Controlling the JetBlue Experience

I spent this afternoon touring JetBlue's operations at JFK airport. I was so impressed by how the airline completely controls the flying experience in Terminal 5. JetBlue branding, image, and values permeate the terminal. It reminds of how Apple and Disney want to control the entire customer experience. So many airline customers spend a great deal of time in the terminal. Leaving that phase of the flying process in the hands of others isn't the way to insure high customer satisfaction and a consistent image. Scale is key though. You need enough critical mass to be able to operate an entire terminal.

Pop-Up Explosion

Recently, Toys R Us announced an expansion of its holiday "pop-up" store strategy, which it employed quite successfully last Christmas. I blogged about that strategy at the time, arguing that it had great potential to grab market share in the down economy given the demise of other mall-based toy stores, while minimizing the long term fixed cost investment that imperils many brick and mortar retailers.

Now, we read today in the New York Times that Borders will be opening 25 pop-up stores for this holiday season. It seems that pop-up stores have become all the rage in retail. The Borders case seems quite interesting, because we all know the severe challenges facing brick and mortar booksellers today. However, perhaps Borders will discover that there is an opportunity for a physical space to be useful on a temporary basis during the holiday season to drive gift purchases.

More broadly, pop-up stores might be useful for more than just driving sales (or building marketing buzz, as Target has used pop-up stores to do in places such as Manhattan). Pop-up stores might be fertile ground for low cost, low risk, fast experimentation that could drive innovation in these retailers. Therein lies the true long term potential of a smart pop-up store strategy.

Developing More Bold, Creative Military Leaders

Renny McPherson has a thought-provoking article in the Boston Globe about why the military may not be producing enough innovative leaders such as General David Petraeus. McPherson argues:

Petraeus may yet be hailed for saving the day. But he also got a new boss and moved one step down the chain of command. How does this happen to the best our military has to offer? Why was there no other general to take the job?The short answer is that the US military has failed to produce enough leaders like Petraeus--the kind of broad-minded, flexible strategic thinkers needed to lead today’s most difficult missions. And a large contributor to this failure is the military’s inflexible system of promotion, which can actively discourage young officers from getting the mind-expanding, challenging experiences that could turn them into potent generals.

McPherson explained the major conclusions from interviews with 37 top military leaders, who were provided assurances of anonymity when they commented:

Given a guarantee of anonymity, they talked openly about the experiences that had helped them become better strategic thinkers. They reported that most beneficial experiences--sustained international experience, civilian graduate education, and taking on special opportunities out of the military mainstream--were the very ones that they felt discouraged from pursuing. As one interviewee said, ”My career has been an aberration. I am surprised I’ve achieved up to this level.”

What's the lesson for companies interested in developing future leaders? Mind-stretching assignments may be "off the beaten path" at times. They may involve multiple lateral moves, different kinds of educational experiences, or assignments to smaller, seemingly inconsequential - yet highly innovative - parts of the business. They may not be on the usual "career track" for managers. However, such challenging, unconventional experiences may be just the right type of diverse experiences required to develop an innovative and creative leader of the future. When charting the career path for a "high potential," the question is not just how to enhance the skills required to climb to the next rung on the corporate ladder. The key is also to think about broadening their perspective and enhancing their critical/strategic thinking skills for the long haul.

Excess Capacity in the Auto Industry

Business Week has an interesting article on its website about European automobile industry manufacturing. The article points out that, "Not a single European automobile plant closed during the recession, while 18 assembly factories have been shuttered in the U.S. since 2008. European governments prevented the biggest automakers from firing workers and used subsidies to prop up sales." In fact, the article goes on to compare two Fiat plants, one of which makes 7 cars per worker per year, versus 53 cars per worker per year at another plant in Italy. How can such productivity gaps be sustained? The answer, of course, is that European governments make it virtually impossible for automakers to rationalize capacity in an efficient manner. For many years, the US automakers also maintained far too much capacity.

