The Anti-Mainstream Brand

This fun article about the resurgence of Pabst Blue Ribbon beer, over on Fortune's website, provides a vivid example of how a small brand can be successful by positioning itself as anti-mainstream, directly in opposition to the values of the market leaders.

Pabst sales have risen by approximately 30% this year. Fortune writer Beth Kowitt writes that, "But the lagging economy isn't the only thing energizing PBR. The brand has also cultivated a reputation as a hipster, offbeat beer -- or what the president of the National Beer Wholesalers Association, Craig Purser, likes to call "retro chic" -- positioning itself as an alternative to big, mainstream brands."

Interestingly, the new brand positioning did not emerge from the Pabst marketing team's minds. Instead, they noticed a surge in sales in Portland, Oregon. Upon visiting the city, they learned that Pabst had found a loyal following among the members of the hipster, music crowd. A new brand positioning was born! Customers drink Pabst specifically because it is not Budweiser, and because it does not market itself the way that those mainstream brands do. It seems to me that many other smaller brands in other markets have an opportunity to position themselves as anti-mainstream, or anti-market leader in their image and values. One way to start understanding how to cultivate that image might be to look closely at a particular area where a small brand seems to be having local success, as Pabst marketers did.

Splitting Chairman-CEO Role

Senator Charles Schumer has proposed mandating that public companies split the role of Chairman and CEO. Dennis Carey, a partner at executive search firm Korn Ferry, argues in the Wall Street Journal that such legislation would not be productive. Carey raises some interesting points, and I do agree that government should not be legislating any such change. However, I do not think that citing successful situations such as those at IBM or Proctor and Gamble necessarily provides a compelling argument for not splitting the role. One could easily cite plenty of counterexamples of firms where perhaps splitting the role would be beneficial. We have seen too many examples of all-powerful Chairman/CEOs who have had boards effectively in their back pocket.

What Carey hints at but does not address specifically is that, fundamentally, corporate governance will not improve simply by making structural or legal changes in the way Boards operate. Companies need to focus on the dynamics in the boardroom and the process of monitoring and control. In the end, the quality of the dialogue in the boardroom will drive performance more so than any structural change.

Meaningful Work

In the 1970s, scholars Richard Hackman and Greg Oldham developed their job design model, in which they argued, among other things, that people will exhibit high degrees of internal motivation if they believe they are performing meaningful work. In this article on the Business Week website, Nick Tasler argues that making the meaning of work more clear to employees can be a very effective, low cost mechanism for enhancing organizational performance. For instance, Tasler describes how Volvo encourages customers and employees to share stories of how people avoided serious injury in a car crash thanks to the automaker's safety features. Similarly, Medtronic invites customers to corporate meetings to share their stories of how the firm's medical devices saved their lives.

Tasler's article cites the research of Wharton Professor Adam Grant in this area. Here is an excerpt from the Business Week column:

"According to research by Adam Grant, an associate professor of management at the Wharton School, making this connection doesn't just improve morale. It also has a huge impact on the bottom line. Grant has discovered that when people get to meet a living, breathing person who benefits from their work, their job performance skyrockets. In one study, Grant found that university fund-raisers who listened to a scholarship recipient tell how the assistance had benefited him increased by 200% the number of weekly calls they made to potential donors. The average amount of funds they brought in jumped 500%, from $400 per week to more than $2,000 per week.

That's an impressive increase in performance by any standard. It's especially so when you consider what did not happen to create the surge in productivity. The callers were not offered a raise. They did not go through extra training to sharpen their interpersonal skills or persuasion techniques. Their managers did not receive extra training on how to be more charismatic or transformational. It required no internal branding effort to communicate a newer, more inspiring vision. The only expense incurred by the organization—time or money—for this dramatic increase in productivity was the 10 minutes of time that fund-raisers spent listening to the beneficiary of their work."

As I read this article, I was reminded of a visit that I paid to Edwards Lifesciences several years ago in southern California. Edwards Lifesciences produces heart valves. The company executives explained that they occasionally brought customers in to meet the person who had worked on their actual valve replacement. These meetings often proved remarkably emotional, incredibly inspiring, and of course, motivational to all. Executives credited these types of efforts to demonstrate the meaning of the work with helping to create an incredibly dedicated workforce which also exhibited remarkably low turnover.

Your Next Move

My friend and former HBS colleague Michael Watkins has a new book out titled Your Next Move. In this follow-up to his best-seller, The First 90 Days, Michael has identified eight typical career moves that managers make in their careers. He explores the challenges one faces with each type of move, and then offers sound, practical advice for how to navigate the pitfalls a manager is likely to encounter during that transition. Michael grounds his work in extensive field research, as well as his consulting work with thousands of managers around the globe. I think every manager ready to navigate a career transition will find this book insightful and useful.

Technology that Harms the Consumer Experience

In the past year, Bank of America has introduced new ATM technology. Instead of depositing checks in an envelope, you insert checks directly into the ATM. The machine scans the check and reads the amount, and then it completes the deposit. Sounds great, right? Well, the technology certainly has promise, but I find that it actually worsens the consumer experience if you have multiple checks to deposit. The process becomes considerably slower than the old envelope method if you are trying to deposit three or four checks. Moreover, it becomes very tedious if the scanning technology fails to read the check amount properly. In that case, if you have forgotten the precise amount of the check you wish to deposit, you face a very frustrating further slowdown.

I raise this example not to bash Bank of America. The technology clearly has great promise. However, Bank of America's ATM provides a vivid example of a company rolling out a new technology that has great benefits for the bank, but actually has some serious negatives for the customer. The bank is not alone. Many companies do this, focusing on how a technology can improve efficiency or accuracy for the firm, without understanding how it may hurt a critical feature of the user experience (in this case, speed).

Best Business Books of 2009

Thank you to Leadership Now's blog for naming my book - Know What You Don't Know - one of this year's best leadership books!

Research on Social Networking

In this article on the HBS Working Knowledge site, Professor Mikolaj Piskorski explains his research on social networking, including some interesting findings regarding the demographics of MySpace vs. Facebook users, gender differences in the use of social networking, and how Twitter usage patterns differ from other platforms.

Making Tech Complex but not Frustrating

My former HBS colleague Andy McAfee has a great column at Forbes.com about how companies such as Apple, Amazon, and Google have been able to enhance their technologies and make them more complex without frustrating consumers. McAfee focuses on four key principles:

1. Evolve, don't upgrade: Focus on making a series of smaller incremental improvements rather than major upgrades that can be disconcerting and confusing to users.

2. Keep the core interface constant: Think about the consistency of the Amazon's website or Apple's iPod interface.

3. Don't even talk about it: Let the consumers discover the enhancements on their own.

4. Let the users opt in: Provide new features that are optional for the consumer, and that the customer can begin to use as they become comfortable with these technological changes. Think about the App Store from Apple.

By the way, if you are not familiar with Andy's work, I highly suggest that you check out his blog.

Helping a friend who's been laid-off

Keith Murray offers advice to anyone who has a friend who's been laid-off over on his blog. It's a terrific post, particularly as we approach the Christmas holiday.

100 Day Plans

This article at Fortune.com describes the culture and management practices at a small boutique innovation consulting firm in NYC called Fahrenheit 212. While much of what is described may only be applicable in a start-up environment, the "100 Day Plans" that the firm employs seem quite interesting and more broadly applicable. Writer Nadira Hira explains:

"Every 100 days, everyone gets together, locks the doors, ditches the cell phones, and sits down to a company-wide strategy session. Together, they set the company's goals for the next 100 days. And they go around the table to hear how each staffer -- execs included -- did on his personal deliverables over the last 100 days. They ask each other questions, weigh in with their own perspectives on their colleagues' work, and do lots of ribbing, reflecting, and cheering. And if the fear of being embarrassed in front of rowdy colleagues weren't enough, staffers work directly with their managers to lay out their individual plans for the next 100 days and actually grade themselves on their last 100-day plan -- and at the end of the year, the scores are added up to help determine incentive bonuses and future compensation."

Why do I love this practice? First, it moves away from strategic planning as an annual exercise that's more about creating piles of documents than it is about candid dialogue. In a fast-moving world, it seems much more appropriate to revisit the strategy every three months or so, and to do so via a vigorous open dialogue as opposed to "death by Powerpoint." Second, this 100 days exercise creates a powerful sense of accountability, with people being held responsible by their peers, not just their bosses. Third, the process promotes transparency, which ultimately has many positive effects. Finally, the meetings provide opportunities for prompt feedback, giving people time to engage in corrective action as they work on projects... rather than waiting until a year has passed and the project is complete before hearing any formal feedback.

