The Steelers, the Stock Market, and Spurious Correlation

The USA Today reports today that the stock market has performed quite well during years in which the Pittsburgh Steelers have won the Super Bowl. In fact, the stock market has clearly done better when the Steelers emerge victorious than when other teams win the Super Bowl. Of course, it doesn't mean we should all run off and root for the Steelers in hopes that it will restore our 401K plan balances. This is a classic example of spurious correlation... and a good example for reminding students about not being fooled into thinking such correlations imply causation.

Selling Assets - Ford and the NY Times

News reports today indicate that Ford is perhaps putting Volvo up for sale, and that the New York Times is doing the same for their stake in the Boston Red Sox. It's quite understandable for struggling firms such as these to be trying to focus their business strategies and raise cash through asset sales. However, firms face a dilemma because the credit crunch makes it difficult for them for them to get a good price for these assets. They may end up only getting a fraction of what they were worth just one year ago in some cases (more of a problem for Volvo than the Sox probably). Thus, we've seen many firms hesitating on whether to sell non-core businesses or other assets at this point in time. For instance, why hasn't General Motors sold Hummer yet? It would seem that they recognize that it may be very hard to find a buyer willing to give them anything near what that business was worth just a short time ago. Thus, every firm faces this balancing act between trying to focus and build their cash reserves versus trying to make sure they don't sell things at a huge discount to what they believe the assets to be worth in the long term.

University Endowments and Drastic Budget Cuts

Brandeis University is the most recent institution of higher education that has announced a major restructuring due to the global financial crisis. Brandeis announced today that they will be closing their art museum and selling their art collection, believed to be worth more than $300 million. Brandeis' actions follow other drastic budget cuts at wealthy schools such as Harvard, Dartmouth, Penn, etc.

Now, everyone certainly understands that these schools with large endowments have suffered large losses in their stock market investments. However, I'm sure many are wondering how and why this is leading to such large budget cuts, given that many still have very large endowments. To answer that, we have to understand how the annual operating budgets for these institutions are set. Basically, each year the universities draw a small percentage (often less than 5%) of their endowments for use in that year's annual operating budget. While this may be a small percentage of the endowment, it's actually a very large number in absolute dollars for a university with a mega-endowment. Therefore, at many endowment-rich institutions, the draw from the endowment represents a very large percentage of the annual operating budget.

At Harvard, for instance, the institution depends on the endowment draw to fund roughly 35% of its annual operating budget. That percentage climbed over recent years, as the endowments at many top institutions grew substantially in value. Thus, when an endowment like this drops by 30-40% due to the stock market crash, then the annual operating budget takes a very, very large hit - perhaps more than 10% in many cases.

In sum, many higher education institutions, while seemingly not using much of their endowment each year, actually were becoming very dependent on their endowments to fund annual operations. Now, that economic model has come apart at the seams due to the equity market crash.

Under Armour Takes on Nike

Recent news reports describe how Under Armour has decided to enter the running shoe market, taking on the likes of Nike, Asics, and Brooks. Under Armour, of course, has been enormously successful breaking into the sports apparel market. However, running shoes will be an enormous challenge. First, they will be competing head-on with some powerful brand names in the running shoe market. Second, those firms such as Nike and Brooks have strong technical reputations and the allegiance of top-flight runners who have high influence over more casual runners as they make their buying decisions. Finally, the competitors have deep pockets. Nike is a $19 billion per year firm, while Under Armour has yet to reach $1 billion in revenue.

It's an interesting brand extension case study that will probably be taught in b-schools for years to come. What's particularly interesting is that many of Under Armour's competitors started as running shoe firms and then extended their brands into apparel. Under Armour is moving in reverse. It would seem that it's easier to branch into apparel after having established a foothold in the shoe market, where technology is so important. Having said that, Under Armour does have a very loyal following, particularly among young men. They have a very strong brand. It will be interesting to see how Under Armour's entry strategy unfolds. Who will be their target market, and how will they win over key influencers in the running shoe market? How will they differentiate themselves from the Nikes of the world?

Home Depot Exits the EXPO business

Home Depot finally decided to close down its higher-end EXPO Design Center business. It's a strategic move long in the making... it was far more difficult than they ever imagined to operate their bread-and-butter "orange boxes" as well as these higher-end design centers. It's a classic example of internal inconsistency in a strategy; the activities and capabilities required to run a Home Depot store are quite different than those required to operate a design center successfully. With this decision, we see Home Depot moving closer to its original roots. Over the past few years, it has gradually been shedding ancillary businesses and refocusing on the "orange boxes." It's a smart move, given that the core business suffered badly as they diversified into other businesses over the past decade.

John Thain at Bank of America

It's not surprising to me that John Thain has been pushed out at Bank of America. It's rather common in these mega-mergers for one of the two CEOs to depart fairly soon after a deal is finalized, despite the fact that the companies had said that both CEOs would stay on board when they announced the deal. It's very difficult for two CEOs to work together in such mega-mergers. Both have been used to being the person in charge, and for one to then become the subordinate to the other is very challenging. It's why I've come to expect such departures in the case of these mega-mergers, much like I've always come to doubt the announcement of so-called "mergers of equals" - there is no such thing! There's always a top dog in any merger. Likewise, there's almost always one CEO who will remain long term, while the other will depart, whether it's a so-called merger of equals or a straightforward acquisition as in this case.

Why Great Leaders in Paperback

My first book, Why Great Leaders Don't Take Yes For An Answer: Managing for Conflict and Consensus (Wharton Publishing, 2005), has been released in paperback today for the first time.

The Business of Baseball

It's interesting to see how the downturn has affected Major League Baseball, a sport that has been amazingly successful from a financial standpoint for years. One sign of the owners scaling back their cost structures is the fact that so many top notch free agents remain unsigned with only a few weeks remaining before spring training begins. Players such as Manny Ramirez, Bobby Abreu, Orlando Cabrera, Ben Sheets, Oliver Perez, Adam Dunn, and Jason Varitek remain unsigned. One more potential sign to examine for evidence of a softening of baseball's revenue streams will be this weekend's sale of Boston Red Sox tickets. The Sox have an amazing string of sell-outs stretching back a number of seasons, and in recent years, nearly all those tickets were sold before a single regular season game had been played. It will be interesting to see how quickly the tickets sell. Moreover, it will be interesting to see how much softening occurs in the after-sale market for tickets. A soft ticket market in the next few weeks will be ominous for those free agents remaining unsigned at this point.

New Book

I am very pleased to announce that I have a new book coming out next month. The book is titled Know What You Don't Know: How Great Leaders Prevent Problems Before They Happen (Wharton School Publishing, 2009). For more information on the book, please click here.

New Entrepreneurship Documentary

Patrick Sargent, a junior at Bryant University, has produced a great new documentary about entrepreneurship. Here is the trailer. The documentary will be available for purchase on January 28th. For more information, see Pat's website.

Fiat isn't the Short Term Solution Chrysler Needs

Alex Taylor III has a very thoughtful article on Fortune.com about the Fiat-Chrysler link-up that has been described in media reports this week. Taylor argues that Fiat may prove very helpful as a long term strategic partner for Chrysler, but deal with the Italian carmaker does not address Chrysler's short term liquidity problem. Chrysler isn't producing cars at the moment, as they idled factories to conserve cash several weeks ago. How will the company generate cash in the short term, until the deal with Fiat begins to lead to new products for the U.S. market? It seems they'll be asking for more aid from the government, but will that be sufficient? Finally, is Chrysler going to have the cash required not only to stay alive but also to fund the development of new autos? Surely, it cannot survive simply by bringing Fiats back to the American market. It will have to continue to innovate if it wishes to preserve its most valuable assets, such as the Jeep brand and its truck business.

Retail Job Losses

CNN has an interesting article on the substantial number of job losses in the retail sector over the year. The author, Parija B. Kavilanz, examines some of the reasons why the sector has not received as much attention, or government support, as other sectors such as the auto industry. The article states, for instance, that the low rate of unionization in the industry may explain why Washington hasn't paid as much attention to the job losses in retail.

To me, there is something else that's very interesting about what is happening in retail. I saw some numbers recently that indicated that retail square footage per capita has risen at a substantial rate in the United States over the past two decades. That didn't surprise me, given the explosive growth of big box retailers in recent years. However, it's unsettling in some ways, as we think about the tremendous growth of internet retailing in the past fifteen years. Given the shift to internet retailing, one might have expected a slowdown in the growth of brick and mortar retail square footage, or even an absolute decline. Yet, retail space has kept on increasing. That seems rather unsustainable. Some retrenchment and rationalization in brick and mortar retail appears to be in order. Unfortunately, that means a significant number of job losses in the sector, and the very real possibility that those jobs aren't coming back for quite awhile.

