An Innovation Secret: Avoiding Death by a Thousand Cuts

G. Michael Maddock and Raphael Louis Viton make a really important point about engaging teams in innovation projects in their current column on Business Week's website.  Here is an excerpt:

Team building works differently from idea building. Once you have an idea you like, don’t ask a committee to agree that it’s a good idea. If they have not been involved from the beginning, it is too late to involve them now. If you bring them in at this point, everyone will chime in with small changes. The result? The idea dies the death of 1,000 cuts. You now have a dumbed-down idea without the head-jerk impact that the best ideas need.

I agree completely, though I would add a second reason for why this strategy often fails.   In some cases, you will experience death by a thousand cuts.  In other situations, the team will feel as though you have simply presented plans as fait accompli.   They may become very disenchanted as a result, and they may not commit fully to the implementation of that course of action. 

Did Focus on New Growth Opportunities Hurt the Core at Pepsi?

Yesterday, the Wall Street Journal ran an interesting set of articles about recent changes at Pepsi.  The articles question whether PepsiCo CEO Indra Nooyi's attention on new growth opportunities, particularly in healthier foods and beverages, may have damaged the core business.   According to the Wall Street Journal, U.S. sales of Pepsi and Diet Pepsi fell by 4.8% and 5.2% last year, while Coke's comparable brands lost only 0.5% and 1.0% share respectively.    Moreover, Diet Coke passed Pepsi as the #2 soft drink brand in America.   The article points out that Nooyi scaled back advertising on the core Pepsi brand fairly significantly over the past few years, and it suggests that this move may have affected market share.   Here's one excerpt from the article:

Jim Tierney, chief investment officer at W.P. Stewart, says PepsiCo focused too much on redesigning Pepsi's logo and the Refresh Project instead of spending money on more traditional advertising.
"You just can't go dark on brands and expect them to hold their value,'' said Mr. Tierney, who is a bigger fan of the company's snack business. 

One can certainly debate the reasons for Pepsi's market share declines.   Changes in packaging and other moves certainly also had an effect.   In one of the articles, Nooyi defends her actions, suggesting that she by no means has downplayed the importance of the core Pepsi brand in her strategy.  

One cannot debate the broader lesson here though, even if Pepsi's issues aren't simply due to the focus on new growth areas in "good for you" brands... many companies do get themselves into trouble when they try to grow in adjacent markets.  Why?   The efforts to grow distract management attention and draw resources away from the slow-growing core.  As a result, however, the core suffers even more than it should due to broader external trends.   The key issue is that it's not simply about financial resources.  Even if the core continues to get its share of money, it may not be getting the ATTENTION of key executives, and perhaps not even attracting the most talented, entrepreneurial individuals at times. 

ESPN - The Beginning

I'm reading Tom Shales and Jim Miller's entertaining book about ESPN - Those Guys Have All The Fun. In it, Bill Shanahan - an early employee - comments on how ESPN invented a new brand of TV. He points out how fortunate it actually was to be in an out of the way place like Bristol, CT. Many disparaged Bristol. However, He said that they were not surrounded by "industry wisdom" - and that was a huge blessing. I think it's a terrific point. Being distant from the existing players in your industry might help you go against the grain and think differently about the industry.

John Rowe, Thoughts on Leadership

In this weekend's Corner Office interview in the New York Times, Adam Bryant speaks to John Rowe, CEO of Exelon.  Here is a fascinating excerpt:

There are probably only four or five real decisions I make in a year. There are an awful lot of things I just quietly ratify. I find it very hard to get officers to let you in before the food is cooked. Their natural tendency is to want to bring it to you all packaged. By then all you can do is say yes or no. And you usually say yes. I like to get in while I can still shape the menu a bit. And I try to get them to bring up problems at our executive committee before they’ve got the solution. And I try to be the one who suggests that a problem is coming before they’ve thought about it.

Interview with Jane Perdue, The HR Goddess

Here is Part I of an interview I conducted recently with Jane Perdue, CEO and founder of Braithwaite Innovation Group.  Perdue is a former human resources executive, who has extensive experience creating leadership development programs.  

