fortune--2020-05-18--The simple metric that’s taking over big business

Vanguard CEO Tim Buckley sees his firm’s Net Promoter Score every time he looks at the management dashboard on his screen. Bill Barton, CEO of California Closets, checks his company’s score first thing every morning and has built his highly successful business on it. Intuit product managers check their score every day and have been using it since it was invented 17 years ago. Some 40,000 employees use it at IBM, and the executive who oversees its use, Michelle Peluso, says, “It’s more than a metric. One could use the word ‘religion.’”
All this devotion for a particular measure of customer sentiment? It may seem bizarre, but the phenomenon is real and growing. At least two-thirds of the Fortune 1000 use the Net Promoter Score, including most or all of the financial service companies, airlines, telecom companies, retailers, and others. Quietly, steadily, without anyone much noticing, NPS has moved into the C-suites of most big companies and the owners’ offices of thousands of small ones—extending its reach deeply and broadly through the global economy. Skeptics and enemies have largely been vanquished. It is now used in every developed economy and many emerging ones. It’s pored over in all types of organizations, not just businesses; in Britain, the National Health Service uses it. As organizations everywhere obsess over the customer experience, NPS’s advance across industries and countries is, if anything, accelerating.
If you are somehow unfamiliar with the Net Promoter Score, you have nonetheless been touched by it—guaranteed. That’s because you have received an email or a phone call asking the one simple question at the foundation of the NPS empire: “On a scale of zero to 10, how likely is it that you would recommend [Company Name] to a friend or colleague?” You were probably asked a second question also: “Why did you give the answer you gave?”
And that, believe it or not, is pretty much it. Some companies add another question or two, and some alter the language slightly, but those two short questions are the essence of the system that inspires so much rampant enthusiasm. The results are so straightforward that they’re often expressed as emoticons—from green smiley faces to red angry faces.
Asking customers for a quick piece of feedback is just the beginning, of course. While the questions may be simple, the art of getting value from them is not. Talk to experienced users in a wide range of industries, and one message comes through loudly: NPS is a tool, very simple and very powerful. The simpler the tool, the more skill it requires; given a chisel, you can carve David or you can ruin a block of marble. Some organizations are using NPS skillfully and achieving significant competitive advantage. Others are misusing it and getting nothing or, worse, are deluding themselves and potentially their investors. The results a company gets from NPS depend on how well it’s used. And the wisdom on how to use it best is not always what one might expect.
To understand what makes NPS so compelling, it’s necessary to know where it came from. The metric was introduced to the world in a 2003 article in the Harvard Business Review by Fred Reichheld, a Bain consultant. Its roots are deep. For years Reichheld had been “focused on loyalty and treating people right,” he says. He found that “companies that focus on earning the loyalty of customers are taking over the world.” They make higher profits, pay employees more, keep employees longer, reward investors better—a virtuous circle. In 1996 he wrote The Loyalty Effect, a business bestseller that’s still in print, and kept working with clients who wanted their customers to be more loyal. “I realized it was a leadership thing and then realized that these things take a long time to play out,” he recalls. “So leaders needed a simple metric to find out, ‘Are we winning or losing with our customers?’ ”
A simple metric was unorthodox at the time, even blasphemous. The customer surveys of the day were massive, sometimes 100 questions long. Customers hated them, and managers needed an 80-slide deck to explain them to colleagues. Reichheld spent two years testing questions for his simple metric. “We picked likelihood to recommend because it best predicted future behavior of customers,” he says. “We picked it on a technical basis. Fortunately, it also makes people want to take action. If someone hears that someone won’t recommend them, they want to fix that.”
At least as important as the question is Reichheld’s way of stating the answer. A respondent who gives a 9 or 10 on the scale is a promoter; a 7 or 8 is a passive; a 6 or lower is a detractor. Subtract the percentage who are detractors from the percentage who are promoters, and that’s the Net Promoter Score, which can range from 100 to –100.
Crucially, it’s one number. You needn’t know how many people chose each number on the scale, or the weighted average; there are no charts or graphs. It’s one question with one answer. “You don’t have to explain in detail what the number means,” says Maurice FitzGerald, who used NPS when he ran the customer experience function at Hewlett Packard Enterprise’s software division and who has written a book on how to apply NPS. “It speaks to people so well. The simplicity of communication is absolutely why NPS is the standard.”
It’s not about chasing the number. It’s about understanding what our customers want and need from us. DEBORAH CAMPBELL, vice president of consumer and marketing insights at Verizon
Having developed the world’s shortest customer survey, Reichheld then got even more radical. He told the world what it was. “We made it open-source, which was a revolutionary move,” he says. Consulting firms don’t give away their secrets. Gallup, J.D. Power, and others had built successful customer research practices based on proprietary methodologies. Not that Bain was averse to making money. But Rob Markey, who worked with Reichheld and now heads the firm’s NPS practice, recalls, “I tried to tell my partners that we should use NPS as widely as possible to learn faster. We wanted more companies to use it and share their results. Those that were really serious would benefit from our consolidating the experience of all these companies.” Besides, how could anybody keep the world’s shortest customer survey a secret?
That’s another reason NPS is everywhere. It’s not just simple, it’s also free. As a result, no one knows exactly how many companies use it; any organization can send out the survey entirely on its own. Which raises an obvious question: Is NPS a business or just a pro bono project at Bain?
Turns out NPS is a large and thriving industry. Any organization wanting to use NPS immediately faces a raft of questions: To whom do we send it? When? How many customers will respond, and how many constitute a valid sample? How often should they be polled? And the biggest question of all: Once we’ve learned our NPS, what should we do?
Several firms will be happy to help. Bain won’t disclose the dollar volume of its NPS practice but says the firm has handled nearly 750 NPS implementation projects over the past decade and has used NPS in thousands of other client projects. Last year SAP paid $8 billion for Qualtrics, a customer research and consulting firm, most of whose clients use NPS. A direct competitor is Medallia, which went public last year; it was worth $4.5 billion before the coronavirus clobbered the stock. Reichheld was a director of a smaller customer experience software firm, Satmetrix, which was bought by NICE Systems in 2017 for an undisclosed sum; Reichheld is no longer involved with it. Beneath these major players are dozens of smaller firms that advise on the use of NPS, plus dozens more that just handle the surveying.
The NPS industry even includes companies that once were bitter enemies of the metric. Gallup, seeing a direct threat to its consulting business, in 2006 called NPS “a popular idea that’s dead wrong.” That view has evolved. “We have to hand it to them,” says Gallup executive Jim Asplund. “People have been using it and finding value in it, so there must be something there.” Gallup even incorporates NPS into its work. Asplund says, “We look at our clients’ NPS data all the time and make use of it.”
At J.D. Power, “when NPS appeared, reaction was kind of mixed—it could be a competitor,” recalls Jay Meyers, the firm’s research chief. But five years ago Bain engaged Power to conduct NPS surveys, and even though that deal has expired, Power continues to measure NPS for clients. “Lots of them use it,” says Meyers. “We advise them on how to use it. We look at Net Promoter definitely as complementary now.”
As for the best way to use it, ask executives at major companies that use NPS and you’ll get a surprise. For all the work that went into devising this one simple metric, they say unanimously that the value doesn’t come from the number. Even at USAA, the financial services firm that continually posts some of the highest Net Promoter Scores in America, the score isn’t what counts. “The most important thing we’ve learned above all is what customers tell us, not the number,” says Julio Estevez-Breton, who oversees the research. Verizon, which gets some of the best scores in a low-ranking industry, has found the same. “It’s not about chasing the number,” says Deborah Campbell, who oversees Verizon’s use of NPS. “It’s about understanding what our customers want and need from us.”
This is a long-term metric. You can drive yourself crazy if you get hung up on the day-to-day or month-to-month. But if you use it for improving long-term, people will never go back. DIEGO RODRIGUEZ, chief product and design officer at Intuit, which has used NPS since it was invented
That is, even though the score gets all the attention, it’s the second question—“Why did you give the score that you gave?”—that delivers the value. Even Bain agrees. “Anyone can hire a research firm and measure their score,” says Markey. “What’s more powerful, and required to get the real impact, is to make use of feedback from individual customers.” The score grabs everyone’s interest and is useful as a trend indicator, but the real importance of the first question is that it sets up the second question.
Parsing the answers to that second question is not easy for companies with thousands or millions of customers. But now technology can read responses and analyze them. “The real gem and actionable insights come from the verbatim transcripts,” says Marc Stein of Dell Technologies, “and we’ve learned the importance of bringing data science and machine learning to NPS.”
