Saturday, October 31, 2009

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.

Friday, October 30, 2009

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.

Thursday, October 29, 2009

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.

Wednesday, October 28, 2009

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, 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 conclusions, but those critics are highly biased, of course. 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.

Tuesday, October 27, 2009

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!

Monday, October 26, 2009

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.

Friday, October 23, 2009

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.

Thursday, October 22, 2009

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?

Monday, October 19, 2009

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.

Friday, October 16, 2009

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!

Thursday, October 15, 2009

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.

Wednesday, October 14, 2009

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?

Top 100 Professor Blogs

Thank you to for listing this site as one of the top 100 professor blogs! Click here for the complete list.

Tuesday, October 13, 2009

Disney Stores Plan Makeover

According to the New York Times, Disney plans a major makeover of its stores in the year ahead. I found this story fascinating both because of Disney's retail struggles in recent years, as well as because the news comes just one day after we learn that Oliver Williamson won the Nobel Prize. Williamson's work actually informs us a great deal as we analyze Disney's retail strategy.

Williamson's theories help us understand the merits of vertical integration. In the Disney store situation, we have a case of forward integration, with a company choosing to operate its own retail locations. Williamson basically details how we can think about why companies might wish to be forward integrated in some situations and why they might not choose to do so. He argues we should always compare the costs of performing activities inside the firm vs. cooperating with other firms through contracts and markets.

Why should Disney be in the retail business? Forward integration makes sense to the extent that Disney is doing things at the retail level that are complex, costly, and difficult to do through contracts with outside parties. If contracts work efficiently, then we would allow others to retail Disney products and not be in the retail business at all. To the extent that Disney stores simply sell products like any other retailer, it's hard to justify forward integration. That's why many questioned Disney's store strategy in recent years. In fact, Disney itself tried to outsource the stores to Children's Place, but it didn't work out.

However, to the extent that the stores are true interactive experiences, then Disney may wish to control those retail outlets themselves and can secure key benefits from that ownership of the stores. The direct control enables them to use the stores to further differentiate the brand in the marketplace, raise willingness-to-pay for Disney products, communicate with and learn directly from customers, and drive synergistic benefits across the Disney portfolio (think Apple). Contracting with outside parties to create this type of experience for consumers would be costly and risky perhaps; thus, Disney wants to own this entire interaction with its customers. We'll see if the new strategy works out. The investment will be substantial. However, if Disney wishes to stay in the store business, moving toward a more "experience-oriented" retail strategy provides more sound justification for forward integration than Disney had in the past.

Monday, October 12, 2009

The NetFlix Prize

Fortune had a good article on the NetFlix prize, arguing that it is a good case study on mass collaboration. Indeed, it is. 40,000 teams competed for the $1 million prize. The competition entailed the development of an improvement in the movie recommendation engine at NetFlix. Why is this so valuable to NetFlix? The business model at NetFlix entails being able to accurately help predict what a customer will enjoy, with a particular focus AWAY from the hit new releases. A focus on new releases requires movie rental companies, such as Blockbuster, to stock huge numbers of a title when it is released, only to then find itself with a huge amount of excess inventory just a few weeks later. Thus, NetFlix would like to rent out a more diverse array of titles. Yet, it needs to recommend movies, including many lesser known and older titles, that customers will enjoy. Customers don't know these movies necessarily, so they must trust NetFlix to help them discover what they will enjoy.

What is NetFlix's leg up on the competition? It's not just better statisticians... after all, this was a public competition. Here is the key: As NetFlix's customer base grows, it's movie recommendation engine improves. Why? The algorithms became more refined as the data about customer preferences become richer and more plentiful. Thus, we have a network effect here. The value to a particular customer rises as the number of NetFlix customer rises, because the recommendation engine gets better! With a huge stable of customers, NetFlix has a huge advantage over rivals because of its proprietary database and algorithms. They can't simply be matched by having better statisticians... you also need the sample size and history that NetFlix has. No one else does at the moment.

