Tuesday, December 23, 2008
Janis, I.L. 1982. Victims of Groupthink. 2nd Edition. Boston: Houghton Mifflin.
Klein, G.A. 1998. Sources of Power. Cambridge, MA: MIT Press.
James Surowiecki. 2004. The Wisdom of Crowds. New York: Doubleday.
Neustadt, R. and E. May. 1986. Thinking in Time: The Uses of History For Decision Makers. New York: Free Press.
Allison, G. and P. Zelikow. 1999. Essence of Decision: Explaining the Cuban Missile Crisis. 2nd Edition. New York: Addison-Wesley.
Andrew Grove. 1996. Only the Paranoid Survive. New York: Currency.
Peter Drucker. 1954. The Practice of Management. New York, Harper.
Michael Lewis. 2003. Moneyball: The Art of Winning an Unfair Game. New York: W.W. Norton.
George, A. 1980. Presidential Decision Making in Foreign Policy. Boulder, Colorado: Westview Press.
Snook. S. 2000. Friendly Fire: The Accidental Shootdown of U.S. Black Hawks Over Northern Iraq. Princeton, NJ: Princeton University Press.
Monday, December 22, 2008
Tuesday, December 16, 2008
Back in 2004, when it was still relatively flush, General Motors invited automotive journalists to the South of France for a three-day "global product seminar." The idea was that writers like me would drive new cars, consume loads of free food and wine, pal around with executives, and develop favorable opinions about GM.
Still a little jet-lagged, I arranged to drive with chairman and CEO Rick Wagoner in a yellow Corvette. Our route would take us from the Four Seasons resort in Provence, where we were staying, through the French countryside and on to the Paul Ricard race circuit near Marseille in time for lunch. My job was to navigate while Wagoner drove, but I used the face time to pepper him with questions rather than pay attention to the route book.
Polite and good-humored as usual, Wagoner mostly ignored my directions and followed the car in front of us. Two hours later we found ourselves back at the hotel. I had been navigating from the wrong map, and the car in front of us, driven by Chinese journalists, was just as lost as we were. Lunch would be delayed while we hurriedly made our way to the track, meaning I had effectively kidnapped the chairman of General Motors for three hours.
Sure, we had been tailed the whole time by Wagoner's security detail, but it remained behind at a respectful distance and never stopped to ask us where we were going. What I learned from the incident were several things. First, never underestimate the ability of a know-it-all journalist to get it wrong. And second, at some point good manners and civility become a liability rather than an asset.
Monday, December 15, 2008
"We show that entrepreneurs with a track record of success are much more likely to succeed than first-time entrepreneurs and those who have previously failed. In particular, they exhibit persistence in selecting the right industry and time to start new ventures. Entrepreneurs with demonstrated market timing skill are also more likely to outperform industry peers in their subsequent ventures."
Globe writer Scott Kirsner also points out his favorite finding from the paper, which is intriguing and makes it worth reading the paper to explore further:
"For instance, one of my favorite conclusions that Gompers compellingly makes is that venture capitalists do not add value to the companies they invest in. How does he know this? Not surprisingly, the top-tier VC firms are better at picking unknown "star entrepreneurs," but once they've been successful in their first ventures (i.e. their "star" qualities are now public information) then the success of subsequent ventures is unaffected by whether the venture backer is a top-tier firm or a bottom-tier one. Ouch!"
To read the entire working paper by Gompers and his colleagues, click here.
Saturday, December 13, 2008
Thursday, December 11, 2008
As many of you now, my research has focused a great deal on how leaders must foster constructive conflict as a means of improving their decision-making processes. In other words, I have tried to write about effective techniques for preventing groupthink. Bringing people with diverse backgrounds and views to the table is certainly a great start. However, it's not sufficient for producing a healthy dialogue and debate. President-Elect Obama, or any other leader, must keep in mind several other things.
First, as soon as Obama becomes the actual President holding meetings in the White House, the atmosphere will naturally change. Many people who may have been very open with him will almost certainly become more deferential out of respect for the office he will hold and because of the atmosphere within the Oval Office.
Second, to stimulate a vigorous debate, one needs specific tools and techniques for generating a healthy give-and-take. Irving Janis wrote about his theory of groupthink by studying the Bay of Pigs fiasco. That's a telling case because Kennedy built a superstart set of advisers which included several Republicans. Thus, he had a diverse set of people around the table, yet groupthink occurred. Later, in the Cuban Missile Crisis, Kennedy employed a number of techniques for helping to force more debate among his advisers.
Finally, President-Elect Obama must remember that debates can easily become counterproductive. One has to be able to manage the interpersonal conflict that often arises in diverse teams. If that does not occur, then group harmony suffers, as will the ability to execute decisions that are made.
Wednesday, December 10, 2008
"... at the heart of any economic or financial mania is an epidemic of self-delusion that infects not only large numbers of unsophisticated investors but also many of the smartest, most experienced and sophisticated executives and bankers. It's not that they don't see the excesses and dangers in front of them -- how could they not? But somehow they convince themselves that the world has changed, that the old rules no longer apply or that, because of competitive pressure, they had no choice but to run with the herd."
Monday, November 24, 2008
Friday, November 21, 2008
Myth 1: Bankruptcy is not an option.
Myth 2: Management changes would be pointless.
Myth 3: Bankruptcy means death.
Myth 4: Banning executive bonuses or requiring more fuel-efficient cars will save Detroit.
Myth 5: A GM-Chrysler merger will help save both firms.
This is definitely worth a read. Ingrassia has covered the auto industry for years, and he brings all that expertise to bear with a concise and insightful argument regarding a potential bailout.
