The Wall Street Journal ran a thought-provoking story on the front page of the Weekend Journal section this past Saturday, in which George Mason University economist Donald Bourdreaux argues that insider trading should be legal. This article proved particularly timely given the charges being brought against hedge fund investor Raj Rajaratnam this month. Boudreaux draws heavily on the classic work of Henry Manne to make his case.
How could Boudreaux argue that insider trading should be legal? He makes the case that insider trading could actually improve the efficiency of our capital markets. Here's the crux of his argument:
"Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie. And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large."
Henry Manne has actually made the argument that we might have fewer corporate scandals such as Enron and Worldcom if we allowed insider trading. The idea is that some insiders would have perhaps started selling the Enron stock given their knowledge of the firm's actual inner workings. They would have pushed the stock price downward, curbing the incredible run-up that took place and sending a very clear signal to outside investors that all may not have been as rosy as it appeared. Without such insider trading, outside investors sometimes remain in the dark for far too long, continuing to plow capital into a sinking ship because they are unaware of the actual condition of the firm.
I find the arguments about capital market efficiency to be compelling, yet I cannot help but wonder whether equity concerns trump these efficiency concerns. While it may be good for the market as a whole to have such insider trading, one wonders whether it is fair that a few well-placed insiders with unique access to information might profit handsomely in the process. It's a classic efficiency-equity tradeoff in some sense. Having said that, there are some reasons to believe the current system isn't so equitable either, given that many believe that only a small fraction of actual insider trading situations are identified and prosecuted.
Monday, October 26, 2009
Friday, October 23, 2009
Theo Epstein and J.D. Drew
Yesterday morning, on Boston sports radio station WEEI, Boston Red Sox general manager Theo Epstein offered an ardent defense of his outfielder, J.D. Drew - a player he signed to a 5 year, $70 million contract several years ago. Drew tends to be viewed by most fans as "not worth the money." Epstein argued that he has indeed been worth the money, and that fans must look past the common statistics reported in the newspapers. His more sophisticated statistics tell a different story. I found several parts of his comments troubling, and perhaps of interest to leaders in other industries.
What are the lessons from this interesting debate about Drew? First, clearly, young baseball general managers, as Michael Lewis explained in his great book Moneyball, have used sophisticated statistical techniques to get a better understanding of player performance. As a result, these general managers have taken advantage of inefficiencies in the market for players - inefficiencies resulting from the fact that commonly used statistics of the past often don't tell an accurate or complete story. Epstein has done this well with two World Series championships during his tenure. As a business leader, do you have such discrepancies in your industry? Can you take advantage of them?
Second, in baseball, nearly all fans know about the advances in statistics, even if we don't know all the nuances. Epstein's argument was incredibly condescending, suggesting that we all didn't know much about what really matters. Imagine telling that to your customers in your business. You never want to suggest to your customers that they are ignorant, which essentially is what Epstein did. Many companies actually do think they are smarter than their customers at times, ignoring key warning signs about their business as a result.
Third, note that Epstein defended Drew's performance "on a rate basis" - i.e. he's very good in terms of output per game played. The problem is that Drew doesn't always play; he can't stay on the field. As a business leader, you might have an incredibly talented employee, but if he or she doesn't come to work every day, then you certainly wouldn't retain the worker. You can't be good half the time. Epstein's defense of Drew's performance "on a rate basis" seems puzzling.
What are the lessons from this interesting debate about Drew? First, clearly, young baseball general managers, as Michael Lewis explained in his great book Moneyball, have used sophisticated statistical techniques to get a better understanding of player performance. As a result, these general managers have taken advantage of inefficiencies in the market for players - inefficiencies resulting from the fact that commonly used statistics of the past often don't tell an accurate or complete story. Epstein has done this well with two World Series championships during his tenure. As a business leader, do you have such discrepancies in your industry? Can you take advantage of them?
Second, in baseball, nearly all fans know about the advances in statistics, even if we don't know all the nuances. Epstein's argument was incredibly condescending, suggesting that we all didn't know much about what really matters. Imagine telling that to your customers in your business. You never want to suggest to your customers that they are ignorant, which essentially is what Epstein did. Many companies actually do think they are smarter than their customers at times, ignoring key warning signs about their business as a result.
Third, note that Epstein defended Drew's performance "on a rate basis" - i.e. he's very good in terms of output per game played. The problem is that Drew doesn't always play; he can't stay on the field. As a business leader, you might have an incredibly talented employee, but if he or she doesn't come to work every day, then you certainly wouldn't retain the worker. You can't be good half the time. Epstein's defense of Drew's performance "on a rate basis" seems puzzling.
Why Corporate Initiatives Fail
Joseph Grenny has a good new column on Business Week's website regarding why so many corporate initiatives fail. Grenny cites some statistics about the rate of failure on special corporate initiatives:
Sustained research shows that across the U.S., estimated failure rates for corporate projects range from 66% to 91%. What's more, companies' collective inability to execute on major projects costs many billions of dollars a year. For example, it is estimated that of the $255 billion spent annually on IT projects in the U.S., more than a quarter is burned up in failures and cost overruns.
Grenny goes on to offer some explanations for the types of behavior that lead to such failures. In the past, I conducted a study on this topic, published in MIT Sloan Management Review. In that article, my co-author Lynne Levesque and I argued that many employees refer to such initiatives as just another "flavor of the month" prescribed by top management. They think to themselves, "This too shall pass." We argued that four critical processes in the early stages of an initiative can help insure that initiatives take hold and that change does indeed stick. Here is a brief excerpt from our prior work:
In our research, we discovered four critical processes that enable firms to avoid the “flavor of the month” trap. These antecedent processes lay the foundation for the successful institutionalization of a strategic initiative. The four sets of processes are: chartering, learning, mobilizing, and realigning. Chartering refers to the process by which the organization defines the purpose and scope of the initiative, as well as the way people will work with one another on the program. The chartering process has two critical components: boundary setting and team design. Learning refers to how managers develop, test, and refine ideas through experimentation prior to full-scale rollout. The mobilizing process entails the use of symbolism, metaphors, and compelling stories to engage people’s hearts as well as their minds so as to build commitment to the project. Finally, the realigning process consists of a series of activities aimed at reshaping the organizational context, including a redefinition of roles and reporting relationships as well as new approaches to monitoring, measurement, and compensation.
Sustained research shows that across the U.S., estimated failure rates for corporate projects range from 66% to 91%. What's more, companies' collective inability to execute on major projects costs many billions of dollars a year. For example, it is estimated that of the $255 billion spent annually on IT projects in the U.S., more than a quarter is burned up in failures and cost overruns.
Grenny goes on to offer some explanations for the types of behavior that lead to such failures. In the past, I conducted a study on this topic, published in MIT Sloan Management Review. In that article, my co-author Lynne Levesque and I argued that many employees refer to such initiatives as just another "flavor of the month" prescribed by top management. They think to themselves, "This too shall pass." We argued that four critical processes in the early stages of an initiative can help insure that initiatives take hold and that change does indeed stick. Here is a brief excerpt from our prior work:
In our research, we discovered four critical processes that enable firms to avoid the “flavor of the month” trap. These antecedent processes lay the foundation for the successful institutionalization of a strategic initiative. The four sets of processes are: chartering, learning, mobilizing, and realigning. Chartering refers to the process by which the organization defines the purpose and scope of the initiative, as well as the way people will work with one another on the program. The chartering process has two critical components: boundary setting and team design. Learning refers to how managers develop, test, and refine ideas through experimentation prior to full-scale rollout. The mobilizing process entails the use of symbolism, metaphors, and compelling stories to engage people’s hearts as well as their minds so as to build commitment to the project. Finally, the realigning process consists of a series of activities aimed at reshaping the organizational context, including a redefinition of roles and reporting relationships as well as new approaches to monitoring, measurement, and compensation.
Thursday, October 22, 2009
Samsung and China
The Wall Street Journal had a very interesting story today about Samsung's decision to build a production facility in China. The article relates how Samsung had been hesitant to manufacture in China because it was concerned about "involuntary knowledge transfer." I think it's a valid concern, and it explains why Samsung's most cutting-edge technology will remain in Korea.
Of course, it's not just cutting-edge technology from its research and development labs that Samsung should be worried about losing to Chinese rivals. There's no question that LCD televisions involve a substantial learning curve in the production process. That learning curve is a critical source of competitive advantage. One risk of manufacturing in China is that "spillovers" of those production learning curve effects will take place, giving upstarts a chance to easily "catch up" to much more experienced competitors - i.e. they might come down the learning curve more quickly than normally possible.
Of course, it's not just cutting-edge technology from its research and development labs that Samsung should be worried about losing to Chinese rivals. There's no question that LCD televisions involve a substantial learning curve in the production process. That learning curve is a critical source of competitive advantage. One risk of manufacturing in China is that "spillovers" of those production learning curve effects will take place, giving upstarts a chance to easily "catch up" to much more experienced competitors - i.e. they might come down the learning curve more quickly than normally possible.
Restructuring at Harley Davidson
We learned this week that Harley Davidson will be shutting down its Buell sport bike division and begin searching for a buyer for its MV Agusta brand of expensive sport bikes built in Italy (a brand they only acquired 16 months ago). The news should not shock us, as Harley has always been primarily a heavyweight cruiser/touring bike company. Its competencies revolved around that primary segment, and it created value largely through its enormous brand equity and consumer loyalty. The core cruiser business has been in decline with the economic downturn, while also facing a longer term threat due to the aging of the company's core customers. Refocusing on the core seems like a sensible strategy, given that Buell was consistently not delivering the necessary return on investment.
Of course, we might ask why Harley chose a multi-brand strategy, given the incredible attachment to the core Harley brand. The answer, I believe, is that Harley wanted to pursue growth, and thus moved to the sport bike segment...but it wanted to be cautious about alienating its core customers. Therefore, it was hesitant about extending the Harley brand to the sport segment. That led to the Buell strategy. Now, it has decided to divest these other brands, as it tries to concentrate its resources on bolstering the Harley brand.
To be sure, the company must cater to its core customers, while also trying to entice younger buyers. The critical question: Can it lure younger buyers in larger numbers without alienating any of its Baby Boomer consumers?
Of course, we might ask why Harley chose a multi-brand strategy, given the incredible attachment to the core Harley brand. The answer, I believe, is that Harley wanted to pursue growth, and thus moved to the sport bike segment...but it wanted to be cautious about alienating its core customers. Therefore, it was hesitant about extending the Harley brand to the sport segment. That led to the Buell strategy. Now, it has decided to divest these other brands, as it tries to concentrate its resources on bolstering the Harley brand.
To be sure, the company must cater to its core customers, while also trying to entice younger buyers. The critical question: Can it lure younger buyers in larger numbers without alienating any of its Baby Boomer consumers?
Monday, October 19, 2009
Allegiant Air
We all know that the airline industry is a very tough economic environment where sustainable profits are quite hard to come by. That's why this story in today's USA Today sparked my interest. The story describes upstart Allegiant Air, which has been profitable for 27 straight quarters. Here's a brief excerpt from the story:
Allegiant's success is rooted in its unique niche: providing leisure travelers affordable non-stop flights from small communities such as Bozeman, Mont., or Allentown, Pa., to such vacation hubs as Las Vegas and Orlando. And if passengers want to see a show or visit a theme park once they arrive, Allegiant will sell them those tickets, too. "We've basically taken a very focused approach in our business," says Andrew Levy, chief financial officer of Allegiant Air, who noted that many of the airline's customers would otherwise have to take connecting flights to reach their destinations. "It's a market that has truly been ignored."
What I found particularly interesting is that Allegiant Air does not fly to each of its destinations multiple times per day. In fact, for some destinations, it doesn't even fly their once each day. That seems like a particularly unique element of their business model, and of course, the infrequent flights to popular tourist destinations helps them maintain a very high load factor. Filling each flight to capacity is perhaps the most critical element of a profitable model in this industry given that nearly all costs per flight are fixed. The key is to spread those fixed costs over as many passengers as possible, given that the variable costs per passenger are nearly zero. Who knows if Allegiant can keep up its streak of 27 straight profitable quarters, but it does seem worth highlighting the merits of crafting a distinctive focused/niche strategy as a small player in a very tough industry.
Allegiant's success is rooted in its unique niche: providing leisure travelers affordable non-stop flights from small communities such as Bozeman, Mont., or Allentown, Pa., to such vacation hubs as Las Vegas and Orlando. And if passengers want to see a show or visit a theme park once they arrive, Allegiant will sell them those tickets, too. "We've basically taken a very focused approach in our business," says Andrew Levy, chief financial officer of Allegiant Air, who noted that many of the airline's customers would otherwise have to take connecting flights to reach their destinations. "It's a market that has truly been ignored."