Sometimes what companies discover is undramatic but important. It could be a broad issue, for example, “clients who think in general that some of our tech documentation has to be overhauled and improved,” says IBM’s Peluso, who implemented NPS in previous jobs at Citigroup and Travelocity. Or it could be a narrow issue, such as “an account team that didn’t realize a client was having trouble onboarding their offering.” Constantly addressing those roadblocks, which the company might never have known about otherwise, builds a cumulative effect. “I’ve been blown away by how this data can be used for continuous improvement of customer experience,” says Boris Groysberg, a Harvard Business School professor who has studied NPS. “The ROI over five years is so much higher than you can get in three to six months.”
At other times the value of the “verbatims” is their power to center a manager’s thinking. At Intuit, chief product and design officer Diego Rodriguez says, “I can log in at any point and see the verbatims coming in. It’s very grounding and humbling.” That’s why California Closets CEO Barton starts his day reading the previous day’s verbatims: “I want the first voice in my ear every day to be the customer’s voice. It just grounds me.”
The customer isn’t always happy, and while listening is nice, it doesn’t help. Only action does. Responding to non-promoters is called “closing the loop” in the NPS world, and it’s vital. “I just had a bad experience with an airline,” says Peluso. “When I got an NPS survey, I wrote back about my experience, but then I thought, ‘Why am I writing this? I know you won’t respond.’ They didn’t, and I’m a really high-level flier.” Her view: “Don’t ask the question if you’re not going to do something about it. It’s like the airline—they’re making me angrier.”
Even in a big retail business where closing the loop seems daunting, it isn’t impossible. “From frontline employees to our executives, we call customers back,” says Carolyn Saunders, who oversees customer experience at Scotiabank, a Canadian bank that has expanded aggressively through Latin America using NPS. “We’ve conducted over a million callbacks since November 2016.”
Because NPS is so simple, many companies are applying it beyond its original use, often by measuring the NPS of competitors. It isn’t necessary to get the other guys’ customer lists; companies hire survey firms to call or email people at random, asking which companies in a given industry they do business with. In fact, many companies use third-party firms to learn their own score because the result is more objective. “The biggest bias is to send a survey request under your own name,” says Reichheld. “You can kick up your score 30 to 40 points by saying, ‘I’m with such-and-such company, and what did you think of us?’”
Net promoter all-stars
CURB APPEAL Workers at a Chick-Fil-A in Pembroke Pines, Fla., deliver orders to customers in their vehicles in March as part of new pandemic protocols. Chick-Fil-A consistently receives much higher Net Promoter Scores than most of its fast-food rivals. Joe Raedle—Getty Images
To calculate their Net Promoter Scores, companies subtract the percentage of customers who rank them between 0 and 6 on a 10-point scale (detractors) from the percentage who give them a 9 or 10 (promoters). Here are the leaders in 10 industries. NPS true believer USAA tops two categories.
Industry Lowest Average Highest Retail banking 16 34 78 (USAA) Credit cards 11 38 57 (Discover) Property and casualty insurance -18 30 70 (USAA) Wealth management 18 34 53 (Vanguard) Wired network operations -31 -7 23 (Verizon Fios) Wireless service (postpaid) 3 33 58 (Consumer Cellular) Department stores 29 36 42 (Nordstrom) Grocery stores -1 29 69 (H-E-B) Drugstores -20 -12 -4 (Walgreens) Quick service and fast-casual restaurants 2 21 60 (Chick-fil-A)
Companies are even finding they can learn a lot by surveying people who aren’t customers at all. Asking the NPS questions of prospects who didn’t buy is highly revealing. Surveying the company’s own employees is also a strong trend; finding out if they would recommend their workplace to a friend or colleague, and why, can be eye-opening.
Like all simple tools, NPS can be used destructively. Longtime users agree on the No. 1 thing not to do: “If you want a bad NPS implementation, start by incentivizing the scores,” says Nacho Deschamps, a top executive at Scotiabank. When pay is at stake, employees can be marvelously creative. The resulting data will be worse than useless because managers won’t realize it’s fake. Many companies nonetheless link compensation for some employees to Net Promoter Scores.
Other damaging errors “can be done with the best of intentions and produce terrible results,” says Markey. For example, at an auto insurance company that was collecting feedback on its claims process, “some genius decided to ask only those customers whose claims had been paid, because it meant the process was over.” Of course it also meant the company didn’t hear the opinions of customers whose claims had not been paid. A common blunder occurs when a score is attributed only to the customer’s last point of contact. For example, a customer starts a transaction online, fails, contacts the call center, gets put on hold, struggles to describe the problem, eventually gets it fixed—and then receives an NPS survey about the phone rep. The web team, the source of the customer’s problem, hears nothing.
The chief remaining critic of NPS as a metric is Timothy Keiningham, a professor of marketing at St. John’s University in New York City. He argues that his statistical analyses show NPS is not “the single most reliable indicator of a company’s ability to grow” and is no better than several other measures of customer sentiment at predicting profitability. But to NPS believers, he’s focused on the wrong issue, since they all agree that the number alone isn’t what gives them value. (Professor Keiningham did not respond to interview requests.)
As NPS becomes ubiquitous, many companies, especially those below an industry’s top tier, have taken to ignoring the first law of NPS—it isn’t about the number—and issuing press releases bragging that they’ve achieved the highest NPS in their industry. Be skeptical of such claims. The numbers are rarely comparable because of differences in how, when, and from whom the results were obtained. They may delude the company’s own managers, “but worse,” says Markey, “is convincing investors that your deluded score is meaningful.”
Not even NPS’s most ardent fans think it’s the only customer experience tool they need. They all use many others as well. “It’s not the only way you get insights on what your customers need and believe to be true,” says Amy Cribbs, a customer experience executive at Vanguard, which has used NPS since it was created. For example, “it doesn’t always give you the insight on where that passion for your brand comes from. We are big believers in it, but there are other things you have to do.”
In addition, technology could someday make NPS obsolete. “You could envision a world where a rep is talking to a customer live on the phone, with the conversation being transcribed in real time and scored for customer sentiment and bucketed for issues,” says Stein of Dell Technologies, another charter member of the NPS users’ club. “Today the accuracy just isn’t there. But it will be.” Only a little further into the future, all customer experience data could be biometric and continuous, detected from a customer’s pulse, voice, and breathing. It’s plausible. And who would need NPS?
Until then, it’s hard to see the metric waning. Someone would have to invent a tool with a higher ratio of value to simplicity. In 17 years, no one has done it. Most important—fittingly for a system that originated as a way of studying loyalty—its users are extraordinarily steadfast. “This is a long-term metric. You can drive yourself crazy if you get hung up on the day-to-day or month-to-month,” says Rodriguez of Intuit, which has used NPS since it was invented. “But if you use it for improving long-term, people will never go back. We’re going to ask the same questions in the same way from now until the cows come home.” For now, the cows are nowhere to be seen.
How to cheat at NPS—and why you really shouldn’t
“Any metric can be gamed,” says Vanguard’s Amy Cribbs. For that reason in part, she says, “we do not bake NPS into individual reward systems.” But some companies do, incentivizing workers to scam their employers in ways that can lead to costly mistakes in the quest to earn customer loyalty. Among the techniques:
Begging
Seemingly everyone in the field of customer experience has heard about car salesmen who, at the end of the sale, tell customers, “You’re going to receive a survey, and if you don’t give me a 10, I won’t be able to feed my kids.” Maurice FitzGerald, who used NPS at HP Enterprise and has written a book on the measure, says this is “the rule rather than the exception” in U.S. auto retailing. Savvy customers sometimes beat the salesman to the punch by saying, near the end of the negotiation, “Take off another $500, and I’ll give you a 10.”
Nudging
Responses can be influenced in many subtle ways. Managers whose bonuses are tied to Net Promoter Scores may send a survey in which 9 and 10 are green, 7 and 8 are yellow, and everything else is red. Or they may send a separate email saying only 9 and 10 count. Or, before the Net Promoter question, they may ask a question designed to get a favorable response; respondents want to be consistent and are thus more likely to answer the NPS question with a high number.
FitzGerald reports a related stratagem: Offer an incentive like entry in a prize drawing to everyone who responds; people won’t believe they can win if they give a low score.
Skewing the sample
Make sure the surveys go only to people who are happy or are friends. This is “easiest where a transaction is taking place by phone, and the script requires the employee to ask whether the customer is willing to take a survey,” says FitzGerald. “Simply omit to ask the unhappy ones.” Send online surveys to customers who have just ordered a new product, not to those whom you’re hounding to pay a late bill.
Ballot stuffing
“A telecom provider had retail stores where they were getting feedback via SMS,” says Bain’s Rob Markey. “The customer’s phone number was captured by the point-of-sale system, and the text message was sent at the end of the customer visit. Some employees figured out they could temporarily change the customer’s number to their own number, give themselves a 10, then change the number back.”
A version of this article appears in the June/July 2020 issue of Fortune.


