Starbucks and Value Meals

Starbucks announced more cost reductions and restructuring moves yesterday. Their CEO also referred to the potential introduction of value meals in the future, i.e. a bundled price for a beverage and a food item. The details remain unclear. While this type of move may help Starbucks woo customers during this severe economic downturn, and perhaps help stem the loss of customers to McDonald's, such a move could have highly detrimental effects in the long run. Moving further downscale to compete with chains such as McDonald's could further erode the Starbucks brand and the company's differentiated positioning in the marketplace. This seems like a classic example of a strategic move that, in the short run, may have financial benefits... while in the long run, it could substantially weaken the firm's competitive position.

The Steelers, the Stock Market, and Spurious Correlation

The USA Today reports today that the stock market has performed quite well during years in which the Pittsburgh Steelers have won the Super Bowl. In fact, the stock market has clearly done better when the Steelers emerge victorious than when other teams win the Super Bowl. Of course, it doesn't mean we should all run off and root for the Steelers in hopes that it will restore our 401K plan balances. This is a classic example of spurious correlation... and a good example for reminding students about not being fooled into thinking such correlations imply causation.

Selling Assets - Ford and the NY Times

News reports today indicate that Ford is perhaps putting Volvo up for sale, and that the New York Times is doing the same for their stake in the Boston Red Sox. It's quite understandable for struggling firms such as these to be trying to focus their business strategies and raise cash through asset sales. However, firms face a dilemma because the credit crunch makes it difficult for them for them to get a good price for these assets. They may end up only getting a fraction of what they were worth just one year ago in some cases (more of a problem for Volvo than the Sox probably). Thus, we've seen many firms hesitating on whether to sell non-core businesses or other assets at this point in time. For instance, why hasn't General Motors sold Hummer yet? It would seem that they recognize that it may be very hard to find a buyer willing to give them anything near what that business was worth just a short time ago. Thus, every firm faces this balancing act between trying to focus and build their cash reserves versus trying to make sure they don't sell things at a huge discount to what they believe the assets to be worth in the long term.

University Endowments and Drastic Budget Cuts

Brandeis University is the most recent institution of higher education that has announced a major restructuring due to the global financial crisis. Brandeis announced today that they will be closing their art museum and selling their art collection, believed to be worth more than $300 million. Brandeis' actions follow other drastic budget cuts at wealthy schools such as Harvard, Dartmouth, Penn, etc.

Now, everyone certainly understands that these schools with large endowments have suffered large losses in their stock market investments. However, I'm sure many are wondering how and why this is leading to such large budget cuts, given that many still have very large endowments. To answer that, we have to understand how the annual operating budgets for these institutions are set. Basically, each year the universities draw a small percentage (often less than 5%) of their endowments for use in that year's annual operating budget. While this may be a small percentage of the endowment, it's actually a very large number in absolute dollars for a university with a mega-endowment. Therefore, at many endowment-rich institutions, the draw from the endowment represents a very large percentage of the annual operating budget.

At Harvard, for instance, the institution depends on the endowment draw to fund roughly 35% of its annual operating budget. That percentage climbed over recent years, as the endowments at many top institutions grew substantially in value. Thus, when an endowment like this drops by 30-40% due to the stock market crash, then the annual operating budget takes a very, very large hit - perhaps more than 10% in many cases.

In sum, many higher education institutions, while seemingly not using much of their endowment each year, actually were becoming very dependent on their endowments to fund annual operations. Now, that economic model has come apart at the seams due to the equity market crash.

Under Armour Takes on Nike

Recent news reports describe how Under Armour has decided to enter the running shoe market, taking on the likes of Nike, Asics, and Brooks. Under Armour, of course, has been enormously successful breaking into the sports apparel market. However, running shoes will be an enormous challenge. First, they will be competing head-on with some powerful brand names in the running shoe market. Second, those firms such as Nike and Brooks have strong technical reputations and the allegiance of top-flight runners who have high influence over more casual runners as they make their buying decisions. Finally, the competitors have deep pockets. Nike is a $19 billion per year firm, while Under Armour has yet to reach $1 billion in revenue.

