Facebook's Future

This Forbes article examines the future of Facebook. Interestingly, it calculates how many ads Facebook would have to sell to particular groups in order to offset its current burn rate of cash. The numbers are staggering. The article makes a strong case for why the site, which has done a remarkable job of attracting new users, may find it much more difficult to become highly profitable.

Dan McCarthy on Job References

Dan McCarthy over at The Great Leadership Blog has a thought-provoking post on the issue of references that are requested and/or provided when people search for employment. The post comes with a terrific Scott Adams cartoon as well!

Mission Planning

Tom Magness over at The Leader Business Blog has a series of interesting posts on mission planning based on research at the U.S. Army War College. Business leaders can learn from this work that's been done by military specialists in the area of planning and decision-making.

The Future of GE

Business Week has a great article on Immelt's strategic options at General Electric. The author, Jena McGregor, makes the case out that Immelt's options are indeed rather limited at this point. For instance, McGregor points out that some investors might believe that the company should be broken up, that the whole is no longer worth more than the sum of the parts. However, given the state of credit markets, it's hard for Immelt to find willing and able buyers for many of the GE businesses at this point.

While McGregor is correct about Immelt's short term options, I think a break-up of some kind is potentially in GE's future as the financial markets cover. Professor Stewart Thornhill of Ivey Business School is correct when he says in the article that companies do face diseconomies of scale at some point. At $180 billion in revenue, it's both hard to manage such a large and complex organization, and it's hard to grow that top line by a substantial percentage. There's simply a large numbers problem there. In fact, one might argue that Immelt's growth ambitions have been too ambitious all along. Trying to grow such a large organization at rapid rates can cause strategic missteps. Moreover, it ignores the diseconomies of scale problem that Thornhill points out.

Jon Stewart on Obama's Auto Plan

Jon Stewart delivered this very funny segment about the President's decision to provide federal government backing for automobile warranties.

Ford's Concerns

The Wall Street Journal has an interesting article about Ford's concerns regarding the federal intervention at GM and Chrysler. Ford's concerns appear very legitimate. First, they recognize the threat to their own supply chain if GM and/or Chrysler file for bankruptcy. Perhaps more importantly, they worry that a bankruptcy filing will enable GM and Chrysler to start anew with a much more competitive cost structure, perhaps giving them a leg up on Ford. I think the federal government will have to tread carefully here. While they may wish to assist GM and Chrysler, they certainly should not do so in a way that penalizes Ford. After all, Ford represents the only one of the Big Three who actually has managed to avoid having to ask for federal bailout funds.

GM and the SUV

Could journalists please stop saying that General Motors has failed because it made a huge bet on gas-guzzling SUVs. The notion is that somehow GM would be ok today if only it had been building green cars all along. This is complete nonsense. GM did not get in trouble in the past few years. Its demise traces back to the 1970s, far before the term "SUV" was even invented. In the 1960s, GM's market share stood at 50%. By the mid to late 1980s, it had fallen to 35%. By the late 1990s, GM's share had fallen below 30%. This crisis has been a long time in the making.

The Decline of Newspapers

We have all heard about the demise of the newspaper business, and we've watched as papers try to charge more for less and less content. Meanwhile, one paper in the United States really stands out from the pack. The Wall Street Journal continues to add content. Of course, they also have a paid subscription model on-line, something other papers do not. One recent addition to the Wall Street Journal is a sports page. However, it's a sports page like no other. That's the hallmark of a great competitive strategy; do what others are not doing - be distinctive! The WSJ sports page focuses on a few distinctive pieces each day, one of which usually offers a statistical analysis of sports that is quite interesting. For instance, yesterday the Wall Street Journal reported on the link between spring training records and regular season records in baseball. The analysis shows that there is a very weak correlation between the win-loss records of pre-season and regular season.

Efficient Markets?

Economist Scott Sumner has a very interesting post on his blog about the efficient markets hypothesis as it relates to recent turmoil in the financial markets (thanks to my former econ prof Greg Mankiw for pointing to this great post on his own blog). One of my favorite excerpts from Sumner's post is:

So the anti-EMH argument for regulation must be based on the following; bankers are irrational and make lots of foolish loans. Regulators are rational and can see that these loans are too risky, and can protect bankers from hurting themselves. At a theoretical level this doesn’t even pass the laugh test.

Who's in Charge of GM?

The government's ouster of Rick Wagoner at General Motors has dominated the news today. While many good arguments can be made for why Wagoner needed to be replaced, many questions remain regarding the future of governance and leadership at GM. For starters, one has to wonder about the people now calling the shots for General Motors. Mr. Rattner, who is chairing the President's auto task force, has a background in investment banking and journalism. He's never been an executive in charge of a large manufacturing corporation. Secretary Geithner has worked for the federal government for most of his adult life. He's never had an executive role in an industrial firm. Larry Summers held one major private sector executive position, and that did not end very well (his resignation as Harvard President). The President himself has never run a private corporation, nor have many of the key Senate leaders who are involved in overseeing the auto industry bailout. All these men clearly exhibit intelligent and expertise in their particular domains, but one wonders whether they have the knowledge to make key decisions regarding the future of such a large automobile manufacturer. Of course, one might argue that they won't be making those types of detailed decisions; they simply will assemble a new team who will then make the hard calls. However, we do not really know what the level of government involvement will be in strategic choices and day-to-day decisions going forward.