What I found particularly interesting is that Allegiant Air does not fly to each of its destinations multiple times per day. In fact, for some destinations, it doesn't even fly their once each day. That seems like a particularly unique element of their business model, and of course, the infrequent flights to popular tourist destinations helps them maintain a very high load factor. Filling each flight to capacity is perhaps the most critical element of a profitable model in this industry given that nearly all costs per flight are fixed. The key is to spread those fixed costs over as many passengers as possible, given that the variable costs per passenger are nearly zero. Who knows if Allegiant can keep up its streak of 27 straight profitable quarters, but it does seem worth highlighting the merits of crafting a distinctive focused/niche strategy as a small player in a very tough industry.
Friday, October 16, 2009
Bryant students win Babson Business Plan Competition
Morgan Morris and her team of Bryant University sophomores won first place in today's Babson Ideas Into Action Business Plan Competition at the 8th Annual Babson Entrepreneurship Forum! The Bryant team beat two Babson MBA teams in the finals, besting roughly 30 teams in the entire contest. First prize is $27,500! Congratulations to Morgan and Team Puro!
Thursday, October 15, 2009
Should You Purchase that Extended Warranty?
It's no mystery that companies make a great deal selling customers extended warranties. If that's the case, then why do consumers keep purchasing these warranties? Clearly, they offer peace of mind. However, it may not be the economically sensible thing to do in many cases.
In today's Wall Street Journal, Neil Templin writes about the mistakes that we make with regard to extended warranties. Here's an excerpt from his column:
"There's no mystery why retailers push them. In some cases, they make more profit selling the warranty than they do selling the actual gadget.The mystery is why consumers get them. If the retailer makes a lot of money selling them, then it stands to reason the consumer buying the warranty isn't getting a great price.That's not all. What if the company offering the warranty gets into financial trouble? asks Ram Rao, a management professor at the University of Texas at Dallas, who has done research on warranties."
Toward the end of the article, he quotes an official from Consumer Reports on the merits of purchasing an automobile extended warranty:
"If you have your heart set on a car that is unreliable, then [an extended warranty] is probably worth it," David Champion, director of automotive testing for Consumer Reports, told me. "But if you have a reliable Honda or Toyota, you should take the money and put it in a CD or money-market account. The odds are it will still be there when you buy a new car."
That quote reminded me of my response when my Honda dealer tried to sell me an extended warranty on my 2004 Accord. I stopped the sales person in their tracks and said, "I won't be needing one of those because I bought a Honda." She looked at me with a puzzled face, and then she got it. Honda Accords are incredibly reliable. I was buying a car which was not likely to break down. More than 100,000 miles later, I have never regretted my decision.
In today's Wall Street Journal, Neil Templin writes about the mistakes that we make with regard to extended warranties. Here's an excerpt from his column:
"There's no mystery why retailers push them. In some cases, they make more profit selling the warranty than they do selling the actual gadget.The mystery is why consumers get them. If the retailer makes a lot of money selling them, then it stands to reason the consumer buying the warranty isn't getting a great price.That's not all. What if the company offering the warranty gets into financial trouble? asks Ram Rao, a management professor at the University of Texas at Dallas, who has done research on warranties."
Toward the end of the article, he quotes an official from Consumer Reports on the merits of purchasing an automobile extended warranty:
"If you have your heart set on a car that is unreliable, then [an extended warranty] is probably worth it," David Champion, director of automotive testing for Consumer Reports, told me. "But if you have a reliable Honda or Toyota, you should take the money and put it in a CD or money-market account. The odds are it will still be there when you buy a new car."
That quote reminded me of my response when my Honda dealer tried to sell me an extended warranty on my 2004 Accord. I stopped the sales person in their tracks and said, "I won't be needing one of those because I bought a Honda." She looked at me with a puzzled face, and then she got it. Honda Accords are incredibly reliable. I was buying a car which was not likely to break down. More than 100,000 miles later, I have never regretted my decision.
Meetings Matter
GolinHarris CEO Fred Cook argues that in-person meetings do matter a great deal and should not be eliminated for cost cutting reasons without some careful consideration.
Why More Women Don't Get MBAs
A very interesting story from Fortune on the efforts by the Forte Foundation to encourage more women to pursue MBA degrees.
Wednesday, October 14, 2009
Bloomberg Buys Business Week
Big news last evening: Bloomberg announces that it is purchasing Business Week from McGraw-Hill. Let's back up a minute. Why was McGraw-Hill selling the magazine in the first place? Clearly, the obvious short-term reason is that the magazine business has been in decline, with falling circulations as well as large drop-offs in advertising revenue during the recession. However, more strategic reasons also exist for the divestiture. McGraw-Hill is a diversified corporation with a number of businesses. Most people are aware of its book publishing unit, but the firm also owns Standard and Poors, JD Power, Aviation Week, and Platts. Of course, the diversity of businesses raises a critical question: Do these businesses belong in the same corporation? Actually, one has to ask another question to truly evaluate the merits of divesting Business Week and selling it to Bloomberg. We should ask: Is Business Week a better fit at Bloomberg or within McGraw-Hill? I believe that one can make a strong argument that Business Week will prove to be a better fit at Bloomberg, where the strategy will be much more focused on business news as opposed to the many other things that McGraw-Hill has in its portfolio. In sum, there's a key lesson here in corporate strategy. We should not only ask whether a particular business unit is a good fit within a particular corporation... to assess whether value is truly being maximized, we ought to ask: Is that business unit even more valuable within another corporation?
Top 100 Professor Blogs
Thank you to OnlineCollege.org for listing this site as one of the top 100 professor blogs! Click here for the complete list.
Tuesday, October 13, 2009
Disney Stores Plan Makeover
According to the New York Times, Disney plans a major makeover of its stores in the year ahead. I found this story fascinating both because of Disney's retail struggles in recent years, as well as because the news comes just one day after we learn that Oliver Williamson won the Nobel Prize. Williamson's work actually informs us a great deal as we analyze Disney's retail strategy.
Williamson's theories help us understand the merits of vertical integration. In the Disney store situation, we have a case of forward integration, with a company choosing to operate its own retail locations. Williamson basically details how we can think about why companies might wish to be forward integrated in some situations and why they might not choose to do so. He argues we should always compare the costs of performing activities inside the firm vs. cooperating with other firms through contracts and markets.
Why should Disney be in the retail business? Forward integration makes sense to the extent that Disney is doing things at the retail level that are complex, costly, and difficult to do through contracts with outside parties. If contracts work efficiently, then we would allow others to retail Disney products and not be in the retail business at all. To the extent that Disney stores simply sell products like any other retailer, it's hard to justify forward integration. That's why many questioned Disney's store strategy in recent years. In fact, Disney itself tried to outsource the stores to Children's Place, but it didn't work out.
However, to the extent that the stores are true interactive experiences, then Disney may wish to control those retail outlets themselves and can secure key benefits from that ownership of the stores. The direct control enables them to use the stores to further differentiate the brand in the marketplace, raise willingness-to-pay for Disney products, communicate with and learn directly from customers, and drive synergistic benefits across the Disney portfolio (think Apple). Contracting with outside parties to create this type of experience for consumers would be costly and risky perhaps; thus, Disney wants to own this entire interaction with its customers. We'll see if the new strategy works out. The investment will be substantial. However, if Disney wishes to stay in the store business, moving toward a more "experience-oriented" retail strategy provides more sound justification for forward integration than Disney had in the past.
Williamson's theories help us understand the merits of vertical integration. In the Disney store situation, we have a case of forward integration, with a company choosing to operate its own retail locations. Williamson basically details how we can think about why companies might wish to be forward integrated in some situations and why they might not choose to do so. He argues we should always compare the costs of performing activities inside the firm vs. cooperating with other firms through contracts and markets.
Why should Disney be in the retail business? Forward integration makes sense to the extent that Disney is doing things at the retail level that are complex, costly, and difficult to do through contracts with outside parties. If contracts work efficiently, then we would allow others to retail Disney products and not be in the retail business at all. To the extent that Disney stores simply sell products like any other retailer, it's hard to justify forward integration. That's why many questioned Disney's store strategy in recent years. In fact, Disney itself tried to outsource the stores to Children's Place, but it didn't work out.
However, to the extent that the stores are true interactive experiences, then Disney may wish to control those retail outlets themselves and can secure key benefits from that ownership of the stores. The direct control enables them to use the stores to further differentiate the brand in the marketplace, raise willingness-to-pay for Disney products, communicate with and learn directly from customers, and drive synergistic benefits across the Disney portfolio (think Apple). Contracting with outside parties to create this type of experience for consumers would be costly and risky perhaps; thus, Disney wants to own this entire interaction with its customers. We'll see if the new strategy works out. The investment will be substantial. However, if Disney wishes to stay in the store business, moving toward a more "experience-oriented" retail strategy provides more sound justification for forward integration than Disney had in the past.
Monday, October 12, 2009
The NetFlix Prize
Fortune had a good article on the NetFlix prize, arguing that it is a good case study on mass collaboration. Indeed, it is. 40,000 teams competed for the $1 million prize. The competition entailed the development of an improvement in the movie recommendation engine at NetFlix. Why is this so valuable to NetFlix? The business model at NetFlix entails being able to accurately help predict what a customer will enjoy, with a particular focus AWAY from the hit new releases. A focus on new releases requires movie rental companies, such as Blockbuster, to stock huge numbers of a title when it is released, only to then find itself with a huge amount of excess inventory just a few weeks later. Thus, NetFlix would like to rent out a more diverse array of titles. Yet, it needs to recommend movies, including many lesser known and older titles, that customers will enjoy. Customers don't know these movies necessarily, so they must trust NetFlix to help them discover what they will enjoy.
What is NetFlix's leg up on the competition? It's not just better statisticians... after all, this was a public competition. Here is the key: As NetFlix's customer base grows, it's movie recommendation engine improves. Why? The algorithms became more refined as the data about customer preferences become richer and more plentiful. Thus, we have a network effect here. The value to a particular customer rises as the number of NetFlix customer rises, because the recommendation engine gets better! With a huge stable of customers, NetFlix has a huge advantage over rivals because of its proprietary database and algorithms. They can't simply be matched by having better statisticians... you also need the sample size and history that NetFlix has. No one else does at the moment.
What is NetFlix's leg up on the competition? It's not just better statisticians... after all, this was a public competition. Here is the key: As NetFlix's customer base grows, it's movie recommendation engine improves. Why? The algorithms became more refined as the data about customer preferences become richer and more plentiful. Thus, we have a network effect here. The value to a particular customer rises as the number of NetFlix customer rises, because the recommendation engine gets better! With a huge stable of customers, NetFlix has a huge advantage over rivals because of its proprietary database and algorithms. They can't simply be matched by having better statisticians... you also need the sample size and history that NetFlix has. No one else does at the moment.
Friday, October 09, 2009
Reasoning by Analogy - Afghanistan
I read with great interest an article in the Wall Street Journal the other day about two books that are all the rage in Washington, DC right now. Apparently, President Obama and his advisers are reading a book titled "Lessons in Disaster" about the evolution of National Security Adviser McGeorge Bundy's thinking during the Vietnam War. Bundy began as a hawk and eventually began disillusioned with the war effort. Meanwhile, Senator McCain and many military leaders have read "A Better War" - a book that traces the evolution in strategy and tactics that took place when General Abrams took over from General Westmoreland in Vietnam. The book has become very influential with military experts interested in counterinsurgency tactics in Iraq and Afghanistan.
What struck me about this article? First, I hope that President Obama reads both books, not just "Lessons in Disaster" - which is apparently the one he's focused on at the moment. Secondly, everyone reading both books must proceed with great caution. Here we have a classic case of reasoning by analogy that could be very harmful. As people read these books, the natural tendency will be for individuals to reason by analogy from Vietnam to Afghanistan. Yet, we know from research by such prominent political scientists as Richard Neustadt and Ernest May (authors of a great book titled "Thinking in Time" published in the 1980s) that we often reason poorly when we draw analogies. We make mistakes because we focus too much on the similarities between two situations, and we ignore critical differences. Bottom line - Afghanistan is not "just like" Vietnam, and thus, we should take great care in drawing lessons from either of these books as they might apply to our current predicament.
