The Hottest Growth Stock of the Past 25 Years? You'll Never Guess!

Source: NASDAQ.com

In an HBR blog post this week, Bill Taylor asks the question:  What's the highest performing stock in the United States since the 1987 market crash?  Is it Starbucks?  Microsoft?  Apple?  GE?  How about a company named Fastenal?  What?  Fastenal?  Many readers won't even know what they do.  Fastenal is the leading distributor of nuts and bolts in the United States.  Yes, you read that correctly.  Nuts and bolts.  The company's stock has risen 38,565 percent since October 1987.    Taylor explains that Fastenal has been successful because it has been "deeply committed to a one-of-a kind strategy."  I don't disagree at all.  However, I think there is more to the story.

Fastenal is a retailer/distributor, with 2,600 stores at which they sell their products.  Of course, we all know the story of many brick-and-mortar retailers that have seen their businesses fundamentally disrupted in the Internet age.   We have all watched as Netflix and RedBox delivered a one-two punch to Blockbuster, for example.  However, Fastenal has done an amazing job of innovating its business model before someone else came along to disrupt them.   On the one hand, they have brought the Red Box model to the fastener business.  According to the 2011 President's Letter:

In 2010, we installed 1,358 machines, representing a 240% increase over 2009. In 2011, we picked up the pace and installed 5,528 machines, an increase of 287% over the 2010 number. Why are so many customers utilizing our FAST SolutionsSM (industrial vending)? I believe it’s simply a better way to buy industrial supplies. Think of it as a fully customized and automated Fastenal store within the customer’s location.

On the other hand,Fastenal has embraced the internet as well.  According to the Annual Report, "Fastenal.com generated an average of 1.15 million visitors per month in 2011 (up from 727,000 per month in 2010), and the value of our web orders grew more than 500%."

How many brick-and-mortar retailers have done that type of remarkable job reinventing themselves, while not at all denigrating the service provided to customers in their traditional retail locations?  To me, that ability to reinvent, while maintaining and enhancing the core business, is what makes Fastenal stand out.

Long Term Thinking Does Exist in Corporate America!

Harvard Business School Assistant Professor George Serafeim, HBS doctoral candidate Maria Loumioti, and Assistant Professor Francois Brochet have written a new paper titled, Short-termism, Investor Clientele, and Firm Risk.  They find that companies with a short-run orientation do have more volatile stock returns and a higher cost of capital.   On the other hand, they find that we may be over-estimating the amount of short term thinking out there in corporate America.   The scholars find plenty of firms who are taking a long term perspective.   Here's an excerpt from HBS Working Knowledge's interview with the authors:

Q: In general, what relationship did you find between companies you identified as short-term-oriented, their investors, and the behavior of their stocks?

Francois Brochet: Overall, we found a positive association between the horizon over which firms communicate and the investment horizon of their shareholders. In addition, short-term-oriented firms appear to have more volatile stock returns and higher estimated cost of equity capital—that is, greater risk. While the presence of long-term-oriented investors appears to mitigate the positive association between firms' short horizon and the volatility of their stock, this does not apply to the association between short-termism and cost of capital. We interpret this as evidence that our short-termism measure captures a dimension of non-diversifiable risk in the economy. 

Q: What is the big takeaway here for investors, especially those seeking to invest in companies with longer-term perspectives?

George Serafeim: One important takeaway is that firms with long-term horizons exist! We tend to make sweeping statements and overgeneralize. While significant short-termism exists, there are organizations that have developed a long-term-oriented approach through formal (e.g., incentive systems) or informal institutions (e.g., building the corporate culture over time and employee selection).
The finding that more long-term-oriented firms have lower volatility and cost of capital has implications for capital allocation. Investors who care about the volatility of their portfolio should factor in their decisions the time horizon of the corporation. That generates a need for more data that help investors separate companies that are short-term-oriented versus long-term-oriented. Developing a robust data infrastructure that separates companies could have profound implications and incentivize companies to become more long-term-oriented.

Why Change is Hard

Facebook and Instagram: Where was the Board?

The Wall Street Journal reports today that the Facebook Board of Directors was not involved until very late in the process with regard to the Instagram acquisition.  According to the article, "By the time Facebook's board was brought in, the deal was all but done. The board, according to one person familiar with the matter, 'Was told, not consulted.'"  Later in the article, it describes an amazing meeting that took place at Zuckerberg's home:

At around 6 p.m. that evening, Facebook board member Marc Andreessen showed up at Mr. Zuckerberg's house for a regular meeting. What he didn't know was that Mr. Systrom was in another room, getting his own board to sign off, people familiar with the matter said. Mr. Andreessen, whose venture-capital firm was the second to invest in Instagram, cutting a $250,000 check before the service launched, was surprised when Mr. Systrom walked into the room about an hour into his meeting with Mr. Zuckerberg, the people said.

