Changing Culture at GM

Frances Frei is right on the money with this blog post (Decision to Lead blog) about the effort to change the culture at General Motors.

Jana Eggers and Spreadshirt

Check out The Hopkinson Report for an interesting podcast about Jana Eggers and her company, Spreadshirt. Eggers' company provides customers with the opportunity to purchase customized, real-time t-shirts on-line, without having to buy large quantities. Customization represents a huge growth opportunity for many companies, yet it seems to have been underexploited in many cases. Has your firm considered how it might offer customized products? They represent an opportunity to differentiate, drive higher margins, and avoid head-to-head price competition with rivals.

Rapping about Supply and Demand

From my former professor Greg Mankiw's blog, I learned of this great rap song about the core principles of economic theory. It's highly recommended to students, as well as all those interested in a quick review of economics... maybe a few folks in Washington ought to listen this song!

Decision-Making Myths

Bob Frisch has a good article over at Business Week on three key myths about decision-making. His three myths are:

Myth 1: A Single Team Makes All of the Big Decisions
Myth 2: The Executive Team Is a Body of Equals
Myth 3: Team Members Should Always Adopt a CEO Perspective

My research confirms Frisch's conclusions regarding Myth #1. Many people speak of the "top management team" as the key strategic decision-making body of the organization. However, my research - along with work by Professors Ann Mooney and Allen Amason - confirms that strategic choices are made a bit differently. Typically, a subset of the top team is involved in all key strategic choices, and then they pull in different people based on the nature of the decision. In short, what we have is a stable core of decision-makers and a dynamic periphery. Mooney and Amason describe that core as the "inner circle". The question is: How does a CEO manage the relationship between the inner circle and the broader management team, and how does that affect the performance of the organization? I believe that the CEO can do significant damage if he or she does not manage that relationship effectively.

Economic Gangsters

I just finished reading Economic Gangsters by Ray Fisman and Edward Miguel. I picked up the book based on the fact that it happened to be on Harvard economics professor Greg Mankiw's freshman seminar reading list this fall (as posted on his blog). I immediately recognized Ray's name, since we went to graduate school together, and decided to take a look at the book.

Economic Gangsters offers a fascinating examination of the challenges associated with promoting economic development in the world's poorest nations. Fisman and Miguel examine the behavior of corrupt officials and governments, using ingenious research methods to learn more about their actions and the impact of their actions. They do a great job of analyzing the link between corruption and poverty.

One of the most interesting aspects of the book involves the examination culture and its link to corruption. They study the likelihood that various countries' United Nations diplomats will park illegally in New York City and not pay those parking tickets. By looking at parking tickets in New York, they gain insight as to whether culture may play a role in making people less likely to adhere to the rule of law.

In another part of the book, they examine violence in Africa. They trace the impact of droughts in Africa, showing that they substantially increase the risk of a subsequent civil war. Thus, they recommend intervening with economic aid during droughts, so as to reduce the odds of violence and war.

All in all, it's a very interesting read for those eager to learn more about the challenges associated with promoting economic development in some of the world's poorest nations.

Private Sales at Saks

I read with great interest that Saks has launched a "private sales" experiment. What are private sales? For some time now, a few retail startups such as Gilt Groupe and HauteLook have used viral marketing techniques to launch intense limited-time sales of discount designer apparel. Vanessa O'Connell of the Wall Street Journal explains:

"The sites had carved out a niche with a new retail formula: Short, intense sales, usually of 36 hours—and constant Web updates on which items "sold out"—to create a sense of urgency and a deadline for shoppers. Sites like Gilt have been a boon to high-end designer brands such as Marc Jacobs and Tory Burch, because their sales of discounted merchandise are held in a controlled setting that is perceived to be more discreet and upscale than the typical off-price chain store."

Saks and other high-end department stores have traditionally relied on their own outlets (Off Saks) or other discounters to sell out of season or older merchandise. Naturally, such discount selling comes with risks. Could the brand be damaged by too much discounting? These private sales offer an opportunity to create a controlled environment for selling such merchandise, while creating an intense feeling of scarcity that can create buzz among fans of the high-end merchandise for sale.

Interestingly, though, Saks did not use this private sale experiment to sell old merchandise typically sold through its outlet stores. Instead, it specifically purchased items to sell via this private sale. This represents an interesting twist on the strategy employed by startups such as Gilt Groupe. Achieving competitive advantage is always about finding a unique way to compete, rather than just employing a me-too strategy. Thus, it's refreshing to see Saks experiment with a slightly different model than that adopted by their upstart rivals. I'm sure more experimentation will follow by Saks and others, and perhaps new revenue streams for high-end department stores will result.

Cash for Clunkers - What a Clunker!

