Friendlys headed for bankruptcy

News reports this morning indicate Friendly's restaurants may be headed for Chapter 11. If you have been to one of their locations lately, you know they often exhibit very slow service. Moreover, some locations clearly need a makeover. They have clearly lost share to places such as Panera and Chipotle, as well as other restaurants at which there is table service. Here's a suggestion for survival: why not exit the restaurant business and focus on ice cream? The brand stands for ice cream. They could shift to small locations, reduce fixed costs substantially, and do what they do best.

The Progress Principle

In their new book, The Progress Principle, Teresa Amabile and Steven Kramer argue that small wins can be a powerful driver of creativity, commitment, and productivity in the workplace. This HBS Working Knowledge feature summarizes the key idea in the book:

Of all the factors that induce creativity, productivity, collegiality, and commitment among employees, the single most important one is a sense of making progress on meaningful work.   Seemingly small signs of progress will induce huge positive effects on employees' psyches. On the other hand, seemingly small setbacks will induce huge negative effects.
  
Amabile and Kramer build on the seminal work of Karl Weick, who wrote a terrific article about the power of small wins back in the mid-1980s.  Weick argued that we can make progress on tough problems by breaking them down into smaller segments and adopting a small wins approach.   He explained that a small wins approach works because tough, complex, large problems can be cognitively overwhelming as well as stressful.   Small wins enable us to build momentum, show proof of concept, and build bridges with others who may have opposed us at the outset.

The Heroic Failure Trophy

The Wall Street Journal has a terrific article today about Grey New York, an advertising agency.   The firm's leader, Tor Myhren, has created a quarterly "Heroic Failure" award to encourage innovative risk-taking.   It reminded me of the Build-A-Bear award program that I wrote about several years ago.    Here is an excerpt from what I wrote about the Build-A-Bear "Red Pencil" award program. 


[Build-A-Bear CEO Maxine] Clark has built an incredibly successful company, growing it to over $350 million in sales over the past decade. She has done so by delivering a world-class customer experience in her stores. Clark credits her store associates, who constantly find ways to innovate and improve. How do the associates do it? For starters, they tend not to fear admitting a mistake or surfacing a problem. Clark’s attitude toward mistakes explains her associates’ behavior. She does not punish people for making an error or bringing a problem to light; she encourages it.

Clark credits her first grade teacher, Mrs. Grace, for instilling this attitude toward mistakes in her long ago. As many elementary school teachers do, Mrs. Grace graded papers using a red pencil. However, unlike most of her colleagues, Mrs. Grace gave out a rather unorthodox award at the end of each week. She awarded a red pencil prize to the student who had made the most mistakes! Why? Mrs. Grace wanted her students engaged in the class discussion, trying to answer every question - no matter how challenging. As Clark writes, "She didn't want the fear of being wrong to keep us from taking chances. Her only rule was that we couldn't be rewarded for making the same mistake twice."  

Clark has applied her first grade teacher's approach at Build-a-Bear by creating a Red Pencil Award. She gives this prize to people who have made a mistake, but who have discovered a better way of doing business as a result of reflecting upon and learning from that mistake. Clark has it right when she says that managers should encourage their people to "experiment freely, and view every so-called mistake as one step closer to getting things just right." Of course, her first grade teacher had it right as well when she stressed that people would be held accountable if they made the same mistake repeatedly. Failing to learn constitutes the bad behavior that managers should deem unacceptable. Clark makes that point clear to her associates.

Excerpt from Michael A. Roberto, Know What You Don't Know, Wharton School Publishing, 2009.  

Quotes are from Maxine Clark's book, The bear necessities of business: Building acompany with heart.  John Wiley and Sons.  2006.

The IKEA Effect

The Neoacademic blog highlighted an interesting new piece of research last week regarding the IKEA effect.    For years, experts have pointed out that consumers love IKEA products in part because they have to exert effort to put the items together.  Many experts also have recounted the story of the launch of cake mix products in the 1950s.  Originally, the mixes did not require much effort at all on the part of the consumer.   However, when manufacturers changed the mixes to require some effort (adding eggs, vegetable oil, etc.), the mixes began to sell quite well.

