McNamara and Obama

Bret Stephens wrote a very insightful piece in the Wall Street Journal yesterday about the lessons that President Obama might take from Robert McNamara's career in Washington. Here is the excerpt which I found fascinating:

But all that happened only after the Planners gave way to what development economist William Easterly has called the "Searchers." As Mr. Easterly writes in his book "The White Man's Burden," "a Planner thinks he already knows the answers; he thinks of poverty as a technical engineering problem that his answers will solve. A Searcher admits he doesn't know the answers in advance; he believes that poverty is a complicated tangle of political, social, historical, institutional, and technological factors. A Searcher hopes to find answers to individual problems only by trial and error experimentation. A Planner believes outsiders know enough to impose solutions."

Stephens writes in reference to the President and his advisors, but I think the notion of Planners vs. Searchers also applies to business executives. Too many CEOs think of themselves more as Planners than as Searchers. They would be well-served to remind themselves that they are unlikely to have all the answers for the thorny problems facing their complex organizations. As leaders, they need to think more carefully about how to uncover the answers amidst the skills, capabilities, and knowledge embedded at all levels of their organizations.

Boeing and Vought Aircraft Plant

Frustrated by delays with the 787 Dreamliner, Boeing has announced that it's acquiring a Vought Aircraft Industries manufacturing facility in South Carolina. The company says that they believe that assuming ownership and complete control over the facilty will help them get the Dreamliner back on track. This incident makes for an interesting example of the virtues and costs of vertical integration. Many firms have chosen to de-integrate in recent years, but of course, there are some coordination and transaction costs associated with trying to work closely with an outside party on a complex endeavor. Boeing appears to have concluded that the coordination costs have become unwieldly, and that the benefits of full ownership and control are perhaps greater than they first anticipated.

Decision Criteria at General Motors

Is this the type of decision-making that will lead to a successful turnaround at General Motors? I think not. Trying to balance so many objectives, rather than focusing on restoring the firm to profitability, seems like a recipe for failure. Moreover, I wonder if it is credible for GM to espouse a strategy of trying to become "the greenest car company in the world." Is this the actual strategy, or is it simply hyperbole? Can the company get back to profitability in the near term while pursuing this vision? I have my doubts given their current capabilities.

Robert McNamara

I just heard the news that Robert McNamara has died. I understand that many people reviled him for his role as a principal architect of the Vietnam War, and there's no question that he made many tragic mistakes... However, I'm still very grateful that Mr. McNamara visited my class at Harvard Business School four years ago. I'm especially thankful for the fact that a conversation with him that day inspired the stream of research that led to my recent book. My students certainly appreciated the opportunity to ask him about many of the momentous decisions he was involved with as Defense Secretary, President of Ford, and head of the World Bank.

Comparison in Decision-Making

Dan Ariely also points out in his book, Predictably Irrational, that we tend to avoid difficult comparisons when making purchasing decisions, while gravitating toward easier comparisons. What does this mean? Suppose we are comparing products A and B, and these two products differ along many dimensions. Now suppose that we add a slightly inferior version of A to our set of choices. How does this affect our behavior? It turns out that adding a slightly inferior version of A to the mix enhances the likelihood to choose the better version of A. Why? Human beings tend to gravitate toward the "easy" comparison...i.e. comparing A to the inferior version of A. Once we do that, the choice becomes obvious.

Predictably Irrational

Several weeks ago, I wrote about the attempt by some Harvard Business School students to create an MBA oath akin to the professional oaths taken by doctors and lawyers. I must admit that I had my doubts regarding the efficacy of such an oath in promoting more ethical and responsible behavior on the part of business executives.

Today, I just finished reading Dan Ariely's interesting book, Predictably Irrational, while on the train from Amsterdam to Brussels (I'm teaching several executive education workshops this week in Europe through the Institute of Management Studies). Ariely is a behavioral economist, i.e. a scholar working at the intersection of psychology and economics to understand how human behavior often does not confirm to the "rational" model of choice employed by many economists.