According to an analysis by Edmunds.com, the Cash For Clunkers cost taxpayers roughly $24,000 per additional car sold, beyond the number of cars that would have sold anyway even without the program. Naturally, automakers and government officials dispute the Edmunds.com conclusions, but those critics are highly biased, of course. Edmunds.com does not seem to have a vested interest in offering a slanted evaluation (though I may be missing something). I'm inclined to believe that we simply changed the timing of many new car purchases through this program, rather than affecting the overall annual volume in a meaningful way.

Interview Podcast

Andy Kaufman of the Institute for Leadership Excellence and Development interviewed me recently about my latest book. Here's the link to the podcast.

Jordan's Furniture: Shoppertainment

Have you ever shopped at Jordan's Furniture? This small Massachusetts furniture chain generates more sales per square foot than any furniture retailer in the country. Jordan's generates $950 of revenue per square foot compared to $150 per square foot for the typical furniture retailer in the United States. Jordan's also has incredible asset efficiency, turning its inventory 13 times per year! Those kind of results attracted the interest some years ago of Warren Buffett, who now owns Jordan's. He purchased the company from the Tatelman brothers several years ago, though one of the brothers continues to lead the firm.

What makes Jordan's so special? It's hard to list all the special features of this retailer in a short blog post, but one thing certainly stand out to me. They have mastered the notion of shopping as entertainment, with special attention to families. The Natick store that I shopped at the other day has an IMAX theater, a re-creation of Bourbon Street in New Orleans, and loads of fun for folks of all ages. Most interestingly, though, they have created an entertaining atmosphere that enables young families to enjoy a satisfying shopping experience.

One of the biggest challenges for young families is always how to handle bored children while trying to shop for furniture. Jordan's engages the kids so that the parents can actually shop with less distraction. What an ingenious way to drive customer satisfaction and sales! So many firms do the exact opposite. They do not make parents comfortable, because they have a "hands off" type environment where children are made to feel very unwelcome. How can you provide a high quality shopping experience for 25-44 year olds if you push away their children? Too many firms trying to sell to parents forget that the kids are very much part of the buying process. Turn off the kids, and you turn off the parents. Engage the kids, and you just might make a big sale!

Should Insider Trading Be Legal?

The Wall Street Journal ran a thought-provoking story on the front page of the Weekend Journal section this past Saturday, in which George Mason University economist Donald Bourdreaux argues that insider trading should be legal. This article proved particularly timely given the charges being brought against hedge fund investor Raj Rajaratnam this month. Boudreaux draws heavily on the classic work of Henry Manne to make his case.

How could Boudreaux argue that insider trading should be legal? He makes the case that insider trading could actually improve the efficiency of our capital markets. Here's the crux of his argument:

"Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie. And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large."

Henry Manne has actually made the argument that we might have fewer corporate scandals such as Enron and Worldcom if we allowed insider trading. The idea is that some insiders would have perhaps started selling the Enron stock given their knowledge of the firm's actual inner workings. They would have pushed the stock price downward, curbing the incredible run-up that took place and sending a very clear signal to outside investors that all may not have been as rosy as it appeared. Without such insider trading, outside investors sometimes remain in the dark for far too long, continuing to plow capital into a sinking ship because they are unaware of the actual condition of the firm.

I find the arguments about capital market efficiency to be compelling, yet I cannot help but wonder whether equity concerns trump these efficiency concerns. While it may be good for the market as a whole to have such insider trading, one wonders whether it is fair that a few well-placed insiders with unique access to information might profit handsomely in the process. It's a classic efficiency-equity tradeoff in some sense. Having said that, there are some reasons to believe the current system isn't so equitable either, given that many believe that only a small fraction of actual insider trading situations are identified and prosecuted.

Theo Epstein and J.D. Drew

Yesterday morning, on Boston sports radio station WEEI, Boston Red Sox general manager Theo Epstein offered an ardent defense of his outfielder, J.D. Drew - a player he signed to a 5 year, $70 million contract several years ago. Drew tends to be viewed by most fans as "not worth the money." Epstein argued that he has indeed been worth the money, and that fans must look past the common statistics reported in the newspapers. His more sophisticated statistics tell a different story. I found several parts of his comments troubling, and perhaps of interest to leaders in other industries.

What are the lessons from this interesting debate about Drew? First, clearly, young baseball general managers, as Michael Lewis explained in his great book Moneyball, have used sophisticated statistical techniques to get a better understanding of player performance. As a result, these general managers have taken advantage of inefficiencies in the market for players - inefficiencies resulting from the fact that commonly used statistics of the past often don't tell an accurate or complete story. Epstein has done this well with two World Series championships during his tenure. As a business leader, do you have such discrepancies in your industry? Can you take advantage of them?

