Anne Mulcahy at Xerox

Anne Mulcahy announced last week that she will be retiring as CEO of Xerox, turning over the reins to Ursula Burns in a long-planned succession. Mulcahy, of course, engineered a remarkable turnaround at Xerox, having taken over when the firm seemed on the verge of collapse. I wrote a bit about Mulcahy in my new book, Know What You Don't Know. Here's an excerpt:

Mulcahy has taken some interesting steps to ensure that she and her fellow senior executives receive unfiltered information about customer satisfaction and dissatisfaction. She has chosen to listen directly to them, without a go-between who might alter or muddy the message. Specifically, Mulcahy employs two techniques to circumvent the usual filtering process that shapes the customer service data that reaches senior leaders. Her techniques involve more than simply going out on customer visits, though she does that as well. First, Mulcahy has assigned each of the company’s top 500 customers to a member of the top management team. Interestingly, she has not only assigned accounts to executives in charge of functions such as sales, marketing, and operations. She explains:

“All our executives are involved--including our Chief Accountant, our General Counsel and our head of Human Resources. Each executive is responsible for communicating with at least one of our customers, understanding their concerns and requirements and making sure the appropriate Xerox resources are marshaled to fix problems, address issues and capture opportunities.”

Secondly, Mulcahy has created a program whereby each member of the top management team serves as a “Customer Officer of the Day” at corporate headquarters on a monthly basis. She wants to hear the unvarnished comments of customers who may be having problems with the firm’s products. Moreover, Mulcahy wants each member of the top team, including herself, to be personally accountable for addressing customer concerns. She describes the program:

“There are about 20 of us and we rotate responsibility to be "Customer Officer of the Day." It works out to about a day a month. When you're in the box, you assume personal responsibility for dealing with any and all customer complaints, that come in to headquarters that clay. They are usually from customers who have had a bad experience. They're angry. They're frustrated. And they're calling headquarters as their court of last resort. The Xerox "Officer of the Day" has three responsibilities--listen to the customer, resolve their problem and assume responsibility for fixing the underlying cause. Believe me, it keeps us in touch with the real world. It grounds us. It permeates all our decision making.”

Mulcahy’s initiatives create direct communication between front-line users of her products and senior executives. She does not simply rely on summaries of statistics about customer service. The conversations with customers become valuable raw data that may provide insights not available in reports compiled from reams of customer survey statistics. Mulcahy has learned that customer questionnaires can be deceiving. People may report that they are “satisfied” with a company on a survey, yet still remain quite likely to switch to another firm’s products. Mulcahy describes this phenomenon:

“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.”

Making Cars Less Safe

We all learned in our introductory economics course in college that "there is no free lunch." Life is full of tradeoffs that cannot be ignored or wished away. In today's Wall Street Journal, former Environmental Defense Fund trustee Robert Grady makes a key point about the push to increase fuel efficiency in U.S. automobiles:

"The Obama fuel efficiency plan may also contribute to a significant increase in highway deaths as vehicles are required to quickly meet the new CAFE standard and will likely become lighter in weight as a result. According to a study completed in 2001 by the National Research Council (NRC), the last major increase in CAFE standards, mandated by the Energy Policy and Conservation Act of 1975, required about a 50% increase in fuel economy (to 27.5 mpg by model year 1985 from an average of 18 mpg in 1978). The NRC study concluded that the subsequent downsizing and down-weighting of vehicles, "while resulting in significant fuel savings, also resulted in a safety penalty." Specifically, the NRC estimated that in 1993 there were between 1,300 and 2,600 motor vehicle crash deaths that would not have occurred if cars were as heavy as they were in 1976.

The president now proposes a fuel economy increase of similar magnitude in an even quicker time frame -- to 39 mpg by model year 2016 from 27.5 mpg now. Given the time it takes for new technologies to be developed, tested and incorporated into new car models, it is likely that down-weighting of cars will be an important means of meeting the new standard. And one result again could be highway deaths that might otherwise not have occurred."

First Mover Advantage

Many managers and students mistakenly presume that first movers always have an advantage in the marketplace. Of course, that is not the case. This article explores one key variable that may explain why first movers have advantages in some markets, but not others. It seems that the article is simply restating a notion that has been discussed previously in the strategy literature - i.e., if there are large spillover effects, whereby firms can easily capture the benefits of their rivals' learning curve economies, then first mover advantage wanes. Still, the researchers make a good point.

In fact, though, there are a number of reasons why first mover advantage may or may not exist in a particular industry. For instance, all else being equal, the presence of large network effects tends to create a first mover advantage. On the other hand, if scale economies are small and buyer switching costs are minimal, then this tends to favor followers rather than leaders.