Monday, November 17, 2008
Thursday, November 06, 2008
"But why weren’t the experts at the Fed saying such things? And why didn’t a consensus of economists at universities and other institutions warn that a crisis was on the way?
The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group."
I think Shiller has made a good point about social pressures for conformity that arise in groups and organizations, and that cause warning signs to be downplayed at times. However, I don't think the term groupthink technically applies here. Janis' work on groupthink tends to focus on pressures for conformity that arise within a team, such as the advisers to a President of the United States. In this case, Shiller is talking about a much more widespread pressure for conformity that extends beyond a team, and in fact, well beyond one organization.
Wednesday, November 05, 2008
Their vertical integration strategy is designed to enable them to react very quickly to market trends, and to produce fashionable clothes very quickly as part of their "fast fashion follower" strategy. The fast replenishment model and massive flexibility means Zara makes fewer mistakes, and when they do make a fashion error, it is less costly becuase they haven't ordered a huge shipment of the item from Asia. Because of this, they have fewer markdowns, and their markdowns tend to be smaller. That helps create higher operating margins.
Vertical integration always has its risks, but in this case, Zara has found a way to make it very profitable. It also has helped to create a unique business model that is very hard to imitate.
Monday, November 03, 2008
Wednesday, October 29, 2008
Bhide's main propositions are sure to prompt reaction and dissent from some quarters, but I find it refreshing to see him so eloquently argue that the United States and other western industrialized nations need not fear globalization. Here are a few of Bhide's propositions:
- "A nation's venturesome consumption - the willingness and ability of intermediate players and individual consumers to take a chance on and effectively use new know-how and products - is at least as important as, if not more important than, its capacity to undertake high-level research."
- "An increase in the world's supply of high-level know-how provides more raw material for mid-and ground-level innovations that increase living standards in the United States."
- "Techno-nationalist prescriptions to protect the U.S. lead in high-level know-how may do more harm than good by impairing the performance of the other players in the innovation game who use high-level know-how."
- Perhaps most importantly, Bhide argues that, "The development of scientific knowledge or cutting-edge technology is not a zero-sum game."
What makes the book fascinating to me is that Bhide approaches the issues of globalization and innovation from a very different perspective than traditional economists. As a business school professor, Bhide examines how venture capital-backed enterprises function. He's looking at the reality of young, innovative companies, rather than studying abstract conceptual models of the economy that are often based on assumptions that may not line up with reality. While economists clearly have much to offer to this debate about globalization, Bhide brings a new vantage point to the table. His book surely informs us in new ways, and it is certain to make us reconsider many of the key arguments being made in the popular press about globalization.
Tuesday, October 28, 2008
Monday, October 27, 2008
Friday, October 24, 2008
Research suggests that we learn more effectively if we compare successes and failures, rather than only examining our failures. Consider the work of Tel Aviv University scholars Schmuel Ellis and Inbar Davidi, who examined after-event reviews conducted by the Israeli military. They compared soldiers who conducted after-event reviews after successful and unsuccessful navigation exercises with soldiers who only reviewed failures. Ellis and Davidi found that soldiers who studied successes and failures performed better on subsequent missions than those who only studied failures. The two scholars argued that “contemplation of successful events stimulated the learners to generate more hypotheses about their performance.”
The implication is that, as firms study their failures these days, they should be systematically comparing the failures to past successes. Comparison and contrast will protect against spurious conclusions, and it will help refine their lessons learned.
Friday, October 17, 2008
Balanced against the opportunity cost, what does this conservatism get you, besides protection against financial distress during economic downturns? Most importantly, a strong balance sheet (low debt, excess cash) can become a competitive weapon for a firm. When other firms face distress, a company with a strong balance sheet can go on the offensive and put additional pressure on competitors. How can they do so? They might launch a price war, using the additional financial resources and flexibility to fund the discounting. That effort may enable the firm to increase market share in a downturn. They might also use the strong balance sheet to gobble up weaker competitors through mergers and acquisitions. Finally, they might use the resources to accelerate key investments in equipment, factories, R&D, and the like - investments that they know their rivals might not be able to match during the downturn.
Take the example of Wal-Mart in recent weeks. They just announced that they will be offering steep discounts on certain toys this holiday season. It appears that they are using their financial strength to try to increase market share at the expense of weaker rivals in the retail sector. Similarly, consider the examples of Wells Fargo and Bank of America in the financial sector. They appear to be using their strong balance sheets to make opportunistic acquisitions of weaker rivals during the financial crisis. These competitive moves would not have been possible without the flexibility provided by a strong balance sheet.
Thursday, October 16, 2008
In general, the philosophy that small businesses (actually all firms) should take in an economic downturn is that, "There is no such thing as fixed costs." In other words, businesses have to focus on overhead costs when volume plummets in an economic downturn. They must scale those down; otherwise, the average costs per unit will skyrocket as volume falls. Some good categories to focus on are energy, supplies, rent, and leases.
Monday, October 06, 2008
Friday, October 03, 2008
Friday, September 26, 2008
The global financial system is a good example of a complex system, as first defined and described by sociologist Charles Perrow. Complex systems are vulnerable to catastrophic failure, according to Perrow, if they have two attributes: high interactive complexity and tight coupling. By interactive complexity, he means that the system has many elements that interact in ways that are hard to predict and know in advance. By tight coupling, he means that different elements of an organizational system are highly interdependent and closely linked to one another, such that a change in one area quickly triggers changes in other aspects of the system. If we have learned anything over these past few weeks, it is that the global financial system exhibits high interactive complexity and tight coupling.
