• Luxury consumers demand that their brands be “woke” in terms of sustainability, ethics, etc.

Further, the luxury customer falls into one or more of the following clusters, all of which appeal to Gen Zers:

• The Need for Uniqueness- I am not just a number on social media

• Costly Signaling and Status- Showing others you can spend it

• Building the Self and Self-Narrative- Who I am and who I want to be.

Troubled, concerned, and passionate. This profile of the demographics and psychographics of the Gen Z customer has me convinced that they will surpass their Millennial elders as the bedrock of the Luxury business in the near future. The time is now for brands to start cultivating and following them.

© 2022 Michael Serwetz

Facebook 2021: A,I can’t help you A,I won’t help you?

 

Company over country; profit over propriety. These were the key points made in the recent book An Ugly Truth, and the documentary The Social Dilemma. Facebook (aka Meta) has been exposed to a staggering amount of bad press which included a whistleblower, Frances Haugen, federal lawsuits, and accusations of pandering to children at a time when suicide among the very young is startlingly increasing.

Yet, especially despite all of the above, Facebook’s numbers are dazzling. Yahoo! Reported on November 24th of this year:

“Meta's third-quarter 2021 earnings of $3.22 per share beat the Zacks Consensus Estimate by 0.6% and increased 18.8% year over year.

Revenues of $29.01 billion missed the Zacks Consensus Estimate by 1.8% but increased 35.1% year over year. At constant currency (cc), the top line improved 34%.

Geographically, Asia-Pacific, the United States & Canada, Europe, and Rest of World (RoW) revenues grew 29.1%, 34.3%, 36.3%, and 49.1%, on a year-over-year basis, respectively.

Average Revenue per User (ARPU) in RoW, Europe, the United States & Canada, and Asia-Pacific grew 41.4%, 33%, 32.1% and 17.2%, on a year-over-year basis, respectively.

Advertising revenues surged 33.2% year over year to $28.28 billion and accounted for 97.5% of third-quarter revenues. Other revenues surged 194.8% year over year to $734 million.

The tech giant’s RoW, Europe, the United States & Canada, and Asia-Pacific advertising revenues grew 49.6%, 35%, 31.1% and 28.5%, on a year-over-year basis, respectively.

Ad impressions served rose 9% and average price per ad increased 22% from the year-ago quarter.

User Base Continues to Expand

Monthly active users (MAUs) were 2.910 billion, up 6.2% year over year.

MAUs in Asia-Pacific, RoW, Europe, and the United States & Canada grew 9.6%, 4.7%, 2.4% and 2.4% to 1.28 billion, 949 million, 423 million and 261 million, respectively.

Daily Active Users (DAUs) were 1.930 billion, which increased 6% year over year and represented 66% of MAUs.

Asia-Pacific DAUs were up 10.7% year over year to 805 million. DAUs in RoW and Europe grew 4.9% and 1% to 622 million and 308 million, respectively. The United States & Canada DAUs were unchanged at 196 million.

Family Daily Active People or DAP, defined as a registered and logged-in user who visited at least one of the Family products (Meta, Instagram, Messenger and/or WhatsApp) on a given day, were 2.81 billion, up 10.6% year over year.” 

Scott Galloway’s New Algorithm of Value is surely at work here. (What it basically says is the bigger you get, the more data you can gather; the more data you can gather, the bigger you get). Can Facebook and Mark Zuckerberg be held responsible for anything that happens, whether intentionally due to their AI or as a result of it?

The Economist recently reported in a piece called “Accounting for algorithms,” that a UN report published in 2018 attributed a “determining role” for Facebook’s platform in the Rohingya genocide. According to the article, on December 6th of 2021 a letter was delivered to Facebook’s offices in London and California. The suit will seek “at least $150bn in compensations for “wrongful death, personal injury, pain and suffering, emotional distress, and loss of property.” The suit is predicated on being able to apply Burmese law for harms done in Myanmar. 

Most importantly, the article points out that, “The current lawsuits argue that Facebook is both manufacturer and, to some extent, messenger: its algorithms decide what people see. Whether and how the firm is liable for what its algorithms do will now be tested.” 

