Making the Novel Seem Familiar

I've just finished reading New York Times journalist Charles Duhigg's new book, The Power of Habit.  I enjoyed it a great deal (full disclosure: Charles was my student 10 years ago at Harvard Business School).   Duhigg has a terrific chapter focusing on the predictive analytics function at many corporations, including Target.  Many of you probably read an excerpt from the book which appeared in the New York Times.  That excerpt discussed how Target tried to determine which female shoppers were pregnant so as to begin marketing key products to them before their babies were born.  As we all know, predictive analytics has become a crucial area of focus for many companies.  They can't seem to find enough talented folks who can mine data, conduct sophisticated analyses, and distill key insights.  

Duhigg makes a key point though.  Simply identifying people who are likely to want to purchase your product is not enough.  You have to entice them by "making the novel seem familiar."   It turns out that we are more likely to adopt a new habit if the behavior seems familiar to us.  Duhigg uses the example of a new song.  We tend to listen to music that has some key similarities to music heard often on the radio.   We tend not to listen to dramatically different songs.  Thus, radio stations sandwich such new songs between two tunes that are very familiar.  That tactic entices us to give that new song a shot.  Similarly, Target doesn't just come right out and bombard those pregnant women with a ton of ads and coupons for baby products.  They have come to realize that these women may not want retailers to know that they are pregnant, or they might be alarmed that a company could have figured this out.  Thus, retailers sandwich such targeted marketing between ads and coupons for other products unrelated to pregnancy and children.  They make the novel seem familiar.  It turns out that this tactic often works when it comes to getting us to adopt new habits, in life and in business.

Captain Sullenberger: Dealing with the Unexpected

CEOs with Military Experience

The Boston Innovation blog reported on a new study today about CEOs with military experience. New research by Efraim Benmelech of Harvard and Carola Frydman of Boston University found that CEOs with military experience tended to engage in less fraudulent behavior than those executives who had never served in the armed forces. The study findings suggest that the leadership training and emphasis on honor and ethics at the military academies may have a lasting impact on personal behavior - years after the individuals depart the military. Does this research suggest that we can teach ethics in places such as business school and thereby increase ethical behavior of business leaders? I'm not sure it is quite that simple. The military inculcates a certain sense of honor and character in many ways, well beyond the classroom. In short, the armed forces employ a holistic approach to building character. If business schools wish to enhance ethical behavior, they must do more than teach a class or two on ethics and morality.

When Hierarchy Helps?

Richard Ronay, Katherine Greenway, Eric Anicich, and Adam Galinsky have produced a new study titled, "The Path to Glory Is Paved With Hierarchy: When Hierarchical Differentiation Increases Group Effectiveness." Chris Shea writes about it in this weekend's Wall Street Journal. The scholars primed some people to think of a time when they had high power, while others were primed to think of an occasion when they wielded low power. Still others were not primed at all. In a cooperative task, the mixed groups outperformed those with folks only from one of the three conditions. The results suggest that a power hierarchy seems to improve productivity. Interestingly though, the results do not hold for other kinds of tasks. These results are consistent with another study by Galinsky, in which he found that NBA teams with larger salary disparities outperform those with more equal pay. Again, those results suggest a power hierarchy improves team effectiveness. We have to take these results with a grain of salt though. First, the type of task does matter. Second, this study examines "informal" hierarchies within teams. It does not examine formal hierarchies within larger, more complex organizations. Most importantly, we should not interpret the results to mean that efforts to flatten organizations are ill-advised. While some hierarchy may have benefits (it helps to have some who are clearly in charge), many organizations have such rigid hierarchies that many negative effects ensue.

Illustrated Brainstorming Tips

The Gentle Art of Smart Stealing blog has a terrific post titled "15 Illustrated Brainstorming Tips."  I highly recommend it.  Here are two that I really enjoyed:

14. Look for inspiration in other industries: cross industry innovation

15. Take action now and cure analysis paralysis

Made in the USA: Can it be a Differentiator?

How does a furniture maker compete with low-cost rivals producing goods in China?  It has several options.  It could outsource to China itself, so as to make its furniture more economically.  Alternatively, it could continue to produce in the USA, but try to differentiate its product so as to justify a significant price premium.  The latter strategy can be very successful in some product categories, but it has been difficult in a category such as furniture.   The Wall Street Journal reports, however, that one crib manufacturer is trying to produce a premium product right here in the US.  The Stanley Furniture Company hopes to persuade customers that they can worry less about product safety recalls if they buy from a company producing cribs in the US.   They also offer a wide variety of colors and designs, many more than can typically be provided by a firm producing its cribs off-shore.   However, Stanley charges a significant price premium - $700 vs. roughly $400 for many cribs made in Asia. Stanley is counting on the fact that customers are less sensitive to price when it comes to their infants.  Moreover, grandparents often contribute a significant amount to the purchase of a crib, according to the firm's research. 