What struck me about this article? First, I hope that President Obama reads both books, not just "Lessons in Disaster" - which is apparently the one he's focused on at the moment. Secondly, everyone reading both books must proceed with great caution. Here we have a classic case of reasoning by analogy that could be very harmful. As people read these books, the natural tendency will be for individuals to reason by analogy from Vietnam to Afghanistan. Yet, we know from research by such prominent political scientists as Richard Neustadt and Ernest May (authors of a great book titled "Thinking in Time" published in the 1980s) that we often reason poorly when we draw analogies. We make mistakes because we focus too much on the similarities between two situations, and we ignore critical differences. Bottom line - Afghanistan is not "just like" Vietnam, and thus, we should take great care in drawing lessons from either of these books as they might apply to our current predicament.
Thursday, October 08, 2009
Inbev Sells the Theme Parks
No surprise at all today when I read that Inbev will be selling the theme park business that they obtained during the Anheuser Busch acquisition. It was always rather difficult to justify why a beer company should be in the theme park business. The synergies, clearly, were rather limited. The sale also helps Inbev pay down debt from the deal, as they reached an agreement for Blackstone to buy the theme parks unit for $2.7 billion. This divestiture represents a classic example of an acquirer undoing a case of unrelated diversification which had yielded few economies of scope.
Free by Chris Anderson
On my trip to and from Silicon Valley this week, I read Chris Anderson's new book, Free: The Future of a Radical Price. Anderson is also the author of the best-seller, The Long Tail. Both are excellent, thought-provoking books.
In The Long Tail, Anderson wrote about what has happened to markets that used to be defined by blockbuster hits. In many markets, such as music, it used to be the case that a very small number of hits accounted for a huge percentage of sales. With the emergence of digital music, take a look at a histogram with products on the x axis and volume on the y axis. You see a very long tail, i.e. many products exist that sell small volumes, but together all these products in the long tail actually account for a sizeable chunk of the overall market. These products represent tons of niche offerings that now can be economically sold in digital form, whereas it was not economical to sell them when you were restricted by the economics of a physical store shelf. Anderson documents the various businesses now subject to the long tail effect, and he describes how it has revolutionized a number of industries.
In Free, Anderson describes the various business models that feature a "free" component. Anderson explains how companies have developed models whereby they can be profitable despite the fact that some of their products are available to consumers for free. He does a nice job of explaining how and why so many products have become free... basic economics, really. If a product's marginal cost is approximately zero, and the market is highly competitive, then we would expect price to fall toward marginal cost - in short, price will fall toward free in those situations. Of course, again, the digital revolution has caused the marginal cost of many products such as music to fall toward zero, thus leading to the emergence of "free" in those markets. Anderson's book proves thought-provoking because it helps you think about when you might find yourself competing with a "free" model, as well as helping you think about how to incorporate a free element in your model so as to actually increase profits.
In The Long Tail, Anderson wrote about what has happened to markets that used to be defined by blockbuster hits. In many markets, such as music, it used to be the case that a very small number of hits accounted for a huge percentage of sales. With the emergence of digital music, take a look at a histogram with products on the x axis and volume on the y axis. You see a very long tail, i.e. many products exist that sell small volumes, but together all these products in the long tail actually account for a sizeable chunk of the overall market. These products represent tons of niche offerings that now can be economically sold in digital form, whereas it was not economical to sell them when you were restricted by the economics of a physical store shelf. Anderson documents the various businesses now subject to the long tail effect, and he describes how it has revolutionized a number of industries.
In Free, Anderson describes the various business models that feature a "free" component. Anderson explains how companies have developed models whereby they can be profitable despite the fact that some of their products are available to consumers for free. He does a nice job of explaining how and why so many products have become free... basic economics, really. If a product's marginal cost is approximately zero, and the market is highly competitive, then we would expect price to fall toward marginal cost - in short, price will fall toward free in those situations. Of course, again, the digital revolution has caused the marginal cost of many products such as music to fall toward zero, thus leading to the emergence of "free" in those markets. Anderson's book proves thought-provoking because it helps you think about when you might find yourself competing with a "free" model, as well as helping you think about how to incorporate a free element in your model so as to actually increase profits.
Wednesday, October 07, 2009
Starbucks: it's not about the coffee!
The debate rages about Starbucks' new instant coffee. I think the debate about the taste actually misses the point. The firm insists that it tastes great. Even if we grant them that point (which some would not), there is still the strategic question. Is this good good for the brand? Eric Felten makes a great point in the Wall Street Journal.
He points out that the instant product is a bit if a contradiction, a mismatch, for the firm, "not because it offends the palate but because it has no romance, it requires none of the effort that demonstrates enthusiasm and passion." In short, Starbucks was always about far more than the taste of the coffee. It was about an atmosphere, an emotion, an experience.
Of course, it's been a long time since Starbucks abandoned the firm's original positioning as a specialty premium differentiated coffee company. It became a mass market coffee company with less and less differentiation from other coffee companies over time. It lost the exclusivity of a luxury brand many moons ago. So perhaps the horse is long out of the barn. At this point there just isn't much that Starbucks won't do in pursuit of growth. Michael Porter argues great strategies require tradeoffs. They become unique by choosing what not to do. Tradeoffs make firms unique and hard to imitate. Yet tradeoffs limit growth to some extent. Many firms violate their original tradeoffs in pursuit of growth. Has Starbucks done that, and in so doing, become far less unique and differentiated?
He points out that the instant product is a bit if a contradiction, a mismatch, for the firm, "not because it offends the palate but because it has no romance, it requires none of the effort that demonstrates enthusiasm and passion." In short, Starbucks was always about far more than the taste of the coffee. It was about an atmosphere, an emotion, an experience.
Of course, it's been a long time since Starbucks abandoned the firm's original positioning as a specialty premium differentiated coffee company. It became a mass market coffee company with less and less differentiation from other coffee companies over time. It lost the exclusivity of a luxury brand many moons ago. So perhaps the horse is long out of the barn. At this point there just isn't much that Starbucks won't do in pursuit of growth. Michael Porter argues great strategies require tradeoffs. They become unique by choosing what not to do. Tradeoffs make firms unique and hard to imitate. Yet tradeoffs limit growth to some extent. Many firms violate their original tradeoffs in pursuit of growth. Has Starbucks done that, and in so doing, become far less unique and differentiated?
Tuesday, October 06, 2009
It Pays to Apologize
The current edition of Business Week has a short note about a new study conducted by scholars at the Nottingham School of Economics in the UK. In the study, the researchers examined over 600 complaints from customers of a German wholesaler. For half of the complaint, which was posted online, they offered customers a short apology and asked them to remove the negative comments from the web. For the other half of the customers who complained, they offered a cash rebate in return for removal of the online comments. Here's the amazing result: 45% of customers who received an apology removed their online complaint, while only 21% of the rebate offer recipients did so. In sum, apologies, even brief ones, can have a major impact on a customer who feels that they have received poor service from a firm.
Monday, October 05, 2009
GM's top management team
Fortune's current issue has a great series of articles about GM's turnaround attempt. The article has an interesting chart about the management team assembled by CEO Fritz Henderson. An amazing stat that I calculated from the chart: the average tenure of a senior team member is 28 years! The shortest tenure is 8 years, but three members have been at the firm for at least 40 years!!! Aren't these the same folks responsible for getting GM to this point? It's hard to believe GM can chart a new course with a team that lacks fresh blood. These may all be good people but shouldn't a leader bring in some people with new and divergent perspectives in this circumstance? A leader always benefits from having some advisers who think differently and who look at things from a different vantage point.
Friday, October 02, 2009
British Airways: Business Class Only Flights
British Airways has announced that it will be launching a business class only flight between New York and London City Airport. I find it interesting, as it is yet another attempt by an airline to find a way to generate true product differentiation in an industry where little true differentiation exists. It's also interesting because several start-ups have tried and failed at operating such a business class only service across the Atlantic.
Of course, this initiative clearly makes more sense than BA's failed attempt to launch a low-cost subsidiary (named GO) to compete with Ryanair and other low cost carriers in Europe. BA's historical strategy and capabilities fit much more appropriately with the business class only concept than the GO concept. Of course, GO wasn't truly an effective low cost positioning, as BA insisted on trying to maintain some of its traditional service elements such as assigned seating.
As for this attempt to offer business class only service, it does face a key hurdle in that flights may have to stop to refuel in Shannon, Ireland because London City Airport's short runway limits takeoff weights. Offsetting that hassle is the fact that London City is closer to the financial district than Heathrow, and passengers can clear US customs in Shannon. Still, a quick-and-dirty calculation performed in my class with my students suggests that BA will have to operate at nearly full capacity on these flights for them to be profitable. Empty seats are a very costly thing, given the high price that will be charged for each seat and the limited number of seats (32) on each plane.
Of course, this initiative clearly makes more sense than BA's failed attempt to launch a low-cost subsidiary (named GO) to compete with Ryanair and other low cost carriers in Europe. BA's historical strategy and capabilities fit much more appropriately with the business class only concept than the GO concept. Of course, GO wasn't truly an effective low cost positioning, as BA insisted on trying to maintain some of its traditional service elements such as assigned seating.
As for this attempt to offer business class only service, it does face a key hurdle in that flights may have to stop to refuel in Shannon, Ireland because London City Airport's short runway limits takeoff weights. Offsetting that hassle is the fact that London City is closer to the financial district than Heathrow, and passengers can clear US customs in Shannon. Still, a quick-and-dirty calculation performed in my class with my students suggests that BA will have to operate at nearly full capacity on these flights for them to be profitable. Empty seats are a very costly thing, given the high price that will be charged for each seat and the limited number of seats (32) on each plane.
Useful Failures: New Podcast
The Wharton School Publishing website has a new podcast available that I created to talk about the concept of "useful failures" - an idea about which I wrote in my latest book.
Thursday, October 01, 2009
Asking Good Questions
Peter Drucker once said that managers often make mistakes because they fail to ask the right questions. This post over at Business Week by Gary Cohen reinforces this classic point by Drucker. Cohen explains how leaders can ask the right types of questions. He notes that many batter their people with questions, but do so in an unproductive fashion. As he says, "Too often managers' questions are designed to show off their own knowledge rather than actually solicit new information or ideas."
Tuesday, September 29, 2009
Satisfying the Grocery Shopper
What stands out when you compare your shopping experience at various supermarkets these days? One thing jumps out at me... how my groceries are bagged. At most supermarkets, someone throws all my groceries in bags, without any rhyme or reason as to how products are placed. If I've forgotten my reusable bags, then I always have to intervene, lest they put 2 items per plastic bag and fill my carriage with hundreds of nearly empty bags. Regardless of what types of bags they use, I am sure to find several things crushed at the bottom of a bag when I get home.
Now, let's compare that experience to the checkout counters at Whole Foods. There, we see incredible attention being paid to how products are placed in bags. The associates take great care to insure that products do not get crushed in the bags, and that berries and other small items don't spill in the bags. Of course, you might say that Whole Foods can afford to offer such service because of their higher prices and gross margins. However, I wonder... Does it really take more time for the Whole Foods associates to get me through the checkout counter? It seems to me that they are just as efficient as any other supermarket, yet they offer a much better experience. Whole Foods just seems to be taking the time to train their associates more carefully, and perhaps monitor them more effectively. Yes, this does involve some extra expense, but the results in terms of enhanced customer satisfaction are likely to be quite substantial.
I write about this small element of the grocery shopping experience only to point out that the checkout counter often is a defining moment in our retail experience these days. Often, it is the ONLY time that we interact with a store associate, given that most retailers are largely self-service these days. Thus, the checkout counter interaction is a critical moment where retailers can set themselves apart from their competition. It's also a moment when retailers can cause the consumer experience to deteriorate dramatically. Too many retailers, it seems, have focused on making the checkout process fast, cheap, and efficient. However, they have done so at the expense of actually creating a satisfying "closing" experience for the shopper as they head for home.
Now, let's compare that experience to the checkout counters at Whole Foods. There, we see incredible attention being paid to how products are placed in bags. The associates take great care to insure that products do not get crushed in the bags, and that berries and other small items don't spill in the bags. Of course, you might say that Whole Foods can afford to offer such service because of their higher prices and gross margins. However, I wonder... Does it really take more time for the Whole Foods associates to get me through the checkout counter? It seems to me that they are just as efficient as any other supermarket, yet they offer a much better experience. Whole Foods just seems to be taking the time to train their associates more carefully, and perhaps monitor them more effectively. Yes, this does involve some extra expense, but the results in terms of enhanced customer satisfaction are likely to be quite substantial.