Are you a micromanager?

The Wall Street Journal has an article today about CEOs getting into the weeds much more during this downturn. While the article explains why leaders feel the need to be more hands-on at this tumultous time, it also cites the risk of micromanagement. This leads to the question: how do you know if you are micromanaging with possible negative consequences? Here are three signs:

1. You begin to find many decisions being kicked up to you on issues you feel do not belong on your desk... A sign that people may be afraid to make decisions on their own.

2. Your schedule becomes increasingly crowded with meetings at which you are being asked to essentially validate decisions made at lower levels, or to review numerous minor status update meetings on projects.

3. People seem to wait for you to express your opinion before offering ideas at meetings. That sign is most dangerous of all. It shows that folks are afraid to speak up and are waiting for a cue from you rather than offering original and creative thoughts without fear of repurcussions.

Tired of Boring Training Sessions

Nearly all employees have taken part in mandatory training that they found boring, repetitive, and difficult to apply to their daily work. In this column in Fast Company, Chip and Dan Heath explain how one technology consulting firm created a highly engaging ethics training video. This firm created a fictional TV series, patterned after the popular NBC hit The Office. The series profiled a variety of ethical transgressions in hilarious fashion. Employees clamored for more, as they enjoyed it so much! Check out the video below:

Aggrieva Season 1, Episode 6 from Resonate Pictures on Vimeo.

Keynes vs. Hayek

Listening to vs. Understanding Your Customers

Michael Norton, assistant professor of marketing at Harvard Business School, has published a case study about elBulli, a unique and incredibly popular restaurant in Spain. In this article discussing the case, Norton makes an interesting distinction between listening to customers vs. understanding them. Norton explains the chef/owner's thinking: "Adrià's idea is that if you listen to customers, what they tell you they want will be based on something they already know," Norton observes. "If I like a good steak, you can serve that to me, and I'll enjoy it. But it will never be a once-in-a-lifetime experience. To create those experiences, you almost can't listen to the customer."

Congress and the Auto Dealers

Here we go again! As many predicted, Congress cannot help but meddle in the auto industry, particularly given the government ownership stakes. Alex Taylor of Fortune writes:

"Last week, House and Senate leaders agreed to a proposal to give the right of arbitration to terminated GM and Chrysler dealers, which are said to number more than 2,000. In other words, Congress, after complaining that the two companies don't know how to make a profit, is imposing a new requirement that will make it more difficult for them to make a profit."ress

Dealer rationalization must occur for the American automakers to turn the corner toward a sustainable profit-generating business model. No one with any sense of how businesses and markets work would argue otherwise.

The Design of Business

I just finished reading Roger Martin's new book, The Design of Business: Why Design Thinking is the Next Competitive Advantage. Martin, the Dean of Toronto's Rotman School of Business, has become a thought leader in the area of how design thinking can be applied to business, and I enjoyed his prior work on the "opposable mind." I think this book does a nice job of highlighting the power of what Martin calls "abductive thinking" - while also exposing the dangers of over-emphasizing reliability in organizations at the expense of exploratory, creative work. The book, however, has one substantial weakness. Martin fails to actually take the time to explain to the reader how designers do their work. As a result, the discussion of design thinking remains rather abstract and conceptual. It would have been helpful to walk the reader through the design process, and THEN show how that process has application to the broader field of business.

Why We Buy

I am thoroughly enjoying the book, Why We Buy: The Science of Shopping by Paco Underhill. The author explains how his firm has mastered the power of observation to understand how shoppers behave and how retailers can use that understanding to drive sales. Every retailer, large and small, should read this book. I especially love ideas such as the "butt-brush" effect - the idea that customers don't like being jostled from behind as they shop. I also like the "decompression zone" - the idea that customers make a transition as the enter a store, and they often walk right past signs and other materials in this decompression zone. The book has many more interesting conclusions based on intense observation over many years. It's a great read for consumers too; you will never think about shopping the same way again.

Colbert on the Federal Reserve

With thanks to Greg Mankiw, on whose blog I discovered this great clip from the incomparable Colbert:

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Fed's Dead
www.colbertnation.com
Colbert Report Full Episodes Political Humor U.S. Speedskating

Restructuring at Talbots

Talbots announced a complex financial restructuring this week, along with news that the company had returned to profitability. The earnings report provided an unexpected surprise to Wall Street analysts.

What has Talbots accomplished with its recent restructuring? First, the divestiture and shutdown of non-core assets and unsuccessful diversification plays has left Talbots more streamlined and focused on its core women's apparel business. Second, the financial transaction announced this week enabled Japanese retailer Aeon to divest its stake in Talbots, and it reduced Talbots' leverage substantially. As a result, the company finds itself with a stronger balance sheet. Moving forward, it has secured a credit facility from GE Capital to help it finance future growth plans. Third, the earnings report indicates substantial progress toward streamlining the company's cost structure. All these moves position Talbots more securely as they prepare for what is hopefully a stronger economy in the year ahead.

What still troubles us about this once-great company? Well, Talbots reported a same-store sales decline of 15.9%. That's a huge decline. If the company cannot reverse that steep decline, then all these financial maneuvers will be for naught. Ultimately, Talbots has to find a way to walk a tight rope... specifically, it must continue to freshen its image and product line while not alienating its traditional demographic. The company has always faced an interesting question: to what extent should it try to appeal to younger women? In my view, a laser focus on women 35 and older probably has merit. Trying to be all things to all people surely will lead to disaster. Having said that, the company has to find a way to adjust to the fact that the 35 and older demographic looks like quite different than it did a decade ago. That target market's wants and needs have changed, and the company must find a way to adapt to those changes without alienating long-time, loyal customers.

Behaving at the Office Holiday Party

Susan Adams at Forbes writes a column on how not to behave at the office party. The photos are hilarious.

Virtual Teams

Anne Fisher of Fortune has a very good article on making virtual teams more effective at IBM. In addition to the points that Fisher makes, managers should consider what I call the "three Rs" of successful virtual teams.

First, what are the ground RULES by which the teams will operate? How will they communicate with one another? What are the shared norms of behavior? What will be expected of folks in terms of availability, response times, etc.?

Second, what are the ROLES of each team member? Making sure each person has a clearly defined role can be especially critical for a virtual team.

Finally, what are the RESPONSIBILITIES of each member? How is the task divided among the members? What are the interim deliverables? One challenge with any team is the diffusion of responsibility: when everyone is responsible, no one is responsible. Making sure accountability is clear proves especially critical with virtual teams.

Should Film Studios Acquire Videogame Companies?

Breakingviews.com has a short piece over at Fortune.com about whether film studios should acquire video game makers. Rolfe Winkler and Rob Cox write that:

The argument for entertainment companies buying video-game makers is compelling. Publishing video games is like making movies: Invest millions developing titles and pray for blockbusters... These larger groups could lay claim to content and corporate synergies that offset the volatility in performance of the film business.

I do think a strong argument exists for film companies acquiring video game makers. Disney owns a film studio and a theme park, thereby leveraging a common resource - i.e. its characters. Similarly, it could leverage characters developed in its film studio into the video game business as well. Some arguments can be made that integration makes sense, as opposed to always relying on licensing arrangements.

However, offsetting volatility is NOT a valid argument for acquiring video game firms. That argument smacks of the classic arguments for conglomerates, i.e. diversification of risk. Shareholders can diversify on their own; they don't need firms to do this for them.

Compensation Committees

James Citrin of Spencer Stuart, the executive search firm, offers an interesting suggestion for how we can restructure the work of the compensation committees on a firm's Board of Directors. Citrin advocates broadening the mandate of the committee to include not only pay issues, but also leadership development and succession.

Public Speaking Myths

Every executive should take into consideration these three myths about public speaking, outlined by Nick Morgan over at Forbes.com

Southwest Airlines - Linda Rutherford

Linda Rutherford, an executive at Southwest Airlines, spoke at Bryant University this morning. She delivered a terrific presentation, with particular focus on the airline's culture. Rutherford explained that Southwest puts people first, customers second, and shareholders third - a unique way of thinking about how cultivating the right work environment can lead to great benefits for customers and investors.

She also explained how the Golden Rule sits at the heart of the company culture; everyone is reminded that the Golden Rule should permeate all decision-making and interactions with internal and external customers.