What's interesting, of course, is that excess capacity may also become a problem in China in the next few years, one of the fastest-growing automobile markets. The reason, there, is that many players have rushed to build capacity in that market, yet the industry is still much more fragmented in China than in most other parts of the world. The central government recognizes the need for industry consolidation, and it has called for it. However, provincial governments appear to be barriers to rationalization and consolidation, because they either have an ownership stake in a local, state-owned enterprise, or because they don't want to lose local jobs. Thus, we have capacity and rationalization issues in both the East and West, though one is a high-growth market and the other has been either stagnant or in decline for the past few years.

Leaders: Avoid the Rarified Air!

What a wonderful piece of advice for leaders from A&E Television Networks CEO Abbe Raven, published in the New York Times:

Q. Let’s say you’re on a cross-country flight, and you sit down next to someone who, it turns out, is on track to become C.E.O. at her company. And she asks you, “What do I need to know?”

A. I would tell them to avoid rarefied air.

Q. And what does that mean?

A. There are many executives who only travel on private planes, go from office to car to home to a hotel, and you’re not really experiencing the world. I take the train in every day. I look at what people are reading, watching, what devices they’re using. I go shopping. I buy the milk in the house. I watch TV.

You want to make sure that you’re in touch with not only your employees, but also your customers and your viewers, and what they like and don’t want. Be out there. Don’t let yourself get trapped in your office. You need to be in the world. And the world is not just other executives.

Does Education Pay?

From the U.S. Department of Labor

No Frills Airline

For those faculty members and students who examine case studies about low-cost airlines such as Southwest, check out this hilarious old video about "no-frills airlines" from the Carol Burnett Show (yes, I'm dating myself!).

Does Private Equity Outperform the Market?

According to a new study by Chris Higson, professor of accounting at the London Business School, private equity returns over a 25-year period did not surpass the overall market. Here is an excerpt from an article in the Wall Street Journal about Higson's findings:

The majority of private-equity investors made "at best a market return" between 1980 and 2005, according to research by a London Business School professor. Chris Higson, professor of accounting at the London Business School, compiled previous findings by academics on global returns from private-equity funds from 1980 through to the early 2000s. He said that the research found there was a significant split among private-equity investors. While the top 25% of funds outperformed the public markets during this period, the remaining 75% of funds underperformed.

The Closer vs. Network TV

At this time each year, I wonder why the major television networks continue to cling to a very traditional model for airing new shows. Why precisely should most programs debut in mid-September and end in early to mid-May? Yes, some reality shows now run in the summer, and a few other programs debut in January. However, by and large, the major networks continue to operate on a very traditional September to May schedule. The question is: Do their customers like or want this schedule? Would they be better served by engaging in some programming innovation?

Well, they have not innovated, and cable networks have done a marvelous job of stepping into that void. Let's take TNT and USA, both of whom have done a marvelous job of counter-programming. Shows such as The Closer run during the summer months, and then again in December-January, when many network shows are airing re-runs. The Closer built quite a following with this schedule strategy. The success of these shows on TNT, USA, and other cable stations shows that the major networks lost an opportunity by not moving away from their traditional September to May schedule.

What's the broader lesson? Ask yourselves: What are the most rigid aspects of my competitors' business models, and how can I take advantage of those rigidities? That question may result in a very successful innovative strategy for your company.

Where are the Economies of Scale in Your Business?

Many CEOs like to claim that powerful scale economies exist in their industries. Why? Well, if large economies of scale exist, then they can make a persuasive argument for growing the size of their firms. Larger firms means more power and more pay in many cases. However, the question is whether such enormous scale economies exist in every industry. The answer is simple: Of course not! In some industries, such as airplane manufacturing, the scale economies are huge and obvious. In others, such as fitness centers, the economies of scale are rather modest. As investors and analysts of companies, we need to become much more critical and skeptical of scale economy arguments. We can't just accept the assertion that bigger is better.

In some industries, it is especially important for executives, investors, and analysts to understand precisely WHERE the scale economies exist in the value chain. For instance, many people presume that large scale effects exist in the cola business, given that there are two large, dominant players. However, a closer look reveals that the scale effects exist in bottling, distribution, and marketing - much more so than in concentrate production. Similarly, if we look at the personal computer industry, we find that the scale effects are much more pronounced in the operating system business than in the personal computer assembly business.

