Monday, December 21, 2015

Bad Design Ruins the Miss Universe Contest

Was Steve Harvey just a terrible host for the Miss Universe contest, or is there more to the story?   By now, most of you have seen the awful and embarrassing gaffe at the end of the competition.   Host Steve Harvey mistakenly announces Miss Columbia as the winner, when in fact, she was the runner-up.   After the crown is placed on her head, Harvey must deliver the bad news... Miss Philippines is actually the winner of the beauty pageant.  

Image from @cthagod
Eric Thomas, senior partner at Saga (Detroit-based marketing agency), has a great LinkedIn post today about the gaffe.  He describes the problem as an example of bad design.   I've posted a photo of the card  given to Harvey as he announced the winner.   Here's Thomas' analysis of the card.  Talk about a bad user experience!

"There isn't any logical order to this. Sizing, placement, and organizing is all over the place. Why is “Miss Universe” all the way to the right, but “Philippines” is centered below it? The actual winner, compositionally speaking, was essentially just cast off to the side. It looks like a footnote. And even though this document was created so that the names could be added later, they could have at least made the letters bigger. Microsoft Word can certainly adjust font sizes."

Image from Eric Thomas

I've posted here both the original card used in the pageant and the newly redesigned card by Eric Thomas.    I think you can see how bad the design actually is, and how easily one could improve the user experience.  It's too bad it took an epic failure to highlight the weaknesses in the existing design.  Fail often to succeed sooner... yes, but not by experiencing what Harvey and the contestants had to endure last night!   Fail often to succeed sooner is all about testing and experimenting so that you don't have a major catastrophe on your hands at a later date.

Friday, December 18, 2015

The Army's Two Up/Two Down Rule

Kellogg Insights has an interesting feature this month on situational leadership, drawing on an interview with Colonel Brian Halloran, U.S. Army Chief of Staff Senior Fellow at the Kellogg School of Management.   Here is an excerpt: 

In the U.S. Army, becoming an effective situational leader—understanding that where you stand is where you sit—is accomplished through a “Two Up/Two Down” model.

“When I get my assignment, I not only have to understand my mission,” Halloran says. “I’ve got to understand my boss’s mission—and my boss’s boss’s mission—and where my goals fit into that. What that does is it helps prevent me doing something that works great at my level but ends up causing a bigger problem for the overall organization.”

By the same token, becoming versed in the goals and responsibilities of your direct reports—and their direct reports—acts to open communication and increase strategic alignment throughout the organization.

“When you’re circulating and getting to know people in your organization two levels down, you have a better flow of information,” Halloran says. “You can make sure that people understand why certain tasks are being asked to be done, where it fits in the big picture, and how we’re all actually going to benefit.”

I love the Two Up/Two Down rule.  It should be a regular facet of our decision-making processes.  We have to understand the goals and interests of those above and below us in the organizational hierarchy if we are to make sound decisions that can be executed successfully.    

Wednesday, December 16, 2015

Simulating an Activist Investor

As I read the lengthy Wall Street Journal article about how Mondelez CEO Irene Rosenfeld has coped with two major activist investors, I was reminded of some thoughts I heard from a CEO recently.  When I gave a leadership talk recently to a group of executives in Chicago, I had the opportunity to listen to a Fortune 500 CEO address the group before I spoke.  He offered a terrific piece of advice for these executives.   One person asked him whether his firm had dealt with any activist investors pushing for strategic and financial changes.   The CEO responded that he had not faced that issue.  However, he described how his management team asked itself a simple question each quarter:  If an activist investor took a substantial stake in our firm, what changes would they advocate?  The team then discussed that question at length each quarter, and it determined which changes might actually make sense for the firm.  Then it made those alterations to the organization's strategy in a proactive manner.  The CEO felt that this proactive approach had helped the firm avoid a confrontation with an activist investor.   I think the technique sounds like a very effective way to not only avoid a battle with an outside investor, but it helps executives take a fresh look at their strategy.  It asks the executives to put themselves in the shoes of an outsider and to consider how someone external to the team would view the strategy. That is a very worthwhile exercise for all management teams.  

Tuesday, December 15, 2015

Be Hypersensitive to Pain if You Want to Innovate

Here's a great tip for all aspiring innovators and entrepreneurs. It comes from Jeff Nelson, an entrepreneur and former Google employee (via Mashable).  I've heard this advice many times, but it's worth emphasizing here:

Be hyper-sensitive to pain. Another technique for innovation is simply being hyper-sensitive to what's wrong around you. For example, one of the most valuable patents of all time is the paper milk container. Milk used to be carried in round glass jars, which were fragile, heavy and bulky. An inventor realized he could hold milk in containers made of heavy-duty, coated paper, which were [sturdy], light and could be tightly packed, resulting in one of the most valuable patents of all time.

One great way to identify a user's "pain points" is to look for workarounds.  What is a workaround?   Consider the elderly woman who puts tennis balls on the bottom of her walker, or the Dunkin' Donuts customer who insulates their iced coffee by inserting it into a hot coffee cup.  These customers have a problem with the existing product, and they have modified it to alleviate their pain.  The workaround demonstrates an opportunity for innovation.  

Friday, December 11, 2015

Investors vs. Competitors: Disclosing Information Involves Key Tradeoffs

Companies face important tradeoffs when thinking about how much information to disclose about their business.  Investors, of course, want a great deal of information about the nuts and bolts of a business.  They want detailed segment information for diversified firms. They would like to see more detailed operating metrics about performance that might serve as leading indicators of financial performance in upcoming quarters.  They want to understand customer satisfaction, product pipelines, etc.  Companies face a delicate balancing act though. The more they disclose to investors, the more that they are also disclosing to competitors.   For instance, many diversified firms provide frustratingly little segment information in their 10K reports.  Of course, they can get away with this limited disclosure as long as they are performing well overall.  When the numbers decline, investors begin to wonder if the whole is worth less than the sum of the parts.  To complete that analysis, investors push for more detailed information about segment performance.   The diversified company may resist such calls though, not simply because they wish to rebuff activist investors.  They also may not want to offer critical data to competitors.  

