Calorie Counts at Starbucks

Scholars at the National Bureau of Economic Research conducted an interesting study recently, which was profiled in the Boston Globe's Uncommon Knowledge column today. The researchers set out to study the impact of new legislation in some cities that forces restaurants to list calorie count information on their menus. The scholars found that such posting of calorie information caused a decrease in the amount of calories found in food purchases by customers. Interestingly, the disclosure of dietary information had no impact on the caloric content of the drinks purchased and consumed by Starbucks customers. The key question: Did the law curtail revenues at Starbucks? Perhaps surprisingly to some observers, the law did not affect sales totals. Actually, those Starbucks locations located in close proximity to a Dunkin' Donuts actually realized in a small increase in revenue. The researchers hypothesized that customers may have compared calorie counts at the two chains, and then concluded that the healthier option was Starbucks. The Boston Globe does not mention if the customers' conclusions about calorie counts at the two chains were actually true. Nevertheless, the broader conclusion is perhaps the most interesting, namely that listing dietary information did not hurt Starbucks' sales.

What Every Student Should Know About Economics

From a letter sent to economics professor and textbook author Greg Mankiw, by Professor Gordon Boronow: http://gregmankiw.blogspot.com/2010/01/economics.html

Succession Planning

Tom Magness, over on his Leader Business blog, has a great post on succession planning, drawing on the example of the University of Texas having to deal with a serious injury to its star quarterback during the opening quarter of the national championship game earlier this month. During that game, Texas had to rely on a very young, inexperienced backup. Magness provides some great simple lessons on succession including the following:

"Simulations and contingency plans must address the loss of key leaders. Most of our "what if" drills involve things like the loss of a key customer, the failure of an important system or piece of equipment, or the interruption in the supply chain. But "what if" we lose a key leader? Are we prepared? Have we practiced under those conditions? Have we established contingency plans so that we can quickly integrate new leaders without losing momentum? Are we prepared to adjust the game plan to be able to operate under the new conditions and still accomplish the mission?"

I can recall one company with whom I've worked that ran a very interesting exercise for it senior leaders. The exercise focused on a major catastrophic event that could impact the business. Each senior executive reported to the CEO's office at the start of this exercise, and immediately, several of them were told that they had been injured/incapacitated during the disaster. Thus, they were not available to work during this time. They were told to leave the exercise. Now, the simulation proceeded with several junior people asked to step in for their bosses. What a wonderful way to evaluate the organization's capability to respond to a crisis, while also evaluating how well prepared the bench was to "go into the game."

Doing Business In China

My colleague, Crystal Jiang, is an exceptional young faculty member who studies and teaches international business strategy. She has done some excellent work, particularly on Chinese businesses. In one recent study, she found that Chinese executives trust their overseas partners differently depending on whether or not these partners were of Chinese ethnicity. Many Chinese have emigrated to other nations, particularly in Asia, over the years. Overseas Chinese are a very important economic force behind foreign direct investment in China.

Jiang distinguishes between two forms of trust: cognitive and affective. Cognitive trust is about your "head" - it's based on one's assessment of another person's knowledge, competence, and reliability. Affect-based trust is socio-emotional in nature - it's about your heart, not your head.

Jiang finds that trust plays a key role in investment relationships between Chinese firms and foreign partners. In particular, she finds that Chinese executives have higher affect-based trust, but lower cognition-based trust, in overseas Chinese than non-Chinese partners. As people think about doing business in China, they should consider how critical the role of affect-based trust can be, as well as the important role that overseas Chinese can play in forging key business relationships with Chinese firms.

What Happened to Toyota?

We read shocking news today that Toyota has suspended sales of 8 popular models in the United States due to a problem with the throttles sticking open. The news comes after a series of other indicators over the past two years which have demonstrated slippage in Toyota's once-vaunted quality record. What happened to Toyota, renowned for its exceptional quality? It appears that the rapid growth of the past few years, as other automakers stumbled badly, may have stressed the organization to a breaking point of sorts. Perhaps, too, Toyota has finally hit a point at which certain diseconomies of scale began to become more pronounced. In the automotive business, every executive seems to have bowed at the altar of scale economies for years, yet it seems that many failed to see how powerful diseconomies of scale can be.