Finally, Rutherford offered some great insights into how Southwest hires. She noted that they hire for attitude, though they do not use personality tests. They also use a 3x3x3 rule: at least 3 interviews, with 3 different people, at 3 different times of day. I thought the last part was particularly intriguing - Rutherford explained that people are different at various points in the day, and Southwest wanted to see how people interacted in early morning, mid-day, and late in the day. All in all, I learned a great deal from this presentation about a company that truly stands out in an industry which has incredibly low profitability overall.

Luxury Ate My Morals

From the Ideas Section of the Boston Sunday Globe:

Luxury ate my morals

IF POWER corrupts, then what does luxury do? In a new study, business school researchers fi nd that it doesn't take much for luxury to do its thing. Students reviewed pictures of either luxury or nonluxury shoes and watches. Later, they were asked to evaluate several business scenarios from the perspective of a CEO. Students who had been exposed to the luxury items were significantly more willing to produce a polluting car, sell buggy software, and sell a violence-inducing video game. In addition, these students were also less likely to identify prosocial words in a letter scramble. In other words, priming people with luxury makes them more selfish. The authors wonder if managers make different decisions "at a luxury resort as opposed to a modest conference room."

Chua, R. & Zou, X., "The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making," Harvard University (November 2009).

Final Round: Classics for Leaders

Two final books to profile: Made to Stick by the Heath brothers and Influence: The Psychology of Persuasion by Robert Cialdini. Every leader must be able to influence and persuade others. Richard Neustadt once wrote that even US Presidents cannot get things done merely by giving orders. That goes for military generals too. Historian Stephen Ambrose wrote that Eisenhower knew he could not succeed in leading the Alkied forces by being a table thumper. He needed to persuade many people on both sides of the Atlantic, and he needed buy-in. These two books really help us learn how to exercise influence and how to present our ideas in ways that have a lasting impact.

Round 4 Classic Books for Leaders

Today we feature two classics on negotiation and conflict resolution: Getting to Yes by Roger Fisher and William Ury, and Ury's complementary book - Getting Past No. Every leader must negotiate with external parties, but also with colleagues and subordinates. The ability to resolve disputes is essential for a leader. These books provide sound, practical advice rooted in extensive scholarship over many years. One example of the terrific advice: Focus on interests, not positions when a dispute emerges. In so doing, you can often discover mutual potential gains rather than remaining stuck in a zero sum game mentality.

Fresh Blood at GM?

Fritz Henderson resigned at General Motors yesterday. Will we finally see fresh blood at GM? Several months ago, I ran a post in which I calculated the average tenure at GM for the top management team, based on data found in Fortune magazine. The average tenure at the firm was 28.5 years! Since that time, two members of the top team have resigned: Fritz Henderson and Mark LaNeve, VP of US Sales. Henderson was replaced by the Chairman of the Board, while LaNeve was replaced by Susan Docherty. You would think that this should dramatically reduce the average tenure. However, it has not. LaNeve had only been at GM for 8 years, while his replacement has been there for 24 years. Thus, with these two changes, and even though Whitacre has zero years of tenure at GM, the average tenure of the top team members remains 27.1 years. Fresh blood? Not much. 77 year old Bob Lutz has the lowest tenure at GM of anyone other than Whitacre!

Round Three: Classic Leadership Books

Today, I would like to highlight two classics written decades ago. In 1962, the preeminent business historian Alfred Chandler, Jr. published Strategy and Structure: Chapters in the History of American Industrial Enterprise. He examined four companies in great depth: DuPont, General Motors, Standard Oil of NJ, and Sears. Chandler traced the evolution of the administrative structure of large American companies, and he argued that "different organizational forms result from different types of growth." Simply put, structure follows strategy. Of course, over time, many strategy scholars and consultants turned this descriptive observation into a normative statement: strategy should drive structure. Chandler's book proves to be quite profound because it shows us the challenges and weaknesses associated with various organizational forms, and it demonstrates that structure must be dynamic, adjusting to the market realities and the changing strategic objectives of the firm. At the same time, you can see that there is no "perfect" structure for a company; all organizational forms have their weaknesses.

Joseph Bower published his book, Managing the Resource Allocation Process, in 1970. In that book, Bower examined how companies make capital investment decisions. He provided great insight into how firms actually allocate resources; he demonstrated how the financial analysis is just a small part of the picture. He also showed how many new strategies emerge from below in organizations. Most importantly, he demonstrated how structure drives strategy at times in corporations - providing a great complement to the arguments put forth by Chandler. Bower defined structural context as more than just reporting relationships. It included the monitoring and control systems, as well as rewards and punishments, that a firm puts in place. He argued that the structural context shaped the types of investment proposals that emerged in organizations. In that way, structure shaped the evolution of strategy. Senior executives, thus, had to take great care in how they shaped the structural context, not only in terms of how it fit the current strategy, but in terms of how it might affect the emergence of new ideas, adaptations, and innovations over time.

Round 2: Classic Leadership Books

In today's post, I'm focusing on two more complementary classics that every leader should go back and read. Today's books: Victims of Groupthink and The Wisdom of Crowds.

In The Wisdom of Crowds, by James Surowiecki examines how "none of us is as smart as all of us." He shows us how and why the pooling of our collective intellect can lead to much better conclusions and decisions. For instance, he starts the book with the example of the game show, Who Wants to be a Millionaire? He tells us that, when contestants ask the audience to vote, the answer with the most votes is the correct one a whopping 91% of the time. Surowiecki explains how various forms of mass collaboration, including prediction markets and open innovation efforts, capitalize on the wisdom of crowds. Of course, he also points out that the collective wisdom only materializes if "independence" exists among the parties contributing in the process. In other words, once we put people in a group where social influence processes can unfold, then we are not always able to achieve such collective wisdom. Put people in a conference room and allow group dynamics to unfold, and suddenly, collective wisdom turns to faulty logic. That point leads us nicely back to another management classic by Irving Janis.

Janis wrote the book, Victims of Groupthink, back in 1972. The term groupthink soon became part of the management lexicon around the world. Janis examined a series of very important presidential decisions, and he showed how a very smart, well-intentioned, and capable group of people can sometimes make poor decisions because of pressures for conformity that arise within teams. In short, he showed how and why we sometimes "go along to get along" in groups. His theory offered an explanation of how group cohesiveness can sometimes become unproductive, leading to a premature convergence on a single alternative, self-censorship on the part of many members, and direct pressure on those trying to put forth dissenting views. His classic fiasco was the Bay of Pigs, and he then offered the Cuban Missile Crisis as a contrasting positive example of how a group can combat groupthink effectively. Janis' theory and examples show us how and why many groups do not achieve their potential, i.e. why we often do not marshal and integrate the intellect of team members in a way that produces true collective wisdom.

Classic Must-Read Books for All Leaders

This week, I plan on profiling classic books that every leader should take the time to go back and read. Actually, I'm going to feature a pair of books each day, focusing on books that complement one another well or provide for an interesting contrast in viewpoints on leadership and strategy.

For today, the books are Michael Porter's classics on strategic management. In 1980, Porter published the classic book, Competitive Strategy. While tons of books have been published in this field over the past three decades, this book remains the foundation of a vast amount of thinking on strategy. The "five forces" framework became ubiquitous and continues to be a great starting point for any strategic analysis. In 1985, Porter followed up his earlier work with Competitive Advantage, a book that introduced the world to the concept of generic strategies. Porter argued that firms must choose between differentiation and low cost strategies, and that attempts to straddle both positions can lead to being "stuck in the middle" with no clear competitive advantage. Porter argued too for the importance of making trade-offs, rather than trying to be all things for all people.

Everyone should take the time to return to this seminal work from time to time, to recall the critical lessons that Porter offered regarding how to analyze a company's competitive landscape, craft a distinctive position, and create and sustain competitive advantage. His simple and clear frameworks provide a very useful starting point, even today, for any leader trying to assess his firm's competitive position and formulate a strategy for the future. Many have argued against Porter's ideas over years, but in many ways, these efforts prove the value of these classic works. When volumes have been written attempting to contrast new ideas with your original arguments, you know that you have penned a classic must-read for all leaders.

Comp the Retail Sales Force

Jeff Lubel, founder of True Religion jeans, spoke to Fortune magazine recently about the lessons that he learned building his company. I thought that this particular lesson was important to emphasize:

Comp the sales staff.