Larry Lucchino at Bryant Commencement

Boston Red Sox CEO Larry Lucchino gave the commencement address at Bryant University on Saturday. He offered a top ten list of advice to our graduating seniors. Here are two of his excellent bits of advice:

Lucchino quoted Elwood Dowd, a character played by Jimmy Stewart in the movie "Harvey" - “My mother used to say to me, ‘Elwood, in this world you must be oh-so clever, or oh-so pleasant.’ For 40 years I tried clever. I recommend pleasant.”

Lucchino also stressed to the students that they should be courageous enough to say, “I don’t know.” He told them not to guess and not to fake it when they don't have the answer. Lucchino explained, "If you don’t have the answer, say so. These seven words often work out well: 'I don’t know, but I’ll find out.'”

All in all, Lucchino offered a humorous speech with sound advice... and he kept it brief, which is a must in commencement speeches!

Time for Perceptions to Change

When companies experience a downturn in quality or customer service, it can take a very long time to recover. The problem is that perceptions are "sticky" - i.e., even when quality and/or service improves, it may take a long time for customers to alter their perceptions. Customers may cling to the old belief that quality and/or service are inadequate long after a firm has corrected the problem.

Home Depot may be a firm experiencing this situation today. The company reported earnings this week. While the firm is making progress financially, it appears to be largely due to expense control, rather than sales gains. Home Depot sales continue to suffer due to the poor economy, as well as the consequences of a damaged customer service reputation. Interestingly, the firm reports that customer service has improved after dismal performance in that area during the later stages of Bob Nardelli's tenure as CEO. It may take time, however, for the general consumer to recognize and believe that service has indeed bounced back from that period of very poor performance.

Companies need to think very carefully about how they can communicate improvements in quality and/or service. They have to be transparent, and show consumers key data that will help convince them of the enhancements. They also must use social media to help drive word of mouth, as traditional advertising may not the best way to change perceptions. What they cannot do is over-reach about their accomplishments, because consumers may become more upset if they perceive that the firm is proclaiming improvements that do not seem real and substantial to the consumer.

Rising Productivity

In Business Week, Michael Mandel points out that labor productivity continues to rise despite the economic downturn. Mandel points out that productivity dropped during two past historically deep downturns - the Great Depression and the steep recession of the early 1980s. Mandel explains that there could be a positive interpretation of this productivity growth today:

So why, today, are we blessed with the unlikely combination of deep recession and rising productivity? The optimistic explanation is that American businesses have gotten religion and are aggressively squeezing out waste and boosting efficiency.

However, Mandel also offers a cautionary note. Perhaps, this productivity increase will be harmful in the long run. He explains that companies have been cutting professionals, which could be worrisome:

In the short term, when a company cuts professionals, output per hour goes up. A pharmaceutical company could, in theory, ax its entire research operation without affecting current sales. And an automaker that laid off its new car designers could still churn out the same number of vehicles, and productivity would rise.

The danger: If the economy is stuck in a slow-growth recovery, companies may not be quick to rehire their professionals—and that would be a disaster. Professionals are the people who do the research, the new-product development, the information-gathering, the training, and even the marketing which moves the economy forward. They are the main source of the "intangible investments" necessary for innovation and future growth. In effect, we could be eating our seed corn to get through the financial crisis—and the official stats would not warn us.

I think it's an interesting issue to consider, and naturally no clear answer exists to this puzzle. In general, though, I'm inclined to favor the optimistic view. Mandel, for instance, does not mention that productivity grew in both of the last two recessions (early 1990s and 2000-2001).

Auto Dealer Consolidation

While the economy will take another jolt this week with the announcement of large number of dealer closings at Chrysler and General Motors, this move is necessary. Long before this current recession, the American automakers had far too many dealers. Top American brands have 3-5 times as many dealers in the U.S. than Honda and Toyota. The dealer network is incredibly inefficient and has to be rationalized.

One thing to watch... closing dealers has typically been a very expensive proposition for automakers due to state franchise laws. However, GM and Chrysler will avoid those excessive costs this time around due to their conditions of financial distress. However, what will happen to Ford? Can they rationalize their auto dealer network while also avoiding excessive closure costs? If not, then the federal help for GM and Chrysler will provide them an advantage over the healthier Ford.

For some time now, experts have worried that Ford will be disadvantaged in key ways by the fact that they are actually healthier than their domestic rivals and do not need federal assistance. The government has to be mindful of this potential inequity, and take care not to harm Ford through this bailout, bankruptcy and reorganization process... after all, Ford deserves better since they have been the best-managed to date in the domestic auto industry.

