User-Generated Content: Engaging Customers, Enhancing Brand Authenticity

Leading edge companies leverage user-generated content to bring their brands alive, engage some of their biggest fans, and emphasize the authenticity of their brand.  They don't just solicit customer reviews, collect likes on Facebook, or ask customers to vote on items that they should sell.  They actually encourage customers to help them tell their brand story.  Paige Beaumont, Assistant Editor of the Post Advertising blog, writes about the impact of user-generated content:  

Great user-generated content (UGC) should not exist in a vacuum—it should be reused, when and where appropriate, to bring color and authenticity to a brand’s marketing.  As brands expand their social-media footprints, many have also (smartly) placed more emphasis on engaging with their fans. As a result, they’ve begun proudly featuring selected consumer contributions in print, TV and online advertising. Dedicated fans often create a gold mine of content that’s just waiting to be explored, and in due course, brands have begun to dip into this resource. It’s the easiest and most direct way to build relationships with customers, because their passion for their favorite brands makes them happy to respond and share their stories—messages that are infinitely more compelling than what the brand might say.

Paige offers some terrific examples in this blog post.   For instance, she highlights an advertisement by Target that features real home videos of high school students opening their college acceptance letters.  The ad clearly evokes an emotional reaction, and Target appropriately makes a connection to their own efforts to donate a portion of revenues to schools throughout the country.  

Cheaters vs. Cheating: Words Matter When It Comes to Crossing The Ethical Line

Christopher Bryan and Gabrielle Adams have conducted a neat new study regarding ethical transgressions.  They examined whether wording mattered when it came to the rate of unethical behavior in which people might engage.  Specifically, they examined whether people might cheat to win $5. They asked subjects to think of number between one and ten; they could win $5 if their number was even.  Much prior research suggests that people are much more likely to think of an odd number.  Therefore, a high rate of even numbers would indicate that quite a few folks were likely to be cheating.  Now, here's the interesting twist.  They broke the subjects into two experimental conditions.  One group was told that they were playing a game that "tests how common 'cheating' is on college campuses."  The other group did not use the word 'cheating' - instead, it used the word 'cheaters' to describe the purpose of the research. In addition, subjects were being told that it would impossible for the researchers to know if subjects were "cheating" vs. were a "cheater." 

What did Bryan and Adams find?  Approximately 20% of the subjects in the "cheater" group reported an even number.  That's what we would expect if people are being honest (given the tendency of most folks to pick an odd number in prior studies).  Roughly one-half of the folks in the "cheating" group reported an even number!   Therefore, the slight alteration of wording seemed to matter a great deal.   No one wants to be called a cheater!  People worry very much about how they think of themselves, not just how others think of them.  The word "cheater" moves people to honesty! 

One Step Toward Attacking The College Tuition Bubble

Source: Business Week

As a college professor, I understand that we are part of the problem when it comes to the college tuition bubble.   At far too many universities, particularly large research institutions, a significant number of faculty members don't teach enough or teach well enough.  Moreover, tuition dollars support research agendas that aren't always relevant to practitioners.   However, I think a significant share of the blame for the tuition bubble also must rest at the feet of administrators.  Take a look at this excerpt from a current Business Week column by John Hechinger:

At universities nationwide, employment of administrators jumped 60 percent from 1993 to 2009, 10 times the growth rate for tenured faculty. “Administrative bloat is clearly contributing to the overall cost of higher education,” says Jay Greene, an education professor at the University of Arkansas. In a 2010 study, Greene found that from 1993 to 2007, spending on administration rose almost twice as fast as funding for research and teaching at 198 leading U.S. universities.

How can students and parents tolerate these types of statistics?  How can faculty members tolerate it?   I think that several factors contribute to the administrative bloat.  If we don't address these factors, then we will have a hard time reducing the administrator-faculty ratio. 