I write about this small element of the grocery shopping experience only to point out that the checkout counter often is a defining moment in our retail experience these days. Often, it is the ONLY time that we interact with a store associate, given that most retailers are largely self-service these days. Thus, the checkout counter interaction is a critical moment where retailers can set themselves apart from their competition. It's also a moment when retailers can cause the consumer experience to deteriorate dramatically. Too many retailers, it seems, have focused on making the checkout process fast, cheap, and efficient. However, they have done so at the expense of actually creating a satisfying "closing" experience for the shopper as they head for home.
Monday, September 28, 2009
Keith Murray: Guest Post on Flagship Stores
Professor Keith Murray read my post on flagship stores the other day, and he offers this insightful commentary expanding upon my earlier analysis. In this post, Keith explains how retailers can make the most use of their flagship locations. If you like what you read, check out Keith's own blog at: keithmurrayonbiz.com
Corporate flagship, or“boutique,” stores provide something better than simple profitability! Let’s count the ways!
A day or so ago, Mike Roberto spoke to the need for and importance of company “flagship” stores—say, like The Apple Store, or The Brookstone Store—in major urban locations to be measured on different terms that just profitability. And, he’s exactly right: they are special, they do “cost” a great deal, and—the important point of his blog—don’t typically show much in the way of profitability.
However, that does not mean that they are devoid of other attributes of high value, indeed, they are unique in many ways and should be exploited for exactly those kinds of benefits. Here are some of those factors that speak to this POV that come to mind:
[1] Use the boutique store as a place to gauge customer feedback. Trained [i.e., trained in subtlety, and under-the-radar interview techniques] personnel should routinely be seeking out customers—and particularly new shoppers and brand adopters--to see what attracts them to a product or product feature as naïve prospects. Even though most any brand or product line “owns” a relatively small market share, product and brand managers nonetheless become jaded into believing that they understanding their buyers and prospects; however, that is never quite the case. New market segments are appealed to over time and refining the product/brand relationship as well as the “position” is necessary—a boutique company store is a perfect place to do exactly that.
[2] Video capture of new customer experiences is a great way to exploit the location. Shoppers are usually in a carefree mood and, thus, in a mental state to take the time and to demonstrably react to what sometimes amounts to their first encounter with the product/brand/firm. Videography can be done up-front and formally as well as with hidden cameras—and, with proper authorizations by shoppers—provide the basis for future product or promotion planning by corporate staff somewhere else in the world; also, it could provide a reservoir of actual footage for testimonial ads/commercials in the future for research, planning, and promotion.
[3] Testing lab for future pricing or promotional evaluation. Boutique stores are perfect places—in large part because they are staffed with above-average corporate staff/managers/representatives—to try out promising price breaks or deals, point of purchase signage and offers, etc. While the results of such tests would not be perfectly projectable from a national perspective—data should be pretty promising in terms of what one might want to test more rigorously with a more representative sample of interest; after all, boutique stores in NYC or convention centers in major cities would, by their very location and crowd-draw [e.g., at the very places regional and national meetings are taking place] provide a sample that is fairly heterogenous and geographically distributed.
[4] Stage for major news events, new product launches, etc. Because boutique stores are generally “busy” with shopper traffic, they provide a ready-made, interested, and interesting audience that can serve as a back-drop to key media events and press-conferences. The realness, the frequent excitement that’s “in the air” at such a boutique store is just the right place to make an announcement that is considerably more promising, media-wise, than a sterile, stogy corporate press room in Stamford, CT, or Mountain View, CA.
Clearly, this is not necessarily a complete list of all of the positive attributes associated with a corporate boutique store, but is a start. Can you think of any others that were not mentioned? It’d be great to learn what they might be in a follow-up comment from savvy readers of this blog!
Corporate flagship, or“boutique,” stores provide something better than simple profitability! Let’s count the ways!
A day or so ago, Mike Roberto spoke to the need for and importance of company “flagship” stores—say, like The Apple Store, or The Brookstone Store—in major urban locations to be measured on different terms that just profitability. And, he’s exactly right: they are special, they do “cost” a great deal, and—the important point of his blog—don’t typically show much in the way of profitability.
However, that does not mean that they are devoid of other attributes of high value, indeed, they are unique in many ways and should be exploited for exactly those kinds of benefits. Here are some of those factors that speak to this POV that come to mind:
[1] Use the boutique store as a place to gauge customer feedback. Trained [i.e., trained in subtlety, and under-the-radar interview techniques] personnel should routinely be seeking out customers—and particularly new shoppers and brand adopters--to see what attracts them to a product or product feature as naïve prospects. Even though most any brand or product line “owns” a relatively small market share, product and brand managers nonetheless become jaded into believing that they understanding their buyers and prospects; however, that is never quite the case. New market segments are appealed to over time and refining the product/brand relationship as well as the “position” is necessary—a boutique company store is a perfect place to do exactly that.
[2] Video capture of new customer experiences is a great way to exploit the location. Shoppers are usually in a carefree mood and, thus, in a mental state to take the time and to demonstrably react to what sometimes amounts to their first encounter with the product/brand/firm. Videography can be done up-front and formally as well as with hidden cameras—and, with proper authorizations by shoppers—provide the basis for future product or promotion planning by corporate staff somewhere else in the world; also, it could provide a reservoir of actual footage for testimonial ads/commercials in the future for research, planning, and promotion.
[3] Testing lab for future pricing or promotional evaluation. Boutique stores are perfect places—in large part because they are staffed with above-average corporate staff/managers/representatives—to try out promising price breaks or deals, point of purchase signage and offers, etc. While the results of such tests would not be perfectly projectable from a national perspective—data should be pretty promising in terms of what one might want to test more rigorously with a more representative sample of interest; after all, boutique stores in NYC or convention centers in major cities would, by their very location and crowd-draw [e.g., at the very places regional and national meetings are taking place] provide a sample that is fairly heterogenous and geographically distributed.
[4] Stage for major news events, new product launches, etc. Because boutique stores are generally “busy” with shopper traffic, they provide a ready-made, interested, and interesting audience that can serve as a back-drop to key media events and press-conferences. The realness, the frequent excitement that’s “in the air” at such a boutique store is just the right place to make an announcement that is considerably more promising, media-wise, than a sterile, stogy corporate press room in Stamford, CT, or Mountain View, CA.
Clearly, this is not necessarily a complete list of all of the positive attributes associated with a corporate boutique store, but is a start. Can you think of any others that were not mentioned? It’d be great to learn what they might be in a follow-up comment from savvy readers of this blog!
Sunday, September 27, 2009
Wall Street Journal To Charge for IPhone Access
Last week, the Wall Street Journal announced that it would begin charging for mobile access, such as through the iPhone app. It's an interesting move, given that this newspaper bucked the trend back in the early days of the web by charging for its online version. All other papers made their online content free; How's that working out for them? The Wall Street Journal has adopted a very successful strategy to date, offering some articles (such as its op-ed pieces) free, but keeping much of the investigative news available only for paid subscribers. I think they will be an interesting test case for the smartphone market. Of course, the key factor remains that the Wall Street Journal offers a very unique, differentiated, high quality product. Thus, willingness to pay for the Wall Street Journal exceeds the perceived value of most other newspapers. At this point, some major city papers have so diminished their content that they don't have something unique and valuable to offer consumers.
For more on the Wall Street Journal's strategic choices vis a vis the Internet, past Chairman of Dow Jones Peter Kann penned an excellent article the other day. It's worth reading because it explains the rationale for the WSJ's decision to charge for online access many years ago.
For more on the Wall Street Journal's strategic choices vis a vis the Internet, past Chairman of Dow Jones Peter Kann penned an excellent article the other day. It's worth reading because it explains the rationale for the WSJ's decision to charge for online access many years ago.
Friday, September 25, 2009
The Flagship Store
If a retailer is going to have a flagship store in Manhattan, then it has to think carefully about the purpose of that location. All retailers in places like Times Square are paying enormous amounts of money per square foot for rent as well as build-out costs. Many do not operate these stores profitably; they run these retail locations in Manhattan for marketing and advertising purposes. However, too many retailers do not take full advantage of the flagship store concept. They are not creating a powerful brand-building experience. The flagship NYC store is a tremendously cost venture, yet it's also a unique opportunity to bring a brand to life and to emotionally connect with millions of consumers per year. Before putting a flagship store in NYC, companies need to think carefully about how that retail location could and should look differently than their other retail outlets. The purpose of the Manhattan store is different; thus, the experience, atmosphere, and even product selection should be tailored to the distinctive purpose(s) of a flagship store.
Thursday, September 24, 2009
Nintendo Slashes Price of Wii
Nintendo has announced a response to recent price cuts by Sony and Microsoft. The Wii will now retail at $199, a 20% reduction in price. They are timing the price cut to coincide with the release of a new Super Mario Brothers game - a smart strategy. One might ask: How can these gaming companies reduce price so substantially? Are they eating into their profits in a significant way? Well, we have to remember two things. First, to some extent, we have a razor and blades business model here. You want to get those consoles into people's homes so that you can them sell them a stream of games at a healthy margin. Second, a substantial cost reduction takes place during a video console technological generation, as firms come down the learning curve and achieve scale economies. Those cost reductions can be very substantial. Thus, prices may be falling, but margins may actually be stable or even improving over time, because the costs come down as cumulative volume of production rises.
Wednesday, September 23, 2009
Article in Ivey Business Journal
I have just published a new article, adapted from my latest book, in the the Ivey Business Journal, from the University of Western Ontario's business school.
Teen Retailers Cater to Moms
The Wall Street Journal has an interesting story today about teen retailers such as Aeropostale now catering more to moms as opposed to simply focusing on the teens who wear their clothes. The story indicates that some teen retailers recognize a need to focus more on moms during this economic downturn, because the parents ultimately control the purse strings, and they have become more cautious about spending on high-priced clothes for their teen sons and daughters. Interesting, Abercrombie and Fitch indicates that they are making less of a shift toward focusing on moms. That firm will continue to be "all about the senses" with music and a general atmosphere that is much more focused on the teen than the parent. So, we have a clear divergence in strategies, which will make for an interesting horse race... which strategy will work best? It's unclear, of course, but I think there is a clear risk to targeting moms, which is that a brand can become "uncool" to teens very quickly. While focusing on parents may be useful during the economic downturn, there may be long term detrimental effects on the brand positioning.
There's a more general lesson here... retailers always need to be aware of who the actual decision-maker is when selling their wares, as opposed to the person(s) who will be using the products. Sometimes, gaining a better understanding of the consumer decision process can be very powerful. In the case of home improvement, for instance, Lowe's made much headway against Home Depot by targeting women, who often are the key decision-maker on home projects, even though the husband may be the one buying and using many of the construction materials to execute the project.
There's a more general lesson here... retailers always need to be aware of who the actual decision-maker is when selling their wares, as opposed to the person(s) who will be using the products. Sometimes, gaining a better understanding of the consumer decision process can be very powerful. In the case of home improvement, for instance, Lowe's made much headway against Home Depot by targeting women, who often are the key decision-maker on home projects, even though the husband may be the one buying and using many of the construction materials to execute the project.
Thursday, September 17, 2009
Mitigating Buyer Power
One worry for many fast moving consumer products companies (FMCG) has to be the continuing consolidation of the retail sector in the U.S. and many other nations. That consolidation has resulted in a substantial increase in power for the retailers relative to the consumer products companies, e.g. Wal-mart and others have huge leverage. What can companies do about this buyer power issue? Well, they could just resign themselves to a future of lower margins, or they could try to cultivate and enhance their alternative routes to market. What do I mean by that? Well, firms often have other channels where they sell their goods, and in some cases, the margins available in those channels are far superior to the mass merchandiser/large grocer channel. Companies need to think creatively about how to drive sales in those channels, many of which may be conducive to higher margin, impulse sales to consumers. Companies also should try to think about how they might offer mass customization of their product via the internet, thereby providing yet another outlet for getting their products to consumers while driving higher gross margins. For instance, companies can offer various forms of personalization via the web (think messages on product labels or the products themselves, monogramming, custom sizes, etc.). All of these efforts to cultivate alternative routes to market mitigate the growing buyer power that consumer products face from the consolidation of the mass retail channel.
Tuesday, September 15, 2009
Temporary Stores at Toys R Us
Toys R Us has announced that it will be opening a series of temporary stores specifically for the upcoming holiday season. 80 of the temporary stores will be pop-ups located within shopping malls. More than 200 additional locations will be temporary "store-within-a-store" toy sections located in their Babies R Us locations. The move is quite interesting, because it clearly seeks to grab market share in this down economy, particularly given the demise of several other toy retailers (including KB Toy, which operated in malls primarily). As this article mentions, it also sets up a clear battle between Toys R Us and Sears, who will be a key competitor within the shopping malls.