Hiring an Executive Search Firm at GM

News reports indicate that the federal government pressured new General Motors Chairman of the Board Kent Kresa to hire Spencer Stuart, an executive search firm, to recruit new directors for the firm. Now, I understand and respect the function of executive search firms. However, I'm a bit shocked that we would be spending taxpayer dollars to hire a search firm to find new directors for GM. Why can't the federal government's hand-picked Chairman, Kent Kresa, and those "brains" at the U.S. Treasury find good solid directors on their own? Kresa apparently wanted to do this on his own. I can understand not wanting him to simply hand select them completely on his own, but do we really want to hire a search firm at a company that is bleeding cash at this rate? After all, we didn't hire a search firm when the federal government decided to hire a new CEO. Isn't the CEO position a bit more important than board positions? We have the federal government making strategic decisions about the brands GM should shut down and the kinds of cars that they should build, yet those same federal officials do not feel capable of identifying and selecting board candidates. What sense does that make?

Bank Stress Tests

Another gem from Saturday Night Live, featuring SNL's Timothy Geithner impersonator:

Commencement

The seniors at Bryant University asked me to write the faculty reflection that is published in the commencement edition of the student newspaper. Here is what I wrote to them:

You will fail! Everyone does at various points in their lives. As you leave Bryant, I encourage you not to simply dream of the success you wish to achieve in your lives. I hope that you will dream big dreams and pursue them with invigorating passion. However, you must also consider the role of failure in a successful person’s life. How will you react when you stumble and fall? You will stumble after all. We all do. Great innovators encounter failure numerous times. The most successful people exhibit remarkable persistence and resilience in the face of failure. They pick themselves up, learn from their mistakes, and move forward. Thomas Edison failed many times in his career. Reflecting on his missteps, he said, “I have not failed. I've just found 10,000 ways that won't work.”

Consider the case of James Dyson. Described as a “tireless tinkerer,” he perfected his revolutionary bagless vacuum cleaner after years of trial and error. Today, Dyson ranks as one of the richest men in the world. Despite all that success, Dyson loves talking about the importance of failure in his life. “I made 5,127 prototypes of my vacuum before I got it right,” said Dyson. “There were 5,126 failures, but I learned from each one. That's how I came up with a solution. So I don't mind failure.” He argues that we often fool ourselves into believing that successful products emerge from a moment of “effortless brilliance.” To him, failures provide keen insights that enable invention. Dyson explains, “We're taught to do things the right way. But if you want to discover something that other people haven't, you need to do things the wrong way. Initiate a failure by doing something that's very silly, unthinkable, naughty, dangerous. Watching why that fails can take you on a completely different path. It's exciting, actually.”

Maxine Clark founded and continues to serve as chief executive of Build-a-Bear Workshop. Clark has built an incredibly successful company. She has done so by delivering a world-class customer experience in her stores. Clark credits her store associates, who constantly find ways to innovate and improve. How do the associates do it? For starters, they tend not to fear admitting a mistake. Clark’s attitude toward mistakes explains her associates’ behavior. She does not punish people for making an error or bringing a problem to light; she encourages it. Clark credits her first grade teacher, Mrs. Grace, for instilling this attitude toward mistakes in her long ago. As many elementary school teachers do, Mrs. Grace graded papers using a red pencil. However, Mrs. Grace gave out a rather unorthodox award at the end of each week. She awarded a red pencil prize to the student who had made the most mistakes! Why? Mrs. Grace wanted her students engaged in the class discussion, trying to answer every question - no matter how challenging. As Clark writes, "She didn't want the fear of being wrong to keep us from taking chances. Her only rule was that we couldn't be rewarded for making the same mistake twice."

Clark has applied her first grade teacher's approach at Build-a-Bear by creating a Red Pencil Award. She gives this prize to people who have made a mistake, but who have discovered a better way of doing business as a result of reflecting upon and learning from that mistake. Clark has it right when she says that managers should encourage their people to "experiment freely, and view every so-called mistake as one step closer to getting things just right." Of course, her first grade teacher had it right as well when she stressed that people would be held accountable if they made the same mistake repeatedly. Failing to learn constitutes the bad behavior that we should deem unacceptable.

At Bryant, you have not only learned many ideas and concepts. You have learned to think more critically. You have learned how to learn. The faculty has tried to nurture and develop you, so that you can become effective lifelong learners. We hope that you will not fear failure in your lives. Embrace it and learn from it. Even in his later years, after remarkable accomplishments, the great Renaissance artist and sculptor Michelangelo used to say, “I am still learning.” I hope that you will maintain that attitude throughout your lives, particularly in those moments when you stumble and fail. Pick yourselves up and move forward, with confidence that you have the ability to fulfill your dreams. Remember that failing to learn represents the only true failure in our lives.

The Boss of the Future

Wayne Miller of the Providence Journal wrote an article about the "boss of the future" in which I was interviewed. Click here for the article.

