Investing in Customer Service

According to this article, "The American Customer Satisfaction Index, a widely followed survey conducted by the University of Michigan, is at a record high. Other surveys also report gains in customer satisfaction." What's interesting about these results? According to the research cited in the article, service often suffers during economic downturns. This year, however, we see firms taking care to retain loyal customers, and trying to improve service. It's good news for customers, who were taken for granted by some firms during boom times.

What does this all mean for companies moving forward? It's so important to understand two sets of customers. The first are those buyers who are likely to defect if not served properly. Does your firm understand which customers, who are profitable for your firm, are also in danger of defecting to the competition? Secondly, your firm has to ask itself: Which consumers are most likely to increase their spending substantially when the economy begins to pick up steam? You want to take good care of them now, so that they demonstrate loyalty to your firm when they begin spending again. In some cases, those buyers may be keeping their wallets mostly closed now, but there may be indicators that they could be profitable customers for you down the road.

Intuition, Emotion, and the Decision-Making of Soldiers

Benedict Carey, writing in the New York Times, offers a look at the latest research on intuition in the military. Carey describes how researchers have been studying the way in which soldiers make decisions about where they believe IEDs are located. It's fascinating work that looks at the role of intuition and emotion in the choices that soldiers make. It reminds me of the groundbreaking work of psychologist Gary Klein, who has studied intuition in the decision-making of soldiers, firefighters, and nurses. Klein has written several great books on the subject. I highly recommend Sources of Power, a book that he wrote in the late 1990s based on his research. Klein shows that intuition fundamentally is pattern recognition based on experience. He provides a model of how we spot cues in our environment, draw analogies to past experiences, and make choices instantaneously and subconsciously in many situations. It's worth reading if you want to know more about what people often describe as "gut instincts."

Wisdom of Crowds

Here's an article about the results of the NetFlix prize, which is an example of what James Surowiecki described as the "wisdom of crowds" in his superb book.

Craig Ferguson: Young and Stupid

To my students...

Bailout Song

Thanks to my former prof, Greg Mankiw, for introducing me (via his blog) to singer Merle Hazard and the "Bailout" song.

Boardrooms and Blackberries

I couldn't agree more... Professors David Beatty and J Mark Weber, writing in the Financial Times.

Leaders as Confronters

Carol Smith, senior vice president and chief brand officer for the Elle Group, offers some interesting thoughts on leadership in this article. While I don't agree with her generalizations about women vs. men as leaders, I do think she makes a number of good points about leadership - particularly on the issues of confrontation and hiring.

Starbucks: Trying to Revive Authenticity

Starbucks tries to go back to its roots and emulate the independent coffee house product/service offering with its new shop in Seattle - 15th Avenue Coffee and Tea, Inspired by Starbucks. It will be interesting to see what Starbucks learns from this experiment. To me, the real success of this concept is not whether this particular store format succeeds, but whether the rest of the Starbucks chain can benefit from the learning and experimentation taking place here.

Don Sull: Updating Mental Maps

Don Sull has an interesting new series of posts on his blog about the types of information that managers must use to update their mental maps during turbulent times. Here's a brief excerpt from the introduction of his latest blog post:

"People use mental maps to guide action. In turbulent markets, however, these maps quickly grow outdated. To update their maps as circumstances change, leaders need information that has four critical characteristics. My last three blogs have discussed the importance of real time, unfiltered, and shared data. This post argues that holistic data is critical to spot opportunities and threats in volatile markets."

Financial Literacy

I'm a big believer in the need for improved financial literacy in the United States. However, as this article notes, one major limitation may be finding teachers at the secondary school level who can provide this education on personal finance matters:

"One weak link in the push for more financial literacy training for young people is teachers, who often lack financial savvy themselves. 'You get a real multiplier effect if you get a teacher prepared well,' says Joseph Peri of the Council for Economic Education."

Ultimately, as with so many things, the real problem begins at home. If parents don't set the right example, we are unlikely to find young people developing good financial habits. As a parent, I think it's important to begin at a young age trying to educate children about how to manage money responsibly.

Blunders Costly in a YouTube World

Major customer service blunders prove mighty costly in a YouTube world. See this article and the video below.

Do You Know What Customers Care About?

Many times, we think we know what our customers care about, but we may be relying on "conventional wisdom" or "gut instinct" rather than cold, hard facts. According to G. Michael Maddock and Raphael Louis Vitón over at Business Week, major league baseball teams may be misguided in their understanding of why fans attend ballgames. Here is an excerpt from what Maddock and Viton wrote:

These same teams are, for the most part, relying on either outdated research approaches or "gut feel" to determine what fans want. And not surprisingly they are swinging and missing. Want proof? Consider some of our recent findings:

• Every sports executive we have ever met says the No. 1 thing fans want is a winning team. Fans rank it 11th when asked why they show up at a game.