• First, accreditation agencies serve a useful function, but they have placed increasing burdens on universities.  Efforts to achieve and/or preserve accreditation soak up enormous amounts of time, and they require a lot of administrative work.   I don't think the return on investment is justified in many cases. Could we streamline accreditation processes?  Absolutely.  Will we?  Well, these accreditation bodies are big businesses. They aren't likely to streamline unless enormous collective pressure is put upon them.  
• Second, we do a terrible of preparing people for senior academic administration jobs.  We name professors to senior administrative posts with virtually no leadership development efforts to enable them to succeed.  We all know that a great teacher or researcher may not have the skills required to lead an organization.  Companies spend significant amounts of time and effort on leadership development; universities throw people into the ocean and expect them to swim.  When they start drowning, we appoint a few more associates or assistants to help them stay afloat!  
• Third, many universities offer a wide variety of additional services to students today as compared to several decades ago.  Those services cost money, and they require administrators to oversee these efforts.  There is no free lunch.  If we want to reduce administrative bloat, we have to take a close look at the services we are demanding from our universities. 
• Fourth, universities have faced an increasing regulatory burden, particularly when it comes to federal regulations that affect large research institutions.  Satisfying the regulatory requirements has taken increasing amounts of administrative work.  
• Fifth, too many universities operate in a very top-down fashion.  Faculty and staff members do not feel empowered to make many decisions.   That centralized organizational structure is a remnant of the past.  Many companies have changed in recent years, adopting leaner and flatter structures.  Universities continue to operate in a much more command-and-control environment in many instances, despite the talk about being faculty-led, consensus-oriented, and the like. 

Retailers, Black Friday, & A Prisoner's Dilemma

We've certainly heard a great deal over the past few days about the controversy surrounding the decision by many retailers to open on Thanksgiving evening.   Regardless of where you stand on that issue, you should ask yourself:  Are these retailers actually generating incremental sales and profits by opening at 8pm on Thanksgiving or at midnight, as opposed to early on the morning of Black Friday?   Perhaps they are, but I suspect that they are simply shifting sales which otherwise would have occurred on Black Friday or thereafter.   People aren't buying more items overall this Christmas; they are simply buying them a bit sooner as a result of the Thanksgiving day openings. 

Why are firms pursuing these policies if they are unlikely to drive incremental sales and profit?  I think it's because the retailers are caught in a prisoner's dilemma.  If they all chose to wait and open on Black Friday at 6:00am, they would be better off as a whole.  However, each retailer is worried that it will lose out if it remains closed while rivals open on Thanksgiving night.  Therefore, each retailer opens up earlier and earlier, for fear of ceding sales to rivals. 

How can firms extricate themselves from this losing proposition?  Well, the retailers cannot legally collude to shift openings back to Black Friday morning.  However, they can try to achieve some form of tacit collusion, or they can try to influence and signal to one another in a way that leads to cooperative behavior for the greater good.  Typically, such cooperation emerges if you have a strong market leader who can influence the behavior of smaller rivals.  Could Wal-Mart serve that function?   It seems unlikely, because even though they are enormous, rivals would probably jump at the opportunity to steal sales from them.  That's why we probably will see this trend of early openings continue, though it may not be enlarging retailer profits by much at all. 

Peer Comparisons & Compensation: Law of Unintended Consequences

Claudine Gartenberg and Julie Wulf have written a paper on executive compensation that you may find interesting.  They examined the effects of the 1992 SEC Proxy Disclosure Rule, which increased the transparency of executive compensation at publicly traded firms.  While transparency is generally a good thing, they found a somewhat unfortunate unintended consequence.   After the ruling, executives became more aware of the compensation received by their peers, and they engaged in more comparison to those peers.  Those comparisons resulted in a convergence and ratcheting up of executive compensation.  The effects proved to most pronounced among geographically dispersed firms.  The scholars argue that those executives had a harder time knowing the pay of their peers before the SEC disclosure ruling.  Executives in firms of close geographic proximity already could compare compensation to one another through other means besides the company proxies. 

This study only confirms what I have felt for a long time, namely that compensation isn't just about the absolute level of pay.  It's about how you stack up against your peers. That is true within firms, as well as across firms.  You might recall Michael Lewis describing how traders compared their bonuses in his book, Liar's Poker.  A giant bonus could still be disappointing if surpassed by one's colleagues.  It may sound insane, but it's human nature. 

The real problem, though, lies with boards of directors.  It's one thing for executives to want to "win the compensation game" against their peers.  It's quite another for boards to escalate this competition.   Boards need to recognize the market dynamics, but they must guard against a "compare and ratchet up" phenomenon that has taken hold in many boardrooms. 

Johnnie Walker: The Man Who Walked Around The World

My good friend, John Crosby, sent me a link to this video this morning.  The brilliant and creative short film features Scottish actor Robert Carlyle telling us the history of the iconic whiskey brand Johnnie Walker.   The short film offers some fun facts about the company's history, such as the rationale for the square bottle and the slanted label.   Moreover, the constant walking, use of props, and beautiful scenery truly are captivating.

