ESPN: Does Any Other Firm Rely As Much on Non-Consumers?

Fox's Outkick the Coverage blog has a terrific detailed analysis of what ails ESPN these days.   Blogger Clay Travis dissects Disney's recent 10K filings to understand precisely how many subscribers and how much revenue ESPN has lost in recent years, as more consumers "cut the cord" with respect to cable television.   Travis determines that ESPN  and its sister channels have lost 7 million subscribers in the past two years.  That loss amounts of a decline in revenue of roughly $700 million per year.  Travis points to cord cutters as the crux of the problem.  He notes that ESPN has tried to hold onto customers by focusing on live sports programming that is difficult to access without cable television.  However, those pricey contracts for events such as NFL games have increased ESPN's fixed costs tremendously.   ESPN has been reducing its workforce to offset the decline in revenue, but that strategy has its limits.   

The most interesting aspect of the blog post, though, has to do with the analysis of ESPN's customers vs. non-customers.  Here's Travis on the dynamics of cable subscriptions:

When Outkick wrote an article about its business challenges back in July, ESPN sent a statement that included the following data:  "More than half (54%) tune into ESPN in the average month and almost two-thirds (65%) tune into ESPN over the course of a quarter."  If that's true then around 48 million cable and satellite subscribers watch ESPN every month. That's a very big number. But it also means means that 44 million cable and satellite subscribers pay $6.60 a month for ESPN and don't watch it in an average month. That means every month ESPN is pocketing $290 million off cable and satellite subscribers who don't watch the channel. Over the course of a year ESPN makes over $3 billion a year off consumers who don't watch ESPN.  Eventually isn't your Aunt Gladys going to realize this?

I'm not sure that I can think of another company that makes as much money off of people who don't actually consume its product.  The implication of this statistic is significant.  It means that going direct to consumers will be challenging for ESPN, much more challenging than for an organization such as HBO.   The paying subscribers of a direct-to-consumer ESPN subscription will have to pay a substantial enough sum to offset the loss of revenue from non-consumers who currently pay for ESPN even though they don't view it.  HBO doesn't face this problem.  ESPN's high fixed costs make this challenge very daunting indeed. 

Count Your Blessings

Arthur Brooks' article in this weekend's New York Times pointed me to a fascinating study about giving thanks.   In 2003, Robert Emmons and Michael McCullough published a paper titled, "Counting Blessings vs. Burdens:  An Experimental Investigation of Gratitude and Subjective Well-Being in Daily Life."  The authors begin their paper by quoting Charles Dickens:  "Reflect on your present blessings, on which every man has many, not on your past misfortunes, of which all men have some."   The scholars asked some research subjects to list things for which they were grateful over a period of several weeks.  Other subjects kept lists of "hassles" - and a third control group listed neutral events.   The researchers also asked all subjects to keep records of their moods, health behaviors, physical symptoms, and overall life appraisals during this time.  The people who kept lists of things for which they were grateful "felt better about their lives as a whole, and were optimistic regarding their expectations for the upcoming week.  They reported fewer physical complaints and reported spending significantly more time exercising."   In short, focusing on gratitude and thanksgiving can be good for you.  So, try to put aside the hassles and the worries for the next few days at least, and attempt to focus on those things for which we should be thankful.   Then let's all try to make it a routine practice to spend more time being grateful and less time being annoyed.    Happy Thanksgiving, everyone! 

EDLP vs Promotional Pricing in Supermarkets

New research at Stanford examines the pros and cons of Everyday Low Pricing (EDLP) vs Promotional Pricing.  The research examines how grocers reacted when Walmart entered the supermarket industry with an EDLP strategy.  Walmart used EDLP to achieve major cost efficiencies throughout the value chain.    They wondered why many firms didn't switch to EDLP despite Walmart's success.

They found that promotional pricing generates more revenue.  Moreover, it's hard to switch from promotions to EDLP.  One author, Harikesh Nair, explains the findings:

“Now we have empirical evidence to show why most stores chose PROMO pricing and stuck with it during a competitive shock — it earns more revenues and is too expensive to change."  