The Wall Street Journal's Heard on the Street column demonstrated this conundrum that firms face when describing the situation at Netflix these days.  Investors would like to know how many people are viewing the company's original content.  They are, after all, used to seeing ratings information for broadcast andcable networks. On the other hand, Netflix may have good reason to resist investors' push for more disclosure. In fact, investors should understand that less disclosure may be very good for the bottom line. Here's an excerpt from this week's Heard on the Street column;

As much as Netflix’s investors might also want to know that, there is an important strategic advantage for the company in keeping everyone in the dark. Not only does having all the data allow Netflix to continue to tout the success of its originals, it also means more leverage over media companies in licensing negotiations. If the companies don’t know how many people are watching their shows on Netflix, they don’t know how much to charge for it.

Wednesday, December 09, 2015

Why Data Analytics Professionals Need to be Good Storytellers

Kellogg Insights has a good article this week, in which they feature comments from various executives about hiring data analytics professionals. It's a hot field, making it a tough fight for great talent. Still, companies have to find the right talent. That means more than hiring folks who can crunch the numbers. Leslie Hampel, Director of Global Strategies at Starbucks, explains: 

What I am looking for is someone who can bridge the gap. Can you do the math? That’s important, but can you pull the story out of the math? Particularly for the next 10 years or so, as we work our way through this current generation of CEOs who don’t understand algorithms for the most part. They are making decisions from a very different place. How do you show them that you have applied the analytic rigor, then help tell the story so that they feel comfortable investing millions, if not billions, of dollars in this idea? It really becomes about storytelling. 

I concur wholeheartedly.  When I was a graduate student, I taught introductory economics at Harvard.   I also participated in the interviewing and training process for new teaching fellows in this course.  Plenty of talented doctoral students in economics applied for these positions.  Some of them could not tell a story though. They could draw the graphs and write the equations on the board, but they could not explain the intuition and the logic in a way that others could understand easily.   The same logic applies with data analytics professionals.  They have to be able to persuade others, some of whom are not able to digest the math easily.   Telling a story with the numbers is crucial.  

Tuesday, December 08, 2015

Chipotle Responds to a Food Safety Crisis

Chipotle finds itself facing a major crisis these days.   The company has experienced a major E. coli outbreak.  It began in the northwestern United States, and the firm closed a number of restaurants temporarily to address the situation.  However,  reports now indicate that some Boston College students may have gotten ill after eating at a Chipotle in Boston.   According to, "City inspectors closed the Chipotle, located in Brighton near BC’s campus, “until further notice” after reporting three critical health violations following a visit Monday... Chipotle believes norovirus is to blame for the rash of illnesses that seemingly stem from the Cleveland Circle restaurant, but the Boston Public Health Commission says it’s too early to tell."

The Wall Street Journal asked several crisis management experts to assess Chipotle's response to the crisis.  Richard Levick commented,

"Long term, Chipotle will need to carefully examine its supply chain. Its 5% stock drop is likely due to the fact that this is the third instance of foodborne illness connected to Chipotle since August. That leaves the company more vulnerable to lawsuits and potential regulatory action. It also directly contradicts a brand built, at least in part, on the sourcing of fresh, organic, farm-sourced fare. Thus far, the supply chain has not been a major focus of the company’s communications. In the coming weeks, that may need to change."

Levick raises a crucial point. Product quality and safety crises become especially threatening to a company when they go to the heart of what a brand has chosen to stand for over many years. In fact, companies can be punished even more extremely by customers (and investors) when a crisis undermines the core of their competitive positioning. Chipotle has staked its reputation on the quality and freshness of its ingredients. Thus, the supply chain has been at the heart of their competitive positioning. Any substantial defect in that supply chain will have long-lasting repercussions. The company not only has to address the situation at the restaurants, but they will have to reassure customers that the supply chain indeed lives up to the reputation that has been cultivated over time. As a big fan of Chipotle, I hope they get it right! 

Sunday, December 06, 2015

Persistence & Creativity

Brian Lucas & Loran Nordgren have conducted a series of interesting studies about creativity.  They find that people tend to underestimate the number of creative ideas that they can generate.  The scholars asked people to generate ideas on a particular topic.  Then they asked them to predict how many more ideas they could generate if they continued thinking about the topic.  The subjects then continued to try to generate ideas.  

The scholars found that people underestimated how many ideas they could generate by persisting for that additional period of time.  Moreover, outsiders judged the ideas generated after persisting as of higher quality than the ideas generated initially.  

The study shows the value of persistence, but it also demonstrates that we sometimes downplay its importance. I think it's because we often think of creativity as a flash of brilliance.  It's not.  It's hard work! It takes time to reflect, think, make connections among disparate concepts, and synthesize ideas.  

Wednesday, December 02, 2015

How Do You Enhance Instrinsic Motivation?

Jane Porter has written an article this week for Fast Company on the topic of intrinsic motivation.  Porter writes:

It's easy to hustle through our daily tasks, head down, focused on what's next on the long list of to-dos. But taking a step back to evaluate what really motivates and drives us is critical, not just for our well-being, but also, as research has shown, for our productivity.  Social psychologists call this type of drive "intrinsic motivation," or the desire and urge inside ourselves that propels us to do the work we do and do it well. While we're often motivated by external factors like pay, approval, or recognition, research has shown that intrinsic motivation is fundamental not just for our long-term happiness, but also for the quality of our work.

How can organizations enhance the intrinsic motivation of their employees?   I would urge managers to consider the lessons imparted by social psychologist J. Richard Hackman in his work on job design many years ago.  Hackman argues that five elements of job design have a strong impact on the intrinsic motivation of workers:  skill variety, whole task, task significance, autonomy, and clear and immediate feedback.   By skill variety, Hackman means that employees should not be performing the same monotonous task all day. They should able to use a range of their capabilities.   Whole task means that we cannot get carried away with the division of labor.  We should enable workers to be part of completing more than one minor step in a more complex task.  Third, workers need to understand the importance of their work.  What does it mean for the organization?  Sometimes we refer to this as establishing a line of sight.  Can workers see how what they are doing has impact throughout the firm, all the way to the customer?  Fourth, workers will be more intrinsically motivated if they have some autonomy in terms of how they do their work. Finally, employees need clear, constructive, and immediate feedback.  They need to know where they stand.   If you design the work in this way, you are likely to have workers who are more intrinsically motivated, and therefore, more engaged, satisfied, and productive. 