To me, the short film demonstrates the creative way in which companies can use lengthier web videos, on platforms such as YouTube, to do things that you cannot do in a brief 60 second television advertisement.  Sharing the history of a brand in a creative manner can be a wonderful way to reinforce its authenticity.

The genius of this "Keep Walking" brand campaign by Johnnie Walker is that it is wrapping the brand in history and nostalgia while simultaneously offering a message of progress and hope for the future.  That can prove to be a tricky proposition.  No brand wants to be "your father's Oldsmobile" when it comes to categories such as whiskey.  Yet, the history and the roots of the brand are a key part of the image and positioning that make it iconic.   This short film threads the needle beautifully, bringing together past, present, and future in an authentic way.

Retailers, Showrooming, and Mobile Apps

Keith Anderson of RetailNet, a leading retail market research firm, tweeted an interesting story today about Wal-Mart's mobile app.   We all know that brick-and-mortar retailers have been fighting a growing "showrooming" trend - the notion that consumers visit stores to see, touch, and interact with a product, but then purchase on-line from an e-commerce company such as Amazon.   Retailers have been working hard on strategies to counter that threat.  Wal-Mart recently updated its app to improve the "Store Mode" element.   That aspect of the mobile app tries to help consumers navigate the store to find what they desire.  The "Store Mode" includes the local advertising circular, a shopping list function, maps of the store layout, and a QR code scanner.   What is interesting about the results to date for this updated app?  According to this article, Wal-Mart reports  that, "12% of its m-commerce sales occur while customers are in stores, showing that consumers are using their smartphones to buy from Wal-Mart what Wal-Mart does not have in stock, or perhaps purchase an item they don’t feel like carrying home, like a big-screen TV."   In sum, a strong mobile app may help protect against the tendency for consumers to drift toward Amazon or another online player for their purchases.

We all know that many retailer apps left a great deal to be desired over the past few years.  However, they have been improving.  Retailers have added functionality that does help consumers navigate the stores more easily and much, much more.  For instance, take this initiative at Nieman Marcus, described in this article on springwise.com:

The US luxury retail store is now trialling its NM Service app, which provides sales associates with consumer data they can act upon in real time. Developed by Signature Labs Inc, the app can be downloaded for free from the App Store. Customers can then select to “opt-in” to participate in the service, and a sensor at a Neiman Marcus store will detect when they walk through the door and launch the app. NM Service will provide information on new products and future events taking place at the outlet, as well as listing the sales staff currently instore. Those sales assistants can also have a version of the app tailored to them, alerting them when a participating customer enters the store. Sales assistants will also be presented with information on the customer’s previous purchases at Neiman Marcus outlets and their online shopping history, and the app will display an image from the customer’s Facebook page so that they can be easily identified. Both customers and sales associates are able to send messages to each other.

These two examples stand at opposite ends of the spectrum: Wal-mart is the classic low-cost player, while Nieman Marcus is a highly differentiated luxury retailer.  However, these examples demonstrate that mobile strategies can be used not only to protect against the disruptive threat of online commerce, but also to enhance the in-store shopping experience.  People still enjoy visiting brick-and-mortar stores to see, feel, and try on items.  If retailers can enhance that visit and provide customers the information they want when they want it, they can compete more effectively not only against online players, but also against their direct brick and mortar rivals. 

The Power of Grit

Paul Tough has written a thought-provoking new book titled, How Children Succeed: Grit, Curiosity, and the Hidden Power of Character.  Tough reviews and examines the extensive academic research which has demonstrated that attributes such as perseverance, conscientiousness, and self-control matter a great deal when it comes to explaining why some people succeed and others do not (ok, his last name fits the subject matter, does it not?).  In fact, researchers have questioned why two children with the same cognitive ability end up achieving very different results in school, work, and beyond.  They have come to conclude that grit matters... and it matters a great deal.  Perhaps most people won't find those results surprising... I certainly do not.   Work ethic, persistence, and resilience have always been known as important attributes that we admire.  What Tough argues, though, is that perhaps we aren't fostering these attributes sufficiently in children today.  In my view, the argument holds for teens and adults as well.  I am enjoying the book and encourage others to take a look - not just parents, but anyone who leads people. 