What should we watch for as Toyota tries to minimize the damage from this move? First and foremost, it will be critical for Toyota to communicate often, and in a myriad of ways, with consumers to educate them about why they have made this move and how they are fixing the situation. Second, Toyota has to do all it can to expeditiously correct the problem on models already sold. Third, Toyota must have a well-orchestrated campaign for re-launching these models in the United States.

What does the Toyota decision mean for its rivals? At first glance, this news does appear to be very positive for firms such as General Motors and Ford. However, each of the rivals must take great care in their response. After all, they too have their share of quality issues from time to time. Will Toyota set an expectation for suspensions of sales that these rivals will not want to emulate? Will people begin to ask questions about why rivals aren't "taking quality issues as seriously as Toyota did?" In the end, Toyota may have raised the bar for everyone in the industry when it comes to handling quality concerns.

SNL's Take on the NBC Mess

Check out Saturday Night Live's hilarious take on the Leno/Conan mess over at NBC

Video Recaps | Full Episodes | Webisodes

Apps for the Kindle

Amazon has announced that it will be soliciting applications for the Kindle from outside developers. The firm plans to sell these apps through an online store. Naturally, Amazon has taken this step as a preemptive move to address the enormous threat posed by Apple's new tablet-like device.

This article on Business Week's website focuses on the possibility of games being developed for the Kindle. While that may be promising, the device itself may need to be overhauled to make the platform amenable to high quality game development. Of course, one could imagine simple "brain" games such as crosswords and Sudoku working quite nicely on the Kindle. Beyond that, the opportunity, and perhaps necessity, exists for Kindle to make its device much more interactive with regard to book and periodical content. The article mentions the education market and the possibility of interactive content in that space. The potential of interactive content, I believe, stretches far beyond the education market.

The question is: Can Amazon court enough developers to cope with the Apple threat? Does Apple have too much of a head start with the developer community, based on the iPhone platform? Ultimately, Amazon has to decide what business it is in. If the fundamental purpose of the Kindle business is to drive book sales, then Amazon must take great strides to make it economically attractive for developers. More apps means more Kindle sales means more e-book revenue. That seems to be the equation. The revenue potential of the apps, as well as the hardware revenue of the Kindle, appears to mean far less than the huge opportunity to drive book sales through this platform.

Healthy Casual Dining

The Wall Street Journal has an article today about casual dining firms such as Applebee's, and others such as Starbucks, introducing healthier menu items. The article discusses how customers will react, as the firms balance taste vs. calorie count. Perhaps more interestingly, I wonder whether one of these large casual dining firms will break from the pack and shift radically to an "all-healthy" menu. After all, this industry is very crowded right now, and many firms are struggling to differentiate themselves. Why not stake out a unique position? It's risky... That's why. CEOs don't like walking away from some of their customers. Yet, the payoff long-term would be tremendous if a firm could be the first mover, and if it could really stake out a differentiated position. If none of the existing firms reposition themselves, it will leave an opening for a smart new entrant.

Uno's Bankruptcy

Uno's Chicago Grill (formerly Pizzeria Uno) filed for bankruptcy today - sad news for an icon in the pizzeria business. The company announced a restructuring that would reduce the debt burden substantially, and hopefully, enable the firm to return to profitability in the near future.

The company's bankruptcy raises some interesting strategic questions. Some may attribute its demise to the economic recession. However, one has to question whether the firm's changing identity in past years lies at the heart of its current troubles. In past years, the company has broadened its menu quite substantially, and as a result, it ultimately chose to change its name from Pizzeria Uno to Uno's Chicago Grill. These changes spur me to ask: Did the company lose focus with these changes? Did it create confusion among its customers? Did the menu expansion cause a significant loss of efficiency? Was the company trying to be all things to all people in recent years, instead of having a laser focus on a particular target market?