Why ROI is Broken

The Corporate Executive Board has an interesting article on Business Week's website. They argue that ROI is being used incorrectly by many IT organizations. In particular, they argue that the problem is not the difficulty in accurately measuring the benefits of an IT project. Instead, they explain that, "The real reason to actively distrust ROI projections is the other side of the equation: Most IT shops are punting when it comes to capturing the true cost of the investment."

I would argue that there is a much more substantial reason to question ROI calculations by IT departments, even if they are tracking labor time and costs accurately. The fundamental challenge lies in the decision-making process leading up to the launch of a major IT project. What we often see is that the IT managers, the hardware and software vendors, and the consultants who will aid in the implementation all collaborate to build the ROI. What's the problem with that? Well, of course, all three parties are advocates for the project. They want it to be approved. Why would they ever come up with an ROI calculation that suggested that the project should not be done? In short, the advocates are the primarily analysts in many of these situations. We don't have an unbiased perspective. ROI is not a purely objective measure... it's only as good as the assumptions and information that you put into it. If advocates drive the inputs, the output of an ROI calculation is likely to be flawed/biased.

$300,000 per job saved!

The Deal.com calculates that the Chrysler bailout costs American taxpayers approximately $300,000 per job saved. Even if we include all other jobs that are "touched" by Chrysler, the number comes to $80,000 per job saved, but surely, not all those jobs would be lost with the demise of Chrysler. Here is an excerpt from thedeal.com:

The relevant question is what the U.S. taxpayer is getting in return for its largess. It is hard to argue that what is left of Chrysler is pivotal to the survival of the U.S. industrial base. The automaker's U.S. operations are significantly smaller than that of either General Motors Corp. (NYSE:GM) or Ford Motor Co. (NYSE:F), and unlike Toyota Motor Co., Honda Motor Co. Ltd. (NYSE:HMC), Hyundai Motor Co. or others, Chrysler's manufacturing presence is shrinking and not growing.

Rather, the best way to justify the Chrysler bailout is the jobs saved, but even by that measure the plan appears expensive. Chrysler on its Web site boasts that it "touches" 100,000 jobs in the U.S., costing taxpayers $80,000 per job saved. But that number almost certainly includes dealers, suppliers, mechanics and others who are also touched by other, healthier automakers, and who may not necessarily be out of work had Chrysler failed.

Chrysler is coy on its exact number of U.S. employees, but the company according to United Auto Workers records had about 26,800 union members in the U.S., prior to the last buyout offer. Using that figure, the government is spending almost $300,000 per job saved.

Monte Carlo Simulations

The Wall Street Journal has an article today about the limitations of using Monte Carlo simulations for retirement portfolio planning. The article properly notes that the real issue is not the simulations, but the fundamental assumptions that these models often make. Most Monte Carlo simulations that were being used by financial planners assumed that market returns adhered to a bell-curve-shaped distribution. Of course, this means very thin tails on the distribution, i.e. an extremely low probability of an "extreme" event such as the 2008-2009 market collapse.

Of course, these planners and the simulations they used were not the only ones improperly assuming a bell-curve-shaped distribution. Most experts also ignored the possibility of "fatter tails" on the distribution. In other words, extreme events might not be as rare as once thought. For a great book on this subject, check out The Black Swan by Nassim Nicholas Taleb.

The Name Says It All

Fast Company has a fun addition to their website; it's short comedy clips from the Rooftop Comedy group. To check out the collection of clips, click here. To sample one funny bit of stand-up, see below.

Disney-Hulu Agreement

Business Week has a good article on the looming battle between Apple and Hulu. Disney now has established an agreement with Hulu to provide content for the site. This means Hulu has become an even more formidable competitor to Apple as a place where consumers can access video content. Hulu, of course, relies on advertising to support its free distribution model. Some question whether this popular site can ever be profitable relying predominantly on advertising for its revenue. Apple charges consumers for video downloads. The two economic models will be tested against one another in the months to come. As the article states, the success of Apple's strategy will be dependent on the further evolution of its hardware technology. Thus, it will be interesting to watch new developments on the product side in the next year. Meanwhile, the article mentions the possibility of a Hulu app for the iPhone... meaning that the two firms will be collaborating as well as competing in this space. To top it all off, Steve Jobs remains Disney's largest shareholder, adding another interesting twist to this latest news about Hulu.

Sunk Costs in Detroit

Something tells me that I will be able to write a great (but sad) paper several years from now about the sunk cost trap as it pertains to the federal government and the U.S. automobile industry. The sunk cost trap refers to the tendency for people to escalate their commitment to failing courses of action in the face of high sunk costs, i.e. to throw good money after bad. I fear that we will continue to engage in this type of escalation over time in Detroit.