I went to Fred Segal on Melrose and showed the jeans to a guy who was running the jeans bar. He hated them. I knew his boss, so I showed her the line, but she said, "I don't get it. I don't think my customer is going to get it." It took me an hour to wear her down, but she finally took 24 pairs. A month went by, and I went back, and they'd only sold two pairs. I asked the sales guy if I could give him a pair free. He and the other workers came out to my truck and I gave them the jeans. Four days later I went back and couldn't find my jeans. I asked where they were, and he said, "People would come in and ask, 'What are those that you're wearing? I want those.'" They sold out.

My students have been working with a specialty food company on a project for the past few months. We have heard the same thing from that company's president. In his case, it's not about being seen with the firm's product. By giving free product to employees at retailers, this specialty food company has created a force of knowledgeable ambassadors for their product. They understand the product - its flavors, ingredients, and the like - and can speak with customers about its distinctiveness. That store level conversation with customers proves priceless, and it's a far less expensive form of promotion than advertising, sales, and the like.

Cutting Your Losses

My new article about "cutting your losses" has just appeared in the Ivey Business Journal. The article tries to offer some practical advice for how leaders can avoid the so-called "sunk cost trap" in their decision-making. Here is an excerpt:

In a highly volatile world, leaders cannot keep marching in the same direction simply because they have invested heavily in a particular course of action. Instead, leaders must react to changing conditions and be willing to shift direction accordingly, perhaps even to pivot one hundred eighty degrees if the situation warrants it. In a turbulent environment, leaders must gather feedback from multiple voices and assess progress against their original goals and objectives on a regular basis. As negative feedback emerges, or external conditions change, successful leaders learn and adapt. Unfortunately, far too many leaders stick to outdated strategies for far too long. Why do they fail to adapt? In part, many leaders do not want to “waste” the time and money that they have already spent. Thus, they keep plowing ahead despite all the changes taking place in their environment. Rather than cutting their losses and changing course, they “throw good money after bad.”

Persistence can be a valuable leadership quality, perhaps even more so in a volatile environment. Sometimes, we want our leaders to push through obstacles; no one likes a quitter, as they say. However, we must be concerned if someone ignores all the advice and evidence to the contrary and continues to throw good money after bad. We certainly should be wary if an individual or a team appears to have a track record indicating a reluctance to cut their losses when projects go south. In sum, in a volatile world, perhaps we must question the extent to which our organizational cultures emphasize the value of perseverance. How much value do we destroy by making people feel as though reversing direction and cutting losses are things about which we should be ashamed? Should we not strive to create an organizational climate that makes admitting and learning from mistakes as valued as persistence and perseverance?

To read about the strategies that leaders can use to avoid the sunk cost trap, click here to read the entire article.

Does Wall Street Do God's Work?

Wow... that's a loaded title for a blog post, isn't it? Lloyd Blankfein, CEO of Goldman Sachs, apparently used the phrase "God's work" in this interview with John Arlidge of the London Times. Here is a quote from Blankfein from that article:

But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."

You can imagine many people's reaction to the phrase "God's work" used in conjunction with investment banking these days. However, John Tamny at Forbes.com offers a defense of Blankfein's comments in this article. While I think that I would have chosen a different phrase to make my point, I do agree that many people, including most journalists, do not understand the value created by bankers. They do not understand that helping entrepreneurs raise capital is one of the most critical functions in our economy.

Now, before you all recoil in horror, please understand that I'm not arguing all is right with behavior, incentives, and compensation on Wall Street. I am arguing that it's simply wrong to not recognize the social purpose achieved by those in our banking sector.

Top Ten Questions You Should Never Stop Asking

I love this column at Forbes.com by Marc Kramer of the Wharton School. The questions are fundamental, but I love the discipline of continuing to ask these questions on a routine basis.

More Great Stand-Up Economist

Cola Wars: Coke vs. Costco

For many years, at business schools throughout the world, professors have taught a case study about the "cola wars" - i.e. Coke's long-running battles with Pepsi. Actually, the case focused mostly on the structure of the carbonated soft drink industry, and it helped students understand why the industry as a whole has been wildly profitable for decades. As part of that analysis, we always discussed the utter lack of buyer power in the industry. In other words, consumers, bottlers, and retailers had very little leverage relative to Coke and Pepsi. You simply had to have these products on your shelves, often on Coke and Pepsi's terms.

The world has changed though, as the grocery channel has consolidated dramatically in the United States (and other parts of the world). We've also seen the increased dominance of mass merchandisers such as Wal-Mart, and the rise of warehouse clubs such as Costco, BJ's and Sam's Club. Now, in 2009, the retail channel appears far more powerful than it was back in the 1960s and 70s. Indeed, this week's events in the soft drink business show just how much the soft drink industry has changed. Costco announced this week that it would no longer sell Coke products, after a breakdown in negotiations between the two firms. Now, the firms will almost assuredly settle their differences. However, the very fact that Costco would make such a pronouncement appears rather startling, given that Coke and Pepsi had very little reason to worry about such manifestations of buyer power for much of their history.

Turnaround at Old Navy

The Wall Street Journal reports this morning that Old Navy, a division of Gap Inc., may be finally turning its fortunes around. According to the article, "Sales at Old Navy stores open at least a year rose 10% year-to-year in the fiscal third quarter, the first increase after 20 consecutive quarters of decline."

The article focuses mainly on Old Navy's past struggles and current strategies for revitalization. However, I believe that there's more to this story. The Gap situation strikes me as interesting corporate strategy question, i.e. is this multi-business unit corporation truly adding value to each of its units? Or, put another way, is the whole worth more than the sum of the parts? The question is interesting, because the Gap stores themselves have performed so poorly over the past decade.

For those who are not aware, Gap has three main business units: Old Navy, Gap, and Banana Republic (with each respectively representing a higher set of price points and more high-end image). To some extent, though, Gap stores has faced a challenge regarding the blurring of distinction among its brands. At times, Gap has, in some sense, been stuck in the middle between Old Navy and Banana Republic, without a clear identity of its own. That has caused some confusion in the marketplace and a degree of self-cannibalization. That problem, coupled with a series of other issues, has caused Gap's same-store sales to not fare well in recent times.

Clearly, synergies exist among the brands in the Gap corporation. However, any company trying to operate multiple brands in the same product category has to be careful about this blurring of brand identity risk. Just ask GM...

Is Your Mission Statement Dumb?

This article by Nancy Lublin at Fast Company struck a chord with me. She offers some very useful advice on how to "write a mission statement that isn't dumb." Let's face it... Most mission statements come filled with generalities and cliches. They fail to define what it is distinctive about a company. In fact, I often see mission statements that could easily pertain to a firm's direct rivals. When your mission statement is indistinguishable from your competitor's statement, you have a problem!

Here's Lublin's terrific advice on how to fix your firm's mission statement:

"Write a mission statement with a goal that's an action, not a sentiment; that is quantifiable, not nebulous. If you're trying to sell a product, how and how many? If you're trying to change lives, how and whose? Take your wonky mission statement and rip it to shreds. Then ponder your ambitions, and write and rewrite the thing until it reflects -- in real, printable words and figures -- the difference that you want to make."

Dark Side of Incentives

I don't know that I agree fully with this essay, titled "The Dark Side of Incentives," by Barry Schwartz (author of Paradox of Choice), but I do think that its thought provoking and worthy of consideration. I recommend taking a look.

Sara Lee: Unwinding a Conglomerate

Slowly but surely, the break-up of Sara Lee continues. Today, we learned that S.C. Johnson is bidding for Sara Lee's air freshener business, a unit that Proctor and Gamble had already expressed interest in acquiring.

Interestingly, the break-up of Sara Lee stretches back a full decade. Back in 2000, the company begin this transformation from an unrelated diversified firm to a more focused company. In 2000, Sara Lee divested units such as Coach, Champion Europe, PYA/Monarch, and its international bakery businesses in France, India, China and the U.K. This transformation accelerated when Brenda Barnes became CEO in 2005. Since that time, the firm has divested many businesses including the spin-off of its branded apparel business into a separate, publicly traded company called Hanesbrands.

Of course, I've noted before that the logic of unrelated diversification should be called into question in industrialized nations today. What's amazing is how long it has taken for Sara Lee to make this transformation, though the company is certainly not unique in this regard. It proves how difficult it can be for a conglomerate to leave behind its diversification strategy. At the heart of this challenge lies the fact that it can be so contentious to decide what businesses are truly related and which are not. No precise way exists to determine "relatedness" in corporate strategy; the term elicits much debate. Moreover, it can be especially contentious inside of a company, where executives have ties to a historical strategy and to particular business units in which they may have worked for many years (and which they may have even been responsible for acquiring many years earlier).

