Do Younger Siblings Take More Risk?

You are hiring a new executive for your company. He or she will have the opportunity to make some large, high stakes investments that will shape the future direction of the firm. Should you care whether that individual was a first-born child or a younger sibling? Why would that matter?

Well, past research has shown that younger siblings engage in riskier behavior than their older brothers or sisters. A new study extends this body of work, examining whether we can see such birth-order effects in the course of the "daily work" of certain professionals. Researchers Frank J. Sulloway and Richard L. Zweigenhaft studied siblings who have played major league baseball. Sports, after all, offers a unique opportunity for scholars because of the extensive body of historical statistics that measure actions and results. The question: Do younger siblings steal more bases than older brothers? Amazingly, in more than 9 out of 10 cases, the younger sibling tried to steal more bases than the older brother, suggesting a propensity to take more risk. For more about this research, take a look at this story in the New York Times.

How to Say No at Work

Do you have a hard time saying no at times? Does this cause you to find yourself completely overwhelmed at times, juggling many more projects than you can handle effectively? Helen Coster has written an article titled "How to Say No at Work" for Forbes. She interviewed me for this very useful column, in which she offers some advice on how to tell your boss that you cannot handle another task.

The BP Oil Spill

Kate O'Sullivan has written an article for CFO magazine about lessons for chief financial officers from the BP oil spill disaster. She interviewed me for the piece, asking about my prior research on catastrophic failures.

Consumer Brands Achieving Social Currency

Fast Company has a terrific feature this month on how consumer brands can achieve social currency. Let's take a look at a few of their conclusions drawn from research by Vivaldi Partners, an international brand consultancy. First, they argue that gimmicks marginalize trust. They compare Wendy's to Burger King. In the last year, Wendy's ran advertisements and used social media to get out the message that it's burger patties were never frozen and were cooked to order for customers. Burger King ran stunts such as the one where consumers could win a free burger if they dropped a certain number of friends on Facebook. Vivaldi's data show that 50% of people believe customers of Wendy's share valuable information about the brand, while only 28% of people believe the same about Burger King customers. Similarly, more people believe Wendy's creates products that they can trust.

The Fast Company article also comes to the conclusion that advocates trump followers. The Vivaldi research shows, for instance, that Dunkin Donuts has far fewer followers on major social media platforms than Starbucks. However, Dunkin' has used social media to more effectively stimulate its customers to become passionate advocates for the brand. The research shows that many more people are likely to have heard positive things about Dunkin' than about Starbucks. These advocates appear to have a powerful impact. A core group of passionate advocates beats an army of followers according to this research. Dunkin' has used a variety of fun and inexpensive social media campaigns and contests to mobilize these advocates in ways many other brands have not. How can your brand do this? That's a question every firm should be considering.

Do Firms Retrench as Government Spending Increases?

The Harvard Business School Working Knowledge site profiles a fascinating new study by finance professors Joshua Coval, Lauren Cohen, and Christopher Malloy. The research examined the effect on local firms when a legislator from that state rose to a powerful chairmanship in Congress. Not surprisingly, these scholars found that, "The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three congressional committees. In the House, the average is around 20 percent."

Much more surprisingly, however, the research shows that, "In the year that follows a congressman's ascendancy, the average firm in his state cuts back capital expenditures by roughly 15 percent." What's happening? Federal spending appears to be crowding out private investment to a very large degree. The professors offer three possible explanations. In some cases, the government spending directly supplants private investment. Second, federal projects may hire away talented employees and secure other resources that private firms need to expand. Third, the heavy government involvement in the local economy may create high uncertainty, making private firms much more hesitant about making large capital investments.

Remember that this study does not even take into account the negative effects of the taxation required to pay for these government projects. The scholars certainly should give us pause as we consider whether stimulus funds can bring the economy back from its doldrums, as well as whether government efforts can truly drive local economic development to the degree many officials often expect.

When Mentoring Fails

Scholars Dawn Chandler and Lillian Eby have an informative article in the Wall Street Journal today about the pitfalls that one may encounter in mentori-protege relationships. They offer five great questions to consider as you assess a mentoring relationship:

1. If you are mentoring someone, are you giving them enough of your time and interesting work?

2. Are the personality and work habits of your protégé similar to yours, and if not, are you able to make sure that doesn't get in the way of working together?