Southwest Airlines: Tweaking the Model

The Wall Street Journal reported yesterday that Southwest Airlines continues to tweak their strategy, which has been so successful them for several decades. For instance, Southwest has now decided to begin providing service from both New York's LaGuardia Airport and Boston's Logan Airport. Traditionally, Southwest avoided these types of crowded and busy major airports in northern cities susceptible to frequent weather delays. As a result, Southwest Airlines has always managed to turn around their planes in a remarkably short period of time, working from smaller regional airports such as Providence and Manchester. Southwest achieved a very good record of on-time arrivals and departures as a result. Moreover, the company kept its planes flying more hours per day because of those fast turnaround times, leading to higher productivity and increased profits.

As a strategy professor, Southwest offers a model to be admired, because they have created such a well-integrated system of activities. Everything they do works to deliver speed and low costs. They do not exhibit any inconsistencies in their strategy. Now, however, these tweaks to the model may weaken the operating model. Will they be able to keep costs as low, turn around planes as quickly, and maintain their record of on-time arrivals and departures, when operating out of such busy, crowded airports?

Southwest has a remarkable string of 36 straight years of profitable operations - a record unmatched in the airline industry. They have chosen to tweak the model to deal with the economic upheaval, and to find new sources of growth. However, they may risk weakening the strategic focus and clarity that have been at the root of their success.

Catch a Piece of Maine

John Ready, co-founder of Catch of a Piece of Maine, spoke last night here at Bryant University. The company, which he created with his brother Brendan, offers what some have described as a lobster trap timeshare. Customers purchase ownership of a trap for a year and receive a credit every time their traps catch a lobster. They can choose to have the lobsters shipped to their homes, or they can gift them to others. Through video emails, the customer learns about lobstering and receives personalized messages from their lobsterman. What a unique idea!

Today, the Ready brothers’ companies generate revenue in excess of $10 million. The Ready brothers have received many accolades for their entrepreneurial success. John and Brendan were named by Inc. magazine as one of the 30 coolest entrepreneurs under the age of 30. They received the Small Business Administration's 2008 National Young Entrepreneur Award. Fortune magazine, USA Today, and other leading periodicals have described their story. CBS News, NPR, Boston’s Channel 5, and WBZ radio have all featured the Ready brothers at one point or another.

John has not only created a company that generates healthy profits. He has helped enhanced the livelihood of Maine lobstermen, many of whom have struggled mightily in recent years to make a decent living. Catch a Piece of Maine also strives to adhere to eco-friendly harvesting methods, producing little to no by-catch and enforcing strict laws to allow the release of all lobsters too small and too large. John and Brendan donate a portion of the profits from Catch a Piece of Maine to the Gulf of Maine Research Institute to fund educational programs on marine ecosystems for 5th and 6th graders.

For more about the company, you might take a look at this video from the CBS Sunday Morning show:

Zappos

If you have not read about Zappos, the online shoe retailer, you should take a look at these articles in Business Week and Fortune. Zappos has a very unique culture of openness and transparency. They also focus on delivering exceptional customer service by providing their employees with more autonomy to be creative in their interactions with consumers.

Hedge Fund Culture

Not many articles on hedge funds provide insight as to unique and impactful corporate cultures. Most such articles focus on the investment philosophies of the founders, rather than their organizational philosophies. However, a recent Fortune article is a wonderful exception. In this article about Bridgewater, the world's largest hedge fund, writer Brian O'Keefe describes the company's unique culture. Some of these attributes are woefully lacking in many organizations. Managers ought to consider the extent to which they might benefit by embedding some of these cultural characteristics in their organizations. Here's one interesting excerpt from the article:

"If you took five organizational psychologists, locked them in a room, and told them to create the perfect blueprint for a corporate culture, this is about what they would come up with," says Bob Eichinger, a retired consultant who has spent five decades working with companies on how to manage talent and now works part-time for Bridgewater. "He's trying to design a culture in which people with talent have the freedom to perform."

The result of that design feels pretty radical compared with the typical corporate environment. In keeping with his identity as a hyperrealist, Dalio is committed to total transparency. So, for instance, every meeting is taped and kept on file. Blunt and frequent feedback is required, including "drill-down" sessions that probe into why employees failed at tasks. Managers aren't allowed to evaluate an employee's performance unless he or she is present. Because Dalio believes mistakes are valuable learning tools, every time something goes wrong employees are required to file a memo in the so-called Issues Log. And because Dalio is passionate about the meritocracy of ideas, subordinates are encouraged to argue with their superiors - and the superiors are required to encourage it. "We hate egos," he says.

If young employees - and loads of recent Ivy League grads with 99th-percentile SAT scores roam the halls - need a reminder of the potential opportunity afforded by that meritocracy, they need look no further than Greg Jensen, 34, the head of research and the third voice, along with Dalio and Prince, in the firm's weekly investment strategy meetings. Jensen started at Bridgewater as an intern directly out of Dartmouth and rose quickly through the ranks. "I love that your contribution here gets evaluated on a logical, principled basis rather than through the prism of a power base," he says.

Not surprisingly, the intense culture is not for everybody. "It's either a cult with mind control or the happiest place on earth, depending on whether you buy into it," says one former employee. Even some happy current employees say that there was an initial adjustment period and admitted that aggressively candid feedback wasn't always fun. But several spoke of how empowering such an open approach can be, and a few even offered testimonials for how embracing a policy of radical clarity had improved their personal lives.

