Friday, May 26, 2017

Why Being #1 Should NOT Be Your Goal

This morning Kathy Chu wrote a Wall Street Journal article titled, "China's Lenovo to Reboot  After Losing PC Crown to HP."   Chu writes:

China’s Lenovo Group is shaking up its operations as it seeks to reclaim the title of global leader in personal computers and shore up its smartphone business.   For the first time in four years, Lenovo—a company that gained acclaim a decade ago for turning around storied U.S. personal-computer maker International Business Machines Corp.—slipped from the top spot this year to No. 2 in the personal-computer market, behind rival HP Inc.  Lenovo has also fallen to No. 8 in the number of smartphones shipped globally, from No. 3 when it acquired another U.S. brand, Motorola, in late 2014.

When I read this article, I asked myself:  Why do firms obsess with being #1 in their market?  Or, perhaps more specifically, why do they obsess with being #1 in market share in their industry?  Yes, Lenovo held the top spot in the personal computer industry for the past four years.  What precisely did that mean for them?  Well, I checked their Annual Report.  Last year, the company reported a net loss.  During the previous year, they generated a slim profit (1.79% profit margin).    Before that, the margins ranged from 1.6% to 2.1% from 2012-2014.  In short, Lenovo has made very little money over the past five years.  Perhaps, you might argue, they generated a decent return on assets despite the low margins.  With strong asset turnover as a low cost producer, they might produce a good return on assets.  Not so much... in 2015, their ROA equaled 3%.   We should not be surprised by these results.  It's not necessarily an indictment of management.  The personal computer industry is one of the lowest profit industries on earth.  If you perform a five forces analysis, you conclude rather quickly that all the elements of the industry structure point to low returns.  It's a very unattractive industry.  

The lesson: Don't obsess over market share.  Don't worry so much about being #1 in volume.  Think instead about the structure of your industry.  If you are in an unattractive industry, you might not want to be #1 in market share. Instead, you may want to find profitable niches and segments within that industry.  By focusing there, you might not lead the industry by volume, but you may produce stronger returns for investors.  

Thursday, May 25, 2017

How To Think About Goals Over Time

Researchers have conducted some interesting new work on goal-setting and achievement.   Insights by Stanford Business summarizes the findings of research conducted by Szu-chi Huang, Liyin Jin,, and Ying Zhang:

New research by Szu-chi Huang, assistant professor of marketing at Stanford Graduate School of Business, finds that while people benefit from concentrating on small “sub-goals” in the early stages of a pursuit, they should focus instead on the larger objective in the late stages. That notion could be important to any business that entices consumers and employees to set goals, whether as part of an incentive program or service offered.

“When you are just starting a pursuit, feeling reassured that it’s actually doable is important, and achieving a sub-goal increases that sense of attainability,” Huang says. But later, people are no longer concerned about attainment and need to feel that their actions continue to be worthwhile in order to maintain motivation.  “At that point, to avoid coasting and becoming distracted, they need to focus on that final goal to see value in their actions,” Huang says. 


The research appears very consistent with the work on small wins.  You need to have those sub-goals, because small wins are important during any transformation process or challenging task.  However, you need to have the broader vision as well.   This work adds nicely to our understanding of how small wins work by describing the important shift that has to happen over time from small sub-goals to broader objective.

Thursday, May 18, 2017

Advice for Graduates (2017)

At this time of year, I've always shared an old blog post with some advice for those young people graduating from college.  This year, I thought that I would share a new post.  Here goes... 

I want to tell you a story about Retired U.S. Navy Captain D. Michael Abrashoff.   Twenty years ago, in June 1997, Captain Abrashoff became the Commander of the USS Benfold, a guided missile destroyer.  Unfortunately, the USS Benfold was a seriously dysfunctional ship.  Morale was quite low, and many sailors could not wait to leave the Navy.   Captain Abrashoff has described how he led a remarkable turnaround on the USS Benfold.  I love the stories that he tells in his book, It's Your Ship: Management Techniques from the Best Damn Ship in the Navy.  