It's an interesting brand extension case study that will probably be taught in b-schools for years to come. What's particularly interesting is that many of Under Armour's competitors started as running shoe firms and then extended their brands into apparel. Under Armour is moving in reverse. It would seem that it's easier to branch into apparel after having established a foothold in the shoe market, where technology is so important. Having said that, Under Armour does have a very loyal following, particularly among young men. They have a very strong brand. It will be interesting to see how Under Armour's entry strategy unfolds. Who will be their target market, and how will they win over key influencers in the running shoe market? How will they differentiate themselves from the Nikes of the world?

Home Depot Exits the EXPO business

Home Depot finally decided to close down its higher-end EXPO Design Center business. It's a strategic move long in the making... it was far more difficult than they ever imagined to operate their bread-and-butter "orange boxes" as well as these higher-end design centers. It's a classic example of internal inconsistency in a strategy; the activities and capabilities required to run a Home Depot store are quite different than those required to operate a design center successfully. With this decision, we see Home Depot moving closer to its original roots. Over the past few years, it has gradually been shedding ancillary businesses and refocusing on the "orange boxes." It's a smart move, given that the core business suffered badly as they diversified into other businesses over the past decade.

John Thain at Bank of America

It's not surprising to me that John Thain has been pushed out at Bank of America. It's rather common in these mega-mergers for one of the two CEOs to depart fairly soon after a deal is finalized, despite the fact that the companies had said that both CEOs would stay on board when they announced the deal. It's very difficult for two CEOs to work together in such mega-mergers. Both have been used to being the person in charge, and for one to then become the subordinate to the other is very challenging. It's why I've come to expect such departures in the case of these mega-mergers, much like I've always come to doubt the announcement of so-called "mergers of equals" - there is no such thing! There's always a top dog in any merger. Likewise, there's almost always one CEO who will remain long term, while the other will depart, whether it's a so-called merger of equals or a straightforward acquisition as in this case.

Why Great Leaders in Paperback

My first book, Why Great Leaders Don't Take Yes For An Answer: Managing for Conflict and Consensus (Wharton Publishing, 2005), has been released in paperback today for the first time.

The Business of Baseball

It's interesting to see how the downturn has affected Major League Baseball, a sport that has been amazingly successful from a financial standpoint for years. One sign of the owners scaling back their cost structures is the fact that so many top notch free agents remain unsigned with only a few weeks remaining before spring training begins. Players such as Manny Ramirez, Bobby Abreu, Orlando Cabrera, Ben Sheets, Oliver Perez, Adam Dunn, and Jason Varitek remain unsigned. One more potential sign to examine for evidence of a softening of baseball's revenue streams will be this weekend's sale of Boston Red Sox tickets. The Sox have an amazing string of sell-outs stretching back a number of seasons, and in recent years, nearly all those tickets were sold before a single regular season game had been played. It will be interesting to see how quickly the tickets sell. Moreover, it will be interesting to see how much softening occurs in the after-sale market for tickets. A soft ticket market in the next few weeks will be ominous for those free agents remaining unsigned at this point.

New Book

I am very pleased to announce that I have a new book coming out next month. The book is titled Know What You Don't Know: How Great Leaders Prevent Problems Before They Happen (Wharton School Publishing, 2009). For more information on the book, please click here.

New Entrepreneurship Documentary

Patrick Sargent, a junior at Bryant University, has produced a great new documentary about entrepreneurship. Here is the trailer. The documentary will be available for purchase on January 28th. For more information, see Pat's website.

Fiat isn't the Short Term Solution Chrysler Needs

Alex Taylor III has a very thoughtful article on Fortune.com about the Fiat-Chrysler link-up that has been described in media reports this week. Taylor argues that Fiat may prove very helpful as a long term strategic partner for Chrysler, but deal with the Italian carmaker does not address Chrysler's short term liquidity problem. Chrysler isn't producing cars at the moment, as they idled factories to conserve cash several weeks ago. How will the company generate cash in the short term, until the deal with Fiat begins to lead to new products for the U.S. market? It seems they'll be asking for more aid from the government, but will that be sufficient? Finally, is Chrysler going to have the cash required not only to stay alive but also to fund the development of new autos? Surely, it cannot survive simply by bringing Fiats back to the American market. It will have to continue to innovate if it wishes to preserve its most valuable assets, such as the Jeep brand and its truck business.