 1. What characteristics distinguish the best leadership development programs with the least effective ones?

In my view, there are three characteristics that contribute to effective leadership development programs: commitment, alignment and accountability.

Commitment. Active support from all levels of management, starting with the senior most in the organization, creates meaningful and impactful leadership development programs. Without this support, programs simply become window dressing and yield little positive outcomes.

Alignment. The knowledge and competencies taught in the program are directly linked to what’s needed to execute organizational vision, strategies and goals. Company successes and/or failures (ideally both) are used as working examples, projects, etc.

Accountability. Real leadership development is so much than hours of training. Observable and measurable metrics that demonstrate a learning transfer from coursework to practical application are essential. And, keep those metrics simple! I love how Marshall Goldsmith says it, “If leadership development is not enough of a priority for the company to establish goals and track progress against those goals, it will be difficult to make any succession planning process work.”

2. What are 2-3 factors that are most likely to derail a high potential employee’s career development/progression?

Based on my 20 years of working with senior and high potential leadership, I’ve seen three common career derailers:

1)    Lack of emotional intelligence. Having a strong sense of self-awareness as well as the ability to comprehend one’s impact on others are fundamentals for moving into positions of greater responsibility.

2)    Thinking too much about me and too little about we. Ego-centric individuals have a tough time navigating the work environment as they quickly get labeled “I win, you lose.” Others are reluctant to assist, believing (usually correctly) that they won’t get any credit for positive outcomes and all the blame for negative ones.

3)    Incapable of making the strategic transition from transactional to conceptual. Delegation and collaboration play greater roles as one moves up the career ladder. An individual focused on doing it all themselves is doomed to failure.

Verizon to end unlimited data plans

Verizon appears ready to eliminate unlimited data plans from new offerings this summer. The move emulates rival choices made in the past year or so. Will unlimited data ever come back? Perhaps. Here is what one has to consider. The demise of unlimited data plans can be traced to two key events. First, the marginal cost of additional usage by the consumer is no longer necessarily zero. Remember that price falls toward marginal cost in hotly contested markets with high fixed costs and low marginal costs. Heavy usage can tax networks as we have seen, and video and other apps soak up bandwidth (meaning marginal costs do rise at some point). Second, recent consolidation means fewer rivals. With fewer competitors, the chances of maintaining this pricing increase goes up. With many rivals, the chances of some players cutting price (by offering unlimited plans) would be much higher.

Could unlimited plans return? Well, if the marginal costs of incremental usage go back toward zero as technology evolves and bandwidth increases, or if new entrants emerge, then we may indeed see them return.

SAB Miller Seeks to Acquire Foster's

We should not be surprised that a major beer company has made a bid for Foster's.  After all, once Foster's spun off its wine business, it became far more attractive as an acquisition target.  Major brewers such as Inbev and SAB Miller would not have been interested in acquiring Foster's when it had a struggling wine portfolio.  Now, however, Foster's offers a solid set of brands, with a strong position in the Australian market and export potential beyond even what the firm has achieved to date.  I would not be surprised if other brewers perhaps take a look at offering a higher bid. 

It will be interesting to see an acquirer discovers that opportunities to invest and grow the business have remained untapped in recent years at Foster's.  After all, the firm treated its beer business as the cash cow which fueled the growth in the wine sector.  While the Australian beer market is mature, the opportunities globally can be attractive for a firm with strong brands and distribution capabilities.   Did the firm under-invest in the beer business while on a spending spree in wine?  It's possible.  That surely is what an acquirer will seek to determine as soon as possible. 

Transformational Leadership

My new 24 lecture course from The Great Courses ( The Teaching Company ) is now available. The title is Transformational Leadership: How Leaders Change Teams, Companies, and Organizations. I hope you will take a look. My prior course is titled The Art of Critical Decision Making.

Embedded Bank Regulators: Bad idea?