In a new study published in the Journal of Consumer Psychology, scholars Michael Norton, Daniel Mochon, and Dan Ariely examined whether they could provide more concrete evidence supporting the IKEA effect.   In other words, do people value  things that they have created for themselves more highly than if others created it for them?   The scholars conducted a series of experimental studies.   For instance, in one experiment, subjects bid on IKEA items that they had either built themselves or simply examined.   The subjects bid over 60% more for the items that they had constructed themselves.  

The results have interesting implications for many brick-and-mortar retailers in my view.  Many of these retailers face the serious threat of losing sales to internet firms.  Could the brick-and-mortar retailers retain more customers by making their shopping experience more interactive and engaging, including the use of mas customization techniques?  Many have argued that they could.  Now we have another reason why an interactive shopping experience could yield better results.  If that interactivity involves "constructing" one's own product, perhaps through a customization experience, then retailers may increase buyer willingness-to-pay.    Customization, then, may have multiple benefits.   From IKEA to Build-a-Bear, we have plenty of examples that support this notion. 

5 Social Media Lessons

At Business Week's site, Home Depot's Brad Shaw shared the following five social media lessons for business:

1. You can't control the conversation:  Companies can't just proclaim; they must engage in a dialogue with consumers.

2.  Be authentic.  Your online image and approach must match your offline image and culture. 

3.  It's about people.  Don't just communicate about products and services.  Share information about the people behind the brand.

4.  Your people need hands-on expertise in what customers care about.  Use front-line employees in your social media efforts, because they touch the consumers directly.

5.  Be patient and flexible.  Invest in small increments, gather feedback, adjust over time.  Stay agile. 

Wharton Profs' Take on the HP Situation

Here is a good read from Knowledge@Wharton about the HP situation.  Several faculty members comment on the CEO switch and what Meg Whitman must do to turn things around at the firm.

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Defining Your Company's "Critical Behaviors"

Many companies outline a set of values by which they wish to operate, and they define the financial goals they wish to achieve.   Senior leaders often spend time describing those values and goals at various company events.  Company newsletters, posters, and wallet cards list the organizational values too.  However, many firms do not take the extra step to define clearly the individual and team behaviors necessary to live those values AND for the firm to achieve financial success.  Great companies take great care to outline the crucial behaviors required for success on both fronts (financial and values).   Moreover, they connect those behaviors to the personal development plans and merit assessments of each employee.  Goals-Values-Behaviors: Every firm should make sure they have addressed each leg of the stool.  

The HP Board: Another CEO Bites the Dust?

News reports indicate that the HP Board of Directors will fire CEO Leo Apotheker today and replace him with Meg Whitman.  Many people have criticized the Board heavily for its actions over the past few years... and rightfully so.  They have had their share of public fiascoes.  From my perspective, they deserve the most criticism for not having developed a talent pipeline and a succession plan that would have enabled them to promote an insider during at least one of these management changes.  From Fiorina to Whitman, the Board keeps going outside the firm to find a new CEO.  How can a firm such as HP constantly have to reach for an outsider?  That's a flawed talent strategy and poor governance.

On the positive side, I applaud the Board for not falling into the sunk cost trap with Apotheker.  They deserve some credit for acknowledging their mistake and cutting their losses.  Many Boards would have been reluctant to fire a CEO after such a short period of time, even if it became quite clear that things were not working out.  

Netflix and Qwikster: What are they thinking?

Why did Netflix decide to split itself in half?  Why create a new brand called Qwikster?  Most people have criticized the move quite heavily.  Slate has an interesting article about the decision.  Farhad Manjoo writes that Netflix seems to have taken guidance from Clay Christensen's model of disruptive innovation.  Manjoo bashes the move in the first few paragraphs of the article, but then writes the following:


