Monday, July 28, 2014

Do Entrepreneurs Do Better In Their Second Attempt at a New Venture?

Francine Lafontaine and Kathryn Shaw have conducted an interesting new study regarding entrepreneurship.   They chose to study whether entrepreneurs who failed in their first new venture did better the second time around.   The scholars examined retail entrepreneurs in Texas from 1990 to 2011.  Here is a summary of their findings, from an article by Allison Schrager in Business Week:

Over the 21-year-period, 2.4 million retail businesses opened and 2.2 million closed. Three out of every four were founded by first-time business owners.  Lafontaine and Shaw found that the Texas retailers were less successful than the national average for small businesses: One in four closed after a year; half after two. What happened next was telling. Of the first-time entrepreneurs whose businesses closed quickly, the overwhelming majority—71 percent—didn’t bother to try again. But the tenacious 29 percent who did were more likely to be successful the second, third, and even tenth time around. Somewhat paradoxically, their success rate increased with their number of past failures.

Interestingly, the article points out that these findings stand in stark contrast to the findings of a study conducted in the UK by Deniz Ucbasaran, Paul Westhead, and Mike Wright.   They found that serial entrepreneurs have a hard time learning from failure, though they note that people working on several ventures at the same time appear to be more successful .  Here is their explanation:

Psychological research suggests that strong emotions often prompt people to blame others or external events rather than themselves so that they can maintain some semblance of self-esteem and a sense of control. This “attributional bias” appears to make serial entrepreneurs less capable of learning from failure than portfolio entrepreneurs, whose attachment is spread among multiple initiatives.

What do we make of these contrasting findings?  I'm not sure, though I would note that the new study on Texas entrepreneurs has a much larger sample size, and it does not rely on self-reported data from surveys.  The new study also controls for industry and type of entrepreneurs (mostly mom and pop retail stores).   Does the type of venture matter?   Perhaps that may be the reason, but more research will be needed in this area.

Wednesday, July 23, 2014

Irrationality in the Airline Business

This Wall Street Journal headline did not shock me today, even though it speaks to an incredibly irrational set of behaviors:  "New Startup Airlines Crowd the Skies."   The article describes how a number of new players ("a flock of startups") are entering the airline industry, including a firm that has brought the People's Express brand back to life.  

Why do I say that the headline describes irrational behavior?  Consider the following important fact: for over one hundred years, the airline industry has been one of the least profitable markets on earth.  Richard Branson once joked that it was actually quite easy to become a millionaire; all you had to do was begin as a billionaire and then enter the airline industry!   Look back at the leading players in the industry in the 1970s and 1980s.   Most of them either no longer exist, or they have experienced a Chapter 11 reorganization at one point or another.  For those familiar with Michael Porter's five forces framework, a quick analysis shows that the industry is terrible along each dimension.   In short, the industry structure is incredibly unattractive.   

Why, then, are firms continuing to enter this industry?  Yes, the barriers to entry are quite low, but why enter if the likelihood of success is so low?   I think it comes down to the fact flying has always had a special allure.  Succeed, even for just a brief time, and you can become a celebrity.  Think about the famous names throughout the industry's history:  Howard Hughes, Juan Trippe, Richard Branson, Herb Kelleher, Michael O'Leary, Freddie Lake, and Don Burr.  Just take a look at the quote that ends the Wall Street Journal article today: 

"It's a high-profile, sexy business," says Henry Harteveldt of Atmosphere Research Group, a travel research firm. "And if you keep a lid on costs, have the right strategy, aircraft and managers, you can make money." What's more, the U.S. needs more airline competition, he says. The problem is: "the best markets are spoken for." 

There you have it.  It's sexy.  It's high-profile.  You can become a celebrity CEO if you succeed, or you can hob nob with CEOs who already are celebrities.  Unfortunately, many entrepreneurs in this industry forget one key lesson that I always teach my students when we study industry structure:  sexy industries are not always very profitable. 

Tuesday, July 22, 2014

Effective Listening Skills

The Wall Street Journal has a very good article today about listening skills.  The article highlights factors that detract from effective listening and offers tips for becoming a better listener.  What are some traps to avoid?

1.  Don't begin formulating your response when the other party has just begun talking.
2.  Don't filter what you are hearing based on pre-existing  views you may have.
3.  Don't multi-task.

What can you to improve?  First, you can write down questions you would like to ask before a meeting takes place.  Second, offer subtle signs (non-verbals) to demonstrate that you appreciate what the other party is saying.  Third, repeat what you think you have heard and ask for confirmation that you have interpreted them correctly.  Fourth, take notes to keep yourself focused.  Fifth, maintain eye contact.  Finally, set a goal of what percentage of time you plan to listen vs talk during a meeting.

