Sara Lee: Unwinding a Conglomerate

Slowly but surely, the break-up of Sara Lee continues. Today, we learned that S.C. Johnson is bidding for Sara Lee's air freshener business, a unit that Proctor and Gamble had already expressed interest in acquiring.

Interestingly, the break-up of Sara Lee stretches back a full decade. Back in 2000, the company begin this transformation from an unrelated diversified firm to a more focused company. In 2000, Sara Lee divested units such as Coach, Champion Europe, PYA/Monarch, and its international bakery businesses in France, India, China and the U.K. This transformation accelerated when Brenda Barnes became CEO in 2005. Since that time, the firm has divested many businesses including the spin-off of its branded apparel business into a separate, publicly traded company called Hanesbrands.

Of course, I've noted before that the logic of unrelated diversification should be called into question in industrialized nations today. What's amazing is how long it has taken for Sara Lee to make this transformation, though the company is certainly not unique in this regard. It proves how difficult it can be for a conglomerate to leave behind its diversification strategy. At the heart of this challenge lies the fact that it can be so contentious to decide what businesses are truly related and which are not. No precise way exists to determine "relatedness" in corporate strategy; the term elicits much debate. Moreover, it can be especially contentious inside of a company, where executives have ties to a historical strategy and to particular business units in which they may have worked for many years (and which they may have even been responsible for acquiring many years earlier).

What's the lesson for executives in other firms? Contentiousness on the question of "relatedness" actually is a good thing. Top management teams ought to have a vigorous debate about what constitutes a related business. Perhaps such candid debates can prevent firms from making unwise acquisitions that have few synergies to exploit.

Apple Tablet

A day does not seem to pass without another story speculating on the "Apple Tablet" - a new multi-function device purportedly under development by Apple. The rumors swirl, in part, because Apple has so many fans who cannot wait to see what Jobs and company come up with next. The firm's history of secrecy naturally adds to the intrigue.

One can certainly argue that the rumors provide Apple with an incredible amount of free publicity in advance of a new product launch. While that does mean expectations are quite high, most firms would still die for such publicity.

Perhaps, though, another great benefit exists from this rumor mill. Maybe Apple has provided this extended period of time during which it can read about what customers would like from a new tablet-type device, as well as what early adopters and technology experts think should be incorporated into the product. In other words, perhaps this window of time represents an opportunity for something akin to mass collaboration, in which Apple is tapping into ideas, suggestions, and input from its legions of fans... and then using that to help drive the development process. No one knows for sure, but I cannot help but wonder whether Apple is watching all this speculation with great attentiveness and interest... and not just because it represents a bonanza of free pre-launch publicity.

Confirmation Bias: The Yes-Man Inside Your Head

What a great article in today's Wall Street Journal about the power of confirmation bias in our investment decisions. For more on confirmation bias, check out the classic study by Lord, Ross, L., and Lepper: "Biased Assimilation and Attitude Polarization: The effects of Prior Theories on Subsequently Considered Evidence," Journal of Personality and Social Psychology.

Intuition at Mann Gulch

For those who don't know the Mann Gulch story, here's a bit more information. When the fire "blew up" that day, the leader - Wag Dodge - yelled to his team that it was a "death trap." Everyone began to run for the ridge, but Dodge soon realized that they probably could not outrun the fire. He bent down and lit another small fire in a grassy area with a match. Then, Dodge placed a handkerchief over his mouth and lay down in the smoldering ashes. Since the grassy area quickly burned, leaving nothing but dirt, the blaze went right over Dodge - leaving him unharmed. He had deprived the forest fire of the necessary fuel. Unfortunately, none of his crewmembers joined him in that grassy area. When he yelled to them to join him, they thought he was crazy. They had never seen such a tactic. They ran for the ridge instead, and most of them did not survive.

Where did Dodge come up with this tactic? He came to an intuitive decision. No such technique had ever been used by any smokejumper. He invented it on the spot. This tragic situation highlights one of the challenges associated with intuitive decision-making. People often don't understand your thought process when you make a "gut" decision, and thus they may be unlikely to follow your lead. Leaders must take great care to explain the rationale for all their decisions, but especially those that did not involve formal analysis.

In this case, Dodge didn't even have time to explain his thinking. Thus, he needed his crew members to believe deeply in him, but they did not. He had not built the rapport and credibility with his team necessary to elicit their buy-in at this critical moment. In short, leaders need to build a reservoir of trust within their team, long before they make critical choices for which they want buy-in and cooperation.

