Thursday, December 23, 2010

Creating Google's Doodles

The Wall Street Journal reports on the creation of the Christmas Doodle this year at Google. By Doodle, we mean the creative modifications to the company logo that appear on the company's main search page to celebrate certain holidays, milestones, achievements, etc. According to the paper, this year's holiday doodle involved the work of a team people, putting in approximately 250 hours over a period of six months.

Now, I happen to find the Google Doodles highly creative. They definitely enhance the company's brand image as an innovative, creative, and fun company. How much value do they have though? Does the company really need to put this much time and effort into something as simple as their holiday doodle? What do shareholders think of these types of uses of their resources? While I don't think there's a clear-cut answer to these questions, I do think that even firms with huge profits and plentiful resources have to be careful about how they choose to use resources. One has to at least question the value of these types of efforts. When the questioning stops, then you know that a firm has become undisciplined about its creative efforts.

Of course, the Google Doodle represents a relatively small use of resources. I'm asking these questions, drawing on this example, to really point to the much larger resource allocation decisions firms often make during times of plenty. These resource decisions involve things such as shiny new corporate offices and putting the corporate name on a sports stadium. As one CEO once told me, "If you see a company building a very expensive new corporate office and putting its name on a ballpark, you might want to think about shorting the stock."

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Analysts Hit the Mall

The Wall Street Journal published an article today about Wall Street analysts visiting malls to examine what's happening at the store level at major retailers such as The Gap, J Crew, Abercrombie and Fitch, and Hollister. For instance, the article quotes analysts who cite empty shelves as signs that items must be moving briskly, and that excess inventory must not be a problem.

On the one hand, I find the "feet on the street" approach by these analysts to be quite useful and interesting. They should be out there examining what's actually happening in the stores. On the other hand, the approach worries me a bit. One could easily jump to the wrong conclusions based on the unscientific observation of a few stores in selected locations. For example, do empty shelves mean that the store has some hot-selling items, or that its inventory management system has key flaws which left it stocked out of items which should be on the shelf? Do long lines suggest brisk sales or poor customer service?

I find myself thinking and analyzing as I walk through retailers as well. I'm always watching, for instance, for signs of exceptional or poor customer service. I tell my students that they can internalize many of the lessons from their business education by becoming more observant and analytical as they shop. The key, however, is to look for patterns over time and across locations, not to draw sweeping generalizations based on one instance in one particular place. Moreover, one has to consider multiple explanations for the same observed phenomenon, i.e. what precisely does an empty shelf mean?

Wednesday, December 22, 2010

The Powerful Manage Time Poorly

Heidi Grant Halvorson, blogger and author, has published a list of the top 10 psychology studies of 2010. She cites one interesting study about how we manage our time, published by Mario Weick and Ana Guinote. Halvorson points out that the new study extends our understanding of what psychologists call the "planning fallacy" - i.e., the tendency during a planning phase to under-estimate how long it will take to complete a project. Halvorson writes:

"New research by Mario Weick and Ana Guinote shows that, somewhat ironically, people in positions of power are particularly poor planners. That’s because feeling powerful tends to focus us on getting what we want, ignoring the potential obstacles that stand in our way. The future plans of powerful people often involve “best-case scenarios,” which lead to far shorter time estimates than more realistic plans that take into account what might go wrong."

I find the study particularly fascinating, given that the planning fallacy seems most evident, and most problematic, to me in the case of corporate acquisitions and large public works projects. In acquisitions, executives often under-estimate how long it will take to integrate two firms. In public works projects, politicians almost always get it wrong on both schedule and budget. What do these two situations have in common? You guessed it - the decision-makers are very powerful folks!

Tuesday, December 21, 2010

Interesting New Research on Pay For Performance

Professors Ian Larkin, Lamar Pierce, and Francesa Gino have an interesting new conceptual paper about pay for performance systems. They use psychology to provide a more nuanced look at how pay for performance systems might affect behavior. According to the authors, agency economists have long been the driving force behind pay for performance, working on the assumption that such compensation systems increase effort on the part of workers. However, they add some caveats based on a deep understanding of human psychology.