Why Bricks and Clicks Failed at Blockbuster

I found this article about the demise of Blockbuster to be quite interesting. In particular, note this comment by Michael Pachter, an analyst at Wedbush Morgan Securities, in an excerpt from the article in the New York Times:

I called Mr. Pachter, who is now managing director of equity research at Wedbush Securities. “Blockbuster should have won — and didn’t. I was wrong,” he said. He ticked off the ways that Netflix executed flawlessly and Blockbuster stumbled when it tried to replicate Netflix’s online service.

“I honestly believe most consumers would like a bricks-and-clicks solution,” Mr. Pachter said. “The reality is, they do have it. It’s just two different companies: Netflix and Redbox.” With video-rental vending machines that sit within grocery stores, drugstores and other retail hosts, Redbox uses the bricks of its partners.

Here is a great learning point for strategists. Yes, it is two different companies, and that is NOT surprising. The fact is that executing two fundamentally different business models within the same corporation is VERY difficult. Thus, it should not shock us that we have two "pure plays" who have done better than Blockbuster, which tried to create a hybrid model of bricks and clicks.

LearnVest: Who else knows how to target women effectively?

How do you begin to create an attractive new product or service that caters to a specific customer segment? One way is to look to existing companies in other industries that have been very successful tailoring a product or service to that demographic. Then, the key is not to simply copy them, but to identify interesting and effective things that they are doing, and to then translate and adapt those to your business. Consider LearnVest, for instance. The start-up promotes and teaches financial literacy to women, particularly those aged 22-40. The firm has done a marvelous job of borrowing concepts from firms such as Weight Watchers (from whom it borrowed the concept of counting points). As Dan Macsai of Fast Company writes, "The trick, says von Tobel (founder Alexa von Tobel), is borrowing elements from products and services that women already love -- the high-gloss aesthetic of magazines like Glamour, the track-your-points monitoring of Weight Watchers -- and applying them to personal finance."

Tweeting Burger Creations

Underdog Brands

Harvard Business School Professor Anat Keinan has done some interesting new work on what she calls "underdog brands." According to her, "Through a series of experiments, we show that underdog brand biographies are effective in the marketplace because consumers identify with the disadvantaged position of the underdog and share their passion and determination to succeed when the odds are against them." An underdog brand story largely recounts the tough external conditions faced by a firm and the amazing persistence, determination, and resilience of the firm/brand in overcoming those obstacles. As examples, she points to the many Silicon Valley firms who often refer to their garage origins, most famously firms such as Google, Apple, Clif Bar, and HP. She also points to firms such as Nantucket Nectars, which refer to starting out "with only a blender and a dream." Keinan also argues that these underdog stories may be particularly useful during tough economic times, as people gravitate toward stories of overcoming adversity. In some sense, the stories give people hope. On the down side, Keinan points out that various actions, including an acquisition by a larger company, can erode the authenticity and credibility of an underdog positioning.

Non-price competition: Building the Category

As companies think about rivalry in their industry, they ought to make a crucial distinction between price wars and intense non-price competition. The latter actually can have some very positive benefits for long term profitability, while price wars generally lead to very unfavorable outcomes for many industry participants. Why can non-price competition (rivalry in marketing, merchandising, advertising, etc.) be a positive force? This type of give-and-take among competitors can help grow a product category overall. Take, for instance, the non-price competition over many decades between Coca-Cola and Pepsi. For much of the 20th century, these two players competed intensely, but not on price. In fact, they tended to raise concentrate prices in lock step with one another over long stretches of time, particularly in the latter decades of the 1900s. However, non-price competition such as the Pepsi Challenge and other major advertising campaigns led to growth in the carbonated soft drink market, and it enabled Pepsi and Coke to swamp many smaller players. Too many firms jump to price as the primary competitive weapon, and in so doing, they destroy industry margins. Before worrying about the market share battle vs. the competition, every firm ought to first ask: Can we grow category demand? After all, a rising tide lifts all boats.

