Forever 21's Possible Bankruptcy: Why Copying Zara is Difficult

Source: USA Today

CNBC reported yesterday that apparel retailer Forever 21 is preparing for a bankruptcy filing.  News reports emphasize the challenges that brick and mortar retailers are facing these days.  Moreover, they note that Forever 21 made a huge bet on building very large stores in recent years.  Both arguments are valid.  Others note that perhaps "fast fashion" is going out of style.   On that last point, I beg to differ.  I don't think the problem is the concept of fast fashion.  I do think that emulating the Zara business model is far more difficult than many competitors recognized.

Zara pioneered the fast fashion strategy many years ago, and it has excelled for many years. Zara has a unique strategy and business model though. For starters, they are vertically integrated, unlike almost any other apparel retailer with whom they compete.  Their unique supply chain strategy is key to their fast fashion positioning, and instrumental to their ability to avoid the deep discounting that has harmed so many apparel retailers. 

Years ago, James Surowiecki wrote a terrific column for The New Yorker about Zara.  He titled the article, "The Most Devastating Retailer in the World."  Toward the end of the article, he explains why it's so difficult to imitate Zara's strategy.  His argument echoes the familiar strategy lessons offered by Michael Porter and Jan Rivkin of Harvard Business School, who have argued for years that imitating a complex, integrated and self-reinforcing system of activities is often very difficult.  Often, competitors don't recognize the need to copy the whole; instead, they identify parts of the model that they try to imitate.  Moreover, rivals often do not understand the "secret sauce" by observing from afar... they only see the observable elements of the model, and they don't see how it all fits together, as well as how the organizational culture and values support the model.   Copying the intangibles often proves incredibly challenging.  How do you even understand the intangible elements of a successful business model?

Here's Surowiecki on the challenge of trying to copy Zara:

"So why doesn't everyone just copy Zara?  They would if they could... Zara is an integrated system, not just a collection of parts.  You can't simply copy elements of the system and expect the same results... After all, it's a lot harder to knock off a two-billion-dollar business model than to knock off two-hundred -dollar pair of pants."  

Of course, Zara too has had to adapt to a changing world that makes life difficult on retailers heavily reliant on brick-and-mortar stores.  Sometimes, modifying or adapting a highly successful, integrated system of activities to a changing environment can be just as difficult as emulating a top competitor.  We shall see how Zara fares moving forward as e-commerce becomes a much more important part of their business.  

Optimistic CEO, Pessimistic CFO: Optimal Pairing?

Source: maxpixet.net

Insead Professor Guoli Chen and University of Miami Professor Wei Shi have conducted some fascinating new research on mergers and acquisitions.  They examined the nature of the relationship between the CEO and CFO, and how that affects merger performance.   They studied 2,356 companies between 2002 and 2013.  They discovered, not surprisingly, that the optimal pairing includes an optimistic CEO and a pessimistic CFO.  Here's their description of the research: 

We culled transcripts of conference calls between 2002 and 2013 involving both the CEOs and CFOs, and measured the executives’ optimism and pessimism by analysing their use of positive and negative words. Positive words included “achieve”, “assure” and “successful”; negative ones covered “flaw”, “penalise” and “unavoidable”. CEO optimism was calculated as the difference between a CEO’s use of positive words and negative words, and CFO pessimism was calculated as the difference between a CFO’s use of negative words and positive words.

Our data showed that CEOs generally used more positive words and were more optimistic than CFOs. CFOs used more negative words and were more pessimistic than CEOs. We then used the ratio of CEO optimism to CFO pessimism to derive what we call the CEO-CFO relative optimism. This value is then matched with the firm’s number of M&As and operating performance, assessed in our study as return on assets (ROA) a year later.

We found that the more optimistic a firm’s CEO-CFO pair was (high-optimism CEO with low-pessimism CFO), the more M&As it undertook. High CEO-CFO optimism also correlated with lower ROA a year after M&As. Conversely, low CEO-CFO relative optimism was associated with fewer M&As but higher ROA.