Index Funds Still Win, Even in a Bear Market

As noted on Greg Mankiw's blog, Standard and Poor's reports that, over the five year period of 2004-2008, "The S&P 500 outperformed 71.9% of actively managed large cap funds, the S&P MidCap 400 outperformed 75.9% of mid cap funds, and the S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003."

These results are important because many people have argued that perhaps index funds would not outperform actively managed funds in a bear market. However, this study's findings demonstrate that trying to beat the market is just as difficult in a bear market as in a bull market.

The bottom line: Your index fund may have taken a beating in 2008, but you are not likely to have been better off with an actively managed fund with its accompanying higher fee structure.

Extending the Illy Coffee Brand

I'm a big fan of Illy coffee, the high end line of espresso coffee from Italy. I discovered it at Whole Foods market, and I'm willing to pay a premium for this very good coffee. Now, I read in Fast Company that Illy is coming out with a new product line... canned coffee beverages. The article reviews the new products, and asks the question: "Is it premium enough?" That certainly seems like a relevant question. One has to wonder whether Illy risks damaging their brand with this product line introduction. Will the firm's quality image suffer at all? We certainly have seen this story before with Starbucks' expansion efforts. It will be interesting to watch consumers' reactions to Illy's growth plans. Of course, this product launch also directly threatens Starbucks' own canned coffee business. The battle is on.

End the University as We Know It

Professor Mark Taylor of Columbia University sparked some vigorous debate in the halls of higher education this week with this thought-provoking op-ed in the New York Times. It's worth reading, not only by faculty members around the country, but also by students and parents as well.

Motivating without Money - Part II

As I think more about the issue of motivating without money, I keep coming back to one of my favorite business books - Soul of a New Machine by Tracy Kidder. Kidder won the Pulitzer Prize for this fantastic book, in which he traces the efforts of Tom West and his product development team at Data General as they develop a new computer in the early 1980s. West employs a variety of unorthodox management methods to drive his team to high performance. Many of my students describe him as manipulative. Whether they approve of his methods or not, however, all students learn from this story that West has created an exceptionally high level of intrinsic motivation among his staff.

One particular lesson that we learn from the book is that many employees are motivated to work very hard on a particular exciting project if they believe that other "cool" projects will be available to them if they perform well in their current work. In Soul of a New Machine, they call this the "pinball theory of management" - i.e. if you excel on this project, you get to work on another exciting one. In short, many people want the promise of interesting future work that will help them grow and develop, and that will challenge them in a unique way. They do not necessarily need to be motivated by a huge bonus at the end of the project (thogh they would like that too!). They might also be highly motivated by the next opportunity that will come available to them.

Motivating without Money

Matthew Boyle has a good article over at Business Week on "Motivating without Money."

There is no question that many firms do not spend enough time thinking about how to enhance the intrinsic motivation of their employees. Far too much time is often spent on trying to perfect the extrinsic reward system.

Scholars Richard Hackman and Greg Oldham developed a job design model many years ago that highlights some of the key drivers of intrinsic motivation. They essentially identified key job characteristics that drive intrinsic motivation, and ultimately, task performance. Here are the five key characteristics of a job to consider:

1. Does the job tap into and regularly require use of a variety of the employee's skills?

2. Does the job entail the performance of the whole task, from start to finish, rather than a tiny portion of the task?

3. Is it clear to the employee that the task is highly significant to the organization?

4. Does the employee have a subsantial degree of autonomy with regard to how to accomplish the work?

5. Does the employee receive clear and immediate feedback regarding the job he or she performs?

Interview on Dan Schawbel's Blog

Dan Schawbel interviewed me about my new book (Know What You Don't Know), and he's posted the interview on his Personal Branding Blog. Dan is the author of Me 2.0: Build a Powerful Brand to Achieve Career Success (Kaplan, April 2009).

GE's Track Record Churning out CEOs

General Electric has a tremendous record developing talent that goes on to lead other companies. Many CEOs have worked for GE at some point in their careers. This article about Bob Nardelli's troubles at Home Depot and Chrysler reminds us that not all GE executives go on to great success elsewhere. Some, such as Bill Anders or Larry Bossidy, enjoy a great deal of success. Others stumble. Why might some executives succeed while others do not? Here are a few theories:

1. The most effective executives may go to companies that resemble General Electric, i.e. large diversified conglomerates (while less successful executives may be trying to make the leap to companies that are quite different than GE (such as a retailer).

2. Some executives may have excelled at GE because of the support network that enabled their success. In other words, they did not excel at GE simply because of their own talent, but because of the people surrounding them and the culture/systems of GE that enabled their success. It is often hard to discern whether a star at GE is capable of excelling without the support network around them.