For me, this move raises some interesting questions regarding the break-even analysis behind this strategy, and reminds us of the importance of considering opportunity costs in any such analysis. How much revenue must these generate to offset the costs? Remember that the "store-within-a-store" outlets within the Babies R Us stores are not "free" by any means. Opportunity cost must be considered. By taking floor space away from baby products, the company is foregoing potential baby product sales. That represents a key opportunity cost of this strategy. More generally, making this concept work hinges on Toys R Us' ability to keep the fixed costs of this initiative as low as possible, particularly with regard to set-up and tear-down. Clearly, the toy market has undergone much consolidation in past years, and the battle for market share has been intense. Look for more interesting battles with this latest creative initiative by Toys R Us.
For me, this move raises some interesting questions regarding the break-even analysis behind this strategy, and reminds us of the importance of considering opportunity costs in any such analysis. How much revenue must these generate to offset the costs? Remember that the "store-within-a-store" outlets within the Babies R Us stores are not "free" by any means. Opportunity cost must be considered. By taking floor space away from baby products, the company is foregoing potential baby product sales. That represents a key opportunity cost of this strategy. More generally, making this concept work hinges on Toys R Us' ability to keep the fixed costs of this initiative as low as possible, particularly with regard to set-up and tear-down. Clearly, the toy market has undergone much consolidation in past years, and the battle for market share has been intense. Look for more interesting battles with this latest creative initiative by Toys R Us.
Top 50 Education Bloggers
Here's a new list of the top 50 education blogs. For some reason, I like the list! :-)
Monday, September 14, 2009
Disney Fan Convention
Last week, Disney held its first-ever fan convention at the Anaheim Convention Center in California. Thousands of Disney fans purchased tickets to attend the "D23 Expo" - named after the year in which Walt Disney arrived in Hollywood to launch his career as a filmmaker. It surprised me that Disney had never done this in prior years. Like Apple, Disney has a loyal following among a group of incredibly dedicated fans. The key word is fans... great companies like Apple and Disney don't just have customers; they have fans. Creating a special experience for those folks helps to deepen loyalty, provides a direct channel of communication with key customers, and provides a unique and exciting way to launch new products and services. Reflecting on Disney's example, every company should ask itself three questions: How can I transform my customers in true fans of our company? How can I cultivate a special relationship with those fans? How can I create two-way communication with those fans so as to improve my company?
Great Boards
Barry Bader published the full-length version of his interview with me in this month's edition of the Great Boards newsletter. Click here to access a PDF version of the piece.
Sunday, September 13, 2009
Industrial Policy vs. Attractive Business Environment
Many states, in desperate hopes of boosting their economies, have resorted to industrial policy as a means of promoting economic development. By that, I mean the states have tried to focus on particular companies or industries, and have used financial incentives to help promote activity in those firms or sectors. Such efforts may work on occasion, but in general, they have serious shortcomings. First, industrial policy presumes that a few bureaucrats in a state government office know what the future will hold, i.e. which firms and sectors have the most promise in the future. What if they are wrong? Second, such economic development plans offer opportunities for political meddling and even rampant corruption. Third, such efforts may lead to a lower cost of doing business for a few firms or sectors, but the state government has to make up for that lost tax revenue in some way. Some of that may be made up by higher economic activity, but often, states find themselves raising overall tax rates while pursuing targeted tax breaks for specific companies. The higher marginal tax rates depress overall economic activity, and thus, the state's economic development policy does more harm than good.
Economic growth generally benefits from efforts to expand the tax base while lowering marginal rates. Thus, states would be better off finding ways to lower the cost of doing business for all firms, and letting entrepreneurs and innovators discover which sectors are most attractive (rather than state politicians). In contrast, many economic development policies today find states shrinking their tax base through selected breaks and special deals, while raising tax rates for all other firms. State after state is pursing such wrong-headed economic development policies.
Of course, I'm not suggesting that states shouldn't provide any assistance to firms who are trying to expand facilities, jobs, etc. I'm just suggesting that states shouldn't be in the business of trying to decide which sector will be the "hot" one in the coming years, and which ones should be favored over others.
Economic growth generally benefits from efforts to expand the tax base while lowering marginal rates. Thus, states would be better off finding ways to lower the cost of doing business for all firms, and letting entrepreneurs and innovators discover which sectors are most attractive (rather than state politicians). In contrast, many economic development policies today find states shrinking their tax base through selected breaks and special deals, while raising tax rates for all other firms. State after state is pursing such wrong-headed economic development policies.
Of course, I'm not suggesting that states shouldn't provide any assistance to firms who are trying to expand facilities, jobs, etc. I'm just suggesting that states shouldn't be in the business of trying to decide which sector will be the "hot" one in the coming years, and which ones should be favored over others.
Friday, September 11, 2009
Eight Years Later
Hopefully, we all took a few moments today to reflect upon the events that transpired in New York, Pennsylvania, and Washington, DC eight years ago. My heart goes out to the families of the victims. Please keep them in your thoughts and prayers, along with all the troops who remain in harm's way while defending our liberty.
Thursday, September 10, 2009
Genius for App Store
Steve Jobs informed the public that Apple had extended its Genius software, first introduced for iTunes, to its iPhone app store. With more than 75,000 apps on the store, it's clearly difficult for consumers to discover interesting new items that might appeal to them. Genius may help them to find apps that could be most useful to them. It will be interesting to see if this increases the volume of paid apps downloaded from the app store. Will Genius induce people who typically focus on the free apps to perhaps upgrade to related paid apps that could provide an enhanced experience for the consumer? If so, Apple and outside party app developers could win from the introduction of Genius.
As an aside, if Blackberry tries to emulate Genius, it will face a daunting challenge... namely, the algorithms that drive programs such as Genius benefit greatly from having a huge sample size. Thus, Apple has a substantial advantage over Blackberry in being able to develop accurate algorithms for Genius. NetFlix has this same advantage, by the way, over Blockbuster and others... because it's database from which its recommendations are driven is so large and diverse.
As an aside, if Blackberry tries to emulate Genius, it will face a daunting challenge... namely, the algorithms that drive programs such as Genius benefit greatly from having a huge sample size. Thus, Apple has a substantial advantage over Blackberry in being able to develop accurate algorithms for Genius. NetFlix has this same advantage, by the way, over Blockbuster and others... because it's database from which its recommendations are driven is so large and diverse.
Wednesday, September 09, 2009
Disney Buying More Video Game Developers
Disney announced today that they have acquired Wideload Games, a small but highly respected video game development firm based in Chicago. Why has Disney acquired and built a series of internal game development studios in recent years? After all, many entertainment firms simply license their characters to the major video game producers, and collect healthy fees for those licensing arrangements? Those deals enable media firms to capitalize on video game opportunities without sinking huge amounts of capital into internal game development efforts. After all, creating a great video game can cost more than $20 million. The answer for Disney is quite simple: They like to control their brand and their characters. Licensing arrangements abound at Disney, but in some circumstances, they come to the conclusion that such deals do not provide them enough control over the quality and the experience that they offer their customers. In the language of academics, we would say that the transaction costs associated with working out and managing a complex licensing arrangement become too large at some point, more substantial than the coordination costs of managing the business internally.
Krugman vs. Cooley: Why Economists Got It Wrong
Paul Krugman wrote a piece for the New York Times magazine this weekend on why economists did not foresee the meltdown of 2007-2009. Krugman criticizes the many economists who have a strong faith in markets, arguing that their faith in the efficiency of markets led them to miss the potential for the current crisis. Thomas Cooley makes a strong counterargument on Forbes' website today. Krugman's article is quite lengthy, while Cooley's is clear and concise. They are both worth reading though.
Tuesday, September 08, 2009
Bill Belichick: What Most Leaders Won't Do
Over the weekend, New England Patriots coach Bill Belichick traded Richard Seymour, one of the franchise's very best players over the decade. Seymour had starred on each of the team's three Super Bowl championship teams since 2001. In return, the Patriots received the Oakland Raiders' 2011 number one draft choice. Now, Seymour is not the player that he once was, but he still contributes significantly on the field. Trading him away may have weakened the Patriots a bit in the short run, but without question, the trade benefits the team substantially in the long run. That number one draft choice received in return for Seymour has the potential to be a cornerstone player for the team for another decade.
Far too many sports teams hang out to the aging stars for far too long, or they wait until they have started showing a considerable decline in skills before trading or releasing the player. Very few coaches and general managers have the guts to make the type of trade that Belichick just made, despite the fact that is a major positive for the long run. Most coaches simply won't make the short term sacrifice. Belichick, of course, does not have to worry about job security. He has a tremendous track record and the complete trust of his boss, Patriots' owner Robert Kraft.
CEOs and other business leaders could learn from this episode. I would argue that few executives have the courage to make the type of move that Belichick just made. Personal loyalties, coupled with incentive structures that heavily emphasize short term performance, tend to cause leaders to shy away from making the short run/long run tradeoff that Belichick just made. However, sustaining competitive advantage over the long haul requires just these types of tradeoffs at times.
Far too many sports teams hang out to the aging stars for far too long, or they wait until they have started showing a considerable decline in skills before trading or releasing the player. Very few coaches and general managers have the guts to make the type of trade that Belichick just made, despite the fact that is a major positive for the long run. Most coaches simply won't make the short term sacrifice. Belichick, of course, does not have to worry about job security. He has a tremendous track record and the complete trust of his boss, Patriots' owner Robert Kraft.
CEOs and other business leaders could learn from this episode. I would argue that few executives have the courage to make the type of move that Belichick just made. Personal loyalties, coupled with incentive structures that heavily emphasize short term performance, tend to cause leaders to shy away from making the short run/long run tradeoff that Belichick just made. However, sustaining competitive advantage over the long haul requires just these types of tradeoffs at times.
Friday, September 04, 2009
Starting from Scratch
Bob Eckert, CEO of Mattel, offers some advice for leaders in Fortune magazine. In the article, Eckert recounts a conversation with his CFO, Kevin Farr, shortly after he took the helm as chief executive. Here's the excerpt from that article:
Kevin said to me, "Well, Bob, if we had a blank sheet of paper, we probably wouldn't pay a dividend." He was telling me to be open to starting over instead of building on previous decisions. We'd been paying a dividend of 36¢ a share every year, and we were borrowing money from banks to pay dividends to shareholders, which doesn't make a lot of sense. When Kevin said that to me I said, "Well, we do have a blank sheet of paper. Let's do the right thing." So we cut the dividend to 5¢ a share. The day we announced that dividend cut, the stock price didn't go down, it went up.
Academics describe how many organizational strategies, structures, and processes prove to be highly path dependent. In other words, past practices constrain future changes in many ways. Eckert reminds us that path dependence need not always be a fact of organizational life. As a leader, you can sometimes start from scratch. You do need to question whether a practice continues simply because "it's always been that way around here." Having said that, leaders need to balance a urge to start from scratch with the understanding that too many changes at once can throw an organization into turmoil. Thus, leaders need to be selective about the instances in which they choose to hit the "reset" button.
Kevin said to me, "Well, Bob, if we had a blank sheet of paper, we probably wouldn't pay a dividend." He was telling me to be open to starting over instead of building on previous decisions. We'd been paying a dividend of 36¢ a share every year, and we were borrowing money from banks to pay dividends to shareholders, which doesn't make a lot of sense. When Kevin said that to me I said, "Well, we do have a blank sheet of paper. Let's do the right thing." So we cut the dividend to 5¢ a share. The day we announced that dividend cut, the stock price didn't go down, it went up.
Academics describe how many organizational strategies, structures, and processes prove to be highly path dependent. In other words, past practices constrain future changes in many ways. Eckert reminds us that path dependence need not always be a fact of organizational life. As a leader, you can sometimes start from scratch. You do need to question whether a practice continues simply because "it's always been that way around here." Having said that, leaders need to balance a urge to start from scratch with the understanding that too many changes at once can throw an organization into turmoil. Thus, leaders need to be selective about the instances in which they choose to hit the "reset" button.
Peter Osborne Blogs About My Book
Consultant Peter Osborne, a specialist in public relations and negotiation, offers his commentary about my book on his blog today.
Thursday, September 03, 2009
Wal-Mart Paying Via Check Cards
Wal-Mart announced that it will stop issuing paper checks to employees who decline to utilize direct deposit. Instead, it will issue debit cards to those employees. The company estimates that it will save more than 257,000 pounds of paper per year through this initiative, given that roughly half of its employees still receive paper checks at this point.