In his book, Ariely has several chapters on the topic of honesty and cheating. He describes an interesting experiment in which he examines whether being reminded of the Ten Commandments might induce individuals to exhibit more honest behavior. In the experiment, participants were asked to solve some simple mathematics problems. The control group did not have an opportunity to cheat; they handed their answers directly to the experimenter. A second group had an opportunity to cheat; they were allowed to self-report their number of correct responses without handing in their answer sheets. Prior to taking the math test, this group was asked to write down the names of ten books that they had read in high school. Finally, a third group also had the opportunity to cheat through self-reporting, but they were asked to write down as many of the Ten Commandments as they could remember. What did Ariely find in this experiment? The second group answered more questions correctly than the control group, suggesting some cheating. However, the third group (which recalled the Ten Commandments prior to taking the test) did not answer any more problems correctly than the control group. Amazingly, many subjects could not recall all of the Ten Commandments, yet they still exhibited honesty. Simply thinking about moral standards had induced honest behavior!

Could this mean that taking a professional oath would reduce unethical behavior on the part of business executives? I'm not so sure. As Ariely points out, the key to his experiment is that the subjects were asked to think about the Ten Commandments immediately before they had an opportunity to cheat. In the case of the MBA oath, students may take it upon graduation, but the tempting situation may not occur to them for a number of years. Thus, the key to any professional oath is not simply to administer one at the start of a career, but to somehow reinforce its salience over time.

New Zealand Air's Creative Advertisement

Well, this certainly represents an interesting way to advertise the lack of fees on an airline... the crew in body paint!

Building Effective Boards

Beverly Behan outlines some key principles regarding the construction of effective boards of directors. I think it's especially important to note that so much of the governance reform literature focuses on the composition of the board, whereas much of the impact can be found in improving board process. After all, one can alter composition to insure, for instance, a high share of outsiders on the board, but that doesn't mean that the board will truly be independent of top management. Many people who appear to be outsiders, in fact, may have close social ties with the CEO. Composition, then, is a blunt instrument of governance reform. For boards to operate effectively, they need to rethink their process. That improvement effort should focus on key process issues such as information flow, opportunity for surfacing divergent views, and the like.

Made to Stick

I just finished reading Chip and Dan Heath's best-selling book, Made to Stick, while on vacation in Maine. What a terrific book! The Heath brothers explain how we can create, spot, and communicate ideas that people both memorable and compelling. I love the blend of research insights, practical advice, and convincing examples. The Heath brothers boil "stickiness" down to six key principles: simplicity, unexpectedness, concreteness, credibility, emotions, and stories. For those who are interested in increasing the impact of their ideas, this book is a must-read.

Discover Bryant University

Later this summer, my institution, Bryant University, will be hosting two great events for high school students interested in learning more about our school. We hold these events each summer. This year's "Discover Bryant" programs will be held on August 14th and August 28th. The programs represent a casual and fun way to learn more about the school. The event includes a campus tour, mock interview session, and a barbeque lunch with members of the faculty and staff. I hope to attend both picnics and to meet many prospective students and their families at that time. Come learn more about how Bryant prepares young people for personal and professional success through applied learning. We don't just teach theories espoused by those in the ivory tower; we create opportunities for students to apply what they are learning through a variety of projects and real world experiences. We hope that talented young people will come take a look.

Ethnography for Innovation

Business Week provides another example of the power of ethnographic methods in the innovation process. This article features a new product development project at OfficeMax. Here's an excerpt:

"In order to get beyond the survey data, OfficeMax asked GravityTank, a Chicago innovation consultancy, to study women who buy office supplies. "If you wanted to understand the behaviors of a long lost tribe in the Amazon, you wouldn't send them a census survey. You'd observe them," says Ryan Vero, OfficeMax executive vice-president and chief merchandising officer, who initiated the research. Ditto, he says, with consumers. "Ethnographies are a critical component of our innovation process."

Vero wanted to know more about the potential customers' underlying needs and values. How could OfficeMax offer something more valuable than an eco-friendly paper line or longer-lasting pens? What products would address their problems? What messaging would resonate? Did OfficeMax need to change the design or staffing of its stores to better address female customers? Gravity Tank's task was to paint a more complete portrait of women's lives and understand how office supplies fit into them.

The research team recruited a group of 10 women, all from the Midwest, who together represented a cross-segment of OfficeMax's customer base, which includes both small offices and big companies.