• What the paying customers want most is a "fan friendly" environment, right? Nope. Fans rank it 6th in importance.

• Teams worry that their ticket prices are too high. Fans say cost ranks 7th when they are deciding whether or not to attend a game

Has your firm tested or validated its conventional wisdom regarding what customers care about most? Do disconnects exist between what you believe and what is actually true? What does this mean for your product and service offering? Every company should take a lesson from these interesting findings about major league baseball, and they should revisit some of the core assumptions that executives routinely making about their customers.

Huffington Post: Review of my work

Thank you, Tom Alderman, over at the Huffington Post for such a wonderful review of my Teaching Company course on decision-making.

Ford's Turnaround

Ford reports more progress on its turnaround efforts. A one-time gain enabled it to turn a profit for the quarter. While the company continues to burn cash at a substantial rate, it does appear to making strides toward turning its core auto operations profitable. It's not out of the woods yet, but there's light at the end of the tunnel. Of course, cutting costs, improving quality, and reducing debt will help the firm stop the bleeding, but to ultimately have sustainable profits, Ford will have to be a leader in new product development. A major test will be this year's introduction of several new models, including the all-new Taurus championed personally by CEO Alan Mullaly. If the Taurus becomes a hit, Ford could have a bright future ahead.

Bezos on Zappos

Google vs. Microsoft

Holman Jenkins offers an interesting theory on the competition between Google and Microsoft in today's Wall Street Journal. While many journalists describe this as a heated battle, Jenkins provides a contrasting view. It reminds me of how the rivalry of Coke vs. Pepsi was often termed the "cola war" over the years, yet in fact, it resembled the sort of war described by Jenkins, in which both firms prospered for decades.

Zappos Acquired by Amazon

As readers of this blog know, I visited Zappos - the online shoe retailer - about a month ago. I was intrigued by the culture and the incredible customer loyalty generated by the firm. Today, I read that Amazon has agreed to acquire Zappos for $847 million. While I think the acquisition makes a good deal of sense strategically for Amazon, I wonder about the cultural fit. Will Zappos be able to preserve its unique culture? I think Amazon will want to preserve it because the company has delivered such amazing customer service, but I'm sure pressures will emerge on that culture over time.

Ruining the Mystique

Some start-ups become successful as they cultivate a cult following among a hard-core group of consumers. The brand builds mystique. However, as the firm aspires to grow rapidly, it begins to expand its target market - even to go mainstream perhaps. As it does so, the company brand can "lose its mystique" as Professor Burnett mentions in this Wall Street Journal article. Here are some questions to ask yourself to test whether your firm might be in danger of losing the loyal following that fueled early popularity of the brand:

1. Would some of our earliest diehard customers accuse us of "selling out" in some fashion? What did those early customers once think about us, and how do they perceive us now?

2. How different are our early customers as compared to our newest customers? Do their needs and wants differ substantially?

3. Have we become less authentic over time in the minds of some customers?

4. Have we become less unique and distinctive over time?

5. Does the firm have the same sense of purpose that it once had?

What's Wrong with Academia

Here's a funny article from the Wall Street Journal, which highlights some of the odd studies being conducted in academia. While I haven't read and cannot judge these particular studies, we all know that far too many scholarly publications simply state the obvious or offer results which have little meaning for those outside of academia. The publish or perish culture of our universities gives scholars plenty of reasons to conduct such studies simply to get one more peer-reviewed journal publication under their belt.

Joined Twitter!

Well, I've decided to try Twitter: http://twitter.com/michaelaroberto

Thank You - The Teaching Company Course

Thank you to all those who have been listening to my new course - The Art of Critical Decision Making - from The Teaching Company. I've been overwhelmed by the response to the course since its introduction a few months ago, and I've enjoyed hearing directly from quite a few of you who have been listening (or watching) the course.

Suggestion Box at GM

The Wall Street Journal has a story today about how Fritz Henderson, GM's CEO, has implemented an online suggestion box so that he can hear feedback directly from customers. I certainly applaud Henderson's efforts to listen directly to his customers, without all the usual filters that synthesize and summarize data for a CEO. However, leaders must be careful when they engage in such efforts. First, they have to expose their entire management team to such feedback, so that everyone is hearing the same messages from customers. Second, they must be careful not to act based on anecdotal evidence that may emerge from the suggestion box. Many managers grab on to a particularly compelling story or example, and they run with it. Perhaps, though, that bit of feedback may not represent the experience of the vast majority of GM customers. Finally, the company must be prepared to act on this feedback. Nothing angers customers more than a suggestion box that becomes a black hole from which feedback never returns. Can GM handle the volume that my come their way? Are they prepared to hear what they may not want to hear?