3. Have you and your protégé clearly outlined his or her professional-development goals?

4. If you are being mentored, is the work interesting, and does your mentor give you credit for any projects you complete for him or her?

5. Do you feel like part of a team, and are you treated in an open, respectful manner?

At the end of the article, they suggest that people should prepare for the end of a mentoring relationship, i.e. how and when will the relationship have run its course and reached the point of no longer adding value for either party. I think this point can be taken one step further. Specifically, we have to consider what might happen when the protege becomes the equal, or even surpasses, the mentor. That occurs in many situations, and it can become very difficult to manage. For instance, consider the situation that unfolded when Theo Epstein, GM of the Boston Red Sox, began to become much more of an equal to Larry Lucchino, his long-time mentor and CEO of the team. That dynamic became very difficult to manage, and their working relationship nearly came to a permanent end until differences were finally resolved. I think scholars Chandler and Eby make a good point when they recommend thinking in advance about how a mentoring relationship will unfold and even end as people's careers progress. Those preparations may help avoid a falling out in the future.

Pricing Baseball Tickets

Business Week has an interesting article this week about a young economics PhD, Barry Kahn, from the University of Texas. Kahn has devised software that enables baseball teams to dynamically price their tickets, much like the airlines price seats. According to the article, "The software helps the Giants set prices based on past ticket sales, the day and time of the game, the teams' records, the pitching match-up, the weather, the going rate on resale Web sites like StubHub, and other data." The software holds the promise that teams can not only fill more seats, but generate more revenue overall.

Why does this type of dynamic pricing, used by airlines for years, fit the baseball market. Consider, for a moment, the key features of both markets. In each case, the costs are almost entirely fixed. The marginal cost of one additional person flying on a plane or attending a baseball game is almost zero. Moreover, the organizations sell seats which are "perishable" - i.e. once the plane takes off, or the baseball game begins, the seat can no longer be sold. This is not a good that can be held in inventory. Finally, there are a number of indicators that can help the organizations identify precisely those occasions and customers for which willingness to pay is quite high, and other situations in which it is much lower. One could see a number of other markets in which such dynamic pricing might apply, particularly in sports and entertainment.

Sam Adams: Less Than 1% Market Share!

Have you see the new Sam Adams TV advertisements, in which they proudly proclaim that the company has less than 1% market share in the US beer market? Have you ever seen a company boast of having low market share? What are they doing?

Actually, it's very understandable and even shrewd. Sam Adams wants to make sure they stay true to their roots, that they brand retains its authenticity. The firm wants to be known as a classic microbrew, not a mainstream mass market brand. However, they clearly are a very large company relative to many microbrews on the market. Yet, the ads remind people that they are still very small relative to the mainstream beer giants. The ads help them to preserve that "us vs. them" positioning relative to the Busch and Millers of the world.

I personally love the ads because I always remind my students that market share should not be the goal of business leaders; profits should be the goal. Striving for maximum market share is not always the path to a great strategy and high profits. Far too many executives obsess about market share, and as a result, do not achieve the type of sustainable competitive advantage that they should.

Women Negotiating Pay Raises

The New York Times recently featured my friend and doctoral classmate Hannah Riley Bowles' research on why women may earn less than men in part because of what occurs at the negotiating table. Bowles is a professor at Harvard's Kennedy School. She has found that women are less likely to request raises, and she notes, "We have found that if a man and a woman both attempt to negotiate for higher pay, people find a woman who does this, compared to one who does not, significantly less attractive."

What is so terrific about Bowles' research is that she has identified ways in which women can frame their requests so that they are much more likely to succeed in getting a compensation hike. Bowles finds that women should frame their requests in terms of the good of the firm as a whole, and they should make clear that they care about maintaining good relationships at work (while making their case on why a hike is deserved). They also must take care when using an outside offer as a bargaining chip, as this may cast them in a negative light - something men do not have to be concerned about as much.

Advice to Graduates

A few words to those graduating from college this year...

