Planet Fitness Case Study

Source: Wikipedia

My newest strategy case study, Planet Fitness:  No Judgements, No Lunks, is now avaiable in the Harvard Business Publishing catalog.   (The case was published by the University of Michigan's Davidson Institute).  The case study focuses on how the company has managed to position itself and create a competitive advantage in a very tough industry.   Moreover, it examines whether the firm will be able to sustain that advantage moving forward given its aggressive growth plans.   Finally, the case enables students to examine the issue of vertical integration and the pros and cons of a franchising model.   Interestingly, Planet Fitness was co-founded by a Bryant alum, Marc Grondahl.  

The NFL Draft & The Sunk Cost Trap

Back in graduate school, I read an excellent paper by Barry Staw and Ha Hoang titled, "Sunk Costs in the NBA: Why Draft Order Affects Playing Time and Survival in Professional Basketball." The authors found that NBA teams fell into the sunk cost trap when it came to high draft picks. If the team expended a highly valuable first round pick on a player, they tended to stick with that player far longer than they should have. The NBA teams gave those players more playing time and retained the player longer than other players of similar ability who were drafted in later rounds. At times, coaches and general managers think to themselves, "We can't put a high first round pick on the bench." It's irrational, of course. They shouldn't be worried about sunk costs. However, we know that human beings have a hard time letting bygones be bygones. In fact, we throw good money after bad. That's precisely what happened to NBA coaches and general managers in this study. 

As a graduate student in the late 1990s, I decided to see if the same effect occurred in the National Football League. Since tonight is the NFL draft, I thought that I would look back what I discovered in that paper. Note that this dataset is from a very different NFL era. For a variety of important reasons, I looked back at NFL drafts in the 1980s, prior to free agency in the NFL. What I found was slightly different than the NBA study. NFL teams did fall into the sunk cost trap in the first few years after drafting running backs out of college. That was the same as the NBA. However, I found that teams disproportionately disposed of high draft picks starting around year 4. In short, there seemed to be a reversal of the sunk cost effect. Why? It turns out that historical data clearly showed that NFL running backs had a very short career, on average. They peaked in Year 4, on average. Almost no one became a star running back for the first time (defined by having their first 1,000 yard season) after Year 4. (see chart above) So what? Well, teams seemed to be quite aware of this history, and thus, they started dumping high draft picks around Year 4 who had not performed as stars in their first few years. In fact, they dumped them at a higher rate than lower round draft picks with similar performance to date. I described this as a reversal of the sunk cost trap.

In other words, the direction of the sunk cost effect may actually change over time. Traditionally, sunk cost research has demonstrated that individuals fail to ignore prior investments when deciding future courses of action. Consistent with prior research, my examination of NFL running backs demonstrated that prior investments can lead to additional investments in the future, and to an escalation of commitment to a course of action. However, the analysis also demonstrated that sunk costs may serve as inducement for divestment, rather than additional investment, as an asset matures. In short, a large prior investment may lead to the de-escalation of commitment in certain situations.

My conclusions focused on the importance of beliefs and expectations. When we throw good money after bad, we do so because we have a strong belief that a little more investment can somehow yield a better outcome. What happens, though, if that belief is strongly contradicted by well-known historical data? Perhaps the sunk cost effect wanes or even reverses itself. 

I concluded that sunk costs begin to become an inducement for divestment, rather than continued utilization, when individuals can no longer sustain the belief that this additional investment and/or utilization will yield improvement in the future. My analysis demonstrated that historical data regarding asset improvement appears to play a significant role in shaping these beliefs. In the case of NFL players, the historical data strongly suggests that players are not likely to improve after Year 4 in their career. Therefore, as assets mature, it appears that sunk costs can become an inducement for divestment if people no longer believe that improvement is possible, and if they believe that the assets have underperformed the expectations typically associated with their acquisition cost.

It's the hardest decisions often have to make in a variety of fields. When do I cut my losses? Perhaps there are a few lessons to learn from the mistakes made by NFL coaches and general managers in all too many situations. 