fortune--2020-05-18--The ‘valuation gap’ between stock market winners and losers is highest in 20 years, according to Gol

The ‘valuation gap’ between stock market winners and losers is highest in 20 years, according to Goldman Sachs

What to do if your stimulus check is for the wrong amount

If you’ve noticed stock market “winners” and “losers” more lately, it’s because the gap between valuation multiples among U.S. companies is now the widest on record since the peak of the Tech Bubble in the 2000s, according to Goldman Sachs.
Even within sectors, the “collective top 20% of stocks from every S&P 500 sector trade at a median [second fiscal year] multiple of 27x, while the bottom 20% of stocks with the same sector composition trade at a multiple of 9x,” Goldman Sachs said in note. That makes the gap within sectors the widest in 20 years, the firm said.
As the coronavirus has propelled certain stocks far above the pack, investors are seeing heady new valuations for some of the standouts. Of note, coronavirus staples Netflix and Amazon both posted recent highs in late April. But at those prices, shares in Netflix and Amazon have gotten expensive. Amazon is currently trading around 114 times trailing earnings, while Netflix comes at a pricey 89 times trailing earnings.
“Diving beneath the surface, although the S&P 500 as a whole remains down ‘only’ [12%] for the year, many stocks are still down over 70%, while other stocks have already surpassed their all-time highs, reflecting investors’ attempts to pick out the winners from the losers within this awful health crisis,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, wrote in a recent note.
Why is the valuation gap so wide right now?
For those like Sameer Samana, Wells Fargo Investment Institute’s senior global market strategist, the reason for the gap is pretty clear: Amid all the uncertainty, investors are willing to pay up for what they perceive has more certainty.
Samana suggests investors have been eyeing trends that were in place before the coronavirus that have been “turbo-charged” amid containment measures, like online streaming, work from home technologies, and food delivery—and are betting on those trends sticking around post-COVID.
“I think that’s what’s creating the valuation gap—more and more people are treating those companies as almost these perma-growth type of sectors and industries,” Samana tells Fortune.
Yet while many of these top performers in the coronavirus stock market are perceived to benefit from further growth even when quarantines end, Goldman notes that “differences in long-term growth expectations explained the valuation gap between the haves and have-nots in 2000, but don’t explain the gap in valuations today.” Historically, stocks with high expected growth typically trade at higher multiples than peers, the firm notes. In 2000, Goldman says the gap in “inflated” long-term growth expectations was especially large, contributing to the contrast in low and high valuations. Today, that distribution of growth expectations isn’t too far above average now, but low interest rates have made equity valuations particularly sensitive to long-term growth estimates, only bolstering the gap in valuations we’re seeing.
In fact, Samana points out that comparing companies’ valuations based solely on P/E ratios (and not taking growth rates into account) is like “apples and oranges” right now (“how can you compare utilities to tech?”).
Instead, Goldman suggests that current valuation dispersion is “more closely tied to actual profitability”—The median return on equity for the highest valuation stocks in the S&P 500 right now is 23%, versus 13% for the lowest valuation stocks (the largest gap on record), the firm says. (Plus, Goldman points out companies considered “high quality,” with strong balance sheets and high profit margins, are also trading at premiums versus “lower quality” names.)
Analysts, however, don’t think the yawning gulf between the most and least expensive stocks will last forever. “You never quite know how far the valuation gap will go before it reverses. We all appreciate reversion to the mean, … but you never quite know when that reversion will start,” says Samana.
Closing the gap
Unlike during the Tech Bubble—which saw many expensive names “catch down,” the firms says—Goldman now estimates that “the extreme current valuation gap between the most expensive and least expensive stocks will most likely be closed when an improving economic environment causes the low valuation stocks to ‘catch up’ to the current market leaders.” That’s based on the pattern that, historically, low valuation stocks were able to find their footing and outperform a rallying market once the economic tide has turned.
With that in mind, for investors focused on more relative returns, the potential for a “catch up” of cheaper stocks should prompt them reexamine (and potentially add) positions in low valuation stocks—provided they have long time horizons and a strong stomach for dips in the meantime, analysts at Goldman write.
However, the firm notes that while the extreme gap in valuations could limit the absolute upside of more expensive stocks moving forward, they will “likely outperform in a weak market by declining less than peers, but nonetheless post positive absolute returns in the event of a rally.”
Wells Fargo’s Samana is of the same mind: He says there will come a time when it makes sense to rotate out of the high-flying stocks and “toward these more cyclical areas that are more beat up and trading a little bit more cheaply.”
But, he adds, he doesn’t think we’re quite there yet.
More must-read finance coverage from Fortune:
—Saving lives vs. saving the economy is a false tradeoff, economists say
—Real unemployment rate soars past 24.9%—and the U.S. has now lost 33.5 million jobs
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—Does Apple’s stock buyback strategy make sense in this market?
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Subscribe to How To Reopen, Fortune’s weekly newsletter on what it takes to reboot business in the midst of a pandemic.


fortune--2020-05-18--How businesses should balance risk and opportunity during the coronavirus crisis