I think the research seems framed in terms of whether EDLP is better or worse than promotional pricing. That's the absolute wrong way to frame the question.  EDLP worked for Walmart because it fit well with the other choices and activities in its value chain.  Other grocers had very different activity systems. EDLP couldn't just be dropped into those systems.  Everything they did fit with promotions.    Change to EDLP naturally was costly because it required many other changes to maintain organizational alignment.  The lesson is clear:  There is no one best pricing strategy.  It's all about fit.  Competitive advantage comes from an aligned system of activities throughout the value chain.  

Are CEOs Smarter Than the Rest of Us?

Renee Adams, Matti Keloharju, and Samuli Knupfer have written a new working paper that attempts to examine the role of intellectual ability in reaching the executive suite. The scholars studied one million men in Sweden who served in the military over several decades. They had access to aptitude test results from the military for these men.   These tests measured inductive reasoning, technical comprehension, spatial ability, and verbal comprehension.  The CEOs were smarter than the average person. People who became CEOs of large companies in Sweden scored in the top 17% on these aptitude tests. However, they were not significantly "smarter" than many other professionals such as doctors, lawyers, and the like. Amazingly they find that CEOs in their sample tended to be taller than the others who had served in the military with them.   Height matters... what does that say about how we select our leaders?  Interestingly, past studies have found that American Presidents have tended to be taller than the average American citizen.   The scholars summarize their findings as follows:

There are more than 100 times as many men in managerial roles in the corporate sector who have better trait combinations than the median large-company CEO and who do not become a large company CEO during our 7-year sample period. Being born with a favorable mix of traits may be necessary but is far from a sufficient condition for making it to the executive suite.

Market Share Does Not Equal Profitability

Over the years, I have stressed to students and executives that market share does not equal profitability in many cases.   Often firms set market share targets, and they become obsessed with being number one in share.  They forget that share is not always highly correlated with profitability.  My colleague, Lou Mazzucchelli, shared with me this incredible chart about smartphone sales that makes this point in a memorable and impactful way.  

Source:  Canaccord Research

Great Commercial: Using Cliches to Your Advantage

Fast Company's Jeff Beer has a short piece about a new commercial from Bobble, maker of reusable water bottles.  The advertisement features a fake brand (Once), and it ridicules those who drink bottled water from disposable plastic bottles.  Beer writes,

If you watch enough advertising aimed at anyone aged 14 to 30, certain patterns of tone, image, and style emerge. Young people, just livin' the good life, embracing the moment, seizing the day and all that. To draw attention to the huge amount of waste created by single-use plastic water bottles, reusable bottle brand Bobble has tapped all these well-tread commercial cliches to reach the exact same audience.

The advertisement is fascinating precisely because it highlights another side to these cliches about how millennials should live their lives.   Moreover, as the advertising agency managing director, James Townsend noted, "It's more effective to make something look uncool than it is to say it's bad for you."  

Starbucks vs. Dunkin - The Challenge of Strategy Convergence

Bloomberg reports today that Dunkin' Donuts has launched a mobile ordering and delivery initiative.  In Maine, they are testing a service that enables customers to order drinks and food through a smartphone app.  Meanwhile, in Texas, they are testing a delivery service.  Dunkin's move follows the launch of mobile ordering several months ago by rival Starbucks.  

The competitive dynamic between these two coffee chains reminds us of the perils of strategy convergence.  Think about these two chains twenty years ago.  They were quite different.  Each had a very unique competitive position.  Today, their positions are more similar (though clearly not alike).   Twenty years ago, Starbucks did not offer drive-thru service, while Dunkin' did.   Starbucks offered wi-fi many years ago, while Dunkin' added that service later.  Starbucks has offered lattes from the start, while Dunkin' added that product more recently.  Dunkin' has had a lucrative food business to go along with its coffee from the start, while Starbucks has struggled with its food lineup and made changes numerous times to improve it.  For many years, Starbucks has sold its packaged coffee in supermarkets for customers to brew at home.  Dunkin' started doing that as well in recent years.  