First, the authors argue that people naturally compare themselves to others in the workplace, and perceived inequity through wage comparison can have negative effects. Second, they note that overconfidence bias affects many individuals, and that may exacerbate perceived inequity. Moreover, people may choose jobs for which they lack the appropriate skills due to overconfidence bias. Finally, psychological theory suggests that individuals tend to engage in more risk-taking behavior if they perceive themselves to be in a "loss position" as opposed to a "gain position." Thus, the authors argue that if some outside factor has made it quite difficult for them to reach their personal income target that they have set for themselves (put them in a loss frame relative to their original goals) , they may start taking excessive risks in an effort to recoup their losses.

What should be done about these biases? Among other things, the authors argue for more use of team-based compensation systems. Of course, team-based systems have their own handicap, namely that we have the potential for free-riding to occur. In the end, I don't think we can ever find the perfect compensation system, but we do have to have a thorough understanding of the limitations and unintended consequences of our compensation systems, which this paper does help us comprehend. Beyond that, we have to consider the non-financial elements of motivation that are critical to having a productive workforce.

The 50 Best Business Professor Blogs

Check out this list of the 50 Best Business Professor Blogs. I really hate rankings, unless I'm ranked!

Monday, December 20, 2010

Michael Dell on Where to Launch a New Firm

For those considering various entrepreneurial opportunities, I highly recommend taking a look at Dell CEO Michael Dell's advice on what industries are ripe for a new start-up:

The Slow Dismantling of Sara Lee

Most of the once-great conglomerates of the 1960s and 1970s have been dismantled over the years. Think of companies such as ITT, Gulf & Western, Textron, and the like. These companies could no longer justify that the whole was greater than the sum of the parts. Thus, they embarked on break-up strategies. Sara Lee once consisted of a large number of diverse businesses. Over the years, the company has owned brands such as Coach, Playtex, Champion, Jimmy Dean, Piggly Wiggly Supermarkets, and Hanes. Slowly, the firm has been divesting businesses over the past decade. Despite these divestitures, the company's stock performance has not always been as strong as management and the stockholders would like. Now, we hear news that a Brazilian firm is contemplating a takeover offer for Sara Lee. In my mind, the Sara Lee situation raises the question: Should the company have moved more dramatically to break up the firm, rather than going for the "drip, drip, drip" approach to divestitures, gradually shedding businesses year after year? Would a bold move been better than death by a thousand cuts?

Friday, December 17, 2010

Principles for Effective Observation

More and more firms are shifting their focus in marketing research away from surveys and focus groups toward direct observation of consumers in natural settings. This type of anthropological research has been a mainstay of the great product design firms for many years, and it has now become commonplace for many consumer goods companies as well. Here are a few tips on the do's and don'ts of observation, taken from my most recent book:

Principles for Effective Observation



Try to wipe away preconceived notions before starting your observations

Begin with a strong expectation of what you expect to see

Collect observations under different circumstances and from varied perspectives

Draw major conclusions from a very small and/or biased sample of observations

Seek informants wisely

Rely on the lone voice of a so-called expert

Take good notes, including quotes from key conversations, and collect important artifacts

Try to commit everything strictly to memory

Engage in active listening

Ask leading questions

Keep systematic track of observations that surprise you or contradict your prior beliefs

Seek and record data primarily to prove a pre-existing hypothesis

Thursday, December 16, 2010

When New Execs Disappear

We have all heard the following from a candidate in an executive search process: "I will be very accessible, open to listening and hearing ideas from everyone, especially in my first few months as I learn about the organization.". Then, after a few months on the job, employees witness a disappearing act. They never see the executive. The new hire seems to always be in meetings or traveling. They never seem to be around for informal conversations, such as in the cafeteria.