Tuesday, December 01, 2015

Giving Tuesday: No One Wants to Fund Overhead Expenses

Few people enjoy donating to charities which have a high administrative expense ratio.  We prefer that our money goes directly to people in need, rather than to fund overhead expenditures.  Uri Gneezy, Elizabeth A. Keenan, Ayelet Gneezy have written a paper on the subject.  Their paper, "Avoiding Overhead Aversion in Charity" was published in Science last fall.  

They conducted an interesting field experiment to examine how people would behave with respect to donations to a large education foundation's new initiative.   Approximately 40,000 people received requests to donate to this foundation.  They split the population into four groups, with each receiving a different letter.  One group received a letter indicating that one donor had already made a $10,000 contribution to the foundation to launch this campaign.  A second group received a letter indicating that someone had offered to match donations up to a total of $20,000.  A third group received a letter indicating that someone had contributed money to cover all overhead expenses for this new initiative.  Finally, the fourth group represented the control for the study.  They simply received a generic letter with information about the foundation's request for funds.  

What did the scholars find in this field experiment?  A significantly higher percentage of people in the "overhead-free" group donated to this cause.  Moreover, they donated three times as much as the people in the control condition, and nearly twice as much as the next highest group.   The findings are quite interesting.  Certainly, nonprofits can try to keep overhead expenses low.  However, some administrative expenditures are necessary.   Having a donor who is willing to fund those costs can make it much easier to raise money from every other potential donor. 

Monday, November 30, 2015

ESPN: Does Any Other Firm Rely As Much on Non-Consumers?

Fox's Outkick the Coverage blog has a terrific detailed analysis of what ails ESPN these days.   Blogger Clay Travis dissects Disney's recent 10K filings to understand precisely how many subscribers and how much revenue ESPN has lost in recent years, as more consumers "cut the cord" with respect to cable television.   Travis determines that ESPN  and its sister channels have lost 7 million subscribers in the past two years.  That loss amounts of a decline in revenue of roughly $700 million per year.  Travis points to cord cutters as the crux of the problem.  He notes that ESPN has tried to hold onto customers by focusing on live sports programming that is difficult to access without cable television.  However, those pricey contracts for events such as NFL games have increased ESPN's fixed costs tremendously.   ESPN has been reducing its workforce to offset the decline in revenue, but that strategy has its limits.   

The most interesting aspect of the blog post, though, has to do with the analysis of ESPN's customers vs. non-customers.  Here's Travis on the dynamics of cable subscriptions:

When Outkick wrote an article about its business challenges back in July, ESPN sent a statement that included the following data:  "More than half (54%) tune into ESPN in the average month and almost two-thirds (65%) tune into ESPN over the course of a quarter."  If that's true then around 48 million cable and satellite subscribers watch ESPN every month. That's a very big number. But it also means means that 44 million cable and satellite subscribers pay $6.60 a month for ESPN and don't watch it in an average month. That means every month ESPN is pocketing $290 million off cable and satellite subscribers who don't watch the channel. Over the course of a year ESPN makes over $3 billion a year off consumers who don't watch ESPN.  Eventually isn't your Aunt Gladys going to realize this?

I'm not sure that I can think of another company that makes as much money off of people who don't actually consume its product.  The implication of this statistic is significant.  It means that going direct to consumers will be challenging for ESPN, much more challenging than for an organization such as HBO.   The paying subscribers of a direct-to-consumer ESPN subscription will have to pay a substantial enough sum to offset the loss of revenue from non-consumers who currently pay for ESPN even though they don't view it.  HBO doesn't face this problem.  ESPN's high fixed costs make this challenge very daunting indeed. 

Wednesday, November 25, 2015

Count Your Blessings

Arthur Brooks' article in this weekend's New York Times pointed me to a fascinating study about giving thanks.   In 2003, Robert Emmons and Michael McCullough published a paper titled, "Counting Blessings vs. Burdens:  An Experimental Investigation of Gratitude and Subjective Well-Being in Daily Life."  The authors begin their paper by quoting Charles Dickens:  "Reflect on your present blessings, on which every man has many, not on your past misfortunes, of which all men have some."   The scholars asked some research subjects to list things for which they were grateful over a period of several weeks.  Other subjects kept lists of "hassles" - and a third control group listed neutral events.   The researchers also asked all subjects to keep records of their moods, health behaviors, physical symptoms, and overall life appraisals during this time.  The people who kept lists of things for which they were grateful "felt better about their lives as a whole, and were optimistic regarding their expectations for the upcoming week.  They reported fewer physical complaints and reported spending significantly more time exercising."   In short, focusing on gratitude and thanksgiving can be good for you.  So, try to put aside the hassles and the worries for the next few days at least, and attempt to focus on those things for which we should be thankful.   Then let's all try to make it a routine practice to spend more time being grateful and less time being annoyed.    Happy Thanksgiving, everyone! 

Tuesday, November 24, 2015

EDLP vs Promotional Pricing in Supermarkets

New research at Stanford examines the pros and cons of Everyday Low Pricing (EDLP) vs Promotional Pricing.  The research examines how grocers reacted when Walmart entered the supermarket industry with an EDLP strategy.  Walmart used EDLP to achieve major cost efficiencies throughout the value chain.    They wondered why many firms didn't switch to EDLP despite Walmart's success.

They found that promotional pricing generates more revenue.  Moreover, it's hard to switch from promotions to EDLP.  One author, Harikesh Nair, explains the findings:

“Now we have empirical evidence to show why most stores chose PROMO pricing and stuck with it during a competitive shock — it earns more revenues and is too expensive to change."  

I think the research seems framed in terms of whether EDLP is better or worse than promotional pricing. That's the absolute wrong way to frame the question.  EDLP worked for Walmart because it fit well with the other choices and activities in its value chain.  Other grocers had very different activity systems. EDLP couldn't just be dropped into those systems.  Everything they did fit with promotions.    Change to EDLP naturally was costly because it required many other changes to maintain organizational alignment.  The lesson is clear:  There is no one best pricing strategy.  It's all about fit.  Competitive advantage comes from an aligned system of activities throughout the value chain.  