Monday, July 21, 2014

Employee Revolt at Market Basket

While I'm here in Tokyo this week, I've been intrigued by what's happening back home in Massaschusetts.  A massive employee revolt is occurring at a supermarket chain called Market Basket.  This family-owned regional chain competes as an effective low cost player and has a devoted customer following.  The CEO has just been fired by the Board.  Here's the interesting part.  He's been fired by his cousin, who took control of the Board last year, and with whom he has feuded for years.  The Board hired two non-family members to run the company.  What happened next is fascinating.  The employees (non-union by the way, and incredibly loyal) revolted!  They have protested publicly.  Store shelves are bare in some instances.  Politicians are supporting the workers.  The employees object for three reasons.  They know the company is profitable, and thus do not understand the firing.  In addition, the fired CEO treated them well in terms of pay and benefits.  Finally, they have great personal admiration for the fired CEO.  The company has responded by dismissing managers who have led the protests.  

What do I take away from this rare situation?   First, every CEO should wish that his or her employees would stand up so forcefully for them even at great personal risk.  What a statement about the leadership provided by the fired CEO, as well as his treatment of the employees!  Second, the Board has badly miscalculated by firing managers who objected to the CEO's dismissal.  It only added fuel to the fire.  Third, it really demonstrates the value of culture as a source of competitive advantage.  One of the greatest assets a firm can have is devoted and highly productive employees who share common values.  That culture has enabled Market Basket to outperform much larger players such as Shaw's in the marketplace.  The Board has failed to understand the true "gold" that they have here.  Fourth, employee loyalty is so rare in retail, yet these employees rarely left.  Turnover was quite low compared to other supermarkets.  The cost of turnover in retail can be incredibly high.  Again, the Board failed to see the key source of competitive advantage here.  Finally, this case shows how social media can fuel a raid and massive backlash.  It has enabled customers to show their support and to spread the employees' message.  The Board is losing the PR battle because it has no counter to this wave of support via social media. 

Sunday, July 20, 2014

Do You Pre-crastinate?

Yes, you read that correctly.  I'm not talking about procrastination, something at which many of us excel.  I'm speaking about a different type of behavior described in a new study by Penn St. scholars David Rosenbaum, Lanyun Gong, and Cory Adam Potts.   The New York Times reported on their research this weekend.    These scholars define pre-crastination as "the hastening of subgoal completion, even at the expense of extra physical effort."   What might that look like?  Well, you may be working from home on an important project, perhaps to write a complex report about some research you have been doing for work.   However, before sitting down to tackle this challenging project, you scratch a few other smaller items off of your to-do list, such as cleaning the kitchen, doing laundry, etc.   

Why do people tackle these smaller items first?   According to the article, "People are seeking ways to limit the burden to their 'working memory,' a critical but highly limited mental resource that people use to perform immediate tasks... In essence, they were freeing their brains to focus on other potential tasks."   That sounds like a good strategy, right?  Well, by now, you can see the risks with this to-do list strategy to limit the burden on our working memory.   As Alan Pastel of UCLA notes in the article, "“People who are checking things off the list all the time might look like they’re getting stuff done, but they’re not getting the big stuff done.” Yes, I've definitely fall into that trap. 

Saturday, July 19, 2014

Fox, Time Warner, and the Perils of Vertical Integration

The news broke this week about a possible Fox takeover of Time Warner.   As you read these reports, you may have noticed many of the key arguments for why this deal would make sense, i.e. powerful synergies exist between the two media/entertainment companies.  However, yesterday's Wall Street Journal featured a terrific article examining the perils of vertical integration with respect to this  deal.   Note that Time Warner is a major producer of television shows, which it sells to various broadcast networks.    Fox, of course, owns a major television network (and a variety of cable channels).  Warner Brothers is one of the only major TV studios not connected to a major broadcast network (Sony is another).  In the article,  Time Warner CEO Jeff Bewkes says, " Being the leading independent supplier to all the broadcast networks makes us the preferred home to the top writers and producers on TV which, in turn, makes us indispensable to those networks."  Lee Dinstman, a partner at the Agency for the Performing Arts, explained, "The fact that [Warner] has the freedom to take a creative idea to the proper home, instead of just selling to a captive network, can be incredibly attractive." 

What happens if the two firms merge?  Will the loss of independence hurt the Warner production studios?  Put yourself in the position of a programming chief at one of the other major broadcast networks.  When Warner Brothers studios comes pitching a new TV show, what will you think?  You might wonder:  "If it's such a great show, why is it now being broadcast on Fox?"   You may conclude that Warner Brothers is trying to push lower quality shows out to your network.  Note that many firms are vertically integrated in the industry.   Many of the in-house studios at other firms place most of their shows on their own networks. For instance, the article notes that Fox studios has 18 shows on major networks at this time; 14 of them are on the Fox network, while only 4 have been sold to other networks.   Is that because it's the most profitable decision, or is it because other networks are reluctant to buy from the competition?   That, in a nutshell, is one of the perils of vertical integration.  A firm such as Warner Brothers ends up competing with its own customers, creating some challenging conflicts of interest.