Colvin on Raising Prices During a Recession

Can your firm afford to raise prices during this economic downturn? That is the question that Geoffrey Colvin tries to answer in his column in this week's issue of Fortune magazine. Colvin offers a simple two-by-two matrix for classifying products. One axis classifies goods in terms of high or low product differentiation. The second axis classifies products as either necessities or discretionary purchases. Colvin argues that products that are both highly necessary as well as highly differentiated have the most potential to raise prices during the downturn. For instance, he cites products such as Colgate toothpaste or Gillette razor blades. What is the worst situation in which firms may find themselves? If a company offers a commodity product that is a discretionary purchase, they are likely to suffer greatly during the recession, and they will virtually no power to raise prices. For instance, airlines sit in this quadrant of the two-by-two matrix. I think this simple two-dimensional matrix offers a useful way for thinking about how the downturn may affect your firm.

Bill George on Leading in a Crisis

Bill George, former Medtronic CEO and my former colleague at Harvard Business School, has a very good post on his True North blog regarding the "seven lessons for leading in a crisis." I was particularly struck by Lesson #2:

Lesson #2: “No matter how bad things are, they will get worse.” Faced with bad news, many leaders cannot believe that things could really be so grim. Consequently, they try to convince the bearers of bad news that things aren’t so bad, and swift action can make problems go away.

This causes leaders to undershoot the mark in terms of corrective actions. As a consequence, they wind up taking a series of steps, none of which is powerful enough to correct the downward spiral. It is far better for leaders to anticipate the worst and get out of in front of it. If they restructure their cost base for the worst case, they can get their organization healthy for the turnaround when it comes and take advantage of opportunities that present themselves.

I would argue that such mistakes by a leader also lead to further difficulties down the road, because bearers of bad news may be reluctant to come forward in the future. Having had their concerns minimized and downplayed, such individuals may not choose to come forward with their concerns. As a result, problems may not surface as quickly in the future.

Finkelstein's New Book on Decision-Making

Sydney Finkelstein and colleagues have an interesting new book about decision-making that has hit the bookstores. The title is: Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You. I had the opportunity to read a draft of the book several months ago. The authors offer a very practical guide for leaders who want to improve their decision-making, drawing upon interesting new science regarding how the brain works as well as their own field research in many businesses. For a review of the book, see this article from the Financial Times.

Steve Jobs' Commencement Speech

On the occasion of Steve Jobs' 54th birthday, Fortune has posted a link to the amazing commencement speech that Jobs gave at Stanford University several years ago. Every student should watch this speech at the outset of their career, and frankly, all of us could benefit by considering what he has to say. Here is the video:

Michael Lewis, Shane Battier, and Team Players

Michael Lewis had a terrific article last week in New York Times Magazine about Shane Battier, the Duke graduate who now plays basketball for the Houston Rockets. Lewis makes the point that Battier has never drawn raves from NBA scouts and coaches for his play, and he does not fill up the stat sheet in most games. However, his teams tend to perform remarkably well. He simply makes his teammates better in a variety of small, but very important ways. Of course, we look for this attribute in our workers in any organization, not just athletics. We want team players who help those around them perform at a higher level. Lewis goes on to write that, "There is a tension, peculiar to basketball, between the interests of the team and the interests of the individual. The game continually tempts the people who play it to do things that are not in the interest of the group." Battier consistently forgoes selfish acts in favor of the interests of the team, often in very hard-to-observe ways. Again, we would love to have such employees.

Lewis talks to Houston general manager, Daryl Morey, who once visited my MBA class to speak with my students. Morey is an incredibly insightful student of the game with an MBA from MIT. Morey describes how his analytic methods enabled him to see that Battier had this positive impact on team performance. The challenge, however, was to understand precisely how Battier had this type of impact. Statistics alone could not provide that answer. Only detailed observation could reveal how Battier, whose individual play seemed so ordinary, could elevate his team's performance so substantially.

Thus, Morey's work as General Manager of the Rockets highlights two critical challenges for any organization leader. How does one find the Shane Battiers of his or her team or firm? Perhaps more importantly, how does one come to understand precisely what actions and behaviors help certain individuals elevate the performance of those around them?