Don't Overestimate Your Powers of Prediction

This week is the NFL Draft. Here's my analysis of 15 years of data on 1st round picks at QB. Conclusion: It's very hard to predict success. True in other fields too. Lessons for us all: don't overestimate powers to predict; don't misattribute forecasting success/failure based on few data points.

A Few Words for Bryant University's Admitted Students, Class of 2024!

Help Me Understand: Three Powerful Little Words

Tapping Into Your Employees' Creativity in a Time of Need

Bryant University just released this short article that I've written, titled "Tapping Into Your Employees' Creativity in a Time of Need."  

During this tumultuous time, organizations face a variety of perplexing problems and challenges. Some of these issues may seem intractable to the senior management teams at many firms. Executives will need to think creatively to develop solutions that meet the pressing needs of their customers and other constituents. The answers will not always come from the top. The best leaders will tap into the creativity of all employees, no matter their level in the hierarchy or level of formal authority. For far too long in far too many firms, executives have sent the implicit message that they desire compliance and control, rather than creativity. They talk a good talk about innovation, but don’t walk the walk. That must change during this time of crisis. 

What can senior leaders do to unleash the creativity of their employees to solve a myriad of challenging problems? Here are five simple strategies that they can employ: 

1. Assemble several virtual “kitchen cabinets” of employees who are likely to bring fresh perspectives. Create a direct line of communication between the top team and these kitchen cabinets. For instance, bring together a group of highly talented young employees, many of whom will not be beholden to the conventional wisdom or past patterns of behavior. Ask them what assumptions need to be challenged and what processes need rethinking. Encourage the youngest to teach the oldest about new trends in technology, consumer behavior, and the like. Or, assemble a team of front-line employees who are interfacing with customers directly each day, and ask them what obstacles they are facing. Then, ask them how senior leadership can help and support them in addressing these challenges. 

2. Invite employees to reach outside their industry for creative ideas. Specifically, encourage them to reason by analogy. Are you facing a customer service problem? What situations are analogous to your own? Invite employees to consider what firms in other industries might be doing to address a similar issue. Or, ask them how people with different technical backgrounds and expertise might approach a similar problem. Then encourage them to adapt and apply those lessons to your organization. 

3. Champion experimentation. Offer to provide resources and other support to employees who design simple, low cost, rapid experiments to test out new ideas and solutions. Insure them that people will not be punished for failed experiments, provided that employees demonstrate that they are learning from mistakes and sharing those lessons with others throughout the organization. Create recognition and offer small awards for people who conduct the most interesting experiments. 

4. Invite employees to role play other key constituents. How might our customers react to a particular situation or proposed solution? What about our suppliers or other external partners? Research shows that we often are more creative when we imagine that we are someone else facing a similar predicament. Imagining ourselves in someone else’s shoes can stimulate fresh ideas. 

5. Create virtual brainstorming sessions where small teams can come together to generate many divergent ideas in a short period of time. Ask participants to withhold critique during this time, focusing instead on building on one another’s ideas. Encourage them to propose ideas that may not seem feasible, or that even may seem a bit quirky or unconventional. Tell your employees that a discussion of feasibility will come later, after a wide variety of options have been put on the table. 

These strategies offer practical ways in which leaders can engage with a broad set of employees in critical problem-solving work. Most importantly, though, leaders need to send the signal that they genuinely believe that they have much to learn from their employees. They need to demonstrate some vulnerability and acknowledge what they do not know in these turbulent times. Stress that you don’t have all the answers and that you appreciate all the help you can get. Identify specific issues about which you believe others may have something valuable to contribute. Making people feel valued in this way can often stimulate them to come forward with terrific ideas. In sum, if you acknowledge you don’t have all the answers, and simply pose a few thoughtful questions to your people, you will be amazed at what you can learn from them. 