Communication in the Cockpit

News reports suggest that Chesley Sullenberger III's amazing emergency landing on the Hudson River owes as much to his skill as a communicator as it does to his technical skills as a pilot. Clearly, his technical skills are remarkable, given the complexities of such a water landing in New York City. However, many have noted that he had deep expertise in crew resource management - the training in communication that was developed in the 1970s by the commercial aviation industry. This training was developed after it was discovered in the 1970s that many airplane crashes are not due to mechanical failure or a lack of technical skill on the part of the pilots, but instead due to errors in communication within the cockpit.

Many of the communication skills that pilots such as Sullenberger have mastered are, in fact, the kinds of skills that all business leaders should focus on developing. For more on crew resource management, see this paper.

Unemployment

How do we digest the news that the unemployment rate has jumped above 7% for the first time in 15 years? Well, it's very sad to see so many people losing their jobs. We should note, however, that unemployment rates above 7.0% are not unheard of in our lifetimes. In the thirteen year period between 1974 and 1986, the unemployment rate rose to 7.0% or higher at one point or another in 11 of the 13 years. Imagine that! When I was in college in the late 1980s, economists used to contend that the natural rate of unemployment was roughly 6%. However, we've all become quite accustomed to the very low unemployment rates of the past 15 years; thus, it's very disconcerting to see the job losses that people are experiencing throughout the United States. Many people cannot recall this type of unemployment, though it's actually not that long ago when our economy experienced similar levels of unemployment.

Disney to Focus More on Boys

The Wall Street Journal has an article about Disney making a new push to target boys aged 6-14. After all, Disney has been wildly successful in recent years focusing on young girls with platforms such as High School Musical, Hannah Montana, and the like. They have not had the same type of success tapping into the market of young boys.

There is no question that a fair amount of specialization tends to occur among companies focused on toys, games, and media for children. For instance, in the toy market, we have two behemoths: Hasbro and Mattel. Hasbro has traditionally been very successful targeting young boys with products such as G.I. Joe, Spiderman, Transformers, Tonka, etc. Mattel has been very successful focusing on young girls with brands such as Barbie and American Girl. Both companies do sell to boys and girls, but they have not had equal success with both genders. In many ways, that has been a good thing. It's meant that the firms have been able to both generate high profits, because their competition has not been completely head-to-head. They've differentiated from one another a bit.

Now, Disney will find itself venturing into an area where they have had some success, but they haven't been as dominant. The question is whether Disney understands the boys market well enough, and has the ability to develop characters successfully, for that market. What new competitors will they bump up against with this new focus on boys? Perhaps most interestingly, this new strategic initiative may renew rumors that Disney is interested in acquiring a large videogame company, such as Electronic Arts, given that video games are particularly popular among young boys.

Apple's New iTunes Pricing

Lots of big news from Apple over the past few days. On the iTunes front, the company announced a new three-tiered pricing structure, as opposed to the prior pricing strategy of having all songs available at 99 cents each. At the same time, Apple will remove digital rights management protection from all its songs. This appears to be part of a grand compromise between the record companies and Apple. The record companies sought the tiered pricing, so that they could charge a slight premium for new songs. This could help produce a surge in revenue for the record companies for those songs that become big hits. Meanwhile, Apple's consumers will be happy that the songs can now be copied onto other devices. The removal of the DRM protection could lead to a new surge in iTunes sales, and it could help fuel even further growth of the iPhone, iTouch, and iPod businesses. The biggest news, however, concerns Steve Jobs' health. Rumors have swirled for months now, and finally, the company disclosed some news about Jobs' situation. Still, many investors wonder about succession planning at the company. Rarely have we seen a company for which investors seem to believe that the performance is so dependent on one person. While it may or may not be true, the investor sentiment is very powerful.

Our MBA Program

For those interested in learning about Bryant University's MBA program, as well as my philosophy on teaching, you might wish to take a look at this brief video.

Gullibility and Financial Scams

Psychologist Stephen Greenspan has an interesting article today in the Wall Street Journal about why human beings are so gullible at times, applying his research to the issue of our vulnerability to financial scams of one kind or another.

The Internet, Transaction Costs, and Investment Bubbles

As the Internet blossomed in the 1990s, many economists argued that the web improved information flow, reduced transaction costs, and thereby made capital markets more efficient. I believe this to be true. After all, the availability of information to all investors makes it even more likely that a new piece of data will quickly get factored into the price of a stock. According to the conventional wisdom, it's even harder to beat the market as an individual investor if stock prices so quickly incorporate new information. Emory Professor Paul Rubin expands upon this argument in a recent column in the Wall Street Journal. While he agrees that the web reduced transaction costs, he also argues that it may have inadvertently contributed to a greater propensity for bubbles. As he says, "It may be that bubbles and crashes are a natural part of capitalist markets. What's more, it may be that the very factors that have recently increased the efficiency of markets have also led to an increased propensity for bubbles."

In sum, because of the internet, people all around the world can quickly learn about "hot" new thing that seems like an attractive investmnet. Word can quickly spread to others through social networks, blogs, email, etc. Reduced transaction costs make it easy and cheap to then make a trade based on that new information. Soon, a bubble can emerge as word spreads quickly about a potential profit-making opportunity. Of course, it becomes a bubble when people are still investing long after the initial profitable opportunity was spotted; by the time the later investors have put money into the asset, the opportunity for a profitable return has greatly diminished. Yet, people are still chasing the idea. Why did the profitable opportunity vanish? Well, of course, the very efficiency of the market due to lower transaction costs has caused the "arbitrage" opportunity to vanish fairly quickly, yet many investors don't realize this until far too late. They are simply jumping on a social bandwagon.

Turnaround at Talbots

The Boston Globe has an interesting article on Trudy Sullivan's attempt to execute a successful turnaround at Talbots. The retail chain's troubles actually began with some fundamental strategic problems, not simply with the poor economy. First, the company had a difficult time integrating its acquisition of the J. Jill apparel chain several years ago. Second, the company had wasted resources with diversification attempts including the opening of men's and children's stores. Finally, the company's clothing increasingly appealed to a narrower and narrower demographic - namely older women.

The Talbots story is interesting, because many management professors like me constantly preach that companies should stay focused. However, in some cases, that focus can lead to a dangerously narrowing target market over time. In Talbots case, the target market shrank as the average consumer became older and older. The clothes no longer appealed to younger working women who used to frequent the company's stores. So, one moral of the Target story is that a firm should focus on its core customer, but it must take great care not to do so in a way that causes that target market to shrink over time. A second moral is that a firm should be wary of trying to overcome slowing growth in its target market by diversifying through either brand extensions (men's stores) or acquisitions (J. Jill). Instead of expanding elsewhere, a firm in that situation should make sure that it fixes its core market first.

Recommended Reading List

At the end of the semester, I often put together a recommended reading list for my students. Typically, I recommend "classics" rather than new releases (though, by classics, I don't necessarily mean only books published decades ago). Here are some classic books that are worth reading if you are interested in the topic of decision-making:

Janis, I.L. 1982. Victims of Groupthink. 2nd Edition. Boston: Houghton Mifflin.

Klein, G.A. 1998. Sources of Power. Cambridge, MA: MIT Press.

James Surowiecki. 2004. The Wisdom of Crowds. New York: Doubleday.

Neustadt, R. and E. May. 1986. Thinking in Time: The Uses of History For Decision Makers. New York: Free Press.

Allison, G. and P. Zelikow. 1999. Essence of Decision: Explaining the Cuban Missile Crisis. 2nd Edition. New York: Addison-Wesley.

Andrew Grove. 1996. Only the Paranoid Survive. New York: Currency.

Peter Drucker. 1954. The Practice of Management. New York, Harper.

Michael Lewis. 2003. Moneyball: The Art of Winning an Unfair Game. New York: W.W. Norton.

George, A. 1980. Presidential Decision Making in Foreign Policy. Boulder, Colorado: Westview Press.

Snook. S. 2000. Friendly Fire: The Accidental Shootdown of U.S. Black Hawks Over Northern Iraq. Princeton, NJ: Princeton University Press.

Strategy in a Structural Break

Richard Rumelt, highly respected strategy professor at UCLA, has written a wonderful article for McKinsey Quarterly in which he discusses how companies can exploit the economic downturn to build and enhance competitive advantage for the long term.