Vermont Teddy Bear Stages a Comeback

The Boston Globe reports that Vermont Teddy Bear has completely shifted its strategy in an attempt to execute a turnaround of the struggling firm. It's quite a shift in target markets, from adult men who listened to shock jock radio to children who want a lovable teddy bear with which to play and sleep. Most firms can't pull off such a radical change in their target market, but perhaps Vermont Teddy Bear can do it. It does seem to make sense to play off of their Vermont heritage with items such as an eco-friendly bear.

Is Google a One-Trick Pony?

Many people have labeled Google a "one-trick pony" despite its many varied efforts to launch innovative new businesses. Much has been made lately of their efforts to challenge Microsoft on a variety of fronts, but this article suggests that it's been a tough slog in the application software business. One has to wonder whether Google may lose focus at some point as it pursues so many different avenues of new growth beyond its search advertising juggernaut. How can it keep so many balls in the air, and do them all highly effectively?

Check out Harsh Luthar's Blog

Harsh Luthar is my colleague at Bryant University, and I'd like to recommend his very unique blog. Harsh is a talented scholar and teacher in the field of human resources. His blog has a spiritual/psychological/religious orientation, and it seeks to promote interfaith understanding and peace. Harsh writes on a wide range of issues, including many aspects of personal growth, happiness, and development. Harsh also regularly invites international scholars from England, India, Egypt, Germany, U.S., and other parts of the world to contribute to the site.

The Boston Red Sox, Sunk Costs, and Julio Lugo

The Boston Red Sox face an interesting decision in the next few days. One of their shortstops, Jed Lowrie, returns from injury this weekend. They will have to make a spot on the roster for him. One logical move would be to release Julio Lugo, a shortstop who has performed poorly, particularly defensively, during his tenure in Boston. However, Lugo's contract runs through the end of next season. Thus, regardless of whether Lugo plays another game on the Red Sox or not, the club will owe him approximately $13 million for the remainder of his contract.

What should the Red Sox do? The $13 million represents a sunk cost. It should be irrelevant to the decision as to whether Lugo should remain on the team. It's as if they already paid him the money, since its a guaranteed contract. If Lowrie is better than Lugo, then the club should release Lugo and "eat the money" as they say in baseball. Of course, most sports teams would keep the player, out of a desire to not "waste" the money that they have spent on him. That's poor logic, but it happens all the time in sports. The big-money athlete gets playing time, while a low-paid athlete sits on the bench, despite the fact that the low-paid athlete is the better performer. Why? Because management allows the sunk costs to sway their decision.

Scholars Staw and Hoang published a great paper in Administrative Science Quarterly back in 1995 showing that sunk costs distort decisions in the NBA. Players drafted very high coming out of college tend to get more playing time and stay on their original team longer than players selected later in the draft, holding constant for performance. In short NBA clubs often throw good playing time after bad, much like companies throw good money after bad when high sunk costs exist.

What will the Red Sox do? History suggests that this management team understands the sunk cost trap, and it is willing to release players even if they have invested a great deal of money in the player. They faced the same situation with another shortstop, Edgar Renteria, and they chose to "eat the money" rather than throwing good playing time after bad. My guess is that they do the same with Lugo. Of course, some fans might wonder why J.D. Drew continues to get so much playing time, and if perhaps his huge contract has affected the club's decision-making with regard to that player, who has under-performed expectations since signing with the Sox. Could J.D. Drew someday be another test of Boston's ability to avoid the sunk cost trap?

Knowledge@Wharton

Knowledge@Wharton has published an excerpt of my latest book. This excerpt is from the final chapter, which focuses on the mindset of a problem-finder.

The Power of Collaboration

Maya Payne Smart at CNNMoney.com has an interesting article on small businesses collaborating with one another to compete for contracts, reduce costs, and introduce new products and services. Collaboration through contracts and relationships provides an appealing alternative to either going it alone or engaging in a full-blown merger with another firm. However, such collaboration raises key challenges. First and foremost, firms must be careful to protect their intellectual property. Second, firms have to think carefully about how to divide both the costs and the profits associated with a collaborative endeavor. They have to think about carefully delineating each firm's roles and responsibilities. They must think about the extent to which the company cultures are compatible with one another. Finally and perhaps most importantly, they must consider their exit strategy for this collaborative venture. Is this going to take place for a finite period of time? Is it going take place for a particular project? How will it end, and when it does, how will firms separate from one another in a constructive way?