New Performance Metric

Geoff Colvin's recent column in Fortune describes a new performance metric, called EVA Momentum. Bennett Stewart, one of the creators of the EVA (Economic Value Added) metric, has developed this new one as well. The original EVA metric measures after-tax profit beyond a company's opportunity cost of capital. EVA Momentum simply equals a firm's EVA divided by the prior period's sales. Achieving high EVA Momentum means that a firm has generated profitable growth.

Stewart claims in the article that this new metric cannot be manipulated - a grand claim indeed. According to Stewart, "It's the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."

It remains to be seen whether Stewart is correct, but I find the concept intriguing to say the least.

China and Enron

Thomas Friedman penned an interesting article the other day in the New York Times. The title could not have been more provocative: "Is China the Next Enron?" In the piece, Friedman writes that James Chanos, the famous short seller who foresaw Enron's demise, now believes that China represents a bubble due to burst in a magnificent way.

Friedman dismisses Chanos' concerns, and he explains why: "I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us)."

Here is what struck me about Friedman's comments: One could have said the exact same thing about Japan in the late 1980s. How did that work out for them?

Crash Course by Paul Ingrassia

I just finished reading Paul Ingrassia's new book, Crash Course: The American Automobile Industry's Road from Glory to Disaster, on my new Kindle. I thought it might be worth commenting both on the book as well as on the electronic reader.

First, regarding the book, I thoroughly enjoyed Ingrassia's history of the auto industry. He does a wonderful job of documenting the evolution of the American auto companies, while contrasting their decisions to those of Honda and Toyota. He takes both management and the union to task equally for their incompetence, explaining ludicrous decisions such as the Job Ban. He also does a nice job of describing how change efforts, such as the Saturn experiment, did not succeed. Lastly, he explains how Ford made the tough decisions that enabled it to avoid bankruptcy, while GM management did not have the courage to make similar choices. I would like to have seen him look forward a bit at the end to talk more about how the firms will have to position themselves to succeed in the long term, and I think he seemed overly positive on the entire federal bailout. For instance, he never criticizes the federal task force for not demanding more change in the top management ranks at GM when they removed Wagoner. Overall, though, it's definitely worth reading.

As for the Kindle, I enjoy having the opportunity to purchase a book in seconds via wireless from the comfort of my home or office. That is incredibly convenient. The screen technology is easy on the eye as well. I do wonder, though, if tablet PC technology will leapfrog the Kindle in terms of user interface.

Latest CEO Accessory

Fortune published an article this week titled, "Latest CEO Accessory: A Chief of Staff." Writers Beth Kowitt and Alyssa Abkowitz explain that more CEOs have hired someone to fill the role of chief of staff, a position traditionally found in politics, but not often in business. The article mostly extols the benefits to CEOs of having someone in this role. Surely, a chief of staff may bring benefits, particularly as the leader's "confidential sounding board" as the article mentions. However, I think the article misses out on the potential negative aspects putting someone in this role. A chief of staff becomes a powerful filter of information, and at times, that can be harmful. The chief of staff may shield the leader from communicating directly and often with key people at lower levels, and may actually filter out bad news that the leader should hear. The gatekeeper function bestows a great deal of power on an individual. Some individuals, unfortunately, choose to abuse that power to advance their agendas. Many times, though, the chief of staff may simply filter out critical information without any nefarious intentions. They are trying to help the chief executive manage their busy schedule, and in so doing, they package and streamline information flowing to the top. However, they may be contributing to an increasing isolation of the CEO from the rest of the organization.

Marchionne on Market Share vs. Profits

I always teach my students that market share does not necessarily equal profitability. Plenty of firms with sizeable market share fail to make good profits, and plenty of niche firms achieve high profitability. Still, far too many executives remain obsessed with market share, and they pursue unprofitable volume growth.

With that in mind, I was very pleased to read about Sergio Marchionne's attempts to change the mindset at Chrysler. Here are Marchionne's refreshing comments at the North American International Auto Show, as reported by the Wall Street Journal:

"There's almost a fanatical, maniacal interest in [market] share. Unprofitable volume is not volume I want. We have a very good track record for how to destroy an industry - run the [plants] just for the hell of volume, and you're finished."