I think it's an idiotic strategy.... And yet: It could work. In The Innovator's Dilemma, Christensen argues that the companies that are most vulnerable to disruptive technologies are those that have really good management. The problem with good managers is that they tend to listen to customers. And the problem with customers is that they don't always know what's best for them. If you were a devoted Blockbuster customer in 2001, and if Blockbuster's CEO sent you an email announcing he was closing all the company's stores and switching to a DVD-by-mail service, you would have balked... As Christensen explains, disruptive technologies usually start out as inferior substitutes, proving attractive only to a small fringe of customers. For years, the people who ran Blockbuster saw Netflix as irrelevant. It's easy to call them stupid now, but at the time they were mostly right. Blockbuster's customers considered Blockbuster better than all the alternatives; if they didn't, they wouldn't have been Blockbuster customers. And Blockbuster's managers were doing what good managers do—they were investing in the parts of the business that customers liked (opening more stores) rather than coming up with a whole new business that might alienate their current users.  The key advantage of Netflix's new model is that it will give each side of the business—the DVD side and the streaming side—flexibility to manage its service in a way that pleases its own customers. As a combined service, any move to strengthen one side of the company over the other would have been perceived negatively by one group of customers. 

For me, the negative reaction to the move has more to do with the seeming inconsistency of management's actions than anything else.  Several months ago, Netflix championed an integrated service at a low price.  Then, they raised prices dramatically on the integrated service, but allowed customers to opt for a lower priced streaming-only service.  Then, after a short period of time, they announced a split into two brands, one for streaming and one for DVD-by-email.  The series of changes in strategy over a short period of time give the impression of a management team unsure of how to move forward.  That makes investors uneasy (rightfully).  Secondly, people have criticized the move because they don't necessarily see the connection between setting up a separate business unit and establishing a second brand.  In Christensen's writings, he provides several good examples of companies establishing independent units to pursue an innovation, without necessarily creating a new brand. Take IBM's creation of a unit to launch the personal computer; it existed independent of the mainframe business, but it leveraged the existing IBM brand.

Despite all the questions, I understand Netflix's predicament.  They face unchartered waters, as a young growing company facing the inevitable demise of the original business.  In the old days, companies may have experienced the disruption of their core business after decades of success.  For Netflix, that demise of the core may be occurring just a decade after the firm rose to prominence.     

Another Break-up at Tyco

The recent burst of break-up activity among diversified companies continues.   Tyco has announced its intention to break up into three separate firms:  security, fire- protection and flow-control.    The split follows a 2007 break-up in the wake of the Kozlowski scandals.  At that time, Covidien and TE Connectivity became independent companies.  With this announcement, the Kozlowski empire has been dismantled completely.   I'm not surprised by the move.  The firm had become more focused after the 2007 spin-offs, but it still remained a company with limited synergies among these business units.   In an era of lower economic growth, firms cannot justify these diversification strategies as easily.  They have to show the economic value of diversification.  If not, they must try to create shareholder value by freeing the units to operate as independent, focused companies.  In the past, economic growth masked some of these sins of diversification at many firms.

Are Gifts Better Bonuses Than Cash?

The Wall Street Journal reports on a new study published in the American Economic Review.  Sebastian Kube, Michel André Maréchal and Clemens Puppe conducted an experiment, in which they compared workers' productivity when given a bonus vs. those in a control group.   Actually, they set up two different types of bonuses:  a 7 Euro cash bonus and a gift of a thermos worth 7 Euros.   They found that the workers promised the gift as a bonus were significantly more productive than those given cash, whether told the value of the thermos or not.

Now, one could conclude that the researchers have shown that gifts might have a better incentive effect in the workplace than cash.  However, I think we need to proceed with caution - a great deal of caution!  Here we have a simple experiment with the bonus only worth 7 Euros.  Would the same effect hold in the workplace if the amount of the bonus were much more substantial?  That's not clear to me at all.  So, while the experiment may be thought-provoking, I'm not sure it provides us practical guidance as to how to design incentive schemes for the workplace. 

Industrial Policy: Jon Stewart's Take

                       

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Could Sears Become a Product Company?

The Wall Street Journal reports today about Sears' moves to expand the sales of its Kenmore line of appliances to other retailers, such as Costco. A decision to move in this direction offers peril and promise. On the one hand, Kenmore is a strong brand likely to sell at other retailers. On the other hand, every sale at another retailer diminishes foot traffic and associated sales at a Sears store.

