The Economics of Vacations

Kellogg Insight has published an interesting feature about key research findings from its faculty with regard to the economics and psychology of summer vacations. One of my favorite segments focuses on Tom Hubbard's research on demand shocks. Full disclosure: Tom , his sister, and I went to high school together. He's a terrific strategy researcher. Here's an excerpt, explaining what he learned about demand shocks by studying how the interstate highway system's development affected the gas station industry:

Perhaps you’ll decide to drive to your destination. You probably didn’t know that the gas stations you will pass reveal an interesting economic lesson about demand shocks.  Demand shocks represent a sudden rise or drop in consumers' desire to purchase a good or service. Empirical evidence of how companies and industries respond to demand shocks is hard to come by in large part because shocks, such as a particularly effective advertising campaign, happen everywhere at once.

Strategy professor Thomas Hubbard found inspiration for a way to study demand shocks in memories of family vacations.  "When I was a kid riding in the car to Florida, I-95 wasn't completed yet, and we had to take side roads," he says. What, he wondered, happened to the gas stations in towns after the interstate arrived? "I realized that these were demand shocks."

Studying demand shocks to gas stations during the construction of the interstate highway system was useful because "they're observable many times over many years in many regions," Hubbard says.  He combined government data on gas stations with data on when every mile of the interstate opened. He also poured over old maps to figure out what the best route was between two cities in the 1950s, before the interstate arrived, then measured how far that route was from the new interstate.

Hubbard found that when interstates were built close to existing roads, gas stations responded to the increased demand by expanding in size and hiring more employees, but few additional stations were built. When a new interstate opened several miles or more from the previous highway, entirely new gas stations opened up to service the demand, but the size of existing stations stayed the same.  The results suggest that entry opportunities in expanding markets are not as simple to exploit as they might seem.

New Version of Columbia Multimedia Case Study

I'm pleased to announce that Harvard Business Publishing has released a completely updated version of the award-winning multimedia case study about the Columbia space shuttle accident that Amy Edmondson, Richard Bohmer, and I created, along with our research associates Erika Ferlins and Laura Feldman.  The updated technology provides a much better experience for students and instructors, while maintaining the rich detail about the communications and information flow among managers and engineers during the shuttle mission.  The case offers important lessons about how to manage ambiguous risks and threats, create a culture where people feel comfortable speaking up and sharing bad news, make timely and effective high-stakes decisions, and build high performing teams.  Thank you to the entire technology team at HBS for working so hard to design this updated multimedia experience!  

Design Thinking is Hard on the Brain

In a new article published in Research-Technology Management (When Cognition Interferes with Innnovation:  Overcoming Cognitive Obstalces to Design Thinking), my colleague Allison Butler and I offer one plausible explanation for why many individuals struggle with the design thinking process. We argue that design thinking is "hard on the brain."   In developing our argument, we draw upon six years of work in curriculum design, teaching, and research on design thinking - including the creation and execution of Bryant University's IDEA program (an intense, three-day design thinking experience that all 850+ first-year students undertake each year).   

We believe that all individuals have the capacity to be creative, yet we often think, reason, and process information in ways that hinder our ability to innovate. Our brains are wired to operate as efficiently as possible, which is ideal for making our way in the world in daily life, but an impediment to successful design thinking.  The article examines the cognitive obstacles at each stage of the design thinking process, and we offer strategies for overcoming these impediments.  

For instance, we describe how our tendency to engage in top down processing when we observe a situation can cause us to miss important details about user behavior.   Moreover, we explain how inattentional blindness and confirmation bias afflict many people trying to conduct field research and empathize with users.  During the ideation stage of the design thinking process, fixation becomes a significant problem.  People get stuck on ideas within a particular category during the brainstorming process, and they fail to generate a sufficiently diverse range of concepts and solutions.   Finally, during the prototyping and testing stage, a number of cognitive obstacles impede our ability to learn, adapt, and iterate effectively.  For instance, our tendency to rationalize our own failures as due to external circumstances rather than internal causes (the fundamental attribution error) prevents us from using feedback effectively to iterate and improve our solution.   Similarly, the sunk cost effect means that we often find ourselves throwing good money and effort after bad, rather than abandoning solutions that receive negative user feedback. 