The news articles indicate that government agencies such as Social Security have begun making a shift to debit cards as well. I found that particularly interesting, given that the other day, I received another copy of my "Social Security Benefits Statement" in the mail. I seem to get these statements periodically, despite the fact that I have nearly forty years until I hit retirement age. As I received my statement the other day, which is several pages long, I wondered how costly these mailings are for the federal government. The waste in paper and money must just be incredible. It makes you wonder whether past attempts to "reinvent government" really made a substantial difference.
The news articles indicate that government agencies such as Social Security have begun making a shift to debit cards as well. I found that particularly interesting, given that the other day, I received another copy of my "Social Security Benefits Statement" in the mail. I seem to get these statements periodically, despite the fact that I have nearly forty years until I hit retirement age. As I received my statement the other day, which is several pages long, I wondered how costly these mailings are for the federal government. The waste in paper and money must just be incredible. It makes you wonder whether past attempts to "reinvent government" really made a substantial difference.
Book Review
Harvey Schachter reviewed my book, along with John Maxwell's new leadership book, in yesterday's Toronto Globe and Mail.
Wednesday, September 02, 2009
Competition among Debt Rating Agencies
Professors Bo Becker (Harvard) and Todd Milbourn (St. Louis) have conducted a new study examining the impact of competition on the performance of credit rating agencies (S&P, Moody, Fitch). They discovered that increases in competition tend to be associated with higher ratings. Moreover, they found that competition tends to reduce the correlation between credit ratings and bond yields. In short, it seems as though companies use enhanced competition to shop for good credit ratings. Fitch's emergence as a more prominent competitor plays a big role in the study. Presumably, their effort to gain market share, coupled with the two major players' efforts to rebuff Fitch's advances, leads to friendlier ratings for debt issuers. The study provides useful guidance for policymakers, as they try to improve the information available to investors in the debt and equity markets. Some policymakers have presumed that competition would increase rating quality/accuracy, but Becker and Milbourn question whether that will indeed be the case.
Tuesday, September 01, 2009
Story-Telling
Wharton Professor Stewart Friedman has a great blog post on the importance of story-telling as a leadership capability. He outlines six key elements of an effective leadership story. It's a must-read for leaders at all levels.
Depression?
Carnegie Mellon Professor Allan Meltzer published a very good article in the Wall Street Journal this week, in which he compares this economic downturn to past recessions.
Monday, August 31, 2009
Disney Buys Marvel
Big news in the entertainment industry today: Disney announced that it is acquiring Marvel Entertainment, known for such popular characters Spider-Man and the X-Men. Here are a few of my initial reactions to this deal:
1. Disney's last two major acquisitions (Pixar and Marvel) fit much more closely to its core strategy than some of the diversification attempts in the second half of Eisner's tenure (Cap Cities/ABC, hockey and baseball teams, etc.). Why do I say that? These last two major deals bring a stable of popular characters to Disney. When Disney has been very successful, it has been developing and leveraging characters across an array of businesses (films, TV, theme parks, consumer products, etc.). Some of the deals during the latter half of Eisner's tenure had very little to do with animated characters, and they stretched Disney well beyond its traditional core.
2. The price tag seems high according to some observers and analysts. However, I thought this comment by Disney's CFO was interesting: "You can't expect to pay a bargain price for premium assets," said Disney Chief Financial Officer Tom Staggs. "Marvel is worth more inside Disney than outside Disney." Of course, that final sentence proves key. Anytime a firm diversifies, particularly via acquisition, you have to ask yourself: Is this business worth more within Disney than outside of the firm? Why might Marvel be worth more within Disney than elsewhere (either independent or as part of another conglomerate)? First and foremost, Disney has the ability to unlock a tremendous amount of value from Marvel's characters, because it can leverage the characters across a wide platform of related businesses. Expect theme park attractions based on Marvel characters, new films, new consumer products, new television shows, etc.
3. We should watch how Marvel's relationships with other entertainment firms unfold in future months. One complicating factor with any deal such as this one - how will existing relationships between Marvel and some of Disney's competitors (such as Sony and Viacom) fare in the future?
1. Disney's last two major acquisitions (Pixar and Marvel) fit much more closely to its core strategy than some of the diversification attempts in the second half of Eisner's tenure (Cap Cities/ABC, hockey and baseball teams, etc.). Why do I say that? These last two major deals bring a stable of popular characters to Disney. When Disney has been very successful, it has been developing and leveraging characters across an array of businesses (films, TV, theme parks, consumer products, etc.). Some of the deals during the latter half of Eisner's tenure had very little to do with animated characters, and they stretched Disney well beyond its traditional core.
2. The price tag seems high according to some observers and analysts. However, I thought this comment by Disney's CFO was interesting: "You can't expect to pay a bargain price for premium assets," said Disney Chief Financial Officer Tom Staggs. "Marvel is worth more inside Disney than outside Disney." Of course, that final sentence proves key. Anytime a firm diversifies, particularly via acquisition, you have to ask yourself: Is this business worth more within Disney than outside of the firm? Why might Marvel be worth more within Disney than elsewhere (either independent or as part of another conglomerate)? First and foremost, Disney has the ability to unlock a tremendous amount of value from Marvel's characters, because it can leverage the characters across a wide platform of related businesses. Expect theme park attractions based on Marvel characters, new films, new consumer products, new television shows, etc.
3. We should watch how Marvel's relationships with other entertainment firms unfold in future months. One complicating factor with any deal such as this one - how will existing relationships between Marvel and some of Disney's competitors (such as Sony and Viacom) fare in the future?
AT&T and the iPhone
Martin Peers, in the Wall Street Journal's Heard on the Street column, has a thought-provoking story about AT&T's relationship with Apple. The article questions whether AT&T has actually benefited financially from its exclusive iPhone service relationship. The article rightfully points out that it's not a no-brainer; it's unclear as to whether the costs outweigh the benefits. More importantly, though, this example provides a good lesson in the dynamics of strategic partnerships. Here are two questions to consider:
First, you must ask: Why did Apple negotiate an exclusive arrangement? One key reason is control. They understand that the service providers had a lot of power in the traditional relationship with phone manufacturers, particularly here in the U.S. Apple did not want to cede that power to the service providers; they wanted to very carefully control the customer experience, particularly as people bought and/or serviced their phones. Apple rightfully wanted to protect their brand equity.
Second, you might ask: Who has the power in this new partnership? Whenever firms enter into a partnership, alliance, or joint venture, you can and should assess the extent to which one party has the ability to appropriate more of the returns generated by this collaborative effort. It's not hard to see that Apple has the upper hand here, and therefore, it's not surprising that AT&T would realize less of the financial benefit. Apple, after all, could select from among multiple options as it chose its partner; therefore, that provided the firm leverage in negotiating this relationship. Moreover, Apple had the scarce asset going into this partnership. Scarcity provides value.
First, you must ask: Why did Apple negotiate an exclusive arrangement? One key reason is control. They understand that the service providers had a lot of power in the traditional relationship with phone manufacturers, particularly here in the U.S. Apple did not want to cede that power to the service providers; they wanted to very carefully control the customer experience, particularly as people bought and/or serviced their phones. Apple rightfully wanted to protect their brand equity.
Second, you might ask: Who has the power in this new partnership? Whenever firms enter into a partnership, alliance, or joint venture, you can and should assess the extent to which one party has the ability to appropriate more of the returns generated by this collaborative effort. It's not hard to see that Apple has the upper hand here, and therefore, it's not surprising that AT&T would realize less of the financial benefit. Apple, after all, could select from among multiple options as it chose its partner; therefore, that provided the firm leverage in negotiating this relationship. Moreover, Apple had the scarce asset going into this partnership. Scarcity provides value.
Friday, August 28, 2009
Starbucks' Growth
I disagree with this article by John Jannarone in the Wall Street Journal's Heard on the Street column. While it may be true that licensed Starbucks locations are more favorable financially than company-owned locations, there are dangers to relying heavily on licensed locations. From a strategic standpoint, Starbucks loses some control when going the licensing route, and that loss of control may diminish the brand. As I've argued before on this blog, Starbucks has already allowed dilution of its brand equity to occur; it has to take great care not to generate further dilution.
Cash for Crib Clunkers
Toys R Us has launched a trade-in campaign, whereby consumers can bring back their old unsafe cribs, car seats, high chairs, and the like and receive a 20% discount off their purchase of a new replacement for that old item. The marketing campaign appears to be a great example of "doing well by doing good." After all, getting all those older items out of households and automobiles certainly enhances the safety of our children. Far too many old cribs, for instance, have wide spaces between their rails - too wide by current safety standards. On the other hand, the campaign may create new demand for Toys R Us products, since it may encourage new purchases by some people who would otherwise have simply kept their old items for many more years. Toys R Us may generate new sales and profits, even with the 20% discount offer, while enhancing safety for its customers.
Gripping Statistics
In Fast Company magazine, Dan and Chip Heath (authors of Made to Stick) explain how to make your statistics more persuasive to others. It's definitely worth reading.
Thursday, August 27, 2009
Spotting Problems Before It's Too Late
Stacy Blackman of BNET's Back To School Blog posts the second part of her interview with me. The interview focused on my work on how leaders can become better problem-finders.
Work vs. Pleasure
My copy of the Harvard alumni magazine came in the mail yesterday, and it included a story about some interesting new research by Harvard Business School Professor Anat Keinan. Keinan and Columbia Business School professor Ran Kivetz have coined a new term - "hyperopia." They describe it as the habit of overestimating the benefits one will receive in the future from making responsible decisions now. Here's what the scholars found:
"Time after time, when subjects were asked to recall situations in which they had to choose between work and pleasure...More of the subjects who’d chosen play over work recently expressed regret, but those numbers reversed for choices made in the distant past. For instance, college students said they’d spent too much time relaxing during a recent winter break, but when they considered the previous year’s break, they said they’d spent too much time studying and working."
Keinan suggests that we could be happier if we took a long term perspective and anticipated our future regrets as we make current choices. She also highlights the fact that companies can retool their marketing to take advantage of this new understanding of how people judge their decisions about work vs. pleasure.
"Time after time, when subjects were asked to recall situations in which they had to choose between work and pleasure...More of the subjects who’d chosen play over work recently expressed regret, but those numbers reversed for choices made in the distant past. For instance, college students said they’d spent too much time relaxing during a recent winter break, but when they considered the previous year’s break, they said they’d spent too much time studying and working."
Keinan suggests that we could be happier if we took a long term perspective and anticipated our future regrets as we make current choices. She also highlights the fact that companies can retool their marketing to take advantage of this new understanding of how people judge their decisions about work vs. pleasure.
Wednesday, August 26, 2009
Hospital Errors
In yesterday's Wall Street Journal, Laura Landro has an excellent column titled "Hospitals Own Up to Errors." She explains how many hospitals have begun to acknowledge their medical errors more openly, rather than "retreating behind a wall of silence to guard against potential lawsuits." Hospitals not only have encouraged their staff members to be more open about mistakes, but they have become more candid with patients and families as well. Amy Edmondson, Anita Tucker, and I wrote a case study several years ago about one hospital's efforts to improve patient safety by becoming more transparent about medical accidents. We wrote about Children's Hospital and Clinics in Minneapolis/St. Paul. At the time, their Chief Operating Officer, Julie Morath, was leading a major initiative to improve patient safety. She strove to create an environment where people felt safe coming forward about medical accidents and near-misses, on the theory that a hospital cannot improve safety if it doesn't know where the problems are. The lesson here is very clear... Organizations must create an environment where individuals feel safe acknowledging mistakes and discussing failures. If not, then the published error rates may seem low, but they may be disguising an ugly truth, while preventing the organization from discovering where improvement opportunities exist.
Tuesday, August 25, 2009
GM Board and Opel
At first, one might react with dismay at the drawn-out process by which GM has tried to sell Opel - its European division. However, recent reports indicate that the new GM Board has rejected management's proposal to sell Opel to Canadian auto-parts manufacturer Magna. The board apparently has pushed management to consider other options, including raising new financing so that the company could retain and restructure Opel. While it's not at all clear whether or not retaining Opel makes sense, one may be heartened to hear that the new GM Board is being vigilant in its governance duties, and not simply rubber stamping management's proposal to sell Opel to Magna. It seems that the board has asked some tough questions and been willing to push back on a key management decision about which board members had serious doubts and concerns.