What can new executives do to avoid falling into this trap, where their people lose faith because they feel the new leader has disappeared? First, one must schedule informal conversation time; in other words, allot time in your schedule for walking around a bit. Second, remind your administrative assistant not to become too overprotective about your calendar. Third, use email to solicit and invite ideas, input, and feedback, as well as to provide frequent updates on key initiatives. Fourth, make sure you stay in touch throughout your travels. Finally, hold "office hours" like a professor, where folks can just drop in without an appointment.

Wednesday, December 15, 2010

Complaints about Google

According to the Wall Street Journal, some companies such as Yelp, WebMD, and TripAdvisor have complained recently that Google has been favoring its own local sites over the sites of these firms. Google has responded by arguing that it is simply trying to provide the best experience for its users. The firms argue instead that Google is favoring its own local businesses when displaying search results.

The spat represents a classic example of the conflicts that emerge from vertical integration. Hmmm... you might wonder how I could use the term vertical integration to describe a "virtual" firm such as Google, that has no manufacturing plants or brick-and-mortar retail stores. Well, vertical integration involves any strategy in which a firm chooses to bring multiple steps of the value chain in-house. In this case, Google has in some sense "vertically integrated" by launching its own local sites, which it then "markets and distributes" to the world through its search business. As a result, Google now finds itself competing with its own customers, and when that occurs, accusations of favoritism are not all that rare. Many vertically integrated firms have to navigate these types of conflicts; some do it more effectively than others. It will be interesting to see how Google handles this situation.

Tuesday, December 14, 2010

Does Economic Growth Increase Life Satisfaction?

The question of whether economic growth increases life satisfaction has been the subject of debate in some circles for many years. In fact, the issue came to the forefront back in the early 1970s, when Richard Easterlin published a paper arguing that no relationship existed between growth and life satisfaction. The finding became known as the Easterlin paradox. He has published more recent papers re-emphasizing this point. Justin Wolfers, writing on the Freakonomics blog over at the New York Times, offers a strong and very persuasive rebuttal. Here's an excerpt from Wolfers' column:

Easterlin’s Paradox is a non-finding. His paradox simply describes the failure of some researchers (not us!) to isolate a clear relationship between GDP and life satisfaction. But you should never confuse absence of evidence with evidence of absence. Easterlin’s mistake is to conclude that when a correlation is statistically insignificant, it must be zero. But if you put together a dataset with only a few countries in it — or in Easterlin’s analysis, take a dataset with lots of countries, but throw away a bunch of it, and discard inconvenient observations — then you’ll typically find statistically insignificant results. This is even more problematic when you employ statistical techniques that don’t extract all of the information from your data. Think about it this way: if you flip a coin three times, and it comes up heads all three times, you still don’t have much reason to think that the coin is biased. But it would be silly to say, “there’s no compelling evidence that the coin is biased, so it must be fair.” Yet that’s Easterlin’s logic.

Wolfers makes a compelling case. Moreover, he ends his column by displaying a graph from data generated by the Gallup World Poll. This chart, shown at the top of this blog post, looks at levels of satisfaction and GDP, as opposed to rates of change/growth - which are the measures used in the Easterlin studies. As Wolfers points out, "If rich countries are happier countries, this begs the question: How did they get that way? We think it’s because as their economies developed, their people got more satisfied. While we don’t have centuries’ worth of well-being data to test our conjecture, it’s hard to think of a compelling alternative."

Surowiecki on Groupon

James Surowiecki, author of the fantastic book - The Wisdom of Crowds, has written a good column for The New Yorker about Groupon. He makes some great points, particularly in contrasting the company to many other "revolutionary" firms of this decade.

Friday, December 10, 2010

The Perfect Brand Name

The Heath brothers have a column in Fast Company this month about selecting the ideal brand name. They take an inside look at the process employed by Lexicon, a boutique firm that has helped create 15 brand names that have generated more than $1 billion in revenue.

