Why More People Don't Buy Hybrids

Forbes.com has a very good article about how and why many hybrid automobiles have not become big sellers. Many people buy the Prius because they have a personal desire to reduce their energy use, and perhaps because they would like to make a social statement about environmental protection. However, hybrid technology comes at quite a cost. For many consumers, a hybrid's price premium proves far too substantial; affordability becomes a major concern. Let's do the math. According to the EPA, a Prius averages 46 miles per gallon. A Toyota Corolla averages 29 miles per gallon. Suppose that the typical person drives 12,000 miles per year, with gas at $3 per gallon. The Prius owner saves $459 per year in gasoline expenses over the course of one year. However, the sticker price for a Prius exceeds that of a Corolla by approximately $7,000. In other words, it would take roughly 15 years for the Prius owner to recoup his or her extra investment ($7000 divided by $459 per year), and that doesn't even take into account the present value of money. In conclusion, I think hybrid technology is very promising, with great potential to help us reduce gasoline consumption and carbon emissions. However, the automakers have quite a way to go before they can make hybrid technology affordable for many consumers.

Nintendo vs. Sony vs. Microsoft

The remarkable success of the Nintendo Wii offers a very important lesson for business leaders. It shows that the most sophisticated technological solution doesn't always win in the marketplace. Recall that, in the prior generation of video game consoles, Sony's Playstation 2 and Microsoft's Xbox outsold Nintendo's GameCube by a wide margin. The GameCube tried to compete with the technology of their rivals, and they failed. In this generation, the Playstation 3 and Xbox 360 became even more technologically advanced. They offer far more speed and graphic capability than the Nintendo Wii. However, the Wii has outsold its rivals and has become a smashing commercial success. The lower-tech Wii does not target the hard-core gamer who favors the technological superiority of the PS3 or Xbox 360. Instead, the Wii offers a unique new approach to gaming with its wireless motion-sensor controller. It has sought to appeal to a much broader audience of consumers who are more casual gamers, or who have never played video games. Even senior citizens have taken to playing the Wii games. With less technological wizardry, but a novel idea, the Wii has gained the upper hand against its rivals. Nintendo shows us that companies can succeed without getting into a technological arms race against rivals with deep pockets. The key is to take an indirect approach to competing against those rivals. Rather than confronting Sony and Microsoft head-on, Nintendo created a different kind of console that appealed to different customers than those typically interested in Sony and Microsoft products.

Diversification vs. Focus at Limited Brands

Limited Brands announced yesterday that it had agreed to sell a 75% stake in The Limited chain of apparel stores to a private equity firm. That announcement comes on the heels of the sale of a 75% ownership stake in the Express chain to a private equity firm. The company will focus on the two business units that have delivered far better growth and profits in recent years - Victoria's Secret and Bath and Body Works. With these divestitures, the company looks far different than it did twenty years ago, when it was one of the leading specialty apparel retailers in the nation.

The transformation of Limited Brands mirrors the situation that many diversified firms encounter. As firms operate multiple businesses, the corporate office finds itself trying to manage a complex internal capital market. Senior executives typically allocate resources to the business units that show more promise in terms of revenue and profit growth. After all, higher growth and profitability makes additional capital investments appear much more attractive. Executives understandably want the best return on their investment, and they do not have unlimited funds; they must make tradeoffs. Perhaps just as importantly, senior executives allocate more of their time and attention to the more promising business units as well. That, in turn, can lead to a downward spiral at the less successful businesses in the portfolio - weak results lead to a decrease in capital allocated to the business, as well as a decrease in management attention, which together further diminish the prospects for enhanced revenue and earnings growth. Moreover, slower growth and lower rates of capital investment make the businesses less attractive to talented current and potential employees, causing a drain in the quality of human capital in those businesses. That, in turn, further weakens the financial results in those units.

This scenario, which we see unfold in many diversified firms, points out the dangers associated with trying to manage a portfolio of businesses with differing levels of growth and profitability. Moreover, it demonstrates why focused firms often are able to capitalize on the distractions faced by executive teams who are trying to oversee a wide range of business units.

Limited Brands deserves credit for ultimately recognizing that its apparel chains could be better off under management whose sole focus is on that particular brand. Moreover, Victoria's Secret and Bath and Body Works are likely to benefit too. Now senior management can completely focus on these businesses, which face increasing competition as new entrants chase the high profits in those sectors.

Generational Differences

Carol Hymowitz has a good article in today's Wall Street Journal entitled, "Managers Find Ways To Get Generations To Close Culture Gaps." Hymowitz is correct when she argues that managers must find ways to tailor their approach to meet the needs of different generations of employees. I find the point about learning and development particularly interesting.

As a professor, I can see these generational learning differences very clearly. Young people gather and process information, develop new skills, and discover new things in very different ways than many people from prior generations. My younger students, for instance, love studying for exams by listening to and reviewing my weekly podcasts, which discuss key points from the case studies that we examined. They also tend to embrace active learning, i.e. classroom experiences in which they are engaged participants, as opposed to passive listeners to faculty lectures. Just as orofessors must adapt to this newer generation's distinct learning style inside and outside the classroom, so too must managers find ways to tailor the way that they monitor, motivate, and train employees of various generations.

The challenge, however, becomes one of fairness. While I believe tailoring approaches for different employees makes some sense, I worry that managers may end up creating perceptions of inequity. People often don't like to feel as though their peers are not playing by the same rules. Thus, as managers try to adapt their approaches to meet the needs of a multigenerational staff, they must be particularly careful that employees do not begin to perceive that they are being treated unfairly in comparison to peers of another generation.

How much is a reputation worth?

Business Week has a very interesting article on corporate reputation. The authors describe efforts by companies and consulting firms to determine the impact that a positive reputation can have on a firm's stock price, and then to develop programs aimed at juicing a firm's shares. What is especially interesting to me about this article is the reaction by investors. The article points out that, "Many investment pros scoff at suggestions they can be influenced by image manipulation." When it is suggested that reputation-building efforts can have a direct impact on a firm's stock price, one investment analyst responds, "The markets are smarter than that." In general, I believe that U.S. capital markets are reasonably efficient. However, I would not be as quick to dismiss the notion that reputation-enhancing initiatives can have a near-term impact on investor perceptions and share prices. Scholars in the field of behavioral finance have shown that investors can be affected by biases, thus demonstrating that markets aren't perfectly efficient.

Having said that, I think that sustainable long-term changes in stock price require substantive improvements on the part of a firm, not just image-oriented campaigns. Companies, in fact, can find themselves in deeper trouble if they try to build a reputation through advertisements and public relations, while consumers, journalists, and investors later learn that the reputation is not consistent with the underlying realities of the business. Take BP, for instance. It spent a great deal of money on its "green" campaign under former CEO John Browne. When it then encountered several accidents and mishaps at its facilities, the company faced a serious disconnect between what it was saying in its image campaigns and what it was revealed to be doing in its own operations. BP's market value fell by nearly $40 billion from mid-2006 until the announcement of the resignation of Lord Browne in early 2007.