More to the point, perhaps, is the fact that Dalio's system gives him the results he's looking for. He says he is perfectly comfortable having his assertions challenged at all times. In fact, he craves it. "I draw my conclusions," he says, "and I say, 'Please shoot holes in this. Tell me where I'm wrong.' People tend to think that my success, or whatever you want to call it, has been because I'm a really good decision-maker. I think it is actually because I'm less confident in making decisions. So in other words, I never know anything really. Everything is a probability."

B-School Reform

The New York Times had an interesting article a few days ago titled, "Is It Time to Retrain B-Schools?" Without question, business schools face a number of challenges. Let's begin with the fact that too many scholars are rewarded for publishing in scholarly peer-reviewed journals, though their work may have little practical relevance for managers and students. Our PhD granting institutions do not train graduates how to teach; they focus only on research skills. The career offices have helped large chunks of students land jobs in investment banking and consulting, with an underemphasis on managerial job opportunities in companies that actually make things. Finally, there is the question many people are asking: To what extent are business schools responsible for some of the management failures that have put us in this economic mess? Here's an interesting quote from the article:

“It is so obvious that something big has failed,” said Ángel Cabrera, dean of the Thunderbird School of Global Management in Glendale, Ariz. “We can look the other way, but come on. The C.E.O.’s of those companies, those are people we used to brag about. We cannot say, ‘Well, it wasn’t our fault’ when there is such a systemic, widespread failure of leadership.”

Joseph McCool's Book

For those interested in learning more about the executive search business, I recommend that they should take a look at Joseph McCool's new book, Deciding Who Leads: How Executive Recruiters Drive, Direct & Disrupt the Global Search for Leadership Talent.

The Dangers of Information Filtering

In my new book, I discuss the dangers that organizations face because individuals filter information, particularly bad news. People filter information for a variety of reasons, including some well-intentioned behaviors intended to help their leaders. Here's a very brief excerpt regarding one main reason why filtering takes place:

Efficiency Concerns
First, individuals choose to summarize and package information for senior leaders for the sake of efficiency. They have a limited amount of time to spend with top executives, and they must use the time wisely. Senior leaders have asked for assistance in decision-making; they want to see key data presented, synthesized, and analyzed. In some cases, they want to see the pros and cons of various options. In others, they also want their subordinates to offer a recommendation as to the course of action that should be chosen. Individuals have to make tough choices as to what information should be presented in the limited time frame available. “Face time” with senior leaders becomes a precious commodity, and no one wants to squander it by inundating them with information that is not organized and analyzed properly. Neither leaders nor subordinates want to spend time on information that is irrelevant or unreliable. Busy schedules and crowded meeting agendas certainly exacerbate the amount of filtering that takes place. Given the fast pace within most organizations, individuals know that they must “get to the point” in meetings.
Individuals also do not know want to waste senior leaders’ time with problems that they believe can and should be solved without executive assistance. Many people fear they will appear weak, or worse yet, incompetent if they bring a problem to a higher level in the organization. They dread being asked why they could not resolve the issue on their own, or why they are “wasting leadership’s time” on issues that appear to be insignificant.

The Cost of Layoffs

In this economic environment, layoffs are unavoidable at many firms. However, Geoff Colvin at Fortune reminds us that managers often underestimate the cost of layoffs. They typically focus only on the direct costs, i.e. the severance payments that occur at the time of the layoff. However, firms do incur other costs as well. Rehiring and retraining expenses often prove much more significant than firms estimate. Firms should pay particular attention to these types of expenses if they have a highly skilled workforce with specialized capabilities that are hard to acquire and/or develop.

Overcrowded Agenda?

Many observers from the left and right of the political spectrum have begun to question whether President Obama has embarked on an overly ambitious set of initiatives. Is his agenda overcrowded? Does he have to set some priorities? As Clive Cook points out in the Financial Times today, there may be many good reasons to pursue such an ambitious agenda right now, but the system may not have the administrative, legislative, and political capacity to handle so many initiatives.

CEOs certainly have gotten in trouble in the past when they have tried to do too much at once. Crowded agendas mean that one does not excel in any particular area, because management attention and organizational resources become spread too thin. Many new CEOs, in particular, fall into this trap of trying to do too much. the organization often does not have the capability to execute so many different initiatives at the same time.

GE's former CEO Jack Welch describes the need for focus and persistence in his book, Jack: Straight from the Gut. In that book, he explains how GE pursued four major initiatives in the 1990s. Each was clearly not a "flavor of the month." The initiatives lasted for years, and the entire firm focused on executing them. Too many firms try to pursue dozens of initiatives simultaneously, and no one is quite sure what the priorities are.

Paul Levy and the Beth Israel in Boston

Several years ago, David Garvin and I developed a multi-media case study about the remarkable turnaround that Paul Levy engineered at the Beth Israel Deaconess Medical Center in Boston. We had an up-close look at that change process, as we interviewed Paul every few weeks as the turnaround took place - beginning just a few days after he became CEO of the hospital. We learned from our study that Levy had a number of distinctive leadership capabilities. Perhaps most importantly, he earned the trust of his workforce, and he built collective ownership for his turnaround plan. Those qualities enabled him to lead a very successful implementation of the plan, returning the hospital to positive cash flow after many years of heavy losses.

Now, the Boston Globe reports that Levy has had to cut costs again in the face of the economic downturn. He stood before his workforce and asked if they would consider sacrificing their pay increases to save the jobs of the lowest-paid staff members at the hospital who might otherwise have to be laid off. He barely got the words out of his mouth, and the entire staff erupted in applause. They chose to make a small sacrifice to save the jobs of their fellow employees.