Monday, November 23, 2015

Are CEOs Smarter Than the Rest of Us?

Renee Adams, Matti Keloharju, and Samuli Knupfer have written a new working paper that attempts to examine the role of intellectual ability in reaching the executive suite. The scholars studied one million men in Sweden who served in the military over several decades. They had access to aptitude test results from the military for these men.   These tests measured inductive reasoning, technical comprehension, spatial ability, and verbal comprehension.  The CEOs were smarter than the average person. People who became CEOs of large companies in Sweden scored in the top 17% on these aptitude tests. However, they were not significantly "smarter" than many other professionals such as doctors, lawyers, and the like. Amazingly they find that CEOs in their sample tended to be taller than the others who had served in the military with them.   Height matters... what does that say about how we select our leaders?  Interestingly, past studies have found that American Presidents have tended to be taller than the average American citizen.   The scholars summarize their findings as follows:

There are more than 100 times as many men in managerial roles in the corporate sector who have better trait combinations than the median large-company CEO and who do not become a large company CEO during our 7-year sample period. Being born with a favorable mix of traits may be necessary but is far from a sufficient condition for making it to the executive suite.

Friday, November 20, 2015

Market Share Does Not Equal Profitability

Over the years, I have stressed to students and executives that market share does not equal profitability in many cases.   Often firms set market share targets, and they become obsessed with being number one in share.  They forget that share is not always highly correlated with profitability.  My colleague, Lou Mazzucchelli, shared with me this incredible chart about smartphone sales that makes this point in a memorable and impactful way.  

Source:  Canaccord Research

Thursday, November 19, 2015

Great Commercial: Using Cliches to Your Advantage

Fast Company's Jeff Beer has a short piece about a new commercial from Bobble, maker of reusable water bottles.  The advertisement features a fake brand (Once), and it ridicules those who drink bottled water from disposable plastic bottles.  Beer writes,

If you watch enough advertising aimed at anyone aged 14 to 30, certain patterns of tone, image, and style emerge. Young people, just livin' the good life, embracing the moment, seizing the day and all that. To draw attention to the huge amount of waste created by single-use plastic water bottles, reusable bottle brand Bobble has tapped all these well-tread commercial cliches to reach the exact same audience.

The advertisement is fascinating precisely because it highlights another side to these cliches about how millennials should live their lives.   Moreover, as the advertising agency managing director, James Townsend noted, "It's more effective to make something look uncool than it is to say it's bad for you."  

Wednesday, November 18, 2015

Starbucks vs. Dunkin - The Challenge of Strategy Convergence

Bloomberg reports today that Dunkin' Donuts has launched a mobile ordering and delivery initiative.  In Maine, they are testing a service that enables customers to order drinks and food through a smartphone app.  Meanwhile, in Texas, they are testing a delivery service.  Dunkin's move follows the launch of mobile ordering several months ago by rival Starbucks.  

The competitive dynamic between these two coffee chains reminds us of the perils of strategy convergence.  Think about these two chains twenty years ago.  They were quite different.  Each had a very unique competitive position.  Today, their positions are more similar (though clearly not alike).   Twenty years ago, Starbucks did not offer drive-thru service, while Dunkin' did.   Starbucks offered wi-fi many years ago, while Dunkin' added that service later.  Starbucks has offered lattes from the start, while Dunkin' added that product more recently.  Dunkin' has had a lucrative food business to go along with its coffee from the start, while Starbucks has struggled with its food lineup and made changes numerous times to improve it.  For many years, Starbucks has sold its packaged coffee in supermarkets for customers to brew at home.  Dunkin' started doing that as well in recent years.  

What's my point?  Well, the strategies of these two firms have converged in recent years.  Yes, they are still quite distinct, but not as different as they once were.  As markets become more mature, strategy convergence tends to occur.  However, the worry is when strategies converge to the point where company positions begin to blur.   The challenge is to remain distinctive even as markets mature.  Gary Hamel put it best when he wrote, 

In nearly every industry, strategies tend to cluster around some central tendency of industry orthodoxy.  Strategies converge because success recipes get lavishly imitated…Aiding and abetting strategy convergence is an ever-growing army of eager young consultants transferring best practice from leaders to laggards…  The challenge of maintaining any sort of competitive differentiation goes up proportionately with the number of consultants moving management wisdom around the world.

Tuesday, November 17, 2015

Internal Promotions vs. Switching Companies

Wharton Professors Matthew Bidwell and Ethan Mollick have conducted research on external vs. internal mobility of employees during their careers.   Here's what they have found (excerpt from interview with Professor Bidwell by Knowledge@Wharton):  

We found quite big differences between the moves that took place inside the firms, and the moves that took place across the firms. When people are moving inside firms, we saw that they got a pay raise. They also got quite a big increase in responsibility — they tended to rise up, in terms of their title. And they pretty much doubled the number of people that they were managing.

When people moved jobs across firms, they also got a pay raise, but it didn’t tend to come with an increase in responsibilities. Instead, they were moving to a job with often a similar title, and usually with the same number of subordinates — managing the same number of people. And so they weren’t necessarily getting a promotion in the same way.

This speaks to the different reasons for moving. When people are moving inside [the firm], they’re moving up the ladder. When people are moving to jobs in other firms, they’re getting a pay raise. They get paid to move. But they’re not making the same kind of move up the ladder. They’re moving to a similar rung, albeit in a different organization.

The authors offer several cautionary notes for firms and employees alike.  For companies, beware that you are often going to have to pay a premium when relying on external talent to fill key positions.   You pay that premium even though you often are not providing that person with additional responsibilities relative to what they had at their previous firm.   For employees, beware that hopping from one firm to another may get you an immediate pay raise, but it may delay future promotions and pay increases, costing you money down the road.   The authors do not suggest that one should stay at the same firm forever.  However, they do caution against taking a job at a firm where career advancement seems unlikely.   Being able to land a few promotions before moving to another company can be the better long term strategy for career advancement, development, and compensation. 