Sample Lab
Marketers will be particularly interested in this Wall Street Journal article about a first-of-its-kind "marketing cafe" that has opened in Japan. Sample Lab Ltd. operates this cafe in Tokyo, targeting women in their 20s and 30s. The women have an opportunity to earn tokens based on the amount of food or drink they purchase. Then, they can redeem those tokens for samples of new products about which marketers would like to garner customer feedback and launch effectively into the marketplace. It will be interesting to see if this concept succeeds in Japan, and if it spreads to other countries.
Monday, August 24, 2009
Happiness
As leaders, we should strive for a deep understanding of what makes our employees happy. I'm not suggesting that we should always aim to please; our goal is not for our employees to necessarily like us. However, we should strive to garner their respect and their commitment to a common goal(s). Having said that, if we are to motivate our employees effectively, we do need to understand what makes them happy. The Boston Globe had a great article yesterday about recent research on the relationship between happiness and money that is must reading for any leader. The article explains that many studies have affirmed the conventional wisdom that money does not buy happiness. However, more recent research has challenged this notion a bit. These studies show that how we spend our money matters. Here's an excerpt:
"A few researchers are looking again at whether happiness can be bought, and they are discovering that quite possibly it can - it’s just that some strategies are a lot better than others. Taking a friend to lunch, it turns out, makes us happier than buying a new outfit. Splurging on a vacation makes us happy in a way that splurging on a car may not... The problem isn’t money, it’s us. For deep-seated psychological reasons, when it comes to spending money, we tend to value goods over experiences, ourselves over others, things over people."
The articles goes into considerable depth on these issues, drawing on a stream of research by Elizabeth Dunn, Michael Norton, and Sonja Lyubomirsky. I highly recommend this piece by Boston Globe writer Drake Bennett.
"A few researchers are looking again at whether happiness can be bought, and they are discovering that quite possibly it can - it’s just that some strategies are a lot better than others. Taking a friend to lunch, it turns out, makes us happier than buying a new outfit. Splurging on a vacation makes us happy in a way that splurging on a car may not... The problem isn’t money, it’s us. For deep-seated psychological reasons, when it comes to spending money, we tend to value goods over experiences, ourselves over others, things over people."
The articles goes into considerable depth on these issues, drawing on a stream of research by Elizabeth Dunn, Michael Norton, and Sonja Lyubomirsky. I highly recommend this piece by Boston Globe writer Drake Bennett.
Saturday, August 22, 2009
Price Changes at Starbucks
Starbucks announced yesterday that it will be raising prices on some drinks, while cutting prices on others. Which prices will be raised? Apparently, they have chosen to increase price on more complicated drinks such as Frapuccinos, while dropping prices slightly on items that are easier for the baristas to make/serve (such as drip coffee and tall lattes). Why has Starbucks made this move? They may have come to a better understanding of their true costs for each product on their menu and realized that the time required to make certain complicated drinks had driven up costs and eaten into their margins on those items. They may also want to encourage slightly higher volumes of easy-to-make drinks as opposed to complicated ones so as to speed up overall service. One complaint many customers have had is the slow service, particularly due to people in line who are ordering complicated, customized drinks. On both the cost and speed fronts, Starbucks seems to be making progress. It's always effective for firms to have a good understanding of the cost of each activity in their production and selling process, as well as to comprehend how to speed up service to the consumer.
Friday, August 21, 2009
Team-Color Bud Cans?
Anheuser Busch, now owned by international beer company Inbev, has launched a new marketing campaign featuring Bud Light cans that come in the team colors of various universities. As you might expect, this new packaging has raised the ire of many college administrators. Is Bud encouraging underage drinking with this campaign? Have they gone one step too far in their efforts to make the brand appealing to young adults? Of course, many college students drink a great deal of beer regardless of the color of the can. Is this campaign actually going to increase beer consumption on campus, or is it likely to simply convert some consumption from other brands to Bud Light? While I'm not sure I approve of the marketing campaign, I'm not convinced it is going to increase consumption overall. I do think that it may help Bud Light capture share from its rivals though.
Thursday, August 20, 2009
Blog of the Week
Thank you to the Weekly Leader for naming me their "blog of the week". The Weekly Leader site has an incredible amount of interesting information about leadership. I recommend checking it out.
Leaders Who Won't Leave
This week Brett Favre announced his return to the National Football League. Over the past few years, Favre has retired and then unretired several times. He just won't go away! Of course, many business leaders find a hard time saying goodbye as well. They remain at organizations for too long, and eventually, they become less innovative, more complacent, and too stuck in their ways.
In Favre's case, the Minnesota Vikings have awarded him a contract worth more than $10 million. They are counting on him to be something akin to the star quarterback he was in his prime, when he won multiple MVP awards and a Super Bowl. However, his skills have clearly eroded. Over the past four years, his average quarterback rating (a key measure of performance for NFL passers) is slightly below the NFL average during that period. However, people still remember his past performance, and they haven't fully come to grips with how far that performance has declined.
The same phenomenon often holds with business leaders. Put simply, we often take too long to adjust our evaluations of a manager's performance. Past success is "sticky" in the sense that it remains embedded in our minds, and we don't adjust our evaluations downward in a timely manner when performance does decline. We have to wary of this "stickiness" because it may lead us to overpay for past performance, or to hold onto managers for too long even if their recent performance does not justify it.
In Favre's case, the Minnesota Vikings have awarded him a contract worth more than $10 million. They are counting on him to be something akin to the star quarterback he was in his prime, when he won multiple MVP awards and a Super Bowl. However, his skills have clearly eroded. Over the past four years, his average quarterback rating (a key measure of performance for NFL passers) is slightly below the NFL average during that period. However, people still remember his past performance, and they haven't fully come to grips with how far that performance has declined.
The same phenomenon often holds with business leaders. Put simply, we often take too long to adjust our evaluations of a manager's performance. Past success is "sticky" in the sense that it remains embedded in our minds, and we don't adjust our evaluations downward in a timely manner when performance does decline. We have to wary of this "stickiness" because it may lead us to overpay for past performance, or to hold onto managers for too long even if their recent performance does not justify it.
Wednesday, August 19, 2009
Using Pilots: What Government Can Learn From Business
As I observe the cash for clunkers program, as well as the debate about health care reform, I continue to be perplexed by the failure of our government to employ small pilots as a mechanism for experimenting with new ideas. Would a well-run private sector firm have ever conducted a national rollout of something as complex as cash-for-clunkers without first conducting a pilot?
Why use a pilot? Let me count the ways. First, you could have tested out the technology and the process for reimbursing auto dealers. Second, you could have examined the unintended consequences. Third, you could have come to a better estimate of how much volume to expect from a national rollout of the program. Fourth, you could have gathered all sorts of improvement ideas from dealers and end customers. I'm sure there are other benefits as well from a pilot. In short, a well-run business would have captured a great deal of learning from a pilot, and then decided whether to roll out nationally. If they chose to roll out, they would have a much stronger process as a result of the learning from the pilot.
Amidst all the health care reform debate, one wonders why we aren't talking about piloting some of the reform ideas on the table rather than trying to change the whole elephant all at once. A pilot may not be the right political choice, but it seems like the sensible thing to do for the good of the country.
Why use a pilot? Let me count the ways. First, you could have tested out the technology and the process for reimbursing auto dealers. Second, you could have examined the unintended consequences. Third, you could have come to a better estimate of how much volume to expect from a national rollout of the program. Fourth, you could have gathered all sorts of improvement ideas from dealers and end customers. I'm sure there are other benefits as well from a pilot. In short, a well-run business would have captured a great deal of learning from a pilot, and then decided whether to roll out nationally. If they chose to roll out, they would have a much stronger process as a result of the learning from the pilot.
Amidst all the health care reform debate, one wonders why we aren't talking about piloting some of the reform ideas on the table rather than trying to change the whole elephant all at once. A pilot may not be the right political choice, but it seems like the sensible thing to do for the good of the country.
Tuesday, August 18, 2009
Aging Customer Base
Reader's Digest has announced that it will file for bankruptcy protection. The magazine failed, in part, because of the advertising downturn in this recession and the high amount of debt on its books. However, Reader's Digest also failed because of a more significant long term decline in its business, as its customer base aged over the years. The magazine's demise provides a lesson for many firms who face a similar risk.
Companies need to be acutely aware of trends that may be leading to a substantial long term increase in the average age of its customers. It's one thing to target older consumers specifically; it's quite another to see your average customer age rise because you become less and less attractive to younger consumers who used to be part of your target market. Talbots has faced this problem in recent years, as it became less relevant to younger women. Harley Davidson must have some concern too as its average customer age has risen from the mid-30s to the late 40s.
Becoming relevant to young consumers again has its risks though, as Talbots learned a few years back. Attempts to attract younger consumers can, at times, turn off the older customers who have become a firm's core market. Thus, radical attempts to reshape a brand can backfire. Firms must be vigilant in monitoring long term trends regarding the age of their customers, so that they can gradually adapt, rather than waiting until a huge problem exists and then trying to dramatically overhaul the brand and target market.
Companies need to be acutely aware of trends that may be leading to a substantial long term increase in the average age of its customers. It's one thing to target older consumers specifically; it's quite another to see your average customer age rise because you become less and less attractive to younger consumers who used to be part of your target market. Talbots has faced this problem in recent years, as it became less relevant to younger women. Harley Davidson must have some concern too as its average customer age has risen from the mid-30s to the late 40s.
Becoming relevant to young consumers again has its risks though, as Talbots learned a few years back. Attempts to attract younger consumers can, at times, turn off the older customers who have become a firm's core market. Thus, radical attempts to reshape a brand can backfire. Firms must be vigilant in monitoring long term trends regarding the age of their customers, so that they can gradually adapt, rather than waiting until a huge problem exists and then trying to dramatically overhaul the brand and target market.
BNET Back to School Blog
Thank you to Stacy Blackman for this first of a two-part blog post about my latest book.
Monday, August 17, 2009
My Op-Ed Published in Washington Times
In today's Washington Times, my friend Brian Gaspardo and I have published an op-ed titled, "A Mid-Summers Dream." The op-ed focuses on what we learned from Professor Larry Summers twenty years ago as Harvard undergraduates, and how those principles stack up against the economic policy choices that are being made today in Washington. We ask the question: What would Professor Summers think of Economic Adviser Summers?
CEO Compensation: Gaming the System
This article describes new academic research examining a key factor that influences executive compensation at many firms. The studies analyze how companies select their "peers" when evaluating what they should pay top executives. Typically, firms compare their compensation packages to peer companies. However, a key question remains: "Who are the relevant peers?" The new academic research shows that firms often select larger rivals, who have higher compensation, when putting together these peer comparison analyses. Therefore, firms find it easier to justify high compensation packages for top executives.
Immediately, I began to think about how effective boards and corporate governance practices should be able to monitor such analyses and force more reasonable comparisons. Weak boards and weak governance would seem more likely to allow such biased analyses to slip by. Indeed, the research shows just that... According to this same article in the Wall Street Journal:
"Companies with what experts consider weak corporate governance -- where the CEO is chairman of the board or where directors serve on multiple boards, for example -- are more likely to choose highly paid peers, the study found."
Immediately, I began to think about how effective boards and corporate governance practices should be able to monitor such analyses and force more reasonable comparisons. Weak boards and weak governance would seem more likely to allow such biased analyses to slip by. Indeed, the research shows just that... According to this same article in the Wall Street Journal:
"Companies with what experts consider weak corporate governance -- where the CEO is chairman of the board or where directors serve on multiple boards, for example -- are more likely to choose highly paid peers, the study found."
Smart Discounting
Here's a good article by Steve McKee on how to discount without doing lasting damage to your brand.
Friday, August 14, 2009
Preemptive Competitive Action
In many cases, competitors learn about a new entrant into their market, but they wait to see if the entrant gains traction before offering a competitive response. However, successful companies should think about how, when, and why they might engage in preemptive action to ward off the threat from a new entrant. Such preemptive action need not always entail price cuts, nor do they even have to cost a great deal of money.
Let's take a look at an example from the Boston radio market. Here in Boston, WEEI has reigned supreme for many years as the dominant sports radio station. Several rivals have tried to compete with them, but they have not fared well at all. However, a new entrant has emerged this summer. This station - The Sports Hub 98.5 - appears to have the potential to be a more substantial threat for a variety of reasons. WEEI has made some interesting preemptive moves. First, about one week prior to the entrant's debut, they came to an agreement to allow Boston Globe sportswriters onto WEEI for the first time in years (the station and the paper had been at odds for years). This enabled WEEI to insure that they would have a substantial infusion of on-air talent, before the entrant snapped up these famous writers. Secondly, WEEI changed its format a bit. One thing that always annoyed listeners were the very long commercial breaks. Now, they have broken up the commercials into shorter chunks - breaking more often, but for a shorter period of time. The shift is also significant for another reason. By changing the regular rhythm of their breaks, and making them shorter, they are trying to discourage listeners from switching the dial over to try out The Sports Hub.