It's a great story. I applaud the efforts of the amazing team at the BIDMC. I admit that I'm biased, given that I studied the hospital in depth. I'm also biased, though, because they did a remarkable job of helping our family during a serious illness several years ago. The staff is incredibly dedicated, and I'm glad to see that they are trying their best to retain everyone at this time.

For those who are interested, Paul Levy maintains a very interesting blog. Click here to access it.

Silent Customer Attrition

Andrea Ayers reviews some fascinating survey data at Forbes.com today. She provides results from survey research regarding customer satisfaction. Her results indicate that CEOs think that their customers are far happier than they really are with their companies' service. Ayers speaks at length about what she calls "silent attrition" - i.e. those customers who leave without ever telling a company why they have chosen to stop doing business with them. Ayers reminds us that even those customers who express "satisfaction" with a company's service are not necessarily loyal.

Anne Mulcahy, CEO of Xerox, once touched on this issue of "silent attrition" in a speech she made about her firm's customer service efforts. Mulcahy said:

“There has been a norm around for many years that somewhere around 75 per cent of customers who defect say they were "satisfied." Our own research bears this out. When our customers tell us they are “very satisfied," they are six times more likely to continue doing business with us than those who are merely satisfied… If you're just providing your customers with service that's good, they're probably just satisfied. This should set off alarm bells. Take the automotive industry. Satisfaction scores average around 90 per cent. Guess how many people repurchase from the same manufacturer? Only 40 per cent.”

Saturday Night Live on the Financial Crisis

Hilarious new video from SNL regarding Secretary Geithner's plan for resolving the banking crisis:

Financial Literacy

There is no question that poor levels of personal financial literacy contributed to the mess in which we now find ourselves. Too many people did not understand how to manage their finances. They did not understand the true cost of maintaining credit card balances. They took on too much mortgage debt. They did not plan adequately for the possibility of a job loss (or two) in the family. In my view, financial literacy begins with how we teach our children at a very young age about spending and saving money. At the university level, we can take concrete steps to help improve our students' financial literacy as well.

With that in mind, I was very glad to see this article in the Wall Street Journal about the National Foundation for Credit Counseling's recent efforts to promote financial literacy among young people. NFCC ran a wonderful poster contest (Be Money Wi$e), which challenged young people to develop creative posters that completed the statement, "I am going to be a millionaire because..." Congratulations to 11th grader Leah Ellyson of Farmington, West Virginia, who won this year's contest.

Paying to Go to the Bathroom on Ryanair?

One of my students sent me this article about Ryanair CEO Michael O'Leary's latest suggestion (perhaps in jest!) for raising revenues on his airline's flights. Ryanair, of course, is one of the most successful low-cost carriers in the world. O'Leary has become famous for his bold actions designed to lower costs so as to offer rock-bottom fares. He also has found creative ways to generate revenues from each flight in the form of advertising onboard, duty-free sales, etc. O'Leary is also well-known for a series of brash moves designed to generate free publicity for his airline, while often poking fun at his competitors, particularly the higher-cost European flag carriers. One of the most incredible O'Leary tactics was an advertisement which showed the Pope revealing the fourth secret of Fatima as Ryanair's low fares! You can imagine the outcry that ensued, including from his own Catholic mother. Of course, he also received an unbelievable amount of free publicity from the stunt.

Buffett's Annual Letter

Warren Buffett has issued his annual letter to shareholders, which often receives a great deal of attention. In that letter, Buffett typically discusses general business and economic issues, as well as the performance of Berkshire Hathaway. Given the current economic environment, this year's letter strikes me as particularly interesting to read. Here's one very insightful comment from his letter, which all investors should remember as they look to the year ahead:

Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our
usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.

Know What You Don't Know

Michael McKinney has posted an interesting write-up about my new book on his blog (Leading Blog). He seems to have generated some good discussion among his readers.

No Smarter Than Anyone Else?

Perhaps those Harvard endownment managers were not smarter than any other set of investors after all. Year after year, Harvard managed to report returns on their endowment investments that exceeded the Standard and Poor's index by a wide margin. What explained such fabulous returns (which led to handsome rewards for the Harvard money managers)? One explanation focused on the remarkably astute investing skills of the team at Harvard Management Co. - presumably a function of the amazingly talented and intelligent professionals that HMC hired and then compensated so well. Another explanation suggested that Harvard had better access to certain non-traditional investment opportunities than other institutions.

Perhaps, though, a simpler explanation suffices... Harvard took a ton of risk - far more risk than we find in the S&P 500 index. With high risk comes high reward - lesson #1 from any introductory finance course taught at Harvard Business School. Now, the Harvard endowment managers have learned that there is indeed no free lunch. With all that risk comes the potential for huge losses and a liquidity crunch. This article from abcnews.com explains that Harvard now faces a severe budget crunch because of a liquidity crunch at the endowment. The school does not face a problem simply because they had become dependent on the endowment for one third of the annual operating budget. In fact, the problem is more severe. High-risk investments now put Harvard in the position of having to dump assets at rock-bottom prices, raise money through pricey debt, and inject additional cash into certain private equity investment vehicles.

Colvin on Raising Prices During a Recession

Can your firm afford to raise prices during this economic downturn? That is the question that Geoffrey Colvin tries to answer in his column in this week's issue of Fortune magazine. Colvin offers a simple two-by-two matrix for classifying products. One axis classifies goods in terms of high or low product differentiation. The second axis classifies products as either necessities or discretionary purchases. Colvin argues that products that are both highly necessary as well as highly differentiated have the most potential to raise prices during the downturn. For instance, he cites products such as Colgate toothpaste or Gillette razor blades. What is the worst situation in which firms may find themselves? If a company offers a commodity product that is a discretionary purchase, they are likely to suffer greatly during the recession, and they will virtually no power to raise prices. For instance, airlines sit in this quadrant of the two-by-two matrix. I think this simple two-dimensional matrix offers a useful way for thinking about how the downturn may affect your firm.