Monday, November 16, 2015

Netflix, Analytics, and Original Programming

Many former and current students have asked me about Netflix's decision to offer original programming.  They always want to know, "Does vertical integration make sense for Netflix or not?"  They know that vertical integration has not always worked out in entertainment industry (think the breakup of Viacom/CBS and the unfortunate consequences of the AOL-Time Warner merger).  I ran across this CNBC interview with Netflix CEO Reed Hastings today (thank you, Professor Jay Rao, for pointing me in this direction!).   Hastings commented on the company's original programming:

Hastings attributed the success of original programming such as "Orange is the New Black" and "House of Cards" to Netflix's powerful data analytics.  "We are just a learning machine. Every time we put out a new show, we are analyzing it, figuring out what worked and what didn't so we get better next time," Hastings added.

Hastings' comments suggest that vertical integration may make a great deal of sense in this case, because Netflix can increase the odds of success with its original programming due to data analytics.  How powerful can data be in this case?  Well, if think about it, Netflix has been invested in "big data" since its inception in the late 1990s (long before big data became a common term).   From the beginning, Netflix did not want to focus on new releases. It wanted to be able to offer a deep library, and then use data to recommend lesser known titles to people.  Now, it's taking that data analytics to a whole new level, by using information it has compiled for over fifteen years to develop original programming.  As we all know, the failure rate for new shows can be quite high.   If Netflix can reduce that rate, even just by a small margin, it can improve the economics of programming substantially.  

Saturday, November 14, 2015

Does Expertise Make Us Close-Minded?

The British Psychological Society reports on a new study by Ottati, Price, Wilson, and Sumaktoyo.  The article, "When self-perceptions of expertise increase closed-minded cognition: The earned dogmatism effect," was published in the Journal of Experimental Social Psychology.   The research consisted of a series of six experiments.  In the research, people were made to feel like they were either experts or novices in a particular knowledge domain.   The scholars found that those who felt as though they were experts tended to act in a more close-minded fashion in subsequent parts of the study.  Hmmm... perhaps all of us at universities should look in the mirror.  Does the level of perceived expertise in academia contribute to a close-mindedness that inhibits the type of learning, exploration, and open dialogue that should be occurring in our classrooms?  Similarly, in a business context, does expertise close managers and technical experts off to new possibilities and make them more vulnerable to disruptive innovation? 

Thursday, November 12, 2015

Big Data in Formula 1 Racing: Don't Overwhelm Humans

Fortune has a fascinating article about how Formula 1 teams are using the internet of things and data analytics to win auto races.   According to the article, 

"These machines, each valued at more than $9 million (a steering wheel alone is worth $77,000 or so) are more than just pricey contraptions capable of whizzing around the track at more than 200 miles per hour. They are also intelligent, thanks to the many dozens of sensors fastened to them. Each sensor communicates with the track, the crew in the pit, a broadcast crew on-site, and a second team of engineers back home in Europe."  

The team then uses predictive algorithms to help them understand how the car will perform under certain track conditions.  These data guide key decisions.  However, they are careful not to put too much on the driver's plate.  After all, he or she is concentrating on many factors while driving at a very high rate of speed.   The team doesn't want to overwhelm the "cognitive capacity" of the driver.  In other words, they have to boil all that data down to a few key items about which they want to make the driver aware.  

That description sounds quite similar to how a great football coach operates.  They conduct extensive analysis of the opponent, breaking down game film and evaluating data about the strengths and weaknesses of that team.  The coaches then build game plan.  However, they have to keep the ultimate plan simple enough so that players can make fast decisions on the field.  They want them to still act instinctively and not be overwhelmed by too much information.   Managers in all types of enterprises should take note.   We want data analysis to guide people's decisions, but we have to keep in mind the cognitive capacity of those individuals.  We have to be able to boil down all that data to a few key principles and recommendations that they can implement effectively and quickly. 

Tuesday, November 10, 2015

Finding Inspiration: Get on the Move

Deepen Your Value Proposition Before Diversifying

Elizabeth Segran has a very good article at Fast Company this week titled, "How to Build a Business That Matters."   She interviews several very successful entrepreneurs.  One piece of advice really stuck out for me.   She writes, "The value proposition has to be deep."   She cites the example of Birchbox, a company founded by Katia Beauchamp and Hayley Barna.  The two women founded a company that offers a subscription service that delivers a set of samples of beauty products to its customers each month.   The startup soon realized that its service was a major hit.  That's a great story, right?  They came up with an innovative idea that clearly met customer needs (people want to try beauty products before they make major purchases).  

What's the problem?  Well, many competitors arose, and others launched similar services in other markets.  How could Birchbox build and defend its competitive advantage?  Beauchamp said, "We understood that the value proposition had to be deep for us to become a staple in consumers’ lives.  It couldn’t just be fun, because fun wears off. It couldn’t just be pretty, because eventually you have enough pretty things."   Thus, the company developed its analytics capabilities so that customers could receive a very personalized set of product samples.   Those analytics capabilities also could provide critical information to beauty product manufacturers, so that they could create new products that customer needs.  Then they worked to get exciting new products to their customers before the competition, and to make it as easy as possible for customers to purchase products from their online store, if they liked the samples.  

In sum, they didn't just rest on their laurels when the initial idea proved a hit.  They deepened the relationship with customers in ways that were much harder to imitate than the initial business concept.  That's what all entrepreneurs must do.  Unfortunately, many entrepreneurs start diversifying into new products and services in search of additional growth before they have fully established a sustainable position in their initial market.  They don't work hard enough at times to make their initial concept hard to imitate.  They don't deepen their relationship with existing customers enough before moving on to new customers and product markets. 

Friday, November 06, 2015

The Decline of Creativity in Innovative Organizations

James March, Mie Augier, and Andrew Marshall published a paper on innovation recently in Organization Science.  The article was titled,  “The Flaring of Intellectual Outliers: An Organizational Interpretation of the Generation of Novelty in the RAND Corporation.”   In the paper, the scholars try to explain the rise and fall of a culture of innovation at RAND.   Stanford's Louise Lee summarized their findings

RAND’s growth as an organization also led to a decline in its culture of innovation. From 1948 to 1962, RAND grew from 225 employees with a $3.5 million annual budget to 1,100 employees with a more than $20 million annual budget, according to the researchers. Growth has benefits, but RAND’s expansion beyond a face-to-face organization led individuals to stick safely with the people and thus the ideas they knew, instead of mingling freely. Big organizations also tend to hire people who conform to conventional methods and thinking instead of challenging them; meanwhile, the ambitious intellectual renegades leave, the researchers say. RAND’s growth also created layers of administrators and more bureaucratic processes such as meetings, committees, and other “red tape” that drowned out intellectual creativity, the researchers found.