Progressive Insurance

Progressive Insurance has put a substantial amount of advertising dollars behind its "Name Your Price" innovation in the automobile insurance market. With this new program, customers go to the firm's website, input a price they are willing to pay for car insurance, and then are given several options for car insurance packages that they can purchase for that price. It's another distinctive strategy by a firm known for innovation in the auto insurance market. I wonder if this "Name Your Price" concept might be applied effectively to the health insurance market. What if we could name our price and then instantly be given an array of options for health insurance packages that we could procure at that named price?

Internship Opportunities

For my students, see this article about the companies with the largest internship programs.

Blogging Workshop at Academy of Management

I will be one of the presenters at a professional development workshop about blogging taking place at the Academy of Management conference next month in Chicago. The title of the workshop is Blogging for Management Scholars: Why & How to Read Blogs, Write for Blogs, and Create your Own Blog. The date of the workshop is Friday, August 7th. The organizer is CV Harquail, the author of the Authentic Organizations blog.

I'm also the co-organizer, with Professor David Ager, of a professional development workshop titled Creating Leadership Development Experiences: Collaboration among Academics and Practitioners. That workshop also takes place on Friday, August 7th. I encourage my faculty colleagues at other universities to attend one or both of these workshops if they can.

Leadership Transitions

How might companies make the transition to an outsider CEO more effective? Let's take a look an interesting successful example that other firms might try to emulate.

In the late 1980s, General Dynamics encountered serious financial difficulty. The company brought in an outsider, Bill Anders, as CEO. Anders, the former Apollo 8 astronaut, had served as an executive at General Electric and Textron. In September 1989, the General Dynamics board chose Anders as the heir apparent to the current CEO, Stanley Pace. Anders joined the firm as Vice Chairman on January 1, 1990. He served in that capacity for one full year, and then succeeded Pace as CEO on January 1, 1991. During his time as Vice Chairman, Anders learned the business inside and out. He conducted a comprehensive strategic and financial assessment, and he evaluated the changing industry dynamics given world events taking place as the Cold War came to an end. He also evaluated the strength of the management team at General Dynamics, deciding on the individuals he wished to retain and those he would replace.

Why is this an interesting example? Well, many firms have planned successions for inside hires, but very few firms have periods of transition for outside hires. Instead, they often hire an outside and throw them into the fire. In many cases, the outsiders have a bumpy transition, to say the least. In this case, though, Anders had a year in which to get up to speed on the business, including a thoroughy assessment of the strategy, culture, and personnel. Anders had a remarkably successful tenure as CEO, and he set General Dynamics on a new course that would lead to exceptional performance over the past two decades. Many people remember his tenure at General Dynamics because of a controversial compensation package that he negotiated for himself and other top executives. Of course, in today's terms, his package looks rather bland! Still, what should be re-examined is the thoughtful approach to leadership transition which the company and Anders undertook so successfully. Other companies ought to consider emulating that strategy when bringing in an outsider as CEO.

Vertical Integration in the Auto Industry

Andy Grove, former Chairman and CEO of Intel, has an op-ed in today's Wall Street Journal in which he suggests that the auto industry should follow the path taken by the computer industry two decades ago... by moving away from the old business model of vertical integration. Grove questions whether the government's actions to date are simply propping up an old business model rather than investing in a fundamentally new way of doing business.

How Boards Can Avoid Surprises

Barry Bader has a blog post about an interview that he conducted with me several weeks ago. I look forward to seeing the full interview published soon in his publication, Great Boards. That publication is a useful read for those involved in both healthcare management and governance.

Career Advice from Colin Powell

Fortune magazine current issue has a feature in which a number of prominent people share the best advice they have ever received. General Colin Powell offers this bit of wisdom pertaining to your career:

“You won’t become a general unless you become a good first lieutenant.”

– Colin Powell, former U.S. Secretary of State and retired four-star general, in the Best Advice issue of Fortune, now on newsstands. This “barracks wisdom,” Powell says, was passed down from the old reserve captains to the young infantry officers at Fort Benning in the form of a fable: A young officer asked a general what it took to earn that rank. The general told him he’d have to have moral and physical courage, never show fatigue or fear, and always be the leader. The young officer thanked him and said, “So, is this how I become a general?” The captain answered, “No, that’s how you become a first lieutenant, and then you keep doing it over and over and over.”

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

The Daily Show With Jon Stewart	M - Th 11p / 10c
Carmageddon '09 - Lemon Aid
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

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.