Today the Wall Street Journal reported that the Fed and the OCC are proposing to embed regulators and examiners at financial institutions. They hope that having overseers on site will improve monitoring and control. I worry about the move though. Won't these "embeds" perhaps get too close to the people they are trying to regulate? Economists call this phenomenon "regulatory capture" - something that has occurred in many industries. In many ways, this is what happens to auditors who spend a ton of time on site at clients. They become close/friendly with employees at the client. It affects their independence.

Overconfident CEOs and Earnings Forecasts

Executives must have confidence to succeed, but how much is too much?   How specifically does overconfidence affect organizational actions?   Wharton Professor Holly Yang and Iowa Professor Paul Hribar have written an interesting new paper regarding CEO overconfidence.   They examined 974 CEOs from Fortune 500 firms in the 2000-2007 time period.  They first examined the extent to which the CEOs were overconfident, based on descriptions and quotes in news articles, press releases, etc.  Then they examined those firms' earnings forecasts.  Yang describes their findings: "We found that if a CEO is classified as overconfident, then his or her chance of missing the forecast is 10% higher than for a manager who is less confident."  The authors wrote in their paper: "Overconfident CEOs are more likely to issue optimistically biased forecasts because they overestimate their ability to affect their financial results and/or they underestimate the probability of random events."  

The Paradox of Excellence

Tom and Sara DeLong have an interesting new article in Harvard Business Review.   They examine why many capable and intelligent professionals are not as productive or satisfied as they could be.  The authors argue:

"They're reluctant to ask important questions or try new approaches that push them outside their comfort zones. For high achievers, looking stupid or incompetent is anathema. So they stick to the tasks they're good at, even while the rest of the organization may be passing them by. In short, they'd rather do the wrong thing well than do the right thing poorly."

The authors go on to argue that the fault here doesn't only rest with the individuals.  It also rests with leaders who have created a climate that may not encourage people to move outside their comfort zone. Certain climates simply make people very hesitant to experiment.  Beyond that, though, I would argue that our education system, at times, contributes to this problem.  We don't always push our students outside of their comfort zone enough, and we allow students to "ride their strengths" much of the time...rather than making it safe for them to on challenges for which the risk of failure is high. 

Personal Use of Corporate Jets

The Wall Street Journal ran a major story today on the personal use of corporate aircraft by company executives.   They found that many CEOs spend a great deal of time using their corporate jets for personal travel.   Many executives consider the use of a corporate jet a major perk.   In my view, corporate jets can serve a very useful function in terms of allowing executives to travel much more efficiently than if they had to use commercial flights.   Some use of the jet for personal reasons may be appropriate as well, since the line between personal and business travel can be blurred at times.  However, it appears that some executives may be abusing this perk.  In addition, SEC rules require the honest reporting of personal usage by executives.  Moreover, personal use of a corporate jet is a taxable benefit.  If companies, as the Wall Street Journal suggests, are under-reporting the personal use of these jets, then shareholders and taxpayers rightfully should be upset. 

We Reason to Win, Not to Find Truth

Today the New York Times profiles a provocative new stream of research, with important implications for those interested in how we can improve our decision-making as leaders.    In the article, :Patricia Cohen examines the work of Hugo Mercier and other cognitive scientists.   Cohen explains that many philosophers and scientists have argued over the centuries that humans developed their ability to reason so that they could search for "truth."  Cognitive biases, such as the confirmation bias, get in the way of the search for truth.  They have always been viewed as flaws to be corrected.  However, this new stream of research suggests that perhaps humans developed their thinking and analytical skills simply because they wanted to, and needed to, win arguments to survive and thrive in the world.  Traps such as the confirmation bias aren't really traps according to this view; presenting only the data that confirms your existing view of the world can be one strategy for winning an argument, for instance. Cohen writes,

"According to this view, bias, lack of logic and other supposed flaws that pollute the stream of reason are instead social adaptations that enable one group to persuade (and defeat) another. Certitude works, however sharply it may depart from the truth... What is revolutionary about argumentative theory is that it presumes that since reason has a different purpose — to win over an opposing group — flawed reasoning is an adaptation in itself, useful for bolstering debating skills."   