Mann Gulch Fire

Sad news today of death of 98 year old Earl Cooley, airborne supervisor at tragic Mann Gulch forest fire of 1949. 12 smokejumpers died at that fire. Norman Maclean wrote an amazing book about that event: Young Men and Fire (1992). I wrote a Harvard case study about the fire to teach important lessons about decision making and team dynamics. I also wrote about the fire in my first book: Why Great Leaders Don't Take Yes For an Answer. The fire has so many leadership lessons. Michael Useem of Wharton also has documented some key lessons from this case. Wag Dodge led that crew that day in 1949, and while he may have exhibited sone leadership flaws, his survival is an interesting and amazing story of the power of intuition.

The Funny Case for Better Economics Education

Vertical Integration at Samsung

The Wall Street Journal has a good article today about Samsung's vertical integration strategy. By vertical integration, I mean that Samsung produces consumer electronics items, as well as many components that go into such products.

Vertical integration, of course, does pose some risks. Let's identify three key risks. First, the firm finds itself competing with its customers and/or suppliers. The article states that, "About one-third of Samsung's revenue comes from companies that compete with it in producing the TVs, cellphones, computers, printers and cameras where it gets the rest of its money." Second, vertical integration can create dulled incentives. In other words, if you produce your own components, then a high level of "guaranteed internally generated revenue" may cause the component production unit to be less efficient than it should be. Finally, vertical integration can lead to wasted time and effort associated with internal transfer price battles.

The article suggests that Samsung does face some challenges associated with competing with key customers. However, it also suggests that Samsung mitigates all three of these risks by forcing each of its businesses to clearly demonstrate that it can compete successfully in the external market. Internal and external competition seems to be key to Samsung's culture and strategy. According to the article: "People look at our businesses and see vertical integration. It really isn't," says David Steel, a Samsung senior vice president and marketing strategist. "It's a portfolio of component businesses and consumer-product businesses and, within that, we don't compromise on the idea that each business is charged with its own success." Of course, it is vertical integration, but what Mr. Steel is saying is that they treat each business as a stand-alone entity that must show it can compete effectively... no guarantees that a component production unit will be able to operate at capacity simply because the company could use all those components in finished products. The components unit must prove it's doing a better job than external players that could be suppliers to the finished product divisions at Samsung.

The Search for Talent: Lessons from the Wildcat Offense!

In the National Football League last year, the Miami Dolphins launched an innovative new offensive strategy called the Wildcat. The strategy was highly unorthodox, involving a series of formations more typical of a college team. Many coaches described it as a gimmick. However, the Dolphins enjoyed remarkable success with the strategy. They achieved an amazing turnaround after a dismal prior season. By the midpoint of this season, many NFL teams have adopted a version of the Wildcat offense. Many new variations of the offense have been invented along the way. More and more people have acknowledged that this strategy is not a gimmick.

The interesting thing is that this formation provides an opportunity to utilize the talents of players once shunned by the NFL. For many years, college quarterbacks who could run the ball effectively, but who were not traditional drop-back passers, did not achieve success in the NFL. Many did not get selected by NFL teams. Or, in many cases, NFL teams tried to force running quarterbacks to transform themselves into traditional passers, which most could not do successfully.

What's the lesson here? Companies often make the same mistake that the NFL did for years with these college quarterbacks who did not fit the usual professional archetype. Firms search for talent that fits their way of doing things, and they try to force people who have unique talents to try to adapt to fit the company's system. They seek conformity. Of course, we should primarily focus on finding talent that fits our company's strategy and culture. However, at times, companies need to be open to the idea of adapting their way of doing business to take advantage of the unique talents of employees. Rather than asking employees to change, sometimes firms need to change. They need to find new ways to utilize the great talent that they have available.

The Kleenex Story: Unintended Use

The history of Kleenex tissue offers an important lesson. Here's the story. Kimberly Clark launched its Kleenex tissue products in 1924. At the time, the company targeted adult females and marketed the product as a means of removing make-up. The first magazine ad ran in the Ladies Home Journal with the tag line: "the new secret of keeping a pretty skin as used by famous movie stars."