What's the lesson for executives in other firms? Contentiousness on the question of "relatedness" actually is a good thing. Top management teams ought to have a vigorous debate about what constitutes a related business. Perhaps such candid debates can prevent firms from making unwise acquisitions that have few synergies to exploit.

Apple Tablet

A day does not seem to pass without another story speculating on the "Apple Tablet" - a new multi-function device purportedly under development by Apple. The rumors swirl, in part, because Apple has so many fans who cannot wait to see what Jobs and company come up with next. The firm's history of secrecy naturally adds to the intrigue.

One can certainly argue that the rumors provide Apple with an incredible amount of free publicity in advance of a new product launch. While that does mean expectations are quite high, most firms would still die for such publicity.

Perhaps, though, another great benefit exists from this rumor mill. Maybe Apple has provided this extended period of time during which it can read about what customers would like from a new tablet-type device, as well as what early adopters and technology experts think should be incorporated into the product. In other words, perhaps this window of time represents an opportunity for something akin to mass collaboration, in which Apple is tapping into ideas, suggestions, and input from its legions of fans... and then using that to help drive the development process. No one knows for sure, but I cannot help but wonder whether Apple is watching all this speculation with great attentiveness and interest... and not just because it represents a bonanza of free pre-launch publicity.

Confirmation Bias: The Yes-Man Inside Your Head

What a great article in today's Wall Street Journal about the power of confirmation bias in our investment decisions. For more on confirmation bias, check out the classic study by Lord, Ross, L., and Lepper: "Biased Assimilation and Attitude Polarization: The effects of Prior Theories on Subsequently Considered Evidence," Journal of Personality and Social Psychology.

Intuition at Mann Gulch

For those who don't know the Mann Gulch story, here's a bit more information. When the fire "blew up" that day, the leader - Wag Dodge - yelled to his team that it was a "death trap." Everyone began to run for the ridge, but Dodge soon realized that they probably could not outrun the fire. He bent down and lit another small fire in a grassy area with a match. Then, Dodge placed a handkerchief over his mouth and lay down in the smoldering ashes. Since the grassy area quickly burned, leaving nothing but dirt, the blaze went right over Dodge - leaving him unharmed. He had deprived the forest fire of the necessary fuel. Unfortunately, none of his crewmembers joined him in that grassy area. When he yelled to them to join him, they thought he was crazy. They had never seen such a tactic. They ran for the ridge instead, and most of them did not survive.

Where did Dodge come up with this tactic? He came to an intuitive decision. No such technique had ever been used by any smokejumper. He invented it on the spot. This tragic situation highlights one of the challenges associated with intuitive decision-making. People often don't understand your thought process when you make a "gut" decision, and thus they may be unlikely to follow your lead. Leaders must take great care to explain the rationale for all their decisions, but especially those that did not involve formal analysis.

In this case, Dodge didn't even have time to explain his thinking. Thus, he needed his crew members to believe deeply in him, but they did not. He had not built the rapport and credibility with his team necessary to elicit their buy-in at this critical moment. In short, leaders need to build a reservoir of trust within their team, long before they make critical choices for which they want buy-in and cooperation.

Mann Gulch Fire

Sad news today of death of 98 year old Earl Cooley, airborne supervisor at tragic Mann Gulch forest fire of 1949. 12 smokejumpers died at that fire. Norman Maclean wrote an amazing book about that event: Young Men and Fire (1992). I wrote a Harvard case study about the fire to teach important lessons about decision making and team dynamics. I also wrote about the fire in my first book: Why Great Leaders Don't Take Yes For an Answer. The fire has so many leadership lessons. Michael Useem of Wharton also has documented some key lessons from this case. Wag Dodge led that crew that day in 1949, and while he may have exhibited sone leadership flaws, his survival is an interesting and amazing story of the power of intuition.

The Funny Case for Better Economics Education

Vertical Integration at Samsung

The Wall Street Journal has a good article today about Samsung's vertical integration strategy. By vertical integration, I mean that Samsung produces consumer electronics items, as well as many components that go into such products.

Vertical integration, of course, does pose some risks. Let's identify three key risks. First, the firm finds itself competing with its customers and/or suppliers. The article states that, "About one-third of Samsung's revenue comes from companies that compete with it in producing the TVs, cellphones, computers, printers and cameras where it gets the rest of its money." Second, vertical integration can create dulled incentives. In other words, if you produce your own components, then a high level of "guaranteed internally generated revenue" may cause the component production unit to be less efficient than it should be. Finally, vertical integration can lead to wasted time and effort associated with internal transfer price battles.

The article suggests that Samsung does face some challenges associated with competing with key customers. However, it also suggests that Samsung mitigates all three of these risks by forcing each of its businesses to clearly demonstrate that it can compete successfully in the external market. Internal and external competition seems to be key to Samsung's culture and strategy. According to the article: "People look at our businesses and see vertical integration. It really isn't," says David Steel, a Samsung senior vice president and marketing strategist. "It's a portfolio of component businesses and consumer-product businesses and, within that, we don't compromise on the idea that each business is charged with its own success." Of course, it is vertical integration, but what Mr. Steel is saying is that they treat each business as a stand-alone entity that must show it can compete effectively... no guarantees that a component production unit will be able to operate at capacity simply because the company could use all those components in finished products. The components unit must prove it's doing a better job than external players that could be suppliers to the finished product divisions at Samsung.

The Search for Talent: Lessons from the Wildcat Offense!

In the National Football League last year, the Miami Dolphins launched an innovative new offensive strategy called the Wildcat. The strategy was highly unorthodox, involving a series of formations more typical of a college team. Many coaches described it as a gimmick. However, the Dolphins enjoyed remarkable success with the strategy. They achieved an amazing turnaround after a dismal prior season. By the midpoint of this season, many NFL teams have adopted a version of the Wildcat offense. Many new variations of the offense have been invented along the way. More and more people have acknowledged that this strategy is not a gimmick.

The interesting thing is that this formation provides an opportunity to utilize the talents of players once shunned by the NFL. For many years, college quarterbacks who could run the ball effectively, but who were not traditional drop-back passers, did not achieve success in the NFL. Many did not get selected by NFL teams. Or, in many cases, NFL teams tried to force running quarterbacks to transform themselves into traditional passers, which most could not do successfully.

What's the lesson here? Companies often make the same mistake that the NFL did for years with these college quarterbacks who did not fit the usual professional archetype. Firms search for talent that fits their way of doing things, and they try to force people who have unique talents to try to adapt to fit the company's system. They seek conformity. Of course, we should primarily focus on finding talent that fits our company's strategy and culture. However, at times, companies need to be open to the idea of adapting their way of doing business to take advantage of the unique talents of employees. Rather than asking employees to change, sometimes firms need to change. They need to find new ways to utilize the great talent that they have available.

The Kleenex Story: Unintended Use

The history of Kleenex tissue offers an important lesson. Here's the story. Kimberly Clark launched its Kleenex tissue products in 1924. At the time, the company targeted adult females and marketed the product as a means of removing make-up. The first magazine ad ran in the Ladies Home Journal with the tag line: "the new secret of keeping a pretty skin as used by famous movie stars."

Several years after the launch, Kimberly-Clark's head researcher began using the tissues to blow his nose due to hay fever. He wanted the marketing folks to advertise the product for this use as well. They resisted at first. Around this same time, many customers also were using the Kleenex tissue in place of their handkerchiefs. Kimberly Clark learned about this unexpected customer behavior. Finally, in 1930, Kimberly Clark ran two ads at the same time. One focused on blowing your nose, while the other emphasized make-up removal. They evaluated customer response. More readers responded that they used the tissue to blow their nose. Ad campaigns changed, sales took off, and the rest is history.

What's the lesson of the story? Companies need to be mindful that customers may use their products in unexpected ways. Perhaps most importantly, firms must resist the temptation to dismiss this unanticipated customer behavior. The customers may, in fact, be telling you something incredibly important, if only you keep an open mind. Give Kimberly Clark credit for coming around in time, and investigating this unexpected behavior. As a result, they created one of the most successful brands of the 20th century.