That is just the point: If Facebook can create algorithms and media that facilitate this kind of hate and tragedy, do they not have the power to create algorithms that don’t, even if it costs them revenue? For example, with today’s algorithms, if you like to see hate posts or fake news, revolutionary or destructive posts, Facebook’s algorithms will show you more of those. Whatever changes Facebook says it has made to better control that sort of thing, how far has it gone? Has Facebook demonstrated what its algorithms will be in the future so it can capture the positive aspects of a global media app and eliminate the negative and tragic? 

Will the US Government succeed in taking Facebook to task in court, as they have tried to do and failed? I think not. Why? Because Senators, Congressmen, all politicians cannot get elected without Facebook. So why kill their golden goose?

Does getting elected take precedence over protecting the electorate?

After showing my students the above documentary and their reading the book, they said they were “trying to cut down” on social media time (like trying to quit smoking—never works). And, when asked the question as to whether someone who chooses to advertise on Facebook is also responsible for its ills, their answer was—silence.

Mark Zuckerberg has proven to be the Teflon Don to a degree that John Gotti could not even dream of. So if we accept the fact that Facebook is too big and too much a part of everyone’s lives to control, we can only hope that he sees the light at some point and makes the changes that will address all these recurring issues. If he does, the case might be that Facebook does not lose users; it may gain back those who (like me) have abandoned it and its avatars.

Meet the HENRYs- Your New Target Customer

 

(This is the second in a series about today’s luxury market and customer. If you read my first article, “Are the Roaring 20’s Back?” you would already know that focusing on the luxury market is a key strategy for 2022 and beyond)

What’s a HENRY? Or rather, who are the HENRYs?

HENRY stands for High Earners Not Rich Yet. What does this mean? According to the Wise Marketer, they are mostly Millennials (born between 1981 and 1996, which means they would have been between 25 to 40 in 2021) but overall a household under 55 whose income ranges between $100 and $250K and who have not yet amassed investable assets of $1M.

Many of these HENRY customers have cleared college loans and dependency on their parents or family, and are in a rising income mode; while the Millenial HENRY has not totally done so, their spending is nonetheless rising. With that rising income comes a rise in discretionary spending, more than the Gen X or Baby Boomer HENRYs. 

Let’s look at the entire Millennial generation first. According to Goldman Sachs, they are the largest population cohort: 92 million vs 61 Million Gen X (1965-1980) and 77 million Baby Boomers (1946-1964) and the first generation of Digital Natives.  That said, their debt burden is higher than those of its predecessors, but the Pandemic has started to reverse that.

So why focus on the Millennial HENRY? 

First, they spend more than the other generations within the HENRY group. According to Wise Marketer, Discretionary Spending peaks at age 40, and begins to decline at age 50.  The report cites $86K for Millennial HENRYs as opposed to $67K and $60K for Gen X and Boomer HENRYs. 

And that is only going to get bigger as the younger Millennial HENRYs reach their peak spending years.

What is the customer profile of the Millenial HENRY?

So Millennial HENRYs are a particular bunch with particular requirements which are different from their older HENRY cohorts. How so?

1. Mobile-First Marketing- There have been different numbers at different times, but Millenials make the majority of their purchases on their smartphone and, if you add laptops and tablets, that about does it all.

That said, the luxury market is and always will be a sector that is oriented toward physical stores, due to the price, the service and the overall experience. BUT, digital marketing is becoming a key tool for a ROPO (Research Online, Purchase Offline) or a Showrooming (the opposite of ROPO) strategy, which many luxury customers prefer. Either way, digital presence is key to success in the luxury market as well as all the others.

Millennial HENRYs are ideal luxury customers, but with their own style and conditions. To HENRYs, brands have to fulfill their Aspirational Self; their view of who they are and who they want to be. As well, their Prosocial Signaling and their need for Uniqueness. This certainly applies to luxury fashion, but also determines where they eat, which car they drive, and where they vacation.

More, the Millennial HENRY is comfortable with new technology and adopts that as a signal of who they are. 