How do individuals overcome these obstacles?   That's the key contribution of our article.  Based on our work with many students and practitioners, we describe countermeasures to address these cognitive obstacles.  The article offers a number of such strategies.  One of my favorite is the notion of engaging in parallel rather than serial prototyping.  We draw upon research that shows how parallel prototyping can help people avoid fixation and premature convergence on one type of solution, and it can help individuals receive and utilize user feedback more effectively.   For an in-depth explanation of each our countermeasures, I hope you will take a look at the article.  

Looking for Labor Market Inefficiencies

Miriam Gottfried and Laura Cooper have written an article in the Wall Street Journal this week about billionaire investor Robert Smith and his private equity firm, Vista Equity Partners. The article examines the company's secretive "formula" for evaluating investment opportunities and enhancing performance in portfolio companies. I was particularly struck by the fact that the company uses an intelligence test to evaluate job candidates. Here's an excerpt describing this test: 

A proprietary cognitive assessment, similar to an IQ test, includes questions on logic, pattern recognition, vocabulary, sentence completion and math. The test inspires consternation and fear among existing employees, according to former employees. Vista primarily hires job applicants who do well, often young people with modest credentials or experience. These are its “high performing entry-level” workers, or HPELs.

Later in the article, Gottfriend and Cooper describe the people often hired by Vista Equity Partners:

Most of the people Vista hires score highly on the cognitive test. Often they are young employees with less-impressive credentials or experience. These HPELs, as they are known, may have gone to state universities and be willing to do a job for $75,000 that an Ivy League graduate in a high-cost market would demand twice as much for.

I've always been highly skeptical of using intelligence tests to evaluate job candidates for several reasons. First, I'm never quite sure of the validity of the tests being used. Second, I think performance on the job is driven by many factors beyond raw intellectual horsepower. Emotional intelligence, ability to work on a team, communication skills, and other skills play a major role in a new employee's success in the workplace. Finally, I wonder if these tests do have a bias toward younger candidates who have recently completed school (the article discusses this point). 

Having said that, the interesting part of Vista's strategy seems to be its use of the test to target exceptionally intelligent candidates from lesser-known colleges and universities. Vista seems to recognize that companies often pay a hefty premium for graduates from elite institutions such as Columbia, where company chief executive Robert Smith earned his MBA. Companies have a hard time evaluating young candidates, and so they use a diploma from an elite school as a signal of quality. 

However, firms may be missing the opportunity to recruit great talent if they focus exclusively on the "signal" provided by a degree from an elite institution. What if a firm could identify the best talent from the non-elite schools and thereby acquire great talent at a much lower price? That seems to be the question that Vista has asked and tried to answer using this intelligence test and other tools. They appear to be using the test to exploit a labor market inefficiency. The article, unfortunately, does not have too much detail on the Vista approach, given the highly secretive nature of the firm's methods. It would be interesting to know more so as to ascertain the merits and drawbacks of this aproach.

Shrink to Grow: Why Don't More Companies Adopt This Strategy?

As we witness the breakup of GE, a thought comes to mind regarding a rarely used corporate strategy - namely, the "shrink to grow" approach.   Many years ago, I went to work for General Dynamics after graduation.  When I began working there, General Dynamics was #44 on the Fortune 500 list of the largest American firms by revenue.  However, the company had been hit by acquisitions scandals and a string of very disappointing financial results.  Then the firm witnessed the fall of the Berlin Wall and the collapse of the Soviet Union, and the US government began to shrink defense spending in key areas affecting the firm's businesses.  The company's leadership knew that consolidation needed to occur in the defense industry.   General Dynamics sold many of its major businesses, including its largest business unit (which manufactured the F-16 fighter jet) as well as smaller units such as its Cessna Aviation division.  

By the mid-1990s, General Dynamics had two major divisions remaining:  one unit produced nuclear submaries, and other manufactured tanks and other armored vehicles.   In 1996, General Dynamics ranked only #350 on the Fortune 500 list.  In the years that followed though, the company began to grow again, building on these two remaining platforms.  It acquired Bath Iron Works, for instance, to expand its shipbuilding business beyond submarines (Bath produced destroyers).   It made a series of other acquisitions as well.  By 2005, General Dynamics had risen to #115 on the Fortune 500 list.   Moreover, the company became highly profitable and delivered strong shareholder returns in this era.   