You can imagine the reaction of corporate governance experts!    Most people have pointed to the fact that the Board and Mr. Zuckerberg will have to interact much differently when Facebook becomes public.  If not, minority shareholders will be quite concerned.  It's interesting, of course, because agency theory says that we ought to like it when CEOs own lots of shares of a company. In those cases, according to theory, there's less divergence of interests between shareholders and executives as opposed to publicly traded companies in which top executives own a tiny ownership stake.  The theory says that we like it when CEOs are playing with their own money, not other people's money.   While I generally agree with that theory, there are limits to the applicability in the real world.   In particular, the interests of minority shareholders need to be considered, particularly when a founder is CEO.   Good governance processes matter, even if we assume that the CEO generally is trying to do right by all shareholders.  Moreover, founder/CEOs rightfully should get held to a different standard when a company goes public.  

Audi to Acquire Ducati

Honda makes automobiles and motorcycles.  BMW does as well.  Now, here comes Audi.  They appear to be on the verge of acquiring Italian upscale sport motorcycle brand Ducati.  More than a decade ago, Ducati had faltered badly.   Texas Pacific Group, a private equity firm, purchased a major stake in the firm in the mid-1990s.  TPG hired turnaround specialists Federico Minoli, who led Ducati in a very successful comeback. 

The deal provides a moment to reflect on the nature of the motorcycle industry.   In many markets, as Gary Hamel has noted, "strategies tend to cluster around some central tendency of industry orthodoxy. Strategies converge because success recipes get lavishly imitated."   Firms compete head-to-head in these situations, and overall industry profitability suffers as a result.  The motorcycle industry, thankfully, does not fall into that type of destructive rivalry.  Instead, firms have found a way to occupy different niches in the industry, and to avoid the type of vicious price rivalry that can damage margins irreparably.   Ducati, Harley, and Honda, as an example, all compete in different segments of the market for the most part.  That recipe has been very good for the key players in the industry.  We'll see if anything changes with the Audi acquisition. 

Growth Lessons from Gilt Groupe Co-Founders

Alexis Maybank and Alexandra Wilkis-Wilson are the co-founders of Gilt Groupe, a company that specializes in online sales of luxury apparel at discount prices.  Maybank and Wilkis-Wilson described to Forbes why they have been so successful.  At first glance, they seem remarkably similar.  They even look alike!  However, the two co-founders argue that their differences make them stronger.  However, it's not just that they have different strengths, but that their abilities and personalities are quite complementary.  One plus one equals three, if you will.   Here's an excerpt from the Forbes article.  A short video is below as well.

“It’s very much like discovering your latter-day stunt double,” Maybank says of finding the right cofounder. Wilkis-Wilson is detail-oriented, a task-master who keeps everything running according to schedule, while Maybank is a self-described “big picture thinker” who is referred to throughout the new book, out in stores this week, as the “impulsive” one. “Our differences haven’t just made us a much stronger team but they’ve allowed us to see what we’re missing and who [else] we need to bring around us as part of our founding team.”

The story, though, is not as simple as selecting a partner who is different than you.  You definitely need someone who shares the same passion for a particular product, technology, or business model.  Both co-founders need to care deeply about what they are doing.   They have to be passionate about the broader purpose of the enterprise.  Moreover, they have be able to communicate well with one another.  In this case, the training at Harvard gave them a common language system that certainly facilitated their communications with one another.  Finally, both parties have to share a similar work ethic and willingness to carry their share of the load. Once you have those foundations in place, then the complementary strengths can become a huge asset. Without that foundation, though, simply finding someone with complementary skills won't lead to success.

 

Separating Needs and Concepts: How to Develop Great New Products

Professor Laura Kornish of Leeds School of Business at CU Boulder has a great post about crowdsourcing over at Fast Company.   She reminds us that we have to be careful when identifying our objectives during consumer research or crowdsourcing initiatives.   We have to separate the determination of the customers' needs from the development of a new product concept.   Here's an excerpt:

In traditional product development practice, there is a separation between gathering data from customers about their needs--via interviews, observations, focus groups, and surveys--and proposing new product concepts. The classic example of this separation is, "People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!" (Theodore Levitt’s example from Harvard Business Review, 1960). In that view, managers guiding innovation should consult the users for what needs to happen, not rely on the users themselves to dream big about how it can happen. Crowdsourcing in innovation allows us rethink this separation. We can ask the crowd directly to provide the solutions, then work backward to infer what is on their minds.

What wonderful advice!  Don't ask the customer to design the new product.   Seek to understand what the unmet need of the customer is!   We don't want the customer actually having to come up with the innovation.  In fact, often they will just offer incremental modifications of the existing product.  They usually won't be able to "think outside the box" in the midst of a focus group or interview.  Seek instead to understand their frustrations and their pain.  What makes them unhappy at the moment?  Then, work on alleviating that pain with a new product concept.  

The Dollar Shave Club: Look Out Gillette?

The Wall Street Journal reports today about the rapid and surprising emergence of a new competitor to Gillette in the razor and blades business.   The Dollar Shave Club provides a subscription service, whereby customers can sign up to have blades shipped to them each month.  Customers choose from among three plans - a good/better/best set of options.  The prices range from $3 to $9 per month.   The company has garnered a great deal of attention, as a YouTube video went viral recently - surpassing 4.1 million views as of this morning. The company's motto might offend some, but it sure garners attention: "Our blades are f— great."