Does that description apply to your organization?  Are people playing it safe much more so today than in the past?  Are they hiring people who conform rather than challenge?  Are people not mingling enough with folks outside their technical domain or discipline? 

Wednesday, November 04, 2015

Creativity, Entitlement, & Unethical Behavior

Maryam Kouchaki of the Kellogg School and Lynne Vincent of Syracuse University’s Whitman School of Management have conducted some fascinating experimental research addressing the relationship among creativity, entitlement, and unethical behavior.   They conducted an interesting experiment in which they gave subjects a test to examine their creative potential.  Some were told that they scored highly, and that many others did as well.  Others were told that they stood out, scoring much higher than the typical participant.  Then the subjects participated in a game in which dishonest behavior could yield higher payoffs.  Here's what they found, according to Kellogg Insights:

The results show that when participants were told they were creative but that creativity is common, there was no adverse effect on behavior. It was when they were told that they were uniquely creative that bad behavior ensued. Participants who had been told that they were creative and that creativity is rare were more than twice as likely to lie to their partners in the game than those in the other two groups. That same group also had a much higher entitlement score on a post-game questionnaire, which asked participants to rate their level of agreement with statements like, “I honestly feel I’m just more deserving than others.”

Kouchaki offers the key takeaway from this line of research:  She notes, “You want to encourage a culture of creativity, rather than a special treatment of creative people.”  I would add one other important notion to her conclusion.  It's not constructive to categorize employees (the creative, innovative folks vs. the "regular" people). That's a recipe for decreasing engagement and fostering resentment.  Moreover, it's not the way to drive innovation.  You don't want to bet on a flash of lightning from a select few.  Instead, you want to leverage the collective intellect of the crowd.  You absolutely want to create a culture where everyone feels responsible for coming up with better ways of working, improved products, enhanced systems and processes, etc. 

Tuesday, November 03, 2015

Why Do the Bad Guys and Gals Win at Work?

Do the bad guys and gals actually win, and the nice folks finish last, in organizations?   Tomas Chamorro-Premuzic, CEO of Hogan Assessment Systems and Professor of Business Psychology at University College London, writes about this interesting question in an HBR blog post today.   He examines the "dark triad" of personality traits:  psychopathy, narcissism, and Machiavellianism. 

Chamorro-Premuzic reviews the literature about these three traits.   He writes:

It should be noted that, unlike clinical personality traits, these traits are normally distributed in the population – e.g., you can score low, average or high – and perfectly indicative of normal functioning. In other words, just because you score high doesn’t mean that you have problems, either at work or in your personal life. And despite the antisocial implications of the dark triad, recent research has highlighted a wide range of career-related benefits for these personality characteristics... An impressive 15-year longitudinal study found that individuals with psychopathic and narcissistic characteristics gravitated towards the top of the organizational hierarchy and had higher levels of financial attainment. In line with those findings, according to some estimates, the base rate for clinical levels of psychopathy is three times higher among corporate boards than in the overall population.

Why do the bad guys and gals rise to the top of many organizations?  He points out that these folks tend to have higher self-esteem.  Moreover, they tend to be extroverted and charming.  They are curious and competitive.   They can seduce and intimidate.   Self-esteem, charm, curiosity... these are not bad things.  In short, there's a "bright side to the dark side."  The problem is when you are extreme with regard to this "dark triad" of psychopathy, narcissism, and Machiavellianism.  In that case, the bad guy or gal may succeed in getting to the top, but at the expense of organizational effectiveness.  

Thursday, October 29, 2015

Individual vs. Group Decision Making in the Venture Capital World

Wharton doctoral candidate Andy Wu has conducted some interesting research about decision making in the venture capital world.    He explains his research to Knowledge@Wharton:

My current work focuses on the role of partners of venture capital firms who make angel investments on the side. What that allows us to do is compare organizational decision-making to individual decision-making. In this work, we find that individuals acting alone are able to process private information that they have that their organization doesn’t have, and allows them to make investments in firms with observably weaker characteristics, such as younger founding teams, less educated founding teams. Nevertheless, these individual investors are able to generate the same financial return as their employing firms.

What does Wu mean by private information?  Well, he's really referring to tacit knowledge... expertise that cannot be easily transmitted to others.  Your intuition may tell you that a certain investment is attractive or not.   The data do not justify your conclusions.  How do you persuade your partners in the firm?  Wu argues that you often do not persuade them.   You can't make a strong, rational, explicit case to them.  However, tacit knowledge leads you to conclude that it's a good investment.  Groups, Wu argues, focus on explicit information and often fail to incorporate crucial tacit knowledge.  

Wednesday, October 28, 2015

REI Shuts Stores on Black Friday! What Are They Doing?!

REI made a rather stunning announcement today.  The firm will be closing all of its stores on Black Friday, the biggest shopping day of the year.  Instead, it will pay its employees to explore and enjoy the outdoors on that day, and it will encourage its customers to do the same.  The company has launched a social media campaign in conjunction with their unique Black Friday strategy.  They have adopted the hashtag "OptOutside" and encouraged people to share their ideas and experiences for enjoying the outdoors on Black Friday.   Jerry Stritzke, president and CEO of REI, explained the company's reasoning: “Black Friday is the perfect time to remind ourselves of the essential truth that life is richer, more connected and complete when you choose to spend it outside. We’re closing our doors, paying our employees to get out there, and inviting America to OptOutside with us because we love great gear, but we are even more passionate about the experiences it unlocks.”  