In a system with these attributes, large-scale failures result from a series of small errors and failures, rather than a single root cause. These small problems often cascade to create a catastrophe. Accident investigators in fields such as commercial aviation, the military, and medicine have shown that a chain of events and errors typically leads to a particular disaster. We see the same thing here with the global financial system. A problem that began with failures in the subprime mortgage market has cascaded to cause huge disruptions in many different parts of the global financial system and the economy more broadly.
Organizations of all kinds should take note. Do they operate systems with high interactive complexity and tight coupling? Could a small failure cascade to create a chain of errors that leads to major catastrophe? Every organization should look in the mirror and examine its vulnerability in light of these concepts.
Monday, September 22, 2008
First, they must communicate even more often than usual. They have to be very transparent about the economic condition of the firm. Managers also need to provide updates as to how external events are affecting the firm's business, i.e. how does overall economic growth correlate with the firm's profitability? How does Wall Street's woes affect the firm's profitability?
Second, they must go to great lengths to educate the workforce about the financial drivers of the business and the current state of the business. Many employees will need help understanding key financial metrics, as well as key causes of stock price changes.
Third, managers must be brutally honest about the state of the business. Just as top managers never like to be surprised by bad news, so too lower level employees don't want to be shocked. People will appreciate the candor.
Fourth, don't let the remedies come out in dribs and drabs (if possible). It's much better to assess the whole situation and announce the entire regimen of tough medicine required to cure the patient, rather than issuing one prescription after another over the course of many months. The initial pain will be great, but then the company can move on.
Finally, managers need to be very proactive about rooting out and disproving false rumors that pop up around the workplace. Letting fears, doubts, and misinformation linger can be very harmful.
Saturday, September 13, 2008
"University of Chicago Graduate School of Business economists Matthew Gentzkow and Jesse Shapiro aren't sure that TV has been all that bad for kids. In a paper published in the Quarterly Journal of Economics this year, they presented a series of analyses that showed that the advent of television might actually have had a positive effect on children's cognitive ability."
The article goes on to cite the findings from the study:
"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did. The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure. The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower."
Now, of course, there are limits to how much we can generalize from this study, as the article points out. The findings are from a different era, when the content on television was quite different (i.e. far less trashy). Moreover, they are seeing positive effects specifically in households where English was not the first language, i.e. immigrant households. Yet, I find the research intriguing, because I was raised in a household where English wasn't the first language. My parents came over from Italy just three years before I was born. We did watch a fair bit of television when I was young. Since my parents didn't speak much English at the time (or at least it was broken English), the television may have been beneficial in helping me learn the language. I think it's at least plausible that it could have had some positive effect. Having said that, I don't think my kids are in the same situation. They have plenty of other avenues for learning to speak, read, and write English, and they don't need the television to help them!
"A winning NFL football team increases the incomes of the people who live and work in its hometown by as much as $120 a year. And while the study doesn't identify exactly what causes the boost, the authors point to psychological literature suggesting that winning fans are at once harder workers and bigger spenders. In short, buoyed by the team's success, we work longer hours, take bigger risks, and shop more avidly, all of which helps the local economy."
I'm not at all sure that this psychological impact on a team's fans merits the large public subsidies often given to sports teams to build new stadiums, but it is certainly fascinating research about how our moods might affect our productivity as workers.
Tuesday, September 02, 2008
This post was contributed by Heather Johnson, who writes on the subject of California teaching certificate. She invites your feedback at email@example.com
Walking down memory lane, I recall a friendly basketball match that I played against the sophomores as a freshman in college. I was new, and so were the others on my team. We had not yet had time to get to know each other well, the strengths and weaknesses that each of our games brought out. So when it came to choosing a captain, a teammate was chosen at random. But as the game progressed, we seemed to be drifting like a rudderless boat thrown at the mercies of a wild sea. We had no game plan, no team work, and most of all, no commitment.
After a poor show in the first half, I decided to take control of things even though I was not the designated leader. The game we’d played so far had offered me a peek into both the strengths of my teammates and the weaknesses of my opponents. Armed with this insight, I outlined plays and strategies for the second half during the interval. We didn’t win that day, but the loss was far from humiliating. We had redeemed ourselves during the latter part of the match.
I learnt a valuable lesson in leadership that day – it’s not just designated leaders who must lead all the time. Team members with a sense of responsibility and an innate aptitude for management are equally at fault if the team goes astray. In fact, they are more to blame, because they know what they must do and yet they fail to do it for various reasons. They may fear alienating or offending the appointed leader, they may be too lazy to take on the onus of leading the team, or they may be too shy and apprehensive to come forward with their ideas.
We can use these points to define a true leader – one who knows what needs to be done and is not afraid, reluctant or timid to do it in a way that is appreciated and admired by everyone else on the team. A leader guides rather than controls, listens rather than talks all the time, works with the team rather than make them do all the work, shares credit with everyone and takes blame alone, and thinks things through before actually implementing them. A good leader knows that the best way to motivate is through encouragement and not fear and that praise is more important than recriminations.
A true leader does not ask for credit for a job well done, which is very important in the kind of scenario I outlined above. Leadership driven by a love for the spotlight is as fleeting as a shooting star – a flash of brilliance reduced to ashes and dust. Leadership must focus on the goals at hand and take the right decisions using the right people to reach those goals in the most efficient way possible. Publicity lets others know that you’re a good leader, but fame is a fickle friend that deserts you the moment you make a mistake. Leadership that’s driven by a love of achievement alone is the kind that’s head and shoulders above the rest, the kind that lasts a lifetime, no matter where the cameras are focused. You don’t have to be the star of the play to feel a sense of achievement; it’s infinitely better to be the director in the wings who pulls the strings and calls the shots. After all, no matter how entertaining the puppets are, there’s no show without the puppeteer!