What's going on here?  With Gillette, we see a classic case of a company innovating constantly to try to upgrade its product quality.  The efforts result in a continuing "premiumization" of the product.  However, at some point, those enhancements "over-shoot" the needs of some customers.   The price point begins to exceed the willingness-to-pay of some consumers, as they don't necessarily see the value of the most recent product upgrades.  Is there some evidence that consumers were beginning to feel that the price did not match the value for Gillette's high-end razors?  Certainly.  As the Wall Street Journal indicates, the company had become the butt of jokes about the number of blades that they could stick on a tiny razor.  Moreover, customers have been reported to go to great lengths to try to get as many shaves as possible from a particular razor. 

The barriers to entry in the razor/blades business seemed insurmountable though.  Getting on the supermarket shelf was no mean feat.   Moreover, promoting a new line of razors could be very expensive.  However, the Dollar Shave Club has found a way around those traditional barriers to entry.   They've gone direct to consumers with a subscription service, avoiding the supermarket shelf entirely.  In addition, they've used social media to promote the product at virtually no expense. 

The question remains:  Is the Dollar Shave Club truly a better value than Gillette?  The answer: it depends.  As the Wall Street Journal reports in this complementary article, the true cost to the consumer depends on shaving habits. Those habits, in turn, depend partially upon the physical attributes of the customer.   Gillette, of course, has been trying to persuade customers that their blades last longer, making the true cost of ownership less expensive than competing blades.   That argument raises one final interesting point related to this story.   With industrial marketing efforts, customer willingness-to-pay is often something that a firm can quantify.  With B2B marketing, a company can persuade a customer of the superior economics of buying their product instead of a competitor's goods.   With consumer marketing, one can try to explain those economics to the user, but it's a bit more challenging.  You aren't sitting with a purchasing agent and walking through a spreadsheet.  You are trying to persuade someone in a 30 second commercial.  Therefore, Gillette will have to come up with a very clear and concise way to convince consumers that the total cost of shaving will be lower with their products, even though the price per blade is significantly higher. 

Do Online Dating Sites Help Those Who Struggle Finding Matches in the Real World?

My friend and former colleague Mikolaj Jan Piskorski has conducted a tremendous amount of research on social networking platforms over the past decade.  In one particular piece of research, he examined online dating sites.   Among other things, he wanted to see whether the online dating platforms helped individuals who might otherwise encounter challenges finding good matches in the "real world" i.e. not online?  Here's an excerpt from HBS Working Knowledge that summarizes his findings:

Piskorski studied a random sample of 500,000 OKCupid members, focusing on two important stages of forming a relationship: spotting a potential mate, and initiating contact. The initial results showed that older, shorter, and relatively overweight men tended to view more profiles than their younger, taller, slimmer counterparts. With the female sample, tall women were the ones who tended to view the most profiles. (In the seminar, he reported only the results related to heterosexual matching.)  "I was very encouraged by these results," Piskorski said. "It is presumably harder for older and overweight people to identify potential partners in the offline world, and the online worlds are helping them do that, thereby potentially equalizing access to romantic relationships."  However, the increased viewing behavior did not lead to increased messaging behavior.  Piskorski found that the older, shorter, overweight crowd sent out relatively few messages after viewing hundreds of profiles, as compared to the taller, sportier men. "Basically, the big finding is that men who view most profiles are least likely to message." Piskorski said. "These results show that people who expect rejection may simply refrain from writing, unless the site gives them an encouragement to do so." The results were similarly discouraging for female users. "Even though women look at as many profiles as men do, they message men much less," Piskorksi said. "It seems that these sites have done little to overcome a very restrictive social norm that makes it inappropriate for women to make the first move."

Interestingly, Piskorski then examined the specific functionality of the OKCupid site.  He found that some aspects of the site actually help encourage visitors who view many profiles, but are reluctant to send messages.  For instance, he found that OKCupid's "Quiver" function on the site helped women to overcome the reluctance to "make the first move."  He concludes that we have to really examine the functionality of specific online dating platforms to understand whether they provide a distinct advantage for certain groups over the "real world" dating scene.

More generally, Piskorski has conducted some terrific research on other social networking platforms.  His work focuses on how certain platforms help overcome "social failures" of the real world.  For instance, he argues that LinkedIn has been very successful matching job seekers and employers because it has made it more socially and culturally acceptable to engage in job seeking behaviors while still at your current employer.  For more of his work, check out his website here.  

The Facebook-Instagram Deal

Wow! What else can you say?  Facebook pays $1 billion for a company with 12 employees and no revenue.   I'd love to see the discounted cash flow model that my students could come up with to determine that valuation! 

What's going on with this acquisition?  First and foremost, we have to remember that photo-sharing is a crucial element of the Facebook experience.  As my former colleague Mikolaj Jan Piskorski likes to say, Facebook made it socially acceptable for all of us to become exhibitionists and voyeurs to some degree!   In that sense, Instagram has emerged as a major threat to Facebook.  As people spend more time sharing their photos via Instagram's mobile app, they are likely to spend less time on Facebook.   That reduced time on Facebook will cost the social media heavyweight a significant amount of advertising revenue.  Moreover, rumors of a possible link-up between Twitter and Instagram (or perhaps even Google and Instagram) surely made Mark Zuckerberg more than a bit nervous.