Cost/Benefit Analysis

Companies are facing some interesting choices as they cope with the economic downturn, and these hard decisions call for careful cost/benefit analysis. Some retailers have expanded their hours dramatically, even staying open 24 hours, to attract shoppers just before Christmas. The question, of course, is whether the additional expenses incurred by remaining open those extra hours will pay off in terms of incremental revenues. Similarly, we have some firms engaging in substantial layoffs, while others are eschewing layoffs in favor of four-day workweeks. Clearly, the four-day workweek means you retain talented, well-trained people, and thus, you can scale back up quickly when the economy rebounds. You also avoid paying the severance that might be associated with layoffs. However, you typically have to continue paying all these employees' benefits. Thus, the fully-loaded hourly wage rate for these workers rises substantially under the four-day workweek scenario. If the firm chooses the layoff strategy, they incur some severance expenses, but they save not only the hourly wage rate but also the benefit expenditures. The challenge, however, will be the expenses down the road that will be associated with hiring and training new employees who might have to be hired as the economy comes back. To me, getting these cost-benefit analyses right are essential for any firm hoping to navigate this downturn successfully. The answer won't be the same for every firm; a good cost-benefit analysis will take into consideration the unique aspects of a particular business model. Companies have to think carefully about their specific workforce's characteristics as they make this type of decision. Similarly, retailers have to think about their particular customers as they consider the decision to expand shopping hours substantially in the final days before Christmas.

A Culture of Deference at GM

Alex Taylor wrote an article about the demise of General Motors in a recent issue of Fortune. In that article, he has a wonderful anecdote that suggests a great deal about the culture at GM. Here's the story. I leave it to the reader to draw the obvious conclusions...

Back in 2004, when it was still relatively flush, General Motors invited automotive journalists to the South of France for a three-day "global product seminar." The idea was that writers like me would drive new cars, consume loads of free food and wine, pal around with executives, and develop favorable opinions about GM.

Still a little jet-lagged, I arranged to drive with chairman and CEO Rick Wagoner in a yellow Corvette. Our route would take us from the Four Seasons resort in Provence, where we were staying, through the French countryside and on to the Paul Ricard race circuit near Marseille in time for lunch. My job was to navigate while Wagoner drove, but I used the face time to pepper him with questions rather than pay attention to the route book.

Polite and good-humored as usual, Wagoner mostly ignored my directions and followed the car in front of us. Two hours later we found ourselves back at the hotel. I had been navigating from the wrong map, and the car in front of us, driven by Chinese journalists, was just as lost as we were. Lunch would be delayed while we hurriedly made our way to the track, meaning I had effectively kidnapped the chairman of General Motors for three hours.

Sure, we had been tailed the whole time by Wagoner's security detail, but it remained behind at a respectful distance and never stopped to ask us where we were going. What I learned from the incident were several things. First, never underestimate the ability of a know-it-all journalist to get it wrong. And second, at some point good manners and civility become a liability rather than an asset.

Serial Enterpreneurs: New Research

The Boston Globe reports on a new paper by Paul Gompers of Harvard Business School and his co-authors. The paper focuses on entpreneurship. Gompers finds that enterpreneurs who have started a company and launched an IPO have a higher success rate for their second venture than the usual success rate for first-time entrepeneurs. Here's what Gompers and his co-authors write:

"We show that entrepreneurs with a track record of success are much more likely to succeed than first-time entrepreneurs and those who have previously failed. In particular, they exhibit persistence in selecting the right industry and time to start new ventures. Entrepreneurs with demonstrated market timing skill are also more likely to outperform industry peers in their subsequent ventures."

Globe writer Scott Kirsner also points out his favorite finding from the paper, which is intriguing and makes it worth reading the paper to explore further:

"For instance, one of my favorite conclusions that Gompers compellingly makes is that venture capitalists do not add value to the companies they invest in. How does he know this? Not surprisingly, the top-tier VC firms are better at picking unknown "star entrepreneurs," but once they've been successful in their first ventures (i.e. their "star" qualities are now public information) then the success of subsequent ventures is unaffected by whether the venture backer is a top-tier firm or a bottom-tier one. Ouch!"

To read the entire working paper by Gompers and his colleagues, click here.

John Chambers on Dealing with Economic Downturns

Cisco CEO John Chambers has some interesting comments on how companies should cope with severe economic downturns in this month's issue of Fast Company.

Team of Rivals

A great deal of attention has been paid to President-Elect Obama's desire to build a "team of rivals" where divergent points of view will be represented around the table when he has to make crucial decisions. He was particularly impressed with this concept as it was described by Doris Kearns Goodwin in her fabulous book about President Lincoln, which was called "Team of Rivals."

As many of you now, my research has focused a great deal on how leaders must foster constructive conflict as a means of improving their decision-making processes. In other words, I have tried to write about effective techniques for preventing groupthink. Bringing people with diverse backgrounds and views to the table is certainly a great start. However, it's not sufficient for producing a healthy dialogue and debate. President-Elect Obama, or any other leader, must keep in mind several other things.

First, as soon as Obama becomes the actual President holding meetings in the White House, the atmosphere will naturally change. Many people who may have been very open with him will almost certainly become more deferential out of respect for the office he will hold and because of the atmosphere within the Oval Office.

Second, to stimulate a vigorous debate, one needs specific tools and techniques for generating a healthy give-and-take. Irving Janis wrote about his theory of groupthink by studying the Bay of Pigs fiasco. That's a telling case because Kennedy built a superstart set of advisers which included several Republicans. Thus, he had a diverse set of people around the table, yet groupthink occurred. Later, in the Cuban Missile Crisis, Kennedy employed a number of techniques for helping to force more debate among his advisers.

Finally, President-Elect Obama must remember that debates can easily become counterproductive. One has to be able to manage the interpersonal conflict that often arises in diverse teams. If that does not occur, then group harmony suffers, as will the ability to execute decisions that are made.

The Perfect Storm?

Steven Pearlstein has a phenomenal article in today's Washington Post about the over-use and mis-use of the "perfect storm" excuse being offered by many executives as they try to explain the failures of their organizations. It's a must-read. Here's a brief except from the article:

"... at the heart of any economic or financial mania is an epidemic of self-delusion that infects not only large numbers of unsophisticated investors but also many of the smartest, most experienced and sophisticated executives and bankers. It's not that they don't see the excesses and dangers in front of them -- how could they not? But somehow they convince themselves that the world has changed, that the old rules no longer apply or that, because of competitive pressure, they had no choice but to run with the herd."

Anatomy of a Meltdown

For a good summary of the global economic crisis, and specifically, Ben Bernanke's role as Fed Chairman, I suggest taking a look at John Cassidy's recent article in The New Yorker. Here is the link.

Paul Ingrassia on The Auto Industry

Paul Ingrassia has a fabulous op-ed piece in the Wall Street Journal today about the auto industry. The title of the article is: The Auto Makers are Already Bankrupt. Ingrassia dispels a number of myths about the situation regarding the Big Three:

Myth 1: Bankruptcy is not an option.
Myth 2: Management changes would be pointless.
Myth 3: Bankruptcy means death.
Myth 4: Banning executive bonuses or requiring more fuel-efficient cars will save Detroit.
Myth 5: A GM-Chrysler merger will help save both firms.

This is definitely worth a read. Ingrassia has covered the auto industry for years, and he brings all that expertise to bear with a concise and insightful argument regarding a potential bailout.

General Motors and Bankruptcy

Business Week has a good, balanced article on the pros and cons of various scenarios for General Motors, as it pertains to a potential Chapter 11 filing. The article does a very nice job of pointing out how the government may actually step in to help facilitate an orderly Chapter 11 restructuring. In other words, the government might not execute a bailout to help GM avoid bankruptcy, but instead, would provide funds to help GM work through a Chapter 11 filing with the least amount of disruption to the rest of the economy. The article also points out that a successful Chapter 11 restructuring would put a great deal of pressure on Ford and Chrysler, as they would then face a domestic competitor with potentially much lower costs due to the restructuring. Thus, any bailout would have to consider how to deal with all three firms, not just GM.

The Financial Crisis and Groupthink

Robert Shiller had a very interesting article in the New York Times on November 1st about the global financial crisis. Shiller notes that a number of people did foresee oncoming troubles in the housing market and the financial system several years ago. However, he argues that the Federal Reserve downplayed the warnings being sounded by various people. Here is an excerpt from Shiller's article:

"But why weren’t the experts at the Fed saying such things? And why didn’t a consensus of economists at universities and other institutions warn that a crisis was on the way?
The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group."

I think Shiller has made a good point about social pressures for conformity that arise in groups and organizations, and that cause warning signs to be downplayed at times. However, I don't think the term groupthink technically applies here. Janis' work on groupthink tends to focus on pressures for conformity that arise within a team, such as the advisers to a President of the United States. In this case, Shiller is talking about a much more widespread pressure for conformity that extends beyond a team, and in fact, well beyond one organization.