Several years after the launch, Kimberly-Clark's head researcher began using the tissues to blow his nose due to hay fever. He wanted the marketing folks to advertise the product for this use as well. They resisted at first. Around this same time, many customers also were using the Kleenex tissue in place of their handkerchiefs. Kimberly Clark learned about this unexpected customer behavior. Finally, in 1930, Kimberly Clark ran two ads at the same time. One focused on blowing your nose, while the other emphasized make-up removal. They evaluated customer response. More readers responded that they used the tissue to blow their nose. Ad campaigns changed, sales took off, and the rest is history.

What's the lesson of the story? Companies need to be mindful that customers may use their products in unexpected ways. Perhaps most importantly, firms must resist the temptation to dismiss this unanticipated customer behavior. The customers may, in fact, be telling you something incredibly important, if only you keep an open mind. Give Kimberly Clark credit for coming around in time, and investigating this unexpected behavior. As a result, they created one of the most successful brands of the 20th century.

Whole Foods: Gathering Customer Feedback

On Saturday, I spent an hour or so shopping at my local Whole Foods. About halfway through my shopping trip, a Whole Foods associate greeted me, told me she was seeking feedback from customers, and then asked me if I had anything that I'd like to share with her about my experience at Whole Foods. She mentioned that it could be anything at all... about products, service, items they don't offer that they should, etc. She expressed interest in my response, asked a number of follow-up questions, and thanked me for my input.

This brief interaction struck me because she did not have a predetermined agenda, list of survey questions, or interview protocol. She made it very clear that she was open to any and all ideas, input, suggestions, critiques, etc. Her openness struck me as the exact opposite of so much customer research today at many firms. Far too many companies ask their customers leading questions, though often inadvertently. As a result, they come to erroneous conclusions based upon their market research. The Whole Foods associate clearly was trying to avoid affecting my response with any bias whatsoever.

Psychologist Elizabeth Loftus has done some remarkable research demonstrating the power of leading questions. For instance, in one wonderful experiment, she showed subjects video of an automobile accident. She asked half the students, “How fast was the white sports car going when it passed the barn while traveling along the country road?” In fact, the video showed no barn along the street. The other half received the same question, except without mention of the barn. Loftus then asked all the students, “Did you see a barn?” Roughly six times as many students in the first group than in the second indicated that they had seen a barn in the video!

Subway: Overcoming Headquarters Bias

This Business Week story explains the origins of Subway's incredibly successful "$5 foot long" marketing campaign. Brand managers at corporate headquarters did not concoct the campaign. The idea did not originate on Madison Avenue. Instead, it began with a promotion launched by a small Miami-based franchisee named Stuart Frankel. Other local franchisees latched onto the idea, after seeing how profitable the strategy had become for Stuart Frankel. Frankel and his peers had some convincing to do though. It took awhile, but they finally did persuade corporate to adopt the concept for the entire chain.

Interestingly, this campaign does not represent the first such innovation from the front lines at Subway. The famous "Subway diet" campaign featuring Jared Fogle emerged form the field as well! A fellow student wrote about Fogle's unique Subway diet, and Men's Health magazine wrote an article about him later. Soon, a local Chicago-area franchisee noticed the story, and he began trying to convince corporate headquarters to adopt Jared's story as the centerpiece of an advertising campaign. Again, the idea met resistance from corporate, but after regional success in the Midwest, franchisees finally convinced headquarters that the idea had tremendous merit.

These two stories both illustrate the power of harnessing creativity and innovation at the front lines of organizations, where local knowledge resides. At the front lines, employees interact with customers every day, and they often generate new ideas that could serve consumers better.

What's the challenge? I describe it as headquarters bias. In too many instances, the corporate office simply thinks they know better than the field employees (sort of like the intellectuals and politicians in Washington always think they know better than the average citizen). Give Subway credit for not allowing the initial "headquarters bias" to completely shut down these ideas. After initially resisting, they recognized the value of the ideas and spread them throughout the chain's locations.

Can You Twitter Your Brand Promise?

Check out this blog post by David Hill. He describes a terrific idea that he learned about during presentation by Marc Gobe, author of Emotional Branding. Gobe asks the question: Can you Twitter your brand promise? In other words, are you able to provide a clear and incredibly concise explanation of your pledge to your customers? Twitter allows 140 characters. Can your firm's brand promise be described in less than 140 characters?

Let's demonstrate the concept. Consider Federal Express. What is the company's brand promise? "Absolutely, positively overnight." - 33 characters! That's just beautiful. Not only is the promise concise, but it is completely accurate and very clear. In short, Federal Express has a proven track record of delivering on this promise; it's not just words.

