Saturday, February 26, 2011

Colbert on Toothpaste Brand Differentiation (or lack thereof)

The Wall Street Journal had an article this week about toothpaste manufacturers finally putting a limit on the number of new product varieties that they are going to launch. The toothpaste aisle reminds me of Youngme Moon's argument in her book, Different: Escaping the Competitive Herd. In that book, she argues that we see many instances of "heterogeneous homogeneity" in consumer products these days. Yes, there are many different SKUs on the shelf, but in the end, the items are not truly differentiated at all. In this funny clip, Stephen Colbert makes fun of the heterogeneous homogeneity in the toothpaste aisle!

Do MBAs from Top B-Schools Have to be More Consultative Leaders?

The Wall Street Journal Weekend Edition reports on a new study by Stephen Sauer to be published in the Journal of Applied Psychology. Sauer compares the effectiveness of "directive" vs. "participative" leadership styles for "high status" vs. "low status" leaders. By status, for instance, he refers to the ranking of the business school from which the leader graduated. In an experiment, Sauer asked observers to evaluate the effectiveness of leaders that they watched on video. For leaders with lower status, a more directive approach yielded higher evaluations of effectiveness. However, leaders with higher status experienced the opposite result. They were given lower grades if they were more directive and higher grades if they were more participative. It seems, then, that individuals are more apt to penalize high status leaders for being too heavy-handed. They may have to be a bit more consultative until they can build some trust and overcome some of the "image liabilities" associated with going to a top notch school.

Thursday, February 24, 2011

Can You Identify Star Employees Early On?

I love the Boston Globe's Uncommon Knowledge section on Sundays. That section profiles interesting new research from the social sciences. Recently, it highlighted a study by Professors Longley and Wong from the University of Massachusetts. They examined whether minor league performance predicted major league success for pitchers. They found that it was NOT a good predictor.

What does that have to do with business? Well, ask yourself this question: Does your firm assume that high performance in an entry-level job is a good predictor of future success as a manager? Does it identify "high-potentials" at a very early stage? If so, this study offers a note of caution. Perhaps, early success at an entry-level job may not be a good predictor of future performance in all professions or in all organizations. Moreover, there may be some people who struggle early in their careers, but who blossom late.

What's the advice, then, for companies who are trying to identify high potentials? They must think about the skills and capabilities required to succeed in future leadership positions and look for signs of potential in those areas, rather than simply looking at task performance in the entry level job. After all, good technical skills often make you stand out in an entry-level job, but those capabilities don't mean you have great leadership potential. In addition, companies need to watch for the late bloomers, who perhaps take awhile to find their footing. Some young people may take a bit of time to get acclimated or to mature enough to succeed in the workplace.

Tuesday, February 22, 2011

Why iPad Can Sell at $500

On Wired's website, Brian Chen writes about how the iPad can possibly sell at $500, when many competing tablets coming to market are more expensive. He begins by citing Jason Hiner of Tech Republic, who focuses on the fact that Apple has its own retail stores. Hiner argues that Apple "saves" the usual retailer margin paid to other chains by competing tablets. Chen rightfully refutes this argument, which is often incorrectly cited to justify vertical integration. As Chen writes, "The retail advantage is a reasonable theory, but Hiner neglects to mention the high overhead costs that Apple must pay handsomely for each of its 300 stores."

If forward integration's benefits were as simple as "cutting out the margin made by retailers," then we would see many more firms owning their own stores. Naturally, we do not because firms don't eliminate that margin "for free" - they must invest a ton of capital. The shareholders expect a return on that investment. They will only tolerate a forward integration strategy if the return on capital invested makes sense.

What does explain Apple's ability to sell the iPad at such a competitive price? Chen argues that one has to look at Apple's vertical integration strategy in its entirety to understand its advantage. Moreover, one has to look at the money it can make off of its "ecosystem" - i.e. all the apps, music, etc.

However, I would go one step further. To understand Apple's advantage, you also must look at its HORIZONTAL integration. In other words, Apple has an advantage from the fact that it competes in multiple product markets - phones, MP3 players, personal computers, tablets, etc. Why is that? Well, Apple can share and leverage resources and capabilities across these product categories. As a simple example, consider the operating system that drives Apple products. An Apple computer operating system costs more than $1 billion to develop. If Apple only competed in personal computers, it would face a steep hill to climb to break even on that investment. However, Apple leverages those R&D expenses across all of its products. The basic elements of the Apple operating system underpin everything from its laptops to its phones and the iPad. That ability to spread its R&D investment and capability across so many categories provides a powerful competitive advantage.

