The Decline of Newspapers

We have all heard about the demise of the newspaper business, and we've watched as papers try to charge more for less and less content. Meanwhile, one paper in the United States really stands out from the pack. The Wall Street Journal continues to add content. Of course, they also have a paid subscription model on-line, something other papers do not. One recent addition to the Wall Street Journal is a sports page. However, it's a sports page like no other. That's the hallmark of a great competitive strategy; do what others are not doing - be distinctive! The WSJ sports page focuses on a few distinctive pieces each day, one of which usually offers a statistical analysis of sports that is quite interesting. For instance, yesterday the Wall Street Journal reported on the link between spring training records and regular season records in baseball. The analysis shows that there is a very weak correlation between the win-loss records of pre-season and regular season.

Efficient Markets?

Economist Scott Sumner has a very interesting post on his blog about the efficient markets hypothesis as it relates to recent turmoil in the financial markets (thanks to my former econ prof Greg Mankiw for pointing to this great post on his own blog). One of my favorite excerpts from Sumner's post is:

So the anti-EMH argument for regulation must be based on the following; bankers are irrational and make lots of foolish loans. Regulators are rational and can see that these loans are too risky, and can protect bankers from hurting themselves. At a theoretical level this doesn’t even pass the laugh test.

Who's in Charge of GM?

The government's ouster of Rick Wagoner at General Motors has dominated the news today. While many good arguments can be made for why Wagoner needed to be replaced, many questions remain regarding the future of governance and leadership at GM. For starters, one has to wonder about the people now calling the shots for General Motors. Mr. Rattner, who is chairing the President's auto task force, has a background in investment banking and journalism. He's never been an executive in charge of a large manufacturing corporation. Secretary Geithner has worked for the federal government for most of his adult life. He's never had an executive role in an industrial firm. Larry Summers held one major private sector executive position, and that did not end very well (his resignation as Harvard President). The President himself has never run a private corporation, nor have many of the key Senate leaders who are involved in overseeing the auto industry bailout. All these men clearly exhibit intelligent and expertise in their particular domains, but one wonders whether they have the knowledge to make key decisions regarding the future of such a large automobile manufacturer. Of course, one might argue that they won't be making those types of detailed decisions; they simply will assemble a new team who will then make the hard calls. However, we do not really know what the level of government involvement will be in strategic choices and day-to-day decisions going forward.

Southwest Airlines: Tweaking the Model

The Wall Street Journal reported yesterday that Southwest Airlines continues to tweak their strategy, which has been so successful them for several decades. For instance, Southwest has now decided to begin providing service from both New York's LaGuardia Airport and Boston's Logan Airport. Traditionally, Southwest avoided these types of crowded and busy major airports in northern cities susceptible to frequent weather delays. As a result, Southwest Airlines has always managed to turn around their planes in a remarkably short period of time, working from smaller regional airports such as Providence and Manchester. Southwest achieved a very good record of on-time arrivals and departures as a result. Moreover, the company kept its planes flying more hours per day because of those fast turnaround times, leading to higher productivity and increased profits.

As a strategy professor, Southwest offers a model to be admired, because they have created such a well-integrated system of activities. Everything they do works to deliver speed and low costs. They do not exhibit any inconsistencies in their strategy. Now, however, these tweaks to the model may weaken the operating model. Will they be able to keep costs as low, turn around planes as quickly, and maintain their record of on-time arrivals and departures, when operating out of such busy, crowded airports?

Southwest has a remarkable string of 36 straight years of profitable operations - a record unmatched in the airline industry. They have chosen to tweak the model to deal with the economic upheaval, and to find new sources of growth. However, they may risk weakening the strategic focus and clarity that have been at the root of their success.

Catch a Piece of Maine

John Ready, co-founder of Catch of a Piece of Maine, spoke last night here at Bryant University. The company, which he created with his brother Brendan, offers what some have described as a lobster trap timeshare. Customers purchase ownership of a trap for a year and receive a credit every time their traps catch a lobster. They can choose to have the lobsters shipped to their homes, or they can gift them to others. Through video emails, the customer learns about lobstering and receives personalized messages from their lobsterman. What a unique idea!

Today, the Ready brothers’ companies generate revenue in excess of $10 million. The Ready brothers have received many accolades for their entrepreneurial success. John and Brendan were named by Inc. magazine as one of the 30 coolest entrepreneurs under the age of 30. They received the Small Business Administration's 2008 National Young Entrepreneur Award. Fortune magazine, USA Today, and other leading periodicals have described their story. CBS News, NPR, Boston’s Channel 5, and WBZ radio have all featured the Ready brothers at one point or another.