Saturday, August 30, 2008
Thursday, August 28, 2008
"In many cases they went into homes to do interviews; in others, they placed motion-activated cameras in the home to observe diaper-change routines and then watched the hours of footage at K-C headquarters... Nelson plays some footage of a newborn getting its diaper changed, taken from one of the videocameras. You see the baby's legs continually springing up and the mom trying to straighten them as she puts on the diaper; clearly it's a struggle. Footage like that started pushing the team in the direction of thinking that a better diaper would be shaped to get around those legs and follow the curves of a baby's body."
The second key point in this article is that Kimberly-Clark is intentionally creating failures in their research labs to learn more about diaper technology. Only through intentionally causing many types of diaper leaks can they discover how to create a diaper that fits comfortably, yet does not leak. Here is the excerpt on that point:
"Fit diapers in varying states of sagginess, are noisily playing with trucks and watching SpongeBob SquarePants. They're an adorable collection of diaper blowouts about to happen, and when they finally do, K-C's researchers record each failure in obsessive detail: how much the diaper weighed at the end, where the leak seeped out, how the diaper fit around the legs.
The goal of this forced-failure test, as Kimberly-Clark calls it, is to check that the diapers being churned out at the company's factories match the rigorous standards for Huggies Supreme Natural Fit..."
As the father of three, with one still in diapers, I found the article quite interesting. It's rather amazing how much time and money is spent trying to perfect diaper "technology" at Kimberly-Clark.
Tuesday, August 26, 2008
This case illustrates the perils of "green" strategies, both for the for-profit firms and the environmental organizations. In this case, the environmental organization found itself on the hot seat for its commercial tie-ups. In other situations, we find that firms who are trying to "go green" find themselves inviting much more scrutiny than they had ever experienced. Sometimes, claiming progress on the environmental front only invites more attention, and perhaps criticism, from various constituencies and activitists. In sum, becoming more environmentally friendly has many merits, but it can be a perilous activity for all involved.
Monday, August 25, 2008
"Edo Interactive, a Nashville-based firm that deals with Web 2.0 technology, is trying to change the game. After spending a year studying young consumers, they developed Facecard, a prepaid credit card aimed squarely at millennials and the businesses that court them.
Launching nationally Sept. 1, Edo's gimmick works like a fiscal Facebook: After applicants create profiles on Facecard.com, they get a card in the mail that allows them to borrow, lend, or give away money to buddies electronically. For a fee, retailers can send them "prewards," small denominations of instant store credit, based on their age, location, and personal interests. Because the $2 to $3 gifts are redeemed via credit card, tracking consumer response is a cinch."
Now, I found this technology rather interesting, but I was also struck by the amount of spending by millenials, and thus the amount of marketers' attention focused on this demographic. According to the article, "America's 80 million millennials (and their folks) shell out roughly $200 billion annually, according to Chicago-based investment firm William Blair & Co.." Wow! Those are some huge numbers.
Well, this leads me to my main point. Both college faculty and parents need to be paying a great deal of attention to the importance of teaching young people about responsible personal finance. These young people are being hit with massive marketing efforts aimed at getting them to use credit cards and spend their money (and their parents' money!). Yet, many young people do not understand certain essential basics of personal finance. Unfortunately, that means that they leave college in far worse financial shape than simply the debt load of college loans. I don't think we can start too soon by the way. We need to begin educating young people about financial matters when they are in elementary school, and gradually introducing more complex ideas about how to manage one's money.
Wednesday, August 20, 2008
"I recently completed a new stone patio adjacent to the deck on my house. In the process of researching suppliers for the stone pavers, I noticed that one local company offered free delivery for any amount of goods purchased. I wondered how they got away with this given the recent increases in fuel prices. Further investigation revealed that their stone prices were noticeably higher than their local competitors, indicating that they must transfer their transportation costs onto the price of their products. The ability to offer “free delivery” must be an important advertisement for this firm as it is indicated in all of their flyers and brochures. Conceivably, this pricing strategy would appeal most to homeowners who cannot amortize the cost of the delivery over a large order. Contractors might prefer to pay the delivery charge in exchange for a lower price on the materials, especially for large orders."
Taylor's example is an interesting one, because one wonders if the firm understands how its pricing strategy may be shaping its target market. Does the company understand that it will attract homeowners much more so than contractors with this pricing strategy? Perhaps it does, but in some cases, firms may not understand how a particular pricing strategy may shape who shops, and who does not shop, for their products.
How about the implications of oil price increases? Well, a free delivery ad might play well given high gas prices. However, those increases in gas prices certainly will result in higher and higher item prices for the stones, if the firm wishes to continue make profit with its free delivery strategy. This will only drive more contractors away, and it will mean that homeowners with very small jobs will be the most likely purchases of their products. Will this be economically attractive for the firm? What will its cost structure look like with a high frequency of deliveries of small batches of items? The cost of these kinds of deliveries, naturally, is higher than traveling to a job site to deliver a very large order.
The point is simple: Every firm should be clear on how its pricing strategy shapes the kinds of customers who will purchase its product. Does the pricing strategy attract the kind of consumers that a firm wishes to target? Or, is a firm attracting customers which it does not want, or with which they cannot make an attractive profit?
Tuesday, August 19, 2008
The article points out that some companies are trying to find ways to extend the peak period of research productivity for their most talented people. They are trying to find ways to both help the young promising stars accelerate their learning curve and become more innovative at an earlie age, and they are trying to help older workers maintain their pace of innovation beyond their early to mid 50s. For instance, companies such as Sun and Texas Instruments are pairing up young engineers with experienced mentors; the partnerships benefit both the young and the old. The young come down the learning curve faster, and the old get access to new ideas and fresh perspectives.