Friday, February 18, 2011

Penalty for Creative Individuals?

Jennifer Mueller, Jack Goncalo, and Dishan Kamdar have written a provocative new paper titled, "Recognizing Creative Leadership: Can Creative Idea Expression Negatively Relate to Perceptions of Leadership Potential?" They find that creative individuals may face a "penalty" when it comes to others assessing their leadership potential. The authors conducted three studies that showed that people have a tendency to view creative individuals as having less leadership potential (unless they are told to focus on charismatic individuals). Why might that be? The authors argue that people tend to have mixed feelings about creative individuals. Mueller explains, "In addition to 'visionary' and 'charismatic,' people also use words like 'quirky,' 'unfocused' [and] 'nonconformist.' The fact is people don't feel just positively about creative individuals -- they feel ambivalent about them." The research demonstrates a powerful dilemma. On the one hand, people express a strong desire to have creativity as a characteristic of their leaders. One the other hand, when people offer out-of-the-box ideas, they sometimes are viewed in a negative light. People think that they are strange or perplexing.

Thursday, February 17, 2011

Jameson Whiskey Commercial

The Wall Street Journal has a fascinating article about Jameson Whiskey's new advertising campaign. The article quotes Paul Duffy, a Pernod Ricard executive: "If you can root the brand in truth and authentic ideas, I think consumers are looking for that kind of real substance." For instance, one commercial has Jameson founder John Jameson battling an octopus to save a barrel of whiskey that had fallen off a ship. Now, here is what is so interesting. The ads provide a funny look at the brand's heritage. However, according to the article, "Little in either ad rings true."

Hmmm... so the ads are not authentic at all! They may be very effective though. They link back to the brand's heritage, but in a humorous way. No one wants to bore young 25-35 year olds in the firm's target market with "history" commercials. These ads seem to walking a fine line, providing a bit of a "heritage" feel to the branding while keeping it hip and funny. They become the types of ads that probably play well in the social media space as well. The campaign does raise a challenge though. You want to be careful that you don't sacrifice the quality image of the brand by going for laughs. The firm also has to be mindful that such ads may bring accusations that the firm is targeting young underage drinkers. These are all interesting questions that these creative ads raise, and that other brands must consider as they try to walk this fine line between heritage branding and remaining hip.

Wednesday, February 16, 2011

Why Didn't Borders See It Coming?

When a company such as Borders files for bankruptcy, we hear many people exclaiming: "They had their heads buried in the sand." The comment suggests that companies such as Borders failed to identify a threat soon enough, that they didn't recognize how the world was changing quickly around them. Certainly, some companies fail to see emerging threats for quite some time. Many firms, however, falter because of a lack of action, not a lack of attention. They see the problem, but they cannot adapt quickly enough.

What are the barriers to taking effective action in the face of a daunting new threat? One could build a very lengthy list. Let's focus on just a few key obstacles. First, firms make commitments as part of their strategy. They commit to certain physical assets, types of human capital, contracts and relationships, and organizational cultures. These commitments often prove very rigid. One cannot easily undo major commitments to a physical infrastructure, such as Borders' brick and mortar stores. One also cannot easily undo major "soft" commitments such as the culture, mentality, and skills of the executive team.

Second, companies have a hard time determining the appropriate pace of the transition from the old business model to a new one. How quickly can and should we abandon our brick and mortar strategy and move toward a digital one? The pace question proves difficult because one cannot decimate an old revenue stream before a new one fully emerges.

Third, firms face certain exit barriers and exit costs associated with an old business model. Do we have expenses that will be substantial if we shut down old operations very quickly? Those expenditures might include lease termination fees, asset writedowns, severance costs, and the like. While firms perhaps should just bite the bullet on these types of costs, we know that executives sometimes have a hard time doing so. They feel pressure to make short term earnings targets.