John has not only created a company that generates healthy profits. He has helped enhanced the livelihood of Maine lobstermen, many of whom have struggled mightily in recent years to make a decent living. Catch a Piece of Maine also strives to adhere to eco-friendly harvesting methods, producing little to no by-catch and enforcing strict laws to allow the release of all lobsters too small and too large. John and Brendan donate a portion of the profits from Catch a Piece of Maine to the Gulf of Maine Research Institute to fund educational programs on marine ecosystems for 5th and 6th graders.

For more about the company, you might take a look at this video from the CBS Sunday Morning show:

Zappos

If you have not read about Zappos, the online shoe retailer, you should take a look at these articles in Business Week and Fortune. Zappos has a very unique culture of openness and transparency. They also focus on delivering exceptional customer service by providing their employees with more autonomy to be creative in their interactions with consumers.

Hedge Fund Culture

Not many articles on hedge funds provide insight as to unique and impactful corporate cultures. Most such articles focus on the investment philosophies of the founders, rather than their organizational philosophies. However, a recent Fortune article is a wonderful exception. In this article about Bridgewater, the world's largest hedge fund, writer Brian O'Keefe describes the company's unique culture. Some of these attributes are woefully lacking in many organizations. Managers ought to consider the extent to which they might benefit by embedding some of these cultural characteristics in their organizations. Here's one interesting excerpt from the article:

"If you took five organizational psychologists, locked them in a room, and told them to create the perfect blueprint for a corporate culture, this is about what they would come up with," says Bob Eichinger, a retired consultant who has spent five decades working with companies on how to manage talent and now works part-time for Bridgewater. "He's trying to design a culture in which people with talent have the freedom to perform."

The result of that design feels pretty radical compared with the typical corporate environment. In keeping with his identity as a hyperrealist, Dalio is committed to total transparency. So, for instance, every meeting is taped and kept on file. Blunt and frequent feedback is required, including "drill-down" sessions that probe into why employees failed at tasks. Managers aren't allowed to evaluate an employee's performance unless he or she is present. Because Dalio believes mistakes are valuable learning tools, every time something goes wrong employees are required to file a memo in the so-called Issues Log. And because Dalio is passionate about the meritocracy of ideas, subordinates are encouraged to argue with their superiors - and the superiors are required to encourage it. "We hate egos," he says.

If young employees - and loads of recent Ivy League grads with 99th-percentile SAT scores roam the halls - need a reminder of the potential opportunity afforded by that meritocracy, they need look no further than Greg Jensen, 34, the head of research and the third voice, along with Dalio and Prince, in the firm's weekly investment strategy meetings. Jensen started at Bridgewater as an intern directly out of Dartmouth and rose quickly through the ranks. "I love that your contribution here gets evaluated on a logical, principled basis rather than through the prism of a power base," he says.

Not surprisingly, the intense culture is not for everybody. "It's either a cult with mind control or the happiest place on earth, depending on whether you buy into it," says one former employee. Even some happy current employees say that there was an initial adjustment period and admitted that aggressively candid feedback wasn't always fun. But several spoke of how empowering such an open approach can be, and a few even offered testimonials for how embracing a policy of radical clarity had improved their personal lives.

More to the point, perhaps, is the fact that Dalio's system gives him the results he's looking for. He says he is perfectly comfortable having his assertions challenged at all times. In fact, he craves it. "I draw my conclusions," he says, "and I say, 'Please shoot holes in this. Tell me where I'm wrong.' People tend to think that my success, or whatever you want to call it, has been because I'm a really good decision-maker. I think it is actually because I'm less confident in making decisions. So in other words, I never know anything really. Everything is a probability."

B-School Reform

The New York Times had an interesting article a few days ago titled, "Is It Time to Retrain B-Schools?" Without question, business schools face a number of challenges. Let's begin with the fact that too many scholars are rewarded for publishing in scholarly peer-reviewed journals, though their work may have little practical relevance for managers and students. Our PhD granting institutions do not train graduates how to teach; they focus only on research skills. The career offices have helped large chunks of students land jobs in investment banking and consulting, with an underemphasis on managerial job opportunities in companies that actually make things. Finally, there is the question many people are asking: To what extent are business schools responsible for some of the management failures that have put us in this economic mess? Here's an interesting quote from the article:

“It is so obvious that something big has failed,” said Ángel Cabrera, dean of the Thunderbird School of Global Management in Glendale, Ariz. “We can look the other way, but come on. The C.E.O.’s of those companies, those are people we used to brag about. We cannot say, ‘Well, it wasn’t our fault’ when there is such a systemic, widespread failure of leadership.”