Whole Foods: Gathering Customer Feedback

On Saturday, I spent an hour or so shopping at my local Whole Foods. About halfway through my shopping trip, a Whole Foods associate greeted me, told me she was seeking feedback from customers, and then asked me if I had anything that I'd like to share with her about my experience at Whole Foods. She mentioned that it could be anything at all... about products, service, items they don't offer that they should, etc. She expressed interest in my response, asked a number of follow-up questions, and thanked me for my input.

This brief interaction struck me because she did not have a predetermined agenda, list of survey questions, or interview protocol. She made it very clear that she was open to any and all ideas, input, suggestions, critiques, etc. Her openness struck me as the exact opposite of so much customer research today at many firms. Far too many companies ask their customers leading questions, though often inadvertently. As a result, they come to erroneous conclusions based upon their market research. The Whole Foods associate clearly was trying to avoid affecting my response with any bias whatsoever.

Psychologist Elizabeth Loftus has done some remarkable research demonstrating the power of leading questions. For instance, in one wonderful experiment, she showed subjects video of an automobile accident. She asked half the students, “How fast was the white sports car going when it passed the barn while traveling along the country road?” In fact, the video showed no barn along the street. The other half received the same question, except without mention of the barn. Loftus then asked all the students, “Did you see a barn?” Roughly six times as many students in the first group than in the second indicated that they had seen a barn in the video!

Subway: Overcoming Headquarters Bias

This Business Week story explains the origins of Subway's incredibly successful "$5 foot long" marketing campaign. Brand managers at corporate headquarters did not concoct the campaign. The idea did not originate on Madison Avenue. Instead, it began with a promotion launched by a small Miami-based franchisee named Stuart Frankel. Other local franchisees latched onto the idea, after seeing how profitable the strategy had become for Stuart Frankel. Frankel and his peers had some convincing to do though. It took awhile, but they finally did persuade corporate to adopt the concept for the entire chain.

Interestingly, this campaign does not represent the first such innovation from the front lines at Subway. The famous "Subway diet" campaign featuring Jared Fogle emerged form the field as well! A fellow student wrote about Fogle's unique Subway diet, and Men's Health magazine wrote an article about him later. Soon, a local Chicago-area franchisee noticed the story, and he began trying to convince corporate headquarters to adopt Jared's story as the centerpiece of an advertising campaign. Again, the idea met resistance from corporate, but after regional success in the Midwest, franchisees finally convinced headquarters that the idea had tremendous merit.

These two stories both illustrate the power of harnessing creativity and innovation at the front lines of organizations, where local knowledge resides. At the front lines, employees interact with customers every day, and they often generate new ideas that could serve consumers better.

What's the challenge? I describe it as headquarters bias. In too many instances, the corporate office simply thinks they know better than the field employees (sort of like the intellectuals and politicians in Washington always think they know better than the average citizen). Give Subway credit for not allowing the initial "headquarters bias" to completely shut down these ideas. After initially resisting, they recognized the value of the ideas and spread them throughout the chain's locations.

Can You Twitter Your Brand Promise?

Check out this blog post by David Hill. He describes a terrific idea that he learned about during presentation by Marc Gobe, author of Emotional Branding. Gobe asks the question: Can you Twitter your brand promise? In other words, are you able to provide a clear and incredibly concise explanation of your pledge to your customers? Twitter allows 140 characters. Can your firm's brand promise be described in less than 140 characters?

Let's demonstrate the concept. Consider Federal Express. What is the company's brand promise? "Absolutely, positively overnight." - 33 characters! That's just beautiful. Not only is the promise concise, but it is completely accurate and very clear. In short, Federal Express has a proven track record of delivering on this promise; it's not just words.

How about Target? "Expect more, pay less." 22 characters! We all understand precisely what this means too. Target meets the test.

One last terrific example. What about Ritz Carlton? "Ladies and gentlemen serving ladies and gentlemen." 50 characters! They pass with flying colors. Anyone who has stayed at a Ritz Carlton knows that they deliver on this promise; it's not just rhetoric.

So now it's time for you to try to Twitter your firm's brand promise. Can you do it? Remember... not only must you be clear and concise, as well as accurate... you have to avoid creating a generic phrase that could apply to a host of rivals. You need to outline a promise that truly stands out from the crowd.

The GM-Opel Decision

The recent decision by General Motors to reverse course on its proposed sale of Opel to Canadian auto supplier Magna raises some interesting questions about the role of a Board of Directors. On the one hand, we desire more effective and vigilant boards who spend time learning a business and monitoring the decisions of senior executives. However, we have to recognize that boards can lose their objectivity if they begin making corporate strategy. In other words, most people believe that boards have an important role monitoring and controlling management behavior. However, if the board begins to become the primary decision-making body regarding the strategic direction of the firm, then you must ask: Who is monitoring and controlling the board? What if decisions don't work out and performance lags? Who is responsible? It becomes difficult for the board to hold management accountable if they have actually made all the key decisions, sometimes by overruling management. I'm not suggesting that the GM Board was incorrect necessarily in overturning Henderson's Opel decision. I'm simply arguing that the board must take great care not to blur responsibilities so much that no one is actually left conducting unbiased governance and control activities.

Disney's Return to Hand-Drawn Animation

The Wall Street Journal reports today on the upcoming December debut of Disney's newest animated feature film: The Princess and the Frog. The film's box office results should be interesting to track, given that it represents a return to hand-drawn animation - something that Disney has not done for six years.

In recent years, Disney had tried to emulate Pixar's success using computer-generated animation. However, the company did achieve the results that it had hoped for movies such as Brother Bear. Then, Disney acquired Pixar, and the company asked Pixar's leaders - John Lasseter and Ed Catmull - to oversee Disney Animation. Now, in an ironic twist, Lasseter and Catmull have endorsed this return to hand-drawn animation. Lasseter explained in this excerpt from the article:

But from Mr. Lasseter's point of view, the real problem wasn't Disney's animation techniques—it was more fundamental elements like characters and plot. "I've never understood why the studios were saying people don't want to see hand-drawn animation," Mr. Lasseter said at a fan convention earlier this year. "What people don't want to watch is a bad movie."

I love this quote. It demonstrates a keen understanding of what really drove Pixar's success and what has troubled Disney for the past decade or so. Lasseter understands that Pixar's success does not hinge on its computer animation techniques. After all, that strategic capability, to a large extent, is imitable. Therefore, even if it was a big contributor to Pixar's early success, it does not lend itself to the establishment of sustainable competitive advantage. Pixar's enduring success, instead, depends upon their ability to develop interesting, funny, engaging story lines. It's plot, not graphics, that primarily brings kids and their parents to the theaters. People love a great story, and no amount of fantastic computer-generated imagery can make up for a terrible plot. That ability to develop incredibly engaging plots also is far less imitable than the computer animation technology. Thus, it's a far more valuable strategic capability.

Changing Culture at GM

Frances Frei is right on the money with this blog post (Decision to Lead blog) about the effort to change the culture at General Motors.

Jana Eggers and Spreadshirt

Check out The Hopkinson Report for an interesting podcast about Jana Eggers and her company, Spreadshirt. Eggers' company provides customers with the opportunity to purchase customized, real-time t-shirts on-line, without having to buy large quantities. Customization represents a huge growth opportunity for many companies, yet it seems to have been underexploited in many cases. Has your firm considered how it might offer customized products? They represent an opportunity to differentiate, drive higher margins, and avoid head-to-head price competition with rivals.

Rapping about Supply and Demand

From my former professor Greg Mankiw's blog, I learned of this great rap song about the core principles of economic theory. It's highly recommended to students, as well as all those interested in a quick review of economics... maybe a few folks in Washington ought to listen this song!

Decision-Making Myths

Bob Frisch has a good article over at Business Week on three key myths about decision-making. His three myths are:

Myth 1: A Single Team Makes All of the Big Decisions
Myth 2: The Executive Team Is a Body of Equals
Myth 3: Team Members Should Always Adopt a CEO Perspective

My research confirms Frisch's conclusions regarding Myth #1. Many people speak of the "top management team" as the key strategic decision-making body of the organization. However, my research - along with work by Professors Ann Mooney and Allen Amason - confirms that strategic choices are made a bit differently. Typically, a subset of the top team is involved in all key strategic choices, and then they pull in different people based on the nature of the decision. In short, what we have is a stable core of decision-makers and a dynamic periphery. Mooney and Amason describe that core as the "inner circle". The question is: How does a CEO manage the relationship between the inner circle and the broader management team, and how does that affect the performance of the organization? I believe that the CEO can do significant damage if he or she does not manage that relationship effectively.