Know What You Don't Know

To learn more about my new book, Know What You Don't Know: How Great Leaders Prevent Problems Before They Happen, you may wish to view this brief video in which I'm interviewed:

Honda on Failure and Risk-Taking

Jim Kouzes and Barry Posner have a blog entry on how leaders must be willing to make mistakes and sometimes fail if they wish to achieve great things. They refer readers to a great video, available on YouTube, in which Honda's CEO talks about risk-taking and tolerance of failure. Here's the video:

McDonald's vs. Starbucks

Michael Arndt at Business Week has an interesting story about a new Pew Research Center poll asking about consumer preferences regarding Starbucks vs. McDonald's.

Foster's Decides to keep Wine Businesses

The Wall Street Journal reported yesterday that Foster's Group of Australia has decided not to sell its wine businesses at the moment, given that the economic downturn has made it difficult to find a buyer willing to pay a reasonable price for those units.

I'm not surprised that Foster's has found it difficult to achieve synergies between its wine and beer businesses, and to manage both product lines effectivley in the same corporation. Back in 2003, I wrote a paper about the wine industry in which I argued that the economies of scope across the wine and beer businesses might be somewhat limited. Here is an excerpt from that paper, which I presented at a conference in Venice, Italy:

The alcoholic beverage producers moving into the wine business have been quite explicit about the fact that they see premium wine as their next growth engine, given flat sales in their core businesses. Foster’s Group provides the best example of this strategy. They have declared a vision of becoming “a global wine company with a leading presence in every premium wine market worldwide.” In their 2001 Annual Report, the company actually has a headline that reads “Beer = Returns,” while a second headline reads “Wine = Growth.” In short, the company is quite clear that they are deriving cash flow from the mature, but highly profitable, beer business; then, they are using that cash flow to subsidize a growth strategy in the wine business. This raises an important question: does this cross-subsidization strategy enhance shareholder value? If capital markets are reasonably efficient, then shareholders can invest the cash flow from the beer business more effectively than the managers at Foster’s; cross-subsidization within the firm’s internal resource allocation process is not optimal in this case. Thus, the only way that this corporate strategy adds value for shareholders is if the beer and wine businesses are somehow more valuable together than apart, i.e. if there are sizeable economies of scope. However, the synergies appear somewhat limited. There are no production economies that are readily apparent. Moreover, the same sales force is unlikely to be able to support both product lines. The economies appear to be mainly in the distribution area. Even then, those economies seem to be limited to negotiating power, because there are serious questions about whether firms can consolidate the physical distribution of beer, wine, and spirits without compromising product quality. If, in fact, the synergies are somewhat limited, then one has to question whether it is in shareholders’ interests to cross-subsidize from the beer to the wine business.

Harley Davidson Advertising

Harley Davidson faces some tough challenges at the present for two reasons. First, they have experienced a substantial rise in the average age of their riders. Aging Baby Boomers represent a challenge for them. Younger riders do not necessarily want to ride the same bikes that their parents ride. Second, the recession has caused consumers to limit their discretionary spending. Harley sales have suffered as a result.

On the positive side, the firm has an amazingly clear and distinctive brand positioning, with a core group of remarkably loyal customers. Here's one advertisement that displays the creative ways in which the firm constantly reinforces its image:

Sunk Costs, Automakers, and the Escalation of Commitment

As GM and Chrysler made their requests for billions more in assistance, policymakers will have to be very wary of getting caught in a dangerous and very expensive escalation of commitment. With such high sunk costs in this situation, the risk will be that federal officials will not want to ever "waste" the prior investments that they have made to help the auto industry. Thus, they may continue to gradually escalate their commitment. The risk, of course, is that the federal government may find itself throwing good money after bad.

GM, Chrysler Present Their Plans

As GM and Chrysler prepare to present their restructuring plans to the federal government, news reports discuss the possibility of a bankruptcy filing by one or perhaps even both automakers. At the same time, journalists are speculating about the scale and scope of the cost reductions and union concessions that the automakers will announce. While massive cost cuts are undoubtedly necessary, no revival of GM and Chrysler can occur unless they also retool their product strategies. The firms must also have a plan for streamlining their brand portfolios, and repositioning their remaining product lines so that each has a clear, distinctive brand identity. Moreover, the firms cannot completely gut R&D, as they will need to bring out new cars that are more appealing than those of the past. People need a reason other than price to buy a GM or Chrysler vehicle. While the government has pressed the automakers to make more "green" vehicles, that alone will not save these firms. Making a few more green cars, or even rolling out an electric car, does not constitute a distinctive, appealing, and comprehensive product and branding strategy.

