Recessions and Differentiation Strategies

Eac day brings news of slowing economic growth. Moroever, we see many retailers reporting disappointing earnings and/or slicing their outlook for the year ahead. These reports raise an interesting question. How should retailers with a differentiation strategy react during a recession? By differentiation, I mean retailers who try to create better-than-average willingness to pay on the part of their customers, thus enabling them to charge premium prices. Limited Brands, for instance, employs a differentiation strategy in its businesses such as Victoria's Secret. Meanwhile, TJX tends to employ a low cost strategy in its businesses such as Marshall's.

The challenge during a recession is that many differentiated players may suffer larger declines in sales than low cost players, as budget-conscious shoppers flock to outlets that offer rock-bottom prices. My view is that differentiated retailers must be very careful during recessionary periods. The natural inclination might be to slash prices to retain customers during sluggish economic times. However, lower prices means lower margins, unless the retailer can also reduce costs. Herein lies the problem. If differentiated players are not careful in their cost reduction efforts, they may damage their brand, quality, and market reputation - thus compromising their position in the market and their ability to return to premium pricing in the future. Thus, the differentiated players in the retail sector have to be very careful, as efforts to shore up their financials during a recession can have long term detrimental effects that persist long after robust economic growth resumes.

New Strategies for the TV Networks

The Wall Street Journal reports today that the major broadcast networks are considering doing away with some age-old conventions of the television business in an attempt to entice viewers and advertisers back after the lengthy writers' strike. Well, it's about time!!! I've wondered for many years now why the broadcast networks have adhered to certain conventions, while their ratings have deteriorated. It's seems a classic case of a business being caught in a particular mental model, and not able to shake those basic assumptions while the world around them is changing dramatically.

Here are some questions that all the networks should consider: Why should most new shows premiere in September? Why must the season run from September to May for most shows? Why should nearly every series air episodes once per week? Why not have some series that run episodes in a more condensed fashion, perhaps with 2-3 episodes per week for a few months? Why not create an event, some hoopla, out of the testing of new pilots, perhaps creating a 2-3 day block several times per year filled with a whole array of pilots? Why not couple that with a huge web-based effort to collect feedback about those pilots? We could go on and on... this is clearly a business that needs to be re-tooled, and that begins with shaking the old conventions. I'm glad to hear some executives are beginning to question the conventional wisdom in the business.

Selling the Chicago Cubs

The Wall Street Journal has a story today on page B1 about Sam Zell's attempt to sell the Chicago Cubs. Apparently, Zell would like to sell the Cubs and Wrigley Field separately to different buyers. The paper reports that Zell is exploring the sale of the ballpark to a state agency in Illinois, while seeking a private buyer for the team. The paper also reports that "most observers believe he will make more money" by selling the two entities separately.

I wonder about this conclusion. Strong arguments can be made that, in fact, it makes more sense for the Cubs to remain a vertically integrated organization - with both the team and the ballpark sitting under one corporate umbrella. When we think about vertical integration, scholars tend to think about transaction costs, i.e. the costs associated with contracting and coordination between two parties. Some would argue that the transaction costs associated with the team and the ballpark trying to cooperate as separate entities exceed the transaction costs associated with that same cooperation if the two entities were part of the same corporation, with the same owner.

What drives transaction costs? Well, scholars like to think about what they call "transaction-specific assets." An example of a transaction-specific asset would be if a supplier had to invest in specialized technology in order to manufacture components for one of its customers. In that scenario, the two parties can become beholden to one another. The opportunity exists for what economists call "holdup" i.e. one party can try to renege on obligations and perhaps try to extract additional value from the other party. In that type of situation, we tend to see vertical integration arise, i.e. the customer merges with the supplier.

In this case, I think that there may be a high degree of asset specificity... to put it simply, the Cubs are closely linked to Wrigley; it's highly unlikely that the Cubs will have the option to play anywhere else in the foreseeable future. Thus, I think the potential for holdup and opportunitistic behavior exists if the two entities are owned separately and trying to negotiate contracts to cooperate with one another. I think that transaction costs associated with coordination and cooperation might be lower if the team and ballpark are owned by the same corporate parent.

Save the planet AND make money

Gary Hirshberg, CEO and founder of Stonyfield Farms, has a great new book about how his company has managed to become very profitable, while adhering to "green" environmental practices and principles. Stonyfield is quite a company; they generate $300 million in annual revenue, and have become the world's largest organic yogurt producer. Hirshberg's book offers practical advice for managers by detailing the specific ways in which his firm has managed to increase revenue and profits, while also promoting sustainable environmental practices. I'm looking forward to hear Hirshberg talk about his book when he visits our campus here at Bryant University on March 19th.

Yahoo in Play

With Microsoft's unsolicited bid for Yahoo, it's now clear that Yahoo is in play. It's likely that other offers will follow, particularly with Google now poised to perhaps help Yahoo find a white knight. My guess is that Yahoo's board and management will try to raise the selling price by attracting other bidders, recognizing that shareholders will not accept a rejection of the bid and maintenance of the status quo.

One key question is: Can Yahoo find a bidder whose culture represents a better fit than Microsoft? Cultural mismatch represents a key hurdle in many acquisition integration efforts, and it surely would be an obstacle if Microsoft purchases Yahoo. Perhaps another company could provide a better match.

Alternatively, we could see a bid by a firm such as News Corporation. Murdoch has a reputation for allowing each of his businesses to run fairly autonomously, though he intervenes selectively on key strategic choices. Perhaps Yahoo's board and management would conclude that they can live with a takeover by News Corporation, because those top managers who remain would maintain some autonomy, rather than facing full integration with other News Corp businesses.