My favorite story centers on the Sunday afternoon cookouts on the aft flight deck of the USS Benfold.    One day Captain Abrashoff noticed the enlisted men waiting in line patiently for their food at one of these cookouts.  Then he watched as the officers cut in line, rather than waiting their turn.  The officers then ate together, separate from the enlisted men.  What did the Commander do?  He went to the back of the line.  One officer approached him, "Captain, you don't understand.  You go to the head of the line."  Abrashoff responded, "That's okay.  If we run out of food, I will be the one to go without."  When the Commander finally received his food, he went to sit with the enlisted men, rather than his officers.   Note that Abrashoff did not chastise his officers or reprimand them for their behavior.  He simply chose to enjoy a quiet lunch with the sailors whose morale had been so low when he took over.   On the following Sunday, the officers waited patiently at the back of the line, and they did not go off and eat by themselves.  How about that?! 

What's the morale of this story for young people beginning their careers after commencement this month?   Be the type of person who understands that leaders don't cut to the front of the line.  Lead by example, not simply by harsh words and reprimands.   Take the time to sit with those doing the real work.  You might learn a new thing or two... no, you WILL learn a thing or two.  Finally, remember that all eyes will be on you when you become a leader.  Your words and actions will have great symbolic importance.  Mind the signals that you send.  Small actions will say a great deal to others about who you are and what you value.  

Wednesday, May 17, 2017

More CEOs Fired for Ethical Lapses

The Wall Street Journal reported this week on new research from Strategy&, the consulting practice of PWC, about CEO dismissals. The researchers found that more CEOs are being fired these days due to ethical transgressions. According to the newspaper, "CEO ousters due to ethical lapses—either their own improper conduct, or their employees’—are climbing. Such forced exits rose to 5.3% of CEO departures in the 2012-to-2016 period, up from 3.9% during the previous five years." 

 The article goes on to quote Per-Ola Karlsson, a Strategy& partner, about the reasons for this uptick in such firings. Karlsson argues that the trend is not the result of an increase in unethical behavior. Instead, Karlsson cites the rise of social media, the loss of trust in institutions as a result of the scandals from the 2007-2009 period, and the enhanced attention from regulators as reasons for the increase in dismissals. The bottom line - for whatever the reason, CEOs are being held accountable for ethical lapses.  That's a good thing.  It shows that they can't escape from responsibility for flawed decisions that due harm to consumers and other stakeholders.   The data suggest that CEOs should have all the more reason to be highly vigilant about uncovering hidden risks in their organizations, welcoming those who wish to share bad news, and demonstrating transparency when problems do surface.  

Tuesday, May 16, 2017

Should You Sit Next to a High Performer at Work?

New research by Michael Housman and Dylan Minor examines the impact of sitting next to a high performer at work.  They discover important "spillover" effects.  In fact, these spillover effects can occur in both a positive and negative direction.  Here's an excerpt from Kellogg Insight about their research:

Researchers looked at the 25-foot radius around high-performers at a large technology firm and found that these workers boosted performance in coworkers by 15 percent. That “positive spillover” translated into an estimated $1 million in additional annual profits, according to new research from Dylan Minor, an assistant professor of managerial economics and decision sciences at the Kellogg School.

Of course, the flipside is that bad eggs impact their neighbors, too. Negative spillover from so-called toxic workers is even more pronounced—sometimes having twice the magnitude of impact on profits as positive spillover. Yet, while this toxic spillover happens very quickly, it also dissipates almost immediately once that worker is either fired or relegated to the far physical reaches of the company.