Starbucks Instant Coffee

The Wall Street Journal reports today that Starbucks has plans to introduce an instant coffee product. Wow. How far will Starbucks shift from its original strategy as a highly differentiated, premium specialty coffee company?

The Providence Granola Project

My former Bryant MBA student, Geoff Gordon, has launched a new venture called The Providence Granola Project. The company makes some terrific granola, and they have an interesting social mission. As the co-founders state, "The Providence Granola Project was conceived as a way to give refugees a boost toward employability (and in the spirit of full disclosure, to make a little money)." For more information, check out the founders' blog: http://www.providencegranola.blogspot.com/

Microsoft to Open Retail Stores

The Wall Street Journal reports that Microsoft has hired a former Wal-Mart executive to lead an effort to open a number of Microsoft retail stores. This news raises several interesting issues. First, forward integration into retail can be a very tricky thing. Certainly, companies such as Apple and Ducati have benefited greatly from their retail strategies. These firms have used forward integration as an effective mechanism to further enhance their product differentiation and gather valuable information and feedback directly from consumers. For Apple and Ducati, the retail store represents a rich experience that they are trying to create for their customers. They came to the conclusion that they had to control the retail environment through ownership in order to manage that experience optimally.

However, many firms have stumbled with such strategies. Gateway clearly did. Of course, their product strategy was not based upon differentiation, design, and a rich, emotion-laden experience for their consumers. Thus, the retail stores did not add a great deal of value for them, while proving costly to operate. Gateway did not have a strong rationale for forward integration. Disney, on the other hand, seems much more like Apple or Ducati in terms of their differentiation strategy, yet they have struggled with their retail stores. Disney's experience proves a cautionary tale for firms who are considering forward integration into retail.

Second, forward integration means that a product firm is now competing with its channel partners. In this case, Microsoft will find itself competing with partners such as Best Buy, Staples, and the like. Apple has navigated these relationships quite effectively, but many firms stumble in this regard when they forward integrate.

Finally, it's interesting to note that Apple hired a Target executive to run its retail stores, while Microsoft has hired a Wal-Mart executive. It makes a great deal of sense for Apple to turn to a Target veteran since both firms share a differentiation strategy; both firms want to create an emotional connection with their customers; and both firms emphasize the importance of design. Wal-mart, however, has excelled at a low cost strategy, not a differentiation strategy. In fact, Wal-mart might have one of the most effective low cost strategies we have ever seen. How does this type of experience help Microsoft though? Do they want their stores to "wow" people, create rich experiences for their users, etc? What type of retail environment does Microsoft aim to create? These questions will be crucial for the firm to answer as it develops its forward integration strategy.

Robert Bruner on Survival of the Fittest

Robert Bruner, Dean of the Darden Business School at the University of Virginia, has a wonderful little article at Forbes.com in which he examines why applying the Darwinian notion of survival of the fittest to the business world is not apppropriate or useful. Here's a short excerpt, which illustrates the way in which he takes apart the phrase, its meaning, and its applicability to the free market system:

"In biological terms, "survival" suggests that your DNA doesn't end with you; it is carried forward by your descendants. Survival means longevity of a genetic model, success in evolutionary terms. But from a business perspective, mere longevity is hardly success. Do we build enterprises just to survive? Don't we want to prosper? Is there no upside to being successful? Centuries of commerce suggest that to the victors belong the spoils. Much of what animates economic behavior is the possibility of gain."

NASA Culture

As many of you know, I've done extensive research on NASA and the shuttle program over the past few years. In that work, my co-authors and I wrote about the barriers to candid dialogue at NASA, and the reasons why dissenting views were suppressed. Therefore, I was quite struck by this video that NPR reported on a few days ago. (Thank you to my colleague Lynda St. Clair for alerting me to this story and video).

An astronaut at NASA produced this satirical video to point out many of the cultural barriers to candid dialogue and innovative thinking that continue to exist at NASA despite many efforts to transform the culture in recent years. I'm sure many of you will recognize the behaviors and norms demonstrated in the video, because they exist in your own organizations.

Southwest Airlines

I'm teaching a classic study about Southwest Airlines this week in my strategic management course. Southwest proves an exceptional case, because they have managed to consistently earn profits over more than three decades in an industry that has been one of the least profitable in the world over many, many years. Whenever I teach the case, I love showing this old 60 Minutes feature about Herb Kelleher, the long-time CEO of Southwest. On YouTube, you can view the feature in two parts, as you will see below. I know that you will enjoy this funny but highly insightful story about this remarkable company.