Joseph McCool's Book

For those interested in learning more about the executive search business, I recommend that they should take a look at Joseph McCool's new book, Deciding Who Leads: How Executive Recruiters Drive, Direct & Disrupt the Global Search for Leadership Talent.

The Dangers of Information Filtering

In my new book, I discuss the dangers that organizations face because individuals filter information, particularly bad news. People filter information for a variety of reasons, including some well-intentioned behaviors intended to help their leaders. Here's a very brief excerpt regarding one main reason why filtering takes place:

Efficiency Concerns
First, individuals choose to summarize and package information for senior leaders for the sake of efficiency. They have a limited amount of time to spend with top executives, and they must use the time wisely. Senior leaders have asked for assistance in decision-making; they want to see key data presented, synthesized, and analyzed. In some cases, they want to see the pros and cons of various options. In others, they also want their subordinates to offer a recommendation as to the course of action that should be chosen. Individuals have to make tough choices as to what information should be presented in the limited time frame available. “Face time” with senior leaders becomes a precious commodity, and no one wants to squander it by inundating them with information that is not organized and analyzed properly. Neither leaders nor subordinates want to spend time on information that is irrelevant or unreliable. Busy schedules and crowded meeting agendas certainly exacerbate the amount of filtering that takes place. Given the fast pace within most organizations, individuals know that they must “get to the point” in meetings.
Individuals also do not know want to waste senior leaders’ time with problems that they believe can and should be solved without executive assistance. Many people fear they will appear weak, or worse yet, incompetent if they bring a problem to a higher level in the organization. They dread being asked why they could not resolve the issue on their own, or why they are “wasting leadership’s time” on issues that appear to be insignificant.

The Cost of Layoffs

In this economic environment, layoffs are unavoidable at many firms. However, Geoff Colvin at Fortune reminds us that managers often underestimate the cost of layoffs. They typically focus only on the direct costs, i.e. the severance payments that occur at the time of the layoff. However, firms do incur other costs as well. Rehiring and retraining expenses often prove much more significant than firms estimate. Firms should pay particular attention to these types of expenses if they have a highly skilled workforce with specialized capabilities that are hard to acquire and/or develop.

Overcrowded Agenda?

Many observers from the left and right of the political spectrum have begun to question whether President Obama has embarked on an overly ambitious set of initiatives. Is his agenda overcrowded? Does he have to set some priorities? As Clive Cook points out in the Financial Times today, there may be many good reasons to pursue such an ambitious agenda right now, but the system may not have the administrative, legislative, and political capacity to handle so many initiatives.

CEOs certainly have gotten in trouble in the past when they have tried to do too much at once. Crowded agendas mean that one does not excel in any particular area, because management attention and organizational resources become spread too thin. Many new CEOs, in particular, fall into this trap of trying to do too much. the organization often does not have the capability to execute so many different initiatives at the same time.

GE's former CEO Jack Welch describes the need for focus and persistence in his book, Jack: Straight from the Gut. In that book, he explains how GE pursued four major initiatives in the 1990s. Each was clearly not a "flavor of the month." The initiatives lasted for years, and the entire firm focused on executing them. Too many firms try to pursue dozens of initiatives simultaneously, and no one is quite sure what the priorities are.

Paul Levy and the Beth Israel in Boston

Several years ago, David Garvin and I developed a multi-media case study about the remarkable turnaround that Paul Levy engineered at the Beth Israel Deaconess Medical Center in Boston. We had an up-close look at that change process, as we interviewed Paul every few weeks as the turnaround took place - beginning just a few days after he became CEO of the hospital. We learned from our study that Levy had a number of distinctive leadership capabilities. Perhaps most importantly, he earned the trust of his workforce, and he built collective ownership for his turnaround plan. Those qualities enabled him to lead a very successful implementation of the plan, returning the hospital to positive cash flow after many years of heavy losses.

Now, the Boston Globe reports that Levy has had to cut costs again in the face of the economic downturn. He stood before his workforce and asked if they would consider sacrificing their pay increases to save the jobs of the lowest-paid staff members at the hospital who might otherwise have to be laid off. He barely got the words out of his mouth, and the entire staff erupted in applause. They chose to make a small sacrifice to save the jobs of their fellow employees.

It's a great story. I applaud the efforts of the amazing team at the BIDMC. I admit that I'm biased, given that I studied the hospital in depth. I'm also biased, though, because they did a remarkable job of helping our family during a serious illness several years ago. The staff is incredibly dedicated, and I'm glad to see that they are trying their best to retain everyone at this time.

For those who are interested, Paul Levy maintains a very interesting blog. Click here to access it.