Ritz Carlton Adds Loyalty Program

For years, Ritz Carlton hotels did not offer a royalty program. Of course, many mainstream hotel brands do (Starwood, Marriott, etc.). Now, facing reduced occupancy rates and pricing pressure since the financial crisis began, Ritz Carlton has decided to offer a program. The Four Seasons has responded by saying it has no plans to offer such a rewards program. What are the risks for the Ritz? The real issue is whether the program is simply viewed as a price discount. If all you are offering is free rooms after a certain number of stays, then you may be harming the brand and hurting margins over time. However, a loyalty program can be much more than just a discount program. First, you can capture information about your customers and use that information to enhance service and drive new revenue opportunities. Second, you can use a loyalty program as a vehicle for gathering crucial feedback from customers about how to improve your product or service. Third, you can use a loyalty program to offer unique, even tailored, benefits and services associated with their stay at the hotel. That tailoring can make customers feel very special. If the Ritz can fully capture these sorts of benefits from a loyalty program, they will be creating value, and perhaps even raising willingness to pay for their product, rather than simply offering price discounts.

Corporate Recruiters Demand Critical Thinking

The Wall Street Journal has published a fascinating new report titled, "Paths to Professions." In this report, Marisa Taylor wrote an article about how corporate recruiters are bemoaning the lack of critical thinking and problem-solving skills among college graduates. Here is an excerpt:


"While the ability to think critically is, well, critical in the workplace, employers have long complained that many of the young college graduates they hire seem to lack this skill. Now, universities are trying to fix the problem before their grads ever meet a recruiter. When asked which skills new college graduates needed to improve most, more than half of the respondents to the question on The Wall Street Journal's survey of 479 college recruiters named some combination of critical thinking, problem solving skills and the ability to think independently."

I think colleges and universities deserve a fair amount of blame for the lack of critical thinking and problem-solving skills among graduates. Far too many classes at many schools still involve large lectures with very little, if any, interaction among students. Far too many examinations require regurgitation rather than reasoning. Witness the large number of multiple choice exams which simply require a good memory to recall key facts from the book. Cold calls during class, oral exams, and other such didactic interactions between professor and student do not happen often enough. The bottom line: We need to change the way we teach. Some of us keep saying this, of course, but overall, universities have been slow to change.

Greasing the skids

We have all been to the infamous "pre-meeting" that precedes the "actual" meeting. This where an advocate "greases the skids" for their proposal, securing key support so that an idea will sail through without dissent at the actual meeting. We have all done this at times to get our ideas enacted. What's wrong with this practice? Well, the players invited to the actual meeting may see the issue as a fair accompli and wonder why their time is being wasted. If this happens too often, people become very cynical. They may not commit to decisions because they perceive the decision process as pre-ordained and highly unfair. Moreover, a leader may not hear all dissenting views as people may self-censor if they perceive a fair accompli.

Shopping Carts at Aldi

As many of you know, Aldi - the German discount retailer - has been opening many new stores in the United States. Aldi operates a small footprint, discount store largely stocked with private label products. It sells a limited range of SKUs in those stores. The firm offers products at such low prices because it has perfected a model that drives costs incredibly low.

One cost reduction effort that I find quite interesting is the shopping cart strategy at Aldi. We all know that shopping carts are a messy problem at many supermarkets. Shoppers leave the carts all over the parking lot. The wind catches some carts and causes damages to parked automobiles. The stores has to pay someone to go retrieve carts all over the lot so as to make sure that shoppers will have available carts when they enter the store. How does Aldi deal with all these issues? It charges refundable 25 cent fee for a shopping cart. You pay 25 cents to get a cart before you shop, and you only get your money back when you return the cart at the end of your store visit. What's the impact of this very small fee? Here's where human psychology works wonders for the firm. Despite the very small amount of money, the overwhelming majority of shoppers returns their cart and gets their 25 cents back.