A Vertically Integrated Clothing Retailer?

Business Week had an article about Zara, the Spanish apparel retailer, a few weeks ago. I actually just taught a case study about Zara, as I often do in my MBA strategy course. It's a fascinating company. While many clothing retailers outsource all production to low wage nations, particularly in Asia, Zara actually produces a substantial percentage of their clothes in their own factories in Europe.

Their vertical integration strategy is designed to enable them to react very quickly to market trends, and to produce fashionable clothes very quickly as part of their "fast fashion follower" strategy. The fast replenishment model and massive flexibility means Zara makes fewer mistakes, and when they do make a fashion error, it is less costly becuase they haven't ordered a huge shipment of the item from Asia. Because of this, they have fewer markdowns, and their markdowns tend to be smaller. That helps create higher operating margins.

Vertical integration always has its risks, but in this case, Zara has found a way to make it very profitable. It also has helped to create a unique business model that is very hard to imitate.

Should Disney Acquire Electronic Arts?

The Wall Street Journal on Saturday, in the Heard on the Street column, speculated on the potential value that could be created if Disney were to make a bid for Electronic Arts. The column focused, in particular, on the fact that EA's stock price had been knocked down recently due to less-than-expected earnings. It's an interesting notion, given the links between the video game publishers and the creators of entertainment content, such as movies and music. Over the past decade, firms such as EA have become more dependent on the film companies, because they have been licensing more and more content for their games. Many entertainment companies, including Disney, have been forward integrating or looking at forward integrating into video game development. The increased dependency on the film studios, as well as the threat of forward integration, both have put pressure on the margins at video game companies such as EA. Perhaps there is some possibility here for a vertical integration play. Of course, there are always downsides to vertical integration. How would Disney handle the possibility of licensing deals with other video game producers? How would EA handle licensing deals with other film studios? At this point, it seems as though the Wall Street Journal report is not indicating rumors of a deal in the works; it appears to simply be a suggestion that this deal might make sense. It will be interesting to watch if anything comes of it.

Bhide's New Book: The Venturesome Economy

I've been reading an advanced copy of Amar Bhide's new book, The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. I must say that it is a thought-provoking manuscript that challenges much of the conventional wisdom about globalization and innovation. Bhide approaches the issue of globalization and innovation from a slightly different perspective than many other scholars, journalists, and pundits. For many years, Bhide has studied entrepreneurship. Thus, he approaches the issue of globalization and innovation by studying venture capital-backed businesses.

Bhide's main propositions are sure to prompt reaction and dissent from some quarters, but I find it refreshing to see him so eloquently argue that the United States and other western industrialized nations need not fear globalization. Here are a few of Bhide's propositions:

• "A nation's venturesome consumption - the willingness and ability of intermediate players and individual consumers to take a chance on and effectively use new know-how and products - is at least as important as, if not more important than, its capacity to undertake high-level research."
• "An increase in the world's supply of high-level know-how provides more raw material for mid-and ground-level innovations that increase living standards in the United States."
• "Techno-nationalist prescriptions to protect the U.S. lead in high-level know-how may do more harm than good by impairing the performance of the other players in the innovation game who use high-level know-how."
• Perhaps most importantly, Bhide argues that, "The development of scientific knowledge or cutting-edge technology is not a zero-sum game."

What makes the book fascinating to me is that Bhide approaches the issues of globalization and innovation from a very different perspective than traditional economists. As a business school professor, Bhide examines how venture capital-backed enterprises function. He's looking at the reality of young, innovative companies, rather than studying abstract conceptual models of the economy that are often based on assumptions that may not line up with reality. While economists clearly have much to offer to this debate about globalization, Bhide brings a new vantage point to the table. His book surely informs us in new ways, and it is certain to make us reconsider many of the key arguments being made in the popular press about globalization.

Slashing Prices on Blu-Ray Players

The Wall Street Journal has an article today about retailers slashing prices on Blu-Ray DVD players. The article is interesting, because it suggests that the retailers are not simply cutting price because of the down economy. They also are doing so because of fears of the oncoming move to digital downloads. They are trying to encourage adoption of the players, and thereby substantial purchases of Blu-Ray DVDs, before consumers begin to adopt video-on-demand and digital movie downloads in far greater numbers. In a sense, we have a race going on, with firms trying to make sure that we move from regular DVDs to Blu-Ray and then on to digital downloads in that order... the worry is that consumers might just leapfrog Blu-Ray, moving directly from normal DVDs to digital downloads and video-on-demand. The other major challenge in this market is that we may not have enough of a technological advantage to justify, in consumer's minds, making the upgrade to Blu-Ray... especially given the large inventory of normal DVDs that customers have in their homes.

GM and Chrysler - Merger, Government Intervention, or Bankruptcy

The Wall Street Journal has a front page story this morning outlining three possible options for General Motors and Chrysler: merger, government intervention, or bankruptcy. Some combination of the first two is also apparently an option. I understand the rationale for a merger, but I have my doubts. The potential for massive cost reduction synergies does exist here, but the key question is this: Can the two firms actually realize these synergies quickly enough to save the companies from bankruptcy? How complicated will the merger be, and does the complexity of integration take the firms' eyeballs off of actually running the business and trying to improve customer satisfaction? Merging two sick giants is not the typical path to success. As an investor, I would be very cautious about believing in the rapid synergy arguments that executives are likely to put forth as a rationale for the merger. For a cautionary tale, we need only look at the disastrous results for shareholders a decade ago when Daimler acquired Chrsyler.

Learning from Success and Failure

Many companies are conducting post-mortems these days. They are reviewing their failures, asking what went wrong, and trying to come up with corrective actions for the future. However, firms should remember that comparison helps to protect against spurious conclusions. When we study a single project, it becomes rather easy to jump to conclusions as to what factors contributed to that outcome. However, we may not have identified the correct cause-effect relationship; we can easiliy attribute a failure to the wrong causes and factors.

Research suggests that we learn more effectively if we compare successes and failures, rather than only examining our failures. Consider the work of Tel Aviv University scholars Schmuel Ellis and Inbar Davidi, who examined after-event reviews conducted by the Israeli military. They compared soldiers who conducted after-event reviews after successful and unsuccessful navigation exercises with soldiers who only reviewed failures. Ellis and Davidi found that soldiers who studied successes and failures performed better on subsequent missions than those who only studied failures. The two scholars argued that “contemplation of successful events stimulated the learners to generate more hypotheses about their performance.”

The implication is that, as firms study their failures these days, they should be systematically comparing the failures to past successes. Comparison and contrast will protect against spurious conclusions, and it will help refine their lessons learned.

The Balance Sheet as a Competitive Weapon

In finance, people talk about the "optimal" capital structure of the firm, i.e. the appropriate balance of debt and equity so as to minimize the cost of capital and maximize the value of the firm. However, some companies choose to maintain much less debt than they could afford to carry on their balance sheet. In fact, some firms not only carry little debt, but they maintain a hefty amount of excess cash as well. During good times, some investors dislike all that excess cash on a firm's balance sheet; they cite the opportunity cost, and they sometimes demand that the firm distribute the cash to shareholders through stock buybacks or dividends (sometimes because of fear that the management might squander the resources in pursuit of flawed diversification strategies or other ill-advised expansions).

Balanced against the opportunity cost, what does this conservatism get you, besides protection against financial distress during economic downturns? Most importantly, a strong balance sheet (low debt, excess cash) can become a competitive weapon for a firm. When other firms face distress, a company with a strong balance sheet can go on the offensive and put additional pressure on competitors. How can they do so? They might launch a price war, using the additional financial resources and flexibility to fund the discounting. That effort may enable the firm to increase market share in a downturn. They might also use the strong balance sheet to gobble up weaker competitors through mergers and acquisitions. Finally, they might use the resources to accelerate key investments in equipment, factories, R&D, and the like - investments that they know their rivals might not be able to match during the downturn.

Take the example of Wal-Mart in recent weeks. They just announced that they will be offering steep discounts on certain toys this holiday season. It appears that they are using their financial strength to try to increase market share at the expense of weaker rivals in the retail sector. Similarly, consider the examples of Wells Fargo and Bank of America in the financial sector. They appear to be using their strong balance sheets to make opportunistic acquisitions of weaker rivals during the financial crisis. These competitive moves would not have been possible without the flexibility provided by a strong balance sheet.

Cutting Costs

The Wall Street Journal has an interesting article today on how small businesses are finding ways to cut costs given the economic downturn. The article highlights some ways to reduce expenditures without cutting employees or service to customers.