Bill George on Leading in a Crisis

Bill George, former Medtronic CEO and my former colleague at Harvard Business School, has a very good post on his True North blog regarding the "seven lessons for leading in a crisis." I was particularly struck by Lesson #2:

Lesson #2: “No matter how bad things are, they will get worse.” Faced with bad news, many leaders cannot believe that things could really be so grim. Consequently, they try to convince the bearers of bad news that things aren’t so bad, and swift action can make problems go away.

This causes leaders to undershoot the mark in terms of corrective actions. As a consequence, they wind up taking a series of steps, none of which is powerful enough to correct the downward spiral. It is far better for leaders to anticipate the worst and get out of in front of it. If they restructure their cost base for the worst case, they can get their organization healthy for the turnaround when it comes and take advantage of opportunities that present themselves.

I would argue that such mistakes by a leader also lead to further difficulties down the road, because bearers of bad news may be reluctant to come forward in the future. Having had their concerns minimized and downplayed, such individuals may not choose to come forward with their concerns. As a result, problems may not surface as quickly in the future.

Finkelstein's New Book on Decision-Making

Sydney Finkelstein and colleagues have an interesting new book about decision-making that has hit the bookstores. The title is: Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You. I had the opportunity to read a draft of the book several months ago. The authors offer a very practical guide for leaders who want to improve their decision-making, drawing upon interesting new science regarding how the brain works as well as their own field research in many businesses. For a review of the book, see this article from the Financial Times.

Steve Jobs' Commencement Speech

On the occasion of Steve Jobs' 54th birthday, Fortune has posted a link to the amazing commencement speech that Jobs gave at Stanford University several years ago. Every student should watch this speech at the outset of their career, and frankly, all of us could benefit by considering what he has to say. Here is the video:

Michael Lewis, Shane Battier, and Team Players

Michael Lewis had a terrific article last week in New York Times Magazine about Shane Battier, the Duke graduate who now plays basketball for the Houston Rockets. Lewis makes the point that Battier has never drawn raves from NBA scouts and coaches for his play, and he does not fill up the stat sheet in most games. However, his teams tend to perform remarkably well. He simply makes his teammates better in a variety of small, but very important ways. Of course, we look for this attribute in our workers in any organization, not just athletics. We want team players who help those around them perform at a higher level. Lewis goes on to write that, "There is a tension, peculiar to basketball, between the interests of the team and the interests of the individual. The game continually tempts the people who play it to do things that are not in the interest of the group." Battier consistently forgoes selfish acts in favor of the interests of the team, often in very hard-to-observe ways. Again, we would love to have such employees.

Lewis talks to Houston general manager, Daryl Morey, who once visited my MBA class to speak with my students. Morey is an incredibly insightful student of the game with an MBA from MIT. Morey describes how his analytic methods enabled him to see that Battier had this positive impact on team performance. The challenge, however, was to understand precisely how Battier had this type of impact. Statistics alone could not provide that answer. Only detailed observation could reveal how Battier, whose individual play seemed so ordinary, could elevate his team's performance so substantially.

Thus, Morey's work as General Manager of the Rockets highlights two critical challenges for any organization leader. How does one find the Shane Battiers of his or her team or firm? Perhaps more importantly, how does one come to understand precisely what actions and behaviors help certain individuals elevate the performance of those around them?

Know What You Don't Know

To learn more about my new book, Know What You Don't Know: How Great Leaders Prevent Problems Before They Happen, you may wish to view this brief video in which I'm interviewed:

Honda on Failure and Risk-Taking

Jim Kouzes and Barry Posner have a blog entry on how leaders must be willing to make mistakes and sometimes fail if they wish to achieve great things. They refer readers to a great video, available on YouTube, in which Honda's CEO talks about risk-taking and tolerance of failure. Here's the video:

McDonald's vs. Starbucks

Michael Arndt at Business Week has an interesting story about a new Pew Research Center poll asking about consumer preferences regarding Starbucks vs. McDonald's.

Foster's Decides to keep Wine Businesses

The Wall Street Journal reported yesterday that Foster's Group of Australia has decided not to sell its wine businesses at the moment, given that the economic downturn has made it difficult to find a buyer willing to pay a reasonable price for those units.

I'm not surprised that Foster's has found it difficult to achieve synergies between its wine and beer businesses, and to manage both product lines effectivley in the same corporation. Back in 2003, I wrote a paper about the wine industry in which I argued that the economies of scope across the wine and beer businesses might be somewhat limited. Here is an excerpt from that paper, which I presented at a conference in Venice, Italy:

The alcoholic beverage producers moving into the wine business have been quite explicit about the fact that they see premium wine as their next growth engine, given flat sales in their core businesses. Foster’s Group provides the best example of this strategy. They have declared a vision of becoming “a global wine company with a leading presence in every premium wine market worldwide.” In their 2001 Annual Report, the company actually has a headline that reads “Beer = Returns,” while a second headline reads “Wine = Growth.” In short, the company is quite clear that they are deriving cash flow from the mature, but highly profitable, beer business; then, they are using that cash flow to subsidize a growth strategy in the wine business. This raises an important question: does this cross-subsidization strategy enhance shareholder value? If capital markets are reasonably efficient, then shareholders can invest the cash flow from the beer business more effectively than the managers at Foster’s; cross-subsidization within the firm’s internal resource allocation process is not optimal in this case. Thus, the only way that this corporate strategy adds value for shareholders is if the beer and wine businesses are somehow more valuable together than apart, i.e. if there are sizeable economies of scope. However, the synergies appear somewhat limited. There are no production economies that are readily apparent. Moreover, the same sales force is unlikely to be able to support both product lines. The economies appear to be mainly in the distribution area. Even then, those economies seem to be limited to negotiating power, because there are serious questions about whether firms can consolidate the physical distribution of beer, wine, and spirits without compromising product quality. If, in fact, the synergies are somewhat limited, then one has to question whether it is in shareholders’ interests to cross-subsidize from the beer to the wine business.

Harley Davidson Advertising

Harley Davidson faces some tough challenges at the present for two reasons. First, they have experienced a substantial rise in the average age of their riders. Aging Baby Boomers represent a challenge for them. Younger riders do not necessarily want to ride the same bikes that their parents ride. Second, the recession has caused consumers to limit their discretionary spending. Harley sales have suffered as a result.

On the positive side, the firm has an amazingly clear and distinctive brand positioning, with a core group of remarkably loyal customers. Here's one advertisement that displays the creative ways in which the firm constantly reinforces its image:

Sunk Costs, Automakers, and the Escalation of Commitment

As GM and Chrysler made their requests for billions more in assistance, policymakers will have to be very wary of getting caught in a dangerous and very expensive escalation of commitment. With such high sunk costs in this situation, the risk will be that federal officials will not want to ever "waste" the prior investments that they have made to help the auto industry. Thus, they may continue to gradually escalate their commitment. The risk, of course, is that the federal government may find itself throwing good money after bad.

GM, Chrysler Present Their Plans

As GM and Chrysler prepare to present their restructuring plans to the federal government, news reports discuss the possibility of a bankruptcy filing by one or perhaps even both automakers. At the same time, journalists are speculating about the scale and scope of the cost reductions and union concessions that the automakers will announce. While massive cost cuts are undoubtedly necessary, no revival of GM and Chrysler can occur unless they also retool their product strategies. The firms must also have a plan for streamlining their brand portfolios, and repositioning their remaining product lines so that each has a clear, distinctive brand identity. Moreover, the firms cannot completely gut R&D, as they will need to bring out new cars that are more appealing than those of the past. People need a reason other than price to buy a GM or Chrysler vehicle. While the government has pressed the automakers to make more "green" vehicles, that alone will not save these firms. Making a few more green cars, or even rolling out an electric car, does not constitute a distinctive, appealing, and comprehensive product and branding strategy.

Starbucks Instant Coffee

The Wall Street Journal reports today that Starbucks has plans to introduce an instant coffee product. Wow. How far will Starbucks shift from its original strategy as a highly differentiated, premium specialty coffee company?

The Providence Granola Project

My former Bryant MBA student, Geoff Gordon, has launched a new venture called The Providence Granola Project. The company makes some terrific granola, and they have an interesting social mission. As the co-founders state, "The Providence Granola Project was conceived as a way to give refugees a boost toward employability (and in the spirit of full disclosure, to make a little money)." For more information, check out the founders' blog: http://www.providencegranola.blogspot.com/

Microsoft to Open Retail Stores

The Wall Street Journal reports that Microsoft has hired a former Wal-Mart executive to lead an effort to open a number of Microsoft retail stores. This news raises several interesting issues. First, forward integration into retail can be a very tricky thing. Certainly, companies such as Apple and Ducati have benefited greatly from their retail strategies. These firms have used forward integration as an effective mechanism to further enhance their product differentiation and gather valuable information and feedback directly from consumers. For Apple and Ducati, the retail store represents a rich experience that they are trying to create for their customers. They came to the conclusion that they had to control the retail environment through ownership in order to manage that experience optimally.

However, many firms have stumbled with such strategies. Gateway clearly did. Of course, their product strategy was not based upon differentiation, design, and a rich, emotion-laden experience for their consumers. Thus, the retail stores did not add a great deal of value for them, while proving costly to operate. Gateway did not have a strong rationale for forward integration. Disney, on the other hand, seems much more like Apple or Ducati in terms of their differentiation strategy, yet they have struggled with their retail stores. Disney's experience proves a cautionary tale for firms who are considering forward integration into retail.

Second, forward integration means that a product firm is now competing with its channel partners. In this case, Microsoft will find itself competing with partners such as Best Buy, Staples, and the like. Apple has navigated these relationships quite effectively, but many firms stumble in this regard when they forward integrate.

Finally, it's interesting to note that Apple hired a Target executive to run its retail stores, while Microsoft has hired a Wal-Mart executive. It makes a great deal of sense for Apple to turn to a Target veteran since both firms share a differentiation strategy; both firms want to create an emotional connection with their customers; and both firms emphasize the importance of design. Wal-mart, however, has excelled at a low cost strategy, not a differentiation strategy. In fact, Wal-mart might have one of the most effective low cost strategies we have ever seen. How does this type of experience help Microsoft though? Do they want their stores to "wow" people, create rich experiences for their users, etc? What type of retail environment does Microsoft aim to create? These questions will be crucial for the firm to answer as it develops its forward integration strategy.