Finally, firms simply don't like to shrink in size. Sometimes, making a transition to a new business model means having to shrink in the near term so as to grow profitably in the future. However, managers have a hard time with the size and scope of a firm. We know that executive compensation in larger firms often exceeds that in smaller firms. Morever, a certain level of prestige sometimes comes with running a larger firm.

Tuesday, February 15, 2011

Exclusive Lines at Retailers: It's the Experience, Stupid!

The New York Times has an article written by Stephanie Clifford today about how many department stores and other retailers are offering exclusive lines of products as a means of trying to differentiate from the competition. According to the article, "In an effort to stave off rounds of price-slashing with competitors over the same brands, stores are increasingly relying on merchandise that can be found nowhere else. Retailers can mark these exclusive lines down at their own pace, with a far more profitable outcome than with a national brand."

Interestingly, many of the examples in the article relate to exclusive product lines tied to a particular celebrity. The stars include Selena Gomez, Jennifer Lopez, Tony Hawk, and Sean Combs. What's the risk of this strategy? By promoting these celebrity product lines, the retailers tie their brand to these stars. What if these stars engage in some inappropriate or unlawful action? How might they damage the retailer's brand? Will the retailer be stuck with a line that suddenly becomes very unpopular?

The notion of exclusivity deserves attention. Retailers do need to differentiate. However, I think retailers need to think beyond celebrities, and they must find other ways to offer exclusive products that are appealing and that draw customers to their store. Beyond that, retailers need to think about the shopping experience. Customers don't simply choose retailers because of the products they sell. They choose an environment and an experience. In some ways, a truly differentiated experience can be much harder to imitate than product moves are. In the end, creating an inimitable experience will be one of the most substantial ways to create and defend competitive advantage.

Monday, February 14, 2011

The Power of War Games

Leonard Fuld, author of The Secret Language of Competitive Intelligence, has a column on Business Week's website today regarding the power of war games for companies. As Fuld writes, "A successful war game not only removes blind spots about the present but also helps anticipate competitive surprises and prepare strategic options should any of those surprises occur."

How do they work? In a business "war game" companies create multiple teams, each representing a competitor or potential entrant into their industry. Then, the teams develop strategic alternatives, trying to generate ideas for how rivals might act in the near future. Then, the company can put some people to work thinking about how the firm might respond to these various moves. In a war game, you ask managers to step into the shoes of the leaders of rival firms. You want them to think and act like them. To the extent possible, you don't simply want a team to think about a rival as a monolithic organization. You want them to really get into the heads of the competitor's executives. What do they care about, and what drives them? What are their backgrounds and how might that influence their future strategies?

You need to be creative, considering multiple scenarios for the future... not just one possible outcome. While the idea may be simple, few firms actually engage in this type of game in a serious way. I've found that the firms that commit to these kinds of role reversal exercises find great benefit in them.

Friday, February 11, 2011

Big Flats Private Label Beer

We are hearing lots of jokes about Walgreen's new Big Flats private label beer. Everyone from my students to Stephen Colbert is commenting on beer that's selling for 50 cents per can ($2.99 per six pack). However, I think there is a bigger point to be made here. This example shows that private label continues to invade more and more categories. Beer will not be immune. More private labels are likely coming. Some of those will likely be higher quality private labels, much as we have seen in some food categories.

Thursday, February 10, 2011

Cat Groomers and Tattoo Artists: Building Barriers to Entry!

One of my MBA students this semester sent me a link to this article in the Wall Street Journal about people from an eclectic set of occupations who are trying to create state licensing requirements for their professions. The occupations include cat groomers and tattoo artists. You may be laughing, but the article reminds us of an important concept regarding competitive strategy.

In nearly every business school on earth, students learn about Michael Porter's "five forces" model of industry analysis. However, many students develop a key misunderstanding about the model. They come to think of industry structure as something that is imposed on companies within a particular market. It's as if industry structure falls from the sky, landing on a particular set of industry rivals. In reality, of course, companies can and should shape their industry structure to their advantage. This article reminds us of that important idea.

In this case, the cat groomers, tattoo artists, and others are trying to build more significant barriers to entry in their markets. If they succeed, they will enhance their ability to earn high profits. We can quarrel over whether these state licensing requirements are beneficial for society, but we should all recognize that these firms are trying to shape industry structure to their advantage, rather than simply accepting their external environment as fixed. Good companies shape their environment. Every strategist must remember that notion.