In general, the philosophy that small businesses (actually all firms) should take in an economic downturn is that, "There is no such thing as fixed costs." In other words, businesses have to focus on overhead costs when volume plummets in an economic downturn. They must scale those down; otherwise, the average costs per unit will skyrocket as volume falls. Some good categories to focus on are energy, supplies, rent, and leases.

Will the Green Movement Become a Victim of the Global Financial Crisis?

The Dow ended down 369 points today, after having been down 800 points earlier in the day. The Dow finished below 10,000 for the first time in years on worries that the financial mess is spreading quickly to various international markets. With the global financial crisis deepening, one wonders about the impact on various companies. Today, I began wondering about the green movement. For the past few years, we have seen companies trying to become more environmentally conscious. Many firms tried to reduce their carbon footprint. You have to wonder, however, whether these firms will cut back on their environmental programs given the tough economic climate. Yes, some pro-environment moves by firms actually reduce their costs. However, other initiatives cost money in the short run, even if they do pay off over the long haul. Will firms scale back their environmental iniatives to try to preserve cash and bolster their financial position in this difficult economic environment? I think they will. It will be interesting to watch these developments.

Harley Davidson Advertising

I've always admired Harley Davidson's advertising, because it is so well-designed to represent the core values of the brand. Their latest print ad didn't let me down. It's an ingenuous ad, in that it BOTH stays consistent with the brand's core values, AND it lets the customer know that a Harley happens to get 50+ miles per gallon. Check out the ad below:

The Global Financial System

The current financial crisis provides a useful learning opportunity for all organizations as they consider their risk of a catastrophic failure of any kind - be it physical, technical, or organizational.

The global financial system is a good example of a complex system, as first defined and described by sociologist Charles Perrow. Complex systems are vulnerable to catastrophic failure, according to Perrow, if they have two attributes: high interactive complexity and tight coupling. By interactive complexity, he means that the system has many elements that interact in ways that are hard to predict and know in advance. By tight coupling, he means that different elements of an organizational system are highly interdependent and closely linked to one another, such that a change in one area quickly triggers changes in other aspects of the system. If we have learned anything over these past few weeks, it is that the global financial system exhibits high interactive complexity and tight coupling.

In a system with these attributes, large-scale failures result from a series of small errors and failures, rather than a single root cause. These small problems often cascade to create a catastrophe. Accident investigators in fields such as commercial aviation, the military, and medicine have shown that a chain of events and errors typically leads to a particular disaster. We see the same thing here with the global financial system. A problem that began with failures in the subprime mortgage market has cascaded to cause huge disruptions in many different parts of the global financial system and the economy more broadly.

Organizations of all kinds should take note. Do they operate systems with high interactive complexity and tight coupling? Could a small failure cascade to create a chain of errors that leads to major catastrophe? Every organization should look in the mirror and examine its vulnerability in light of these concepts.

Helping Employees Cope with Economic Turmoil

With turbulence and turmoil in the capital markets, employees in all industries are feeling a bit anxious these days, both about their net worth and their job security. For good reason, employees find themselves distracted from their day-to-day work. It's very easy for rumors to spread in the workplace about potential problems at a particular company, as well as the prospect of layoffs. The rumors and distractions can have a serious detrimental effect on employee productivity. How can managers cope with this problem?

First, they must communicate even more often than usual. They have to be very transparent about the economic condition of the firm. Managers also need to provide updates as to how external events are affecting the firm's business, i.e. how does overall economic growth correlate with the firm's profitability? How does Wall Street's woes affect the firm's profitability?

Second, they must go to great lengths to educate the workforce about the financial drivers of the business and the current state of the business. Many employees will need help understanding key financial metrics, as well as key causes of stock price changes.

Third, managers must be brutally honest about the state of the business. Just as top managers never like to be surprised by bad news, so too lower level employees don't want to be shocked. People will appreciate the candor.

Fourth, don't let the remedies come out in dribs and drabs (if possible). It's much better to assess the whole situation and announce the entire regimen of tough medicine required to cure the patient, rather than issuing one prescription after another over the course of many months. The initial pain will be great, but then the company can move on.

Finally, managers need to be very proactive about rooting out and disproving false rumors that pop up around the workplace. Letting fears, doubts, and misinformation linger can be very harmful.

Is Television Good for Kids?

The Wall Street Journal had a provocative article last week about new research exploring whether television might actually be good for children and families in some ways. Here is a short excerpt from the opening to the well-written, in-depth article:

"University of Chicago Graduate School of Business economists Matthew Gentzkow and Jesse Shapiro aren't sure that TV has been all that bad for kids. In a paper published in the Quarterly Journal of Economics this year, they presented a series of analyses that showed that the advent of television might actually have had a positive effect on children's cognitive ability."

The article goes on to cite the findings from the study:

"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did. The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure. The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower."

Now, of course, there are limits to how much we can generalize from this study, as the article points out. The findings are from a different era, when the content on television was quite different (i.e. far less trashy). Moreover, they are seeing positive effects specifically in households where English was not the first language, i.e. immigrant households. Yet, I find the research intriguing, because I was raised in a household where English wasn't the first language. My parents came over from Italy just three years before I was born. We did watch a fair bit of television when I was young. Since my parents didn't speak much English at the time (or at least it was broken English), the television may have been beneficial in helping me learn the language. I think it's at least plausible that it could have had some positive effect. Having said that, I don't think my kids are in the same situation. They have plenty of other avenues for learning to speak, read, and write English, and they don't need the television to help them!

Can winning sports teams make us more productive employees?

The Boston Globe had an interesting article last week on the topic of whether a winning team can actually enhance the financial well-being of its fans. It cites research by economist Michael Davis and psychologist Christian End. The article explains the study:

"A winning NFL football team increases the incomes of the people who live and work in its hometown by as much as $120 a year. And while the study doesn't identify exactly what causes the boost, the authors point to psychological literature suggesting that winning fans are at once harder workers and bigger spenders. In short, buoyed by the team's success, we work longer hours, take bigger risks, and shop more avidly, all of which helps the local economy."

I'm not at all sure that this psychological impact on a team's fans merits the large public subsidies often given to sports teams to build new stadiums, but it is certainly fascinating research about how our moods might affect our productivity as workers.

Guest Post - Leading from the Wings

Leading From the Wings

This post was contributed by Heather Johnson, who writes on the subject of California teaching certificate. She invites your feedback at heatherjohnson2323@gmail.com

Walking down memory lane, I recall a friendly basketball match that I played against the sophomores as a freshman in college. I was new, and so were the others on my team. We had not yet had time to get to know each other well, the strengths and weaknesses that each of our games brought out. So when it came to choosing a captain, a teammate was chosen at random. But as the game progressed, we seemed to be drifting like a rudderless boat thrown at the mercies of a wild sea. We had no game plan, no team work, and most of all, no commitment.

After a poor show in the first half, I decided to take control of things even though I was not the designated leader. The game we’d played so far had offered me a peek into both the strengths of my teammates and the weaknesses of my opponents. Armed with this insight, I outlined plays and strategies for the second half during the interval. We didn’t win that day, but the loss was far from humiliating. We had redeemed ourselves during the latter part of the match.

I learnt a valuable lesson in leadership that day – it’s not just designated leaders who must lead all the time. Team members with a sense of responsibility and an innate aptitude for management are equally at fault if the team goes astray. In fact, they are more to blame, because they know what they must do and yet they fail to do it for various reasons. They may fear alienating or offending the appointed leader, they may be too lazy to take on the onus of leading the team, or they may be too shy and apprehensive to come forward with their ideas.

We can use these points to define a true leader – one who knows what needs to be done and is not afraid, reluctant or timid to do it in a way that is appreciated and admired by everyone else on the team. A leader guides rather than controls, listens rather than talks all the time, works with the team rather than make them do all the work, shares credit with everyone and takes blame alone, and thinks things through before actually implementing them. A good leader knows that the best way to motivate is through encouragement and not fear and that praise is more important than recriminations.

A true leader does not ask for credit for a job well done, which is very important in the kind of scenario I outlined above. Leadership driven by a love for the spotlight is as fleeting as a shooting star – a flash of brilliance reduced to ashes and dust. Leadership must focus on the goals at hand and take the right decisions using the right people to reach those goals in the most efficient way possible. Publicity lets others know that you’re a good leader, but fame is a fickle friend that deserts you the moment you make a mistake. Leadership that’s driven by a love of achievement alone is the kind that’s head and shoulders above the rest, the kind that lasts a lifetime, no matter where the cameras are focused. You don’t have to be the star of the play to feel a sense of achievement; it’s infinitely better to be the director in the wings who pulls the strings and calls the shots. After all, no matter how entertaining the puppets are, there’s no show without the puppeteer!