Such preemptive strikes may or may not work in this case, but as you can see, they are low cost maneuvers that are trying to defend a competitive position. I would argue that incumbents need to think hard about using such preemptive action, while trying to avoid the price wars that can damage profit margins so badly.
Let's take a look at an example from the Boston radio market. Here in Boston, WEEI has reigned supreme for many years as the dominant sports radio station. Several rivals have tried to compete with them, but they have not fared well at all. However, a new entrant has emerged this summer. This station - The Sports Hub 98.5 - appears to have the potential to be a more substantial threat for a variety of reasons. WEEI has made some interesting preemptive moves. First, about one week prior to the entrant's debut, they came to an agreement to allow Boston Globe sportswriters onto WEEI for the first time in years (the station and the paper had been at odds for years). This enabled WEEI to insure that they would have a substantial infusion of on-air talent, before the entrant snapped up these famous writers. Secondly, WEEI changed its format a bit. One thing that always annoyed listeners were the very long commercial breaks. Now, they have broken up the commercials into shorter chunks - breaking more often, but for a shorter period of time. The shift is also significant for another reason. By changing the regular rhythm of their breaks, and making them shorter, they are trying to discourage listeners from switching the dial over to try out The Sports Hub.
Such preemptive strikes may or may not work in this case, but as you can see, they are low cost maneuvers that are trying to defend a competitive position. I would argue that incumbents need to think hard about using such preemptive action, while trying to avoid the price wars that can damage profit margins so badly.
Monday, August 10, 2009
Women Underrate Bosses' Opinions of Them
The Boston Globe reports on a fascinating study presented at the Academy of Management conference this week. Here's the basic finding:
"A new study shows female managers are more than three times as likely as their male counterparts to underrate their bosses' opinions of their job performance. The discrepancy increases with women older than 50, the study states. 'Women have imposed their own glass ceiling, and the question is why,' said Scott Taylor, an assistant professor at the University of New Mexico Anderson School of Management who conducted the study."
Do you have a view as to why women, particularly older women, come to these conclusions?
"A new study shows female managers are more than three times as likely as their male counterparts to underrate their bosses' opinions of their job performance. The discrepancy increases with women older than 50, the study states. 'Women have imposed their own glass ceiling, and the question is why,' said Scott Taylor, an assistant professor at the University of New Mexico Anderson School of Management who conducted the study."
Do you have a view as to why women, particularly older women, come to these conclusions?
Friday, August 07, 2009
Cash For Clunkers
Several days ago, the administration reported on the cash for clunkers program. They indicated that many small, energy efficient cars made the list of the top-selling cars in this program. Today, however, I read a surprising story on CNN's website. Peter Valdes-Dapena writes about an analysis conducted by Edmunds.com, which challenged the results communicated by the administration. Edmunds found that pick-up trucks such as the Chevy Silverado and Ford F-150 actually made their version of the top 10 list. How could that be? What explains the discrepancy between Edmunds' findings and the goverment's reporting? Edmunds.com discovered that the government "subdivides models according to engine and transmission types, counting them as separate models." Edmunds counted all variations of a particular car as one automobile in their analysis. As it turns out, trucks and SUVs tend to come in many more variations. Therefore, by counting each variation as a separate vehicle, the government found that no truck or SUV made their top 10 list.
What's the lesson from this story? First and foremost, we have to be careful how we measure the outcomes of any program or initiative. One always has to question the means by which a program has been evaluated or measured. Secondly, these results demonstrate once again the law of unintended consequences. The administration hoped that the program would mean that consumers would trade in their clunkers for small, energy efficient cars. Now, what has happened is that people have improved the energy efficiency of the cars they own, but perhaps not by as much as the administration had hoped. They may have traded an old gas guzzler for a reasonably efficient truck, but it's still a truck, not a Prius! The real question is: Did the administration and the Congress anticipate the results that have been achieved? If not, why did they miss seeing these unintended consequences?
In your own companies, you always have to ask: Are we seeing unintended consequences of a particular initiative? If so, why didn't we anticipate these results? Could we have enhanced our decision-making process so as to better anticipate unintended consequences?
What's the lesson from this story? First and foremost, we have to be careful how we measure the outcomes of any program or initiative. One always has to question the means by which a program has been evaluated or measured. Secondly, these results demonstrate once again the law of unintended consequences. The administration hoped that the program would mean that consumers would trade in their clunkers for small, energy efficient cars. Now, what has happened is that people have improved the energy efficiency of the cars they own, but perhaps not by as much as the administration had hoped. They may have traded an old gas guzzler for a reasonably efficient truck, but it's still a truck, not a Prius! The real question is: Did the administration and the Congress anticipate the results that have been achieved? If not, why did they miss seeing these unintended consequences?
In your own companies, you always have to ask: Are we seeing unintended consequences of a particular initiative? If so, why didn't we anticipate these results? Could we have enhanced our decision-making process so as to better anticipate unintended consequences?
Thursday, August 06, 2009
Academy of Management Conference
Management professors from around the world converge on Chicago this week for the annual Academy of Management Conference. I'll be involved in two professional development workshops on Friday. I'm the organizer of a session on how academics and practitioners can collaborate effectively to develop leadership development programs for corporations. I'm also a panelist in a day-long workshop on blogging for management professors. I look forward to the discussions at both sessions.
P&G Introduces Tide Basic
The Wall Street Journal ran a front-page story about P&G's intense internal deliberations over whether to launch a less expensive, simplified version of Tide. In the end, facing pressure from consumers buying less of P&G's premium products during the recession, P&G decided to introduce Tide Basic. This debate highlights a crucial issue for many firms during this downturn. How does one cope with changing consumer habits while trying to not damage their brand equity? At the heart of this debate lies a critical question: Is the change in consumer habits temporary or perhaps more long lasting? It seems as though P&G believes they are facing a longer term challenge, driven both by the broader economy as well as the increasing pressures from higher quality private label products in many of their product categories.
Wednesday, August 05, 2009
GM: Is Market Share the Goal?
I read with some consternation the comments in today's Wall Street Journal from GM's new Board Chairman, Edward Whitacre. He explains that he wants GM to aim for being #1 in market share in the US. He clearly acknowledges that profitability is also a key goal, but I worry about the tension between those two objectives. Market share and profitability are not necessarily fully compatible. In the end, the company's goal should be to return to profitability, even if it may mean ceding the #1 market share position in the US. Too many firms become obsessed with market share, and their efforts to maximize share lead to suboptimal profits. GM needs to be wary of this trap.
Whole Foods: Becoming Healthier
I read with great interest the article in today's Wall Street Journal about Whole Foods Market. The company has announced that it is launching a healthy eating initiative. Apparently, CEO John Mackey has adopted healthier eating in his personal life and recognized the amount of unhealthy food at Whole Foods. His goal is to return the company to its natural foods origins and to focus on foods that are good for you. As a customer of Whole Foods, as well as an observer of company strategies, I applaud the strategic shift. I've noticed over the past few years that Whole Foods was not at all a store filled with healthy foods. While it did have wonderful fruits and vegetables, and plenty of organic foods, it also had many, many foods that were very high in saturated fat. This always seemed to me to conflict with the "healthy" image that Whole Foods hoped to portray. Thus, it seems to me that Whole Foods is trying to clarify its brand image and insure that its product selection reinforces that brand image. That seems like the right move for a company that faces intensifying competition, particularly from lower-priced rivals.
Tuesday, August 04, 2009
Innovation Process at Whirlpool
Here's an interesting article about the innovation process at Whirlpool. Such processes always raise a series of interesting questions. Perhaps most importantly, one must ask whether a process such as this one strikes the right balance between promoting incremental innovations versus breakthrough/radical innovations. If the process focuses too much on short term financial targets, then it will drive out breakthrough ideas. On the other hand, without the discipline of metrics and targets, management may find itself wasting a great deal of money on ideas that cannot be executed profitably. It's always a delicate balancing act. I'd like to know more about how Whirlpool deals with this tension in their innovation process.
Monday, August 03, 2009
Advice for New GM Chairman
The new GM Board of Directors meets today for the first time. Here are three pieces of advice for new GM Board Chairman, Edward Whitacre, Jr.
First, Whitacre needs to have a frank discussion with the Board, as well as senior management at GM, about the role of the Board relative to management. The Board needs to exercise good governance and control, but it can't be meddling in numerous operational decisions at GM. Whitacre needs to lead an open conversation about how they will delineate the boundaries between management versus Board responsibilities.
Second, Whitacre must discuss Board process with his team of directors. How will he run the Board meetings? What is expected of each director? What role(s) will each director play? What information will be made available to the directors, and at what time? How will Whitacre encourage candid dialogue and the expression of dissenting views?
Third, Whitacre must establish a process for evaluating CEO Fritz Henderson over the coming months. What criteria will be used to evaluate Henderson? Whitacre should establish those criteria clearly, as well as marking out clear milestones for Henderson to strive to achieve. He should also establish the timing of the CEO review process. In other words, how often will the Board formally review Henderson's performance? Given the situation at GM, an annual review seems inadequate. Establishing quarterly milestones and reviews seems more appropriate given the depth of the crisis.
First, Whitacre needs to have a frank discussion with the Board, as well as senior management at GM, about the role of the Board relative to management. The Board needs to exercise good governance and control, but it can't be meddling in numerous operational decisions at GM. Whitacre needs to lead an open conversation about how they will delineate the boundaries between management versus Board responsibilities.
Second, Whitacre must discuss Board process with his team of directors. How will he run the Board meetings? What is expected of each director? What role(s) will each director play? What information will be made available to the directors, and at what time? How will Whitacre encourage candid dialogue and the expression of dissenting views?
Third, Whitacre must establish a process for evaluating CEO Fritz Henderson over the coming months. What criteria will be used to evaluate Henderson? Whitacre should establish those criteria clearly, as well as marking out clear milestones for Henderson to strive to achieve. He should also establish the timing of the CEO review process. In other words, how often will the Board formally review Henderson's performance? Given the situation at GM, an annual review seems inadequate. Establishing quarterly milestones and reviews seems more appropriate given the depth of the crisis.
Friday, July 31, 2009
Tata Motors and Jaguar/Land Rover
The Financial Times has an interesting story today about the struggles Tata Motors has faced since acquiring Jaguar Land Rover from Ford Motor Company. The article raises important questions about issues such as the ability of niche players to survive in an auto industry that continues to consolidate globally. However, I think the most relevant question remains whether a company that makes the Nano - a low cost car for the developing world - is also well-suited to make luxury automobiles. Certainly, some auto firms, such as Toyota, make everything from subcompacts to luxury automobiles. However, Toyota has far more experience in the business than Tata, and they have scale economy advantages over Tata. Moreover, Toyota may be an exception, rather than the rule. In many industries, firms that try to serve such disparate segments of the market end up becoming average at best - not excellent at serving any particular segment. The article does point out, though, that Tata has a reputation for taking a long-term perspective. They have been patient with their investments in the past. Thus, they may ride out this dramatic slump in the auto business, and gradually learn how to make Jaguar Land Rover profitable.
Thursday, July 30, 2009
Can't Sell His Home
| The Daily Show With Jon Stewart | Mon - Thurs 11p / 10c | |||
| Home Crisis Investigation | ||||
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Bryant Student Interviews Southwest CEO
One of our exceptional students, Dan Webb, managed to score a brief interview with Southwest Airlines CEO, Gary Kelly. Here is the link.
Wednesday, July 29, 2009
The Naysayer vs. the Devil's Advocate
This article, by Michael Maddock and Raphael Louis Vitón, offers some useful advice for how to deal with the naysayer in your company who puts up roadblocks at every turn. However, you must also keep in mind the difference between a dysfunctional naysayer and a constructive/useful devil's advocate. In my first book, I contrasted effective devil's advocacy with what Lou Gerstner described as the "culture of no" that he inherited at IBM - where very powerful individuals, acting as naysayers, could effectively torpedo any innovative idea. The bottom line is that you can benefit from devil's advocates who help insure a high level of critical thinking. However, devil's advocates must remember that their job is to spur more divergent thinking, to open up new lines of inquiry, and to generate new options. Their job is not simply to tear down every existing proposal on the table. The best devil's advocate is not closed-minded; he or she seeks to open other's minds up to new possibilities.
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