Sunday, November 9, 2008

Smith, Slywotzky and Some Damn Beavers

Not far from where I’m sitting, just up the road apiece and across the state line, Jedediah Smith Sr. and wife Sally Strong farmed land and raised a family that would eventually number 12 children.

The fourth, born in 1799 after the Smiths had move from New Hampshire to New York, was Jedediah Jr. In 1821, Jed Jr. went to work for William H. Ashley’s fur trading company out of St. Louis. After a series of extraordinary adventures, Smith and partners acquired Ashley’s company and successfully took on the Hudson’s Bay Company monopoly in the fur trade. Today, Smith is remembered as one of the most successful explorers and entrepreneurs of the first half of the nineteenth century.

Also not far from where I’m sitting, in the lowlands along our driveway, a family of beaver are hiding out, waiting for sunset to repair their dam in a little culvert that flows under our driveway. These beaver don’t much bother me since our home sits on a rise above the lowlands. But, in a town where everyone has septic and wells, and where some of the wells reach aquifer less than fifty feet below the service, these beavers are bedeviling our neighbors.

It seems their magnificent dam is backing up water from nearby Cedar Pond, flooding acres and acres of well-tended backyard. It’s causing septic systems to overflow, and septic to flow into well water, and nothing that walks on two legs is very happy when that happens.

Finally, not far from where I’m sitting—in fact, on the bookshelf to my left--is a copy of Adrian Slywotzky’s The Art of Profitability, published in 2002. I had the opportunity to work with Slywotzky for a spell last century when a company for which he was consulting grew interested in partnering with our business. The Art of Profitability, which suggests that we’d all be a lot more profitable if we thought about profits on a regular, disciplined basis, is a delight to read and suggests a variety of ways to redefine business to make more money—a good tonic given our current economic straits.

Now, let me tell you how these things all tie together. And let me start with those dx!% beavers.

From about 1750, when they were hunted out of the Commonwealth, until 1928, when one was spotted in West Stockbridge, beavers had been absent from Massachusetts. Folks in Massachusetts were so excited by their reappearance that three more were imported from New York and released in nearby Lenox in 1932.   Fourteen years later, the Massachusetts Department of Fish and Game reported that there were 300 beavers in 45 colonies around the state.

As with every other instance when human beings have messed with the balance of nature, we got it wrong. The well-meaning people of Massachusetts failed to offset their good deed by providing the beaver population with a natural predator. Then, to make matters worse for homeowners, in 1996 the state passed a ballot referendum prohibiting or restricting the use of many types of commonly-used traps.

The result: the beaver population in the state grew from 24,000 in 1996 to 70,000 in 2001.

Now, if I were pitching you on my new “beaver-pelt” business, I would take that annual growth rate of 24% and project it right into 2009, telling you that from one lonely beaver in 1928, the state beaver population is now over 385,000.  And you can bet there are a slew of illegal immigrant beavers and more than a few expired H1-B Visa beavers to add to the organic growth of the population.

Despite the hundreds of thousands of beavers I now estimate reside in Massachusetts, we here in the neighborhood are only worried about the three or four which have set up housekeeping on the premises.

To solve the flooding problem, every morning one of my good neighbors comes by and takes down the allowed two inches of dam, letting the water flow back into Cedar Pond. Every evening the beavers repair their dam, insuring that the floodwater stays in the backyards of my neighbors. The theory is—and I have never seen this to be the case—we will eventually wear the beavers down and they will move away.

It all makes me pine for the 1820s and 1830s, which was the height of the beaver trade in America and across the Atlantic. Back then, one of my neighbors could have taken his gun, shot the beavers, walked to Newburyport or Salem or Boston and sold their pelts for a good price. The pelts would be sent on to Europe to be made into one of the stylish hats for which Europeans were all a-twitter.