Retail Job Losses

CNN has an interesting article on the substantial number of job losses in the retail sector over the year. The author, Parija B. Kavilanz, examines some of the reasons why the sector has not received as much attention, or government support, as other sectors such as the auto industry. The article states, for instance, that the low rate of unionization in the industry may explain why Washington hasn't paid as much attention to the job losses in retail.

To me, there is something else that's very interesting about what is happening in retail. I saw some numbers recently that indicated that retail square footage per capita has risen at a substantial rate in the United States over the past two decades. That didn't surprise me, given the explosive growth of big box retailers in recent years. However, it's unsettling in some ways, as we think about the tremendous growth of internet retailing in the past fifteen years. Given the shift to internet retailing, one might have expected a slowdown in the growth of brick and mortar retail square footage, or even an absolute decline. Yet, retail space has kept on increasing. That seems rather unsustainable. Some retrenchment and rationalization in brick and mortar retail appears to be in order. Unfortunately, that means a significant number of job losses in the sector, and the very real possibility that those jobs aren't coming back for quite awhile.

Communication in the Cockpit

News reports suggest that Chesley Sullenberger III's amazing emergency landing on the Hudson River owes as much to his skill as a communicator as it does to his technical skills as a pilot. Clearly, his technical skills are remarkable, given the complexities of such a water landing in New York City. However, many have noted that he had deep expertise in crew resource management - the training in communication that was developed in the 1970s by the commercial aviation industry. This training was developed after it was discovered in the 1970s that many airplane crashes are not due to mechanical failure or a lack of technical skill on the part of the pilots, but instead due to errors in communication within the cockpit.

Many of the communication skills that pilots such as Sullenberger have mastered are, in fact, the kinds of skills that all business leaders should focus on developing. For more on crew resource management, see this paper.

Unemployment

How do we digest the news that the unemployment rate has jumped above 7% for the first time in 15 years? Well, it's very sad to see so many people losing their jobs. We should note, however, that unemployment rates above 7.0% are not unheard of in our lifetimes. In the thirteen year period between 1974 and 1986, the unemployment rate rose to 7.0% or higher at one point or another in 11 of the 13 years. Imagine that! When I was in college in the late 1980s, economists used to contend that the natural rate of unemployment was roughly 6%. However, we've all become quite accustomed to the very low unemployment rates of the past 15 years; thus, it's very disconcerting to see the job losses that people are experiencing throughout the United States. Many people cannot recall this type of unemployment, though it's actually not that long ago when our economy experienced similar levels of unemployment.

Disney to Focus More on Boys

The Wall Street Journal has an article about Disney making a new push to target boys aged 6-14. After all, Disney has been wildly successful in recent years focusing on young girls with platforms such as High School Musical, Hannah Montana, and the like. They have not had the same type of success tapping into the market of young boys.

There is no question that a fair amount of specialization tends to occur among companies focused on toys, games, and media for children. For instance, in the toy market, we have two behemoths: Hasbro and Mattel. Hasbro has traditionally been very successful targeting young boys with products such as G.I. Joe, Spiderman, Transformers, Tonka, etc. Mattel has been very successful focusing on young girls with brands such as Barbie and American Girl. Both companies do sell to boys and girls, but they have not had equal success with both genders. In many ways, that has been a good thing. It's meant that the firms have been able to both generate high profits, because their competition has not been completely head-to-head. They've differentiated from one another a bit.

Now, Disney will find itself venturing into an area where they have had some success, but they haven't been as dominant. The question is whether Disney understands the boys market well enough, and has the ability to develop characters successfully, for that market. What new competitors will they bump up against with this new focus on boys? Perhaps most interestingly, this new strategic initiative may renew rumors that Disney is interested in acquiring a large videogame company, such as Electronic Arts, given that video games are particularly popular among young boys.