Friday, October 09, 2009

Reasoning by Analogy - Afghanistan

I read with great interest an article in the Wall Street Journal the other day about two books that are all the rage in Washington, DC right now. Apparently, President Obama and his advisers are reading a book titled "Lessons in Disaster" about the evolution of National Security Adviser McGeorge Bundy's thinking during the Vietnam War. Bundy began as a hawk and eventually began disillusioned with the war effort. Meanwhile, Senator McCain and many military leaders have read "A Better War" - a book that traces the evolution in strategy and tactics that took place when General Abrams took over from General Westmoreland in Vietnam. The book has become very influential with military experts interested in counterinsurgency tactics in Iraq and Afghanistan.

What struck me about this article? First, I hope that President Obama reads both books, not just "Lessons in Disaster" - which is apparently the one he's focused on at the moment. Secondly, everyone reading both books must proceed with great caution. Here we have a classic case of reasoning by analogy that could be very harmful. As people read these books, the natural tendency will be for individuals to reason by analogy from Vietnam to Afghanistan. Yet, we know from research by such prominent political scientists as Richard Neustadt and Ernest May (authors of a great book titled "Thinking in Time" published in the 1980s) that we often reason poorly when we draw analogies. We make mistakes because we focus too much on the similarities between two situations, and we ignore critical differences. Bottom line - Afghanistan is not "just like" Vietnam, and thus, we should take great care in drawing lessons from either of these books as they might apply to our current predicament.

Thursday, October 08, 2009

Inbev Sells the Theme Parks

No surprise at all today when I read that Inbev will be selling the theme park business that they obtained during the Anheuser Busch acquisition. It was always rather difficult to justify why a beer company should be in the theme park business. The synergies, clearly, were rather limited. The sale also helps Inbev pay down debt from the deal, as they reached an agreement for Blackstone to buy the theme parks unit for $2.7 billion. This divestiture represents a classic example of an acquirer undoing a case of unrelated diversification which had yielded few economies of scope.

Free by Chris Anderson

On my trip to and from Silicon Valley this week, I read Chris Anderson's new book, Free: The Future of a Radical Price. Anderson is also the author of the best-seller, The Long Tail. Both are excellent, thought-provoking books.

In The Long Tail, Anderson wrote about what has happened to markets that used to be defined by blockbuster hits. In many markets, such as music, it used to be the case that a very small number of hits accounted for a huge percentage of sales. With the emergence of digital music, take a look at a histogram with products on the x axis and volume on the y axis. You see a very long tail, i.e. many products exist that sell small volumes, but together all these products in the long tail actually account for a sizeable chunk of the overall market. These products represent tons of niche offerings that now can be economically sold in digital form, whereas it was not economical to sell them when you were restricted by the economics of a physical store shelf. Anderson documents the various businesses now subject to the long tail effect, and he describes how it has revolutionized a number of industries.

In Free, Anderson describes the various business models that feature a "free" component. Anderson explains how companies have developed models whereby they can be profitable despite the fact that some of their products are available to consumers for free. He does a nice job of explaining how and why so many products have become free... basic economics, really. If a product's marginal cost is approximately zero, and the market is highly competitive, then we would expect price to fall toward marginal cost - in short, price will fall toward free in those situations. Of course, again, the digital revolution has caused the marginal cost of many products such as music to fall toward zero, thus leading to the emergence of "free" in those markets. Anderson's book proves thought-provoking because it helps you think about when you might find yourself competing with a "free" model, as well as helping you think about how to incorporate a free element in your model so as to actually increase profits.

Wednesday, October 07, 2009

Starbucks: it's not about the coffee!

The debate rages about Starbucks' new instant coffee. I think the debate about the taste actually misses the point. The firm insists that it tastes great. Even if we grant them that point (which some would not), there is still the strategic question. Is this good good for the brand? Eric Felten makes a great point in the Wall Street Journal.