As you leave this place, you will become builders. You will build a career, a home, and hopefully a family. For many of you, life will take on a certain rhythm eventually. Routines and rituals will mark your days. You will experience a measure of comfort with the familiar – familiar people, places, and activities. As you grow older, the unfamiliar will jar you, unsettle you, at times. You will want to retreat to that which is comfortable and familiar.

My advice to you today: Do not become wedded to the old and familiar in your lives. Cherish the past, but always look ahead. Seek out novel experiences. Keep breaking new ground, even as the hairs become gray. When in his 80s, Michelangelo, the great Renaissance painter and sculptor, once said, “Ancora imparo.” – I am still learning. I hope that you will live to such a ripe old age, and that you will utter those same words. Researchers have shown that novelty stimulates the brain. So, I tell you know: Exercise your minds throughout your lives. Memories do not nourish the brain. New challenges do. They say that you cannot teach an old dog new tricks. Do not listen to such rubbish. I’m confident that you have the ability to transform yourselves, to make yourselves new, time and again throughout your lives.

As you experience the new and unfamiliar, you will feel discomfort, even fear, at times. Do not let that apprehension get the best of you. Dr. Peter Carruthers of Los Alamos National Laboratory once said, “There’s a special tension to people who are constantly in the position of making new knowledge. You’re always out of equilibrium. When I was young, I was deeply troubled by this. Finally, I realized that if I understood too clearly what I was doing, where I was going, then I probably wasn’t working on anything very interesting.”

As you learn and grow as individuals, do not keep your new knowledge and skills to yourself. Share your knowledge and insight with others. Do more than that; serve as an exemplar to others. Mentor young colleagues, teach your children well – through actions as well as words. Your impact on the next generation will become your enduring legacy.

Singer and songwriter Ben Folds once wrote to his daughter Gracie, “One day you’re gonna wanna go. I hope we taught you everything you need to know.” I love that song, but I know that we have not taught you everything you need to know. I sincerely hope, though, that we have cultivated your intellectual curiosity and nourished your love of learning. May that spark of youthful curiosity remain with you all the days of your lives.

CVS' Office of the Chairman: Three's a Crowd?

This week, CVS announced that CEO Tom Ryan will be stepping down next year, to be replaced by Larry Merlo, who has led the firm's retail operations in recent years. Now, Merlo becomes President and COO of CVS until May 2011, when he will succeed Ryan as CEO. As part of this transition plan, CVS will create an office of the chairman, which will include Ryan, Merlo and Per Lofberg, the head of the company's pharmacy benefit management business.

CVS deserves credit for what appears to be a well-designed succession process, with a successor who has been groomed for some time, and who will spend the next year making the gradual transition to the CEO role. However, one must wonder a bit about how the three-person Office of the Chairman will function. Several months ago, a CEO at another firm mentioned to me that three people in a top executive group can be problematic because one person often will find himself feeling left out. After all, many informal conversations occur one-on-one. The third person not involved in that conversation automatically feels left out if they discover that important issues were discussed in their absence. The Office of the Chairman at CVS will face this challenge of how to handle the normal informal conversation that it will inevitably occur between two of the three parties. Maintaining as much transparency as possible around one-on-one conversations that occur will be critical. Moreover, insuring that the three parties get together often to share information and opinions openly will be essential.

Is Your CEO Beautiful?

I don't even know what to say... From the WSJ Deal Journal:

Duke University researchers, in connection with the National Bureau of Economic Research, have found that CEOs are perceived to have more competent faces than non-CEOs. The Duke researchers also concluded that people responded more favorably to the faces of CEOs from large companies than from small business.

Another interesting finding from the 20-page report: that “baby-faced” CEOs received lower “competence” scores than more-mature looking CEOs and tended to be paid less, though on the plus side, the baby facers got higher likability ratings.

And yet, “we find no evidence that the firms of competent looking CEOs perform better,” the study concludes. Essentially, the ‘look’ of competence says very little about effective competence.”

Risking Brand Equity?

I was asked an interesting question today by a marketing manager at a larger consumer products firm. She asked how she should respond to her boss, who was pushing for continued strong growth from a successful brand - growth which she felt might cause the brand to extend itself too far, and perhaps erode brand equity. It's a tough situation for any manager.