As an academic, from time to time I think about this issue of research productivity over one's lifetime. I've seen plenty of scholars who make great contributions at a relatively early age and then become rather stale. They continue to work in a very narrow domain for decades, and they don't branch out to learn and discover new things. I think it takes a concerted effort on the party of any researcher, whether commercial or academic, to keep exploring new territory and exposing one's mind to completely new perspectives. It's easy to continue to mine the same territory upon which one has built their reputation; it's harder, but ultimately more beneficial, to take the risk to go beyond one's comfort zone and stake out new ground. In sum, I think all of us need to set some personal goals about the new bodies of knowledge and new skills that we would like to develop in the next 3-5 years; we need to keep setting these goals over time, so that we truly become lifelong learners. Hopefully, this will keep us innovative and productive for decades to come.
Thursday, August 14, 2008
If there is one positive from the high oil prices that we've experienced, it is that firms have implemented major changes to eliminate wasteful use of energy. Such cost reductions will help them become more competitive in the long run. It's interesting that the U.S. productivity numbers have been rather strong during the past few quarters, despite the downturn in economic activity. Perhaps the productivity growth is a reflection of firms trying to become more efficient to offset the high price of energy. Whatever the cause, the growth in productivity in 2007-2008 bodes well for long term economic growth, despite the short term economic troubles.
One last thought on oil prices... One does have to wonder about the timing of the shift in the oil market. Is it just a coincidence that prices began to fall when the goverment began discussing ways to crack down on short sellers who may have been acting inappropriately? Short sellers clearly play a useful role in our capital markets, but there are some questions regarding the appropriateness of some behavior.
Saturday, July 26, 2008
The Ford situation reminds us that there are two different reasons that firms customize their products for local markets. First, they might do it to tailor their products and services to local customer tastes and needs. This is a perfectly viable reason for localization, though of course, companies must weigh the benefits of local customization against the foregone economies of scale. However, there is a second reason that firms customize for local markets, and it is not value maximizing. As companies grow and develop local management in various countries, those organizational units grow in power. Sometimes, they become fiefdoms run by managers behaving like feudal lords. These managers insist of building their own products for those markets, rather than adopting global product platforms. Yet, they might be doing so because they want to control their region and accumulate more resources under their control, rather than because it is actually the right thing to do for the business. The Ford story suggests that firms need to be particularly attuned to this second, value destroying reason for local customization in different geographic markets.
Wednesday, July 23, 2008
Friday, July 11, 2008
Thursday, July 10, 2008
Can businesses leverage the power of deliberate practice to develop their human capital? Surely, they can. We can engage in deliberate practice when it comes to key activities such as drafting and making presentations. Leadership development programs can provide opportunities for deliberate practice at a variety of skills related to communication, negotiation, and the like. Beyond that, we can employ technology to create opportunities for deliberate practice. One innovative new methodology for doing so involves the use of simulations and video game technology to train employees. For instance, Hilton Garden Inn employs an interactive training game called "Ultimate Team Play." This game allows individuals to immerse themselves in various scenarios that take place in a hotel. They have to make decisions about serving customers, and they have to complete various tasks. The game provides immediate feedback to the trainees, enabling them to see how their efforts impacted measures such as customer loyalty and satisfaction.
Wednesday, July 09, 2008
It's hard to argue that you are one of the highest quality coffee companies in the country when you have your coffee being brewed and then sold from air pump dispensers in tons of different locations. How long does that coffee sit in those dispensers before it is sold? Is it really fresh? Does it always taste as good as Starbucks drip coffee sold in its company-owned locations?
In my view, the company must address this fundamental strategic question. The craving for growth above all else clearly drove them to expand at a frenetic pace in recent years. Now, retrenching can be painful. Stepping back from its licensing strategy won't be easy. It may even be economically a negative in the short run, but it may be precisely what the company must do strategically to position itself for the future.
Wednesday, June 25, 2008
What should the NBA do about it? Peter Keating has an interesting solution in this month's issue of ESPN: The Magazine. Keating draws on the work of James Surowiecki, the author of the best-selling book, The Wisdom of Crowds. He suggests that perhaps the NBA should allow fans to vote on key calls in an NBA game. After all, Suroweicki and others have shown that the collection of thousands of independent opinions often may yield an answer that is better than the judgment of any particular expert.
Keating's suggestion may sound preposterous, but perhaps there is a different solution that the NBA might experiment with, drawing on the same logic of mass collaboration. Companies in a variety of industries have employed mass collaboration effectively. For the NBA, perhaps fan voting could be used to EVALUATE referees, rather than to actually make calls in a live game. Rather than simply relying on an expert in the league office to judge the competency of officials, perhaps the NBA could take a look at how its millions of fans think referees have performed. Comparing the fans' collective judgment to the ratings by experts could be quite interesting. Not only might it yield informative results, but such a system might go a long way toward restoring the league's credibility in the eyes of its customers.
Monday, June 23, 2008
Then, we have the befuddling news that United Airlines may require minimum stays on some routes. I'm not sure that I understand this policy. Does it mean that I can't fly from Boston to DC and back on the same day with United? Why would they turn away that business, when their goal should be to fill the planes so as to spread their fixed costs over as many passengers as possible? If this is true, then perhaps there is some economic reason for doing so, but again, it sure does not seem like a move designed to please its customers.
Friday, June 20, 2008
Apple owns its retail stores because it wants to control the consumer purchasing experience, gather critical marketplace information, and further enhance its product differentiation. Exxon Mobil has no such powerful rationale for forward integrating into retail gas operations. They can accomplish their goals by licensing their brand to distributors who own and operate the locations. Let those who are more adept at operating these businesses do so... after all, gas retailing is about much more than fuel these days. The business is much more about operating convenience stores profitably than it is about pumping gas.