7 Ways to Fail Big

Paul Carroll and Chunka Mui have a provocative article (Seven Ways to Fail Big) in this month's issue of Harvard Business Review. They studied the 750 of the most significant business failures from 1981-2005, and they identified some key lessons from those cases. While one might quibble with their methodology or even with some of their conclusions, it certainly makes for interesting reading. The article should be commended for not only providing a list of the mistakes that were most often made, but also for offering some suggestions on how to avoid these catastrophes. I especially liked their two sidebars titled "The Devil's Advocate" and "Questions Every Company Should Ask." I think executives would be well-served to consider the techniques presented in those portions of the article.

Ann Fulmer on Mortgage Fraud

Yesterday, Ann Fulmer spoke at the Economic Summit we held at Bryant on the topic of mortgage fraud. Fulmer made herself into one of the nation's leading experts on the subject when the problem invaded her own upscale neighborhood in the suburbs of Atlanta. She gave a dynamic presentation, in which she showed us how much it may have contributed to the mortgage meltdown, while providing vivid examples of how fraud simply decimates some neighborhoods (because there's some benefit to the criminals of clustering their activity in particular areas). It was truly frightening to see how mortgage fraud works, and to see that it can affect upscale suburban neighborhoods, bringing other more dangerous crime along with it. For more on Ann Fulmer, see this story about her in Business Week, and this one in the New York Times.

Ethnography, Failure, and Diaper Design

Fortune has a great article on how Kimberly-Clark designed a new line of premium diapers, in part to cope with declining future demand due to demographic trends (lower birth rates). The article highlights two important practices that firms are employing these days. First, it points out the importance of ethnographic marketing research, i.e. direct observation of consumers in natural settings using a company's products. Firms are employing these observational methods, rather than relying solely on focus groups and surveys, because they have learned that people often say one thing and do another. Moreover, consumers often aren't even aware of key aspects of how they use particular products. Observation yields great insights about the specifics of consumer behavior. Here is an excerpt from the article on this point:

"In many cases they went into homes to do interviews; in others, they placed motion-activated cameras in the home to observe diaper-change routines and then watched the hours of footage at K-C headquarters... Nelson plays some footage of a newborn getting its diaper changed, taken from one of the videocameras. You see the baby's legs continually springing up and the mom trying to straighten them as she puts on the diaper; clearly it's a struggle. Footage like that started pushing the team in the direction of thinking that a better diaper would be shaped to get around those legs and follow the curves of a baby's body."

The second key point in this article is that Kimberly-Clark is intentionally creating failures in their research labs to learn more about diaper technology. Only through intentionally causing many types of diaper leaks can they discover how to create a diaper that fits comfortably, yet does not leak. Here is the excerpt on that point:

"Fit diapers in varying states of sagginess, are noisily playing with trucks and watching SpongeBob SquarePants. They're an adorable collection of diaper blowouts about to happen, and when they finally do, K-C's researchers record each failure in obsessive detail: how much the diaper weighed at the end, where the leak seeped out, how the diaper fit around the legs.
The goal of this forced-failure test, as Kimberly-Clark calls it, is to check that the diapers being churned out at the company's factories match the rigorous standards for Huggies Supreme Natural Fit..."

As the father of three, with one still in diapers, I found the article quite interesting. It's rather amazing how much time and money is spent trying to perfect diaper "technology" at Kimberly-Clark.

The Perils of Going Green

Fast Company has an article about how Clorox struck up a partnership with the Sierra Club when it launched its Green Works line of more environmentally friendly cleaners. The deal means that the Sierra Club label to appear on all Green Works products. Naturally, the environmental organization receives a payment in return for the use of its logo. This partnership has been very beneficial for Clorox, but it has created much internal furor within the Sierra Club. Some members apparently do not agree with this type of commercial deal.

This case illustrates the perils of "green" strategies, both for the for-profit firms and the environmental organizations. In this case, the environmental organization found itself on the hot seat for its commercial tie-ups. In other situations, we find that firms who are trying to "go green" find themselves inviting much more scrutiny than they had ever experienced. Sometimes, claiming progress on the environmental front only invites more attention, and perhaps criticism, from various constituencies and activitists. In sum, becoming more environmentally friendly has many merits, but it can be a perilous activity for all involved.

The Importance of Design

From the remarkable success of Apple to the popularity of kitchenware products made by Alessi, we see many examples of the power of innovative design. More and more companies have rediscovered the basic notion that success in the marketplace is not simply a function of a product's quality or technological superiority; design matters. Now, Business Week reports that Coca-Cola has taken a fresh look at how design can freshen up the iconic brand's look and feel. There's no question that great designers can not only help to improve the products we purchase and use, but they also can help connect consumers more closely with brands. A good design can and should convey the meaning of a brand. Some of Coca-Cola's recent work seems quite interesting, particularly because the firm does have some interesting design roots - particularly with the famous glass bottles of old.

Prewards- Coupons for a Digital Age

Business Week has a fascinating article about a new Web 2.0 technology that marketers are using to court millenials. The concept is called a preward. Here is how Business Week describes it:

"Edo Interactive, a Nashville-based firm that deals with Web 2.0 technology, is trying to change the game. After spending a year studying young consumers, they developed Facecard, a prepaid credit card aimed squarely at millennials and the businesses that court them.
Launching nationally Sept. 1, Edo's gimmick works like a fiscal Facebook: After applicants create profiles on Facecard.com, they get a card in the mail that allows them to borrow, lend, or give away money to buddies electronically. For a fee, retailers can send them "prewards," small denominations of instant store credit, based on their age, location, and personal interests. Because the $2 to $3 gifts are redeemed via credit card, tracking consumer response is a cinch."

Now, I found this technology rather interesting, but I was also struck by the amount of spending by millenials, and thus the amount of marketers' attention focused on this demographic. According to the article, "America's 80 million millennials (and their folks) shell out roughly $200 billion annually, according to Chicago-based investment firm William Blair & Co.." Wow! Those are some huge numbers.

Well, this leads me to my main point. Both college faculty and parents need to be paying a great deal of attention to the importance of teaching young people about responsible personal finance. These young people are being hit with massive marketing efforts aimed at getting them to use credit cards and spend their money (and their parents' money!). Yet, many young people do not understand certain essential basics of personal finance. Unfortunately, that means that they leave college in far worse financial shape than simply the debt load of college loans. I don't think we can start too soon by the way. We need to begin educating young people about financial matters when they are in elementary school, and gradually introducing more complex ideas about how to manage one's money.

Knowing Your Target Market

One of my MBA students, Judd Taylor, has shared with me an interesting example of a firm perhaps not being fully aware of how its pricing strategy shapes its target market, particularly given the recent run-up in fuel prices. Taylor wrote:

"I recently completed a new stone patio adjacent to the deck on my house. In the process of researching suppliers for the stone pavers, I noticed that one local company offered free delivery for any amount of goods purchased. I wondered how they got away with this given the recent increases in fuel prices. Further investigation revealed that their stone prices were noticeably higher than their local competitors, indicating that they must transfer their transportation costs onto the price of their products. The ability to offer “free delivery” must be an important advertisement for this firm as it is indicated in all of their flyers and brochures. Conceivably, this pricing strategy would appeal most to homeowners who cannot amortize the cost of the delivery over a large order. Contractors might prefer to pay the delivery charge in exchange for a lower price on the materials, especially for large orders."

Taylor's example is an interesting one, because one wonders if the firm understands how its pricing strategy may be shaping its target market. Does the company understand that it will attract homeowners much more so than contractors with this pricing strategy? Perhaps it does, but in some cases, firms may not understand how a particular pricing strategy may shape who shops, and who does not shop, for their products.

How about the implications of oil price increases? Well, a free delivery ad might play well given high gas prices. However, those increases in gas prices certainly will result in higher and higher item prices for the stones, if the firm wishes to continue make profit with its free delivery strategy. This will only drive more contractors away, and it will mean that homeowners with very small jobs will be the most likely purchases of their products. Will this be economically attractive for the firm? What will its cost structure look like with a high frequency of deliveries of small batches of items? The cost of these kinds of deliveries, naturally, is higher than traveling to a job site to deliver a very large order.

The point is simple: Every firm should be clear on how its pricing strategy shapes the kinds of customers who will purchase its product. Does the pricing strategy attract the kind of consumers that a firm wishes to target? Or, is a firm attracting customers which it does not want, or with which they cannot make an attractive profit?