What is Strategy? A Very Helpful Reminder

Averting a Social Media Crisis

Perhaps you have heard this story of how the American Red Cross averted a social media crisis some time ago.  I heard about this incident from one of our accomplished Bryant alumna with expertise in social media.  I felt that the lesson was worth sharing for those who have not heard about it.  The story can be told by three tweets.  First, an employee at the Red Cross mistakenly used the Red Cross official account, rather than her personal Twitter account, to write about her personal (drinking) behavior:

Ok, so now we have a problem.  It's not a major crisis.  The Red Cross could simply have issued a standard apology.  However, they added a creative twist.  They used a bit of humor to spice up their apology.  Here's the tweet:

The story gets better.  Then Michael Hayek of Dogfish Head Brewery noticed the events transpiring on Twitter.  He chimed in with a third tweet.

Shazam!  The Red Cross managed to turn a mini-crisis into a positive moment.  For me, it shows the value of using a bit of humor appropriately to handle problems that sometimes emerge on social media.  Moreover, it shows how you can turn negative moments into positive ones with some creativity.   For Dogfish, it was a good moment to connect with fans and encourage them to do something positive for a worthwhile charity.  Talk about a win-win scenario. 

JC Penney vs. Zara: How to Reduce Markdowns

Frequent markdowns can eat into a retailer's margins quite substantially.  No wonder, then, that Ron Johnson - the CEO of JC Penney has tried to wean the department store off of its reliance on discounts and sales.  We all know, however, that he has had limited success to date.  In fact, sales have plummeted as customers have revolted at the dramatic reduction in sales and markdowns. 

Let's compare JC Penney to Zara for a moment.  Zara is a Spanish apparel retailer that has done remarkably well over the past decade or so.   Zara manages to offer fewer markdowns than many rivals, and when it does discount its clothing, they price reductions are smaller than those offered by competitors.  How does Zara do it?  They pursue a "fast fashion" strategy, whereby they make smaller batches of fashion items - a substantial percentage of which they make in their own factories.  They change their product mix often, and they react quickly to changing trends and consumer tastes.  Customers know that many lines of clothing will have limited numbers of items, and that those items may not be on the shelf one month later.  As a result of this nimble strategy, Zara minimizes the downside of "fashion misses" in their product line.  Because they don't produce huge runs of some of these items, they have much less inventory left over if a new product is not a hit with consumers.  Therefore, they have less of a need to mark down those clothes.  

In short, Zara has reduced its dependency on markdowns, but they have not done it simply by declaring that there will be less discounts.  They have built an entire strategy that makes it much less likely that they will need to discount items.  JC Penney hasn't yet built that comprehensive strategy to support its  new pricing policy.  As a result, JC Penney has struggled. 

Making Customers Wait Can Be a Costly Problem

Gad Allon, Awi Federgruen, and Margaret Pierson have conducted an interesting piece of applied research regarding the fast-food business, with implications for a wider range of industries.  They examined the fast-food drive-thru industry and took a look at the relationship between willingness-to-pay and wait time.   They found that, "Both the price and waiting time parameters have a significant impact on the consumer’s decision.  These results confirm … that in the fast-food drive-thru industry customers trade off price and waiting time. In particular, to overcome an additional second of waiting time, an outlet will need to compensate an average customer by as much as $0.05 in a meal whose typical price ranges from $2.25 to $6. This corresponds with an hourly cost rate of approximately ten times the (pre-tax) average wage of $18/hour and nearly 30 times the (pre-tax) minimum wage in Illinois in 2005.”

Most importantly, the scholars did not just show that people value their time, but that they value their time waiting in line VERY highly.  The research shows that people strongly dislike wait time while at the restaurant, and they value that time more heavily than they do the travel time to the restaurant.   As Allon notes, "The waiting time once in line is considered pure waste.”

Some firms should pay special attention to this study.  In particular, firms that do a fair bit of customization for customer orders need to be wary of wait time effects.  Take Starbucks, for instance.  They offer customers the opportunity to customize their drinks in many different ways.  One such customer with a highly specialized order can really lengthen wait times at their drive-thrus.  I always kid my wife about her tendency to use the Starbucks drive-thru. On numerous occasions, I've hopped out of the car, walked into the Starbucks, and come back into the car while she is still in line.   You might argue that a customer faces the same risk of being held up inside the Starbucks.  However, we have to remember that the customers inside the store are different in their wants and needs.  They have chosen to enter the store rather than go to the drive-thru. That decision suggests that they may not value speed as highly.  They may intend to sit down for a few moments, or they wish to use the restroom.  Therefore, the delay in wait time is not as problematic inside the store as it is in the drive-thru.  