Time to Write a Thank You Note

Source: Bloomberg

During this crisis, we have an even greater need to express our gratitude to hard-working, dedicated employees in our organization.   Recognizing people's efforts and achievements can be instrumental to cultivating high employee engagement, fostering their well-being, and increasing productivity.   Doug Conant, former CEO of Campbell's Soup, has been an ardent proponent of the handwritten thank-you note for years.   Here's an excerpt that he wrote for Harvard Business Review several years ago about the importance of acknowledging what people have done for the organization.  

Believe it or not, I have sent roughly 30,000 handwritten notes to employees like Patti over the last decade, from maintenance people to senior executives. I let them know that I am personally paying attention and celebrating their accomplishments. (I send handwritten notes too because well over half of our associates don’t use a computer). I also jump on any opportunities to write to people who partner with our company any time I meet with them. It’s the least you can do for people who do things to help your company and industry. On the face of it, writing handwritten notes may seem like a waste of time. But in my experience, they build goodwill and lead to higher productivity.

Excessive Worrying About How Others Judge Us

Source: Wikimedia

Alice Moon, Muping Gan, and Clayton Critcher wrote a paper last year titled, "The Overblown Implications Effect."   They studied how people think about how others are judging them.  They conducted a series of experimental studies on this topic.   The researchers found strong evidence that, "Actors overestimate how much observers think an actor’s one-off success or failure offers clear insight about a relevant competency.  Furthermore, actors overblow performances’ implications even in prospect, before there are experienced successes or failures on which to ruminate."

The researchers uncovered a particularly interesting phenomenon.  People tend to assume that others are making blanket judgments about their overall afbilities in an area based on upon a very specific result. In an interview with Knowledge@Wharton, Professor Moon explains:

"Our key finding was that people overweigh how omuch both failures and successes factor into observers’ perceptions of them. That is, if you bake a bad batch of cookies, you assume that now others will think you are horrible cook, and if you bake a good batch of cookies, you think that others will now assume you are a fantastic cook. Interestingly, both you and the observer agree on whether the batch of cookies is good or bad, but the error arises in the greater implications from that performance: how good of a cook you are, and also, how good you are at related skills, such as making an omelet."

The study has some interesting implications for how managers provide recognition and constructive feedback to their employees.  They need to keep in mind that employees often think managers are making broad sweeping conclusions based on the one incident or project.  Managers need to remind employees that the feedback pertains to the particular situation.  Moreover, they need to clearly distinguish between specific incident feedback and broader pattern recognition.  Clarity here is essential.  Are you commenting on a pattern of good or bad performance, or are you simply trying to identify and provide feedback on a specific situation?  Employees will think you are commenting about a pattern unless you specify otherwise.  They assume you think a pattern exists, in a sense.  

Sharing Learning Across the Organization: The Power of Near-Misses

Source: Moody Air Force Base

I'm working on a new case study about the Boeing 737 MAX crisis right now, and I've come across a very interesting incident that arose before the first crash.  I think there is a key lesson from that incident that applies to all organizations as we cope with the COVID-19 crisis today.  

On the day before the crash of Lion Air Flight 610 in Indonesia, pilots flying the same plane nearly experienced tragedy.   Fortunately, a third pilot happened to be in the cockpit that day.   He observed the captain and co-pilot struggling to understand and react to the fact that the stall-prevention system was pushing the nose of the plane down repeatedly.   Finally, the observer recognized what was happening and identified how to rectify the situation.  He intervened and saved the day.  Unfortunately, the lessons from this "near-miss" never flowed to other crews at Lion Air.   On the very next day, flying the very same plane, tragedy ensued.   Pilots experienced a mis-fire of the stall-prevention system, brought on by a faulty sensor reading.  They did not know how to address the sitaution, and the plane crashed into the sea, killing everyone on board.