What I find most fascinating about the Lexicon process is the fact that they often have multiple small teams working in parallel on a project, rather than getting a large team together in a room to brainstorm. Here's an excerpt from the Fast Company article:

Notice what's missing from the Lexicon process: the part when everyone sits around a conference table, staring at the toothbrush and brainstorming names together. ("Hey, how about ToofBrutch -- the URL is available!") Instead, Lexicon's leaders often create three teams of two, with each group pursuing a different angle. Some of the teams, blind to the client and the product, chase analogies from related domains. For instance, in naming Levi's new Curve ID jeans, which offer different fits for different body types, the excursion team dug into references on surveying and engineering.

Here are a couple of lessons that I draw from this example. First, too many firms form very large, unwieldy teams when trying to perform creative work. Yes, adding members adds to the cognitive diversity, but the size of the group eventually gets too large for the dialogue to be productive. Second, the parallel work of multiple subgroups may seem inefficient, but in fact, it offers a wonderful mechanism for stimulating divergent thinking. Finally, the use of analogies from different domains opens up people's minds to new, creative possibilities. While reasoning by analogy can be dangerous at times, in this case, the analogies are useful because they aren't being used simply to imitate what has occurred in some other domain. Instead, the analogies provide fuel for creative thinking, for the invention of a new idea based on examining what has happened in another domain.

Thursday, December 09, 2010

How Budgets Distort Spending Behavior

Two economists, Jeffrey Liebman and Neale Mahoney, have written an interesting paper about how budgets affect spending in the federal government. In particular, they hunted for evidence of wasteful expenditures at year end, driven by the "use it or lose it" nature of government budgets. Here is what the Boston Globe reported about their study:

Not only does information technology spending across the federal government jump by a factor of seven in the last week of the fiscal year, but those end-of-year projects are much more likely to earn lower quality scores, based on cost overruns, delays, and management evaluations. The authors recommend allowing the rollover of unused funds.

Businesses and other organizations should be cautious about this same phenomenon. Draining unused budgets at year-end is a universal phenomenon, unless other controls are put in place (including policies such as the rollover of unused funds).

The Grinch Teaches Economics

Check out how the story of the Grinch can teach us a fair amount about externalities and economics!

Wednesday, December 08, 2010

Southwest Expands and Slips

Are we seeing the first signs of slippage in the Southwest model given its aggressive expansion of late? As readers of this blog now, I'm always concerned when firms begin to violate their tradeoffs, which made them unique, in an effort to drive growth. In the past few years, Southwest has moved into congested airports such as LaGuardia and Boston's Logan Airport. Now, we read from Business Week that Southwest has slipped to eighth in on-time arrivals, after being first or second for many years. Moreover, turnaround time has increased from twenty minutes to thirty minutes. Can Southwest stop the slide? How will the AirTran deal affect this decline in performance? Southwest bears close watching in the next year or so.

Tuesday, December 07, 2010

Chasing Stars: Should You Hire Away Stars From Your Rivals?

My former colleague, Boris Groysberg, has a new book out titled, "Chasing Stars:
The Myth of Talent and the Portability of Performance.
" Groysberg's work over the years has examined what occurs when "star performers" are hired away by another firm. His work shows that, in many cases, those stars experience a performance decline in their new organization. Why? Many reasons exist for that drop-off. Groysberg focuses on the notion that, often, exceptional performance is a function of not just the individual's capability, but also the support structure in their previous organization. What talent surrounded them? What systems supported them? What culture enabled their high performance?

Other reasons exist for this drop-off as well. For instance, sometimes star performers fall in love with the way they did their work at their prior organization so much so that they try to replicate that approach exactly in their new firm. They don't recognize the need to adapt certain practices and approaches to the new culture and context.

One might jump to the conclusion that home-grown talent is the way to go, given Groysberg's findings. One note of caution though... these same reasons for star performer drop-off can pertain to internal promotions as well. People can move from one team or one unit of an organization to another and experience the same type of decline for the same reasons cited above.