Over the course of two weeks, the Gravity Tank field teams, including a researcher and videographer/photographer, spent one or two days with each subject, arriving at the woman's home in the morning and shadowing her as she traveled to work and back. "We try to watch for workarounds. Things people don't necessarily perceive as a problem, because they've developed a way around it," says Shailesh Patel, a Gravity Tank partner who led the OfficeMax project.

For instance, the research teams repeatedly saw women trying to reuse file folders, often writing a new project name on a Post-It and sticking that on the tab. But because the adhesive was relatively weak, the Post-Its would often fall off."

Visiting Zappos

My colleague, David Ager, and I spent yesterday afternoon visiting Zappos, the fast-growing on-line shoe retailer. Zappos has been recognized repeatedly for its extraordinary customer service as well as its very distinctive organizational culture. We simply had to see what Zappos was all about... and we learned a great deal during our visit.

I had heard so much about Zappos' ten core values, which are at the heart of its unique culture and commitment to exceptional customer service. What struck me most, though, was how every employee we met could rattle off the core values. Not only that, but they seemed incredibly committed to bringing these values alive each and every day. These people absolutely loved the company and their jobs.

We also heard legendary stories of how Zappos "delivers WOW through service." One person, for instance, described multiple occasions when employees have spent HOURS on the phone with a customer to help them find just the right shoes that they wanted. In another example, a woman bought shoes for her husband, but he died right after the order was placed. The Zappos' employee not only helped her return the shoes and get her money back, but also sent a beautiful bouquet of flowers to the funeral.

The work environment proved quite unique. Each group decorates its own workspace, and each group had a unique greeting for us as we toured the offices. People freely answered so many of our questions, and they wanted to share their knowledge with us. Zappos talks a great deal about the importance of passion, and we certainly saw a great deal of evidence of passion for the company and its mission.

Perhaps most interestingly, we learned that many much larger companies are trying to learn about Zappos, and trying to understand how they deliver such an exceptional customer experience.

For more on Zappos and its core values, you might wish to view this video:

Lessons in Leadership

If you have not seen it, the Wall Street Journal has developed a rich set of video resources on leadership. They call the site, "Lessons in Leadership" - it includes many videos from CEO interviews that they have done. Many videos offer good, practical advice for managers. Here's the link.

Business Plan Flaws

London Business School Professor John Mullins has a terrific article in today's Wall Street Journal about the typical flaws in entrepreneurs' business plans.

M&A Advice

Shaun Rein provides some sound advice regarding how to approach mergers and acquisitions in his column over at Forbes.com.

I would add a few additional pieces of advice. First, be aware of how sensitive valuations are to a few assumptions. Slight changes in growth rates, discount rates, and the like can have a profound impact. Therefore, it's especially important to identify who is driving those assumptions. If the advocates for the deal control the assumptions, they control the valuation... and thereby can push through bad deals. Too many times, the bankers have a powerful influence on those assumptions, which is problematic because they have a financial interest in seeing the deal completed.

Second, the people who are going to implement the deal (i.e. the integrators) need to be involved in the decision process. That not only helps scope out a deal effectively, but it also builds buy-in and commitment that will be helpful in making the integration process succeed.

Third, don't leave due diligence to the financial experts. You need to also perform due diligence from an operational perspective. You want to not only know about the target firm's financial condition, but also the condition of their fundamental business functions.

Finally, don't let deal fever, momentum, and sunk costs take over an acquisition decision process. It's easy to get swept up in the moment and find yourself going down a path where you find it very hard to turn back.

Writing Good Emails

Stacey Hanke provides some wonderful advice on how to write effective emails. I would simply add one additional recommendation: individuals must learn to write consistently in the active voice!

Gaming the US News Rankings

Is it any surprise that some colleges have learned to game the US News ranking system? I doubt very much that Clemson is the only school to engage in such activity. The incentives to game the system are quite substantial. I'm not excusing such behavior, of course, but simply pointing out that we should not be surprised.

Economies of Scale in Autos?

For a long time, the conventional wisdom in the auto industry has been that bigger is better. In other words, consolidation occurred as firms sought to achieve economies of scale. We saw huge mergers such as Daimler & Chrysler, as well as acquisitions such as Ford's purchase of Volvo and GM's acquisition of Saab.