I must say that I'm always intrigued by these sorts of evolutionary arguments, though often I find the evidence underwhelming.  In my view, I'm not sure why it must be either/or in this case.  Why couldn't evolutionary adaptation have led humans to develop reasoning skills for both the search for truth and the winning of important debates? 

 

VIP Tours: The BP Spill and The USS Greenville Accident

As I'm finishing up my new case study on the BP Oil Spill in the Gulf of Mexico, I am struck by an interesting similarity to another major accident.  In February 2001 the USS Greenville, a U.S. Navy nuclear submarine (SSN 772 Los Angeles class), collided with a Japanese fishing boat - the Ehime Maru.  On the day of the collision, Commander Scott Waddle hosted sixteen VIPs on board his submarine.   On April 20, 2010 when the Deepwater Horizon blowout occurred in the Gulf of Mexico, four VIPs were visiting the rig.   Could the VIP visits have had any effect on safety-related behavior?

Perhaps the presence of the VIPs may have affected behavior in several ways.  First, it may have distracted senior leaders on both the submarine and the oil drilling rig.  After all, the leaders had to spend time escorting the VIPs.  They may have otherwise spent that time directly supervising the work of their crews.  Second, lower level workers may have been more reticent to raise concerns, express dissent, and ask questions about safety procedures given the presence of the VIPs.  After all, they may not have wanted to make their bosses look bad in front of the VIPs, or they may not have wanted to bother the senior leaders.  Third, the presence of the VIPs may have created additional stress and anxiety.  Perhaps that stress may have affected decision-making.  

What's the lesson for business leaders in all fields?   Executives have to get out of their offices and make visits in the field.  They must connect with front-line employees to see what is actually going on in the organization.  However, they must be very careful about diverting attention away from critical tasks or distorting the behavior of their employees.  In most cases, the distractions won't be matters of life or death, but they may adversely affect key processes and outcomes. 

P&G's Organic Growth Strategy

Business Week reports on new P&G CEO Bob McDonald's strategic push to emphasize organic growth over acquisitions, particularly growth in emerging markets.   I must say that I applaud any CEO who is willing to put a priority on organic growth vs. acquisitions.  I think too many chief executives fall in love with doing deals, rather than doing the hard work required to grow existing brands.   Moreover, too many firms pay an overly high price tag for deals.

Having said that, the P&G organic growth strategy has some risks.   First, a company of that size must generate a ton of new growth simply to "move the needle" - i.e. to grow the overall top line by a small percentage.  Second and perhaps more importantly, P&G must take care not to diminish its brand equity in various product lines as it tries to grow in emerging markets.  Under McDonald's predecessor, A.G. Lafley, P&G definitely shed many of its lower-priced brands and focused instead on premium positioning of its products.  That strategy proved very successful.   Now, however, to grow in emerging markets, P&G will face pressure to offer lower-priced versions of its products.  The question is this:  Can P&G effectively maintain its premium strategy in the developed world while catering to lower income customers in emerging markets?  In an increasingly global economy, might that strategy dilute certain brands?  In the past, it may have been easier to position brands differently in different countries.  That has become a bit more difficult with globalization, increased international travel, and the like. 

Motivation: Daniel Pink

Sign First To Make Ethics Salient

A group of scholars from Harvard, Toronto, and Duke have conducted an interesting study on how we might induce people to be more honest in self-reporting.  The scholars are Harvard's Lisa L. Shu, Francesca Gino, and Max H. Bazerman, the University of Toronto's Nina Mazar, and Duke's Dan Ariely.   People self-report on forms such as tax returns and expense reports.  In those instances, they often sign the form upon completion. Of course, they might have already lied at that point.   The scholars examined whether asking respondents to sign first, before completing the forms, might actually enhance the level of honesty.  Indeed, their experiments show that moving the signature line to the front of the form increases truthfulness.  The researchers argue that the up-front signature might enhance the salience of ethical norms and standards.   Simply doing that alone appears to increase truthful behavior.   Hmm... will the IRS make any changes based on this research?  Can companies take advantage of this research finding to raise adherence to ethical and legal standards? 