Does this mean that a pessimistic CFO is always a positive for organizations?  Not necessarily.  I often speak to audiences of finance executives about playing the role of the devil's advocate on the top management team.  CFOs often embrace this role, seeking to poke holes in proposals and find the potential flaws and risks in any course of action.  Such critical thinking can be quite helpful at times.  However, CFOs can take such behavior too far, and then devil's advocacy no longer proves constructive.   The CFO can become "Dr. No" - always finding reasons not to try new things, and always arguing why a new idea won't work.   CFOs need to maintain a healthy balance when they look at the downside of new ideas.  They should be critical, but they should also ask:  How might we make this proposal work?  What other options could help us achieve the same goal?  How could we move forward in a less risky manner?   They can't simply say no to everything.  They have to help find other ways to move forward if the proposed course of action seems inadvisable.  For more on how to play the devil's advocate constructively, you can read my article here.   I also have a chapter dedicated to this topic in Unlocking Creativity.  

Are You Willing to "Fire Yourself" to Gain Fresh Perspective?

Source: Logitech

Adam Bryant of Merryck and Co. recently published a terrific interview with Bracken Darrell, CEO of Logitech. I especially liked this exchange. We all should think about this reflection exercise. Darrell "fired himself" and started anew in the very same role, but with fresh perspective. Here's an excerpt: 

How do you set the tone for constant change given that people crave a certain amount of sameness?

I’m very explicit about it. I’ve shared a story from last year, after I’d been on the job for five years. One Sunday night, I asked myself, “Am I the right person for the next five years?” I had made tons of change, and the stock was up about 500 percent.

I knew that, on paper, I probably was the right person for the next five years, and that it’s risky to change if you don’t have to. On the other hand, I had been involved in every single personnel and strategic decision. My disadvantage was that I knew too much, and that I was too embedded in everything we were doing.

So I decided that I was going to fire myself, and that I would sleep on the decision. I didn’t share it with anybody, including my wife or kids. I just thought to myself that I might be done. I woke up the next morning, and felt that I knew exactly what I needed to do: I have to rehire myself but have no sacred cows. It was super exciting and fun, and I started changing things that I had put in place. Fortunately, I didn’t have to change things radically, but I felt new again.

Then I realized that the real opportunity is to compress that timeframe from five years to a year and then to a month and then into every day. And if you can get yourself to the point where you can really come in unbiased every day, then you’re there. That’s my ultimate goal, which I think is impossible, but that’s the goal.

3 Ways to Spark Creative Ideas

Check out my recent guest post for the Institute for Management Studies blog.  The short piece is titled:  "Getting Unstruck: Three Ways to Spark Creative Ideas."   The Institute for Management Studies provides leadership development for member organizations throughout the country.  

Never Eat Lunch Alone

Source:  Needpix.com

I recently came across a terrific essay by Assurant CEO Alan Colberg on LinkedIn, published two weeks ago. In the article, Colberg reflects on what he learned during three major events at which he appeared along with other top executives in a series of panel discussions and speeches. One key lesson he derived from these sessions: ask good questions that challenge the status quo and the conventional wisdom in your company and/or industry. He writes:

One of the most profound, yet simple suggestions discussed across each event was about the importance of asking the right questions. Imperative to future success is not solely dependent on having the best products or services. Indeed, it starts with asking the right questions and viewing those through a “consumer” lens – again, being attuned to the changing needs of customers and delivering on that exceptional customer experience. Someone at the CNBC Evolve event asked, “why isn’t buying enterprise software as easy as buying a book on Amazon?.” This is an important question every organization -- whether a global B2B company, a small technology start-up –- must ask if it’s serious about changing and improving the consumer experience.

Even better, I loved his advice for his employees.  He has adopted the mantra - "never eat lunch alone" - at Assurant.   He explains:  

Finally, attending these events reminded me yet again of how important it is for all of us to take some time to think externally and engage with people. I often advise my employees to “never have lunch alone.” We learn so much from one another through dialogue and interaction. I would encourage everyone at all levels to get out from behind your desk and think externally. Consider actions like reaching out to a colleague or friend elsewhere at your own company or at another organization – or visiting a website or store of one of your client partners – you never know how what you learn now will change the course of your future.