Will the strategy work?  It could work, provided that Stanley delivers on its high quality promise.  Beyond that, though, the firm ought to think about the potential advantages that vertical integration may offer.  For instance, producing the cribs in-house here in the USA gives the company the opportunity to do more than offer many different colors and designs.  It also can change its designs much more frequently than an off-shore manufacturer can.  Moreover, it may even be able to offer some level of customization to the consumer.   Mass customization might help support a hefty price premium.    In all these cases, the company relying on outsourcing has a disadvantage, as they will be counting on large production runs of standardized products to take advantage of economies of scale.  Stanley could sacrifice those economies in return for providing the customer some benefits for which they would pay enough of a premium to offset the higher manufacturing costs.   Such a strategy comes with some risk, but given that Stanley cannot compete on cost with Asian manufacturers, it may be the only way to go. 

More Honest Customer Responses on Surveys?

We always should worry that customer surveys will yield inaccurate results for a variety of reasons.  In many cases, people simply say one thing and do another; they don't behave in a manner consistent with their survey responses. 

According to Christopher Shea in the Wall Street Journal, researchers may have discovered a simply way to enhance the accuracy of responses.  He cites a study by researchers at the University of Michigan and the New School for Social Research.  They compared phone surveys with text-message-based polls.  They found that texting-based responses tended to be more candid.    In fact, they asked about somewhat sensitive topics such as drugs, religion, and sex.   People admitted to certain behaviors more openly via texting than by phone. 

Perhaps the results suggest that market researchers should try text-message-based questionnaires in lieu of the usual phone surveys.  They may discover how consumers actually behave, rather than just hearing a "sanitized" version via phone call. 

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Understanding Your Customer: The Unasked Question Problem

As consumers, we receive tons of requests from companies to complete surveys these days.   During most restaurant visits, the waiters or waitresses ask us to complete a questionnaire.   Retailers print a phone number or web address on their receipts, and they request that we complete a survey.  After we purchase a car, the automobile company calls our home trying to solicit responses about our car-buying experience.    Do companies learn a great deal from these surveys, or might they be drawing erroneous conclusions at times?

Researchers David Gal and Derek Rucker at Kellogg Business School have examined a key form of response bias that may trip up companies. Specifically, they have demonstrated that consumers get quite frustrated when the survey instruments fail to ask them about key issues about which they would like to comment or respond.   In those cases, the unasked question becomes a serious problem.  Why?  It turns out that consumers often engage in a behavior that the scholars call "response substitution."   As researcher Derek Rucker says, "People don’t answer the question they’re asked. Instead, they supply an opinion they want to share." 

For example, a consumer may report that they did not like the food at a particular restaurant, when in fact, they really had an issue with the ambiance.   Perhaps the restaurant was a bit too loud.   However, if the survey doesn't ask about the ambiance, then the consumer may substitute their displeasure on a different question, such as one related to the quality of the meal.   In those cases, the restaurant may come to two misguided conclusions.  First, they may determine that the food quality must be improved, when the consumer actually likes the meals provided.  Second, the restaurant may not even realize that they have an ambiance problem.   The scholars recommend providing the consumer with a chance to offer an open-ended response in an "additional comments" section, so as to dig a bit deeper regarding consumer displeasure. 

Advice to College Graduates

For the past several years, I have re-run this old post with some advice for new college graduates.  I hope my seniors, and seniors at other institutions, will read and ponder these thoughts. 

With graduation ceremonies taking place at many colleges and universities this week, I thought it would be appropriate to re-run this post from last year with advice for 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.

Classic Hiring Mistake

Patty Azzarello has written a very good column for Fast Company titled, "The 6 Huge Hiring Mistakes Everyone Makes."   Here's one mistake I find particularly useful to highlight:

Admire a past accomplishment too much
Very often a candidate will have an accomplishment in their past that is truly extraordinary. It’s more impressive than anything you’ve ever done and vastly overshadows the accomplishments of the other candidates. Wow! You’re Hired!

• Don’t: Hire the candidate based on this one grand accomplishment alone.
• Don’t: Assume this breakthrough will be repeated for you!
• Do: Make sure they are ahead of the pack on many of the other hiring needs too.
• Do: Make sure to get them to talk about how they will think, learn about, and do the specific things you need now--don’t assume brilliant success on the prior thing will automatically translate to brilliant success on what you need done.