Peter Schwartz has spent five decades studying the balance between risk and opportunity. As the head of scenario planning for oil giant Royal Dutch Shell, as a consultant on movies such as the sci-fi thriller Minority Report and disaster epic Deep Impact, and since 2011 as the senior vice president for strategic planning at cloud software phenomenon Salesforce.com, the 73-year-old has devoted his career to peering past the noise of the present to focus on the future. But never before has he seen a risk scenario as unpredictable and confusing as the coronavirus crisis.
“I’ve been doing this since 1972,” says Schwartz. “This is the greatest level of uncertainty I’ve seen—ever. I’ve been through the oil crises of the 1970s, several financial crises, the attacks of 9/11, and two different Iraq wars. It all pales next to this. So, you know, if people are uncertain, it is thoroughly appropriate. It’s not like somehow you could figure it out and get the right answer. You can’t.”
Start with the fact that there is so much about the virus that we don’t know: Will it mutate into an even deadlier form? Will the second wave be worse than the first? When will we have a vaccine, or an effective treatment—if ever? Then there’s the economic anxiety: Are we headed into a long depression? Will the financial consequences of “reopening” be even worse than the pain of the shutdown?
Photo Illustration by Selman Design
Together these hard-to-answer questions add up to the perfect formula for maximizing the stress we feel. “Something that is really risky has two features,” says Hersh Shefrin, a professor at Santa Clara University’s Leavey School of Business and a leading expert in behavioral finance. “The first is that the consequences induce a sense of dread. Second, there’s a great deal of uncertainty, so we don’t feel we have control.” Check, and check.
Living with the pandemic means navigating this new normal of pervasive risk. The drumbeat of grim news—more than 80,000 dead from COVID-19 in the U.S. by mid-May and over 30 million people out of work—is an accelerant for our fears. It can be paralyzing. And it triggers ancient, hardwired reactions in our brains that can undermine our decision-making. For business leaders, the extreme uncertainty only amplifies the threats they’re facing—to the health and well-being of their employees, to their companies’ short-term survival, and to their ability to plan for the long run. What’s key, say strategists, is to understand how risk affects our thinking and create systems that mitigate it and allow us to unlock new opportunities.
Think near and far
Amy Webb can feel the decision-fatigue setting in. It comes through loud and clear in the calls she is getting from her clients. “Everybody wants to know what’s next,” says Webb, the founder and CEO of the Future Today Institute, a management consulting firm. “They haven’t been in a position before where they’re having to make 1,000 decisions a day without any clear understanding of what’s coming.” One danger in that scenario is that leaders pull back and tighten their focus. “Everybody gets narrow,” says Webb. “You start to make decisions just based on the stuff that you already know really well.”
To break her clients out of that mode, one visual tool Webb uses is what she calls a “time cone.” The narrow end represents the near term, with tactics informed by the most data and evidence available. As you go further out in time, the cone widens to demonstrate the widening uncertainty of data and outcomes. That is the strategy zone. And it’s more important than ever right now, Webb argues, for CEOs to push themselves to imagine how the world is likely to evolve and decide how their companies want to compete in that new landscape.
This is a time when data matters more than gut. And certainly more than, ‘well, this is what we’ve always done in the past.’ AMY WEBB, FOUNDER AND CEO OF THE FUTURE TODAY INSTITUTE
As just one example of how quickly assumptions can change, Webb points to health care, “which is being transformed before our eyes.” Telemedicine is soaring by necessity. More consumers are ordering prescriptions online, and drone deliveries of supplies are beginning to take flight. And the need to ramp up coronavirus testing capacity could give another entry point to nontraditional players like Amazon and Walmart who are already circling the industry. All of these trends could spell opportunity for those who act boldly, and trouble for companies that stay in a defensive crouch.
Webb believes that right now every big company should establish a triage organization to balance tactical and strategic modeling—a CentCom for the pandemic if you will. “This is a time when data matters more than gut,” says Webb. “And certainly more than, ‘Well, this is what we’ve always done in the past.’ ”
Balance your biases
When Shefrin teaches behavioral risk management, the first bias he warns his students about is excessive optimism. “People are unrealistic about the likelihood that favorable events will happen to them,” he says. “But they especially think bad things are less likely to happen to them than is warranted.” Research shows that we tend to overrate our own skills, overestimate our control over events, and assume that we just aren’t the type of people that bad things happen to.
At the same time, we make different decisions in the heat of the moment than we would if we were in a so-called cold state. A classic example is that the more often a person checks stock prices in a falling market, the more likely she or he is to panic and sell. The uncertainty triggers our inherent sense of loss aversion—our well-being is impacted more by the fear of loss than the potential for gain. The solution is to create heuristics, or rules of thumb, while we’re at our most rational: triggers to buy stocks when prices fall to a certain level, for example, or sell when they rise high enough that it’s prudent to take profits.
Kristen Berman advocates that companies apply the same principles to their operational planning, particularly now. The CEO and cofounder of Irrational Labs, a behavioral design company, Berman suggests that business leaders conduct a reality check in advance on, say, how much they’re willing to invest in rehiring or what kinds of losses they can withstand in a given business line, knowing that a second wave of the pandemic could be devastating financially. “If we realize we have an optimism bias,” says Berman, “we can put in little checks to say, ‘What if it’s still going on at this point? What do I do?’ ”
Reset the mental model
Back in 2016, a pair of researchers at the University of Bath in England published a study testing the “habit discontinuity hypothesis”—that it’s easier to change people’s behavior in a certain area, like recycling more or reducing water use, when they’re already making a major change, such as moving to a new home. Their results confirmed that people who uproot are more open to behavioral changes, and that the window of opportunity was greatest in the first three months.
That openness to change during a time of disruption, says Berman of Irrational Labs, means that the coronavirus crisis is a golden opportunity for companies to introduce a new “mental model” of their products or their business model to customers. The mental model is the understanding we have in our minds about how products and services work, and our relationship to them. Google Search is free. I pay a monthly fee to work out at the gym, not at home. The Amazon Fire tablet is for reading or watching movies. Once our habits are established, they’re hard to change.
Opportunistic companies are making the most of the window offered up by the pandemic. In March, for instance, at-home fitness company Peloton boosted the free trial period for its exercise app from 30 to 90 days, and got 1.1 million downloads in six weeks. In April, Amazon started giving away one-year free subscriptions to live and on-demand cooking classes for Fire users. Working out at home and cooking with Fire might become habits for many.
The strategy behind these experiments is one that virtually any company can and probably should apply right now. “The key is to look at the mental model that customers currently have with you, see if that’s the one you want to keep, and then redefine the mental model going forward,” says Berman. When uncertainty reigns, you might as well turn it to your advantage.
A version of this article appears in the June/July 2020 issue of Fortune with the headline “Facing the unavoidable risk.”


fortune--2020-05-19--Of beef and barley: Why China and Australia are feuding—and what it means for the U.S. trade war

German intelligence can no longer freely spy on the world ’ s Internet traffic , top court rules