Apple's New iTunes Pricing

Lots of big news from Apple over the past few days. On the iTunes front, the company announced a new three-tiered pricing structure, as opposed to the prior pricing strategy of having all songs available at 99 cents each. At the same time, Apple will remove digital rights management protection from all its songs. This appears to be part of a grand compromise between the record companies and Apple. The record companies sought the tiered pricing, so that they could charge a slight premium for new songs. This could help produce a surge in revenue for the record companies for those songs that become big hits. Meanwhile, Apple's consumers will be happy that the songs can now be copied onto other devices. The removal of the DRM protection could lead to a new surge in iTunes sales, and it could help fuel even further growth of the iPhone, iTouch, and iPod businesses. The biggest news, however, concerns Steve Jobs' health. Rumors have swirled for months now, and finally, the company disclosed some news about Jobs' situation. Still, many investors wonder about succession planning at the company. Rarely have we seen a company for which investors seem to believe that the performance is so dependent on one person. While it may or may not be true, the investor sentiment is very powerful.

Our MBA Program

For those interested in learning about Bryant University's MBA program, as well as my philosophy on teaching, you might wish to take a look at this brief video.

Gullibility and Financial Scams

Psychologist Stephen Greenspan has an interesting article today in the Wall Street Journal about why human beings are so gullible at times, applying his research to the issue of our vulnerability to financial scams of one kind or another.

The Internet, Transaction Costs, and Investment Bubbles

As the Internet blossomed in the 1990s, many economists argued that the web improved information flow, reduced transaction costs, and thereby made capital markets more efficient. I believe this to be true. After all, the availability of information to all investors makes it even more likely that a new piece of data will quickly get factored into the price of a stock. According to the conventional wisdom, it's even harder to beat the market as an individual investor if stock prices so quickly incorporate new information. Emory Professor Paul Rubin expands upon this argument in a recent column in the Wall Street Journal. While he agrees that the web reduced transaction costs, he also argues that it may have inadvertently contributed to a greater propensity for bubbles. As he says, "It may be that bubbles and crashes are a natural part of capitalist markets. What's more, it may be that the very factors that have recently increased the efficiency of markets have also led to an increased propensity for bubbles."

In sum, because of the internet, people all around the world can quickly learn about "hot" new thing that seems like an attractive investmnet. Word can quickly spread to others through social networks, blogs, email, etc. Reduced transaction costs make it easy and cheap to then make a trade based on that new information. Soon, a bubble can emerge as word spreads quickly about a potential profit-making opportunity. Of course, it becomes a bubble when people are still investing long after the initial profitable opportunity was spotted; by the time the later investors have put money into the asset, the opportunity for a profitable return has greatly diminished. Yet, people are still chasing the idea. Why did the profitable opportunity vanish? Well, of course, the very efficiency of the market due to lower transaction costs has caused the "arbitrage" opportunity to vanish fairly quickly, yet many investors don't realize this until far too late. They are simply jumping on a social bandwagon.

Turnaround at Talbots

The Boston Globe has an interesting article on Trudy Sullivan's attempt to execute a successful turnaround at Talbots. The retail chain's troubles actually began with some fundamental strategic problems, not simply with the poor economy. First, the company had a difficult time integrating its acquisition of the J. Jill apparel chain several years ago. Second, the company had wasted resources with diversification attempts including the opening of men's and children's stores. Finally, the company's clothing increasingly appealed to a narrower and narrower demographic - namely older women.

The Talbots story is interesting, because many management professors like me constantly preach that companies should stay focused. However, in some cases, that focus can lead to a dangerously narrowing target market over time. In Talbots case, the target market shrank as the average consumer became older and older. The clothes no longer appealed to younger working women who used to frequent the company's stores. So, one moral of the Target story is that a firm should focus on its core customer, but it must take great care not to do so in a way that causes that target market to shrink over time. A second moral is that a firm should be wary of trying to overcome slowing growth in its target market by diversifying through either brand extensions (men's stores) or acquisitions (J. Jill). Instead of expanding elsewhere, a firm in that situation should make sure that it fixes its core market first.