3. Some GE executives may have tried to transplant GE processes and systems without sufficient adaptation to their new company's industry, strategy, and culture. Others may have had more success because they engaged in more effective adjustments of the "GE way" to fit their new external and internal environment.

The Art of Critical Decision Making

My new course from The Teaching Company has been released this week (24 half hour lectures available in CD, DVD, and audio download format). The title is "The Art of Critical Decision Making." For more information, click here (or see the advertisement on page B5 of today's Wall Street Journal - Thursday, April 23rd).

Advertising During a Recession

My colleague Keith Murray passed along this insightful piece by James Suroweicki, published in The New Yorker. Suroweicki, of course, is the author of the wonderful book, The Wisdom of Crowds. This article addresses the issue of the impact of cutbacks in advertising during a recession. Here's an excerpt:

A study of advertising during the 1981-82 recession found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets. And a McKinsey study of the 1990-91 recession found that companies that remained market leaders or became serious challengers during the downturn had increased their acquisition, R. & D., and ad budgets, while companies at the bottom of the pile had reduced them.

J&J's Secrets to Success

Geoff Colvin and Jessica Shambora at Fortune have an article about J&J's secrets to success. They point out that J&J has a remarkable record over more than 100 years as a corporation, and they try to identify five key factors that contribute to their success. Such exercises are often futile or counteproductive, but in this case, the rules are simple, but nevertheless valuable to consider:

1. Diversify within a single industry.
2. Focus on the future.
3. Let the experts run the business.
4. Stay financially disciplined - always.
5. Have a purpose beyond profits.

Gladwell on Teacher Quality

My colleague Mary Lyons just forwarded me this intriguing article by Malcolm Gladwell about teaching. Gladwell argues that teacher quality matters much more than class size or school quality when it comes to our children's learning. Here's one excerpt from Gladwell's essay:

Hanushek (Eric Hanushek, an economist at Stanford) recently did a back-of-the-envelope calculation about what even a rudimentary focus on teacher quality could mean for the United States. If you rank the countries of the world in terms of the academic performance of their schoolchildren, the U.S. is just below average, half a standard deviation below a clump of relatively high-performing countries like Canada and Belgium. According to Hanushek, the U.S. could close that gap simply by replacing the bottom six per cent to ten per cent of public-school teachers with teachers of average quality. After years of worrying about issues like school funding levels, class size, and curriculum design, many reformers have come to the conclusion that nothing matters more than finding people with the potential to be great teachers. But there’s a hitch: no one knows what a person with the potential to be a great teacher looks like. The school system has a quarterback problem.


The question then becomes: How does one find great teachers? Gladwell explains that schools face the same problem that NFL scouts encounter. NFL teams have a very hard time determining which college quarterbacks will excel in the professional game. They find it easier to determine which receiver or defensive linemen will excel. The quarterback position involves so many intangibles as well as mental aspects to the game; it's more than physical prowess that drives success at the professional level.

Similarly, Gladwell argues that it is difficult to identify great teachers. He points to research that shows that the usual qualifications don't correlate with success in the classroom. For instance, being certified or having earned a graduate degree do not lead to more effective teaching on average. He concludes that we can only identify great teachers by actually watching them teach for awhile. Observation often yields very meaningful insights which cannot be discerned from a resume. Gladwell points to one researcher's work that suggests that effective teachers have a quick sense of when behavioral problems are emerging in a classroom. The researcher describes this teacher quality as "withitness." One can detect this through observation, but it's a highly intangible, yet crucial, aspect of teacher quality.

While this essay provides insight as to teacher recruiting and selection, it also brings to light some issues for many business firms. Does your firm have a particular position that is similar to the NFL quarterback, where it is particuarly difficult to discern the likelihood of the candidate's success at your firm based on the credentials outlined on the resume? Are some positions easier to fill than others, much as NFL teams have discovered? How can you observe performance, and perhaps your firm's equivalent of "withitness", in the early days of a person's tenure at your firm, so as to discern whether they will succeed in the long term?

The Problem with Stock Options

Dartmouth Professor Sydney Finkelstein provides a clear and concise critique of stock option compensation schemes on BusinessWeek.com. Naturally, his criticism focuses first and foremost on the fact that stock option compensation tends to encourage excessive risk-taking. Finkelstein rightfully also critiques the rush to reprice stock options now in the face of huge declines in stock prices.

In general, pay for performance has the potential to be effective as part of a broader human resource management system designed to attract, retain, and motivate talented people. However, no pay for performance plan is perfect. In the case of stock options, the downside is excessive risk-taking. As companies make key decisions on their compensation plans, they must always remember that the law of unintended consquences will prevail in most situations. While trying to motivate desirable behavior X, the plan often leads to undesirable behaviors Y and Z as well.