Thursday, June 19, 2008
If more attention on this issue spreads across the country, we could see important implications for businesses such as Jiffy Lube and other auto maintenance centers. They have profited from the disciplined approach that many Americans take to changing their oil every 3,000 miles. If people begin to adhere to manufacturers' guidelines for new cars, we may see substantial challenges for these firms. It will be interesting to watch to see if this trend takes hold, and how the auto maintenance centers respond. With oil above $130 per barrel, it's also interesting to see how many different ideas are being pursued to eliminate wasteful consumption.
Monday, June 16, 2008
The Choices we Make
Any student of management should be familiar with the process of decision-making – describe and understand the problem, identify the objective, determine the alternative options available, evaluate each of these options either objectively or subjectively, and choose the one that fits best. Unfortunately, the simplicity of the statement of the process does not carry over to the actual process itself, which is why most people find the procedure of making decisions extremely difficult.
On one end of the spectrum you have people who agonize over every small thing, from what to eat to what to wear; and on the other, you have those who save their energy to rationalize choices that are life-changing, if not for them, then for the people whose livelihoods depend on them. I’m not trivializing the first category, only trying to highlight the fact that every one of us considers the decisions we have to make as the most important choice we make at the moment.
The art of making decisions is a theory that has been thrashed about, debated on, and put to effective use in almost every boardroom across the globe. But it’s not something that’s applied when it comes to the individual - personal decision-making is a process that’s often intuitive, based on circumstances that prevail at that point, and influenced by people who control aspects of our lives. From where I sit, this is what I’ve learnt about people and the decisions they make:
· The majority is happy to go with the flow; they do not take decisions that change their lives overnight or even set in motion the harbinger of positive change. Any change that happens is forced, and these people then rearrange their lives to fit around the change.
· Some people straddle the fence; they know they have to take a decision one way or the other (mostly a yes-no decision where there is no in-between ground) and they’re hesitant or afraid to choose. The more daring in this category call the shots and finally choose while the meek (who I don’t think will inherit the earth) fall on one side after being either pulled or pushed. If the decision is a success, the one who chose is elated that he made the right decision; if it’s a failure, the one who fell blames the one who pushed him over, a case of passing the buck once again.
· Some let other people decide; they are the laidback kind who are ok with following the leader rather than taking the lead themselves.
· A rare few are go-getters; they plan their lives and map out where they should be at what point of time. These people live their dreams, and if one or two of the dreams die a premature death, they’re back to the drawing board mapping out new strategies and alternatives. This kind thrives in challenges – they do not fear to take the road less trodden and delight in finding offbeat paths that lead them to the pinnacle they hope to achieve.
The choices we make have repercussions, both on ourselves and the people whose lives are intertwined with ours. Unfortunately, there’s no writing on the wall to guide us as we take decisions that sometimes, may be the difference between success and failure, wealth and mediocrity, and even life and death. But the fear of failure should not be a deterrent to attempting – just as you’d get back on a horse asap after a fall, do not hesitate to make a new choice even if the one you made earlier turned out to be a mistake.
The best way to make decisions is to let your head rule your heart and not vice versa. Rational scores way over emotional when it comes to decision-making. The time taken to make a decision should not outweigh the value of the decision itself – it’s not worth it to spend a whole day deciding the color of pants you want to buy. Think your choices over, and when you’re done, your instinct will tell you what’s right.
This guest post is written by Heather Johnson, who frequently writes on the subject of grants for nursing college degree. She welcomes your comments and freelance writing inquiries at:
Thursday, June 12, 2008
As I mentioned in a recent Reuters article, I think the Anheuser Busch board of directors will have a hard time turning back this bid without making other strategic moves. (Consider what has happened at Yahoo after that firm rejected the Microsoft bid). Shareholders are not likely to be pleased if the board simply rejects a bid that offers a substantial premium. The family only owns about 4% of the shares, so it cannot block the deal on its own.
If the Busch family does not want to sell to Inbev, what can they do? I think that one possibility would be to find a private equity buyer who would be willing to retain and work with the current management team in place, particularly CEO August Busch IV. Mature companies with strong, stable operating cash flows and valuable brands make attractive targets for private equity investors. The only question would be whether a private equity firm (or group of firms) could raise the required capital at the right price given this year's turmoil in the capital markets.
Regardless of what happens, I think you will see prospective buyers (Inbev, private equity firms, or some other white knight) taking a close look at some of Anheuser-Busch's ancillary operations. While the theme park business (Busch Gardens, Seaworld, etc.) is quite profitable, it's hard to make a case that strong economies of scope exist between the beer business and the theme park operations. One way to generate cash to help finance a deal would be to sell the theme parks. Other business units, such as the firm's packaging operations, might also receive scrutiny.
Wednesday, June 11, 2008
Over the past two decades, retail formats have gotten larger and larger, with superstores cropping up everywhere. It's not just the mass merchandisers such as Target and Wal-Mart, but a whole array of other specialty retailers as well. These giant stores perhaps made sense in an era of $25 oil, but executives will have to rethink the notion of optimal store size given oil prices in excess of $130 per barrel.
Heating costs represent a largely fixed cost. As they rise, the breakeven point for a retail store suddenly rises as well; in short, you need far more revenues to cover your fixed costs today. Given near term pressures on sales, companies need to rethink their cost structure. Reducing variable costs such as labor may be one option, but retailers do not want to cut too deep in that area, for fear of harming customer service. They may find that shrinking the size of the store helps bring down the breakeven sales figure, while also helping to improve inventory turns. Slower moving items can simply be sold on-line today, something that wasn't possible two decades ago. Overall, retailers may lose some revenue from shrinking their floorplans, but they could more than make up for it in higher asset efficiency (more sales per square foot, greater inventory turns, etc.).