Now, we see a reverse in this trend. As GM reorganizes, it is selling off many business units. However, these units are not being purchased by large automakers. Just today, we hear that Koenigsegg Automotive AB, a quite small Swedish super luxury carmaker, has acquired Saab. Magna, a Canadian auto parts supplier, acquired GM's European subsidiary, Opel, last week. With these deals, we see firms operating at what used to be considered suboptimal levels of production. In fact, Fiat bid for Opel in part because their CEO, Sergio Marchionne, believes that his firm needs to get to roughly 6 million cars produced in order to fully capitalize on economies of scale. Below that number, he does not believe that he will have fully exploited scale economies.

Who is correct? Are these smaller firms making sensible moves by choosing to compete at levels of production far below 6 million autos, or is Marchionne correct that one has to achieve that level of production to be cost competitive in the mass market? I tend to believe that some powerful scale economies do exist in autos, but that consolidation over the past two decades went too far. Companies failed to account sufficiently for the possibility of diseconomies of scale, and they didn't fully understand the challenges of cross-border merger integration.

CEO as Storyteller

Sangeeth Varghese has a good post over at Forbes.com about the importance of storytelling for leaders. Here's an excerpt:

"Many top executives, trained at conventional business schools, eschew storytelling and stick to a tight-jacketed professional approach. They lay out their vision, goals and results using data points, graphs, Excel sheets and PowerPoint slides. They transform the boardroom into a bored room. Not that numbers and charts are unnecessary, of course--what would happen if salespeople never mentioned numbers? But storytelling can be the most powerful way for a chief executive to sketch a vision and align people behind it. Explanatory talk and statistics appeal to the intellect, but people aren't inspired by reason alone. Compelling stories convey loads of information while also appealing to our emotions, ensuring that we not only listen, but get engaged and inspired."

Several years ago, Gordon Shaw, Robert Brown, and Philip Bromiley wrote an interesting Harvard Business Review piece about strategic planning at 3M. In that article, they explained how stories can be used to convey a strategy quite effectively. For those who are interested, here's the link to obtain that article.

Diversity's Missing Ingredient

Pat Lencioni has a great new article discussing why diversity does not automatically lead to better decisions. He rightfully points out that taking advantage of diversity requires the proper management of conflict. Simply having people with diverse backgrounds in an organization does not automatically lead to higher performance. Those diverse ideas must be brought together in a vigorous dialogue and debate. Unfortunately, sometimes people with diverse backgrounds engage in conflict that becomes personal and highly counterproductive, in part because they don't understand each other well.

Heading Issues Off at the Pass

Thank you to CIO Insight for putting together this nice slideshow about my work.

Safeway's Efforts To Cut Health Care Costs

Steven Burd, CEO of Safeway, has an interesting op-ed in today's Wall Street Journal explaining how his company has tackled the high cost of healthcare. Specifically, Burd's firm has set worker premiums based on each employee's behavior. In other words, if you smoke, or are obese, you can expect to pay more for your health care at Safeway. He's creating incentives for people to change their lifestyle so as to become healthier, thereby driving down the cost of care, particularly for chronic conditions. It's an approach worth further examination.

Software Makers Choosing Between Apple, Palm, and RIM

Business Week has an article about how some software makers, given limited resources, must grapple with the difficult choice regarding whether to develop software for the iPhone, Blackberry, Palm's new smartphone - the Pre, or other devices. The situation provides a powerful example of positive and negative feedback loops. If one player achieves a dominant lead in the smartphone business, then developers will flock to build software for that platform, as they will be able to more quickly achieve a return on their investment. Laggards will be in trouble, as few developers will want to expend precious resources to create software that has limited market potential. Of course, the question becomes: How does one achieve a lead in the smartphone market? In part, one has to woo developers, so as to have enough interesting software available to persuade consumers to buy your phone. If one attracts developers, then that increases the installed base of your smartphone, which in turn attracts more developers. That's the virtuous cycle of positive feedback in action. Of course, if one does not attract sufficient developers, that shrinks the installed base of phones, which means less developers work on your platform in the future - that's the negative feedback loop in action. What determines the intensity of these feedback loops. The size of the fixed costs of software development will be a key factor. To the extent that the fixed costs of development rise, then the pressure on laggards will intensify dramatically. Software developers will not want to develop products for niche phone-makers, because they won't be able to amortize their high fixed costs effectively. Recall that this phenomenon affected Apple in the late 1980s and early 1990s, when its very small market share relative to Windows caused many software developers to choose to create products for Windows rather than Apple. The key factor was that the fixed costs of software development could not be recouped quickly given the small installed base of Apple machines relative to Windows.