As you may recall, on this blog post a few months ago, I worried about GM's Board Chairman (and now CEO)Edward Whitacre's emphasis on market share gains. I'm glad to see Marchionne questioning Detroit's past obsession with volume growth.

Undercover Boss

Over the past few days, I've seen a number of previews for a new CBS reality show titled "Undercover Boss." I'm generally not a fan of reality shows, but this one has attracted my interest. According to CBS:

"The series follows high-level chief executives as they slip anonymously into the rank and file of their companies... Each week a different executive will leave the comfort of their corner office for an undercover mission to examine the inner workings of their company. While working alongside their employees, they will see the effects their decisions have on others, where the problems lie within their organization and get an up-close look at both the good and the bad while discovering the unsung heroes who make their company run."

I'm very intrigued because my last book argues that CEOs can derive great value from this type of interaction with front-line employees and customers. In the book, I wrote:

"Discovering your organization’s problems requires more than a few town hall meetings to ask for employee input. Effective leaders become adept at watching how customers shop, employees work, and competitors behave. They break out of the isolation of the executive suite and “get out and look.” They do not simply “manage by walking around.” They become careful and systematic observers of people, processes, and facilities. They immerse themselves in the everyday contexts in which work is being done, and in which consumers buy and use their products. They engage with people on the front lines of organizations, and they get their hands dirty doing some of the real work that must be done to serve customers. Working alongside their employees, they see how things actually get done."

I give some examples in the book of CEOs who did this effectively, including David Neeleman, founder of JetBlue. When Neeleman boarded one of his planes, he would introduce himself to the passengers over the intercom system. Then, he would join his flight attendants in providing drink and snack service. Neeleman actually donned an apron with his nickname – “Snack Boy” – as he worked the aisles. He found these interactions with employees and customers to be incredibly valuable.

Who knew that I'd find a reality show profiling an activity which my research uncovered as a valuable leadership activity?! Undercover Boss premieres after the Super Bowl on CBS. I have no idea if it's a good show, but I'll be watching to find out! Here's a preview from CBS:

The Jay Leno Experiment

News reports today indicate that NBC will be moving Jay Leno back to a late night television time slot. The low ratings of his new prime-time show had upset NBC affiliates throughout the country, who were seeing an adverse impact on their late night local news. At the same time, Leno's replacement, Conan O'Brien, had fallen far short of the ratings achieved by his predecessor on the late night Tonight show. What can we learn from this failed experiment?

It seems that NBC failed to fully grasp the fundamental differences in the audiences at these different time slots and for these different hosts. First, the habits of the loyal Tonight Show audience during the Leno tenure did not appear to fit with a new prime-time slot. In other words, the Tonight Show appeared to be a ritual for many people, something they watched after the late night news. They liked that sequence, and they enjoyed ending their day with the Leno monologue. That didn't mean, however, that they would watch Leno during prime-time, when he was competing with very different alternatives. At the same time, the loyal viewers who watched Leno did not necessarily connect well with a much younger, quirkier Conan O'Brien, who had a very different style. Thus, O'Brien watched Tonight Show ratings fall as he took over. Again, his ratings success at a different time slot (after the Tonight Show) did not translate well to the earlier period, as the viewership demographic differs.

Did NBC understand all these demographic differences? We would think so, yet they seemed to convince themselves that these highly accomplished comics could overcome these issues. They learned that viewing habits and patterns have a more powerful, enduring influence than they imagined. Talent doesn't necessarily trump customer habits, needs, and rituals! The lesson is that companies really need to understand the rituals and habits of their customers, and they must comprehend why these habits may be difficult to break. They also have to understand at a deep level why people enjoy a particular product, and how their happiness may derive from precisely how they consume the product.

One positive from the Leno experiment: At least NBC cut their losses quickly. One big potential negative: One of their talented comics (or more) may depart over the whole way that this has been handled.

