BMW, 4 cylinder engines, and new fuel efficiency standards

BMW has announced that it will be launching new vehicles with four-cylinder engines in the United States.  The decision represents a sharp reversal from past policy.   Twelve years ago, BMW stopped selling four-cylinder vehicles in the United States due to a lack of sufficient consumer demand.  Why are they reversing their strategy now?  CAFE: Corporate Average Fuel Economy standards.   The United States has implemented a sharp increase in those standards, and to avoid large fines, automakers will need to sell many more fuel efficient vehicles. 

What's the implication for BMW?   Regardless of whether you endorse the new government regulations or not, the business question is whether an effort to comply with the standards will lead to poor investments.  Will consumers buy four-cylinder BMWs?  Beyond that, though, one has to wonder about the potential damage to the brand if they offer four-cylinder vehicles which lack the power and performance that customers are accustomed to experiencing with BMW cars.  After all, this is the "ultimate driving machine" company.  They have done a terrific job of articulating that brand positioning over the years  and remaining completely consistent with it.  BMW insists that the engine technology has advanced sufficiently over the past twelve years so that consumers will not be dissatisfied with power and performance for the new four cylinder engines.  It will be interesting to watch consumer reaction. 

SNL Parody - Salary Tutor

My friend, Wired.com's "marketing guy" Jim Hopkinson, has produced this terrific Saturday Night Live parody as part of the launch of his new book, Salary Tutor - a book designed to help with those ever-so-delicate and always challenging salary negotiations. 

Developing your people: Lessons from NFL Quarterbacks

Karl Moore and Devin Bigoness have a good column at Forbes.com about developing your people.  They draw lessons from the development of National Football League quarterbacks.  As they point out correctly, teams tend to take one of two contrasting approaches with their young quarterbacks.  Some teams take the "immediate testing" approach - i.e. they throw them in the pond and challenge them to learn to swim.   These quarterbacks often will struggle mightily in their rookie year.   It's trial by fire.   Other teams will adopt a "learning to win" model.  These quarterbacks sit on the sidelines for some time, perhaps even several years, watching a veteran quarterback lead the team.  

Each of these models has had its successes and failures.  Aaron Rodgers succeeded using the "learn to win" approach.  He spent four seasons as a back-up before becoming the starting quarterback for the Green Bay Packers.  He went on to become a star and a Super Bowl champion.   Peyton Manning, on the other hand, went the immediate testing route.  His team lost many games during his first year, and he did throw many interceptions.  However, we went on to craft a Hall of Fame career, won multiple MVP awards, and became a Super Bowl champion too.   Of course, both models also have their share utter failures as well.

Moore and Bigoness do not advocate one model over another (appropriately, I might add).  Instead, they propose that you should really understand your people, so that you can determine which model might be best for each individual.  At the same time, you have to assess your organization's needs.  You must balance what's best for individual against what is best for the firm.  Some times, you might have to "rush" someone's development, despite some risks, because of a pressing organizational need.  In other cases, you may determine that the organization can afford to give an individual a bit more time to "learn to win." 

Importantly, if you do adopt at  the "learn to win" model, you do need to still make sure that you present that individual with sufficient challenges and development opportunities.  One risk, with this model is that a talented person will leave because they are not receiving the opportunity that they desire.  In the NFL, teams have control over young players for several years.  In companies, people can depart at any time.  Thus, leaders must share their development strategy with the individual being groomed, and work with them to co-create a development plan that works for them and the organization. 

Why Individuals In Larger Teams Perform Worse

The University of Pennsylvania's Jennifer Mueller has published an interesting new study regarding team effectiveness.  She examines why individuals in larger teams tend to perform worse than individuals in smaller teams.  For many years, scholars have argued that motivation and coordination problems tend to worsen performance in larger teams.  Mueller does not dispute that these effects exist.  However, she demonstrates another factor that may play an important role.  Mueller's work shows that intra-group relationships may not be as strong in larger groups, and that may decrease individual performance.  She writes:

"Specifically, there may be process losses due to relational losses- individuals in larger teams perceive that support is less available in the team. Hence, the current paper expands the theory of group size and performance by identifying that individuals in larger teams also experience relational loss, and this additional source of process loss contributes uniquely to poor individual performance."