Employee Engagement

Stefan Stern pokes some fun at the literature on employee engagement in the Financial Times. Stern wraps up the article by arguing that the best path to engaging employees is to share the unvarnished truth with them in these tough times. He quotes Archie Norman, the British businessman who turned around the Asda supermarket chain some years ago:

“We stated it as it was,” he told me. “You have to get people to face up to the reality. People will follow you...what they can’t stand is unrealistic, deluded leadership. When we said that the situation was very bad, that we were in survival mode, we got three cheers from the front line,” Mr Norman explained. “They said: ‘At last, somebody’s arrived who realises what it’s really like out there.’”

I would add one important note about employee engagement. If a firm wants to engage its workforce, it must focus first and foremost on the supervisor-employee relationship. Engagement begins with that relationship with one's direct supervisor. No matter what the firm does as a whole, if that communication and engagement does not exist in the one-on-one relationship with an individual's direct supervisor, then it's quite difficult for an organization to have a committed and productive workforce.

Equity Analysts - Buy! Buy! Buy!

It turns out the equity analysts have been just as incredibly optimistic in the past few years as they were during the dot com boom of the late 1990s. Reforms designed to address the conflicts of interest at investment banks don't seem to have curtailed the bias toward "buy" recommendations within the equity analyst community. The New York Times has a very good article on the issue today.

Thought-Provoking Old Clip from Milton Friedman

Bailouts: Money is Fungible!

We recently read that politicians were concerned that the government had provided a large amount of bailout funds to CitiGroup, while that financial institution planned to spend $400 million over 20 years for naming rights at the New York Mets' new ballpark. Lawmakers did not want government funds to subsidize the purchase of these naming rights at a baseball stadium. The bank responded that bailout funds were not being used to pay for the naming rights.

CitiGroup is not alone here in responding to such questions from lawmakers. We have heard a number of other questions raised about the activities of various banks. Time and again, we hear banks respond that bailout funds are not being used for this or that activity that is being questioned.

What's wrong here? The banks seem to be forgetting that money is fungible! It's not as if the money raised from private investors cannot be easily substituted or exchanged for the money that's coming from the federal government. There's no difference in those dollars! With limited resources, the banks are making tradeoffs every day about where to put there money. Any dollar dedicated to one activity must mean one less dollar that could be used for another activity. Now, I'm not suggesting that the federal government should intervene and micromanage bank activities. I'm simply say that it's difficult to argue that "bailout funds aren't being used for x, y, or z." When money is fungible, it's hard to make such claims.

Problem-Finding and McDonald's Remarkable Success

Dev Patnaik and Peter Mortensen have an interesting article at Forbes.com about McDonald's resurgence under CEO Jim Skinner. The article is an excerpt from their book Wired to Care: How Companies Prosper When They Create Widespread Empathy. In the article, they argued:

"How did he (Skinner) know what to do? He had experienced it all himself. After all, he began his career on the grill line at a McDonald's before working his way to the very top of the organization. In all that time, he had made sure to eat at a McDonald's every day. Not only because he genuinely likes Quarter Pounders, but also because it has allowed him to make two kinds of observations critical to the success of his company. First, he knows as well as anyone whether the food and service are good or need improvement. Second, he gets to engage directly with McDonald's diners. He doesn't need to commission a big research report. He can just talk to the guy at the next table. It's an easy, everyday way to stay connected and see the business the way the rest of the world does."

Skinner's actions resonated with me, because they are consistent with some of my latest research findings about effective leadership. In my recent work, I describe how leaders at all levels must hone their skills as problem-finders. They must seek out the small problems in their organizations before they mushroom into large-scale failures. They must recognize that bad news often won't come to them; they have to go find it. How can leaders become effective problem-finders? One thing that they can do is circumvent the filters that typically funnel information to them. Leaders have to venture out to the front lines and interact directly with customers, employees, and suppliers. They must seek out the raw data. Moreover, leaders must behave like an anthropologist who observes groups of people in natural settings. They cannot simply ask people questions; they must watch how they behave. After all, people often say one thing and do another. Watching how the organization actually functions can be a very powerful and illuminating learning experience – and a far more accurate one. Firsthand observation and experience must become part of every leader’s toolkit.