Make sure you will love them just as much for other reasons---for the mainstream work they will do and for their personal contribution to your team. Don’t just hope for a repeat home run.

I'm particularly struck by this piece of advice from Azzarello for several reasons.  First, we often forget that the person probably needed a strong team and organizational support system to achieve that great accomplishment.  Without that support, they may not be able to replicate the success. So, we have to find out if they built the team themselves... do they have the ability to build another great team?  That's very important, but often overlooked.  Second, we need to make sure that the person still has the same drive and determination that they may have had prior to that major accomplishment.  Have they gotten a bit complacent? Are they resting on their laurels?   Third, you have to ask whether their skills transfer to your organization?  In other words, we often think they may are bringing a set of 'best practices' with them to your firm.  However, those practices and processes may not fit your culture, your strategy, your people.  We must remember that success doesn't come from universal best practices... it comes from practices that are tailored to a particular organization, market, culture, etc.   So, you have to ask:  Will those person be able and willing to adapt their approach to our firm if modification and adaptation is needed? 

Does a Flat Organization Have Negative Consequences?

Julie Wolf of Harvard Business School has conducted an extensive study of companies that have tried to flatten their organizational structure.  She studied historical data on 300 large U.S. firms over a 15-year period, and she conducted interviews and analysis of CEO calendars.   She examines the consequences of attempts by large firms to "flatten their hierarchies" - something often recommended to improve performance.   The conventional wisdom is that we should flatten hierarchies so as to push decision-making down to the lowest level possible.  However, Wolf found an unintended consequence of such flattening efforts: "Results suggest that flattening transferred some decision rights from lower-level division managers to functional managers at the top. Flattening is also associated with increased CEO involvement with direct reports—the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy."  In short, by removing layers, we may be pushing decision-making up the organization, rather than down to the people at the local level with specific knowledge about the customer, markets, technologies, and the like.  Flattening could lead to a more centralized management structure.

I've always believed that organizational structure is a blunt weapon.  Structure is an easy lever to pull if an executive wants to reduce costs and influence behavior.  However, simply moving boxes and arrows on the organizational chart often does not lead to higher performance.   Structural change must be accompanied by process and cultural change.  Specifically, Wolf's research suggests that firms need to be very clear about the allocation of decision rights when layers are removed.  I also think that firms need to pay close attention to status/informal hierarchies, rather than only focusing on the formal organizational structure.   Often, the informal hierarchy drives decision-making processes.   The values of the organization drive decision-making processes.  Flattening of the formal structure has to be accompanied by an effort to reduce the salience of status differences, and it has to be buttressed by leadership which emphasizes the value of putting decision-making in the hands of those closest to the work. 

The Challenge at Etsy

Etsy is the fast-growing online marketplace where artists and craftspeople can sell their products.   Wharton Professor Barbara Khan calls it a "very well run, high-quality street fair."   Etsy has 39 million unique visitors per month.  More than $525.6 million of items were sold on the site last year.  Etsy generates revenue through a small listing fee as well as a transaction fee equal to 3.5% of an item's price once it is sold.  

As this article on Knowledge at Wharton notes, the site faces an interesting challenge as it grows.   As it becomes very popular and goes more mainstream, it risks alienating some of its hard-core original customers.  Will the artists and craftspeople see it as less quirky and unique?   Will some people accuse of it selling out when they learn that some vendors, who are larger than perhaps it may seem at first, appear on the site?   This challenge isn't new, of course.  However, it creates a dilemma for a company such as Etsy.  After all, the company benefits from network effects, i.e. the value to each buyer and seller rises as the number of buyers and sellers increases.  People want to be where many other buyers and sellers are.  That network effect drives Etsy to get bigger at first.  Yet, at some point, that urge to get big fast runs up against this potential backlash... are you becoming "too mainstream" and "losing your soul"?  

The challenge for Etsy moving forward is to maintain that quirky appeal, to stay appealing to the unique artists and craftspeople who made the site popular.   They can continue to grow, while staying true to those values and positioning. However, it will take hard work.    To achieve this objective, the firm ought to be very clear now about what they absolutely won't do moving forward.  What is absolutely out of bounds?  Moreover, they need to be very clear about their core values.   What do they stand for as an organization?  What values are non-negotiable?  By being more explicit about these issues, Etsy and other firms like it will be more likely to avoid alienating their original, hard-core customers. 