I love the idea!  I've always felt that the Black Friday phenomenon had become a sort of Prisoner's Dilemma for firms.   Each company opened earlier to keep up with or one up the competition.  Some firms even began opening on Thanksgiving itself.  Promotions became even crazier with each passing year.  Yet, such moves often only shifted sales from other days.  They did not add to total holiday spending necessarily.  Thus, firms incurred more costs without actually improving revenues overall.  No firm wanted to opt out of this arms race though, for fear of the damage they would suffer if they didn't keep up with the competition.  Now, we have seen one firm choose to opt out of the arms race.  Great firms zig whenever everyone else zags.  They find a way to differentiate.  For REI, the move fits beautifully with their brand image and their values.  It reinforces all that we believe about REI's brand, culture, and beliefs.  It helps them stand out from the competition.   The key question: Will other firms follow?  I doubt it that many will follow.  Actually, simply copying REI's strategy does not make much sense anyway.   Being different is the key to building a great strategy.   Other firms may want to adapt their Black Friday strategy to avoid the arms race that I describe above, but they will have to find their own unique way of doing so.  

The NFL: Could Growth Obsession Become its Downfall?

The National Football League has never been more popular in the United States.  The league enjoys record ratings and lucrative television contracts.  Long ago, the league surpassed major league baseball as the national pastime.  However, many observers have noted a substantial decline in the quality of play recently.  Are such observations just the usual nostalgic "it ain't like the glory days" comments, or is there some truth to the comments?   That's hard to tell at the moment, though the league does appear to have an inequality not seen in some time (record number of 6-0 teams at this point in the season comes with an incredible amount of futility as well).  

What could be driving a decline in the quality of play?  I would hypothesize that the obsession with revenue growth has diluted quality... something we see in many industries.  The NFL is not immune to that phenomenon.   How has revenue growth obsession damaged quality?   One reason may be that the desire for growth has led to a huge shift in emphasis toward offense.   Fantasy sports have contributed greatly to that emphasis on offense.   As the emphasis has shifted toward increasing scoring, the league has become very pass happy.  The running game has diminished in importance.  How does that lead to decreased quality?  Well, for one thing, the incredible emphasis on passing offense means that one player, the quarterback, is more important than ever.   The quarterback has always been the most important position on the field, but now the critical need for superb play at that one position is elevated substantially.   In the past, you could win in multiple ways.   You could run the ball in a dominant fashion.  You could have a monster defense.  Today, the old adage "run the ball and stop the run" just does not apply.   If you do not have a superb quarterback, you are going to struggle to win consistently.   Recall that quarterbacks such as Mark Rypien, Brad Johnson, Trent Dilfer won Super Bowls in the past.  That seems increasingly difficult in this new era.  The problem, then, is that the league does not have enough quarterbacks who can play at a very high level.  This year, Peyton Manning has suffered a decline in skills due to age and injury, and other top QBs (Luck, Roethlisberger, Brees) have been injured or have played poorly.  So, in a rush to drive revenue growth, the league made itself more dependent on one position, the quarterback.  However, it does not have enough excellent quarterbacks to maintain a high level of play.  

That's my hypothesis.  The NFL is not immune to the basic tradeoff that many firms face... top line obsession can lead to brand and quality dilution.  The ratings continue to soar, but will this problem eventually lead to a loss of viewers?    I don't know... I still watch, but then again, I have the privilege of watching the greatest quarterback of all time each week.

Tuesday, October 27, 2015

Do Firms Really Value Curiosity?

George Mason University Professor Todd  Kashdan has conducted a study about curiosity in the workplace.  He found that companies talk a good talk about curiosity and new ideas, but they don't walk the walk.   Kashdan reports, "Surveying workers in 16 industries, we found that while 65% said that curiosity was essential to discover new ideas, virtually the same percentage felt unable to ask questions on the job. The contradictions continued: while 84% reported that their employers encouraged curiosity, 60% said they had also encountered barriers to it at work."  

What types of barriers do workers cite?  According to Kashdan, "Common stumbling blocks cited (across industries) were a top-down approach to decision-making, limited time for creative thinking, a preference for safe ideas over new ones, and fear of standing out from the pack. How can these and other organizations do better?"  

We have seen the many reports about low employee engagement across a variety of industries and firms.  Why is engagement so low in the American workforce?  One reason may be that employees have become disenchanted by too many instances of leaders talking a good game, but not acting in ways that are consistent with those verbal messages.  Not backing up your words with actions can be a very easy way to lose the trust of your employees.  The research here on curiosity offers one example of a situation in which firms and their leaders appear to be dropping the ball. 

Thursday, October 22, 2015

Lessons from the Cuban Missile Crisis

Source:  Boston Globe (from JFK Library)
On this day in 1962, President John F. Kennedy addressed the nation to discuss the Cuban Missile Crisis.  In his speech, Kennedy informed the public that the U.S. would be establishing a naval quarantine around the island of Cuba until the missiles were removed.  I have written extensively about Kennedy's decision-making process during the crisis.   Ten years ago, I had the opportunity to talk to Kennedy's Secretary of Defense, Robert McNamara, about the crisis.  He came to Harvard to address my students at that time.  For more on what we can learn from how Kennedy led his team through that ordeal, you might wish to read an article that I published in the Ivey Business Journal.  

Wednesday, October 21, 2015

When You Are Overly Dependent on One Product: Apple's "Problem"

The Wall Street Journal has a great chart today (shown here) that highlights how increasingly dependent Apple has become on the iPhone as the one product driving a substantial portion of revenue and profit.   Many analysts have expressed concern about this dependency.  I find it an interesting discussion.  On the one hand, it does appear worrisome to have so much of the company's fate reliant on one particular blockbuster product. On the other hand, a firm has to be careful how it responds to this type of "problem" that emerges with success.  Diversifying recklessly simply to reduce dependency on a single product can be a recipe for disaster...yet many firms have made that mistake when faced with this situation.  Moreover, we know that focus can be a powerful dimension of any strategy.  Jobs preached focus relentlessly during his time at Apple (and at Pixar).   Will a company lose focus if it tries "too hard" to reduce reliance on one hit product?  It's a delicate balancing act, and it will be interesting to see how Apple navigates this situation in the years to come. 

Tuesday, October 20, 2015

Amazon Hits Back at The New York Times: Why Now?