Second, in baseball, nearly all fans know about the advances in statistics, even if we don't know all the nuances. Epstein's argument was incredibly condescending, suggesting that we all didn't know much about what really matters. Imagine telling that to your customers in your business. You never want to suggest to your customers that they are ignorant, which essentially is what Epstein did. Many companies actually do think they are smarter than their customers at times, ignoring key warning signs about their business as a result.

Third, note that Epstein defended Drew's performance "on a rate basis" - i.e. he's very good in terms of output per game played. The problem is that Drew doesn't always play; he can't stay on the field. As a business leader, you might have an incredibly talented employee, but if he or she doesn't come to work every day, then you certainly wouldn't retain the worker. You can't be good half the time. Epstein's defense of Drew's performance "on a rate basis" seems puzzling.

Why Corporate Initiatives Fail

Joseph Grenny has a good new column on Business Week's website regarding why so many corporate initiatives fail. Grenny cites some statistics about the rate of failure on special corporate initiatives:

Sustained research shows that across the U.S., estimated failure rates for corporate projects range from 66% to 91%. What's more, companies' collective inability to execute on major projects costs many billions of dollars a year. For example, it is estimated that of the $255 billion spent annually on IT projects in the U.S., more than a quarter is burned up in failures and cost overruns.

Grenny goes on to offer some explanations for the types of behavior that lead to such failures. In the past, I conducted a study on this topic, published in MIT Sloan Management Review. In that article, my co-author Lynne Levesque and I argued that many employees refer to such initiatives as just another "flavor of the month" prescribed by top management. They think to themselves, "This too shall pass." We argued that four critical processes in the early stages of an initiative can help insure that initiatives take hold and that change does indeed stick. Here is a brief excerpt from our prior work:

In our research, we discovered four critical processes that enable firms to avoid the “flavor of the month” trap. These antecedent processes lay the foundation for the successful institutionalization of a strategic initiative. The four sets of processes are: chartering, learning, mobilizing, and realigning. Chartering refers to the process by which the organization defines the purpose and scope of the initiative, as well as the way people will work with one another on the program. The chartering process has two critical components: boundary setting and team design. Learning refers to how managers develop, test, and refine ideas through experimentation prior to full-scale rollout. The mobilizing process entails the use of symbolism, metaphors, and compelling stories to engage people’s hearts as well as their minds so as to build commitment to the project. Finally, the realigning process consists of a series of activities aimed at reshaping the organizational context, including a redefinition of roles and reporting relationships as well as new approaches to monitoring, measurement, and compensation.

Samsung and China

The Wall Street Journal had a very interesting story today about Samsung's decision to build a production facility in China. The article relates how Samsung had been hesitant to manufacture in China because it was concerned about "involuntary knowledge transfer." I think it's a valid concern, and it explains why Samsung's most cutting-edge technology will remain in Korea.

Of course, it's not just cutting-edge technology from its research and development labs that Samsung should be worried about losing to Chinese rivals. There's no question that LCD televisions involve a substantial learning curve in the production process. That learning curve is a critical source of competitive advantage. One risk of manufacturing in China is that "spillovers" of those production learning curve effects will take place, giving upstarts a chance to easily "catch up" to much more experienced competitors - i.e. they might come down the learning curve more quickly than normally possible.

Restructuring at Harley Davidson

We learned this week that Harley Davidson will be shutting down its Buell sport bike division and begin searching for a buyer for its MV Agusta brand of expensive sport bikes built in Italy (a brand they only acquired 16 months ago). The news should not shock us, as Harley has always been primarily a heavyweight cruiser/touring bike company. Its competencies revolved around that primary segment, and it created value largely through its enormous brand equity and consumer loyalty. The core cruiser business has been in decline with the economic downturn, while also facing a longer term threat due to the aging of the company's core customers. Refocusing on the core seems like a sensible strategy, given that Buell was consistently not delivering the necessary return on investment.

Of course, we might ask why Harley chose a multi-brand strategy, given the incredible attachment to the core Harley brand. The answer, I believe, is that Harley wanted to pursue growth, and thus moved to the sport bike segment...but it wanted to be cautious about alienating its core customers. Therefore, it was hesitant about extending the Harley brand to the sport segment. That led to the Buell strategy. Now, it has decided to divest these other brands, as it tries to concentrate its resources on bolstering the Harley brand.

To be sure, the company must cater to its core customers, while also trying to entice younger buyers. The critical question: Can it lure younger buyers in larger numbers without alienating any of its Baby Boomer consumers?