Economic Gangsters

I just finished reading Economic Gangsters by Ray Fisman and Edward Miguel. I picked up the book based on the fact that it happened to be on Harvard economics professor Greg Mankiw's freshman seminar reading list this fall (as posted on his blog). I immediately recognized Ray's name, since we went to graduate school together, and decided to take a look at the book.

Economic Gangsters offers a fascinating examination of the challenges associated with promoting economic development in the world's poorest nations. Fisman and Miguel examine the behavior of corrupt officials and governments, using ingenious research methods to learn more about their actions and the impact of their actions. They do a great job of analyzing the link between corruption and poverty.

One of the most interesting aspects of the book involves the examination culture and its link to corruption. They study the likelihood that various countries' United Nations diplomats will park illegally in New York City and not pay those parking tickets. By looking at parking tickets in New York, they gain insight as to whether culture may play a role in making people less likely to adhere to the rule of law.

In another part of the book, they examine violence in Africa. They trace the impact of droughts in Africa, showing that they substantially increase the risk of a subsequent civil war. Thus, they recommend intervening with economic aid during droughts, so as to reduce the odds of violence and war.

All in all, it's a very interesting read for those eager to learn more about the challenges associated with promoting economic development in some of the world's poorest nations.

Private Sales at Saks

I read with great interest that Saks has launched a "private sales" experiment. What are private sales? For some time now, a few retail startups such as Gilt Groupe and HauteLook have used viral marketing techniques to launch intense limited-time sales of discount designer apparel. Vanessa O'Connell of the Wall Street Journal explains:

"The sites had carved out a niche with a new retail formula: Short, intense sales, usually of 36 hours—and constant Web updates on which items "sold out"—to create a sense of urgency and a deadline for shoppers. Sites like Gilt have been a boon to high-end designer brands such as Marc Jacobs and Tory Burch, because their sales of discounted merchandise are held in a controlled setting that is perceived to be more discreet and upscale than the typical off-price chain store."

Saks and other high-end department stores have traditionally relied on their own outlets (Off Saks) or other discounters to sell out of season or older merchandise. Naturally, such discount selling comes with risks. Could the brand be damaged by too much discounting? These private sales offer an opportunity to create a controlled environment for selling such merchandise, while creating an intense feeling of scarcity that can create buzz among fans of the high-end merchandise for sale.

Interestingly, though, Saks did not use this private sale experiment to sell old merchandise typically sold through its outlet stores. Instead, it specifically purchased items to sell via this private sale. This represents an interesting twist on the strategy employed by startups such as Gilt Groupe. Achieving competitive advantage is always about finding a unique way to compete, rather than just employing a me-too strategy. Thus, it's refreshing to see Saks experiment with a slightly different model than that adopted by their upstart rivals. I'm sure more experimentation will follow by Saks and others, and perhaps new revenue streams for high-end department stores will result.

Cash for Clunkers - What a Clunker!

According to an analysis by Edmunds.com, the Cash For Clunkers cost taxpayers roughly $24,000 per additional car sold, beyond the number of cars that would have sold anyway even without the program. Naturally, automakers and government officials dispute the Edmunds.com conclusions, but those critics are highly biased, of course. Edmunds.com does not seem to have a vested interest in offering a slanted evaluation (though I may be missing something). I'm inclined to believe that we simply changed the timing of many new car purchases through this program, rather than affecting the overall annual volume in a meaningful way.

Interview Podcast

Andy Kaufman of the Institute for Leadership Excellence and Development interviewed me recently about my latest book. Here's the link to the podcast.

Jordan's Furniture: Shoppertainment

Have you ever shopped at Jordan's Furniture? This small Massachusetts furniture chain generates more sales per square foot than any furniture retailer in the country. Jordan's generates $950 of revenue per square foot compared to $150 per square foot for the typical furniture retailer in the United States. Jordan's also has incredible asset efficiency, turning its inventory 13 times per year! Those kind of results attracted the interest some years ago of Warren Buffett, who now owns Jordan's. He purchased the company from the Tatelman brothers several years ago, though one of the brothers continues to lead the firm.

What makes Jordan's so special? It's hard to list all the special features of this retailer in a short blog post, but one thing certainly stand out to me. They have mastered the notion of shopping as entertainment, with special attention to families. The Natick store that I shopped at the other day has an IMAX theater, a re-creation of Bourbon Street in New Orleans, and loads of fun for folks of all ages. Most interestingly, though, they have created an entertaining atmosphere that enables young families to enjoy a satisfying shopping experience.

One of the biggest challenges for young families is always how to handle bored children while trying to shop for furniture. Jordan's engages the kids so that the parents can actually shop with less distraction. What an ingenious way to drive customer satisfaction and sales! So many firms do the exact opposite. They do not make parents comfortable, because they have a "hands off" type environment where children are made to feel very unwelcome. How can you provide a high quality shopping experience for 25-44 year olds if you push away their children? Too many firms trying to sell to parents forget that the kids are very much part of the buying process. Turn off the kids, and you turn off the parents. Engage the kids, and you just might make a big sale!

Should Insider Trading Be Legal?

The Wall Street Journal ran a thought-provoking story on the front page of the Weekend Journal section this past Saturday, in which George Mason University economist Donald Bourdreaux argues that insider trading should be legal. This article proved particularly timely given the charges being brought against hedge fund investor Raj Rajaratnam this month. Boudreaux draws heavily on the classic work of Henry Manne to make his case.

How could Boudreaux argue that insider trading should be legal? He makes the case that insider trading could actually improve the efficiency of our capital markets. Here's the crux of his argument:

"Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie. And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large."

Henry Manne has actually made the argument that we might have fewer corporate scandals such as Enron and Worldcom if we allowed insider trading. The idea is that some insiders would have perhaps started selling the Enron stock given their knowledge of the firm's actual inner workings. They would have pushed the stock price downward, curbing the incredible run-up that took place and sending a very clear signal to outside investors that all may not have been as rosy as it appeared. Without such insider trading, outside investors sometimes remain in the dark for far too long, continuing to plow capital into a sinking ship because they are unaware of the actual condition of the firm.

I find the arguments about capital market efficiency to be compelling, yet I cannot help but wonder whether equity concerns trump these efficiency concerns. While it may be good for the market as a whole to have such insider trading, one wonders whether it is fair that a few well-placed insiders with unique access to information might profit handsomely in the process. It's a classic efficiency-equity tradeoff in some sense. Having said that, there are some reasons to believe the current system isn't so equitable either, given that many believe that only a small fraction of actual insider trading situations are identified and prosecuted.

Theo Epstein and J.D. Drew

Yesterday morning, on Boston sports radio station WEEI, Boston Red Sox general manager Theo Epstein offered an ardent defense of his outfielder, J.D. Drew - a player he signed to a 5 year, $70 million contract several years ago. Drew tends to be viewed by most fans as "not worth the money." Epstein argued that he has indeed been worth the money, and that fans must look past the common statistics reported in the newspapers. His more sophisticated statistics tell a different story. I found several parts of his comments troubling, and perhaps of interest to leaders in other industries.

What are the lessons from this interesting debate about Drew? First, clearly, young baseball general managers, as Michael Lewis explained in his great book Moneyball, have used sophisticated statistical techniques to get a better understanding of player performance. As a result, these general managers have taken advantage of inefficiencies in the market for players - inefficiencies resulting from the fact that commonly used statistics of the past often don't tell an accurate or complete story. Epstein has done this well with two World Series championships during his tenure. As a business leader, do you have such discrepancies in your industry? Can you take advantage of them?

Second, in baseball, nearly all fans know about the advances in statistics, even if we don't know all the nuances. Epstein's argument was incredibly condescending, suggesting that we all didn't know much about what really matters. Imagine telling that to your customers in your business. You never want to suggest to your customers that they are ignorant, which essentially is what Epstein did. Many companies actually do think they are smarter than their customers at times, ignoring key warning signs about their business as a result.

Third, note that Epstein defended Drew's performance "on a rate basis" - i.e. he's very good in terms of output per game played. The problem is that Drew doesn't always play; he can't stay on the field. As a business leader, you might have an incredibly talented employee, but if he or she doesn't come to work every day, then you certainly wouldn't retain the worker. You can't be good half the time. Epstein's defense of Drew's performance "on a rate basis" seems puzzling.