Why don't more companies adopt a "shrink to grow" approach when experiencing poor financial results and/or other crises/scandals?   Many executives hate the thought of shrinking, of leading a much smaller organization.   They focus on the top line (revenue) and market share, rather than thinking about how to position the organization to thrive in the long run.   As we watch GE shrink now, perhaps we will see that it positions the organization to succeed and grow again over time.  More companies should consider this strategic approach. 

The Downside of Open Office Environments

Harvard scholars Ethan Bernstein and Stephen Turban have published an intriguing new study regarding open office environments. The study is distinctive because of its methodology. The scholars used sociometric badges and microphones to monitor the face-to-face interactions of employees before and after the switch from cubicles to an open-office layout. As a result, they did not rely on people's feelings and perceptions about the layout, but instead, they collected objective data about the impact that a change in office environment had on human interactions. The scholars discovered that face-to-face interaction dropped substantially after the shift to an open-office layout. Here is a summary of the research findings, from the British Psychological Society's Research Digest:  

The results were stark: after the shift to an open-plan office space, the participants spent 73 per cent less time in face-to-face interactions, while their use of email and instant messenger shot up by 67 per cent and 75 per cent respectively.

A second study involving 100 employees at another Fortune 500 company was similar but this time the researchers monitored changes to the nature of the interactions between specific pairs of colleagues before the shift to an open-plan office compared with afterwards.

There were 1830 interacting dyads and, of these, 643 reduced their amount of face-to-face interaction after the workspace became open-plan, compared with just 141 showing more physical interaction. Overall, face-to-face time decreased by around 70 per cent across the participating employees, on average, with email use increasing by between 22 per cent and 50 per cent (depending on the estimation method used).

How Do You Respond to Bad News?

Source: Flickr stock photo

As a leader, you should be creating an environment where people feel comfortable sharing bad news.  You don't want them hiding problems, or worse yet, manipulating data to make it seem as though things are proceeding smoothly.   When people do surface issues and concerns, leaders face a moment of truth.  How should you respond?   You only need to shoot the messenger once to poison the organizational culture for years to come.  People have long memories.  They will remember if a prominent leader reacted poorly to the messenger who delivered bad news.   

What is the right way to respond to someone brings forward a key risk or problem with potentially damaging ramifications for the business?   

• First, leaders need to express their gratitude and praise the courage that it took to raise the issue.  
• Second, they need to point out the harm that hidden risks can pose to the organization, and encourage others to come forward in the future with similar concerns or problems.  
• Third, leaders have to avoid the natural instinct to ask, "Why did this happen, and who is responsible?"  Certainly, there will be time to delve into the causes of this problem.  However, in the moment, leaders want to avoid finger-pointing and assigning blame.  Instead, they must focus on bringing people together to solve the problem.  They need to ask, "How can we resolve this problem?  What do we need to do moving forward?"  Naturally, answering these questions will require some investigation as to the cause of the problem.  However, the focus on problem solving rather than "investigation and interrogation" will mean a world of difference moving forward.  
• Fourth, leaders must encourage the team to look systemically at the problem, rather than individualistically.  They can't focus on the individual(s) involved, but instead must address the systemic issues that led to this failure.  It's not about the one rotten apple usually... it's about the damaged barrel that caused the apples to spoil.  
• Finally, leaders must look inward.  How did their behavior, leadership style, goal-setting tactics, and means of rewarding employees lead to this problem?  Acknowledging your own role in the situation not only helps the organization improve and avoid making a similar mistake again, but it makes others more comfortable discussing the mistakes and errors that led to this failure.  

Jimmy Kimmel on Shark Tank

As I was looking for some creative ways to teach my students about building new business models, I came across this hilarious Jimmy Kimmel video.  In this clip, he takes his "bold" ideas to Shark Tank and pitches to the panel.  Let's just say he doesn't receive an overwhelmingly positive response.