Clean Business Cuisine

Citation

Mainelli, M. and Harris, I. (2005), "Clean Business Cuisine", Journal of Business Strategy, Vol. 26 No. 4. https://doi.org/10.1108/jbs.2005.28826daf.001

Clean Business Cuisine

Clean Business Cuisine

Michael Mainelli and Ian Harris

With this issue of Journal of Business Strategy we continue serializing one of the more amusing business books of recent times, even though it is about ancient times. Our thanks to authors Michael Mainelli and Ian Harris for providing this divertimento from their book, Clean Business Cuisine.

Business people sometimes feel insulted to be compared with gamblers. But while the retail gambler out for a good time at the track or casino is, on average, a loser, to be compared with the professional gambler is a compliment. The professional gambler works hard at his or her portfolio of wagers, seeks out information and knows how to hedge bets and take arbitrage opportunities. One of the great difficulties in management theory is that it is often geared towards a deterministic, mechanistic view of the world, although most business decisions are in effect gambles in a stochastic, probabilistic universe.

Chapter ten

Fat chance's risky business

How can a whole orange tree grow from a seed in but one segment? (Believed to be from “Lo Fan’s diary”.)

[Why has it taken so long for our characters to discover the basic theory of business. No matter, they have got there in the end.]

“How to make some more money? If only my business were as simple and clean as Fat Chance’s,” pondered Chao Kli Ning, famous restaurateur and laundry entrepreneur. He was thinking of his local race track bookie Mr Fat, known in the village as Fat Chance. Fat Chance seemed to have the simple business of cleaning out the villagers’ wallets each time they went to the racetrack.

“Give Peace a chance,” said Lo Fan, referring to Perpetual Peace, the strong favorite for the Village Cup. “Perpetual Peace may be the odds-on favorite, but his performance is such a dead certainty that you are bound to win some money despite the poor odds.”

“Lo Fan, you can be truly trying,” spat Kli Ning. “I was talking business. Perpetual Peace is a horse. Fat Chance’s bookie operation is a business. I find it difficult to understand how Fat Chance can be so successful. How can he make money by playing games with the entire village? I must find out. I am sure that his brother, the lawyer Fat Fee, has arranged some kind of legal angle to put the squeeze on honest gamblers.”

“O Noble Master,” began Lo Fan, seeing the onset of one of Kli Ning’s irritable-soon-to-result-in-a-new-scheme-with-extra-work-for-Lo-Fan moods, “perhaps we could peruse the situation this weekend when I place my bet with Fat Chance.”

Come the weekend, Lo Fan and Kli Ning made their respective excuses to their respective wives – pressures of work, need to investigate alternative business methods, the wives had to understand. The wives did understand, especially when they were asked to pack a picnic lunch. The wives wisely stayed mum; in any event, the longer the men were at the racetrack, the longer the wives had to entertain their friends and enjoy their own profitable enterprise, hosting a terracotta-ware party.

On the big day, Lo Fan had his heart set on getting to the bookie quickly. He knew the importance of placing bets early on a favorite. Lo Fan rapidly placed an each-way bet on the odds-on favorite, Perpetual Peace. Kli Ning should have noticed that Lo Fan’s wager was rather significant for someone with such a restricted income, but that’s another story.

Kli Ning was a bit more relaxed than Lo Fan. Although Kli Ning had kept it a bit of a secret, unlike most businessmen in the village he had only a passing acquaintance with the racetrack. Kli Ning’s had been a misspent youth – petty businesses, lucrative cash-based laundering, fly-by-night fast food stands, etc. Kli Ning never really had any time for the racetrack. Kli Ning’s naveté was all too apparent when he went to place his first wager. Fat Chance was totally flummoxed by Kli Ning’s insistence on an interest rate for his deposit. Fortunately, Lo Fan was close by to offer Kli Ning some paternal advice – “when the wind be in the East, put all your cash on Perpetual Peace.”

Partially out of annoyance with Lo Fan’s trite jingles, and partially out of annoyance with the complex jargon used for strange combinations of bets, Kli Ning placed some pocket money on a total outsider, War Wounded. When Fat Chance recovered his breath at the extravagant size of the sum, he managed to gasp and write out a betting slip, knowing that despite the perceived risk this would be easy money as he could lay the risk off against the other bookies, as long as he moved quickly. And Fat Chance, despite his weight, could move quickly.

While Fat Chance raced around the course, laying off Kli Ning’s extravagant wager, Kli Ning and Lo Fan sipped suitably alcoholic concoctions from their terracotta mugs. Perpetual Peace covered Lo Fan’s stake by coming in second. Kli Ning’s horse, War Wounded, came in several lengths ahead of the rest of the field (save Fat Chance, who had managed a faster pace on softer ground). Kli Ning could hardly conceal his lack of surprise. Lo Fan braced himself for impending irritation; Kli Ning was benefiting from beginner’s luck and would be positively unbearable about War Wounded’s win.