China dealt a blow to Australian farmers when it confirmed it will place an 80.5% tariff on Australian barley imports starting Tuesday, China’s Ministry of Commerce announced on Monday.
The tariffs escalate already-high tensions between China and Australia that began in April when Australia called for an independent probe into the origins of the coronavirus that first emerged in Wuhan, China.
Both sides argue publicly that the trade spat is just that: a lingering disagreement about barley prices that stretches back to 2018. That rhetoric reflects the traditional nature of Beijing-Canberra relations, which have long separated trade from politics. But now, as Australia casts a global spotlight on China for its role in the coronavirus pandemic, there’s unmistakable spillover between the two.
“Trade tensions will escalate if China perceives that Australian actions or policies could damage its interests and international standing,” said Hans Hendrischke, professor of Chinese business and management at the University of Sydney Business School. And that’s the case “with the COVID-19 inquiry.”
A two-track relationship
Australia and China have a strong bilateral trading relationship. China is Australia’s biggest trading partner; around a quarter of Australia’s total imports come from China, and more than a third of all its exports go there. Australia, meanwhile, ranks 13th in China’s export destinations, and sixth among its import sources.
Australia and China have operated with a “two-track relationship” in which political tensions are kept from tainting commerce and trade, said James Laurenceson, director of the Australia-China Relations Institute at the University of Technology Sydney.
Barley silos at a grain facility in Victoria, Australia, on May 18, 2020. China slapped anti-dumping duties on Australian barley for five years as diplomatic tensions escalate between the two trading partners. Carla Gottgens—Bloomberg via Getty Images
The two have butted heads politically in recent years, including recent run-ins over military exercises in the South China Sea and concerns about Chinese state influence at Australian universities. In 2018, when Australia banned Chinese telecommunications company Huawei from participating in the country’s 5G rollout, China’s ambassador to Australia, Cheng Jingye, called the ban “a sore point” and criticized the Australian government for “discrimination against the Chinese company.”
The last visit to China by an Australian Prime Minister was in 2016, and current leader Scott Morrison, who assumed office in 2018, has not received an invitation to visit his counterpart in China—an illustration of the enduring iciness within the countries’ diplomatic relations.
But even with those political spats, the bifurcated model has meant the economic relationship between China and Australia has “continued to go from strength to strength,” Laurenceson said. Australia’s exports to China grew 26% year over year in 2019, and its imports from China rose 15%.
But the trade restrictions of the past few weeks have “really raised this question again of whether that two-track approach is sustainable in the long term,” Laurenceson said.
China’s new tariffs will apply to $980 million to $1.3 billion worth of barley. The duties could cut Australian farmers off from the lucrative Chinese market, where they sell the cereal grain at a premium to beermakers. Australian barley prices have dropped 20% to 30% since the tariffs were announced, the Australian Broadcasting Corp. reported.
Besides the barley tariffs, China suspended meat imports from four Australian slaughterhouses, and Cheng, the ambassador, called the proposed inquiry into the origins of the coronavirus “politically motivated.”
“Maybe ordinary people [in China] will say ‘Why should we drink Australian wine? Eat Australian beef?’” Cheng told the Australian Financial Review in an April 26 article.
Around 30% of exported Australian beef goes to China. The four suspended slaughterhouses represent 20% of Australian beef exports to China; the other 80% of exports are proceeding as normal.
A holding paddock at a Bindaree Beef facility in Inverell, Australia, in 2016. The China-Australia spat has touched Australia’s massive beef industry as well as its barley sector. Carla Gottgens—Bloomberg via Getty Images
But, Laurenceson said, it would be unwise for China to ramp up the conflict.
“China’s reputation globally is under a lot of pressure at the moment, so I don’t think it really serves China’s interests to be using trade as a weapon to punish countries for political disputes,” Laurenceson said.
Nor would Beijing want to engage in a protracted trade dispute that might harm economic growth. Chinese commerce minister Zhong Shan said on Monday that China is facing “unprecedented challenges in foreign trade this year” owing to a drop in global demand sparked by the coronavirus pandemic.
“Trade is mutually beneficial by definition. If trade stops, yes, it hurts Australia, but it hurts China as well,” Laurenceson said. “It’s pretty hard not to suspect that this is an example of some politics spilling over into the economics, but given its limited scale, I’m more interpreting it as a bit of a shot across the bow—a bit of a warning—rather than China seriously setting out to inflict major economic damage on Australia.”
The two countries have complementary economies and “a degree of mutual dependence” that China wants to maintain, Hendrischke said.
China depends heavily on Australia’s reliable supply of raw materials—Australia supplied 62% of China’s imported iron ore in 2019, and 40% of China’s liquefied natural gas comes from Australia—and consumer goods that are in high demand from its growing middle class. Australia also serves as a “testing ground” for Chinese companies planning to enter Western markets, and as “a training ground for China’s global elite,” Hendrischke said. (One in every 10 Australian university students is a Chinese national.)
“China has been careful to flag the recent tariffs as technical issues and not as political sanctions,” and there’s a “big difference” between the two, Hendrischke said. Political sanctions are an official statement that “relations have been damaged across the board,” while technical trade issues like the beef and barley export barriers “can be resolved behind the scenes [and] withdrawn at any time if the two sides reach a consensus.”
The U.S. role
A notice on the China Customs website posted on May 14 said China will start importing barley from the U.S., fueling speculation that U.S. barley could replace Australian barley exports to China, though Hendrischke said these speculations are “premature.”
Such a move would benefit the U.S. economically but would damage American standing in Australia, Laurenceson said. “If it’s seen that the U.S. is actually taking advantage of Australia’s dramas with China, that will cause some pretty serious reevaluation of the U.S. relationship in Australia.”
The U.S. and Australia have a long-standing security alliance that ties the two countries together in their political scrutiny of China. “If you look at Australian foreign policy over the last few years it’s probably become more closely aligned to the United States,” Laurenceson said.
In April, Australia participated in military exercises with the U.S. in the South China Sea near waters jointly claimed by China and other countries, as the U.S. criticized China’s territorial claims as “bullying behavior.”
Australia also concurred with U.S. actions in 2018 when it barred Huawei and ZTE, another Chinese telecom equipment company, from taking part in its 5G rollout. Hendrischke called the ban a “spillover” from the U.S.-China disputes.
“While China has no illusions about Australia’s commitment to its allies, it is signaling to Australia what actions are perceived as provocations,” namely the COVID-19 inquiry effort, Hendrischke said.
China’s trade dispute with the U.S., in turn, might well temper China’s trade actions toward Australia in the long run.
“I still don’t think China’s keen to open up multiple fronts of a trade war when, of course, China’s main focus is the trade war with the United States,” Laurenceson said.


fortune--2020-05-19--Opera houses face two daunting uncertainties: Reopen dates and funding from wealthy donors

Of beef and barley : Why China and Australia are feuding—and what it means for the U.S. trade war

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The Metropolitan Opera’s opening night is typically one of the hottest tickets in New York’s autumn cultural season. And the opera world was buzzing about the new production of Verdi’s Aida starring soprano Anna Netrebko to kick off the 2020–21 season when it was announced back in February.
But as the COVID-19 pandemic wears on, and uncertainty deepens as to when the performing arts can return to New York’s stages, only a fraction of the tickets for the Met’s season opener, still on the calendar for September 21 despite doubts about that date, have sold. What’s more, this is prime time for selling subscriptions or ticket bundles, as well as regular tickets for the first part of the 2020–21 season, and business has not been brisk.
“The sale of advance tickets for next season has come to almost a standstill,” Peter Gelb, the Met’s general manager, tells Fortune.
With opera fans sitting on their hands right now, strains on the Met, the country’s largest performing arts organization, will worsen. Last month, S&P Global Ratings lowered its outlook to “negative” and downgraded bonds that are part of Met’s debt of $156 million after the company said the cancellation of the last two months of the 2019–2020 season would lead to a loss of $60 million. The Met has furloughed employees and Gelb is forfeiting his salary.
Countless other opera houses are also under pressure: The Lyric Opera in Chicago had to cancel its Ring cycle by Wagner—an expensive undertaking and one that burnishes a company’s prestige—and will lose $13.6 million from spring cancellations. One saving grace for Chicago: Patrons opted not to ask for refunds worth $1 million on canceled tickets for spring performances—the ticket holders can write off the cost as a tax-deductible donation. This month, the Santa Fe Opera canceled its summer program, as did the Glimmerglass Opera in upstate New York.
Complicating matters, planning in this environment becomes nearly impossible. “We’re in a vacuum of total uncertainty,” says Lyric Opera CEO Anthony Freud.
All this comes on top of a long decline in attendance figures at most opera houses. Some 20 years ago, the Lyric was selling every single ticket available; that’s down to about 78% now. At the Met, its box office generated 69.9% of possible ticket sale dollars for the 2019–20 season until it was aborted. That was an improvement over recent years, but well below the 83.2% of a decade ago.
And relief will be slow in coming. News last week that Broadway theaters will remain dark until at least September 6 does not bode well for the Met. Gelb says that even when the Met gets a green light, it will be a big challenge to ensure the safety of patrons, employees, and musicians.
“There is absolutely no space for social distancing,” he said. The proximity of orchestra musicians in the pit, the fact that there are several different rotating productions every week, and the question mark about whether international opera stars can even get to New York given travel restrictions suggest it could be a long haul before performances resume at the 3,800-seat house. And lest we forget, singers are “super-spreaders” of this virus.
Even when reopening is cleared, the Met and its peers could be dealing with half-empty halls if opera fans are skittish or if limits are placed on audience sizes. “Sitting down for three house four seats away from someone coughing will prey on people’s minds,” says Rich Maloney, a professor of performing arts administration at New York University.
The Met, which had a budget of $312.5 million in the fiscal year ending July 31, is particularly reliant on the generosity of donors—it received 48% of its budget last year that way, a reliance Gelb acknowledged was “too heavy.” The Lyric also gets about half from donors.
But now, in an hour of dire need, the Met, along with all cultural organizations for that matter, is hitting up donors again, urgently trying to find new ones to update an aging donor base and audience.
Last month it held a popular online four-hour gala featuring megastars like Joyce DiDonato, Renée Fleming, Roberto Alagna, and the Met’s highly regarded chorus and orchestra under maestro Yannick Nézet-Séguin’s direction, beaming in performances from their homes. Some 750,000 have watched the gala. Other opera companies are similarly putting many performances online.
The Met has also been webcasting classic performances every night since mid-March: The upshot of these efforts has been 18,000 new donors and a doubling of subscriptions to its “on demand” app. Gelb says the app will be the cornerstone of new revenue streams the Met is looking into, but he’s staying mum on the details for now.
“Their ability to fundraise is a big strength they have,” says S&P research analyst Stephanie Wang.
The extra revenue beyond tickets has indisputably been a balm: The Met has been broadcasting live performances to movie theaters worldwide since 2006, which, along with the on-demand content on its app, brought in $28 million in 2018–2019 on top of $85 million in ticket sales.
But the fact remains: Opera houses need to fill seats again.
“No one of these things will ultimately change the fate of the opera house, but it shows we have a healthy donor base,” says Gelb.
Not just opera’s greatest hits
Even once opera and other performing arts return—and they are not high on any governor’s reopening list—the financial strain will remain for a while. There are fears that could lead opera houses to play it safe, putting on even more tried-and-true box office hits like Puccini’s Tosca or Bizet’s Carmen at the expense of the more adventurous fare that keeps opera vital and longtime fans interested.
That can be risky, Gelb warns: “If you overplay chestnuts, they become less of a sure thing.” While more challenging work has frequently been greeted with half-empty halls, this season’s Akhnaten by Philip Glass at the Met was entirely sold out.
So Gelb says the Met plans on keeping up the pace with new productions, but, to be sure, there are plenty of the “greatest hits” on the calendar. New productions include the Met’s first-ever commissions of operas written by women, coming in a future season: Jeanine Tesori’s Grounded, which is based on a George Brant play about a fighter pilot who goes into drone warfare while pregnant, and Missy Mazzoli’s piece based on the George Saunders novel, Lincoln in the Bardo. In Chicago, the Lyric will present Lessons in Love and Violence, a political story set in an authoritarian state, written by Sir George Benjamin and Martin Crimp.
“If you can keep your social cachet, and if you can keep your high quality, you can survive,” says NYU’s Maloney.
The economics of the opera business have always been tough: enormous casts, large orchestras, big choruses, and, in the past decade, smaller audiences. But Gelb, whose contract was recently renewed through 2027, sees one inevitable upshot from the pandemic: a restructuring of opera’s cost structure. That includes the lavishness of the productions that most people associate with the art form.
“Grand opera in some people’s minds is all about opulence,” he says. “But it doesn’t need to be opulent to be effective.”
While it’s anyone guess when opera will return to stages worldwide, or how big the financial wreckage will be in the meantime, the big companies are betting that audiences will eventually return.
“I refuse to believe that as a species, we’ve lost our appetite for human interaction, that the time won’t return that humans want to gather in opera houses and concert halls and reengage with live music,” says Chicago’s Freud.