The Value of a University

Bob Sutton has an amazing post on his blog this week.  He writes about what struck him as he read an article from about a decade ago by the great organizational behavior scholar Karl Weick.  Sutton writes:

Karl started out his 2002 British Journal of Management on "Puzzles in Organizational Learning: An Exercise in Disciplined Imagination" this way: 

It is sometimes possible to explore basic questions in the university that are tough to raise in other settings. John Gardner (1968, p. 90) put it well when he said that the university stands for:

• things that are forgotten in the heat of battle

•values that get pushed aside in the rough and tumble of everyday living

• the goals we ought to be thinking about and never do

• the facts we don’t like to face

• the questions we lack the courage to ask

What an important reminder for us all... The thoughts of John Gardner don't just help a professor like me try to justify the existence (or cost) of universities. These thoughts remind me of what we are obligated to do as faculty members.  Sutton points out one small example, a Stanford study that finds "there is little or no documented health advantage to organic food."  Sutton argues that this study made him uncomfortable.  Frankly, it bums me out too... so much for spending all that money at Whole Foods!  Yet, who will make these types of contributions if not a professor? 

It is our obligation to ask these tough questions.  I would argue that it's also our obligation to train our students to ask these types of tough questions, and to teach them how to explore these questions.   That practice will help them not just in the scholarly arena, but also as leaders in various private enterprises or other organizations.  

How Do Sexy Ads Affect Consumers' Desire for Immediate Rewards?

Wharton marketing professor Gal Zauberman and USC Professor B. Kyu Kim, have written a working paper called "Can Victoria's Secret Change the Future? A Subjective Time Perception Account of Sexual-cue Effects on Impatience."   The scholars conducted a series of experiments in which they showed "sexually suggestive and non-suggestive photographs to self-identified heterosexual male students."  The suggestive photos came from the Victoria's Secret catalog.  Geesh... I imagine that students flocked to sign up for this study!  

After seeing the images, subjects had to assess the value of items, such as a $65 Amazon gift card, that were received immediately versus a year later.  The research found that viewing the suggestive photos tended to enhance the value of the immediate reward and diminish the value of rewards provided a year later.  In other words, the subjects' discount rate rose substantially. 

Zauberman argues that, "Part of the reason why people discount future events, more or less, is their perception of duration [of time]."  The suggestive photos may "lengthen the perceived temporal distance to delayed rewards. That is, sexual cues make the wait seem subjectively longer, resulting in greater impatience."  In other words, consumers may not only be compelled to buy an item, but they may be much more likely to buy NOW even if it is not the most prudent financial decision. 

The scholars conducted other experiments as well.   They also showed subjects photos "designed to elicit physical symptoms similar to arousal -- increased heartbeat and respiration, for example -- that weren't actually sexual in nature."  Interestingly, people showed the same impatience that occurred when they had viewed the suggestive photographs.   In sum, "Sex may not be the only driver of this temporal response."

Are Network Effects Over-rated?

Nir Eyal and Sangeet Paul Choudary have written an absolutely terrific column for TechCrunch about network effects.  The essay is titled, "The Network Effect Isn't Good Enough."  Network effects, of course, exist when the value per user rises as the number of users of a particular good or service rises.  When network effects are strong, one firm can become the standard in a market - think eBay in auctions, for instance.  In these situations, firms tend to try to "get big fast" so as to move up the curve and achieve a high value per user.  Then they hope that switching costs will lock users into their good or service.    Eyal and Choudary point out that many startups in Silicon Valley bank heavily on the notion of network effects.  They willingly run up huge losses in the early years, hoping to cover those losses with venture money.  Then they hope to reap the rewards when they have become the dominant player in their particular market. 