Leadership Immersion at Hilton Hotels

Yesterday I had the privilege of attending (and presenting at) the Towers Watson HR Leadership Forum in Falls Church, Virginia.  Prior to my talk, one of the Towers consultants moderated a wonderful panel discussion of HR experts from a variety of different organizations.   During that discussion, I learned about a terrific program at Hilton Hotels.  At Hilton, the top 72 executives in the company take part in an "immersion" experience once per year.    In that immersion, they spend one week per year actually working in one of the company's hotels.   They don't go there just to hold a town hall meeting or "inspect" the work.  They actually work alongside their front-line associates for one week, performing a variety of roles from the front desk to maintenance.   The immersion provides a powerful learning experience for top executives, and it insures that they understand the challenges that front-line employees face. 

Bed Bath & Beyond Acquires Cost Plus

Bed Bath & Beyond has announced the acquisition of Cost Plus, a specialty food and home furnishings discounter. At first glance, one might wonder why a firm facing increasing competition from online players such as Amazon would double down in brick and mortar stores. Let's take a closer look. First, I find it interesting that the two firms were working together a bit over the past two years. Bed Bath & Beyond had opened several in-store Cost Plus shops in the past few years. It seems like a very good strategy to date a bit before getting married. More firms should pursue this strategy before major mergers. One might ask, though, why they needed to merge if they were working together effectively through a strategic partnership. That's a tough question to answer from the outside, but perhaps there are additional forms of cooperation that could not occur efficiently without a merger. Let's hope so. Finally, Bed Bath and Beyond seems particularly interested in Cost Plus because it mainly sells unique food products tht cannot be found at other retailers. It seems that thy view the proprietary product line, particularly in food items, as protection against online rivals such as Amazon. This move to proprietary items is a major trend tht will continue as retailers fight the "showrooming" threat.

Don't Ask Your Customers To Invent New Products

Steve Jobs used to say that the iPod and the iPhone didn't emerge from focus groups. Steven Spielberg says a great movie is not created in a focus group. We need to remember that customers often tell us about incremental improvements they would like to see in existing products. They have a hard time imagining a brand new future. That does not mean, however, that we should not engage customers in our radical innovation efforts. We should engage them. We need to focus, though, on the pain they feel when using existing products. What frustrations and obstacles do they experience? If we understand those deeply, then we can begin to develop ways to alleviate that pain. Radical innovations can emerge from that deep understanding of customers' pain.

Power without Status: A Recipe for Disaster?

Alison Fragale, Jennifer R. Overbeck, and Margaret Neale have conducted some interesting new research on power and status.   They have "observed that people who have power without status have a hard time in their organizations."   The researchers point out that most organizations have situations in which people have powerful positions, but people throughout the firm don't think very highly of them.   Status is in the minds of others; your status is how others perceive you.  You may secure a powerful position in a firm, but it doesn't mean that others attribute high status to you.  The scholars have found that, "high-power, low-status people struggle to lead and build a well-functioning team."  They have even found that people reject good advice from high-power, low-status leaders. 

What's the takeaway for leaders?  Recognize the difference between power and status.  Don't rely only on the formal hierarchy to get things done.  The informal status hierarchy matters a great deal.  Finally, when appointing someone to a powerful position, think about how others perceive them. Do they have high status?  If they don't, you might examine why that is the case.  What can be done to mentor or coach them so that their behavior can change, and ultimately, others' perceptions can change as well.

Bill Rasmussen: Founder of ESPN - Great Entrepreneurial Story

Bryant Collegiate Entrepreneurs Organization

I'm very proud to be the faculty adviser to this terrific group of young aspiring entrepreneurs:

Homeboy Industries: The Story of Father Greg Boyle

Fast Company has an amazing story this month about Father Greg Boyle's work with ex-cons and gang members in Los Angeles.   I promise that the story will make you smile and cry... and consider how business leaders truly can help social enterprises thrive.   Father Boyle runs Homeboy Industries, the largest gang-intervention program in the United States.  Homeboy employs ex-cons in a variety of small businesses, from a bakery to a tattoo removal service.   As this rather unorthodox priest says, ""We don't hire homies to bake bread. we bake bread to hire homies."

Source: Fast Company

What makes the story even more interesting is the role of Bruce Karatz, the former CEO of KB Home. 
Karatz ran the company for 20 years.  He made over $100 million in his final year as CEO.  However, in 2006, the SEC conducted a criminal investigation of the firm.  The Board fired Karatz.  According to the LA Times, "A federal jury in Los Angeles convicted Karatz of two counts of mail fraud, making false statements in a regulatory filing and lying to the company's accountants. The panel acquitted him of 16 other charges."  Karatz joined Homeboy Industries several years ago, as the social enterprise teetered on the brink of insolvency.  While Father Boyle has a tremendous sense of compassion and a loyal following among his people, one would be hard pressed to describe him as the most financially prudent executive.   Boyle explains, "The day won't ever come when I could run GE, but Bruce could. And the day won't ever come when Bruce could run Homeboy, but I have great affection for him. Because he gets who our people are, and he's moved by them."  What Karatz has done is make a big impact on Homeboy Industries.  Through his guidance, the enterprise has put itself on much firmer financial ground.  What an interesting and unique team... not one you would ever expect... a unconventional priest who speaks the language of gang members and a convicted former CEO who once ran a nearly $10 billion company.   Together they are making a difference in the lives of many people.  It's a story of redemption and unparalleled compassion.