Succession at P&G

Business Week has an article about the succession process unfolding at Proctor and Gamble. The company announced this week that Robert McDonald will take over from A.G. Lafley as CEO. The authors point out that Lafley has become a management icon during his very successful tenure at the company. Moreover, they stress that the track record of those CEOs who follow icons is rather mixed.

This issue raises an important question about which I've often wondered. Many leadership scholars argue that the mark of a truly great CEO is that the company's performance persists long after he or she retires. It is said that such CEOs built sustainable organizations. However, one could make the counterargument... a drop-off in performance after a CEO retires could be taken as a sign that the leader was indeed substantially responsible for the exceptional performance during his or her tenure. In other words, maybe a drop-off after retirement means that the CEO added a great deal of value, above and beyond what another leader can bring to the table.

Questions to Ask Your Boss

Rachel Zupek of Career Builder provides a terrific list of nine important questions to ask your boss.

The Limits of Telecommuting

Jonathan Weber writes on MSNBC.com about the pitfalls of extensive telecommuting within your organization. He makes some good points about the value of face-to-face interaction.

Supermarket Differentiation

Business Week has an article about supermarkets trying to differentiate themselves given the low margins in the business and intense competition for the roughly 10% of consumers who do switch supermarkets each year. Here's an excerpt:

"Today's newly frugal consumers are cranking up the pressure on retailers to innovate. Margins in the $547.1 billion market averaged just 1.84% nationally in 2008, according to the Food Marketing Institute. Though an average grocery store has 46,852 items, the sector's big chains also stock pretty much the same brand-name goods. So with little room to further cut prices or wow consumers with unique products, food retailers are seeking out new trends and technology that might differentiate them from competitors."

The article goes on to examine some of the innovations that have been introduced by various supermarkets around the country. However, the author fails to highlight one key problem facing the supermarket industry. Most of the attempts to differentiate can easily be imitated. After all, many innovations and improvements have taken place in the industry over the past several decades, yet margins remain paper thin. Why? In part, supermarkets cannot fatten their margins because it's difficult to sustain differentiation; most innovations are easily copied in this industry. Of course, a few supermarkets have differentiated in the premium segment of the market (Whole Foods, for instance), but most mainstream supermarkets remain in an intensely competitive space.

In any industry, the challenge is to build a sustainable and defensible competitive advantage through strategies that are inimitable. Unfortunately, some industries lend themselves to such differentiation attempts more easily than others (for instance, some industries involve innovation that can be defended through intellectual property laws).

Why Don't Students Like School?

Cognitive scientist Daniel Willingham has written a tremendous book titled, "Why Don't Students Like School?" I read a review of the book in the Wall Street Journal and promptly ordered it. I couldn't put the book down. Willingham has written a serious book, filled with findings from rigorous academic research, yet he has communicated his points in clear and concise language that all can understand.

The book focuses on nine cognitive principles "that are so fundamental to the mind's operation that they do not change as circumstances change." Willingham outlines these principles in detail, and he then lays out the implications for teachers in the classroom (whether it be elementary schools or universities).

The book has many important insights. He explains, for instance, that "factual knowledge must precede skill." What does this mean? First and foremost, it implies that one cannot teach students to be critical thinkers without first teaching them a body of factual knowledge. Many college professors that I know talk about how it's not important to "drill facts"... that their job is to teach critical thinking skills. However, Willingham provides rich evidence that contradicts this viewpoint, that explains the importance of background knowledge for everything from reading comprehension to complex problem-solving.

Willingham also challenges another precious bit of conventional wisdom held by many in the field of education. Many people believe that teachers should vary their approach with students based on each individual's cognitive style. Willingham explains that scant evidence exists to support this widely held viewpoint. That chapter was eye-opening for me.

The book has many more important insights, useful to both teachers and parents. I highly recommend the book.