The New Manager Ambush

An executive shared with me an important lesson a few weeks ago. She mentioned a key risk that one faces in the first few weeks and months in a new position. During that time, some subordinates will uncover old rejected proposals and try to garner your support. Pet projects that have not secured resources in the past suddenly end up on your desk. You may not even be aware that they have been rejected in the past. You may not know why the ideas have failed to gain traction earlier. A new manager mustvproceed with caution in these circumstances. One has to explore the history of key issues and understand the origins of proposals that end up on your desk.

Breaking Up Nokia?

Bloomberg BusinessWeek has conducted an interesting sum-of-the-parts analysis of Nokia.  The magazine argues that Nokia is worth more apart than it is together. Specifically, Bloomberg attempted to value the three major units of Nokia:  mobile phones, mapping systems, and infrastructure equipment.  It chose one comparable firm for each unit, and then valued the units based on the revenue multiples of the comparables.  The conclusion: Nokia's sum-of-the-parts may be worth 52% more than the whole! 

What should we make of this analysis?   I think it's certainly advisable for investors and executives to be looking at whether Nokia might be worth more in a break-up.  However, I have some concerns with concluding that the sum of the parts exceed the value of the current whole based on this methodology.   First, I would like to have seen some other valuation methods besides revenue multiples.  One wonders how much the numbers shift based on different valuation techniques.  Revenue multiples seem particularly troublesome here since the mobile phone unit seems in serious distress, with market share plummeting over the past few years as the smartphone business has been dominated by rivals such as Android and Apple. 

Second, the methodology only chooses one comparable for each Nokia business unit.  I would much rather see a set of comparables for each unit, with an average taken of the revenue or earnings multiples for those rivals. 

Third, sum-of-the-parts analyses can be a bit dangerous if significant synergies exist among the units, and if those synergies might be lost during a break-up.  I don't know enough about the intricacies of Nokia's business to determine the extent of synergies; the article at BusinessWeek.com does not mention synergies at all.  

Finally, the rapid significant decline in the mobile phone business at Nokia really does make valuation a challenge.  Projecting forward based on history can be difficult based on the deterioration happening in the business.  As one expert noted in the article, "“It’s hard to do a sum-of-the-parts analysis when the floor is falling out and you don’t know where the bottom is.” (Michael Liss, fund manager at American Century) 

Progessive: Usage-Based Car Insurance Pricing

Progressive has been a leading innovator in the auto insurance market for many years.  Twenty years ago, it made its mark by developing sophisticated algorithms to price policies more effectively for high risk drivers (think of it as the subprime segment of the car insurance market).   Progressive aimed to cull the best risks out of the high risk pool, leaving the worst risks to their rivals.  They became a very profitable company with a strategy focused on the higher risk drivers.   Since then, they have expanded their reach to a broader set of consumers, but they still aim to stay ahead of the competition by having finer-grained methods for evaluating and pricing risk.  

Progressive now has developed an onboard diagnostic device called Snapshot that can provide Progressive a real-time driving report, including the number and time of miles driven, incidents of hard braking or quick acceleration, and speed.   Progressive aims to use the data to provide discounts to those drivers with the best evidence on good driving practices from its Snapshot database.  Naturally, some people have expressed privacy concerns about such devices.  However, for Progressive, Snapshot provides them another way to price risk more accurately than the competition.   To this point, auto insurers have tried to estimate an individual's riskiness based on demographic characteristics, driving record, etc.   Now, Snapshot offers a way to personalize the pricing of risk in a way that has not been done previously.  Eventually, with enough data, Progressive will build even more sophisticated algorithms that connect the frequency rate of incidents such as "hard braking" or "quick acceleration" to the probability of an accident.  