Allegiant Air

We all know that the airline industry is a very tough economic environment where sustainable profits are quite hard to come by. That's why this story in today's USA Today sparked my interest. The story describes upstart Allegiant Air, which has been profitable for 27 straight quarters. Here's a brief excerpt from the story:

Allegiant's success is rooted in its unique niche: providing leisure travelers affordable non-stop flights from small communities such as Bozeman, Mont., or Allentown, Pa., to such vacation hubs as Las Vegas and Orlando. And if passengers want to see a show or visit a theme park once they arrive, Allegiant will sell them those tickets, too. "We've basically taken a very focused approach in our business," says Andrew Levy, chief financial officer of Allegiant Air, who noted that many of the airline's customers would otherwise have to take connecting flights to reach their destinations. "It's a market that has truly been ignored."

What I found particularly interesting is that Allegiant Air does not fly to each of its destinations multiple times per day. In fact, for some destinations, it doesn't even fly their once each day. That seems like a particularly unique element of their business model, and of course, the infrequent flights to popular tourist destinations helps them maintain a very high load factor. Filling each flight to capacity is perhaps the most critical element of a profitable model in this industry given that nearly all costs per flight are fixed. The key is to spread those fixed costs over as many passengers as possible, given that the variable costs per passenger are nearly zero. Who knows if Allegiant can keep up its streak of 27 straight profitable quarters, but it does seem worth highlighting the merits of crafting a distinctive focused/niche strategy as a small player in a very tough industry.

Bryant students win Babson Business Plan Competition

Morgan Morris and her team of Bryant University sophomores won first place in today's Babson Ideas Into Action Business Plan Competition at the 8th Annual Babson Entrepreneurship Forum! The Bryant team beat two Babson MBA teams in the finals, besting roughly 30 teams in the entire contest. First prize is $27,500! Congratulations to Morgan and Team Puro!

Should You Purchase that Extended Warranty?

It's no mystery that companies make a great deal selling customers extended warranties. If that's the case, then why do consumers keep purchasing these warranties? Clearly, they offer peace of mind. However, it may not be the economically sensible thing to do in many cases.

In today's Wall Street Journal, Neil Templin writes about the mistakes that we make with regard to extended warranties. Here's an excerpt from his column:

"There's no mystery why retailers push them. In some cases, they make more profit selling the warranty than they do selling the actual gadget.The mystery is why consumers get them. If the retailer makes a lot of money selling them, then it stands to reason the consumer buying the warranty isn't getting a great price.That's not all. What if the company offering the warranty gets into financial trouble? asks Ram Rao, a management professor at the University of Texas at Dallas, who has done research on warranties."

Toward the end of the article, he quotes an official from Consumer Reports on the merits of purchasing an automobile extended warranty:

"If you have your heart set on a car that is unreliable, then [an extended warranty] is probably worth it," David Champion, director of automotive testing for Consumer Reports, told me. "But if you have a reliable Honda or Toyota, you should take the money and put it in a CD or money-market account. The odds are it will still be there when you buy a new car."

That quote reminded me of my response when my Honda dealer tried to sell me an extended warranty on my 2004 Accord. I stopped the sales person in their tracks and said, "I won't be needing one of those because I bought a Honda." She looked at me with a puzzled face, and then she got it. Honda Accords are incredibly reliable. I was buying a car which was not likely to break down. More than 100,000 miles later, I have never regretted my decision.

Meetings Matter

GolinHarris CEO Fred Cook argues that in-person meetings do matter a great deal and should not be eliminated for cost cutting reasons without some careful consideration.

Why More Women Don't Get MBAs

A very interesting story from Fortune on the efforts by the Forte Foundation to encourage more women to pursue MBA degrees.

Bloomberg Buys Business Week

Big news last evening: Bloomberg announces that it is purchasing Business Week from McGraw-Hill. Let's back up a minute. Why was McGraw-Hill selling the magazine in the first place? Clearly, the obvious short-term reason is that the magazine business has been in decline, with falling circulations as well as large drop-offs in advertising revenue during the recession. However, more strategic reasons also exist for the divestiture. McGraw-Hill is a diversified corporation with a number of businesses. Most people are aware of its book publishing unit, but the firm also owns Standard and Poors, JD Power, Aviation Week, and Platts. Of course, the diversity of businesses raises a critical question: Do these businesses belong in the same corporation? Actually, one has to ask another question to truly evaluate the merits of divesting Business Week and selling it to Bloomberg. We should ask: Is Business Week a better fit at Bloomberg or within McGraw-Hill? I believe that one can make a strong argument that Business Week will prove to be a better fit at Bloomberg, where the strategy will be much more focused on business news as opposed to the many other things that McGraw-Hill has in its portfolio. In sum, there's a key lesson here in corporate strategy. We should not only ask whether a particular business unit is a good fit within a particular corporation... to assess whether value is truly being maximized, we ought to ask: Is that business unit even more valuable within another corporation?