Stand-up Economist

Check you Yoram Bauman, the hilarious stand-up economist. We could all use a laugh during these trying economic times.

Job Advice for Class of 2009

Anne Fisher at Fortune has some good advice for soon-to-be college graduates. I particularly like the notion of using volunteer work in one's field of expertise to bolster one's resume. For example, she points out that an aspiring accountant could volunteer to keep the books at a non-profit as a means of gaining valuable experience.

John Madden and EA Video Games

John Madden, the most famous NFL sportscaster of the last quarter century, announced his retirement today. Several generations of NFL fans have grown up listening to him as a color commentator alongside such accomplished play-by-play announcers as Pat Summerall and Al Michaels. Of course, his partnership with EA Sports has led to the remarkably successful Madden video game series. Today, EA announced that Madden's retirement will have no impact on their video game products. However, one wonders what will happen down the line. In 5-10 years, will the Madden brand resonate with young gamers who will not have grown up listening to John Madden on television? How will EA react? It will be interesting to watch how the brand develops and evolves during Madden's retirement.

Southwest Airlines Struggles

Southwest Airlines posted its third straight quarterly loss. The company, of course, has recorded positive annual profits for more than thirty straight years. That streak may be in jeopardy. Here is a CNN interview with Southwest CEO Gary Kelly, speaking about the future for Southwest, including some cost-cutting measures that the firm has put in place in reaction to these losses:

Teaching MBAs

We now have a video about our Bryant MBA program up on YouTube. This video provides some insight regarding my teaching philosophy for those who are interested.

Tax Day!

Here we are on April 15th. Most taxpayers do not enjoy this day, because those taxes are due! The deadline, as well as the filing process, reminds me again of the complexity of our tax code. That complexity surely costs us a great deal of money. Experts refer to these expenditures as the "costs of tax compliance." How large are these costs for Americans? Here is an excerpt from the Tax Foundation's website:

The full cost a tax system is more than the amount of tax paid. It also includes the cost of tax planning and paperwork. Economists call these "tax compliance" costs, and the IRS estimates Americans spend 6.6 billion hours per year filling out tax forms—including 1.6 billion hours on the 1040 form alone. In 2002 Americans spent roughly $194 billion dollars on tax compliance. That amounts to 20 cents of compliance cost for every dollar collected by the tax system.

Capitalism vs. Socialism

Rasmussen released a shocking poll last week about Americans' views regarding capitalism and socialism. Here's an excerpt from their report:

Only 53% of American adults believe capitalism is better than socialism.

The latest Rasmussen Reports national telephone survey found that 20% disagree and say socialism is better. Twenty-seven percent (27%) are not sure which is better.

Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided.

These numbers clearly reflect some disenchantment associated with the poor economy. Still, these data startle and worry me. Do young people truly understand what socialism means? Do they recognize that, throughout our history, well-meaning Americans of all political stripes have worked very hard to build and defend our system of democratic capitalism. This economic and political system has brought freedom and posterity to many parts of the world. Socialism has brought nothing but ruin, and with it has often come dictatorship and oppression. As an educator, I worry that perhaps we are not teaching our young people the critical lessons of history. As educators, we should never flinch from teaching that capitalism is far superior to socialism, while acknowledging that people of different political affiliations may have different views on the form of capitalism that should be employed.

Building Community

Seth Godin has a thought-provoking post over on his blog about "intentionally building communities." Godin argues that we should create opportunities within our organizations for people to identify closely with a group of colleagues. Interesting projects or experiences, even if short term in nature, can become opportunities not only to accomplish a particular task, but perhaps more importantly, to build bonds that will last for years. These connections can be instrumental to performing far more important work in the future.

Motivation for Innovators

The Innovaro Blog has an intriguing new post about the motivation for many innovators. The post specifically addresses those people inventing new apps for mobile phones such as the iPhone. Some of these innovators hope to profit from their innovation efforts, but many others do it for non-financial reasons. Companies have to be able to encourage and harness such innovation from a broad array of people, particularly when these innovators are creating complementary products that will help drive sales for their firms.

Change of Control Provisions

Business Week has an article today about change of control provisions enacted by various companies. Here's an excerpt from the article:

The tactic might well be called "the banker made me do it" defense. Amylin (a biotech firm) has in place a "change of control" debt covenant that requires it to pay back an outstanding loan if investors buy a large stake in the company or elect a block of board members. Amylin says it would be forced to pay back a $125 million Bank of America (BAC) loan if outsiders wrested control of its board, which in turn could force it to default on up to $900 million in debt. That could make Amylin unpalatable as a takeover target.