Why Corporate Initiatives Fail

Joseph Grenny has a good new column on Business Week's website regarding why so many corporate initiatives fail. Grenny cites some statistics about the rate of failure on special corporate initiatives:

Sustained research shows that across the U.S., estimated failure rates for corporate projects range from 66% to 91%. What's more, companies' collective inability to execute on major projects costs many billions of dollars a year. For example, it is estimated that of the $255 billion spent annually on IT projects in the U.S., more than a quarter is burned up in failures and cost overruns.

Grenny goes on to offer some explanations for the types of behavior that lead to such failures. In the past, I conducted a study on this topic, published in MIT Sloan Management Review. In that article, my co-author Lynne Levesque and I argued that many employees refer to such initiatives as just another "flavor of the month" prescribed by top management. They think to themselves, "This too shall pass." We argued that four critical processes in the early stages of an initiative can help insure that initiatives take hold and that change does indeed stick. Here is a brief excerpt from our prior work:

In our research, we discovered four critical processes that enable firms to avoid the “flavor of the month” trap. These antecedent processes lay the foundation for the successful institutionalization of a strategic initiative. The four sets of processes are: chartering, learning, mobilizing, and realigning. Chartering refers to the process by which the organization defines the purpose and scope of the initiative, as well as the way people will work with one another on the program. The chartering process has two critical components: boundary setting and team design. Learning refers to how managers develop, test, and refine ideas through experimentation prior to full-scale rollout. The mobilizing process entails the use of symbolism, metaphors, and compelling stories to engage people’s hearts as well as their minds so as to build commitment to the project. Finally, the realigning process consists of a series of activities aimed at reshaping the organizational context, including a redefinition of roles and reporting relationships as well as new approaches to monitoring, measurement, and compensation.

Samsung and China

The Wall Street Journal had a very interesting story today about Samsung's decision to build a production facility in China. The article relates how Samsung had been hesitant to manufacture in China because it was concerned about "involuntary knowledge transfer." I think it's a valid concern, and it explains why Samsung's most cutting-edge technology will remain in Korea.

Of course, it's not just cutting-edge technology from its research and development labs that Samsung should be worried about losing to Chinese rivals. There's no question that LCD televisions involve a substantial learning curve in the production process. That learning curve is a critical source of competitive advantage. One risk of manufacturing in China is that "spillovers" of those production learning curve effects will take place, giving upstarts a chance to easily "catch up" to much more experienced competitors - i.e. they might come down the learning curve more quickly than normally possible.

Restructuring at Harley Davidson

We learned this week that Harley Davidson will be shutting down its Buell sport bike division and begin searching for a buyer for its MV Agusta brand of expensive sport bikes built in Italy (a brand they only acquired 16 months ago). The news should not shock us, as Harley has always been primarily a heavyweight cruiser/touring bike company. Its competencies revolved around that primary segment, and it created value largely through its enormous brand equity and consumer loyalty. The core cruiser business has been in decline with the economic downturn, while also facing a longer term threat due to the aging of the company's core customers. Refocusing on the core seems like a sensible strategy, given that Buell was consistently not delivering the necessary return on investment.

Of course, we might ask why Harley chose a multi-brand strategy, given the incredible attachment to the core Harley brand. The answer, I believe, is that Harley wanted to pursue growth, and thus moved to the sport bike segment...but it wanted to be cautious about alienating its core customers. Therefore, it was hesitant about extending the Harley brand to the sport segment. That led to the Buell strategy. Now, it has decided to divest these other brands, as it tries to concentrate its resources on bolstering the Harley brand.

To be sure, the company must cater to its core customers, while also trying to entice younger buyers. The critical question: Can it lure younger buyers in larger numbers without alienating any of its Baby Boomer consumers?

Allegiant Air

We all know that the airline industry is a very tough economic environment where sustainable profits are quite hard to come by. That's why this story in today's USA Today sparked my interest. The story describes upstart Allegiant Air, which has been profitable for 27 straight quarters. Here's a brief excerpt from the story:

Allegiant's success is rooted in its unique niche: providing leisure travelers affordable non-stop flights from small communities such as Bozeman, Mont., or Allentown, Pa., to such vacation hubs as Las Vegas and Orlando. And if passengers want to see a show or visit a theme park once they arrive, Allegiant will sell them those tickets, too. "We've basically taken a very focused approach in our business," says Andrew Levy, chief financial officer of Allegiant Air, who noted that many of the airline's customers would otherwise have to take connecting flights to reach their destinations. "It's a market that has truly been ignored."

What I found particularly interesting is that Allegiant Air does not fly to each of its destinations multiple times per day. In fact, for some destinations, it doesn't even fly their once each day. That seems like a particularly unique element of their business model, and of course, the infrequent flights to popular tourist destinations helps them maintain a very high load factor. Filling each flight to capacity is perhaps the most critical element of a profitable model in this industry given that nearly all costs per flight are fixed. The key is to spread those fixed costs over as many passengers as possible, given that the variable costs per passenger are nearly zero. Who knows if Allegiant can keep up its streak of 27 straight profitable quarters, but it does seem worth highlighting the merits of crafting a distinctive focused/niche strategy as a small player in a very tough industry.

Bryant students win Babson Business Plan Competition

Morgan Morris and her team of Bryant University sophomores won first place in today's Babson Ideas Into Action Business Plan Competition at the 8th Annual Babson Entrepreneurship Forum! The Bryant team beat two Babson MBA teams in the finals, besting roughly 30 teams in the entire contest. First prize is $27,500! Congratulations to Morgan and Team Puro!

Should You Purchase that Extended Warranty?

It's no mystery that companies make a great deal selling customers extended warranties. If that's the case, then why do consumers keep purchasing these warranties? Clearly, they offer peace of mind. However, it may not be the economically sensible thing to do in many cases.

In today's Wall Street Journal, Neil Templin writes about the mistakes that we make with regard to extended warranties. Here's an excerpt from his column:

"There's no mystery why retailers push them. In some cases, they make more profit selling the warranty than they do selling the actual gadget.The mystery is why consumers get them. If the retailer makes a lot of money selling them, then it stands to reason the consumer buying the warranty isn't getting a great price.That's not all. What if the company offering the warranty gets into financial trouble? asks Ram Rao, a management professor at the University of Texas at Dallas, who has done research on warranties."

Toward the end of the article, he quotes an official from Consumer Reports on the merits of purchasing an automobile extended warranty:

"If you have your heart set on a car that is unreliable, then [an extended warranty] is probably worth it," David Champion, director of automotive testing for Consumer Reports, told me. "But if you have a reliable Honda or Toyota, you should take the money and put it in a CD or money-market account. The odds are it will still be there when you buy a new car."

That quote reminded me of my response when my Honda dealer tried to sell me an extended warranty on my 2004 Accord. I stopped the sales person in their tracks and said, "I won't be needing one of those because I bought a Honda." She looked at me with a puzzled face, and then she got it. Honda Accords are incredibly reliable. I was buying a car which was not likely to break down. More than 100,000 miles later, I have never regretted my decision.

Meetings Matter

GolinHarris CEO Fred Cook argues that in-person meetings do matter a great deal and should not be eliminated for cost cutting reasons without some careful consideration.

Why More Women Don't Get MBAs

A very interesting story from Fortune on the efforts by the Forte Foundation to encourage more women to pursue MBA degrees.

Bloomberg Buys Business Week

Big news last evening: Bloomberg announces that it is purchasing Business Week from McGraw-Hill. Let's back up a minute. Why was McGraw-Hill selling the magazine in the first place? Clearly, the obvious short-term reason is that the magazine business has been in decline, with falling circulations as well as large drop-offs in advertising revenue during the recession. However, more strategic reasons also exist for the divestiture. McGraw-Hill is a diversified corporation with a number of businesses. Most people are aware of its book publishing unit, but the firm also owns Standard and Poors, JD Power, Aviation Week, and Platts. Of course, the diversity of businesses raises a critical question: Do these businesses belong in the same corporation? Actually, one has to ask another question to truly evaluate the merits of divesting Business Week and selling it to Bloomberg. We should ask: Is Business Week a better fit at Bloomberg or within McGraw-Hill? I believe that one can make a strong argument that Business Week will prove to be a better fit at Bloomberg, where the strategy will be much more focused on business news as opposed to the many other things that McGraw-Hill has in its portfolio. In sum, there's a key lesson here in corporate strategy. We should not only ask whether a particular business unit is a good fit within a particular corporation... to assess whether value is truly being maximized, we ought to ask: Is that business unit even more valuable within another corporation?