I think many firms conduct market research to see if a growth strategy will yield new customers as expected. At times, though, firms fail to see how existing loyal customers will react to growth strategies, brand extensions, etc. Thus, they fail to see how growth plans may compromise a brand's "credentials" with loyal, hard core consumers. So, this manager might commission a study to see how the firm's most loyal customers might feel about the company chasing new consumers and segments. Such a study might see that customer losses or price premium erosion might offset new customer gains to a large degree.

College Graduate Reading List

Here's my 2010 suggesting reading list for college graduates entering the business world. I've included only books that have been published in the last few years.

Predictably Irrational, by Dan Ariely
Switch, by Chip and Dan Heath
Made to Stick, by Chip and Dan Heath
Outliers, by Malcolm Gladwell
SuperFreakonomics, by Steven Levitt and Stephen Dubner
Different, by Youngme Moon
Change by Design, by Tim Brown
Free, by Chris Anderson
The Long Tail, by Chris Anderson
The Big Short, by Michael Lewis

Customized Coke

Today's Wall Street Journal reports on the design and testing of Coca-Cola's new Freestyle machine. This new high-tech soda fountain enables the customer to design their own drink. For instance, as the article mentions, you can create a Caffeine-Free Diet Raspberry Coke if you wish.

The technology has been difficult to develop, but the early tests show promise. According to Coca-Cola, beverage sales at the Firehouse Subs restaurants in Atlanta, where the machine is being tested, have risen 13%. Overall revenue is up 7.6%. The Freestyle machine offers an important opportunity for Coca-Cola, since soft drink sales in the United States have been decreasing for the past five years.

The article brings to mind an important strategic issue for a firm such as Coca-Cola. In many instances, when a firm's core business begins to erode due to societal trends, company leaders look to diversification to address their woes. For Coke, that might mean selling more waters and other healthier beverages given concerns about the caloric content of its soft drinks. However, companies need to be careful not to accelerate the demise of their core business through inattention. Moreover, innovative firms do not simply accept a decline due to societal trends. They find ways to rekindle demand. The Freestyle machine may be just one of those innovations that helps revitalize the firm's core soft drink business.

One thing to note: The article mentions that the Freestyle machine costs 30% more than traditional fountains. However, Coca-Cola may wish to reduce the price premium that they are commanding for the high-tech fountain if they indeed find that the machines generate double-digit increases in soda revenue. Why not discount the "hardware" to sell more "software" after all?

Letterman on Goldman Sachs

Nestle Chairman on Corporate Philanthropy

Over at Business Week, I read the following about Nestle's approach to corporate philanthropy:

"Nestle SA Chairman Peter Brabeck- Letmathe said he opposes corporate philanthropy because it misuses shareholders’ money and said government, business and civic groups should team up to tackle society’s problems. 'I’m personally very much against corporate philanthropy,” Brabeck said in a television interview in London. “You shouldn’t do good with money which doesn’t belong to you. What you do with your own money, this is absolutely fine.'

Nestle’s strategy in corporate and social responsibility focuses on areas that are key to its own business strategy and that boost shareholder value as well as helping society, 65- year-old Brabeck said. The maker of Nescafe, based in Vevey, Switzerland, has three main areas of action: helping boost productivity among the more than 500,000 farmers it works with, reducing water use and developing more nutritious products."

I'm curious as to what readers think about Brabeck's comments. He has a point that companies shouldn't be using shareholder funds without their agreement/support. The question, it seems to me, is how one interprets the question of how philanthropy fits with a firm's strategy, and how it relates to long term shareholder value. One can interpret that very narrowly, or much more broadly. That is where things get tricky.

Cognitive Bias Song

With thanks to Authentic Organizations blog for pointing me to this fabulous YouTube video, which reviews the major cognitive biases that impair human decision-making.