In my view, these takeover defense tactics do not serve shareholders well. A company should be capable of defending itself against a hostile takeover by performing at a high level, not through such gimmickry. If a firm isn't performing well, then perhaps a hostile takeover (or the credible threat of one) is the right medicine. After all, even the threat of a hostile takeover puts management on its toes, and it insures that management will not drag its feet on necessary restructuring moves when performance lags. That threat also insures that companies will not horde excess cash during and after a period of high performance.

One other type of change of control provision also proves troublesome. Some CEOs have change of control provisions in their compensation contracts. They stand to gain a huge windfall if the company is sold. These provisions clearly do not enhance shareholder value, nor do they help employees or customers of the firm. If the firm is performing well, and the CEO engineers the sale of the firm to another company, the CEO will benefit greatly anyway because he or she often holds a high number of shares and options (which will be purchased at a substantial premium). Why the need for an additional change of control "bonus"? If the firm is not performing well, then the CEO doesn't deserve any type of special added bonus because of a takeover. In fact, if the CEO loses his or her job in such a hostile takeover, he or she probably deserves it and certainly doesn't deserve a large bonus since the firm has underperformed.

Diseconomies of Scale AND Scope

In class yesterday, one of my exceptional students, Rick Moylan, asked me an interesting question. He said, "I have heard about diseconomies of scale. Is there such a thing as diseconomies of scope? It would seem that they must exist." What a terrific question! Clearly, we hear people talk about diseconomies of scale whenever a firm gets so large and complex that it becomes difficult to manage effectively. Recall that scale economies exist when costs per unit fall as the number of units produced rises. In other words, bigger is better. However, costs per unit often bottom out at some point, and then they start to rise again. We have heard reference to diseconomies of scale with regard to firms such as Citibank and General Motors, for instance. Frankly, I think too many executives justify large mergers and acquisitions on the grounds of scale economies without ever considering the potential for diseconomies.

What do we mean by diseconomies of scope? Well, first let's define economies of scope. We are talking here about multi-business unit corporations. In those cases, we would argue that scope economies exist if an economic benefit exists because multiple businesses operate under one corporate parent. People commonly refer to scope economies as synergies. For instance, one could argue that Disney's theme parks derive economic benefit from being in the same corporation as Disney's animation studio.

Can diseconomies of scope exist? Surely, they can. Sometimes, when firms diversify into new businesses, they actually do more harm than good. The expansion of scope does not enhance the value of the businesses in the corporate parent's portfolio, but instead diminishes their value. For instance, consider this hypothetical scenario. Imagine if Disney acquired a video game company with a reputation for making incredibly violent games. That expansion of scope may actually harm Disney's other businesses because it would damage Disney's brand image as a provider of "family entertainment." We would not have synergies, but instead a negative impact on the value of the firm as a whole. Once again, I think managers often discount the possibility of such diseconomies, focusing instead on making the argument for synergies that can justify a particular merger or acquisition.

Brad Brooks Show

Brad Brooks interviewed me for his radio show in Vancouver. The one-hour interview consists of an in-depth discussion of my new book, Know What You Don't Know: How Great Leaders Prevent Problems Before They Happen. To listen to the interview, click here to download the MP3 file. Thank you to Brad for having me on his show!

Consumer Interest in the iPhone and iPod

Piper Jaffrey has released interesting new survey results examining U.S. teenagers' interest in both the iPhone and iPod. Teens showed strong interest in purchasing an iPhone in the future. It clearly represented an aspiration for many young people, though they perhaps could not afford to buy one just yet. Here's some data that will astound you:

"[Piper Jaffrey's] Andrew Murphy attributes much of the iPhone’s popularity to the penetration of the iPod and iTunes Store among this cohort. The iPod’s market share has held steady at 86% over the past 12 months, and although only 19% of teens planned to buy a new MP3 player this coming year (down from 34% six months ago), 100%of those who did planned to buy iPods. Meanwhile, iTunes now enjoys a 97% market share among teens—up from 81% a year ago—with No. 2 RealNetworks hanging on at 2%."

We've written in the past on this blog about the power of network effects. Clearly, the iPod and iTunes are riding the benefits of a strong network effect. In other words, the more people that own an iPod or use iTunes, the more that potential new customers will value the iPod and iTunes. To give another example, consider eBay. I will value eBay more if there are lots of other buyers and sellers on eBay, because it enhances the likelihood that I will be able to find a buyer or seller for the item for which I have interest.

Apple, of course, has worked to enhance this network effect. For instance, consider the launch of Genius, which is new software that comes with iTunes. Click on any song in your library, and then Genius will create a playlist for you. That list will include songs in your library, as well as other songs that you can purchase via iTunes. How does Genius create the playlist? Well, it drives off of algorithms built based on data analysis of your preferences as well as those of millions of other iTunes users. The more people that use iTunes, the better Genius becomes at predicting what you will enjoy. Thus, Genius enhanced the network effect.

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.