I love this mantra.  We often feel that pressure to eat at our desk, because we face a looming deadline or a lengthy to-do list.  However, we miss a huge opportunity when we isolate ourselves at our desks.  We forego an opportunity to connect with colleagues or perhaps customers.  So many terrific collaborations can emerge from conversations that begin casually and informally over lunch.  We can learn from others, and we can expose ourselves to different points of view.  We can learn about the work being done in other silos of the organization, and we can begin to break down the barriers among those silos.  "Never eat lunch alone."  I think that I'll embrace this mantra moving forward in my own work.  I hope you do as well. 

Lyft CFO Brian Roberts: Creating a Dialogue, Testing for Understanding

The Wall Street Journal recently published an interview with Lyft CFO Brian Roberts, an MBA classmate of mine from Harvard Business School. Roberts describes his attempts to create an open dialogue with members of his organization. Tatyana Shumsky of the Wall Street Journal writes,

Mr. Roberts regularly holds CFO chats—free-form, large-group conversations open to anyone and everyone in the ride-sharing company—to facilitate communication and give employees greater clarity on company strategy. He also holds frequent office hours, doled out in 10-minute increments, so that any of the more than 150 people on the finance team can get a one-on-one meeting with the CFO to chew over any work topic.

During the interview, Roberts mentions an important a-ha moment during on of these dialogues:

When I did my first chat since the IPO, I think it was probably several hundred people in the room. And there was videoconference, so it was a much larger group. Obviously the stock has been volatile, and I expected a lot of questions about the stock. But a lot of questions were around the strategy. Why are we doing this? Why are we doing that?

It was a lightbulb moment for me, because I realized if we have internal employees who are living, breathing Lyft 24 hours a day, seven days a week and the strategy is not clear to them, it means it’s not clear probably to the external world as well. And so from that, it gave me a very good lens for the next time I’m in front of investors to make sure that we’re really crisp in terms of why we’re doing certain things and what’s the purpose of strategies.

I've witnessed far too many organizations in which top executives think that they have communicated the strategy clearly, but in fact, employees remain confused or unsure.  I've always advocated a "check the pulse of the organization" approach whereby senior leaders go out into the organization, often in an informal fashion, to see if their message has "gotten through" to employees in the way that they intended.  Do people understand the goals?  Do they understand why we are doing what we are doing?  Do they understand how they can contribute to the fulfillment of our organizational objectives?  Roberts has developed an effective mechanism to get direct feedback.   More executives should follow his lead. 

When Substitutes, Not Direct Rivals, Pose the Most Serious Competitive Threat

Source: Pixnio

Years ago, many strategy faculty members used to teach an old Harvard case study about the breakfast cereal industry.   The U.S. industry operated as an oligopoly.  A few firms dominated the market (General Mills, Kellogg, Post).  The firms competed in terms of new brands, flavors, and the like, yet they tended to avoid competing heavily on price.   The market leaders tended to have a stranglehold on the supermarket shelf, making it difficult for new players to enter the market.   In short, the industry tended to be quite attractive for the incumbent players.  

Things have changed.  Cold cereal sales have declined by 6% over the past five years.  As the Wall Street Journal reports today, 

Cereal makers, under increasing competitive pressure, are struggling to improve sales of puffed rice, wheat flakes and oat clusters that were once a standard part of Americans’ morning routines.  Fast-food chains are beckoning customers with new breakfast products and bacon-laden promotions. More people say they are eating less sugar and more protein, or forgoing breakfast altogether. Snack bars for on-the-go consumers are ubiquitous.  “There’s a lot more competition for breakfast than there ever has been,” General Mills Inc. Chief Executive Jeff Harmening said in a recent interview.

What's the lesson from this story of the changing fortunes of the breakfast cereal industry?   In many cases, the most serious competitive threat for a company does not come from its direct rivals.  Instead, it comes from substitutes - i.e. alternative products and services that fulfill a similar human need.  In other words, snack bars, yogurt, and fast-food restaurants have displaced cereal in the daily morning routine of many Americans.  General Mills didn't get beat by Kellogg or vice versa.  They are getting threatened by these substitutes.  The same dynamic plays out in many industries.  Often, this type of substitution threat proves much more difficult to detect in the early going, and then much more challenging to address moving forward.  Executives have to think carefully and broadly about substitutes as they plot their firms' strategies.  For instance, what's a substitute for auto insurance?  Well, it might be Uber, Lyft, and other options that have reduced the number of people owning and driving personal automobiles.    