Robert Bruner on Survival of the Fittest

Robert Bruner, Dean of the Darden Business School at the University of Virginia, has a wonderful little article at Forbes.com in which he examines why applying the Darwinian notion of survival of the fittest to the business world is not apppropriate or useful. Here's a short excerpt, which illustrates the way in which he takes apart the phrase, its meaning, and its applicability to the free market system:

"In biological terms, "survival" suggests that your DNA doesn't end with you; it is carried forward by your descendants. Survival means longevity of a genetic model, success in evolutionary terms. But from a business perspective, mere longevity is hardly success. Do we build enterprises just to survive? Don't we want to prosper? Is there no upside to being successful? Centuries of commerce suggest that to the victors belong the spoils. Much of what animates economic behavior is the possibility of gain."

NASA Culture

As many of you know, I've done extensive research on NASA and the shuttle program over the past few years. In that work, my co-authors and I wrote about the barriers to candid dialogue at NASA, and the reasons why dissenting views were suppressed. Therefore, I was quite struck by this video that NPR reported on a few days ago. (Thank you to my colleague Lynda St. Clair for alerting me to this story and video).

An astronaut at NASA produced this satirical video to point out many of the cultural barriers to candid dialogue and innovative thinking that continue to exist at NASA despite many efforts to transform the culture in recent years. I'm sure many of you will recognize the behaviors and norms demonstrated in the video, because they exist in your own organizations.

Southwest Airlines

I'm teaching a classic study about Southwest Airlines this week in my strategic management course. Southwest proves an exceptional case, because they have managed to consistently earn profits over more than three decades in an industry that has been one of the least profitable in the world over many, many years. Whenever I teach the case, I love showing this old 60 Minutes feature about Herb Kelleher, the long-time CEO of Southwest. On YouTube, you can view the feature in two parts, as you will see below. I know that you will enjoy this funny but highly insightful story about this remarkable company.

Employee Engagement

Stefan Stern pokes some fun at the literature on employee engagement in the Financial Times. Stern wraps up the article by arguing that the best path to engaging employees is to share the unvarnished truth with them in these tough times. He quotes Archie Norman, the British businessman who turned around the Asda supermarket chain some years ago:

“We stated it as it was,” he told me. “You have to get people to face up to the reality. People will follow you...what they can’t stand is unrealistic, deluded leadership. When we said that the situation was very bad, that we were in survival mode, we got three cheers from the front line,” Mr Norman explained. “They said: ‘At last, somebody’s arrived who realises what it’s really like out there.’”

I would add one important note about employee engagement. If a firm wants to engage its workforce, it must focus first and foremost on the supervisor-employee relationship. Engagement begins with that relationship with one's direct supervisor. No matter what the firm does as a whole, if that communication and engagement does not exist in the one-on-one relationship with an individual's direct supervisor, then it's quite difficult for an organization to have a committed and productive workforce.

Equity Analysts - Buy! Buy! Buy!

It turns out the equity analysts have been just as incredibly optimistic in the past few years as they were during the dot com boom of the late 1990s. Reforms designed to address the conflicts of interest at investment banks don't seem to have curtailed the bias toward "buy" recommendations within the equity analyst community. The New York Times has a very good article on the issue today.

Thought-Provoking Old Clip from Milton Friedman

Bailouts: Money is Fungible!

We recently read that politicians were concerned that the government had provided a large amount of bailout funds to CitiGroup, while that financial institution planned to spend $400 million over 20 years for naming rights at the New York Mets' new ballpark. Lawmakers did not want government funds to subsidize the purchase of these naming rights at a baseball stadium. The bank responded that bailout funds were not being used to pay for the naming rights.

CitiGroup is not alone here in responding to such questions from lawmakers. We have heard a number of other questions raised about the activities of various banks. Time and again, we hear banks respond that bailout funds are not being used for this or that activity that is being questioned.

What's wrong here? The banks seem to be forgetting that money is fungible! It's not as if the money raised from private investors cannot be easily substituted or exchanged for the money that's coming from the federal government. There's no difference in those dollars! With limited resources, the banks are making tradeoffs every day about where to put there money. Any dollar dedicated to one activity must mean one less dollar that could be used for another activity. Now, I'm not suggesting that the federal government should intervene and micromanage bank activities. I'm simply say that it's difficult to argue that "bailout funds aren't being used for x, y, or z." When money is fungible, it's hard to make such claims.

Problem-Finding and McDonald's Remarkable Success

Dev Patnaik and Peter Mortensen have an interesting article at Forbes.com about McDonald's resurgence under CEO Jim Skinner. The article is an excerpt from their book Wired to Care: How Companies Prosper When They Create Widespread Empathy. In the article, they argued:

"How did he (Skinner) know what to do? He had experienced it all himself. After all, he began his career on the grill line at a McDonald's before working his way to the very top of the organization. In all that time, he had made sure to eat at a McDonald's every day. Not only because he genuinely likes Quarter Pounders, but also because it has allowed him to make two kinds of observations critical to the success of his company. First, he knows as well as anyone whether the food and service are good or need improvement. Second, he gets to engage directly with McDonald's diners. He doesn't need to commission a big research report. He can just talk to the guy at the next table. It's an easy, everyday way to stay connected and see the business the way the rest of the world does."