For many companies, predictive algorithms have become a source of competitive advantage (think NetFlix and Amazon, to name a few).   For all these firms, the more personalized the predictive power, the more that they can derive a competitive advantage.   For NetFlix, it's been easier to personalize than for a firm like Progressive, but technology may be changing that now. 

Groupon's IPO

Groupon announced yesterday that it would be issuing an initial public offering soon.   Many analysts expressed concern about the high valuation coupled with the significant losses that have mounted as the company grows rapidly.  Some analysts have talked of this IPO as further evidence of a bubble in new tech firm valuations.

How do we make sense of these concerns?   We have to ask ourselves:  Has Groupon built a significant sustainable competitive advantage?   Are they a successful first mover, or will they be like many early movers in technological industries who actually end up being overrun by later entrants?   To answer these questions, we have to look at several factors.  First, does the company's business model have significant scale economies?   If so, then they can amortize fixed costs as they grow, and therefore, they will become quite profitable.  Second, does the business model have substantial network effects?   Amazon's model has both scale economies and network effects.  Thus, Amazon turned early losses into sizeable profits as it grew, and it built a quite formidable competitive advantage.   At first glance, it does not appear that Groupon has the type of economies of scale and network effects enjoyed by Amazon.   The model seems to very labor intensive, with new staff required to drive new growth.  The jury, of course, is still out though.  As the company goes public and we learn much more about its finances and strategy, we will be able to discern this more accurately. 

Competitive advantage may derive from other sources as well. Groupon itself focuses on its relationships with local merchants.  Undoubtedly, they do have ties at the local level that are quite impressive. Yet, questions remain to be answered.   Have they built relationships that will be hard to duplicate or break?  Are there significant switching costs for these merchants?  The barriers to entry do not look huge at this point, as we have seen a flood of entrants into this space.  Of course, some big existing players also want a piece of this pie, and so we will have to watch the likes of Google, Amazon, and Facebook to see if Groupon can sustain its early lead.

Engaging Customers Through Gaming

Many firms have begun to use gaming technology to engage their customers. As an example, take the latest move by the wine website Snooth. The firm has created Wine Rack, a gaming layer to its site in which consumers can win virtual souvenirs and trophies based on how much they have learned and discovered about wine. Mashable recently highlighted this new feature, pointing out that gaming technology holds great promise for creating a closer connection with customers. It makes a website an active experience, and it brings customers back more often. In addition, customers stay longer when they visit the site. I think Snooth is showing also that gaming can be a great way to educate your customers about your product category.

Creativity, How Ideas Must Ripen, and the Aha! Moment

Daniel Goleman has a good article for creativity over at Bloomberg.com.  He describes research by Harvard's Teresa Amabile, which suggests that workers must have "periods of sustained focus" in order to engage in creative work.  Moreover, Goleman explains how Joy Bhattacharya's research on the brain's functioning supports Amabile's conclusions.  Here is what Goleman writes:

The Harvard researchers also recommended that supervisors protect workers’ time and resources so they can have periods of sustained focus on their projects. This advice -- to manage staff time well -- is supported by new brain research that reveals what happens at the moment of Aha! Joy Bhattacharya at the University of London has found that in the moments just before a creative insight, the mind is typically relaxed and open to new ideas, as indicated by an alpha brain wave.   As the Aha! approaches, there’s an abrupt shift marked by high gamma-wave activity. This indicates that far-flung neural circuits are connecting in a new network. A third of a second after the peak of this activity, a novel idea floats into the mind.  This finding indicates that creative insights can’t be concocted on demand; they need to ripen. The first step in the creative process typically involves immersion in the problem and current thinking, and then gathering any information that might be relevant. But in the next stage, intense effort should give way to letting what is known as the "cognitive unconscious" work on the problem by making novel connections. Constant distractions interrupt the mental space where creative insights simmer. That’s why so many Aha! moments come in the relaxed space of downtime -- when we’re doing something other than tensing to be creative. 

This work suggests that one of the most critical roles that a mid-level manager can play is a "buffer" for a creative team.   That manager can protect that team from other organizational demands and pressures, and insure that the team members have the time and sustained focus required to be creative.