Wednesday, February 09, 2011

Do Rich People Have a Hard Time Reading Others' Emotions?

A new study published in Psychological Science by Michael Kraus, Stephane Cote, and Dacher Keltner finds that people from wealthier socioeconomic backgrounds tend to have lower emotional intelligence than those with lower socioeconomic status. In their study, these authors asked 300 people to interpret the emotional state of people in photographs and mock job interviews. Individuals of higher socioeconomic status fared quite poorly when trying to determine the emotions of the people that they were observing, as compared to those of lower socioeconomic backgrounds.

In this article on MSNBC's website, study co-author Michael Kraus offers his interpretation:

Kraus says that's likely because people from lower-economic backgrounds may have to rely on others for help. “You turn to people, it’s an adaptive strategy,” he says. “You develop this sort of heightened independence with other individuals as a way to deal with not having enough individual resources." Upper-class people, on the other hand, don’t need to ask for help that often. “One of the negative side effects of that is that they’re less concerned and less perceptive of other people’s needs and wishes. They show a deficit in empathic accuracy.”

On the Chief Learning Officer website, Dr. Casey Mulqueen, explains how these findings are consistent with other research: “This new study is consistent with other research showing that people in positions of leadership or influence often have performance blind spots or shortcomings in their ability to work effectively with others. Fortunately, emotional intelligence and interpersonal effectiveness skills can be learned and developed with practice.”

Tuesday, February 08, 2011

Why not fire your CEO?

Wharton Finance Professor Luke Taylor has published a thought provoking new study in the Journal of Finance. Taylor examines the issue of CEO dismissals. He built a complex model to examine the issue, and specifically, to quantify various elements of the decision process by a Board to fire a CEO. Taylor identifies two types of costs associated with the forced dismissal of a CEO. Direct costs constitute the first category. They include severance for the dismissed CEO, executive search firm fees for the new hire process, and other negative effects on profit due to the turmoil caused by a CEO firing. Entrenchment costs constitute the second category, and they involve the intangible costs borne by the Board, but not the shareholders, during the dismissal process. For instance, the Board members' personal relationships with the CEO may be irreparably harmed. Taylor finds that these entrenchment costs are quite substantial, and they cause far fewer CEOs to be fired than if Boards only considered the direct costs of dismissal. In fact, his empirical work shows that 2% of CEOs in his sample were fired each year. He estimates that over 10% of CEOs would be fired each year based on poor performance if entrenchment costs were not considered by Boards. While the study surely will provoke great reaction, and many will disagree with its conclusions, the notion of entrenchment costs resonates with me. Undoubtedly, these costs have a key role in the Board's decision process.

Monday, February 07, 2011

Myths about American Manufacturing

Jeff Jacoby had a terrific article about the alleged demise of U.S. manufacturing in yesterday's Boston Globe. He presents a few interesting bits of data that would shock most people who read the business press these days:

  • U.S. manufacturing output is twice as high as it was in the early 1970s.
  • American manufacturing output exceeds China's production by by nearly 46 percent.
  • The U.S. share of world manufacturing output is essentially the same as it was in 1990.
  • America manufactured more goods in 2009 than the combined total of Japan, Germany, Italy, and the UK.
How could this be? All we hear lately is that the U.S. manufacturing sector is in decline. The answer, of course, is that American jobs in manufacturing have decreased substantially since the 1970s. What has occurred? First and foremost, manufacturing productivity in the United States has soared since the 1970s. Secondly, we have shifted from manufacturing goods that require lots of unskilled labor to producing goods that required many fewer people with much higher skill levels.

Interconnectedness and Supply Chain Risk

The Wall Street Journal has an excellent article today on how global interconnectedness increases supply chain risk. For those who want to read more about the academic underpinnings of this idea, I recommend reading Charles Perrow's famous work on the Three Mile Island accident. In that work, Perrow explained that tight coupling, or rigid interconnections, increase the risk of catastrophic failure in a system. In many supply chains today, the efforts to become more lean have actually increased tight coupling. This article in today's WSJ does a nice job of looking at the issue.

Friday, February 04, 2011

Super Ads vs Super Campaigns?