Lo Fan and Kli Ning fell out over the next race. Nodding Nag and Speedy Stallion were favorite and outsider, respectively, although some found this difficult to guess from their names. Ai Char, one of the village’s experts on trivia and part of the increasing band of former Kli Ning employees, had no problems guessing that the names of the horses were inversely related to their likely positions. Ai Char studied the form.

“Ai Char, long time, no see,” said Kli Ning, interrupting Ai Char’s concentration. “All’s well on the job front, I trust,” observed Kli Ning, with his typical aplomb and delicacy in small talk. “What’s that bunch of numbers you’re studying?”

“Ah, well I wouldn’t expect of man of rash judgments such as yourself to invest time in proper decision-making, but this is the racing form,” answered Ai Char caustically. “Chance favors only the prepared, and I am prepared. I use this information carefully to select horses whose odds are not commensurate with their past performance and, I hope, their potential.”

“Get a big picture grip on the details, Ai Char. It seems like a lot of effort for a bit of fun. Besides, I don’t study the form, and I always seem to get it right,” rebuked Kli Ning as he extrapolated wildly from his sole lifetime wager.

“Well, all I can say is that you either “bribe the gods” or bet once in a lifetime,” replied Ai Char, both enviously and suspiciously close to the mark. “Anyway, I have to go. Time’s closing for this race and I need to get my cash on True-2-Form.”

“What about Nodding Nag and Speedy Stallion?,” asked Kli Ning. “Surely, your wager is better placed on a certainty or a high payout?”

“Well, if you are so unprepared, you won’t have noticed True-2-Form’s consistent improvement against comparable fields; excellent odds given the risk,” pontificated Ai Char. “Anyway, I have to run. I trust you’ve managed to stay in business of late,” he called out over his shoulder.

Lo Fan sped by Kli Ning on his way to lay a bet on the favorite, Nodding Nag. Kli Ning raced off after Lo Fan to place his bet on the outsider, Speedy Stallion. Again, because of the size of Kli Ning’s wager, Fat Chance began an exercise routine which made the horses look as if they were merely greyhounds circling a course without a hare.

When the results of the race came in, Lo Fan and Kli Ning had already moved several inches down the bar drinks menu. In the end, Lo Fan was vindicated. Nodding Nag had comfortably seen off Speedy Stallion and Lo Fan had established a convincing two-inch lead over Kli Ning on the alcoholic menu. Unfortunately, Nodding Nag had not seen off any other contenders and Lo Fan was well on his way to the mother of all hangovers. Lo Fan and Kli Ning lost their stakes, utterly, completely and totally. One more such “victory” over Kli Ning and Lo Fan would be undone[1]. Kli Ning began a spirited argument with Lo Fan, which began by questioning Lo Fan’s irresponsibility in poorly advising an innocent, novice gambler; Kli Ning went on to question Lo Fan’s suitability for managerial business positions given his poor luck; Kli Ning ended his argument by questioning the virtue of certain of Lo Fan’s family members. Lo Fan retaliated with some choice comments, but was saved from irreparable outbursts by Ai Char’s interruption.

“Well, I hate to intrude on such lovingly crafted base insults,” interjected Ai Char. “I’m sure that both of you noticed the importance of superiority of form. Even more important, as my horse True-2-Form came in second, I’m sure that both of you noticed the importance of balancing odds against potential performance. I’m sure that you’ve learned something today, although these things can take time to sink in with certain types. Anyway, have to rush. See you next time, losers.”

Kli Ning and Lo Fan had learned something. Thanks to Ai Char, their fight could wait till another day. Sadly for Lo Fan, Kli Ning had the inklings of learning something – business also seemed to be all about risk and reward. Fat Chance knew something else that the business duo had little chance of learning quickly – business might well be all about risk and reward, but the only way to make real money was to dominate the betting system (although total domination seemed to involve significant amounts of exercise).

“There is nothing special about my business, Lo Fan,” elucidated Kli Ning the following day in the office. “This is just like the racetrack. We place some bets based on our interpretation of the form. If we work them well, we win – big time!” Fat Chance may have had a richer description of the complexity of events surrounding bets, but Kli Ning had clearly grasped the essence of the previous day’s activities.

“Well try this problem then,” interjected Lo Fan. “I have two business proposals from two of your employees before me. Bli Ching tells me that we must move into hospital bedding for the laundry. Sik Chao is adamant that the hospitals will buy our food long before we can sell them laundry services. Which proposal should I choose? Or both? Or neither? How will your current infatuation with speculation illuminate us?”

Kli Ning offered Lo Fan some paternal advice, “you have to speculate to accumulate! To your problem then, Lo Fan. You must ask Bli Ching and Sik Chao what is the balance of risk and reward for their proposals. I suggest that you allocate two thirds of our enterprise funding to the best proposal and one third to the second best.”