Ethics and Sustainability figure for the Millennial HENRY, where they were not a factor for their predecessors.

Make me look good, feel good, feel special about myself and my association with you, brand. And follow my needs, or someone else will.

This is one of the biggest differences between the Millennial Luxury Customer and their predecessor generations: brands have to follow them, not the other way around. Even the big iconic brands like LVMH and Kering are learning that.

For the Millennial, the sacred Four P’s of marketing have become the Four E’s:

• Product >> has changed to >> Experience

• Place >> has changed to >> Everyplace

• Price >> has changed to >> Exchange

• Promotion >> has changed to >> Evangelism  

On Strategy explains:

Experience: Where marketers used to focus on their product, now we must think of the entire customer experience- what does a customer encounter related to purchasing and using your product/service?

EveryPlace: Today, place has become everyplace- there’s just SO MANY methods for conveying your message: IM, SMS, countless social media websites, video games, product placement in places like TV, Movies, internet video clips- the list goes on.

Exchange: With so much on the web being offered for free, pricing has become much different. Words like Freemium, describing how premium services pay for free services offered by the same company would have boggled marketers minds a few years ago.

Engagement/Evangelism: Promotion isn’t enough any longer. With so many more message channels, we can’t just bombard people with messages and hope they’ll pick them up. Companies have to figure out how to get consumers to allow them into their attention spans.

Brands better pay very close attention to the entire experience, from Awareness to Advocacy, or someone else will be glad to do it for them. This is especially important, as well as difficult, in the digital space. 

What happens as Millennial HENRYs get old and start to peak spending? 

Everything they believed and their approach to spending is geometrically multiplied by their followers, Gen Z.

But that’s another subject. Watch this space.

©Michael Serwetz 2021

Are the “Roaring 20’s” back? Yes, but not how you probably think.

There she is- the common image of the Roaring 20’s symbolized by the beautiful Mia Farrow.

An age of joy, abandon, unprecedented riches and living in the moment—until the moment fell apart in 1929.

There has been a lot of talk about this type of wild consumerism coming back post-Pandemic. And maybe it will. But not everyone will attend the wild party.

In 2021-22, the Roaring 20’s WILL dominate the retail scene. But not the era, the income group; the top 20% of earners has grown dramatically, while the bottom 20% struggles with necessities and paying bills.

Let’s take a look:

It is clear to see from the above that the top 20% has lots of wiggle room between their necessities expense and discretionary spending; however, if the bottom 20% wants to spend on something they don’t need, they have to dip into the pot that funds their necessities.

And this:

The combined wealth growth of the top 10% was $17.3 trillion; if we include the top 50%, it was $23.4 trillion. This compared to $1.2 trillion for the entire bottom 50%. So, in terms of wealth and discretionary spending, it will come from the top 20% plus the wannabes and aspirants from the top 50%. The HENRYs (High Earner, not rich yet- typically between $100 and $250K annual income).

So what does this portend for retail?

First, tremendous growth in the premium and luxury sectors. Not just the iconic brands, but the hundreds of new brands that have positioned themselves with the hope of joining the luxury fraternity.

Second, what has come to be known as the Bifurcation of Retail will become more exaggerated. The bottom 50% has to be concerned about price in everything they do; retailers that emphasize and are devoted to the price strategy like Walmart, TJX, Amazon will be their go to shopping destinations.

The top 50% will look for individualistic, higher quality product from the above iconic and emergent premium and luxury retailers.

What is missing here? The middle. Traditionally populated by “balanced” department stores. It looks like they are and will continue to find themselves irrelevant in both high- and low-end consumers retail plans.

Can the department stores reinvent themselves to be the true moderate middle again? To do so, will they give up the 25% because of this plus another 25% because of that and 25% more because we like you to fill their floors with quality, well-merchandised goods that represent fashion and quality at a moderate price point? Even if they want to, do they have the merchants who can do it? Back in the day, we NY department store buyers were good to great merchants who trekked to Paris and Tokyo, and knew what they wanted to buy or develop; the sales floors were not overcrowded or overassorted—they represented our statement of what we believed in. Sound familiar? This is the way Inditex (Zara biggest division) runs its business.