What's my point?  Well, the strategies of these two firms have converged in recent years.  Yes, they are still quite distinct, but not as different as they once were.  As markets become more mature, strategy convergence tends to occur.  However, the worry is when strategies converge to the point where company positions begin to blur.   The challenge is to remain distinctive even as markets mature.  Gary Hamel put it best when he wrote, 

In nearly every industry, strategies tend to cluster around some central tendency of industry orthodoxy.  Strategies converge because success recipes get lavishly imitated…Aiding and abetting strategy convergence is an ever-growing army of eager young consultants transferring best practice from leaders to laggards…  The challenge of maintaining any sort of competitive differentiation goes up proportionately with the number of consultants moving management wisdom around the world.

Internal Promotions vs. Switching Companies

Wharton Professors Matthew Bidwell and Ethan Mollick have conducted research on external vs. internal mobility of employees during their careers.   Here's what they have found (excerpt from interview with Professor Bidwell by Knowledge@Wharton):  

We found quite big differences between the moves that took place inside the firms, and the moves that took place across the firms. When people are moving inside firms, we saw that they got a pay raise. They also got quite a big increase in responsibility — they tended to rise up, in terms of their title. And they pretty much doubled the number of people that they were managing.

When people moved jobs across firms, they also got a pay raise, but it didn’t tend to come with an increase in responsibilities. Instead, they were moving to a job with often a similar title, and usually with the same number of subordinates — managing the same number of people. And so they weren’t necessarily getting a promotion in the same way.

This speaks to the different reasons for moving. When people are moving inside [the firm], they’re moving up the ladder. When people are moving to jobs in other firms, they’re getting a pay raise. They get paid to move. But they’re not making the same kind of move up the ladder. They’re moving to a similar rung, albeit in a different organization.

The authors offer several cautionary notes for firms and employees alike.  For companies, beware that you are often going to have to pay a premium when relying on external talent to fill key positions.   You pay that premium even though you often are not providing that person with additional responsibilities relative to what they had at their previous firm.   For employees, beware that hopping from one firm to another may get you an immediate pay raise, but it may delay future promotions and pay increases, costing you money down the road.   The authors do not suggest that one should stay at the same firm forever.  However, they do caution against taking a job at a firm where career advancement seems unlikely.   Being able to land a few promotions before moving to another company can be the better long term strategy for career advancement, development, and compensation. 

Netflix, Analytics, and Original Programming

Many former and current students have asked me about Netflix's decision to offer original programming.  They always want to know, "Does vertical integration make sense for Netflix or not?"  They know that vertical integration has not always worked out in entertainment industry (think the breakup of Viacom/CBS and the unfortunate consequences of the AOL-Time Warner merger).  I ran across this CNBC interview with Netflix CEO Reed Hastings today (thank you, Professor Jay Rao, for pointing me in this direction!).   Hastings commented on the company's original programming:

Hastings attributed the success of original programming such as "Orange is the New Black" and "House of Cards" to Netflix's powerful data analytics.  "We are just a learning machine. Every time we put out a new show, we are analyzing it, figuring out what worked and what didn't so we get better next time," Hastings added.

Hastings' comments suggest that vertical integration may make a great deal of sense in this case, because Netflix can increase the odds of success with its original programming due to data analytics.  How powerful can data be in this case?  Well, if think about it, Netflix has been invested in "big data" since its inception in the late 1990s (long before big data became a common term).   From the beginning, Netflix did not want to focus on new releases. It wanted to be able to offer a deep library, and then use data to recommend lesser known titles to people.  Now, it's taking that data analytics to a whole new level, by using information it has compiled for over fifteen years to develop original programming.  As we all know, the failure rate for new shows can be quite high.   If Netflix can reduce that rate, even just by a small margin, it can improve the economics of programming substantially.  

Does Expertise Make Us Close-Minded?