Corporate Social Responsibility: How Do Firms Get Treated By the Press?

Jiao Luo, Stephan Meier, and Felix Oberholzer-Gee have published a new working paper titled, "No News Is Good News: CSR Strategy and Newspaper Coverage of Negative Firm Events."  They test the conventional wisdom that companies with strong corporate social responsibility programs build up lots of good will that can help them in difficult times. They examine firms in the oil industry specifically.  In fact, they find that, "the media far more likely to report accidents if they occur at a company with a superior CSR record. Rather than acting as an effective form of insurance, our results suggest that a strong CSR record can be a liability. Moreover, the tone of coverage is no less critical for organizations with a greener reputation." 

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Carlyle Group and Other Private Equity Firm IPOs

News reports indicate that the Carlyle Group, a large and successful private equity firm, has priced its IPO at slightly below the initially expected range.   Apparently, the firm met with some skepticism from investors about their offering, and more generally, the prospect of investing in publicly traded private equity firms. 

Dan Primack of Fortune has written an article about investing in these IPOs.  To start his article, he writes:

Shortly after the Blackstone Group went public in mid-2007, I advised friends not to buy the stock. Investors didn't seem to understand how private equity firms like Blackstone should be valued, as illustrated by a 6% share price bump in the days after Blackstone agreed to acquire Hilton Hotels. Private equity firms recognize value when they sell assets, not when they acquire assets, I argued. They aren't conglomerates that generate margin via economies of scale.

I'm quite confused by the comment.  How precisely is a private equity firm different than a conglomerate?  Both own a variety of unrelated businesses. Conglomerates don't achieve economies of scale.  In a developed market such as the United States or Western Europe, how can one achieve scale economies by acquiring unrelated businesses?    You simply cannot!


Let's get to the heart of the matter then. Private equity firms do create value in society, and they do differ from publicly traded conglomerates.  How?  In many ways, when private equity firms gained prominence, they offered a better governance model than publicly traded corporations.  Many publicly traded firms suffer from high agency costs that come with the separation of ownership and control.   Private equity ownership of a business reduces agency costs and reduces the clash of interests that often exists between CEOs and shareholders of publicly traded corporations.   If' that's a major advantage of a private equity firm, then what do we make of taking these private equity firms public?  Well, I would argue that such public offerings counteract one of the key benefits that private equity firms bring to the table.  They would seem to interest a layer of agency problems at the top, offsetting some of the very governance benefits that private equity firms bring to the companies in their portfolio.

Should Coke Acquire Monster?

The Wall Street Journal reports that Coca-Cola explored a possible acquisition of Monster, the energy drink company.   Coca-Cola apparently backed away due to the hefty price tag.  Some investors reportedly balked at the premium that would be paid for Monster, and they made their concerns known to management.

I found one particular note in the story quite interesting.  It reads: "Coca-Cola already has an agreement with Monster to distribute some of its drinks, and that could diminish the potential synergies from any deal—and thus Coke's willingness to pay a large premium."   When I teach strategy, I always reinforce the idea that companies need to consider whether a merger is actually required to achieve the benefits of cooperation.  I draw on Williamson's transaction cost theory, and I argue that we have this "markets vs. firms" choice to make.  Do we organize the activity inside the firm (merger), or do we transact with another party through the market (with a contract or alliance)?   In this case, Coke has been working quite effectively with Monster through the market for some time.  The question is:  What additional synergistic benefits will come if they move from this relationship to a merger?   What can they NOT accomplish through their current relationship?  That's the key question in this case.

Beyond that, though, we also have to consider the following:  What are the costs of inaction?  Will Pepsi acquire Monster, and therefore, Coke would lose its current relationship altogether with this leading energy drink firm?  We have seen that story before, in fact.  Coke once considered acquiring Gatorade, and investors (specifically Warren Buffett) balked at the price tag.  Pepsi swooped in and acquired Gatorade instead.  Coke has been a laggard in the sports drink business ever since that time.  So, Coke must consider the question about whether additional synergies exist above and beyond their current relationship, but they also must consider whether that relationship could get disrupted by a rival's purchase of Monster.