fortune--2020-05-19--German intelligence can no longer freely spy on the world’s Internet traffic, top court rules

In the world of online spying, great power lies with those who can get their hands on the data flowing through the world’s Internet infrastructure. So the fact that Germany is home to one of the world’s biggest Internet exchange points—where data crosses between the networks that make up the Internet—has given a lot of power to the country’s equivalent of the U.S. National Security Agency.
The Bundesnachrichtendienst, or BND, gets to freely sift through all the foreign traffic passing through that exchange junction in search of nuggets that can be shared with overseas partners such as the NSA. But now that power is in jeopardy, thanks to a Tuesday ruling from Germany’s constitutional court.
The case was brought about by journalists who report on human rights in conflict zones. They don’t want German spies potentially identifying their sources there and sharing that information with other countries.
Germany’s Federal Constitutional Court ruled that foreigners also benefit from privacy protections under Germany’s constitution, so the surveillance conducted on them by Germany’s spy agency needs to respect their rights.
The legislation in question, which was introduced in 2016, does nothing of the sort. Indeed, those rules trample over foreigners’ rights in a variety of ways, the court said: They allow mass surveillance rather than targeted surveillance; there’s not enough oversight of the spying; there are no protections for journalists and lawyers, as there should be; and there aren’t enough restrictions or safeguards when it comes to sharing the information with the likes of the NSA.
The court said it was possible to have a constitution-compliant law governing the surveillance of foreigners in other countries, so the German government has until the end of 2021 to make the necessary adjustments.
The Frankfurt connection
Germany’s signals intelligence agency—the Bundesnachrichtendienst, or BND—has had an information-sharing deal with the NSA since soon after 9/11. After NSA contractor Edward Snowden in 2013 spilled the beans about the American agency’s international partnerships, it emerged that the NSA had been directing the BND to gather information on high-profile targets such as the European Aeronautic Defence and Space Company, and the administrations of France and Austria.
This triggered a parliamentary inquiry in Berlin, which revealed a lot about the BND’s tapping of the data flowing through the DE-CIX Internet exchange point in Frankfurt (the world’s second-largest Internet exchange point, after the Brazil Internet Exchange). DE-CIX’s operators complained that the BND was supposed to monitor only a fifth of the traffic passing through but was actually scooping up the whole lot.
The solution introduced in the 2016 law was to simply legalize what the BND had been quietly doing before—it lifted the 20% limitation and allowed the BND to access all it wanted. The law also explicitly allowed the agency to spy on journalists’ communications.
In its Tuesday ruling, the constitutional court said none of this was kosher, because the German government was wrong to assume that foreigners outside its territory don’t fall under Germany’s constitutional privacy protections.
“With its decision, the Federal Constitutional Court has clarified for the first time that the protection afforded by fundamental rights vis-à-vis German state authority is not restricted to the German territory,” the court said in a statement.
The BND said in a statement that it would evaluate the judgment and help the government to adapt its law so as to protect both fundamental rights and Germany’s security. “Nobody has a greater interest in acting on legally secure grounds than the BND itself,” said the agency’s president, Bruno Kahl.
Journalists rejoice
The German chapter of Reporters Without Borders, which brought the case in partnership with the Berlin-based Society for Civil Rights (GFF) and a few other journalists’ associations, is overjoyed.
“The Federal Constitutional Court has once again underlined the importance of freedom of the press,” said Reporter Without Borders chief Christian Mihr in a statement. “We are pleased that [the court] is putting a stop to the escalating surveillance practices of the BND abroad.”
GFF lawyer Bijan Moini said the German government would now finally have to rein in the practices that Snowden had exposed.
The whistleblower testified in 2014 that the NSA had set up what was effectively a “bazaar” of Internet espionage among European spy agencies, all of which would spy on people outside their own borders in order to comply with their domestic restrictions, then share the information with the Americans.
This story has been updated to include a statement from Bruno Kahl, BND president.