Productivity of Scientific Researchers

The Wall Street Journal had an interesting article yesterday about the productivity of scientific researchers. The article cites studies about the period during one's lifetime when a researcher tends to be most productive. The Wall Street Journal cites research by Benjamin Jones of Northwestern, who argues that innovators tend to make their peak contributions around the age of 40, but then their contributions decline markedly in their early to mid-50s. Thus, the period of peak productivity is fairly limited. Naturally, these studies simply report the averages; there are many outliers, both young inventors who make substantial contributions at an early age as well as people who continue to innovate well beyond their early 50s.

The article points out that some companies are trying to find ways to extend the peak period of research productivity for their most talented people. They are trying to find ways to both help the young promising stars accelerate their learning curve and become more innovative at an earlie age, and they are trying to help older workers maintain their pace of innovation beyond their early to mid 50s. For instance, companies such as Sun and Texas Instruments are pairing up young engineers with experienced mentors; the partnerships benefit both the young and the old. The young come down the learning curve faster, and the old get access to new ideas and fresh perspectives.

As an academic, from time to time I think about this issue of research productivity over one's lifetime. I've seen plenty of scholars who make great contributions at a relatively early age and then become rather stale. They continue to work in a very narrow domain for decades, and they don't branch out to learn and discover new things. I think it takes a concerted effort on the party of any researcher, whether commercial or academic, to keep exploring new territory and exposing one's mind to completely new perspectives. It's easy to continue to mine the same territory upon which one has built their reputation; it's harder, but ultimately more beneficial, to take the risk to go beyond one's comfort zone and stake out new ground. In sum, I think all of us need to set some personal goals about the new bodies of knowledge and new skills that we would like to develop in the next 3-5 years; we need to keep setting these goals over time, so that we truly become lifelong learners. Hopefully, this will keep us innovative and productive for decades to come.

The Fall of Oil Prices

It's been amazing to watch the rapid decline of oil prices in recent weeks, driven in large part by the fact that demand has dropped. People and companies have finally begun to make substantial changes in their behavior, as witnessed by AAA's data on the reduced amount on miles driven by Americans this summer.

If there is one positive from the high oil prices that we've experienced, it is that firms have implemented major changes to eliminate wasteful use of energy. Such cost reductions will help them become more competitive in the long run. It's interesting that the U.S. productivity numbers have been rather strong during the past few quarters, despite the downturn in economic activity. Perhaps the productivity growth is a reflection of firms trying to become more efficient to offset the high price of energy. Whatever the cause, the growth in productivity in 2007-2008 bodes well for long term economic growth, despite the short term economic troubles.

One last thought on oil prices... One does have to wonder about the timing of the shift in the oil market. Is it just a coincidence that prices began to fall when the goverment began discussing ways to crack down on short sellers who may have been acting inappropriately? Short sellers clearly play a useful role in our capital markets, but there are some questions regarding the appropriateness of some behavior.

Global vs. Local

Ford announced this week that it was shifting more of its production to small cars, and that it was going to bring some of its popular European small cars to the United States. The news reports suggest that Ford is finally making more progress toward standardizing models across countries, whereas in the past, the company focused on building different models for different local markets.

The Ford situation reminds us that there are two different reasons that firms customize their products for local markets. First, they might do it to tailor their products and services to local customer tastes and needs. This is a perfectly viable reason for localization, though of course, companies must weigh the benefits of local customization against the foregone economies of scale. However, there is a second reason that firms customize for local markets, and it is not value maximizing. As companies grow and develop local management in various countries, those organizational units grow in power. Sometimes, they become fiefdoms run by managers behaving like feudal lords. These managers insist of building their own products for those markets, rather than adopting global product platforms. Yet, they might be doing so because they want to control their region and accumulate more resources under their control, rather than because it is actually the right thing to do for the business. The Ford story suggests that firms need to be particularly attuned to this second, value destroying reason for local customization in different geographic markets.

Airline Service

Sorry about the long delay between postings. I was finishing up the manuscript for my next book, and then I flew here to Tokyo to teach an executive program. I did have an interesting experience on the flight over here. I flew from Boston to Dallas, and then from Dallas to Tokyo on American Airlines. I've flown this route every year now for the past five years, and I always fly American Airlines as I have elite frequent flyer status with them. I was quite surprised, though, when I landed in Dallas. As I walked off the jetway into the gate area, a woman from American Airlines stood there with a placard with my name on it, as well as the name of one other passenger. She offered to drive us to our gate for the departure to Tokyo. Now, Dallas is a huge airport, and it was quite some distance between the gates. However, we had plenty of time before our next flight. I had never been offered this type of service on prior flights to Tokyo. I think it's interesting that American Airlines appears to be going that extra mile to provide service to its best customers, even while cutting back in many areas. While we have read so much about labor reductions, here we had a person driving us through the airport. It seems clear that the airlines are very focused on trying to enhance service to their core customers. It's always been tough for the airlines to differentiate their products. Flying has simply become a commodity product. Yet, here we have an airline trying to make sure that it offers a small amenity that may help it retain its best customers. It will be interesting to see if more attempts are made at differentiating their products and services, and if these efforts are any more successful than they have been in the past.

A Friendly Deal for Bud?

The Wall Street Journal reports this morning that Inbev may be raising its bid from $65 per share to $70 per share in an effort to secure a friendly deal with Anheuser Busch. It's not surprising to see Inbev up its offer, given that a friendly deal likely means a smoother integration process than a hostile takeover. Achieving key synergies becomes crucial to justify the takeover premium, and those synergies require the cooperation of Anheuser-Busch managers and employees. Most experts believe Anheuser-Busch would have a hard time devising a strategic plan that would allow it to argue to shareholders that it can get to $70 per share on its own, even if it sells noncore assets such as the theme parks and packaging business. It will be interesting to see if the two firms can hammer out a friendly deal. Moreover, it will be interesting to see how analysts and investors react to the larger takeover premium being offered by Inbev. Will they think that the potential synergies justify that acquisition price?

Deliberate Practice and Simulations

Research by K. Anders Ericsson and others has shown that elite performers in a wide variety of fields do not excel simply due to innate talent. Instead, these stars engage in a great deal of what Ericsson calls "deliberate practice." It's more than just hard work. Elite performers engage in practice that is aimed at a very specific performance improvement goal, and which provides immediate feedback. Moreover, deliberate practice involves focusing on the things that elite performers don't do well; many of us tend to practice that at which we already excel in our leisure sport activities. Finally, deliberate practice consists of extensive repetition of the very same activity, so as to hone a particular skill. It emphasizes focus over variety in the building of skills - i.e. working on one thing at a time. As famous tennis instructor Vic Braden has said, "“Losers have tons of variety. Champions just take pride in learning to hit the same old boring winning shots."

Can businesses leverage the power of deliberate practice to develop their human capital? Surely, they can. We can engage in deliberate practice when it comes to key activities such as drafting and making presentations. Leadership development programs can provide opportunities for deliberate practice at a variety of skills related to communication, negotiation, and the like. Beyond that, we can employ technology to create opportunities for deliberate practice. One innovative new methodology for doing so involves the use of simulations and video game technology to train employees. For instance, Hilton Garden Inn employs an interactive training game called "Ultimate Team Play." This game allows individuals to immerse themselves in various scenarios that take place in a hotel. They have to make decisions about serving customers, and they have to complete various tasks. The game provides immediate feedback to the trainees, enabling them to see how their efforts impacted measures such as customer loyalty and satisfaction.

Starbucks Closing Locations

Starbucks recently announced that it was closing 600 locations this year. Interestingly, it appears that the company will close company-owned locations, rather than any of its licensed locations (such as small airport shops). While this closure strategy may make sense economically, one still wonders about the strategic logic of the company's massive growth of licensed locations. It seems quite likely that the proliferation of licensed locations, including the abundant licensing to food service companies, has diluted the Starbucks brand.

It's hard to argue that you are one of the highest quality coffee companies in the country when you have your coffee being brewed and then sold from air pump dispensers in tons of different locations. How long does that coffee sit in those dispensers before it is sold? Is it really fresh? Does it always taste as good as Starbucks drip coffee sold in its company-owned locations?

In my view, the company must address this fundamental strategic question. The craving for growth above all else clearly drove them to expand at a frenetic pace in recent years. Now, retrenching can be painful. Stepping back from its licensing strategy won't be easy. It may even be economically a negative in the short run, but it may be precisely what the company must do strategically to position itself for the future.