What challenges will Facebook face with this acquisition?   Zuckerberg has announced that he intends to continue operating Instagram as an independent company with relationships to other social media platforms such as Twitter.  Users will still be able to post photos on other social media services, follower users outside of Facebook, and can choose not to share photos on the Facebook platform.   In some sense, this move is a type of vertical integration.  When that happens, firms also face the challenge of competing with their customers.  Instagram will now be competing with its customers - i.e. Twitter and Google Plus compete with Facebook.  Will that cause friction?  Will it cause Instagram competitors such as Hipstagram and PicYou to steal away users?  Facebook will have to be quite careful as it manages those relationships.

Some experts have wondered why Facebook could not have achieved some of the same benefits without having to acquire Instagram. Could they have formed an alliance or partnership with Instagram?  Perhaps they could have.  However, such an arrangement may have made it more difficult to engage in the type of close coordination required to integrate Instagram more deeply into the Facebook platform moving forward.  If Instagram simply were to remain an independent company, then an alliance might have made more sense.  However, I think more intense coordination and integration is coming... and a merger probably makes more sense in that instance. 

External vs. Internal Hires: The Pay-Performance Gap

Wharton Professor Matthew Bidwell has conducted some fascinating new research that contrasts external vs. internal hires.   Do people hired from the outside get paid more than internal workers doing comparable work?  Do external hires perform better or worse than their internal counterparts?   Bidwell finds that external hires get paid substantially more than internal workers.  Why?  His research shows that, on average, they tend to have more education and experience than internal workers (in other words, their resumes look stronger).  However, a strong resume doesn't necessarily equate to on-the-job performance.   Bidwell finds that these external hires tended to do worse on merit reviews in their first two years at the new organization.  Moreover, they leave more frequently than internal workers.   If they survive those first two years, then they tend to do better, even getting promoted faster than internal workers.   However, those first two years can be quite rough, especially when you consider how much the organization is paying for this new talent.  

We should take a few key lessons away from Bidwell's research.  First, we have to be wary of becoming enamored with a beautiful resume.  Credentials don't necessarily translate into performance.  Second, we have to recognize that the first year, even for quite competent folks, can be a difficult transition period.  Acclimating to a new culture, new processes, and new colleagues can be very challenging.   Finally, in baseball, we often hear that general managers "fall in love" with their own minor league prospects.  They sometimes overvalue them, and demand far too much in return for trading them.   Others "fall in love" with outside free agents and give up a great deal to acquire that "external" talent.  In business, it seems that we often undervalue our own "prospects" in favor of the free agents.  We have to focus on developing our internal talent and assessing it fairly and accurately. 

Will Delta really save money by acquiring an oil refinery?

The Wall Street Journal reports today that Delta Airlines is considering the acquisition of an oil refinery as a means of dealing with volatile oil prices. The article reports that Delta could save between $20 and $25 per barrel on fuel costs due to this backward integration strategy. Seriously? This claim represents one of the common myths about vertical integration. I find it hard to believe that the paper published such a claim. People often assume that you can save money by bringing an activity in-house and eliminating the markup/profit margin that the outside party was taking. This "savings" is completely false. You only get that "savings" by investing a ton of money in new assets you did not own previously! There is no free lunch! Later, in the "Heard on the Street" section of the paper, we see much more thoughtful analysis. There, the writers point out that Delta could achieve a similar result with a long term contract securing a certain fuel supply at a particular price; why vertically integrate, with all that capital investment, when contracts could achieve much the same result?  Whenever firms horizontally or vertically integrate, they should always ask whether they could achieve a similar outcome through a contract or long-term partnership.

In the segment below, which aired on CNBC, we hear a discussion of Delta's latest strategic move:

Can Burger King Be Saved?

Business Week reports that we will have yet another change in ownership structure for Burger King.   According to the magazine, "Now, merely 18 months after the venerable Home of the Whopper was sold to buyout shop 3G Capital, it is again returning to a stock market listing by taking over the ticker of Justice Holdings, a special purpose acquisition company owned by famed activist investor William Ackman."  Meanwhile, the chain continues to struggle.  McDonald's has done a tremendous job of remaking itself over the decade and driving comparable store sales growth as a result. Wendy's has become the #2 burger chain in North America.  New players such as Chipotle and Panera have taken share, while regional burger chains such as Five Guys and In-and-Out Burger have thrived.  Internationally, McDonald's and Yum Brands have done very well, particularly in places such as China. 

What happened to Burger King?   First and foremost, I think the chain suffered from the fact that it was owned by corporate parents pursuing unrelated diversification strategies for several decades.  Pillsbury owned Burger King for many years.  Then, Diageo - the alcoholic beverage company - owned Burger King during the 1990s.  Diageo essentially treated Burger King as a cash cow to finance growth in its alcoholic beverage businesses (much like rival Allied Domecq did with its ownership of Dunkin' Donuts).   Since Burger King was not the focus of either Pillsbury or Diageo, it has not received the type of strategic focus and investment required to succeed in an increasingly competitive marketplace.    Over the past decade, it has been owned by several private equity firms, but instability in ownership has been an additional challenge - two private equity firms have owned it over the past ten years, and now we are seeing yet another ownership change.  Dunkin' Donuts, of course, also was acquired by a private equity firm when Allied Domecq finally stopped pursuing its unrelated diversification strategy.   However, in Dunkin's case, the firm thrived under private equity ownership.   A renewed focus on the business led to growth and high profits, leading to an IPO. 