As we watch the Super Bowl ads this weekend, we should ask whether these firms are launching a great 60 second commercial that is essentially a standalone act, or is this ad part of a broader campaign? Does this ad fit into an integrated marketing campaign? Has social media been used effectively before and after the ad runs? I suspect that some firms expend a great deal of money and energy coming up with a hilarious or provocative ad, bit they haven't worked out the big picture as well as possible. That is a wasted opportunity.

Thursday, February 03, 2011

Potential Sale of BJ's Wholesale

Various news organizations report this morning that BJ's Wholesale Club has decided to explore strategic options, including the possible sale of the company. This news comes after substantial external pressure has been placed on the company in recent months, particularly as a private equity investor (Leonard Green) took a significant equity stake in the firm.

Why has BJ's ended up in this predicament? On the one hand, the company has improved its financial position in many ways over the past few years. Specifically, the firm has established a much stronger balance sheet, with an elimination of most long term debt and an increase in cash on hand. On the other hand, investors have clamored for faster growth, something that the firm has been unable to deliver. Recently, the firm has taken some actions to try to mollify investors; for instance, it has shut several underperforming stores. However, investors want more substantial change.

Here's the irony: BJ's has actually made itself much more attractive to a private equity firm because of its strengthened balance sheet. Putting itself on more stable financial footing has now meant that they may lose control of the firm.

Can the firm improve its performance, perhaps under different ownership? It certainly has great potential, but one wonders about the disadvantages that the firm faces because it cannot exploit the same economies of scale available to Sam's Club and Costco. For years, the firm has walked a fine line, by trying to offer great value to consumers, while at the same time attempting to do some things to differentiate from their bigger rivals. BJ's knows that it cannot simply compete in a head-to-head battle against its rivals in terms of price because of lack of scale. However, differentiating successfully, particularly against the Costco, can be very challenging. Costco achieved such success in this market, even more than Sam's Club, because it created a retail concept that was more than just about having low prices.

Wednesday, February 02, 2011

Info BEFORE the meeting!

If leaders want meetings to be more productive, they ought to require that documents and other presentation materials be distributed at least 24 hours prior to the session. They then must hold people accountable for reviewing these documents before attending the meeting. In so doing, leaders will cultivate much more robust dialogue during meetings and avoid lengthy PowerPoint dog and pony shows. People can offer useful comments and critiques, because they have had time to digest the information. Team members will not be reacting on the spot to something they have never seen. It takes discipline to accomplish this type of meeting norm, but it can be done.

Tuesday, February 01, 2011

Scorecasting and Omission Bias

Psychologists have documented many cognitive biases that affect our judgments and decisions, including the omission bias. According to the work on omission bias, individuals tend to view a harmful act as worse than an equally harmful instance of inaction. In their fantastic new book, Scorecasting, University of Chicago Professor Tobias Moskowitz and Sports Illustrated writer Jon Wertheim write about how various biases manifest themselves in sports. They spend a great deal of time, in particular, on how referees affect the game and how they make decisions.

Moskowitz and Wertheim provide very convincing evidence that the omission bias plays a role in how we judge referees, as well as in how referees act. The omission bias would suggest that we would judge a referee much more negatively if he or she made a bad call than if that person simply did not make a call at all in a particular situation... even if that non-call was just as egregious.

Does evidence from sports demonstrate the potential existence of omission bias? Indeed, the authors claim that it does. The authors use data from the Pitch FX system that documents the speed and location of every pitch in all major league ballparks to conduct their study. First, they point out that umpires are generally very accurate overall in major league baseball. However, accuracy lags in a few situations. They show, for instance, that baseball umpires call fewer strikes than they should when the hitter already has two strikes. In other words, the strike zone shrinks. On the other hand, if the count is 3 balls and no strikes, the umpire tends to not call ball four as often as he should. In other words, the strike zone expands. The umpires tend to make bad "non-calls" rather than possibly make the incorrect "active call" that would take the "bat out of the player's hands."

Does omission bias affect business leaders, as well as those who observe and evaluate them? It certainly does. Consider these questions: Do we tend to come to harsh conclusions about the leader who hired the wrong person? Are we just as tough on the leader who passed on the chance to hire a terrific individual? Do we even know about these bad "non-calls" that leaders make? In many instances, outside observers, such as journalists, don't even know about these bad "non-calls" in business situations.