Many Workers Don't Feel The Same Way About Innovation as Executive Leaders Do

Source:  PxHere

SurveyMonkey recently conducted a survey on behalf of Fast Company regarding employee attitudes about innovation.  They questioned over 3,000 workers in this study.  The results demonstrate a wide disparity between executive beliefs and lower level employee attitudes and beliefs.  

According to Jay Woodruff of Fast Company, "71 percent of C-level respondents believe they have opportunities to personally contribute new or innovative ideas at work."  Unfortunately, Woodruff reports that, "only 22 percent of lower level individual contributors feel the same way."

Meanwhile, the study also shows a marked difference in beliefs regarding the extent to which the culture supports creative thinking. Woodruff writes, "While 48 percent of C-level respondents believe their workplaces encourage innovative thinking, only 30 percent of individual contributors agree."

What's happening here?  Nothing new, I would argue.  Unfortunately, prior studies have documented similar results.  As I have explained in earlier writings, executives say that they want creative thinking, but their behavior often makes it seem as though they simply desire compliance and control.  Their words simply don't match their actions.  No wonder then that workers are cynical about initiatives designed to encourage innovation.  

Leaders need to ask themselves:  Are my actions expressing a desire for compliance or a desire for creativity?   What systems and processes encourage or discourage one or the other?  What do our incentive systems reward or punish? Of course, they can't just engage in self-reflection.  Leaders have to ask others, because top executives may be seeing their organization through rose-colored glasses.  

Three Techniques for Smart Prototyping

Source:  Flickr

Here is my latest article about the prototyping stage of the design thinking process.   I've published it as a guest post on the Experience Point blog.  The title of the short piece is "Three Techniques for Smart Prototyping."  In the article, I explain some of the typical mistakes that we make when trying to prototype new ideas, and I offer several strategies for enhancing our approach.  I hope you find the article useful and informative. 

Why Employees of Acquired Firms Leave in Droves (And Can We Predict Turnover In Advance?)

Source: Flickr

The Wharton School's J. Daniel Kim has written a good paper titled, "Predictable Exodus: Startup Acquisitions and Employee Departures." Kim finds that 33% percent of workers brought into a company through an acquisition of a startup leave within 12 months, compared to 12 percent of other employees with similar backgrounds. Why do they leave? Could we actually predict whether such high turnover will occur BEFORE we make a deal and acquire a startup? Kim has developed a rather ingenious strategy for examining that question. He explains how he constructed a measure he calls "startup affinity." 

I track employee departures prior to the acquisition along with their destinations. While these individuals leave before the acquisition, their decisions to join a young firm or an established company provide useful information for predicting their peers’ post-acquisition retention outcomes. When aggregated up, these mobility choices reflect the firm’s tendency to attract workers who prefer to transition to startups rather than established firms. Following this reasoning, I define firms to have a strong affinity for startups if their former employees – who leave prior to the acquisition – systematically tend to move to other young companies.

Kim then goes on to examine the relationship between startup affinity and worker turnover after an acquisition:

I find that the pre-acquisition departure patterns strongly predict the acquired employees’ decision to stay with the buyer. In short, target companies with a strong affinity for startups exhibit much higher rates of turnover following an acquisition. Furthermore, these effects are magnified when the acquiring firm has a lower startup affinity than the target firm, lending empirical support to the role of organizational mismatch. Therefore, ex-ante differences in the target and buyer’s organizational type largely explain why many acquisition deals fail to retain the new workers while others succeed in capturing talent. 