The decision raises a broader long term strategic question though. Sears has struggled mightily in recent years. Some question whether it can ever reverse this slide. If that is true, perhaps Sears could gradually be transforming itself from a retailer into a product company. It already sells Craftsman and Diehard branded products at other retailers. Could Sears one day no longer be a retailer at all, but instead be a home and garden products firm with a stable of strong brands (Kenmore, Diehard, Craftsman, etc)? As the retail business continues to decline, this may not be so far fetched.

Leaders, Explore outside your domain!

At the very start of my doctoral program, faculty members assigned us to read Thomas Kuhn's great book, The Structure of Scientific Revolutions. I learned that many great scientific discoveries emerged when people from one field tackled a question in a different domain. Why? I think three key reasons exist. First, people in a particular field become entrenched in a certain way of thinking, and that can inhibit innovation. Second, new ideas can emerge when we draw analogies carefully from one domain to another. Third, many social and scientific problems require a fundamentally interdisciplinary problem-solving approach. You simply can't address the issue from one silo.

What's the lesson for leaders? We have to read, scan, and explore ideas from outside our industry and outside the field of business. We have to make the time for this and encourage our peers and subordinates to do the same.

Advertising: The Value of Celebrity Endorsements

What's the value of a celebrity endorsement for your brand?  Harvard's Anita Elberse and and Barclay Capital's Jeroen Verleun examined this question recently.  They looked at how a firm's sales change as they sign a star athlete, as well as how revenue changes with major accomplishments by the athlete.  Elberse and Verleun found that a firm's sales do rise with the signing of a star athlete - on average by approximately 4%.  Moreover, revenue increases with each subsequent major accomplishment by the athlete.  In other words, winning helps drive the firm's sales.  However, they found decreasing returns to winning.  In other words, sales increases tend to diminish in size as the athlete racks up subsequent victories (the first Grand Slam victory by a tennis star yields a bigger jump in firm revenue than the fifth Grand Slam victory).  The researchers argue that firms need to keep these decreasing returns in mind as they contract with star athletes.  For instance, providing bonuses of equal size for each major victory would not necessarily make sense, since the associated economic benefit for the firm falls over time.  Moreover, the decreasing returns might suggest that long term deals should be negotiated with caution. 

GameStop: Trying to Counter a Disruptive Threat

GameStop made news this week by announcing that it will accept trade-ins of Apple iPods and iPhones at its stores throughout the country, after testing the concept in Texas for several months.  This article quotes CEO Paul Raines as saying, ""We're selling refurbished iPod Touches like crazy."   I find the news interesting for reasons beyond the fact that all things Apple tend to attract attention these days.  GameStop clearly faces a serious threat of disruption for two fundamental reasons. First, many people see the future of console-based video games shifting to downloads as opposed to buying CDs at retail stores.  Second, console-based games themselves are under attack from the shift toward mobile and social gaming.   GameStop clearly will have to evolve its strategy, or face a future that looks more like Blockbuster and Borders  than they would like.  I'm intrigued by how Raines, who I interviewed years ago when he was at a different firm, has continued to experiment with the business model and evolved the strategy in the face of these threats.  They seem much more agile than other brick-and-mortar retailers who have been disrupted, but it remains to be seen whether they can thrive amidst these challenges. 

Transformational Leadership Course

For those with a subscription, you might wish to check out the Providence Business News today.  John Larrabee interviewed me about my new leadership series from The Great Courses (The Teaching Company).   During the interview, I discuss how faculty members team up with the terrific staff at The Great Courses to build a course.  In addition, we talked about the challenges of shifting from case method teaching in the classroom, which relies on the Socratic method, to the lecture format of The Great Courses. 

Postal Service Blues: Substitution is Always the Biggest Threat!