And here is where Jedediah Smith comes in. Daniel Howe tells us the following about Smith, taken from Dale Morgan’s 1953 Jedediah Smith and the Opening of the West:
At the the age of twenty-two [Smith] retraced much of Lewis and Clark’s route up the Missouri. During his short life Smith proved himself a natural leader, an intrepid explorer, and a successful businessman. Taking his Bible and a few companions, this sober, religious young man laid out the route of the future Oregon Trail over South Pass in 1824 and explored the regions of the Great Salt Lake.. .Along the thousand of miles that he traveled without maps, he fought some Indians, traded with other, survived hunger, thirst, snowstorms and floods, and got mauled by a grizzly. He successfully challenged the Hudson’s Bay Company in the fur business, and with two partners was able to buy out his employer Ashley in 1826. A rich man when he returned to St. Louis in 1830, Smith had seen more of the Rocky Mountain West than anyone else in his time. . .

If you are not familiar with the Hudson’s Bay Company (HBC), it is the oldest commercial concern in North America, dating from 1670. It now operates retail stores, and is owned by a private equity firm (which seems weird to say), but in the first part of the nineteenth century it was the most powerful private organization in North America and actually ruled most of Canada.

The HBC, for parts of two centuries, was essentially its own sovereign country.

How do you attack a giant? One way is to change the profit model, and that’s what Smith and his partners did. Starting in 1825, the firm of William H. Ashley paid salaries to keep white trapper-traders in the wilderness year round, departing from the depot-based, pay-per-pelt practice of HBC.

I once visited the offices of a very large pharmaceutical customer and, as we were walking down the hall, my guide was saying, “That’s where the VP Marketing is, and that’s where the VP Production is, and that’s where the executive from 3M has his office.”

“3M,” I asked?

“Well,” said my guide, “we do so much business with them that it makes sense they should have an office permanently here to help organize our purchases.”

This was essentially the idea that Smith and his cohorts hit upon: Let’s pay to keep the trappers-traders in the wilderness, living alongside the natives, building up long-term relations and establishing strong interior distribution. It was the Early Republic equivalent of the Application Engineer.

That’s how you take on a giant, then; you change the way profits are made.

All of which leads me back again to Adrian Slywotzky’s The Art of Profitability. In it, Slywotzky suggests that you read only one chapter of the book (i.e.—one profit model) a week and really stew on the material. Imbedded in most chapters is other, recommended reading, like Innumeracy: Mathematical Illiteracy and its Consequences, Asimov on Astronomy, Einstein’s Dreams, Confessions of an Advertising Man, and Ezra Pound’s ABC of Reading. The entire story takes place as a conversation between a mentor and struggling mentee.

Chapters include Pyramid Profit (Mattel developed a barely-profitable $10 Barbie to block low cost knock-offs from establishing a connection to their customers), Multi-Component Profit (Coke makes a different profit per ounce in the supermarket, restaurant and vending machine), and Switchboard Profit (Michael Ovitz packaged talent, story, and critical mass in Hollywood to gain share and profits).

The chapter that struck me, however, was one called Customer Solution Profit. A company, Factset, generated high profits by identifying a potential customer and then sending a team of people to work onsite at the company, sometimes for months, and almost always for free—an extraordinarily costly proposition.

It would be like paying salaries to trappers to stay in the woods year-round.

If Factset won the account, however, they would have built such great relations with their customer, and such a tailored solution, that their profits soared, easily making up in the longer term for what they had invested in the first year. By then, their product and people were woven into the account, the expensive selling was done, and the account became a long-term, high-margin profit center.

There’s more where that came from, all courtesy of Slywotzky’s engaging storytelling and ability to see clear patterns in a variety of business models.

All of which, finally, leads me back to our beaver problem.

I’m sorry to say that Jedediah Smith died at the early age of 31, surprised by a Comanche hunting party. His life burned, in the parlance of Bladerunner, twice as bright but half as long.

I just looked up Adrian Slywotzky on Wikipedia and he appears to be very much alive and well, industrious as ever.

Given those two very different outcomes, and given that the rain is still falling hard, would you like to wager which future is most likely in store for our neighbors, the beaver family?