What's the implication for team leaders?  Based on this research, leaders ought to spend more time with larger groups focused on making sure that helping and supporting relationships exist among team members.  They need to identify key team members who may play a role in facilitating support for their fellow team members.  Moreover, they need to encourage team members to reach out if they need support from peers. 

Do we complicate easy decisions unnecessarily?

Knowledge@Wharton has profiled a new paper, "Complicating Choice," by Wharton marketing professor Rom Schrift and co-authors Oded Netzer and Ran Kivetz of Columbia University.  They find that consumers tend to feel that a certain amount of effort should be associated with making a buying decision.  The notion comes from people's belief that hard work pays off, and that a lack of appropriate effort will lead to a bad outcome.  If a decision appears "too easy" to us, we sometimes come to the conclusion that the seemingly obvious choice is "too good to be true."   As a result, we over-complicate the decision.  We make it more complex in order to make ourselves feel as though we have exerted appropriate effort.  Of course, such over-complication may lead us to choose a less desirable option or to waste time and energy.   We may end up moving far too late and missing a golden opportunity. 

The scholars discovered three ways in which consumers over-complicate easy decisions.  First, they "make the unimportant important."  In other words, they end up deliberating about an attribute that they didn't even care about at the initial stages of the decision process.  Second, they make two alternatives appear more equal than they actually were.  Third, people actually alter their preferences about specific attributes of one of the the options in order to make their decision harder.

HP's Exit from PC Business

While I was away on vacation, HP announced that it was exploring the sale of its PC business.  Naturally, the news surprised many journalists and investors, given how much attention the company has focused in recent years on the unit.  I don't find it shocking though.  As my students learn in their strategic management course, the Wintel portion of the PC industry is incredibly unattractive.  If you conduct a five forces analysis, you come to the conclusion that the industry is characterized by low product differentiation, massive supplier power (Microsoft, Intel), and substantial price rivalry.   More recently, substitutes have become problematic (smartphones, slates, etc.).  

As a result, the margins in the PC business prove incredibly thin for many players.  HP generated a large portion of its revenues from the PC business, but only a small slice of its profits.  Over the years, the incredible profitability of HP's printer business has masked many sins, including the thin margins on PCs and ill-fated new product introductions such as HP's TouchPad.  

The unattractive industry structure has led many firms to exit thePC business over the years, most famously IBM with its divestiture to Lenovo.  Even Dell has struggled on the consumer side of the PC business, though it has been very profitable with its core business focused on the corporate customer.  Of course, Dell has had a tremendous low cost position for many years.  

What's the lesson of this story?  As Warren Buffet once said, "When an industry with a reputation for tough economics meets a manager with a reputation for excellent performance, it’s usually the industry that keeps its reputation intact."

Why ESPN should embrace crowdsourcing

In the National Football League, statisticians have compiled a measure called "passer rating" to evaluate quarterbacks since 1973. Many people have criticized this statistic since it's inception. This year ESPN invested a great deal of time and effort to develop a better measure that they call "total QBR.". They unveiled the rankings of QBs based on this measure in a TV special recently. They argued that this rating includes a much better evaluation of how QBs perform in key situations.

Interestingly, ESPN did not disclose the actual formula and methodology for compiling the rating. I think this was a mistake. These days so many statistics experts love to dissect sports. They would love to sink their teeth into this rating. If ESPN embraced crowd sourcing, they could create a contest whereby many people could compete to refine and improve the measure. They could offer a special prize for the winner - think one day at the firm's Bristol headquarters complete with a lunch with a top ESPN personality. Such a contest wouls be very inexpensive to run, but it would have many benefits. It would engage many rabid sports fans, who are ESPN's core customers. The contest would specifically build connections with stats-obsessed fans. It could yield a better measure. Moreover, being open about the method could enhance the acceptance and use of this new rating by fans, media folks, and teams. Think of the hoopla that they could create and the attention it would draw.

Changing the Culture at Ford

I watched a CNBC special last night about the transformation taking place at Ford under Alan Mullaly. I found one story particularly interesting. Ford had a culture in which managers feared disclosing problems or admitting problems in front of senior executives. During the early months of Mullaly's tenure, EVP Mark Fields spoke about a planned new product launch. He disclosed a problem with the vehicle and recommended a launch delay. As Mullaly tells it, many people looked around the room wondering what would happen next. Putting a problem out in the open like that did not happen usually at Ford. If it did occur, the consequences were not typically positive. Mullaly did something rather remarkable. He started applauding right there in the meeting! He celebrated Fields' openness and willingness to confront the problem head-on. He told team that he didn't want managers keeping bad news from him. What a terrific leadership moment!