Do You Want Your Peers to Set Your Bonus?

Rachel Silverman of the Wall Street Journal writes today about an interesting new human resources strategy being employed by several firms.  These companies have given employees the opportunity to determine the bonus compensation of their colleagues.  Here's how it works:

Coffee & Power, a San Francisco odd-jobs start-up, granted each of its 15 full- and part-time employees 1,200 stock options this past January, to distribute among co-workers in whatever way they chose. A worker can plunk all his options onto one colleague or split them among the group, so individual bonuses are tied to how co-workers perceive each other's work."  It lets me reward people that management may not always recognize," says Becky Neil, who works in marketing and product management. "This person who has a big title—maybe he didn't actually contribute that much."  Exchanges like those at Coffee & Power make the labor market of an individual office fluid, crowd-sourced and open to constant feedback. Allowing employees to vote on one another's performances also holds workers accountable and raises the stakes for those who don't contribute, managers say. On the flip side, there is a chance these markets could devolve into popularity contests, or lead to hard feelings among those who aren't recognized by the group.

Some companies have experimented with this type of process, though they haven't actually based compensation on the employee input.  Instead, companies such as At HCL Technologies of India have provided workers virtual currency to allocate among their peers.  The imaginary currency allocation is then used to determine how to provide recognition to excellent performers, though it does not translate directly into changes in compensation. 

I think the notion certainly is quite interesting, and I'm intrigued to learn more about firms trying to implement such systems.  I would offer one additional word of caution not cited in the article though.  Such a system may be effective in a small start-up, in which everyone knows what others are doing.  It may be more problematic in a larger, more complex organization in which individuals do not have an accurate understanding of their peers' contribution to the organization.  In those instances, giving employees an opportunity to rate their peers in this manner may lead to erroneous conclusions... and then hard feelings and other negative consequences.   

Gender Bias in Human Resource Processes: How to Overcome It

Max Bazerman and his co-authors have written a new working paper examining how an organization might counteract gender biases in promotion decisions.   They found that stereotypes and biases are more prevalent when a manager evaluates an individual in isolation.  However, those biases fade away, and managers focus more on performance alone, when they are comparing multiple candidates as they make promotion decisions.  Here is their abstract:

We examine a new intervention to overcome gender biases in hiring, promotion, and job assignments: an "evaluation nudge," in which people are evaluated jointly rather than separately regarding their future performance. Evaluators are more likely to focus on individual performance in joint than in separate evaluation and on group stereotypes in separate than in joint evaluation, making joint evaluation the money-maximizing evaluation procedure. Our findings are compatible with a behavioral model of information processing and with the System 1/System 2 distinction in behavioral decision research where people have two distinct modes of thinking that are activated under certain conditions.

Millenials in a Process-Oriented Workplace

An executive asked me a terrific question today during a leadership development workshop.  He inquired, "How do we keep young people engaged and intrinsically motivated while, at the same time, maintaining disciplined, standardized processes in the organization?"  He worried that millenials working at the front lines (in distribution centers, for instance) will chafe at the notion of simply following standard processes. 

Naturally, companies like this particular one can't simply ditch their standardized processes.  However, they can provide plenty of opportunity for young people on the front lines to offer ideas for improving those processes.  The key, however, is not to simply allow people to begin making ad hoc changes to those processes at every localized unit of the organization.   Moreover, people don't want their ideas to simply get thrown into a suggestion box never to be heard from again.   Companies need to find ways for people on the front lines to experiment with improvement ideas in a systematic way, and then they need to assess those experiments carefully.  If the experiment goes well, they need to create a feedback loop, so that the idea doesn't just lead to change at the local level, but instead gets built into the standard processes across the organization.   If young people get to experiment in this manner, they will be pleased that they are being given some potential to make a broader impact, while the company maintains needed process discipline. 

Why What Others Think of You Does Matter!

Researchers Heidi Gardner and Lisa Kwan have conducted an interesting new study that explains why some teams do not perform effectively.   Their research shows that what others think of you actually does matter.  Specifically, your fellow team members' assessments of your ability have a significant effect on team performance overall.  Why?   The scholars studied the variance in team members' perceptions of each others' expertise.   Low variance means the members have similar perceptions.  High variance means the team members hold clashing perceptions of each others' expertise.  The scholars describe the high variance condition as "expertise dissensus."   They argue that expertise dissensus increases interpersonal conflict and decreases productive collaboration.  As a result, the team members experience less satisfaction and cannot work together effectively over time. 

GE: Changing the Vaunted Leadership Development Model

GE appears to be making a significant shift in its leadership development philosophy.  According to the Wall Street Journal,

The conglomerate that once groomed jack-of-all-trades generalists is now betting on deep industry experts instead. The shift is a change in philosophy at a corporation that for decades had made a rigorously applied but generic management tool kit central to its identity. Like all companies, GE wants some of both traits in its leaders, but the balance has tipped toward expertise. For years, GE wanted its top managers to be experts in managing. Now, it's increasingly looking for them to be deep experts in their fields. Rather than purposely relocate its senior leaders every few years to expose them to more of the company, GE now is leaving them in their business units longer than it used to, in hopes their deeper understanding of products and customers will help them win sales.