General Motors and Efficient Markets

Some very useful video for teaching students about efficient capital markets...

http://money.cnn.com/video/news/2009/06/04/news.buzz.gm.060509.cnnmoney

Mulally at Ford

Here's a good video from CNN about Alan Mulally's efforts to turn around Ford Motor Company. The video highlights two key aspects of his tenure at Ford: how he positioned Ford to survive a severe downturn such as the current one, and how he chose to streamline the company's brand portfolio and focus on the core Ford brand. Both decisions appear to smart ones, though clearly, Ford has a long way to go to return to profitability.

Politicians Running GM

Yesterday brought the first signs that members of Congress, from both parties, will find it hard to resist meddling in the affairs of General Motors. First, we hear that Massachusetts Congressman Barney Frank intervened to stave off the closing of a GM distribution center in his home state. That distribution center was slated to be shut down according to GM's restructuring plan. At the same time, Congress held hearings on GM and Chrysler's plans to shut down many dealers throughout the country. Naturally, we heard members of Congress pushing the heads of GM and Chrysler to reconsider the closings of dealers in their districts. It's week 1 of the GM bankruptcy, and already, we see some disturbing signs.

The Incredible Shrinking Harvard

Richard Bradley writes a fascinating piece about the current challenges at my alma mater. There's no question that Drew Faust was hired when the university faced a a bountiful set of opportunities... much different from the problems and threats it faces today. She may very well have been ideal for the situation Harvard faced two years ago. Bradley raises the interesting question though of whether Faust has the skills and capabilities to deal with today's circumstances.

An MBA Oath?

On her blog, Decision to Lead, Frances Frei explains that some business school students have attempted to create an MBA oath, modeled after the type of oaths taken by law and medical school graduates. For more information regarding the oath, go to http://mbaoath.org/

Cutting Salaries Instead of Jobs

Business Week has an interesting article on the pros and cons of the "cut salaries rather than enact layoffs" approach to reducing costs being taken by many firms in this recession.

Jon Stewart: Carmageddon '09 - Lemon Aid

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Air France Crash

The Associated Press has posted an article about the Air France crash with the title, "Multiple factors eyed in case of missing jet." Experts tell the writer that lightning or turbulence alone are unlikely to have caused the crash. Here is a brief excerpt:

Although aviation experts stressed it was much too early to speculate about the causes of the disappearance, they noted that the incident was most likely caused by various factors that combined to cause a catastrophic chain of events. "It sounds like something that evolved into a problem, not something that happened instantly," said Bill Voss, president and CEO of Flight Safety Foundation, in Alexandria, Virginia. "It would appear that their systems were degrading but we don't know why they were degrading." Most aviation accidents are the result of the combination of several adverse circumstances which by themselves would not ordinarily be dangerous.

The lesson here applies to all large-scale failures, not simply aviation accidents. Most large-scale failures result from a series of small errors and failures, rather than a single root cause. These small problems often cascade to create a catastrophe. Accident investigators in many fields, not simply aviation, have shown that a chain of events and errors typically leads to a particular disaster. The key lesson: Be wary of trying to identify a single root cause; search instead for all the links in the chain of events that led to catastrophe.

Questions about the GM Bankruptcy

A few questions to ponder on this historic day in which General Motors announces that they are filing for bankruptcy:

1. Why should we believe that a company whose core capabilities revolve around making trucks and SUVs can suddenly become a highly competitive and successful manufacturer of small, environmentally friendly cars?

2. How long will it take to wind down the "old GM" and will this process require an additional infusion of government funds?

3. Has the company done enough in its talks with the UAW to make the firm competitive against firms such as Honda and Toyota?

4. Will GM's suppliers survive this process, or will some enter bankruptcy themselves? Will the government find itself bailing some of them out as well?

5. Can the firm attract the management talent required to engineer the turnaround, particularly given the limitations on executive compensation that are likely to be put in place due to government ownership?

6. How much will Washington meddle in business decisions for political reasons?

7. Will Washington find itself favoring GM over Ford or engaging in protectionist policies to advance the interests of government-owned General Motors?

8. Does GM have a viable, profitable strategy for the Volt?

9. With the sale of assets such as Opel and Saab, GM will become more U.S.-centric while the auto industry continues to globalize; is this an effective strategy?