He points out that the instant product is a bit if a contradiction, a mismatch, for the firm, "not because it offends the palate but because it has no romance, it requires none of the effort that demonstrates enthusiasm and passion." In short, Starbucks was always about far more than the taste of the coffee. It was about an atmosphere, an emotion, an experience.

Of course, it's been a long time since Starbucks abandoned the firm's original positioning as a specialty premium differentiated coffee company. It became a mass market coffee company with less and less differentiation from other coffee companies over time. It lost the exclusivity of a luxury brand many moons ago. So perhaps the horse is long out of the barn. At this point there just isn't much that Starbucks won't do in pursuit of growth. Michael Porter argues great strategies require tradeoffs. They become unique by choosing what not to do. Tradeoffs make firms unique and hard to imitate. Yet tradeoffs limit growth to some extent. Many firms violate their original tradeoffs in pursuit of growth. Has Starbucks done that, and in so doing, become far less unique and differentiated?

Tuesday, October 06, 2009

It Pays to Apologize

The current edition of Business Week has a short note about a new study conducted by scholars at the Nottingham School of Economics in the UK. In the study, the researchers examined over 600 complaints from customers of a German wholesaler. For half of the complaint, which was posted online, they offered customers a short apology and asked them to remove the negative comments from the web. For the other half of the customers who complained, they offered a cash rebate in return for removal of the online comments. Here's the amazing result: 45% of customers who received an apology removed their online complaint, while only 21% of the rebate offer recipients did so. In sum, apologies, even brief ones, can have a major impact on a customer who feels that they have received poor service from a firm.

Monday, October 05, 2009

GM's top management team

Fortune's current issue has a great series of articles about GM's turnaround attempt. The article has an interesting chart about the management team assembled by CEO Fritz Henderson. An amazing stat that I calculated from the chart: the average tenure of a senior team member is 28 years! The shortest tenure is 8 years, but three members have been at the firm for at least 40 years!!! Aren't these the same folks responsible for getting GM to this point? It's hard to believe GM can chart a new course with a team that lacks fresh blood. These may all be good people but shouldn't a leader bring in some people with new and divergent perspectives in this circumstance? A leader always benefits from having some advisers who think differently and who look at things from a different vantage point.

Friday, October 02, 2009

British Airways: Business Class Only Flights

British Airways has announced that it will be launching a business class only flight between New York and London City Airport. I find it interesting, as it is yet another attempt by an airline to find a way to generate true product differentiation in an industry where little true differentiation exists. It's also interesting because several start-ups have tried and failed at operating such a business class only service across the Atlantic.

Of course, this initiative clearly makes more sense than BA's failed attempt to launch a low-cost subsidiary (named GO) to compete with Ryanair and other low cost carriers in Europe. BA's historical strategy and capabilities fit much more appropriately with the business class only concept than the GO concept. Of course, GO wasn't truly an effective low cost positioning, as BA insisted on trying to maintain some of its traditional service elements such as assigned seating.

As for this attempt to offer business class only service, it does face a key hurdle in that flights may have to stop to refuel in Shannon, Ireland because London City Airport's short runway limits takeoff weights. Offsetting that hassle is the fact that London City is closer to the financial district than Heathrow, and passengers can clear US customs in Shannon. Still, a quick-and-dirty calculation performed in my class with my students suggests that BA will have to operate at nearly full capacity on these flights for them to be profitable. Empty seats are a very costly thing, given the high price that will be charged for each seat and the limited number of seats (32) on each plane.

Useful Failures: New Podcast

The Wharton School Publishing website has a new podcast available that I created to talk about the concept of "useful failures" - an idea about which I wrote in my latest book.

Thursday, October 01, 2009

Asking Good Questions

Peter Drucker once said that managers often make mistakes because they fail to ask the right questions. This post over at Business Week by Gary Cohen reinforces this classic point by Drucker. Cohen explains how leaders can ask the right types of questions. He notes that many batter their people with questions, but do so in an unproductive fashion. As he says, "Too often managers' questions are designed to show off their own knowledge rather than actually solicit new information or ideas."