Hostile Brands

I'm continuing to read HBS Professor Youngme Moon's terrific new book, Different: Escaping the Competitive Herd. I recently finished her chapter on "hostile brands" - what a thought-provoking notion. She argues that some brands have differentiated very successfully by almost daring you to purchase their product. They polarize in many ways, causing some customers to love them with great passion while others hate them with equal fervor. These brands make it very clear that they are not for everyone. For instance, she talks about the Mini Cooper's entry into the United States. The brand made no apologies for being a small vehicle in a country that, at the time, was completely in love with the SUV. They actually boasted of the fact that the vehicle was very small, the anti-SUV if you will. Similarly, she describes Hollister's strategy. The store environment is quite hostile to parents, and that is quite intentional. Professor Moon makes the point that the brand, in many ways, is quite hostile to girls who are not slim. She finds that disturbing to some degree, but at the same time, she acknowledges that it may be a successful differentiation strategy in the marketplace. I love the fact that she concludes that hostile brands may make us uncomfortable at times, but in the end, their polarizing nature makes them stand out in a sea of homogeneity.

Are You Blind to the Truth?

C.J. Prince has written a good new article in Chief Executive magazine. The article, in which I'm quoted several times, is titled "Are You Blind to the Truth?"

Google Ventures: Does Corporate VC Work?

In this post on the New York Times "Bits" blog, Claire Cain Miller writes about Google Ventures - the corporate venture capital fund established by Google in March 2009. According to the article, Google has increased the amount of investment activity lately and aims to invest approximately $100 million per year.

As I read the article, I began thinking about the literature on corporate venture capital. What did scholars find when they studied the effectiveness of corporate VC funds? The work of Gary Dushnitsky of Wharton and Michael Lenox of Duke seemed particularly interesting. These scholars argue that corporate VC funds pursue both financial returns and so-called "strategic benefits" i.e. they provide a "window on cutting-edge technologies" being developed by start-ups. Dushnitsky and Lenox have found that corporate VC funds can increase value for the corporate parent, but the results are specific to particular industries. They specifically find that corporate VC funds tend to do well in the devices, semiconductor, and computer industries - whereas the results do not appear positive in industries such as chemicals, metals, pharmaceuticals, and vehicles. Moreover, these scholars find that corporate VC funds create value when they explicitly seek strategic benefits, not simply financial returns.

Well, what about Google? From an industry perspective, it operates in a sector that has seen corporate VC funds achieve success according to the work of Dushnitsky and Lenox. However, this quote in the NY Times blog seems to suggest that Google has a strategic orientation in some cases, but not in all situations:

"Many corporations, including Cisco, Intel and Disney, have venture arms. Most have a strategic goal to fund projects that might someday be useful to the company. But Google executives emphasized that the fund is not an incubator for companies that Google wants to someday buy. It invests in Internet and advertising companies, but also in biotech and clean tech."

United and Continental Merger

In the Heard on the Street column over the Wall Street Journal, I read the following about the United-Continental merger:

"Like a jet cutting across a clear blue sky, a merger between UAL's United Airlines and Continental Airlines could be seen coming miles off. And no wonder. Announced synergies, when taxed and capitalized at 10 times, equate to two-thirds or more of the airlines' combined market capitalization. Roughly three-quarters of this is revenue synergies. Longer-term, that should worry competitors like American Airlines."

Hmmmm... I found the synergy numbers quite interesting. 75% of the synergies are on the revenue side, and only 25% on the cost side, according to this article. Typically, investors find cost synergy estimates by executives to be much more credible. After all, cost synergies typically represent more tangible estimates based on concrete actions such as facility closings and consolidations. Revenue synergy estimates often are less credible. After all, they represent much less tangible projections of how two companies can drive more sales by working together. In sum, like most investors, I would have liked to have seen a greater percentage of the projected synergies on the cost side of the equation. I would have much more confidence that those merger benefits could be achieved.

By the way, for more on the merger, see my favorite airline industry blogger, Dan Webb.

Hottest Employers 2010

Business Week has published their 2010 list of hottest employers for college graduates, based on a survey of 56,900 college students conducted by Universum USA. Google tops the list, followed by Disney. I'm proud to say that, in the past two years, I've had students who have each landed their dream job, one at Disney last year, and one at Google this year. Their determination, work ethic, and can-do attitude helped them fulfill their dreams. They serve as a model for every student. The lesson: Dream big, but also be ready to pursue that dream with incredible persistence.