Conglomerate Bankruptcy

News reports indicate that Spectrum Brands filed for Chapter 11 bankruptcy protection on Tuesday. Spectrum is a conglomerate with businesses including batteries, shaving products,lawn and garden products, insect repellents, aquarium products, and pet products/supplies. The bankruptcy is a reminder of the challenges that firms face if they pursue an unrelated diversification strategy. While those strategies were once quite popular (back in the 1960s and 1970s), few firms maintain such conglomerate strategies successfully today. The unrelated nature of the diversification leaves little opportunity for capturing economies of scope (or synergies). Without substantial scope economies, it's difficult to justify putting such a wide array of businesses under one corporate parent.

Crisis Communication

Leadership Now has a great post on crisis communication on their Leading Blog site.

Guy Kawasaki - Tips on Finding a Job

Guy Kawasaki has a great blog post titled, "Ten Ways to Use LinkedIn to Find a Job." It's definitely worth reading.

Starbucks and Decaf

Starbucks announced recently that they will not automatically brew decaf in the afternoons at many locations where it does not appear to be economical. Starbucks is concerned about the waste, because they have committed to having freshly brewed coffee in their stores, and if insufficient demand for decaf exists, then they end up throwing out a great deal of decaf coffee over the course of the day. Of course, if someone does want decaf, they will end up waiting roughly four minutes for it to be brewed for them. There's no question that cost savings will occur by eliminating the brewing of decaf in lower volume locations, but one wonders how customers will react. I'm sure Starbucks has conducted a careful cost/benefit analysis, but I would sure be curious to see the assumptions behind that analysis. This is a great example of a company grappling with how to reduce costs in a way that has the least impact on the customer experience. The key question is how customers react. Will a number of people become disenchanted, even if they only occasionally drink decaf. It may only take a time or two when they are told to wait for that decaf before they turn to other coffee shops. In the end, so many of these cost/benefit analyses come down to the validity of the assumptions made by management. In the end, most cost/benefit analyses are highly sensitive to a few key assumptions; with some small changes, one can make the conclusions be whatever one wants them to be. The key to any good cost/benefit analysis is a highly vigorous debate about those assumptions, so that each is challenged, and if possible, validated.

Lessons from the Bursting of the Japanese Bubble

Much has been written lately about the parallels between the current U.S. banking crisis and the Japanese banking crisis of the 1990s. Many people have pointed to purported mistakes of Japanese policymakers in the wake of the bursting of the Japanese bubble. They have argued that these mistakes led to the "lost decade" in Japan, a period of stagnant GDP.

For those interested in learning more about what really happened in the 1990s in Japan, Harvard Business School Professor Diego Comin has an interesting new working paper that's worth reading. For more information and a link to the full PDF version of the paper, click here.

Davos and Groupthink

Reflecting on the Davos meetings, Business Week Editor-in-Chief Stephen Adler has some interesting thoughts on how many people may be jumping the gun when trying to explain the events surrounding the global economic crisis. As Adler writes, "Beware conventional wisdom and groupthink. Be skeptical of tidy explanations for complex past events.Be even more skeptical of confident predictions of future human behavior. Don't fight the last war." Those words ring so true, not just with regard to the economic crisis, but with regard to many failures that we encounter in business.

Cobblers Enjoy a Revival

A front page article in the Wall Street Journal today describes the surge in business experienced by cobblers during this economic downturn. With the economy in recession, more people are choosing to have their old shoes repaired and resoled, rather than purchasing new ones. I've read similar articles over the past few weeks about auto mechanics. More people are choosing to repair old vehicles rather than purchasing new ones.

I was struck by these articles because this behavior represents such a stark break from the way in which we all began to treat more and more goods as "disposables" or "consummables" in recent years. When I was a child, people would have major electronic items such as TVs, cameras, or stereos repaired when they were broken. When my digital camera broke a few years ago, the retailer laughed at me when I asked about getting it repaired. He informed that the new technology was light years better than my old digital camera, and the cost of repair was nearly as high as the cost of buying a great new camera. As a nation, we simply stopped repairing things. We bought them, used them, and then went on to buy another one when the original broke. We witnessed the demise of the "repair shops" that used to be in every small town.

Will our behavior change as soon as the economy improves, or will we see a return to more frugal ways of the past? I would be inclined to think that behavior will change again as the economy gets better... which would be bad news for the cobblers!