Why is the return rate so high? Perhaps we see this effect because the typical Aldi shopper is in search of value and very conscious of their spending. Most people think there is more to it though. There's just something about paying for a shopping cart that probably bothers people; they want that quarter back. Moreover, as one Aldi employee told me, perhaps people simply don't want to give the next shopper who comes a long a free cart, which would be the case if they left the cart by their car. Of course, I find that interesting. It would seem that otherwise very charitable people do not want to "give" others a free shopping cart rental. The specifics of this setting seem to make them far less altruistic! Of course, social psychologists have long argued that small changes in a situation or setting can drive behavioral changes; here we see that quite clearly.

By the way, what does Aldi get from this policy? They save the money associated with having to pay someone to go retrieve carts all day, and they have customers who don't get annoyed by dents and scratches on their cars from roaming shopping carts. Not bad at all! Just one more piece to their low-cost model...

Social Media: You Can't Always Listen to Your Customer!

Leah Bourne has written an interesting article at Forbes.com about the use of social media in the fashion industry. At first, it did not appear that the article offered anything new. Yes, fashion companies are using social media to listen to their customers and to adapt quickly based on feedback that they receive via Facebook and Twitter. However, the article goes further and offers an important word of caution for companies who are engaging their customers via social media. Here is the key excerpt:

"Hakim and other fashion designers also must learn to balance responding to digital customer feedback while maintaining a consistent brand identity. 'It's an enormous challenge,' Hakim says. 'A brand today has to be both a reflection of a designer while remaining open to the suggestions of customers.' Shauna Mei, who is launching online specialty retailer AHALife this month, aims for her site to be a two-way conversation. 'I want to create a dialogue between my site, brands and shoppers, but it isn't a democracy,' she says. 'We need to filter our customers' suggestions.'"

Every company should pay close attention to this point about the trade-off between responding to customer feedback via social media vs. maintaining a clear, consistent strategy and brand identity. Firms cannot succeed if they become "excessively flexible" in response to customer feedback. Managers have to cultivate an ongoing conversation inside the company about what fulfilling certain customer requests means for the brand. They have to constantly ask themselves: Are we being so responsive and adaptive that we have begun to muddle our competitive positioning in the marketplace?

Starting College: A Few Words of Advice for Freshmen

Inspired by Greg Mankiw's great New York Times column titled "A Course Load for the Game of Life," I decided to offer a few comments of my own for college freshmen.

1. Pick your faculty, not just your courses. Ten years from now, it won't matter much if you took "18th Century French History" or "Cognitive Psychology" in your freshmen year, but you will remember the faculty member who made a huge difference in your life. Seek out the professors who care the most, who have a passion for teaching, and who are willing to spend time outside the classroom with students. Building those relationships early in your college career, and finding good mentors, can have a huge impact.

2. Be smart about personal finance. Think carefully about how you manage your money. The habits you cultivate at 18 years of age will last a lifetime. Have a great time, but don't take on unnecessary debt and don't spend carelessly.

3. Redefine how you study. For many students, studying means reading or re-reading the textbook and their notes from class. I would encourage you to think differently about studying. As you prepare for an exam, sit down with all your class materials, and write out a detailed review of the entire course. Then, boil that review down to just 1 or 2 pages. Then, boil it down again to just a few note cards. That process of having to synthesize and integrate all your learning in writing will have much more impact than a few extra hours spent re-reading the same tired words from a textbook.

4. Seek out your own space. Don't count on studying in your dorm room. Far too much distraction exists in the dorm room. Find a spot on campus in which you are comfortable, and in which you can focus. For many, it will be a spot in the library. However, there may be other locations as well. If you do go to the library, don't sit in a high traffic area where you will constantly be approached by friends.

5. Care for your whole self - mind, body, and soul. Don't just focus on academics. Stay in physical shape, take care of your spiritual well-being, and be mindful of your stress level.