The British Psychological Society reports on a new study by Ottati, Price, Wilson, and Sumaktoyo.  The article, "When self-perceptions of expertise increase closed-minded cognition: The earned dogmatism effect," was published in the Journal of Experimental Social Psychology.   The research consisted of a series of six experiments.  In the research, people were made to feel like they were either experts or novices in a particular knowledge domain.   The scholars found that those who felt as though they were experts tended to act in a more close-minded fashion in subsequent parts of the study.  Hmmm... perhaps all of us at universities should look in the mirror.  Does the level of perceived expertise in academia contribute to a close-mindedness that inhibits the type of learning, exploration, and open dialogue that should be occurring in our classrooms?  Similarly, in a business context, does expertise close managers and technical experts off to new possibilities and make them more vulnerable to disruptive innovation? 

Big Data in Formula 1 Racing: Don't Overwhelm Humans

Fortune has a fascinating article about how Formula 1 teams are using the internet of things and data analytics to win auto races.   According to the article, 

"These machines, each valued at more than $9 million (a steering wheel alone is worth $77,000 or so) are more than just pricey contraptions capable of whizzing around the track at more than 200 miles per hour. They are also intelligent, thanks to the many dozens of sensors fastened to them. Each sensor communicates with the track, the crew in the pit, a broadcast crew on-site, and a second team of engineers back home in Europe."  

The team then uses predictive algorithms to help them understand how the car will perform under certain track conditions.  These data guide key decisions.  However, they are careful not to put too much on the driver's plate.  After all, he or she is concentrating on many factors while driving at a very high rate of speed.   The team doesn't want to overwhelm the "cognitive capacity" of the driver.  In other words, they have to boil all that data down to a few key items about which they want to make the driver aware.  

That description sounds quite similar to how a great football coach operates.  They conduct extensive analysis of the opponent, breaking down game film and evaluating data about the strengths and weaknesses of that team.  The coaches then build game plan.  However, they have to keep the ultimate plan simple enough so that players can make fast decisions on the field.  They want them to still act instinctively and not be overwhelmed by too much information.   Managers in all types of enterprises should take note.   We want data analysis to guide people's decisions, but we have to keep in mind the cognitive capacity of those individuals.  We have to be able to boil down all that data to a few key principles and recommendations that they can implement effectively and quickly. 

Finding Inspiration: Get on the Move

Deepen Your Value Proposition Before Diversifying

Elizabeth Segran has a very good article at Fast Company this week titled, "How to Build a Business That Matters."   She interviews several very successful entrepreneurs.  One piece of advice really stuck out for me.   She writes, "The value proposition has to be deep."   She cites the example of Birchbox, a company founded by Katia Beauchamp and Hayley Barna.  The two women founded a company that offers a subscription service that delivers a set of samples of beauty products to its customers each month.   The startup soon realized that its service was a major hit.  That's a great story, right?  They came up with an innovative idea that clearly met customer needs (people want to try beauty products before they make major purchases).  

What's the problem?  Well, many competitors arose, and others launched similar services in other markets.  How could Birchbox build and defend its competitive advantage?  Beauchamp said, "We understood that the value proposition had to be deep for us to become a staple in consumers’ lives.  It couldn’t just be fun, because fun wears off. It couldn’t just be pretty, because eventually you have enough pretty things."   Thus, the company developed its analytics capabilities so that customers could receive a very personalized set of product samples.   Those analytics capabilities also could provide critical information to beauty product manufacturers, so that they could create new products that customer needs.  Then they worked to get exciting new products to their customers before the competition, and to make it as easy as possible for customers to purchase products from their online store, if they liked the samples.  

In sum, they didn't just rest on their laurels when the initial idea proved a hit.  They deepened the relationship with customers in ways that were much harder to imitate than the initial business concept.  That's what all entrepreneurs must do.  Unfortunately, many entrepreneurs start diversifying into new products and services in search of additional growth before they have fully established a sustainable position in their initial market.  They don't work hard enough at times to make their initial concept hard to imitate.  They don't deepen their relationship with existing customers enough before moving on to new customers and product markets. 