The NBA, Referees, and The Wisdom of Crowds

The NBA has an interesting and quite serious problem these days. The league appears to have a lack of credibility among many fans. Disgraced referee Tim Donaghy claims that some games were intentionally manipulated by the officials, and NBA commissioner David Stern dismisses the claim as the desperate accusations of a criminal. However, many fans question the league's credibility when it comes to the officials. One of the games mentioned by Donaghy (Game 6 of the 2002 Lakers-Kings Western Conference Finals) raises serious questions in the minds of both sportswriters and fans. The commissioner cannot simply dismiss all of this as the fraudulent claims of a criminal. Whether true or not, the real issue is the credibility problem that the NBA has with its own fans.

What should the NBA do about it? Peter Keating has an interesting solution in this month's issue of ESPN: The Magazine. Keating draws on the work of James Surowiecki, the author of the best-selling book, The Wisdom of Crowds. He suggests that perhaps the NBA should allow fans to vote on key calls in an NBA game. After all, Suroweicki and others have shown that the collection of thousands of independent opinions often may yield an answer that is better than the judgment of any particular expert.

Keating's suggestion may sound preposterous, but perhaps there is a different solution that the NBA might experiment with, drawing on the same logic of mass collaboration. Companies in a variety of industries have employed mass collaboration effectively. For the NBA, perhaps fan voting could be used to EVALUATE referees, rather than to actually make calls in a live game. Rather than simply relying on an expert in the league office to judge the competency of officials, perhaps the NBA could take a look at how its millions of fans think referees have performed. Comparing the fans' collective judgment to the ratings by experts could be quite interesting. Not only might it yield informative results, but such a system might go a long way toward restoring the league's credibility in the eyes of its customers.

Airline Pricing

We have all seen the reports of new fees being imposed by the airlines, particularly for checked luggage. It's amazing to me that an industry with such an awful reputation for customer service would now choose to nickel and dime its customers in this fashion, rather than raise fares slightly. It's especially befuddling to charge for checked luggage, because this scheme creates an even bigger incentive for customers to try to carry on everything that they have. More carry-on bags means a slower boarding process and longer turnaround times. That means planes sitting on the ground rather than flying... which decreases profits, as well as angers customers.

Then, we have the befuddling news that United Airlines may require minimum stays on some routes. I'm not sure that I understand this policy. Does it mean that I can't fly from Boston to DC and back on the same day with United? Why would they turn away that business, when their goal should be to fill the planes so as to spread their fixed costs over as many passengers as possible? If this is true, then perhaps there is some economic reason for doing so, but again, it sure does not seem like a move designed to please its customers.

Exxon Mobil Selling Gas Stations

News reports indicate that Exxon Mobil plans to sell its 2,200 company-owned gas stations over the next few years. The articles suggest that, despite high gas prices, the company does not make sufficient margins in gas retailing, because the business is highly competitive. While that may be true, there is a larger strategic issue at play here. The company simply recognizes that the case for forward integration into gas retailing simply is not a strong one. That is why most of the Exxon Mobil gas stations around the United States already were operated by distributors, rather than being company-owned.

Apple owns its retail stores because it wants to control the consumer purchasing experience, gather critical marketplace information, and further enhance its product differentiation. Exxon Mobil has no such powerful rationale for forward integrating into retail gas operations. They can accomplish their goals by licensing their brand to distributors who own and operate the locations. Let those who are more adept at operating these businesses do so... after all, gas retailing is about much more than fuel these days. The business is much more about operating convenience stores profitably than it is about pumping gas.

The 3,000 Mile Oil Change

The state of California recently launched a campaign to persuade consumers that they may not need to change the oil in their cars every 3,000 miles. In fact, for most new cars, the manufacturers recommend that you change your oil less frequently. For my car, Honda suggests changing the oil every 5,000 miles, for instance. (For older cars, the 3,000 mile benchmark may still make sense.) If everyone changes their behavior, Americans could reduce their consumption of oil and reduce the amount of waste generated.

If more attention on this issue spreads across the country, we could see important implications for businesses such as Jiffy Lube and other auto maintenance centers. They have profited from the disciplined approach that many Americans take to changing their oil every 3,000 miles. If people begin to adhere to manufacturers' guidelines for new cars, we may see substantial challenges for these firms. It will be interesting to watch to see if this trend takes hold, and how the auto maintenance centers respond. With oil above $130 per barrel, it's also interesting to see how many different ideas are being pursued to eliminate wasteful consumption.

Guest Post on Decision-Making

Heather Johnson sent me the following guest post, with her take on a subject that I've spent a great deal of time studying over the years.

The Choices we Make

Any student of management should be familiar with the process of decision-making – describe and understand the problem, identify the objective, determine the alternative options available, evaluate each of these options either objectively or subjectively, and choose the one that fits best. Unfortunately, the simplicity of the statement of the process does not carry over to the actual process itself, which is why most people find the procedure of making decisions extremely difficult.

On one end of the spectrum you have people who agonize over every small thing, from what to eat to what to wear; and on the other, you have those who save their energy to rationalize choices that are life-changing, if not for them, then for the people whose livelihoods depend on them. I’m not trivializing the first category, only trying to highlight the fact that every one of us considers the decisions we have to make as the most important choice we make at the moment.

The art of making decisions is a theory that has been thrashed about, debated on, and put to effective use in almost every boardroom across the globe. But it’s not something that’s applied when it comes to the individual - personal decision-making is a process that’s often intuitive, based on circumstances that prevail at that point, and influenced by people who control aspects of our lives. From where I sit, this is what I’ve learnt about people and the decisions they make:

· The majority is happy to go with the flow; they do not take decisions that change their lives overnight or even set in motion the harbinger of positive change. Any change that happens is forced, and these people then rearrange their lives to fit around the change.
· Some people straddle the fence; they know they have to take a decision one way or the other (mostly a yes-no decision where there is no in-between ground) and they’re hesitant or afraid to choose. The more daring in this category call the shots and finally choose while the meek (who I don’t think will inherit the earth) fall on one side after being either pulled or pushed. If the decision is a success, the one who chose is elated that he made the right decision; if it’s a failure, the one who fell blames the one who pushed him over, a case of passing the buck once again.
· Some let other people decide; they are the laidback kind who are ok with following the leader rather than taking the lead themselves.
· A rare few are go-getters; they plan their lives and map out where they should be at what point of time. These people live their dreams, and if one or two of the dreams die a premature death, they’re back to the drawing board mapping out new strategies and alternatives. This kind thrives in challenges – they do not fear to take the road less trodden and delight in finding offbeat paths that lead them to the pinnacle they hope to achieve.

The choices we make have repercussions, both on ourselves and the people whose lives are intertwined with ours. Unfortunately, there’s no writing on the wall to guide us as we take decisions that sometimes, may be the difference between success and failure, wealth and mediocrity, and even life and death. But the fear of failure should not be a deterrent to attempting – just as you’d get back on a horse asap after a fall, do not hesitate to make a new choice even if the one you made earlier turned out to be a mistake.

The best way to make decisions is to let your head rule your heart and not vice versa. Rational scores way over emotional when it comes to decision-making. The time taken to make a decision should not outweigh the value of the decision itself – it’s not worth it to spend a whole day deciding the color of pants you want to buy. Think your choices over, and when you’re done, your instinct will tell you what’s right.

This guest post is written by Heather Johnson, who frequently writes on the subject of grants for nursing college degree. She welcomes your comments and freelance writing inquiries at:
heatherjohnson2323@gmail.com

Inbev Makes Bid For Anheuser Busch

Inbev officially announced its takeover bid for Anheuser Busch. They offered $46.4 billion for the American brewer, valuing the target firm at a 35% premium to the 30-day average stock price prior to recent speculation about the acquisition.

As I mentioned in a recent Reuters article, I think the Anheuser Busch board of directors will have a hard time turning back this bid without making other strategic moves. (Consider what has happened at Yahoo after that firm rejected the Microsoft bid). Shareholders are not likely to be pleased if the board simply rejects a bid that offers a substantial premium. The family only owns about 4% of the shares, so it cannot block the deal on its own.

If the Busch family does not want to sell to Inbev, what can they do? I think that one possibility would be to find a private equity buyer who would be willing to retain and work with the current management team in place, particularly CEO August Busch IV. Mature companies with strong, stable operating cash flows and valuable brands make attractive targets for private equity investors. The only question would be whether a private equity firm (or group of firms) could raise the required capital at the right price given this year's turmoil in the capital markets.

Regardless of what happens, I think you will see prospective buyers (Inbev, private equity firms, or some other white knight) taking a close look at some of Anheuser-Busch's ancillary operations. While the theme park business (Busch Gardens, Seaworld, etc.) is quite profitable, it's hard to make a case that strong economies of scope exist between the beer business and the theme park operations. One way to generate cash to help finance a deal would be to sell the theme parks. Other business units, such as the firm's packaging operations, might also receive scrutiny.