6. Read constantly about world events. You might think I'm crazy. After all, you will have tons of assigned reading in your courses. Who has time for more reading? Actually, staying abreast of current events in world affairs, business, science, and the like will be very helpful in your college career. As you read, you can and should try to make connections to what you are learning in class. By applying what you are learning in class as you read about world events, you will engage in much deeper learning. The lessons will sink in much more effectively.

7. Thank your parents. Be sure to express appreciation early and often to your parents and other family members who are supporting you throughout your college experience. Be mindful of the sacrifices that your parents are making for you. Don't dismiss the fact that it may be emotionally difficult for them to see you leave home. Surely, you should seek out and affirm your independence from your parents, but don't trample on your parents' feelings as you do so.

Immersion Experiences

In this article at Forbes.com, Donna Sturgess argues that immersion experiences are highly valuable for executives. From time to time, they should get out of the office and go experience how another industry works. Here's an excerpt from Sturgess' article:

Choosing an immersion should be based on what you can learn from worlds outside of your industry. Taking a one-day glass-blowing class illuminates decision-making and process thinking for a team. Attending a Nascar race for a day puts you up close and personal with mass-market consumers and grass-roots promotions. Putting in a full workday on an organic farm makes sustainability issues real for business leaders. Taking a physical deep dive in storytelling at the Tenement Museum in Manhattan stimulates the power of story to connect to customers. You will be surprised at how the learning and novelty of the physical experience triggers conductive thinking to germinate into unrestrained innovation for your business.

While I would definitely attest to the value of immersion experiences, I would offer one important caveat. An immersion experience must be well-designed so that the executive team understands the purpose/objectives up front and then works together to translate and adapt lessons for their own business on the back end. The team also needs some help so that they know what to look for and what to think about as they go about the immersion experience. If not, then the executives may just have a "fun day" and perhaps some stimulating conversation, but they won't necessarily mine the experience fully for its true value in surfacing new ideas for their business.

Do you solve other's problems, but not your own?

I loved Rajesh Setty's recent blog post, which is titled "Why Smart People Are Better At Solving Other People's Problems." I recommend that you take a look.

People Dislike Ambiguity

The Heath brothers have a terrific column in Fast Company about how managers should "break down the play" when trying to enact change in an organization. Chip and Dan Heath explain that human beings dislike ambiguity. Given a choice between two situations - one quite clear and one rather murky - they will choose the clearer one even if there's no other reason to prefer one over the other. They explain that managers should capitalize on this aversion to ambiguity as they plot change efforts. They recommend "breaking down the play" - i.e. acting like a football coach who creates explicit directions for each of the 11 players on the field so that a complex play will be executed according to plan. The idea is to make the steps as concrete as possible, so that people understand what you are expecting them to do. They need to understand precisely which behaviors must change to accomplish your broader goals.

Millenials: Think Before You Share!

Andy McAfee has a great blog post out that is titled, "Mistakes Millenials Make at Work." McAfee argues that, "Gen Y's misbegotten emphasis on egalitarianism and tendency to share too much information can be a detriment." He explains that millenials may overshare information, and in so doing, they may simply annoy their colleagues or embarrass themselves. Moreover, millenials may express opinions so freely about matters far and wide that they run afoul of those who believe strongly in adherence to hierarchy and respect for past accomplishments. As McAfee puts it, "Most if not all of the digital communities where Gen Y has spent time are highly egalitarian. They're indifferent to pre-existing hierarchies and credentials, and sometimes even hostile to them." Of course, business organizations are quite different than many of those egalitarian online communities!

He offers some solid advice for millenials as they consider how to act in the workplace. First, he proposes that they ask themselves whether a colleague they have never met might find the information that they wish to share interesting or useful. Second, he argues that they should, "understand the political and organizational lay of the land before engaging in egalitarian online interactions and fearless truth telling."

I would add one more piece of advice. Each millenial should ask himself or herself these three simple questions before they opine on an organizational matter beyond their particular area of responsibility: What might I need to learn more about before I express my views? What person(s) might be helpful to me in getting a broader perspective and more knowledge about this issue? What risks do I face if I offer my views without gathering more background information? Asking those three questions might help millenials step back and reflect before they act.