Friday, December 03, 2010

Do You Need an MBA to Become a CEO?

Compensation consultants from Equilar have conducted an interesting study for Business Week. They evaluated the 50 highest-paid CEOs among a list of companies with more than $1 billion in revenue. Here are a few of the key findings:

1. Less than 50% of those CEOs had earned MBA degrees.

2. Only 9 of the top 25 highest-paid CEOs received MBAs from schools ranked in the top 10 by Business Week in 2010.

3. 7 of the top 25 received MBAs from schools ranked outside the top 30 by Business Week, or they did not receive an MBA at all.

Am I surprised? Not really. We've always known that many of the most successful CEOs lack MBAs. Jack Welch and Andy Grove had PhDs. Steve Jobs and Bill Gates dropped out of college.

Having said that, what else might explain the findings, particularly given the growth in MBA programs over the past few decades? First, the magazine does note that many of today's CEOs went to school during a time when the MBA degree was not as widespread as it is today. Perhaps the percentage of chief executives with MBAs will rise if we conduct the analysis ten years from now.

Second, Business Week points to another interesting study by two scholars that highlights the value, or lack thereof, associated with an MBA. Professors Aron Gottesman and Matthew More of Pace University's Lubin School of Business published a study in the Journal of Applied Finance in which they report no relationship between company performance and a CEO's educational background. The authors explain that executives who have not earned degrees from top schools may make up for that by simply outworking others on their way to the top. Gottesman also explains, "Business schools tend to focus on technical skills, while success at the executive level is a function of broader, more subtle skills such as communication skills, interpersonal skills, and the ability to make bold decisions quickly."

Thursday, December 02, 2010

Introvert vs. Extravert Leaders

Professors Francesca Gino, Adam M. Grant, and David A. Hofmann have conducted a thought-provoking new study about the role of extraverted vs. introverted leaders. The HBS Working Knowledge site has profiled their findings. Here is an excerpt:

A new study finds that extraverted leaders actually can be a liability for a company's performance, especially if the followers are extraverts, too. In short, new ideas can't blossom into profitable projects if everyone in the room is contributing ideas, and the leader is too busy being outgoing to listen to or act upon them.

An introverted leader, on the other hand, is more likely to listen to and process the ideas of an eager team. But if an introverted leader is managing a bunch of passive followers, then a staff meeting may start to resemble a Quaker meeting: lots of contemplation, but hardly any talk. To that end, a team of passive followers benefits from an extraverted leader.

The authors present interesting data from a study of managers and employees at a large national pizza delivery chain. Their work will be published in the Academy of Management Journal in 2011. I find the work fascinating, though I think one needs to consider whether the appropriateness of extraverted vs. introverted leaders may not only be dependent on the profile of the followers, but also on the external context of the firm as well as the firm's competitive strategy. For instance, if a start-up enters a highly relationship-oriented business, where the founder/CEO must be highly engaged in selling to potential new customers, it may be difficult to achieve high performance with an introverted leader, regardless of who the followers are. Simply sending an extraverted follower to close the deal with a key client may not be effective at all. Those situations may require the leader to make the sale. In sum, the study is fascinating, but I do wonder about the contextual factors that may impact the extent to which we can generalize the findings.

Wednesday, December 01, 2010

Neglecting the Core

Many companies face a formidable challenge when they try to launch a new internal venture. Many consultants and researchers have focused on the phenomenon of how "big companies eat their young" i.e., the core business sometimes strangles the new venture's efforts to get resources, organize differently, and develop a unique business model.

I find, however, that an equally challenging issue emerges for many companies with regard to what I call "neglect of the core." In this circumstance, so much attention gets paid to the promising, but not yet profitable, new venture that the core business fails to get the attention and resources it needs to continue to thrive. Cross-subsidization from the "cash cow" helps the new venture, but it stifles innovation efforts at the core. It also becomes harder, as a result, to attract young talent to the core. Over time, the core business falters, and it brings down the entire organization.