Friday, May 12, 2017

The Power of a Nudge: Persuading People to Take the Job

Knowledge@Wharton profiles some interesting new research regarding how to persuade people to commit to a new endeavor such as a job. Clayton Featherstone and Judd Kessler have written a paper titled, “Can Social Information Affect What Job You Choose and Keep?"   They studied Teach for America, and they conducted an experiment to see if they could convince more young people to sign up for the program.   Featherstone explains the research:    

Teach for America tries to place teachers in schools. If you’re admitted to the program, you get an email that says something like, “Congratulations, you’ve been admitted to Teach for America. You’ve been assigned to wherever. We hope you’ll join us.” That email is how they communicate that you should join Teach for America. The sentence we added to the email was, “Last year, 84% of people in your position chose to join Teach for America. We hope you will as well.” We found that one sentence was actually pretty powerful in inducing extra people to join. That sentence is a canonical example of social information. Basically, when I’m thinking about doing something, I might be interested in what others in my situation have chosen to do in the same way.

Now you might wonder if these people were convinced to join, but later dropped out as teachers in the program.  In fact, the scholars found that these people stayed on in their positions.  The small inducement via social information had long term positive consequences.  You can begin to see the implications for other situations, not simply letters to candidates who have been offered a job.   Of course, the power of social information has to be used with care.  You would not want to persuade someone to do something which is not ultimately good for them or the organization.  One wonders too whether the effect is pronounced here due to the age of the people in the study.  We are all shaped and affected by social information, but might the effect be larger for younger people?  

Monday, May 08, 2017

Learning Strategies: Is Talking to Yourself Crazy or What?

Ulrich Boser has written an interesting piece for Harvard Business Review regarding learning strategies.  Boser argues that our ability to learn new skills and assimilate large amounts of new information has become very important in today's economy.  We have to be lifelong learners to adapt and grow as our companies and our jobs change.  Boser reviews the work of University of Illinois psychologist Brian Ross, who has conducted some fascinating research on how we learn.   Boser tells the story of how Ross decided to take a computer science course.  Ross chose to employ a learning strategy called self-explaining to try to master the class.  Boser explains the strategy:

The approach revolves around asking oneself explanatory questions like, ”What does this mean? Why does it matter?” It really helps to ask them out loud. One study shows that people who explain ideas to themselves learn almost three times more than those who don’t.  To help him outperform his younger colleagues, Ross asked himself lots of questions. He would constantly query himself as he read through the assigned texts. After each paragraph, after each sentence, he would ask himself: “What did I just read? How does that fit together? Have I come across this idea before?”  By the end of the course, Ross had found that, despite his relative inexperience and unfamiliarity with computers, he could answer many questions that the other students couldn’t and understood programming in ways that they didn’t. “I sometimes had the advantage,” he told me. “I was focused on the bigger picture.”

Far too many of us continue to believe that reading and re-reading a text provides the best mechanism for digesting new material and accumulating new knowledge.  We whip out our highlighter and brighten the pages of those books, thinking that these colorful additions to the text will help us remember key nuggets.  It doesn't work.  Recent advances in learning research show that other strategies are far more effective than reading and highlighting.  These studies show that we must force ourselves to recall what we read.  We have to quiz ourselves.  We have to summarize and synthesize what we have heard and read.  We have to do something with the information that we are trying to digest.   In short, we need to be much more active in our learning strategies, rather than passively reviewing material.   These strategies work well for students, but they also work well for adults on the job, as we try to develop and enhance our skills and as we take on new roles.  

Wednesday, May 03, 2017

Edward Lampert & The Demise of Sears

Earlier this year, Sears acknowledged publicly for the first time that bankruptcy might be a possibility.  The two charts shown here document the financial deterioration over the past decade.  Many people have placed substantial blame at the feet of CEO Edward Lampert.  In Forbes last year, Adam Hartung wrote about the unwillingess of Lampert to welcome and listen to dissenting views.  

Source:  Company 10K Filings

Mr. Lampert had no time for staff who did not see things his way. Mr. Lampert wanted his management team to agree with him - to confirm his Beliefs, Interpretations, Assumptions and Strategies -- to believe his BIAS. By seeking managers who would confirm his views, and execute rather than disagree, Mr. Lampert had no one offering alternative data, interpretations, strategies or tactics. And, as Mr. Lampert's plans kept faltering it led to a revolving door of managers. Leaders came and went in a year or two, blamed for failures that originated at the Chairman's doorstep. By forcing agreement, rather than disagreement and dialogue, Sears lacked options or alternatives, and the company had no chance of turning around.