Susan Peters, head of leadership development at GE, explains the need for the change: "The world is so complex. We need people who are pretty deep." Interestingly, this shift in philosophy has occurred as the firm continues to face critiques of its corporate strategy. As this article on Forbes.com suggests, GE may be trading at a conglomerate discount because of its complex unrelated diversification strategy.   For years, GE remained an exception to the rule when it came to unrelated diversification.  Its whole was worth more than the sum of the parts, in contrast to many conglomerates that have since broken up.

When a firm pursues a conglomerate strategy, it strives to achieve governance economies.  Governance economies emerge when a firm shares management systems, processes, and talent across a variety of businesses.  Most related diversified firms, such as Disney, strive for scope economies - i.e. synergies through the sharing of intellectual property, manufacturing plants, distribution channels, and the like.   A conglomerate often does not have these types of synergies, so governance economies become critical to justifying the fact that so many seemingly unrelated businesses are being kept together.   However, if GE isn't sharing management talent across the businesses as much any longer, then it seems as though governance economies will shrink.  Of course, the units will still share many excellent systems and processes.  Those processes can be a key source of governance economies.  Will that be enough to convince investors that the parts are worth more together than apart?  That will be the key question moving forward. 

We Don't Learn More From Our Failures Than Our Successes!

Ok, I'm frustrated with the cliche, "You learn more from your failures than your successes." Why? Well, for starters, it's not entirely true! You learn most effectively when you can COMPARE AND CONTRAST SUCCESS AND FAILURE! In so doing, you develop a much more accurate understanding of cause-effect relationships. Consider the research of Schmuel Ellis and Inbar Davidi, which I described in my last book. These researchers examined after-event reviews conducted by Israeli military forces. They compared soldiers who conducted post-event reflection exercises after successful and unsuccessful navigation exercises with soldiers who only reviewed failures. The scholars found that “contemplation of successful events stimulated the learners to generate more hypotheses about their performance.” The soldiers who systematically analyzed both successes and failures developed richer mental models of cause and effect. Perhaps most importantly, these soldiers performed better on subsequent missions!

In addition to the importance of comparison and contrast, one other key psychological phenomenon makes the cliche problematic.  When we examine the causes of failure, we experience the fundamental attribution error.  When others fail, we look inside of them, and we blame their lack of knowledge, experience, and the like.  However, when we fail, we tend to look outside of ourselves. We blame "unexpected external forces" or some other cause not of our own doing.  The fundamental attribution error prevents us from learning effectively from our failures.

So, let's stop with the cliche!  We learn by comparing our successes and failures!

HP Combines PC and Printer Businesses

HP announced yesterday that it will combine its personal computer and printer units. The firm tried this once before, under CEO Carly Fiorina. Her successor reversed course just a short time later. What are the benefits of such a move? HP believes that they can achieve substantial cost savings from such moves. Perhaps they also can coordinate their sales and distribution strategies more effectively. What are the risks? First, this move may make it more difficult/costly to divest the PC unit in the future, if the firm decides that it really can't make a go of it for the long haul in PCs. Second, investors may lose some much desired visibility into segment financial performance. If HP reports PC and printer financials combined, then printer earnings may mask weakness in the PC unit. Lack of transparency may cause investors to discount their valuation of the firm.

Why did Amazon buy Kiva?

I'm quite intrigued by the announcement that Amazon is acquiring Kiva Systems. Kiva makes bright orange robots that operate in distribution centers to fulfill orders. Why does Amazon want to vertically integrate in this way? Clearly, distribution is a key capability at Amazon. Thus, they may be acquiring key knowledge and competences. On the other hand, why lock yourself into this particular warehouse solution? Will Kiva truly be better off within Amazon as opposed to being independent, or part of a logistics firm? Moreover, how will other retailers react to the fact that they will be buying the robots from a direct competitor? The deal raises many questions. Stay tuned as we should hear much more about Amazon's rationale for the deal in the days ahead.

How Teams Reject Good Advice

Prof. Mueller

Wharton management professor Jennifer Mueller and Wharton lecturer Julia Minson have published a fascinating new paper titled, "The Cost of Collaboration: Why Joint Decision-making Exacerbates Rejection of Outside Information." Minson and Mueller compared how pairs of people responded to outside input as opposed to individuals working alone.  They found that people working in pairs exhibited a greater tendency to reject outside input.   The individuals and the pairs gave initial responses to a series of questions such as, "What percentage of members of Congress are Catholic?"   Then, they had an opportunity to revise their estimate based on outside input.  As expected, the pairs demonstrated higher accuracy during their initial responses (two heads are better than one).  However, the discrepancy in accuracy disappeared after the opportunity to incorporate outside input.   Why? The individuals working alone tended to adjust their responses more so than the pairs. 

What's going on here?   A number of factors surely play a role in this phenomenon.  However, I think the general point is that teams have a tendency to be inward-focused at times.  An in-group vs. out-group dynamic emerges, whereby you exhibit an affinity for your fellow group members, and you tend to reject, marginalize, or discriminate against those in the out-group (such as the outsider providing input to the pair).  The group members also may spend time bolstering each others' confidence in the judgment at which they arrive, and that makes it difficult to alter that judgment in the future.