What does this mean for larger firms employing an acquisition strategy to target technology and talented employees at startups in their industry or a related market?   Companies have to do some strong self-diagnosis before embarking on an acquisition spree.  They have to understand their current workforce and culture, and in so doing they can assess whether they are a good match for the target firm's employee population.   Remember, those workers don't get to choose to be employed by the acquiring firm.  They have chosen to work at that startup.  They can then vote with their feet after the deal.  If there's a strong mismatch between the employee population and the acquiring firm, you can expect a significant dose of turnover.  Perhaps that's not concerning to some executives, but in many cases, a big chunk of the value of the deal is tied to the intellectual capital embodied in the workforce.  If those folks leave, what is left?  Often, the remaining physical assets (technology, etc.) aren't worth nearly enough to justify the takeover price if the workers leave in droves.  

Clarifying Information Priorities to Make Better Decisions

Source:  flickr

Former Army Colonel Robert Hughes, now a professor at the Kellogg School, has some great advice for leaders facing tough decisions. In a feature for Kellogg Insight, he argues that you have to identify and clarify your information priorities. According to Hughes, "This means determining the most important information they will need in order to decide—as early as possible—whether the plan is moving forward as intended, or whether it might need to be adjusted." He goes on to explain, "“The leader’s role is to define what success looks like for each operation. Then you think about what essential information is needed throughout the plan to achieve success.”

Establishing your information priorities is only a first step though. Hughes argues that you have to link those information priorities to decision points that you anticipate will occur moving forward. In other words, you have to anticipate key choices you will have to make and roughly when you might need to make them, and identify the data you will need to make those decisions effectively. 

Finally, Hughes argues that you have to communicate your information priorities clearly and concisely to your team. You have to encourage people to share key data, including problems or unexpected issues that arise. Moreover, you have to be willing to adjust your plans and priorities when things don't work out as planned.

Hughes' advice is terrific. I love the notion of anticipating the information you may need to make good decisions as you execute a plan of action. In addition, I think it's critically important to anticipate key decisions that you might have to make, and preparing yourself to make those choices as much as possible. Mountaineer David Breashears once told me that he played out many scenarios in his mind before beginning to climb a mountain. Moreover, he thought carefully about the types of tough decisions he might face, including whether to turn around himself or to direct a team member to return to base camp. Breashears argued that thinking carefully about the "exit decision" before you launch is critically important to helping make that challenging decision. He also argued that you have to discuss those issues with your team before you begin your journey. His advice is very consistent with Hughes' approach to planning and execution. Both men have offered good lessons applicable to business leaders.

"I Don't Think My Company Tells Me The Truth"

I recently read a great interview, conducted by Wharton's Mack Institute for Innovation Management, with accomplished entrepreneur and angel investor David Kidder (author of the new book, New To Big).   Kidder talks about how to create an environment conducive to growth and innovation.   He explains the keys to "productive failure" as part of that culture.  Here is an excerpt:

I think there are a couple qualities to productive failure. One is that it was done inexpensively. You got to a truth on a cost basis that was much, much less than say the planning model, which makes predictions and then tries to make them true. The cost base of the learning is really important. Secondly is that the person who’s delivering that productive failure is actually telling the commercial truth. Often when I do my keynotes, the CEO of the company will come to me and say, “I don’t think my company tells me the truth.” And my response to this is, “Because it doesn’t, because your cost of failure is too high.” You have these amazing people who want this company to be successful, but the organization is largely intellectually dishonest... As a result of this, you have these zombie ideas, these zombie companies, these zombie programs that literally won’t die because there are people who are trying to make their ideas work. Here’s a rule of investing: You never invest in an entrepreneur who loves their idea, ever, because they have no elasticity or permission to change it. You want to invest in entrepreneurs who are obsessed with the customer problem, with total permission to solve it, even if it means letting go of truths about yourself or your product that are no longer true. I think that, coming full circle, you need to have the mindset and mechanics and the permission inside the leader and the organization so that people are in a position to actually lower the cost of failure and, as well, they can tell you the truth.

I love the notion that you don't want people who are in love with their ideas.  You want people in love with a perplexing problem, people who are willing to learn and to shed ideas that are not working.   I also think it's very important for CEOs to acknowledge that people aren't telling them the truth in all cases, and then to discover WHY that might be the case.  What have those leaders done that has discouraged people from telling the truth?