My word is not as good as the facts. Let’s take a look (the following two graphics are from the Deloitte Insights Report (2018). They are even worse (or better, depending on who you are) today:

      

      And this:

The Deloitte report was exposing something that had started to happen years before the Pandemic. We all know that the Pandemic served as the Grim Reaper for many retailers, most in that moderate middle.

Conclusively, the report said, “The great retail bifurcation is the apparent low-end and high-end retailers in accordance with the consumer’s economic situation and, more importantly, in accordance with a close understanding and response to what needs the consumer is expressing.” 

According to the same report (pre-Pandemic), the bifurcation represents an opportunity, a Renaissance, for retailers, big or small, apparel or any industry, who want to pay close attention to the evolving requirements of their target audience.

Such as ethics and sustainability- but that’s another subject. (Author’s note: this is the first in a series of articles about the luxury retail sector in 2021 and the future. Watch this space for more.)

© Michael Serwetz 2021

Another Ugly Truth: Facebook's Moat

 Another Ugly Truth: Facebook’s Moat

 

“An Ugly Truth” is the name of a recent book about Facebook, authored by Sheera Frenkel and Cecilia Kang, reporters for the New York Times. The book is an eye-opening, stomach-churning account of Facebook’s history from its birth in 2006 through its role in Trump’s election in 2016, up until the recent history of the attack on the Capitol on January 6, 2021. After reading the book, I considered: Why does Facebook have a Teflon coating, and just keeps growing despite all its missteps, misses and company-first decisions with significant global impact?

 

First, to understand the book’s point of view, present tense, stated in the last paragraph, let’s read it here:

 

“One thing is certain. Even if the company undergoes a radical transformation in the coming years, that change is unlikely to come from within. The algorithm that serves as Facebook’s beating heart is too powerful and too lucrative. And the platform is built upon a fundamental, possibly irreconcilable dichotomy: its purposed mission to advance society by connecting people while also profiting off them. It is Facebook’s dilemma and its ugly truth.”[i]

 

What the book chronicles is exactly the above: As Facebook got bigger (by acquisitions and users) and became more relevant in people’s lives, thus more irresistible for advertisers’ money, the more it became a platform not only for people wanting to say hi to Grandma, but people wanting to overthrow governments, influence elections, and spread misinformation easily to the world’s biggest audience. Of course, the known examples are Trump’s use of the platform before and after his election and defeat (he was at one point Facebook’s biggest advertiser), the Cambridge Analytica scandal, and the insurrection of January 6. How to balance hate being spread on its pages with “free speech” (Oliver Wendell Holmes may be doing spins in his grave) and pissing off users when you take a stand for or against something that may influence their lives (Trump’s BS) or even get people killed (Myanmar), which might lead to loss of users and revenue?

 

Facebook’s “Battle for Domination” becomes a battle to walk the tightrope between revenue and principle- in the public and government’s eyes, with revenue the clear and simple goal. Frenkel and Kang leave no doubt that, to Zuckerberg, the algorithm was and is “Company over Country.”[ii]

 

Fast forward to today, July 27, 2021. Two recent news articles about Facebook reveal the road that Facebook has chosen to walk, at least up to now. The first is, as reported by Reuters, that Facebook will restrict targeting of users under 18 according to their behavior on other sites (they still can be targeted, but only based on their activity on Facebook/Instagram/Messenger).[iii]

 

The other is an article in the New York Times by the same Cecilia Kang entitled, “The F.T.C. asks for an extension to refile its Facebook antitrust suit,” which was thrown out by the District Court in D.C.  and given 30 days to refile (good luck with finding something in the next 30 days that they didn’t find before).[iv]

 

For those who are thinking (again) that altruism and social responsibility has become the mantra at Facebook over moneymaking, ask yourself if Facebook is doing this because they want to protect our children, or because they want to protect themselves? The same question must be asked about Apple’s IOS 14.5 (which gives the users the right to opt out of companies selling their info to other companies) and Google’s new Privacy Policy. 