Bli Ching made a stunning case to Lo Fan for the benefit to the Kwik Klining Duck Tea House And Laundry of hospital laundry services. Her exposition became a bit technical, and slogans, such as “whiter than white” seemed to fall off her tongue. Bli Ching had studied the market, the requisite supporting operations, the pricing, the promotion and the packaging. She concluded with a convincing punchline, “hospital laundry can remove blood, sweat and cash from tight-fisted hospital administrators world-wide.” Lo Fan saw the extensive merits of pursuing hospital laundry, although he fervently hoped that the blood would wash off the cash. Sik Chao developed an entrancing story. People eat. People get sick. People go to hospital. People eat food in hospital. People get well or die. Dead people don’t eat. Cured people continue to eat the food they ate in hospital in order to stay alive. The logic was inescapable. If the Kwik Klining Duck Tea House fed people in hospital, not only would the Kwik Klining Duck Tea House make money catering to hospitals, but the business would have customers for life – or at least until the customers visited a hospital for the last time (and even funerals need catering, thought Lo Fan, always anxious to develop a lively idea). Sik Chao finished with a flourish, “remember, hospital food is for life customers, not just for sick people; and, a Kli Ning Chao meal a day keeps the doctor away.”

Lo Fan exited before Sik Chao could elaborate on some of his other marketing ideas, such as further health slogans relating anatomical parts to various animals, fruits and vegetables. Lo Fan needed to think on Kli Ning’s remonstration, what was the balance of risk and reward. Lo Fan was captivated by Sik Chao’s proposal. The risks were high, e.g. headlines such as “food poisoning kills the terminally ill.” The rewards were high. Sik Chao’s forecasts were phenomenal. Lo Fan’s sensible nature gave him natural sympathies for Bli Ching’s straightforward low risk, moderate reward proposal.

Lo Fan set things in motion. He also returned to inform Kli Ning. “O Master, on the balance of risk and reward, Sik Chao was measured and found wanting. I have chosen the sensible risk and reward of Bli Ching for the majority of the enterprise funding.”

“Lo Fan, get a detailed grip of the big picture,” expounded Kli Ning. “In the portfolio of life, a balance must always be struck. Choosing Bli Ching’s proposal gives us another low risk, low reward project. Yet how can we ever achieve the high gains that Fat Chance obtains if we weight our portfolio with low risk, low reward activities? Where is the opportunity to make a quick buck? What have I wrought with my infatuation with speculation?” Kli Ning nervously fiddled with his new worry beads, strange six sided cubes blessed by a lucky monk, with subtle arrangements of dots on each side. Lo Fan slunk away, leaving Kli Ning deep in thought.

As is more than usual with committed senior managers such as Lo Fan and Kli Ning, they were both far too busy dealing with complex risk/reward analysis to spend much time on the sales front with Sik Chao and Bli Ching. Sik Chao was finding it hard going. Hospitals did need good food, but they wanted a trial period and trial periods cost money. With only half the budget he required, Sik Chao would need a very long time to develop the hospital food market. Bli Ching was also finding it hard going. True, the funding she required was in place, but for some reason the hospitals had too few tough stains to clean. Without tough stains, hospitals would only pay a minimal price for laundry cleaning. And funerary shrouds seemed to get buried.

One fine day, Bli Ching secretly went to visit one of Sik Chao’s client hospitals. She bumped into a former colleague, Ai Char, who was languishing in traction in a bed. Apparently Ai Char had been injured while gambling at the racetrack. He had made the near-fatal mistake of crossing the racetrack in front of a heavy, fast-moving herd, led by a particularly single-minded beast. When Fat Chance the bookie was laying off bets, woe betide a passing punter trying to cross the course. The doctors agreed that all four limbs broken in one incident was rare and unlucky, but Ai Char would probably be out of hospital in a mere six weeks.

“You look great Ai Char,” said Bli Ching, addressing Ai Char’s tractioned, bandaged foot, momentarily mistaking it for Ai Char’s tractioned, bandaged head.

“Hmm,” replied Ai Char.

“You do really look great,” said Bli Ching, re-orienting herself to Ai Char’s head. “However, this bed is a real mess. Look at this; there’s food everywhere. And all these stains. These sheets could be whiter than white if only I had the laundry contract for this hospital. In fact, if I had a contract for each hospital that Sik Chao serves, with all the food he’s doling out and all the food stains that implies, what a business. Sik Chao’s menu could easily feature staining curries, unremovable egg and even beetroot. Just think of the stains. With all those sales commissions, Sik Chao and I could both spend much more time with Fat Chance at the racetrack.”