Over the past few weeks, we have heard a great deal about the troubles at the US Postal Service.   The USPS experience offers a crucial lesson regarding threats to competitive advantage.  Many firms spend enormous amounts of time conducting competitor analysis of various kinds.  They worry constantly about how their rivals might overtake them.  However, the most dangerous threat to competitive advantage really does not come from direct rivals in your industry.  Instead, it often comes from substitutes.  In other words, different goods or services emerge that address the same customer need, thereby supplanting your product in the marketplace.  Think digital photography undermining instant cameras, NetFlix destroying Blockbuster, tablets eroding the position of traditional PC makers, mobile and social gaming undermining the position of traditional console-based video games, and clearly... email and other electronic forms of communication threatening the sustainability of the USPS business model.  In sum, companies should spend much more time scanning the external environment for the rising threat from potential substitutes, as opposed to fixating on their existing direct competitors.  Of course, in so many cases, companies fail to acknowledge the threat from a substitute until it's far too late... even though they are aware of the emergence of this alternative good or service.  Unfortunately, existing mental frameworks often make it difficult for executives to get their arms around the very different business model associated with the substitute.  

Recommender Systems Build Commonality, not Factions

Wharton Professors  Kartik Hosanagar, Andreas Buja and Daniel M. Fleder have conducted a fascinating new study regarding recommender systems (in this case, iTunes recommendations). The authors chose to examine the arguments being made by various folks that, "Increased personalization is creating fragmentation throughout society."   For example, Cass Sunstein,law professor and head of the Obama administration's regulatory policy, has made such an argument.   The scholars examined how recommendation systems on the Internet affect consumer behavior.  They focused on iTunes for their study.   Here is what they found, according to the Knowledge@Wharton website:

"An increase in the volume of purchases was anticipated, the authors write, but the increase of roughly 50% was larger than expected. By comparison, the number of purchases made by the control group actually declined by a small amount. "The personalization system exposes you to a lot more items you like, so you consume more than you used to before," says Hosanagar. "As each consumer buys more, it increases the likelihood they have something in common." For the taste effect, the study results also show that once volume is controlled for, consumers buy a more similar mix of products after receiving recommendations.  In addition to purchasing more songs, the research showed that consumers who used the service became part of networks that intensified as a result of receiving suggestions about songs. The researchers, who plotted relationships between thousands of users and millions of songs, found a 23% increase in the percent of listeners with an artist in common compared to the control group.  The researchers also plotted combinations exploring the "distance" between pairs of users, or the number of people in the network between them. They wanted to determine whether those who initially were close on the network become closer, while others who were farther removed grew farther away, indicating fragmentation. The authors found that all kinds of users -- close as well as far -- became closer to one another on their networks in the treated group relative to the control group. The group that received recommendations showed more user-pairs becoming closer (36%), while fewer pairs (9.2%) moved farther apart. "The increase in similarity appears uniform: All types of users become closer to one another," the paper states. "Users who were close became closer, and users who were initially far became closer, too."

In sum, music recommendation systems tend to broaden consumer interests, rather than narrowing the individual's focus on a particular niche.  Hopefully, future studies will examine whether the same result occurs with other types of recommendation engines.  For more on the importance of recommendation systems in many markets, I highly recommend reading Chris Anderson's excellent book, The Long Tail.  In that book, he explains how companies such as NetFlix and Amazon have a much higher percentage of their sales coming from non-blockbuster hits than brick-and-mortar retailers.  They accomplish this through the digital nature of their business, and they drive those sales of less well-known products through things such as their recommendation engines.  

Do Narcissists Impede Information Sharing in Groups?

A lengthy stream of research demonstrates that groups tend to focus their discussion on information commonly possessed by all members, while privately held information tends not to be shared and discussed sufficiently.  Team performance often suffers when members fail to disclose privately held information.  Some tasks and decisions require the integration of each member’s information and expertise; just one member’s failure to disclose and share privately held information can impair the team’s ability to accomplish its task effectively.  Some studies have shown that small changes in a leader's behavior can facilitate or impede information sharing in groups. 

Christopher Shea of the Wall Street Journal pointed us to a new study conducted by Barbora Nevicka, Femke Ten Velden, Annebel De Hoogh, and Annelies Van Vianen.  Their research examined specifically how narcissistic leaders performed in a setting in which group members needed to share and integrate privately held information to solve a problem.  The scholars found that, "The narcissists’ preoccupation with their own brilliance inhibits a crucial element of successful group decision-making and performance: the free and creative exchange of information and ideas."  I don't find the conclusion surprising at all, but the research definitely helps shine the spotlight on this important challenge that many leaders and groups face.