Source: www.bigcharts.com
Of course, others have argued that Sears' culture had become insular long before Lampert took over.   Fortune writer Geoffrey Colvin wrote about an incident in the early 1990s, when Edward Brennan served as the firm's CEO:


At this same time, shareholder activist Robert A.G. Monks launched a campaign to get elected to the Sears board and to reform its rules; he even ran a full-page ad in the Wall Street Journal headed “The Directors of Sears, Roebuck and Co.: NON-PERFORMING ASSETS.” When he was finally granted an audience with Sears CEO Ed Brennan in his 90th-floor office in the Sears Tower (now the Willis Tower), the functionary escorting Monks in the elevator reportedly said, “This is the first time bad news has made it above the 78th floor.” Star consultant Ram Charan asks CEOs if they’re hearing lots of bad news. Why? Every company has lots of bad news, he tells them, and if you’re not hearing it, something’s wrong.

Tuesday, May 02, 2017

Strategy at McDonald's: Cheaper or More Premium?

Venessa Wong has written an interesting article about McDonald's for Buzzfeed.  Here is an excerpt: 

McDonald's spends a lot of time and money rolling out "premium" products like design-your-own burgers and ambitious, leafy wraps. But time and time again, the chain is rewarded most when it goes cheap.  It's a tough reality for a restaurant giant whose CEO loves to share his vision for "a modern, progressive burger company," and invests in store remodeling, digital technology, and ingredient overhauls like upcoming switch from frozen to fresh beef by 2018.

Yet amidst this much hyped transformation, guest numbers have been declining for years. "When value is customer-focused and locally-relevant, it drives guest counts, period," McDonald's CEO Steve Easterbrook recently said on an investor call. Even as the chain tools around with guacamole and artisan grilled chicken sandwiches, it needs to focus on value, he said, "whether customers have a couple of bucks in their pockets or a few more than that."

It raises questions about how far McDonald's can really innovate. The McDonald's "concept succeeds best when leaning into core competencies," analysts at Cowen and Co. wrote in a report in April, such as selling Egg McMuffins all day long, or offering bigger and smaller versions of the Big Mac. Going upscale was not on that list, and few people think of McDonald's when they're craving guacamole. They think of it when they want ten chicken nuggets for $2.

Consider some recent flops. McDonald's launched Premium McWraps in 2013, and they failed. Mighty Wings — which cost almost $1 per wing — failed in 2013. The chain made a splashy foray into build-your-own burger territory with the Create Your Taste menu in 2014 — and that will be pared down to a smaller menu with fewer choices this May.

McDonald's faces a thorny strategy challenge.  It is a low cost player faced with erosion of customers and revenue, as more premium fast casual players have entered the market (think Five Guys, Smashburger, Panera, etc.).   People have criticized the firm's food as unhealthy and unnatural.  Should it try to enhance quality and offer more premium products in response to this trend?  Some would say yes; they should follow customer and societal trends.  Yet, those trends cut against much of what they do well.  They have been a successful low cost player for decades, emphasizing speed of service and low prices.  Of course, if they just "stick to their knitting," they must end up a dinosaur.  What can a firm in such a predicament do?   

What they certainly don't want to do is straddle... i.e get caught stuck between a low cost position and a more premium, high quality position in the market.  They will have to make tough choices.  If they don't, they'll lose to fast food places offering more value at the bottom end, and fast casual chains offer more quality at the higher end.  One interesting question:  Could a corporate strategy move be the solution?  In other words, what about launching a new business unit that leveraged the company's core strengths, but enabled it to find new growth?  That's a tough move too perhaps.  They did own a large stake in Chipotle after all, and they divested that stake because it was difficult to manage the tensions between the two very different operating models.  Still, a separate chain might enable them to experiment without confusing customers who have a fixed view of the McDonald's brand.  It will be interesting to watch the firm's next moves.