Reverse Innovation

Vijay Govindarajan of Dartmouth's Tuck School of Business gave a terrific presentation yesterday at the Academy of Management conference. He spoke about reverse innovation, a concept he introduced in an HBR article he wrote with GE CEO Jeff Immelt. Vijay described how most multinationals develop innovations in industrialized nations and then try to sell them in emerging markets. Reverse innovation occurs when innovations arise in emerging markets and then multinationals find markets for those products in the developed world. He gave the example of a EKG machine that GE sells in the US for $25,000. Naturally most Indian health care providers cannot afford these machines, particularly in rural areas. Thus, GE developed a simple $500 mobile device well-suited to rural India. Then, they realized a market for those devices exists in the US. Specifically, they have found that ambulances can carry these low cost mobile devices. Vijay argued that reverse innovation represents a huge opportunity for many multinationals. I think it's a fascinating phenomenon to watch.

Reviewing Organizational Failures: The Case of Medical Accidents

NYU professor Lucy MacPhail has earned a best paper award here at Academy of Management for her paper examining how an academic medical center conducts reviews of medical accidents. In healthcare, regulators dictate that certain types of errors must be subjected to a formal organizational review. MacPhail found that the hospital did indeed conduct systematic reviews in accordance with regulatory oversight. However, her research shows that the hospital did not review a number of incidents which had the potential to provide substantial learning opportunities. Why not? Those incidents did not fall under the regulatory rules. In other words, the focus on compliance may steer managers away from investigating failures which may yield key learning. I believe that similar experiences may exist in a number of other industries. MacPhail recommends that organizationals their own learning goals, independent of compliance concerns. Those learning goals should drive the selection of projects to review in a systematic manner.

Accepting blame vs. Expressing remorse

I'm headed to the Academy of Management conference in San Antonio today, and I'll be blogging over the next few days about interesting research presented at the conference. As I look at the program, I'm intrigued by a study conducted by Northwestern doctoral student Brian Gunia. He examines two dimensions of the typical apology offered after an organizational failure: Blame-taking vs. Expressing remorse. He finds that leaders are more likely to express remorse rather than accept blame during the delivery of an apology. However, other organization members valued an acceptance of blame more than an indication of remorse. It seems that taking responsibility reflects more positively on the leader's character. I find the study quite interesting given my work on how large-scale failures occur. Prior studies have not made this distinction, and I'm not sure if leasers think carefully about these two aspects of an apology.

First a customer, then CEO

I've read a great deal recently about how Bob Kraft, owner of the New England Patriots, helped broker the agreement with the players' union in the National Football League. Players credited him with building bridges between the sides, despite dealing with the death of his wife, Myra, during the negotiations. Kraft has talked repeatedly about how the two sides owed it to the fans to get a deal done. I do not think that those comments are just platitudes. I'm struck by how Kraft has built an organization that truly concerns itself with optimizing the fan experience. I think the reason is that Kraft was a long-time fan before buying the team. He understands the customer because he lived, as a fan, through the horrid years the team experienced. He knows the frustrations of the customer firsthand. I'm not saying a CEO has to be a customer before taking charge of an organization, but I do think it's an advantage. I also think CEOs who were not customers prior to joining a firm must go the extra mile to try to walk in the customers' shoes. That sounds easy, but it's not because the CEO is never treated as an ordinary customer once they have taken charge.

Stand-up Economist: Humorous Take on the Federal Budget

Breaking up is the thing to do: Does Kraft's split make sense?

Kraft announced this morning that it will be splitting into two independent companies.  According to the firm's press release, it will divide into "a high-growth global snacks business with estimated revenue of approximately $32 billion and a high-margin North American grocery business with estimated revenue of approximately $16 billion."   While some investors applauded the move, others expressed some surprise given that Kraft recently acquired Cadbury.  At the time, Kraft made a strong argument for the synergies between Cadbury's chocolate and gum business and the Kraft food businesses.  