Bryant University - Info for Prospective Students

For all high school students interested in applying to Bryant University, the deadline is approaching soon! Applications are due on February 1st. Our admissions office is holding a series of winter receptions for prospective students in different locations, including Greater Boston, Long Island, Hartford, Bermuda, and Puerto Rico. For additional information about Bryant, you might take a look at the two videos below:

The Impact of Private Equity

In this new working paper, Shai Bernstein, Josh Lerner, Morten Sørensen, and Per Strömberg examine the impact of private equity on industry performance across many nations. They find that industries with active private equity investments in the past five years have experienced more growth in production, value added, and employment. These industries also do not appear to be more volatile than those without private equity investment activity. The results appear to not be a situation of reverse causality, i.e. it's not the case that private equity appears to be investing disproportionately in industries already with rapid growth and low volatility.

The Cost of a Meeting

This article in the Wall Street Journal describes how small businesses are trying to make their meetings more efficient. I thought that Iowa-based Russell Construction had developed a method that could be applied by many firms to great effect. As WSJ writer Emily Maltby explains,

"Managers at Russell Construction Co. introduced a new device at a recent quarterly meeting that calculates the average salary of those in attendance and determines exactly how much the meeting is costing the company based on those figures. 'I don't think people thought of time as an expense before,' says Angela Bagby, director of marketing and client relations for the 70-employee firm, which is based in Davenport, Iowa. That initial 90-minute meeting cost the firm roughly $5,000, according to the $25 cost-management gadget, which is made by Bring TIM LLC. Since then, employees have used the device at smaller group meetings, helping to shave off as much as $100 per meeting, Ms. Bagby estimates."

Have you estimated the cost of people's time at your staff meetings? I encourage all managers to consider conducting this simple calculation, and then raising people's awareness as to the opportunity cost of having a meeting. Perhaps it might make people think twice about how they spend their time, as well as how they ask their subordinates to spend their time.

Target's Great Save Event

According to this article by Sarah Gilbert, Target will be launching a "Great Save Event" in its stores from now through February 21st. In this event, Target will sell large bulk items, such as large packages of paper towels, in its seasonal aisles. In a sense, Target will create a Costco-type section within its stores for a seven week period. They hope people will seek out the treasure hunt experience in this special section, and perhaps visit the store a bit more often than usual in this post-holiday time period.

Does this make sense? I think it does. The seasonal aisles are probably not very productive in terms of sales per square foot in the period immediately after Christmas. Why not use that square footage to do something exciting and innovative? Moreover, consider the typical Costco customer. You might think that lower income folks who are eager to save tend to be the ones shopping warehouse clubs. That is NOT the case! In fact, the typical warehouse club customer tends to have a bit higher income. Why? Well, you may save on a per unit basis at a wholesale club, but the total cash outlay when buying items in bulk is quite high. Plus, you must pay an annual fee. Moreover, you need a decent-sized vehicle to carry these items home, as well as a good-sized house to store these items. Small business owners also tend to shop warehouse clubs quite often. All that adds up to a customer demographic that is more affluent than you might think at first. Just take a look at the brands of vehicles in a typical Costco parking lot!

Why is this information about the demographics important? Well, Target aims to serve customers who are a bit wealthier than the typical Wal-Mart customer. They have a differentiated strategy, which includes selling some designer-type items at a premium price. Thus, their target demographic fits nicely with the typical warehouse club customer demographic. Target's customers should be attracted to this Great Save Event.

Making College Relevant

The New York Times ran a thought-provoking article this week titled "Making College Relevant." Writer Kate Zernicke describes a change in the nature of questions being asked by parents and children as they visit campuses:

"Even before they arrive on campus, students — and their parents — are increasingly focused on what comes after college. What’s the return on investment, especially as the cost of that investment keeps rising? How will that major translate into a job?"

I think those in the ivory tower who dismiss this line of questioning by parents as incorrect or inappropriate are making a grave error. In the end, the parents and students are the customers. We cannot simply ignore the reality of the marketplace. Yes, a broad, well-rounded education is critical. Yes, the selection of a particular undergraduate major is often not as critical as people think. Yes, critical thinking and communication skills (written and oral) are often essential building blocks to a successful career, regardless of your major. Yes, college is more than about an ROI calculation based on expected salary upon graduation. All these things are indeed true.