Silent Customer Attrition

Andrea Ayers reviews some fascinating survey data at Forbes.com today. She provides results from survey research regarding customer satisfaction. Her results indicate that CEOs think that their customers are far happier than they really are with their companies' service. Ayers speaks at length about what she calls "silent attrition" - i.e. those customers who leave without ever telling a company why they have chosen to stop doing business with them. Ayers reminds us that even those customers who express "satisfaction" with a company's service are not necessarily loyal.

Anne Mulcahy, CEO of Xerox, once touched on this issue of "silent attrition" in a speech she made about her firm's customer service efforts. Mulcahy said:

“There has been a norm around for many years that somewhere around 75 per cent of customers who defect say they were "satisfied." Our own research bears this out. When our customers tell us they are “very satisfied," they are six times more likely to continue doing business with us than those who are merely satisfied… If you're just providing your customers with service that's good, they're probably just satisfied. This should set off alarm bells. Take the automotive industry. Satisfaction scores average around 90 per cent. Guess how many people repurchase from the same manufacturer? Only 40 per cent.”

Saturday Night Live on the Financial Crisis

Hilarious new video from SNL regarding Secretary Geithner's plan for resolving the banking crisis:

Financial Literacy

There is no question that poor levels of personal financial literacy contributed to the mess in which we now find ourselves. Too many people did not understand how to manage their finances. They did not understand the true cost of maintaining credit card balances. They took on too much mortgage debt. They did not plan adequately for the possibility of a job loss (or two) in the family. In my view, financial literacy begins with how we teach our children at a very young age about spending and saving money. At the university level, we can take concrete steps to help improve our students' financial literacy as well.

With that in mind, I was very glad to see this article in the Wall Street Journal about the National Foundation for Credit Counseling's recent efforts to promote financial literacy among young people. NFCC ran a wonderful poster contest (Be Money Wi$e), which challenged young people to develop creative posters that completed the statement, "I am going to be a millionaire because..." Congratulations to 11th grader Leah Ellyson of Farmington, West Virginia, who won this year's contest.

Paying to Go to the Bathroom on Ryanair?

One of my students sent me this article about Ryanair CEO Michael O'Leary's latest suggestion (perhaps in jest!) for raising revenues on his airline's flights. Ryanair, of course, is one of the most successful low-cost carriers in the world. O'Leary has become famous for his bold actions designed to lower costs so as to offer rock-bottom fares. He also has found creative ways to generate revenues from each flight in the form of advertising onboard, duty-free sales, etc. O'Leary is also well-known for a series of brash moves designed to generate free publicity for his airline, while often poking fun at his competitors, particularly the higher-cost European flag carriers. One of the most incredible O'Leary tactics was an advertisement which showed the Pope revealing the fourth secret of Fatima as Ryanair's low fares! You can imagine the outcry that ensued, including from his own Catholic mother. Of course, he also received an unbelievable amount of free publicity from the stunt.

Buffett's Annual Letter

Warren Buffett has issued his annual letter to shareholders, which often receives a great deal of attention. In that letter, Buffett typically discusses general business and economic issues, as well as the performance of Berkshire Hathaway. Given the current economic environment, this year's letter strikes me as particularly interesting to read. Here's one very insightful comment from his letter, which all investors should remember as they look to the year ahead:

Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our
usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.

Know What You Don't Know

Michael McKinney has posted an interesting write-up about my new book on his blog (Leading Blog). He seems to have generated some good discussion among his readers.

No Smarter Than Anyone Else?

Perhaps those Harvard endownment managers were not smarter than any other set of investors after all. Year after year, Harvard managed to report returns on their endowment investments that exceeded the Standard and Poor's index by a wide margin. What explained such fabulous returns (which led to handsome rewards for the Harvard money managers)? One explanation focused on the remarkably astute investing skills of the team at Harvard Management Co. - presumably a function of the amazingly talented and intelligent professionals that HMC hired and then compensated so well. Another explanation suggested that Harvard had better access to certain non-traditional investment opportunities than other institutions.

Perhaps, though, a simpler explanation suffices... Harvard took a ton of risk - far more risk than we find in the S&P 500 index. With high risk comes high reward - lesson #1 from any introductory finance course taught at Harvard Business School. Now, the Harvard endowment managers have learned that there is indeed no free lunch. With all that risk comes the potential for huge losses and a liquidity crunch. This article from abcnews.com explains that Harvard now faces a severe budget crunch because of a liquidity crunch at the endowment. The school does not face a problem simply because they had become dependent on the endowment for one third of the annual operating budget. In fact, the problem is more severe. High-risk investments now put Harvard in the position of having to dump assets at rock-bottom prices, raise money through pricey debt, and inject additional cash into certain private equity investment vehicles.