I'm still trying to sort through the logic and details of the split, but I am a bit puzzled by a few details that have emerged.  According to the company, the high-growth global snacks business will include brands such as "Oreo and LU biscuits, Cadbury and Milka chocolates, Trident gum, Jacobs coffee,and Tang powdered beverages."  The high-margin North American foods business will include brands such as "Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Capri Sun beverages, Jell-O desserts and Miracle Whip salad dressing."  Now, wait a second.  We're going to have coffee brands in each new firm.  We're going to have other beverage brands (Capri and Tang) in each new firm.  How can one argue that the break-up is about keeping the most synergistic businesses together if you are putting identical products in different companies?   

To me, the logic appears to be: keep the high growth stuff in one entity and the low growth stuff in the other entity, rather than focusing on the actual synergies among the businesses.   The press release is very explicit about that motivation.  The move seems designed to try to drive the stock price through a focus on attracting different types of investors to each entity, and through trying to garner as high a price multiple as possible for the global snacks business.   I think this may be somewhat short-sighted though.  At the end of the day, brands should be together in one firm if there are true economies of scope (i.e. synergies).  Price multiples should not be driving competitive strategy.    I'll be interested in hearing more about how and why different brands have been put into each entity.  Perhaps there's more to the story. 

The Innovative University

I'm reading Clay Christensen's new book: The Innovative University.   I'll be posting about it once I'm done.  Here's a video from the authors:

McGraw-Hill - Breaking up is hard to do

The Wall Street Journal reports that Jana Partners (a hedge fund) and the Ontario Teachers' Pension Plan have increased their equity stake in McGraw-Hill and may be pushing the company to break up in the near future.  I found the news quite interesting, because it's been apparent for quite some time that the whole was not worth more than the sum of the parts.  Last year, a team of my first-year MBA students performed a strategic analysis of McGraw-Hill for their course project.  They concluded that McGraw-Hill's businesses did not fit together.  The company operates a financial services unit, which includes the S&P credit rating agency.  It also operates a large, but struggling, education unit (which sells textbooks, for example), and it has several television stations in its portfolio.   McGraw-Hill divested Business Week last year.   The synergies among these varied units are rather limited.  

Of course, investors have known this for some time, as has the management team.  Even a team of first-year MBAs could see rather easily that one had a hard time justifying this strategy given the limited economies of scope.  Yet, the company has remained intact.   It shows how difficult it can be for management to break up a company... particularly one that has a long and storied history of family ownership and leadership.   Chairman and Chief Executive Harold McGraw III's great-grandfather founded the company in 1888.  I'm sure that the family legacy makes it difficult to ponder breaking up the firm.  One reason for that may be that a break-up might put the company in play.   Firms may swoop in to try to acquire the various parts, and the firm may have a hard time remaining independent and family-controlled.  

Little Bets and The Value of Crude Prototypes

I just finished reading a great book titled Little Bets, by Peter Sims.   The author makes a strong case for the concept of acting first, learning, and refining your ideas - rather than spending tons of time planning before doing.  Others, of course, have made this argument in the past few years, yet Sims does a terrific job of tying together multiple threads of work, ranging from design thinking to Karl Weick's work on small wins.  Moreover, he infuses his argument with lots of stories from different domains - from Pixar to Chris Rock to the U.S. Army.

I found his discussion of prototyping particularly interesting, as he discusses P&G's push to engage in more crude prototyping in its innovation process.   Many firms make the mistake of trying to "perfect the prototype" - a process that takes far too long and diminishes opportunities for rapid learning and improvement.  At P&G, managers discovered how keeping the prototypes simple has several key benefits, besides reduced cost and enhanced speed.  Chris Thoen from P&G explains:

The problem with showing something to consumers when its almost totally done, people don't necessarily want to give negative feedback at that point, because it looks like, "This company has spent a lot of money already getting it to this stage and now I'm going to tell them, 'It sucks.'" On the other hand, if something hangs together with tape, it's clear that it's an early prototype, the mindset of the consumer often is, "These people still need some help, so let me tell you what I really think."  

In sum, consumers will offer more candid and constructive feedback if firms keep the prototypes very simple/crude.  Moreover, Thoen also argues that managers within the firm will be more open to feedback, because they won't have become overly committed to a particular design.  In other words, crude prototypes minimize the sunk cost trap, which can prevent managers from adapting their ideas based on consumer feedback.