I recall one fascinating example of this phenomenon in action during a leadership development workshop.  My colleague Amy Edmondson was conducting a team exercise called the Electric Maze.  She invited a group of individuals on stage to work on the exercise.  After the group had a chance to plot their strategy for a few minutes, the audience members had an opportunity to offer the group advice before it started the exercise.  The group barely listened to the audience.   They had become so fixated on the strategy that they had begun to concoct that they were not receptive to outside advice.  The amazing thing is that the group had only been plotting its strategy for a few minutes when the outsiders chimed in with their input.  Yet, the group dismissed the outside input. The team already had become insular!

Susan Cain TED Talk: Power of Introverts

Should Pepsi Divest Frito Lay?

As many of my readers know, I am often skeptical of diversification strategies. I prefer focused firms that place their undivided attention on one business. However, I do believe that many investors and analysts react in a knee-jerk fashion when a firm's share price lags - they quickly recommend a break-up or divestiture. They think this move will magically increase the share price. While such moves often do increase shareholder value, they don't always create value.

Recently, some investors and analysts have called for Pepsi to divest Frito Lay. However, it does not appear to me that Pepsi's recent struggles are primarily due to a poor diversification strategy. I don't see Pepsi investing in unrelated businesses with no synergies. I see them struggling to deal with the changing beverage market, and I see them failing to maintain the strength of their core brands whose growth has stalled. Still, I don't think divesting Frito Lay magically solves those problems. Breakup is not an elixir. For investors and analysts, it's an easy, ready made solution... While it may add value in many cases, it shouldn't be viewed as the answer in every case where stock price slumps.

Show & Tell in a Job Interview?

Fortune writer Jennifer Alsever has written an article about a clear new trend in the job market. Increasingly, companies don't simply want to interview candidates. They want to see them in action! In other words, firms want to see potential hires make a presentation, conduct some research, perform analysis on some data, or evaluate a product or service. Applicants need to demonstrate that they can execute. Moreover, they have to show that they can think on their fee, communicate clearly, and think critically. Alsever offers some good advice for applicants given this trend. Naturally, she recommends doing your homework. She also points out that firms aren't just evaluating the answers you provide. They are examining the kinds of questions you ask. They want to know how you think.

Are Risky Personal Behaviors Associated with Risky Business Decisions?

Bob Sutton's blog has pointed me to a terrific article by New York Times writer Steven Davidoff.  The piece is titled, "A Mirror Can Be a Dangerous Tool for Some CEOs."   Davidoff examines the effects of CEO personality on business actions and performance, drawing on some interesting academic research. Here is an excerpt:

Arijit Chatterjee and Donald C. Hambrick said in a 2006 paper that narcissism among chief executives encouraged more volatile company performance. In a study of 111 chief executives in the technology industry, the authors found that indicators of narcissism correlated not only with company performance but also with the pursuit of deals.  The study was criticized for overstating the power a chief executive has over a company. But additional research has shown that a top executive’s personality can have powerful effects on how a corporation is operated.  For example, Henrik Cronqvist, Anil K. Makhija and Scott E. Yonker found that the level of debt for a company was related to how much a chief executive was willing to borrow to buy a house. Matthew Cain and Stephen B. McKeon looked at chief executives who had pilot licenses. Flying small planes is viewed as thrill-seeking behavior. Professors Cain and McKeon found that chief executives with pilot licenses were more prone to engage in acquisitions, with the theory that takeovers are risky, yet exciting ventures.

I think the latter two studies are truly fascinating.  One of our Bryant honors students (now finishing his MBA at Duke) completed a senior thesis examining similar relationships.  He analyzed people who enjoyed sky-diving , and likewise, he found that those individuals tended to exhibit riskier choices in other parts of their lives as well.  What is the implication of such studies?  I believe it suggest that we should be taking a look at signals that suggest an executive may have a high propensity to take risk or strive for the public spotlight, and we should search broadly for those signals.  However, we have to be careful.  These studies demonstrate a pattern that emerges, on average, from the data.  That does not mean every thrill-seeker will be advocating risky corporate acquisitions.

These studies do make a broader point as well about acquisitions.  They re-emphasize the fact that many CEOs do deals for reasons beyond the impact on shareholder value.   Many individuals find deal-making to be exciting and satisfying.  They derive much personal utility from such deals.   However, that "thrill-seeking" may be to the detriment of shareholders, customers, and employees.  

How To Anger Your Best Customers

Have you ever become angry when you paid full price for an item, and then learned that the company had put that item on sale shortly after your purchased it?   We have all been there.   Now scholars have examined the long term effects of such deep discounting. 