The Decline of Creativity in Innovative Organizations

James March, Mie Augier, and Andrew Marshall published a paper on innovation recently in Organization Science.  The article was titled,  “The Flaring of Intellectual Outliers: An Organizational Interpretation of the Generation of Novelty in the RAND Corporation.”   In the paper, the scholars try to explain the rise and fall of a culture of innovation at RAND.   Stanford's Louise Lee summarized their findings: 

RAND’s growth as an organization also led to a decline in its culture of innovation. From 1948 to 1962, RAND grew from 225 employees with a $3.5 million annual budget to 1,100 employees with a more than $20 million annual budget, according to the researchers. Growth has benefits, but RAND’s expansion beyond a face-to-face organization led individuals to stick safely with the people and thus the ideas they knew, instead of mingling freely. Big organizations also tend to hire people who conform to conventional methods and thinking instead of challenging them; meanwhile, the ambitious intellectual renegades leave, the researchers say. RAND’s growth also created layers of administrators and more bureaucratic processes such as meetings, committees, and other “red tape” that drowned out intellectual creativity, the researchers found.

Does that description apply to your organization?  Are people playing it safe much more so today than in the past?  Are they hiring people who conform rather than challenge?  Are people not mingling enough with folks outside their technical domain or discipline? 

Creativity, Entitlement, & Unethical Behavior

Maryam Kouchaki of the Kellogg School and Lynne Vincent of Syracuse University’s Whitman School of Management have conducted some fascinating experimental research addressing the relationship among creativity, entitlement, and unethical behavior.   They conducted an interesting experiment in which they gave subjects a test to examine their creative potential.  Some were told that they scored highly, and that many others did as well.  Others were told that they stood out, scoring much higher than the typical participant.  Then the subjects participated in a game in which dishonest behavior could yield higher payoffs.  Here's what they found, according to Kellogg Insights:

The results show that when participants were told they were creative but that creativity is common, there was no adverse effect on behavior. It was when they were told that they were uniquely creative that bad behavior ensued. Participants who had been told that they were creative and that creativity is rare were more than twice as likely to lie to their partners in the game than those in the other two groups. That same group also had a much higher entitlement score on a post-game questionnaire, which asked participants to rate their level of agreement with statements like, “I honestly feel I’m just more deserving than others.”

Kouchaki offers the key takeaway from this line of research:  She notes, “You want to encourage a culture of creativity, rather than a special treatment of creative people.”  I would add one other important notion to her conclusion.  It's not constructive to categorize employees (the creative, innovative folks vs. the "regular" people). That's a recipe for decreasing engagement and fostering resentment.  Moreover, it's not the way to drive innovation.  You don't want to bet on a flash of lightning from a select few.  Instead, you want to leverage the collective intellect of the crowd.  You absolutely want to create a culture where everyone feels responsible for coming up with better ways of working, improved products, enhanced systems and processes, etc. 

Why Do the Bad Guys and Gals Win at Work?

Do the bad guys and gals actually win, and the nice folks finish last, in organizations?   Tomas Chamorro-Premuzic, CEO of Hogan Assessment Systems and Professor of Business Psychology at University College London, writes about this interesting question in an HBR blog post today.   He examines the "dark triad" of personality traits:  psychopathy, narcissism, and Machiavellianism. 

Chamorro-Premuzic reviews the literature about these three traits.   He writes:

It should be noted that, unlike clinical personality traits, these traits are normally distributed in the population – e.g., you can score low, average or high – and perfectly indicative of normal functioning. In other words, just because you score high doesn’t mean that you have problems, either at work or in your personal life. And despite the antisocial implications of the dark triad, recent research has highlighted a wide range of career-related benefits for these personality characteristics... An impressive 15-year longitudinal study found that individuals with psychopathic and narcissistic characteristics gravitated towards the top of the organizational hierarchy and had higher levels of financial attainment. In line with those findings, according to some estimates, the base rate for clinical levels of psychopathy is three times higher among corporate boards than in the overall population.

Why do the bad guys and gals rise to the top of many organizations?  He points out that these folks tend to have higher self-esteem.  Moreover, they tend to be extroverted and charming.  They are curious and competitive.   They can seduce and intimidate.   Self-esteem, charm, curiosity... these are not bad things.  In short, there's a "bright side to the dark side."  The problem is when you are extreme with regard to this "dark triad" of psychopathy, narcissism, and Machiavellianism.  In that case, the bad guy or gal may succeed in getting to the top, but at the expense of organizational effectiveness.