The authors point out, however, that network effects may not be the elixir that many startups believe they will be.  Why?  The authors make several key points.  Here is an excerpt from their argument:

For one, in the old days, consumers paid to access the network through their upfront investment in hardware. These upfront costs locked users into the network and once they were in, they were in for good, thus erecting barriers to entry for would-be competitors. However, the cost of providing access to the network has fallen precipitously. The days of customers buying expensive hardware to use a network are gone as is the correlating lock-in effect. In addition to access costs falling to zero, another key component of what once kept users locked into a network has vanished. Once, porting contacts onto a new network, like switching instant messaging services from Yahoo! to AIM, was a non-trivial task. Today however, customers use their Facebook, Twitter or Google profiles to join a new service in seconds. A burgeoning network, take Instagram or Pinterest, can leverage the single sign-on enabled by the social graph to reach critical mass faster than ever before.

In other words, switching costs may not be nearly as high as many startups believe them to be.  Thus, the lock-in effect doesn't materialize as hoped.  Consumers flock to a platform, but then they may just as quickly move on to a different product or service.   Think MySpace relative to Facebook.   This limitation on switching costs may explain why many startups have a hard time "monetizing" their eyeballs.  If they try to extract more value from their consumer, they face the startling possibility that people will simply switch to another product or service. 

Iger's Long Term Strategy at Disney

As you know by now, Disney acquired Lucas Films last week. With that, Disney now owns the Star Wars and Indiana Jones franchises. I'm not surprised by the move. In fact, you can see a pattern emerging to Bob Iger's strategy at Disney, which is quite in contrast to the strategy during the second half of Eisner's tenure at the company. In Eisner's later years, he moved away from simply focusing on the characters as the central driver of synergy among Disney's businesses. He acquired ABC and Miramax, and he owned a baseball and hockey team for some time - among other moves. Now we see Iger refocusing on characters as the heart of Disney's corporate strategy. We see three major moves (Pixar, Marvel, and now Lucas) during his tenure that all involve expanding the universe of characters which Disney can leverage across its many businesses. I think the focus on characters makes a great deal of sense. Here's why...

When thinking about the characters at Disney, we should note those resources are quite valuable because they are highly durable and inimitable. Moreover, Disney can appropriate the value associated with those resources (as Buffett says, "the mouse has no agent"). How then can one think about leveraging such a valuable resource across multiple businesses? A strategist needs to think about how specialized vs. fungible/general the resource is. A highly fungible resource/capability would be something like “brand management expertise” or “innovation” or “risk management.” A highly specialized capability might be patented product formulas or engineering expertise in a very narrow discipline. Fungible capabilities can be easily transferred across lines of business. However, they are often too general/not unique enough to convey a substantial competitive advantage. On the other hand, highly specialized capabilities tend to provide powerful competitive advantage in a particular business, but they lose value very quickly when a firm tries to transfer them to a wide array of businesses. In other words, there are only so many areas in which you can grow based on a highly specialized set of capabilities.

In the 1980s, Disney’s core capabilities revolved around animated character development and deployment. Those tended to be highly specialized capabilities; Disney was able to leverage those capabilities to enter the hotel and cable television business, but ultimately, growth was constrained by the specialized nature of that capability. To move into even more diverse businesses, Disney had to be able to make the case that it had a broader/more general/more fungible capability such as “managing creativity.” That's the argument that Eisner used to move into a variety of businesses that did not have to do with characters (ABC, Miramax, etc.) There are two challenges associated with defining a firm’s capabilities so broadly. First, it is more difficult to make the case that the firm is truly unique and superior to all rivals in that set of capabilities. Second, it becomes rather difficult to discriminate among various options for diversification, i.e., how many businesses have something to do with managing creativity vs. developing and deploying unique characters?

Sharing Bad News Uncovers Creative Solutions

Several weeks ago, I spoke with a group of senior executives about the importance of cultivating a climate of candor within their senior management team.  I argued that leaders need to encourage people to share bad news.  Put simply, bad news is not like cream; it often does not rise to the top.  Instead it remains quite hidden, often until problems mushroom and grow to a much riskier size and scope.  One executive noted that encouraging people to share bad news doesn't simply help the leader understand the key risks for the business.  Opening sharing among top team members also helps uncover creative solutions to tough problems.  Why?  The other top team members may never hear about a key problem in another division or functional area if that bad news is not shared openly.  If they do hear about it, they may be able to offer some ideas as to how to fix the problems.  Perhaps they have even experienced a similar problem in their own division.  In that way, a candid discussion of bad news isn't just about keeping the chief executive aware of key risks; it also provides an opportunity to get these problems fixed more quickly.