Kellogg School of Management Professor Eric T. Anderson and MIT Professor Duncan I. Simester conducted a study to examine whether such deep discounting angered customers, particularly the company's best customers.  Beyond creating anger, they wanted to know if that negative emotional reaction affected long term sales.  Here's what the researchers did, according to Kellogg Insights:

"Anderson and Simester worked with a retailer that specialized in selling durable goods, like software, electronics, apparel, or books. In the past, the retailer had typically kept prices high but frequently offered small discounts and the occasional deep discount. Anderson and Simester worked with them to create test catalogs to determine whether and which customers would be antagonized by price changes. (Most of the retailer’s customers purchased via catalog at the time of the study.) The two types of test catalog were mailed according to the regular schedule and included 86 products, 36 of which were discounted by varying amounts depending on which test catalog people received. The deep-discount version offered the 36 items at an average of 62 percent off, while the shallow-discount version offered an average discount of 34 percent."

The scholars studied customers who paid full price for items and then received a catalog offering steep discounts.  “When you look at this segment of customers, what you see is that a substantial portion just stop buying,” Anderson said. “We call this the boycott effect.”   Customers offered the steep discounts placed substantially fewer new orders than those people who were offered smaller discounts!  Customers who received the steep discount catalog placed 14.8%  fewer subsequent orders than those who received the shallow-discount version. Moreover, many people who were offered subsequent deep discounts simply ordered nothing at all in the months that followed.   It turns out the "boycott effect" lasted for awhile.   The scholars found that customers who reacted poorly to the steep discounts tended to buy less items from that retailer for the next twenty months! 

Does Ambition Shorten Your Life?

Fortune reports about a new study conducted by Professor Timothy Judge of the University of Notre Dame's Mendoza College of Business.   Judge examined 717 highly ambitious individuals born in the early 1900s.  They went to top schools, embarked on high-status careers, and made a great deal of money. 

He compared them to a control group of people who did not exhibit the same level of ambition.  Judge found that, "Despite their many accomplishments, ambitious people are only slightly happier than their less-ambitious counterparts, and they actually live somewhat shorter lives."  

Hmmm... food for thought indeed.  When we strive to accomplish great things, do we sometimes make lifestyle and health choices that may be detrimental to us?  

Speakers, Have a Conversation With Your Audience

Nick Morgan at Forbes points us to a terrific TEDx Houston talk by Professor Brené Brown.  As Morgan writes, "Audiences long for presenters to be real with them, and just have a conversation.  Sure, they want a focused, smart conversation, not a rambling, pointless one like so many real conversations.  But they want an authentic connection with their speakers, and the way to achieve that is with a conversation."

Morgan goes on to explain that many presenters fear a conversation with their audience.  They want to control the situation.  Professors suffer from this same desire for control.  As a result, they sometimes shy away from interactive learning processes, because they are not sure how they will handle unexpected conversations and questions. 

I encourage you to read Morgan's article and watch Professor Brown's terrific talk:

Can Companies Learn from Apple?

Adam Lashinsky's article has published an article on Fortune.com titled, "3 things any company can learn from Apple." (drawn from his book to the left)  I especially love the first point.  My students know that I preach this point about "saying no" all the time! Here's the excerpt:

Say no more often. Steve Jobs was fond of saying that saying no was harder -- and more important -- than saying yes. Apple said no to making personal digital assistants, in the 90s that is. It said no for years to making a telephone-- until it said yes. Apple refused to focus on selling to businesses. It wouldn't put a USB port on the first iPad. And so on. While not every company can achieve Apple's level of Zen by rejecting seemingly good business opportunities, there isn't a company out there that wouldn't benefit by more rigorously asking itself: "Have we absolutely satisfied ourselves that we have said yes for the right reasons?" How many companies pursue revenue opportunities that any new recruit knows the company is doing to make money rather than delight customers. (An example: Jobs ridiculed the PC industry for years for the margin-boosting "crapware" that comes loaded on a PC. The crap remains.) It takes real courage to say no. But it's not like top executives aren't being compensated for brave action.

I would like to make a larger point though.  I think leaders need to be very careful about trying to draw lessons from Apple and apply them to their businesses.  First of all, Apple is a very unique animal, unlike most other firms in terms of its fundamental DNA.   Secondly, we must remember that competitive advantage derives from fit among strategy, structure, systems, culture, and people.   It doesn't come from a silver bullet - a single core competence, one particular strategic choice, a specific business principle or value.  Emulating Apple in one or two dimensions may not bring much advantage to a firm, if that choice doesn't align well with everything else a company does.  Changing a company for the better requires systemic change, not just a tweak here or there that results from a benchmarking exercise of a stellar firm.   

Learning from Our Success and Others' Failures

Scholars KC Diwas, Bradley Staats, and Francesa Gino have conducted a new study about how we learn and improve (or fail to do so).  They examined Minimally Invasive Cardiac Surgery procedures.   Their research shows that individuals (cardiac surgeons in this case) learn more from their own success than the success of others.  Moreover, they learn more from others' failures than others' successes.   What explains these findings?  The scholars argue that we attribute our own success as well as others' failures to internal factors rather than external conditions.   When we succeed, we attribute it to our own effort and capabilities.  When we fail, we often blame "unexpected external factors or pressures."  On the other hand, when others fail, we tend to attribute the outcome to some deficiency on the part of that person (poor effort, planning, skills, etc.).  Finally, the study demonstrated that, "Individuals may be more open to reflect on their own failures and learn from them when they have greater experience with success." 

Our Everest Leadership and Team Simulation in the MBA Classroom