Yesterday, Amazon's Jay Carney (former White House Press Secretary) published a post on Medium that criticized the New York Times scathing article published two months ago about Amazon's culture and workplace environment.    The newspaper offered a quick rebuttal.   My question: Why now?  Why offer this rebuttal two months after the article ran?  The controversy had died down, after receiving a great deal of attention two months ago.  Why bring the issues back to the forefront now?  It only serves to remind people about the negative statements and observations made about Amazon's organization.  Moreover, as The New York Times stated, the Carney post did not refute the claims made in the article directly, but instead only pointed out that some of the quotes came from highly disgruntled employees (at least one of whom may have been fired for wrongdoing).   In a situation such as this one, offering a clear rebuttal may be good policy, but timing is important.  You have to move quickly.  In many ways, you only rekindle the controversy by responding now.

Monday, October 19, 2015

Confirmation Bias

I discovered this terrific comic about confirmation bias today.

Normalization of Deviance at Volkswagen?

Paul Kedrosky, a venture investor, wrote a very interesting column for The New Yorker about the Volkswagen scandal.  He does not introduce new facts, but instead speculates as to how the ethical and legal transgressions may have taken place.  He draws upon Diane Vaughan's great work on the Challenger space shuttle accident.  In her research, Vaughan describes a phenomenon that she calls the "normalization of deviance."  It's a process whereby we gradually engage in riskier behavior.  We don't jump over the line from legal/ethical to illegal/unethical.  Instead, we inch our way there over time.  As Vaughan puts it, "the unexpected becomes the expected becomes the accepted" over time.  In short, what may look very risky or irresponsible in hindsight actually came to be viewed as acceptable  by decision makers in a gradual process that unfolded over a lengthy period of time.  With each incremental step down the slippery slope, people established a "new normal."  The next deviation didn't seem so large, because it wasn't being compared against the original standard of behavior.  Instead, it was being compared against the new normal established in the recent past.  Kedrosky explains how the normalization of deviance may have played out at Volkswagen.  Investigators should definitely examine this aspect of organizational behavior.  In no way does this explanation excuse the behavior, but it does help us understand how such things happen in large organizations.  Here's Kedrosky's hypothesis:

If the same pattern proves to have played out at Volkswagen, then the scandal may well have begun with a few lines of engine-tuning software. Perhaps it started with tweaks that optimized some aspect of diesel performance and then evolved over time: detect this, change that, optimize something else. At every step, the software changes might have seemed to be a slight “improvement” on what came before, but at no one step would it necessarily have felt like a vast, emissions-fixing conspiracy by Volkswagen engineers, or been identified by Volkswagen executives. Instead, it would have slowly and insidiously led to the development of the defeat device and its inclusion in cars that were sold to consumers... Faced with an expensively engineered diesel engine that couldn’t meet strict emissions standards, Volkswagen engineers “tuned” their engine software. And they kept on tuning it, normalizing deviance along the way, until they were far from where they started, to the point of gaming the emissions tests by detecting test conditions and re-calibrating the engine accordingly on the fly.

Thursday, October 15, 2015

The Inbev Acquisition of SAB Miller

Major consolidation in the beer industry continued this week, as Inbev agreed to acquire SAB Miller for over $100 billion.  The deal continues a long track record of acquisition by Inbev.  Several years ago, they took over Anheuser Busch, for instance.   Here are a few thoughts about this deal, with lessons that apply to many mergers and acquisitions:

1.  Divestitures of certain brands are highly likely due to antitrust concerns.  Therefore, other major brewers could be able to acquire some important brands during this process. 

Broader lesson:  Will rivals be strengthened at all as a result of an acquisition that we do? 

2.  Economies of scale and scope are a major driver of beer industry consolidation.  However, one has to ask:  How big is big enough?  At what point do diseconomies kick in?  Moreover, some research suggests that economies of scale in the beer business are largely about achieving scale within a particular country as opposed to achieving global scale. 

Broader lesson:  How confident are we that diseconomies of scale will not hamper us?

3.   Acquisition integration will be challenging, as with many complex cross-border deals.  The firms will have to account for "anti-synergies" i.e. the costs associated with trying to put the two firms together and achieve synergies.  Put another way,  many deals include detailed valuations of potential synergies without examining the true cost of putting in place processes and systems to achieve those economies of scope.

Broader lesson:  Value synergies and anti-synergies in every deal you make.

4.  Cost synergies are easier to achieve than revenue synergies.  They are much more concrete and predictable.  Inbev has a great history of achieving cost synergies.  To really make this deal worthwhile, they will have to drive revenue synergies as well.

Broader lesson:  Is your deal based on the somewhat hard-to-quantify hope and promise of revenue synergies or the more concrete and predictable cost synergies of bringing two firms together?

Tuesday, October 13, 2015

Was Steve Jobs' Daily Question to Jony Ive a Good One?

Inc. magazine reports this week on the one question that Steve Jobs asked Apple design guru Jony Ive every day.  Here's the query:  "How many times did you say no today?"   Jobs preached "extreme, laser-like focus" at all times. Ives explained:   "The discipline to turn your back on something you believe in passionately, so you can apply yourself to what's at hand, is really remarkable," Ive said. "It's a deeply uncomfortable but really effective thing to do."  

Do I agree with Jobs' question?  All things in moderation, I suppose.   I do agree that focus is crucial if you want to excel.  That's as true of companies as it is of individuals.  Great firms clearly make tradeoffs; they say no when the typical firm in their industry says yes.  Trader Joe's, for instance, rejects many of the standard ways of doing business in the grocery industry.  That makes them incredibly distinctive and difficult to imitate. 

When it comes to individual behavior, though, I am a little leery of taking the Jobs question too far. To have a successful organization, we have to have people who are willing to sacrifice at times to help others. We need collaborators.  That means sometimes saying yes for the good of the greater whole, even if it may distract you from the task at hand.  

Friday, October 09, 2015

Quick Tip for New Hires

You have landed a new job, perhaps just out of college or maybe after a successful stint at another organization.  You have lofty ambitions for your career.   People have advised you to find a mentor to help you think about your long term goals and objectives.  Hold it!  Before you go any further, here's an important tip offered to me by a mentor many years ago.  He reminded me before I started work, "Do the job that you have been assigned.  Do it well.  The best thing you can do for your long term career goals is to excel at your current assignment.  Don't put tomorrow before today."   It was tremendous advice.  I encourage everyone to follow it. 

More on Making Good Predictions: An Interview with Philip Tetlock