10. Finally, how much more money will the government have to invest in GM in the years ahead? Will we end up throwing good money after bad?

Teaching Kids About Basic Business Skills

I just learned about Lemonade Day, a terrific Texas event designed to train young people about entrepreneurship in a fun, enjoyable way. Take a look at this inspiring video about Lemonade Day:

Nintendo: Cultivating Complements

Peanut butter is to jelly as the Wii is to... well, video games, of course. We are talking complements here. It comes as no surprise that, according to the Wall Street Journal, Nintendo is "pushing to increase the number of Wii videogames made by outside publishers, including combat and sports titles that target serious players." The Wii has been a fabulous success, but some observers have worried that the system will run out of steam if Nintendo is not able to cultivate a more diverse array of titles. Many Wii consumers (includin our family) actually own and play a very limited number of games. The concern is that such users may eventually get bored with these games. The key to long term sustainable success is to continue to build more diverse games, including some that are for use with new hardware attachments. Thus, the push to cultivate more complements (i.e. games from outside publishers) makes a great deal of sense.

One note of concern though... the quote above from the Wall Street Journal suggests a push to create combat games for more serious players. What will these combat games be like? One reason that many families purchased the Wii instead of Sony or Microsoft is the fact that Wii games tended to be more family friendly. A push to move more aggressively into combat games enjoyed by hard-core gamers could turn off the core family casual gamers that Nintendo has had so much success selling to over the past few years.

Marketing: Art or Science

Seth Godin has a thought-provoking post over on his blog concerning the distinction between marketing as science vs. marketing as art. He puts forth the cogent argument that sometimes we get confused as to whether we are practicing art or science. As Godin writes, "If you don't know if you're doing a science project or an art project, you'll probably emphasize the wrong elements." I would add that managers often encounter dysfunctional conflict with their peers when they are talking different languages (art vs. science) without being aware of it. They simply talk past one another, and conflicts boil over at some point.

Twitter's Revenue Model

It's still hard for me to believe that a company as ubiquitous as Twitter does not have a revenue model yet. In an interview with the Wall Street Journal, the founders of Twitter discuss their plans to generate revenue in the near future. Click here for a link to the video.

Guest Post: How Relevant is Education to Leadership

From Kat Sanders:

How Relevant is Education to Leadership?

Perhaps the most convincing argument a kid can make against education, the kind of formal learning that’s taught at school today, is to point out that Albert Einstein was not held in too high esteem by his teachers, none of whom expected him to achieve great things in life. Well, in hindsight, we know how wrong an opinion that was! And we also know that academic brilliance is not the only way to achieve a bright future. So does this same principle apply to leadership as well? Are leaders born naturally or are they made through circumstances? While people who do well at school and college (academically) may or may not go on to success in later life, leadership is an aspect that comes to the fore on demand, and this is why, in my book, leaders are born and not made. When we talk of the relationship between education and leadership or of the relevancy that education has in leadership skills, we see that people who assumed leadership in school and college go on to make natural leaders when they are adults. This is because they are familiar with leading from the front and know what leadership involves. I’m not talking of the leadership that is thrust on us, but of that which we take on willingly. For instance, a group may have a designated leader, but he or she is not the one who is actually carrying out all the tasks that a leader should do. Instead, another person in the group, someone who is a born leader, assumes the mantle and sets out to lead the group when the designated leader falters or is found wanting. Consider a sport where each team has a captain, someone who does not necessarily have to be the best in the game, but who is supposed to bring out the best of his/her teammates. Normally, when you’re pretty young, the best player on the team is the captain. But as the games progress and you need to get into the spirit and become more competitive, the team member with a natural flair for leadership takes over and begins directing play and strategy.

Perhaps we could say that situations bring out the true leaders, rather than an education. While you can try to teach people the qualities of leadership, there’s no guarantee that they will become good leaders because of the education. However, if they do have leadership traits in them, no matter how long they remain dormant, they will find a way to break free when the right situation comes. Maybe we could say that a formal education provides us with opportunities for true leaders to show themselves, to understand their skills, and put them to good use all through their lives.


This article is written by Kat Sanders, who regularly blogs on the topic of best online engineering degree at her blog, The Engineering A Better World Blog. She welcomes your comments and questions at her email address: katsanders25@gmail.com.

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.