Tuesday, June 10, 2008
My personal favorite on their list is what they call the "lemming effect" - i.e. companies decide to imitate their competitors' new products, rather than trying to truly deliver a distinctive product to the market. Me-too strategies are everywhere in the business world. Companies seem to so easily forget that enduring competitive advantage comes from distinctiveness, not imitation.
Ever wonder why that cereal box is only two-thirds full? Foodmakers love big boxes because they serve as billboards on store shelves. Wal-Mart has been working to change that by promising suppliers that their shelf space won't shrink even if their boxes do. As a result, some of its vendors have reengineered their packaging. General Mills' Hamburger Helper is now made with denser pasta shapes, allowing the same amount of food to fit into a 20% smaller box at the same price. The change has saved 890,000 pounds of paper fiber and eliminated 500 trucks from the road, giving General Mills a cushion to absorb some of the rising costs.
The interesting thing about these types of moves is that they reduce costs, AND they are environmentally friendly. More and more companies are searching aggressively for ways to eliminate waste, and particularly, to reduce fuel consumption. The high oil prices are, in fact, driving fundamental changes in behavior. We are seeing innovation and increased efficiencies result from the desire to counter the high price of oil/gas. In the long run, such moves may have wonderful positive effects for companies as well as for the economy as a whole.
Thursday, June 05, 2008
Stew Leonard's is not alone in making shopping more entertaining. Consider Jordan's Furniture, a small chain in Massachusetts founded by the Tatelman brothers and now owned by Warren Buffett. My local Jordan's is designed to around a New Orleans theme, with the main portion of the store made to look like Bourbon Street. The store has hourly entertainment, someone handing out beads to at the front door, a virtual reality ride, and an IMAX theater inside as well. We could go on with many other examples, including Build-a-Bear and American Girl stores.
The trend is clear. Each of these retailers is trying to differentiate itself from the competition, and thus increase willingness-to-pay by enhancing the shopping experience. Retailers also compete more effectively against internet competition by making their stores more than simply a place to conduct transactions. Retail is a tough business with low margins in many sectors. Price competition can be ruinous at times. Differentiation can be difficult to achieve. These retailers have found a way to stand out from the pack by focusing on making shopping a truly entertaining experience that's about much more than buying products that can be found elsewhere, including on-line.
Swisher points to research by the Center for Creative Leadership (CCL) which shows that formal training accounts for only a small fraction of the learning/knowledge that managers need to to develop critical skills; the rest comes from experience. This finding is certainly no surprise. Formal training can only do so much. The real role for formal training has to be in helping managers accelerate the learning through experience that takes place on the job. It can do so in a number of ways. For instance, formal training can introduce managers to new ideas or perspectives, enable sharing of knowledge across the organization, help managers reflect on their experiences and identify ways to improve, and give executives access to practices and techniques being employed in other organizations so as to prevent a firm from becoming overly insular.
Still, Swisher rightfully points out that not all experiences are equally useful as development learning opportunities. Her list of what research shows to be the most useful developmental jobs is quite intriguing.
Friday, May 30, 2008
Let's step back and consider the research on information sharing in teams. We know from academic research (by Gerald Stasser) that groups do not share information effectively when members possess private information. When members of a group have different pieces of information, Stasser observed an interesting phenomenon: people tend to discuss the information that they all posses in common, and they do not always share or emphasize the information privately held by each group member. The lack of proper information sharing and integration inhibits group problem-solving effectiveness.
Now consider what you surely have observed at many management meetings over the past few years. Someone is presenting at the front of the room, while others around the table listen and ask questions. However, people frequently duck their hands under the table to read an email on their Blackberry or to type out a quick reply. Sometimes, people duck out to take "important" phone calls. It's hard to imagine that effective listening takes place in such environments.
Given this behavior, consider this fact: Stasser's research shows a lack of information sharing in groups, even when everyone appears to be paying close attention! Imagine how much worse the information sharing problem has become given the distraction of Blackberries.
Thursday, May 29, 2008
Consider the following: Since January 2007, global crude oil prices have risen by 109%; gasoline prices in the U.S. have risen by 77% (roughly apace); gasoline prices in China have risen only 9%.
Gasoline in the U.S. now sells for around $4 per gallon, but it sells for $2.49 per gallon in China. Beijing last raised domestic gasoline prices in November 2007, by 9%, and that was the first and only hike since January 2007, when crude was $87 per barrel.
Given this information, we clearly can see that artificial price controls have driven the voracious demand for oil within China. Is it sustainable though? Straszheim estimates that the Chinese government is providing $40 billion per year in subsidies to maintain cheap gasoline throughout the nation. The Chinese government is in a bit of a quandary though. Inflation has hit 8% in China, and if the government lifts the price controls on gasoline, it will rise substantially - moving well into double digits perhaps. How will the Chinese economic growth engine be affected if inflation gets uncomfortably higher? Meanwhile, we have to remember that China is the second biggest consumer of oil in the world. If prices rise substantially, how much will that curtail demand in that nation? A correction in the Chinese domestic market could stem the rapid increase in the global price of oil that we have been experiencing.
Wednesday, May 28, 2008
Tuesday, May 27, 2008
Meanwhile, at Anheuser Busch, the firm faces a hostile bid for a few reasons. First, the firm has struggled recently with a substantial change in consumer tastes in US. Consumers are buying more craft brews or imports when they drink beer, but the bigger problem is that they are substituting spirits and wine for beer. Spirits has grown with the innovations in that market in recent years (pre-mixed drinks, flavored spirits, etc.) Wine has grown with the continuing efforts to educate the public about the health benefits of wine, as well as with the branding efforts of major wineries. Second, Anheuser Busch is highly reliant on the North American market. They have not been able to expand successfully in many parts of the world. Thus, as American consumers have shifted away from beer, they have been quite vulnerable.