fortune--2020-05-19--The man who made Moderna

The man who made Moderna

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Good morning.
The big news yesterday—and possibly the best news since the pandemic began—is that Moderna Therapeutics announced positive Phase I test results from its COVID 19 vaccine candidate. It’s a small test—just 8 people—but all developed antibodies from the vaccine, suggesting a path to success by early next year.
Last week, I interviewed the man who gave birth to Moderna—Noubar Afeyan of Flagship Pioneering—for our podcast, Leadership Next, out this morning here. It was one of the most interesting conversations I’ve had during lockdown, and well worth listening to.
Flagship is a portfolio company, which creates and incubates life sciences companies, and its goal, Afeyan says, is “innovation at the extreme.” An excerpt from the interview:
“Everything we do is to create completely new possible solutions that don’t exist today. When we start these things, they are completely unreasonable, and therefore dismissed…I believe humanity has largely used up all the obvious things to do to have social impact. We have to work on things that are un-obvious and unreasonable, and identify from those the subset that might turn out to be realizable. We have to start with science fiction and take the fiction out.”
The vaccine technology Moderna developed uses messenger RNA, which is a snippet of genetic code, to produce an antibody response. Afeyan says Moderna is aiming for capacity of a billion doses annually by the end of next year. With pressure growing to make any vaccine free, that early effort is unlikely to prove profitable. But a successful vaccine would demonstrate the value of Moderna’s technology—which could explain why the company’s stock price has jumped 4X since the start of the year.
More news below. And if you are struggling with the challenge of how to reopen after lockdown, here’s some collected advice from the CEOs of Ford, Gap, Rite Aid, Hilton, Qualcomm, Duke Energy, Synchrony, Delta, Bristol-Myers Squibb, Starbucks, Kohl’s, Wells Fargo, Macy’s and Cisco.
Alan Murray
@alansmurray
alan.murray@fortune.com
TOP NEWS
Recovery fund
France and Germany have jointly proposed a $545 billion EU recovery fund that would issue grants (not loans) to the member states that are hardest hit by COVID-19 (think Italy and Spain). It's a big shift in position for German Chancellor Angela Merkel, who was previously against the idea of EU nations sharing debt. Interestingly, Merkel and her French counterpart, Emmanuel Macron, would like this new fund—described by ECB President Christine Lagarde as "ambitious, targeted and welcome"—to also finance green investments. Fortune
Trump WHO
President Trump is threatening to permanently defund the World Health Organization unless it proves within 30 days that it is not dependent on China. Trump has previously threatened to temporarily remove U.S. funding from the pandemic-fighting body, over the same issue—he says the U.S. agency was too supportive of China and ignored early reports of the coronavirus outbreak in Wuhan. Fortune
Trump pills
President Trump also claims to be taking the anti-malaria drug hydroxychloroquine daily to ward off COVID-19, despite the view of most medical experts that it has no proven efficacy in the context of that disease. Hydroxychloroquine does however have a long list of potential side effects, include heart arrhythmia and psychiatric disorders. Trump has been trying to urge its use for months now. Politico
Uber layoffs
Uber has announced another round of cuts, this time involving 3,000 employees being laid off and nearly 40 offices being closed or consolidated. CEO Dara Khosrowshahi in an email to staff: "We have decided to refocus our efforts on our core. We need to fundamentally change the way we operate." Analysts say the shedding of money-losing markets and business lines was needed anyway, even before the coronavirus struck. Fortune
AROUND THE WATER COOLER
Son of God
In one of history's greatest demonstrations of CEO humility, SoftBank chief Masayoshi Son yesterday compared himself to Jesus Christ. Facing accusations of poor performance after the Japanese conglomerate posted a record $13 billion annual loss, Son reportedly told investors that Jesus, too, had been misunderstood and criticized. Those who recall the outrage John Lennon once sparked with a Jesus comparison may be amused to note that Son also drew an analogy with the Beatles, saying they had not been popular when they first started. Financial Times
German spying
Germany has played a key role in international online espionage, largely thanks to the fact that one of the world's biggest internet exchange points is on its turf. But now the country's highest court has ruled that it's unconstitutional for the BND (Germany's NSA equivalent) to conduct mass surveillance on foreigners—because they too have privacy rights under the German constitution. Score one for the internet exchange point's operators, who have for years been complaining about having to help the spies. Fortune
U.K. tariffs
After the Brexit transition period concludes at the end of this year, the U.K. intends to cut or remove tariffs on products ranging from dishwashers to Christmas trees, while still protecting industries such as automotive and agriculture. In total, 60% of the U.K.'s trade would be tariff-free under the plan announced Tuesday. Bloomberg
TikTok CEO
TikTok will have outgoing Disney+ chief Kevin Mayer as its new CEO, as of June 1. The longtime media exec was passed over for the top job at Disney, so he will now be heading up TikTok and serving as COO for its parent, Bytedance. Given that Bytedance is desperately trying to distance itself from its Chinese roots, Mayer's appointment could also be politically advantageous. New York Times
This edition of CEO Daily was edited by David Meyer.


fortune--2020-05-19--How Jeff Bezos built an A.I.-driven “cyber contraption” that puts customers first

This is the web version of Business x Design, a newsletter on the power of design. Sign up here to get it in your inbox.
The latest issue of Fortune magazine—on newsstands now—showcases our new Fortune 500 list of the biggest companies in the U.S. Rocketing from fifth place to No. 2 on the list this year, with $280 billion in sales, is Amazon.
The e-commerce behemoth was on a tear even before the coronavirus pandemic, but—in a fascinating profile featured in the magazine and online here—Brian Dumaine argues that Amazon is perfectly “designed” to capitalize on the health and economic crisis created by the outbreak.
Since the company joined the Fortune 500 in 2002, annual sales growth has averaged 28%, while Amazon’s market value has risen more than 22,000%. Brian attributes Amazon’s extraordinary longterm success and its post-pandemic growth prospects to “the flywheel.”
The flywheel—a concept popularized by management guru Jim Collins—is a virtuous circle that keeps turning and turning. As Brian explains, rather than worrying about competitors, Amazonians obsess over pleasing customers, which they do mainly by lowering prices.
Lower costs increase the number of customers who shop on Amazon, which attracts more independent sellers, which helps Amazon boost traffic, which generates more revenue for Amazon and helps the company achieve greater economies of scale and lower prices again.
With the help of A.I. and tens of thousands of engineers, data analysts, and programmers, Bezos has turbocharged his flywheel into a vast learning machine. Or, as Brian puts it: “a cyber contraption with its own intelligence that takes all the data that Amazon collects on its customers and then analyzes it in minute detail.”
Rather than rely on humans to decide what to purchase, how much to charge, where to keep stock, Bezos’s A.I.-enabled flywheel can now make those decisions automatically. That ability is sure to improve as the pandemic boosts online shopping, bringing in ever more data for Bezos’s flywheel to digest.
Brian’s profile is a great read and well worth the time of anyone with an interest in design. Amazon is a prime (I know, horrible pun) example of how companies, for better or worse, are using data and technology to get inside the heads of millions of customers at once and serve them at lightning speed.
More design news below!
Clay Chandler
clay.chandler@fortune.com
NEWS BY DESIGN
Hyoung Chang—MediaNews Group/The Denver Post via Getty Images
Buckle up
An autonomous shuttle company has had to install seatbelts in its vehicles in order to resume operations within the U.S. after one passenger fell from their seat during a sudden stop. This basic safety feature is often overlooked on public transport, but why it would be excluded on experimental AVs is beyond me.
Car of the past
Dyson revealed what its electric vehicle would have looked like. The 7-seater SUV was scrapped last year because it was too expensive. The EV would have been “5 meters long, two meters wide and 1.7 meters tall,” featured a windscreen that “rakes back more steeply” than a Ferrari and sat on wheels almost one meter in diameter. The interior was more uniquely Dyson, with segmented cushions on seats and a dashboard that “floats in front of your face like a hologram.”
Walk on by
Researchers at the University of Maryland have created a gait-recognition algorithm that helps a robot suss whether a person is happy, sad, angry or just fine. The robot then manages how much personal space it gives the pedestrian based on their mood. The tech could be useful for creating more socially integrated robots—like the sort that deliver our food. Bonus: here’s how researchers taught robots to avoid meddling kids.
Who holds the key?
The FBI unlocked the iPhone of a gunman months after attempting to get Apple to do it for them. This is the second time the FBI has claimed it needs Apple’s help to access the phone of a terror suspect. Both times, the FBI has ultimately unlocked the phone itself. Apple refuses to help law enforcement crack into iPhone; analysts say to do so could risk the security of all iPhones.
Back to work
Apple outlined how it plans to improve the safety of workers across its supply chain as laborers return to factories during the pandemic. The measures include fairly standard things, such as mandating employees wear PPE in all common areas, as well as implementing flexible work hours and “staggered work shifts.” It’s unclear whether that would simply mean having day and night shifts for factory workers.
Hej!
Ikea released a series of fort designs to keep children entertained during lockdown. The seven strongholds, constructed using Ikea products and household items, are a delight. No complaining if you still can't figure out the instructions.
EVENTS BY DESIGN
May, delayed: An extremely pertinent conference on the integration of technology and health care due to convene in Manchester, U.K. this week has been postponed until after the summer. The Lodz Design Festival, also scheduled for this week, has been postponed until November.
The Venice Biennial has postponed both its architecture and its art editions by a year. The Architecture Biennial, scheduled originally for this month, will now be in May 2020. The art biennial will be in April 2022, rather than 2021.
June: The month-long London Festival of Architecture is running a stripped back event online this year, with the core public program moved to (hopefully) later this year. The San Francisco Design Week, which starts June 16, has gone digital too. Also, London Fashion Week: Men’s would have walked June 12-14. Instead, it will sit online.
July: Christie's is planning a semi-virtual auction for July 10. The "first of its kind" event will livestream auctions from four cities—Hong Kong, New York, Paris and London.
Ongoing: Virtual Design Festival, a collaborative effort from Dezeen, Dutch Design Week and Design Indaba continues to exhibit work from a global roster of designers.
QUOTED BY DESIGN
“I think there is a model [of Internet regulation] coming out of countries like China that tend to have very different values than Western countries that are more democratic…The best antidote is having a clear regulatory framework that comes out of Western democratic countries and can become a standard around the world.”
Mark Zuckerberg appears to have abandoned his yesteryear ambitions of courting China. The 36-year-old CEO has grown increasingly vocal about China’s policy of Internet censorship while, at the same time, positioning Facebook as the paragon of democracy. Zuckerberg made the above comment while talking with European Union Industry Commissioner Thierry Breton on Monday.
Breton and Zuckerberg have disagreed before about where Internet regulation should come from—is it governments or the social media giants that provide platforms for mass-misinformation?
This week's edition of BxD was edited by Eamon Barrett. Email him at eamon.barrett@fortune.com


fortune--2020-05-19--Why the pet industry hopes Americans will start treating their cats more like dogs