 

And, I believe the answer to this question for three of Scott Galloway’s Four Horsemen[v] is the same: when they have more to lose than gain, only then will they consider compromising any activity that contributes to revenue.

 

Why can they get away with this and why does their business keep growing significantly (Facebook’s share price has increased 61.44% in the last year[vi])? The simple answer is the same as for every other company- Their Moat.

 

For those of you who are not familiar with the term, an economic Moat is, put simply, a barrier to entry for any threats to the enterprise- be it another company, economic issues, governments or Pandemics. The wider the Moat, the safer the company is to continue its mission and prosper. 

 

Morningstar Investments, the famous investment research company, defines four types of Moats:

 

1.    Switching Costs- The financial and/or emotional cost of switching from one brand/product/service to another

2.    Intangible Assets- Brand image, patents, trade secrets, customer perception

3.     Cost Advantage- Based on:

1.    Economies of scale- eg., Amazon Prime-wide

2.    Process advantage- Be cheaper eg., Payless Shoe Stores, Kmart-narrower

4.    Network Effect- Value grows as people use the brand or service more and more-self perpetuating[vii]

 

Let’s look at each as regards Facebook:

 

1.    Switching Costs- Sure, you can switch social media apps, but a. you want to be where everyone is, is the soul of social media, and b. If you did switch from Facebook, your likely choice would be Instagram, which is—Facebook. Yes, you can go TikTok or Reddit or Snapchat but in the 6+ hours the average teenager spends on the internet, which social media app is where the action is? And what would it take, if it were at all possible, for the invaders of the moat to be a real alternative to Facebook? Switching costs are both financial and functional. And advertisers know that.

2.    Intangible Assets- Facebook is a brand that has withstood governmental attacks, hackers, invaders and their own greed and inability to respond in a timely and correct manner-but it is still—Facebook. And advertisers know that.

3.    Economies of Scale- In this case, Scale above all is reach. Half the world outside of China is on Facebook. And advertisers know that.

4.    Network Effect- Why Facebook keeps getting bigger and bigger. The huge trove of data feeds the monster and it perpetuates itself. And advertisers know that.

 

Is there anything that can readjust the balance between social responsibility, actually protecting users from hate and misinformation, and the constant flood of increased revenue without overbearing government control, which would taint the experience? 

 

Well, as Frenkel and Kang have aptly stated above, if there is an answer, nobody has found it yet. Even if government is successful in breaking up the company, it will be broken into pieces so big that they may be able to regenerate to an even bigger tomorrow. But yet, given the absolute fact that our children are digital-native and are influenced more and more by what they see and hear on social media, where they may spend most of their day, it is a problem that must be solved for the good of society. Will today’s teenagers and young people demand more social responsibility of companies they deal with? I have polled every class I teach about this, and they all say yes. 

 

But, the question really is, are they the influencers or the influenced?

 

And Facebook, with the rest of the Four Horsemen, goes on.

 

Author’s Note: An Ugly Truth is a well-written, totally engaging, at times stomach-turning, book that everyone should read, if they live anywhere in this world.

 

---

[i] Sheera Frenkel and Cecilia Kang, “An Ugly Truth: Inside Facebook’s Battle for Domination,” (New York: HarperCollins, 2021), p. 300.

[ii] Ibid., p. 117.

[iii] Reuters.com, “Facebook will restrict ad targeting of under-18s,” https://www.reuters.com/article/us-facebook-advertising/facebook-will-restrict-ad-targeting-of-under-18s-idUSKBN2EX1OS

[iv] NewYorkTimes.com, “The F.T.C. asks for an extension to refile its Facebook antitrust suit,” https://www.nytimes.com/2021/07/23/technology/ftc-facebook-antitrust-lawsuit.html

[v] Scott Galloway, “The Four: The hidden DNA of Amazon, Apple, Facebook and Google,” (New York: Portfolio/Penguin, 2017) p. 2. 

[vi] Seekingalpha.com, https://seekingalpha.com/symbol/FB

[vii] Morningstar.com, “Types of economic moats,” http://news.morningstar.com/classroom2/course.asp?docId=144046&page=5