At this point, Ai Char appeared to go apoplectic. Bli Ching was surprised that Ai Char was so supportive, particularly where Fat Chance was concerned, but Ai Char was well known for studying the form better than most.

As will be apparent to even the most casual reader, Sik Chao and Bli Ching teamed up to form an insuperable partnership. Sik Chao’s staining recipes combined with Bli Ching’s stain removal formulae were able to produce outrageous revenues for the Kwik Klining Duck Tea House and Laundry. Yet, not so outrageous profits, and, like Lo Fan, for several years, Sik Chao and Bli Ching made outrageous claims for company expenses and appeared to place wagers with Fat Chance which were rather significant for Kli Ning employees on such restricted incomes.

Soon after the combined enterprise took off, Kli Ning and Lo Fan visited Ai Char in hospital. Kli Ning and Lo Fan were not the sort of bosses to ignore a former employee when he was down on his luck, not even a nit-picking troublemaker like Ai Char, especially at a time when Kli Ning and Lo Fan themselves were doing so well and would be able to cheer up the wretched Ai Char with news of his former employer’s soaring revenues in the hospital catering and laundry markets.

At Ai Char’s bedside, following a mere fifteen minute exposition by Kli Ning espousing his new risk/reward technique for investment appraisal and the resulting inevitability of success, Lo Fan finally chipped in “yes, but despite the detailed analysis we undertook, the result was a complete reversal of our expectations. We thought that the laundry element would yield the lion’s share of growth and gain, whereas in reality it is the food element of the enterprise which has proved to be the real “rising starfish.” True, the laundry business which results from the food sales is a “fat cow,” but without that combination of the two services, hospital laundry would be a “dead dog”[2]. It was like going to Fat Chance and winning money on the favorite and the outsider in the same race. Boy, did we get lucky.”

“Hmm,” remarked Ai Char, apoplectic with apparent joy and support for Lo Fan’s statements, especially the analogy with Fat Chance and the racetrack.

Kli Ning, however, did not seem so pleased. “Much as I hate to bicker with you, Lo Fan, especially in front of a miserable, unfortunate former employee such as Ai Char, I disagree wholeheartedly with your analysis of our success. Firstly, your constant reference to the racetrack is irritating beyond belief. Betting through Fat Chance is a mug’s game; the only person who is making real money at the racetrack is Fat Chance. You should try your luck at my other new venture, the Kwik Klining Duck, Tea Laundry and Craps Emporium. Dice are the only sensible way to wager, they are relatively clean and safe, and I run all the dice games in this province. But that’s not important right now. More to the point, our success with hospital food and laundry was not down to luck at all. It was an excellent case study in total portfolio management. I am astonished that neither of you have grasped the essence of risk and reward. As my business grows I can take larger risks for larger rewards on individual projects, just as Fat Chance can take high odds bets from the entire village as long as he has a large portfolio. Despite the size, extent and diversity of my business empire, indeed, partly because of those characteristics, my business is actually as simple as Fat Chances. All businesses are gambling portfolios. This is the essence of Z/Yen.”

At this point in the ancient text, sadly, the scrolls have become faded and damaged. Many scholars have tried unsuccessfully to reconstruct the conclusion of this tale. It is clear that Ai Char became apoplectic again at this juncture, to such a degree that medical intervention was required. The extent to which Ai Char recovered from this fit, if at all, is now lost in the mists of time, although he is clearly absent from later scrolls. More tragically, Kli Ning’s ultimate exposition on the simplicity of risk/reward and total portfolio management, if indeed such an ultimate exposition ever existed, has gone forever. This loss has been much to the benefit of countless generations of professional advisors but much to the detriment of countless generations of businessmen since Kli Ning’s time.

Given the choice between skilful risk/reward managers and lucky risk/reward managers, I would choose lucky risk/reward managers every time (attributed to many business generals)

[Questions for students: Explain the tax benefits of using race horses as part of your off balance sheet investment program. State the appropriate criminal sentences, or required bribes, if caught, for one, five and ten racehorses. Recalculate the Kwik Klining Duck Tea House and Laundry’s accounts using risk/reward probability distribution functions and real option theory. Bonus question: explain the benefits of the trifecta and its similarity to the capital asset pricing model.]

Conclusion

In many ways, the gambling analogy helps people realize when they are bound to lose. Without inside information or immense skill (as opposed to a lucky streak) or powerful friends … perhaps you shouldn’t be in the game. Even if you stay in the game, if you intend to win you need to find a way to take control of some or part of the game. Of course, owning the gambling house is often the best way to be on to a sure thing.

Notes1. Lo Fan might have called it a Pyrrhic victory, but for the fact that Pyrrhus would not be born for another 150 years and, even then, at some distance from the village racetrack.2. In Hunan province, it has been common practice for businessmen throughout the millennia to describe the success of business opportunities in terms of their favorite dishes on the restaurant menu.