Humans worshipped cats in pharaonic times and have been their servants, one way or another, almost ever since then. But until recently, the felines have not been getting that kind of deference in the modern-day United States from a pet products industry more focused on their canine counterparts.
It’s easy to see why doggos get so much attention from pet stores and manufacturers. Among U.S. pet owners, spending per dog last year was $1,381, while for cats it was $908, according to AlixPartners. Most cats are much smaller than most dogs, so they consume less food. Cats are much more difficult to coax into a visit to the vet. And there are fewer cat owners to cater to: 43 million U.S households have a cat, but there are 63 million with a doggie.
Still, industry players, from big-box retailers to foodmakers to Silicon Valley entrepreneurs, are hopeful that they can eventually get pet owners to spend on their cats like they spend on their dogs—and thus expand an underexplored market. Those folks are seeing promising signs in some product lines: An AlixPartners analysis of APPA’s data found that expenditures on vitamins, treats, toys, and grooming aids are all seeing significant growth among cat owners. (For more, see “It’s a dogfight at America’s pet stores as COVID-19 upends the $96 billion industry.”)
Right now, cats account for only about 7% of the $7 billion spent annually on pet treats. Food makers think they can shake that up—not least because, in the era of Instagram and sheltering in place, teaching old cats new tricks is more rewarding for their owners. “You have cat parents who want to reward and engage their cats in new and different ways,” says Rob Ferguson, interim SVP for pet food, pet snacks, and supply chain at J.M. Smucker, which earlier this year launched cat treats under its Rachael Ray Nutrish brand. It remains to be seen whether cats feel the same way, but the industry is prepared to feed the beast, so to speak. “The cat treats market has been ‘doggified,’” says David Sprinkle, an analyst with research firm Packaged Facts.
Cat food has not seen the kind of proliferation of innovation dog food has seen. While dogs are omnivores who can be persuaded to eat such health food staples as quinoa and broccoli slaw, cats are mini-carnivores related to lions and tigers, with fairly limited dietary interests. “Cats…don’t gravitate toward natural food quite as well—they like the sound of a can,” says PetSmart CEO J.K. Symancyk. Of course, foodmakers know that convincing the owners of a food’s healthfulness is more important than convincing the cat: Smucker last year launched grain-free Meow Mix.
Cats…don’t gravitate toward natural food quite as well—they like the sound of a can. PetSmart CEO J.K. Symancyk
In the startup world, new ventures in the pet space have also predominantly focused on dogs. Leonid Sudakov, president of Kinship, a $100 million investment fund set up by Mars Petcare, thinks that focus has something to do with Silicon Valley bros being more likely to own dogs than cats. But exceptions are beginning to emerge. Despite its name, JustFoodforDogs, which makes “human-grade” food, has a small but growing menu for cats. CatPerson, a startup that sends boxes of treats and supplies to cat servants, launched in March. And Kinship has put money into a Chinese company called Mollybox, a subscription service for food and supplies focused on cats, because he thinks they will spur the next big boom in pet products. (For more, see “10 big business deals that are changing the pet industry.”)
The coronavirus pandemic could also bolster veterinary spending on cats. Felines visit the vet far less often than dogs because of how traumatic leaving the house can be for them (and, these days, for their owners). Americans currently spend $650 per year per dog on vet visits, compared to $374 per cat. But the growing use of telehealth and virtual consultations could narrow that gap.
“Cats have been a strong No. 2 for a long time,” says Steve King, CEO of the APPA. That comment that would likely elicit a hiss from any feline that could be bothered to react. But if they cared, cats might find solace in the fact they could be catching up.


fortune--2020-05-19--10 big business deals that are changing the pet industry

The pet industry has long been almost boringly stable, having proved itself to be recession-proof (or at least recession-resistant). But it has also been ripe for innovation, with new products and services and new ways of selling to consumers as customers’ behaviors and tastes change—along with the ways they project those behaviors and tastes onto their pets.
For more, see “It’s a dogfight at America’s pet stores as COVID-19 upends the $96 billion industry.”
In recent years, those factors have earned the $95.7 billion industry plenty of attention from merger-and-acquisition bankers and tech investors alike. Here are some of the biggest deals of the past five years, in both spaces, according to data from Dealogic (for M&A) and PitchBook (for venture capital deals).
Big buys in the pet aisles
A big blue deal
In 2018, Fortune 500 food giant General Mills bought Blue Buffalo Pet Products for $8 billion. General Mills’ sales of processed food and cereals had been languishing; this deal made it a major player in the pet industry overnight.
Who owns your vet?
Mars Petcare bought veterinary giant VCA for $7.7 billion in 2017. Mars is best known as a maker of food (for humans and pets alike). But this deal cemented its place as the top employer of veterinarians in the U.S.
A big retailer goes online
PetSmart, the nation’s biggest pet retail chain, bought online upstart Chewy for $3.35 billion in 2017. The big-box superstore had neglected e-commerce for years, and the Chewy deal was aimed at fixing that and gaining control of a surging rival.
PB&J and Kibbles
J.M. Smucker bought Big Heart Pet Brands (maker of Meow Mix, Milk-Bone, and other well-known product lines) for $3.33 billion in 2015. The food conglomerate was eager to diversify away from instant coffee and jams, and this deal gave it an instant toehold in the pet food industry.
Targeting refined pet palates
J.M. Smucker added Ainsworth Pet Nutrition (maker of Rachael Ray Nutrish) to its portfolio with a $1.9 billion acquisition in 2018. This deal solidified Smucker’s place as a major pet food player, deepening its reach into the premium-food market.
Tails of venture capital
Walking the walk
SoftBank pumped $300 million into Wag, a dog-walking startup, in 2018, in a deal some saw as embodying the frothiness of the tech bubble. SoftBank later reportedly sold its stake at a loss. Wag, like other companies offering dog-walking services, has seen a huge drop-off in business amid the pandemic.
Matchmaking for mutts
The VC firm First Round led a $155 million funding round in 2018 for Rover.com, a matchmaking app that connects dog owners with walkers and sitters. The round valued Rover at $925 million, almost enough to be a unicorn. But demand for its services is also taking a hit as people work from home.
Human-grade dining
L Catterton in 2019 invested for the second time in JustFoodForDogs, a high-end food brand that is now an important partner for Petco, making “human grade” food for its stores. The deal, which injected $68 million in capital into the firm, showed the market’s belief in “premiumization” of pet foods. (Despite its name, JustFoodForDogs also makes cat meals.) (For more, see “Why the pet industry hopes Americans will start treating their cats more like dogs.”)
Rural route
A group of VC firms in 2018 invested $39 million in premium-food maker The Farmer’s Dog, whose ads have graced countless New York City subway cars, valuing it at $209 million at the time.
Betting on health
Viking Global led a group of investors in 2017 that put $224 million into Covetrus, a provider of management technology for vet clinics. Pet health care spending has been growing even faster than spending on food and supplies in recent years, a trend that investors are eager to tap.