Skinner's actions resonated with me, because they are consistent with some of my latest research findings about effective leadership. In my recent work, I describe how leaders at all levels must hone their skills as problem-finders. They must seek out the small problems in their organizations before they mushroom into large-scale failures. They must recognize that bad news often won't come to them; they have to go find it. How can leaders become effective problem-finders? One thing that they can do is circumvent the filters that typically funnel information to them. Leaders have to venture out to the front lines and interact directly with customers, employees, and suppliers. They must seek out the raw data. Moreover, leaders must behave like an anthropologist who observes groups of people in natural settings. They cannot simply ask people questions; they must watch how they behave. After all, people often say one thing and do another. Watching how the organization actually functions can be a very powerful and illuminating learning experience – and a far more accurate one. Firsthand observation and experience must become part of every leader’s toolkit.

Conglomerate Bankruptcy

News reports indicate that Spectrum Brands filed for Chapter 11 bankruptcy protection on Tuesday. Spectrum is a conglomerate with businesses including batteries, shaving products,lawn and garden products, insect repellents, aquarium products, and pet products/supplies. The bankruptcy is a reminder of the challenges that firms face if they pursue an unrelated diversification strategy. While those strategies were once quite popular (back in the 1960s and 1970s), few firms maintain such conglomerate strategies successfully today. The unrelated nature of the diversification leaves little opportunity for capturing economies of scope (or synergies). Without substantial scope economies, it's difficult to justify putting such a wide array of businesses under one corporate parent.

Crisis Communication

Leadership Now has a great post on crisis communication on their Leading Blog site.

Guy Kawasaki - Tips on Finding a Job

Guy Kawasaki has a great blog post titled, "Ten Ways to Use LinkedIn to Find a Job." It's definitely worth reading.

Starbucks and Decaf

Starbucks announced recently that they will not automatically brew decaf in the afternoons at many locations where it does not appear to be economical. Starbucks is concerned about the waste, because they have committed to having freshly brewed coffee in their stores, and if insufficient demand for decaf exists, then they end up throwing out a great deal of decaf coffee over the course of the day. Of course, if someone does want decaf, they will end up waiting roughly four minutes for it to be brewed for them. There's no question that cost savings will occur by eliminating the brewing of decaf in lower volume locations, but one wonders how customers will react. I'm sure Starbucks has conducted a careful cost/benefit analysis, but I would sure be curious to see the assumptions behind that analysis. This is a great example of a company grappling with how to reduce costs in a way that has the least impact on the customer experience. The key question is how customers react. Will a number of people become disenchanted, even if they only occasionally drink decaf. It may only take a time or two when they are told to wait for that decaf before they turn to other coffee shops. In the end, so many of these cost/benefit analyses come down to the validity of the assumptions made by management. In the end, most cost/benefit analyses are highly sensitive to a few key assumptions; with some small changes, one can make the conclusions be whatever one wants them to be. The key to any good cost/benefit analysis is a highly vigorous debate about those assumptions, so that each is challenged, and if possible, validated.

Lessons from the Bursting of the Japanese Bubble

Much has been written lately about the parallels between the current U.S. banking crisis and the Japanese banking crisis of the 1990s. Many people have pointed to purported mistakes of Japanese policymakers in the wake of the bursting of the Japanese bubble. They have argued that these mistakes led to the "lost decade" in Japan, a period of stagnant GDP.

For those interested in learning more about what really happened in the 1990s in Japan, Harvard Business School Professor Diego Comin has an interesting new working paper that's worth reading. For more information and a link to the full PDF version of the paper, click here.

Davos and Groupthink

Reflecting on the Davos meetings, Business Week Editor-in-Chief Stephen Adler has some interesting thoughts on how many people may be jumping the gun when trying to explain the events surrounding the global economic crisis. As Adler writes, "Beware conventional wisdom and groupthink. Be skeptical of tidy explanations for complex past events.Be even more skeptical of confident predictions of future human behavior. Don't fight the last war." Those words ring so true, not just with regard to the economic crisis, but with regard to many failures that we encounter in business.

Cobblers Enjoy a Revival

A front page article in the Wall Street Journal today describes the surge in business experienced by cobblers during this economic downturn. With the economy in recession, more people are choosing to have their old shoes repaired and resoled, rather than purchasing new ones. I've read similar articles over the past few weeks about auto mechanics. More people are choosing to repair old vehicles rather than purchasing new ones.

I was struck by these articles because this behavior represents such a stark break from the way in which we all began to treat more and more goods as "disposables" or "consummables" in recent years. When I was a child, people would have major electronic items such as TVs, cameras, or stereos repaired when they were broken. When my digital camera broke a few years ago, the retailer laughed at me when I asked about getting it repaired. He informed that the new technology was light years better than my old digital camera, and the cost of repair was nearly as high as the cost of buying a great new camera. As a nation, we simply stopped repairing things. We bought them, used them, and then went on to buy another one when the original broke. We witnessed the demise of the "repair shops" that used to be in every small town.

Will our behavior change as soon as the economy improves, or will we see a return to more frugal ways of the past? I would be inclined to think that behavior will change again as the economy gets better... which would be bad news for the cobblers!

Starbucks and Value Meals

Starbucks announced more cost reductions and restructuring moves yesterday. Their CEO also referred to the potential introduction of value meals in the future, i.e. a bundled price for a beverage and a food item. The details remain unclear. While this type of move may help Starbucks woo customers during this severe economic downturn, and perhaps help stem the loss of customers to McDonald's, such a move could have highly detrimental effects in the long run. Moving further downscale to compete with chains such as McDonald's could further erode the Starbucks brand and the company's differentiated positioning in the marketplace. This seems like a classic example of a strategic move that, in the short run, may have financial benefits... while in the long run, it could substantially weaken the firm's competitive position.

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."