However, a college must prepare students for success both personally and professionally. We must help students discover their calling, and then prepare them to be successful in that vocation. We have to connect ideas and theories to the real world in which our students will have to live and work. Professors do need to spend less time pushing their ideological views on students and more time helping students truly discover their own beliefs, as well as the type of career about which they will have a great passion. In the end, it is about ROI broadly speaking, though the return should not be measured simply by the expected salary upon graduation.

The Unfocus Group

Readers of this blog know that I've been quite critical of focus groups in the past. Put simply, the problem with focus groups is that people often say one thing and do another. In the real world, they do not behave in a manner consistent with their responses in focus group settings. Those inconsistencies emerge for a number of reasons including the use of leading questions by the facilitators and the emergence of social pressures for conformity within the groups.

I'm currently reading IDEO CEO Tim Brown's book, Change by Design. I am thoroughly enjoying his discussion of design thinking, particularly as it is practiced at his firm. One practice that jumped out at me was the "unfocus group." Over at Design Thinking Blog, IDEO founder Tom Kelley offers a description of the "unfocus group" technique. He notes:

"Our alternative to the focus group in the early phase of the process is the ‘unfocus’ group where we deliberately bring in people who are on the tails of the normal distribution curve. A lot of these sessions happen in our San Francisco office, and we include really unusual people in the group.

In The Ten Faces of Innovation, I talk about our work on a different kind of shoe. Among others, we included in the ‘unfocus’ group someone who had a shoe fetish and someone else who was a dominatrix. Clearly they aren’t in the wide part of the random bell curve commonly known as ‘normal’. The process involved having these very unusual people tell their stories, and think out loud about what kind of new products or services they would like to have.

By looking at the needs of people at the edge of the distribution curve we sometimes find hints and clues about how we can ratchet their ideas back a bit and serve the big market in the center of the distribution curve. The “unfocus” group is not going for normalcy, not going directly for the center of the distribution curve. It’s going for the tails but getting insights that can be applied to the big markets in the center."

I find this concept very intriguing. These folks in the tails of the distribution are often incredibly passionate about a product, and they often have incredible knowledge about the features that they look for as they make purchase decisions. I think the key challenge with an unfocus group is to remember, however, that you ultimately want to adapt the lessons from these sessions for a larger mainstream audience. One key challenge for many mainstream consumers, for instance, is that they can become intimidated in a retail environment by a feeling that they are a novice among experts. In his book, Why We Buy: The Science of Shopping, Paco Underhill explains how mainstream bike shoppers often can be intimidated by retail employees who are die-hard bike enthusiasts who cannot relate to someone who just wants to pedal around their community with their kids. To use the unfocus group effectively, then, one has to be able to make sure that the new product ideas that emerge remain accessible to the mainstream consumer who is far less passionate and knowledgeable about the product category.

Old Time Recession

The American Economic Association (AEA) is holding its annual meeting this weekend in Atlanta. The Wall Street Journal has a funny article today about whether economists are particularly frugal. The piece cites some interesting research that examines this issue. For instance, WSJ writer Justin Lahart writes that, "University of Washington economists Yoram Bauman and Elaina Rose found that economics majors were less likely to donate money to charity than students who majored in other fields. After majors in other fields took an introductory economics course, their propensity to give also fell."

Speaking of the AEA meetings, a wonderful humor session is taking place this weekend at the meetings featuring, among others, Yoram Bauman and the incomparable Merle Hazard. For an example of Hazard's work, take a look at this video:

Champagne Blues!

Several articles this week described the rampant price cutting taking place in the champagne market, including among premium brands. Are we surprised? Not at all! Will an economic recovery endcthe discounting? Not necessarily! In fact, this price cutting is not simply about the recession. Over the past decade, more and more wine has been sold in large national and global grocery chains, wholesale clubs, and the like. This increase in buyer power, relative to the days of retailing wine through mom and pop stores, is a key driver in squeezing winery margins and causing rampant discounting. Champagne producers, beware. Consumers, rejoice!