In general, the large brewers find themselves fighting for share in mature markets, and looking for growth in emerging markets. It's not surprising to see consolidation given the slower overall industry growth. The interesting question is whether further consolidation will yield the benefits that firms have seen to this point. How big is big enough?
In addition, the question is what will happen to diversified alcoholic beverage firms that own beer businesses. Will a firm such as Diageo, which is largely a spirits company, keep a hold of Guinness - its prime beer brand - in the face of beer industry consolidation? Will Foster's Group keep its beer businesses now that it's primarily a wine company (it owns Beringer's, Wolf Blass, Lindeman's, etc.)? Will these companies focus on wine and spirits and move out of beer? Or, will we see beer companies increasingly expand into wine and spirits to deal with the declining consumption of beer in some countries such as the US?
Thursday, May 22, 2008
What can firms do about this problem? Companies may want to consider the benefits of shrinking in the short term, and then recharging growth from that smaller platform. I mean more than simply selling off underperforming businesses from time to time, or disposing of unrelated units. I mean actually purposefully shrinking the scope of the corporation, even if certain businesses are related and performing fairly well - simply for the purpose of bringing the corporation back to a more manageable size, solidifying the firm's financial position, and returning a chunk of cash to shareholders.
Have firms done this in the past? Let's take General Dynamics, for example. Back in the early 1990s, General Dynamics was a Fortune 50 company, almost entirely focused on defense (with the exception of a few small businesses, such as its Cessna aircraft unit). In 1991, the firm had $10 billion in revenue, putting it 48th on the Fortune 500 list. The company, however, was not performing well at all. Moreover, its prospects did not appear bright, given the fall of the Berlin Wall and the demise of the Soviet Union, which brought about defense spending cuts.
During Bill Anders' term as CEO, he shrunk the company dramatically. I remember it quite well, because I was working at the company at the time. By 1995, the company had $3.7 billion in revenue, and it was ranked 307th on the Fortune 500 list. Anders didn't simply sell underperforming assets, nor did he sell off only noncore businesses. For instance, Anders sold the company's fighter jet unit, which produced F-16s for the U.S. Air Force. That business was considered by many to be "the crown jewel" of the company at the time - a solid business that was clearly related to the firm's other defense units. By the time Anders was done shrinking the company, General Dynamics was a far smaller firm. The firm focused entirely on two major businesses - shipbuilding and land combat systems.
What happened next? Starting in 1995, Anders' successor begin growing the business once again through a careful acquisition program - focusing first on the two major platforms remaining after the reorganization, and then gradually adding two other lines of business. General Dynamics begin by acquiring Bath Iron Works, a firm that fit nicely with the company's shipbuilding business (it already produced submarines at its Electric Boat subsidiary). Today, General Dynamics is 87th on the Fortune 500 list, with $27 billion in revenue.
During the intervening years, the company has produced an incredible amount of value for shareholders since the early 1990s. During Anders' time, the company sold off businesses and returned much of that cash to shareholders in the form of stock buybacks and special dividends. Later, the company enhanced shareholder wealth by producing a steady stream of earnings growth by driving revenue gains both organically and through acquisition, and by constantly improving productivity.
What's the moral of this story? Sometimes, retrenchment and rebirth can be an effective strategy. Diseconomies of scale are real, and managers must be aware that growing $50 billion behemoths at double digit rates simply may not be feasible - at least not in a profitable manner. Moreover, charging ahead for growth at that rate and scale may lead to some very poor strategic choices. But, how many CEOs do you know that want to see their company fall from 48th on the Fortune 500 list to a 307th? Therein lies the problem in many large companies...
Wednesday, May 21, 2008
"John Glass, an analyst at Morgan Stanley, said Mr. Peltz could urge Starbucks to cut spending and use more licensing or franchising in opening locations. The money saved from that could go to buying back shares or a larger dividend for shareholders."
I can see why Mr. Glass has come to this conclusion. There is no question that licensing or franchising would reduce the capital investment required to continue to expand the Starbucks footprint around the globe, and it would free up cash to be returned to shareholders. However, Starbucks has relied on owning a majority of its locations for good reason (it does use some licensing in locations such as airports, as well as in other countries).
There's an important lesson about vertical integration here. Many firms rightfully employ franchising, because it gives local entrepreneurs great incentive as they run their own businesses. Moreover, it conserves capital. However, a company tends to own its own retail locations when they have concerns about controlling the experience, atmosphere, and customer interaction that takes place. Starbucks sells much more than coffee.
Some firms with premium differentiated strategies face challenges when they try to write into contracts the specific behaviors and atmosphere that they want to create and stimulate in their stores. Thus, one can see why these firms tilt toward owning their retail locations. Take Apple, for example, which operates its own retail stores; the retail location is about the entire Apple experience, not just selling computers and iPods. Apple doesn't want to leave that responsibility for guarding the brand, the relationship, and the experience to a licensee. Similarly, a Starbucks location is supposed to be about much more than selling coffee. It entrusts that relationship and experience to others at some peril.
If you examine what Schultz has done since returning as CEO, he's focused extensively on the Starbucks experience within their stores. He has always talked about the importance of Starbucks as a "third place" - outside of home and office. Shifting dramatically in the direction of franchising and licensing would seem to be at odds with his strategic direction. Starbucks would not have full control over the quality and the experience if they don't own these retail locations.