What's the lesson for us today?   We have to make sure that teams are reflecting on what they have learned, particularly after failures, and sharing their lessons learned with others throughout the organization.   Of course, failures often get a lot of attention, and people do hear about what went wrong and what the lessons learned are from those situations.  However, people often do not hear about the near-misses, yet they are some of the most valuable learning opportunities.   Near-misses are those situations when a failure almost occurred, but thankfully, someone intervened to take action, avoiding a major negative consequence.   

Why don't we hear about the near-misses?   Often, people's natural reaction is to simply say, "Phew! Thank goodness!"   Then they don't share the news of the situation with others.  In part, they do it to avoid scutiny or perhaps the assignment of blame.  Sometimes, they simply don't think about how the lessons from that incident can be helpful to others in the organization. 

Years ago, Amy Edmondson, Anita Tucker and I wrote a case study about Children's Hospital and Clinics in Minneapolis/St. Paul.   They wanted to surface near-misses, rather than sweep them under the rug, so as to learn from them and avoid future medical accidents.  Someone there came up with the brilliant idea to rename the near-misses!   They started calling them "Good Catches."   Clinicians were asked to record these "good catches" in logs, and then a team studied the lessons from those situations.  The term "good catch" emphasized the heroic action to intervene and avoid tragedy, rather than focusing on the bad things that happened leading up to the problem.   I since have encountered another organization, in a manufacturing environment, that actually borrowed the phrase "good catch" and actually created an award for plant employees who initiated a "good catch."  As a result, they learned about many more near-misses than ever before, studied them closely, and over time, they reduced quality defects in the factory considerably!  

Coping with Quarantine: Learning from the Polar Explorers

Source: history.co.uk

Daniella McCahey, a history lecturer at the University of Idaho, has written an inspiring column for Fast Company this week.   She takes a look back at the Antarctic explorers of the early 1900s and examines how they coped with months of isolation, darkness, and surviving in close quarters with fellow adventurers.   She argues that seven things helped the explorers cope effectively, and that we can use some of these same strategies today during the COVID-19 crisis. 

1. Music: McCahey quotes Apsley Cherry-Garrarde, an English explorer and member of Robert Falcon Scott's expedition of 1910: “It is necessary to be cut off from civilization … to realize fully the power music has to recall the past…to soothe the present and give hope for the future."

2.  Books:  She reminds us that, when Shackleton's ship sank, he made sure to grab his favorite Rudyard Kipling poem.  Grab that book you have been meaning to read.  Dive into a subject you would love to learn more about, or expand your understanding into a related domain.   Reading widely can help spur creativity and innovation, as we sometimes find ideas in adjacent fields that are applicable to our own.   Read a few fun books too... a mystery that captures the imagination or keeps you in suspense.

 

3.  Diary Writing:  Taking the time to record key events and reflect upon them can have value.  It also helps people release a bit of their stress.  

4.  Expedition Newspapers:  Some explorers also chose a different form of writing.  Not only did they record personal diaries, but they also produced newspapers for the expedition as a whole.  These basic newspapers included poetry, humor, games, and puzzles. 

5. Games: She quotesCarsten Borchgrevink, leader of the Southern Cross Expedition: “The sameness of those cold, dark nights attacks the minds of men like a sneaking evil spirit. We found that … playing chess and cards were very valuable pastimes.”   I can attest to the value of playing games.   My family and I have been enjoying many game nights amidst the crisis.  As the kids grew older, we played board games much less often.   Now we are revisiting our game night tradition, and we have enjoyed the break from our remote work.  

6.  Food:  Here's one that I can relate to very much.   She says that the meals quickly became monotonous.  Out of boredom and at times necessity, the explorers experimented with new foods and recipes.  I've found myself doing the same thing.  I've always enjoyed cooking, but often don't have the time. Now, I'm usig my time at home to try new recipes, and the practice has not only lifted my spirits but made the entire family happy.  (well most of the time... there have been a few misfires!) 

7.  Alcohol:  I don't think that I need to say much about this one.  We all agree it has a role to play!  Of course, some research does suggest that drinking wine can enhance your creativity!