How about Target? "Expect more, pay less." 22 characters! We all understand precisely what this means too. Target meets the test.

One last terrific example. What about Ritz Carlton? "Ladies and gentlemen serving ladies and gentlemen." 50 characters! They pass with flying colors. Anyone who has stayed at a Ritz Carlton knows that they deliver on this promise; it's not just rhetoric.

So now it's time for you to try to Twitter your firm's brand promise. Can you do it? Remember... not only must you be clear and concise, as well as accurate... you have to avoid creating a generic phrase that could apply to a host of rivals. You need to outline a promise that truly stands out from the crowd.

The GM-Opel Decision

The recent decision by General Motors to reverse course on its proposed sale of Opel to Canadian auto supplier Magna raises some interesting questions about the role of a Board of Directors. On the one hand, we desire more effective and vigilant boards who spend time learning a business and monitoring the decisions of senior executives. However, we have to recognize that boards can lose their objectivity if they begin making corporate strategy. In other words, most people believe that boards have an important role monitoring and controlling management behavior. However, if the board begins to become the primary decision-making body regarding the strategic direction of the firm, then you must ask: Who is monitoring and controlling the board? What if decisions don't work out and performance lags? Who is responsible? It becomes difficult for the board to hold management accountable if they have actually made all the key decisions, sometimes by overruling management. I'm not suggesting that the GM Board was incorrect necessarily in overturning Henderson's Opel decision. I'm simply arguing that the board must take great care not to blur responsibilities so much that no one is actually left conducting unbiased governance and control activities.

Disney's Return to Hand-Drawn Animation

The Wall Street Journal reports today on the upcoming December debut of Disney's newest animated feature film: The Princess and the Frog. The film's box office results should be interesting to track, given that it represents a return to hand-drawn animation - something that Disney has not done for six years.

In recent years, Disney had tried to emulate Pixar's success using computer-generated animation. However, the company did achieve the results that it had hoped for movies such as Brother Bear. Then, Disney acquired Pixar, and the company asked Pixar's leaders - John Lasseter and Ed Catmull - to oversee Disney Animation. Now, in an ironic twist, Lasseter and Catmull have endorsed this return to hand-drawn animation. Lasseter explained in this excerpt from the article:

But from Mr. Lasseter's point of view, the real problem wasn't Disney's animation techniques—it was more fundamental elements like characters and plot. "I've never understood why the studios were saying people don't want to see hand-drawn animation," Mr. Lasseter said at a fan convention earlier this year. "What people don't want to watch is a bad movie."

I love this quote. It demonstrates a keen understanding of what really drove Pixar's success and what has troubled Disney for the past decade or so. Lasseter understands that Pixar's success does not hinge on its computer animation techniques. After all, that strategic capability, to a large extent, is imitable. Therefore, even if it was a big contributor to Pixar's early success, it does not lend itself to the establishment of sustainable competitive advantage. Pixar's enduring success, instead, depends upon their ability to develop interesting, funny, engaging story lines. It's plot, not graphics, that primarily brings kids and their parents to the theaters. People love a great story, and no amount of fantastic computer-generated imagery can make up for a terrible plot. That ability to develop incredibly engaging plots also is far less imitable than the computer animation technology. Thus, it's a far more valuable strategic capability.

Changing Culture at GM

Frances Frei is right on the money with this blog post (Decision to Lead blog) about the effort to change the culture at General Motors.

Jana Eggers and Spreadshirt

Check out The Hopkinson Report for an interesting podcast about Jana Eggers and her company, Spreadshirt. Eggers' company provides customers with the opportunity to purchase customized, real-time t-shirts on-line, without having to buy large quantities. Customization represents a huge growth opportunity for many companies, yet it seems to have been underexploited in many cases. Has your firm considered how it might offer customized products? They represent an opportunity to differentiate, drive higher margins, and avoid head-to-head price competition with rivals.

Rapping about Supply and Demand

From my former professor Greg Mankiw's blog, I learned of this great rap song about the core principles of economic theory. It's highly recommended to students, as well as all those interested in a quick review of economics... maybe a few folks in Washington ought to listen this song!

Decision-Making Myths

Bob Frisch has a good article over at Business Week on three key myths about decision-making. His three myths are:

Myth 1: A Single Team Makes All of the Big Decisions
Myth 2: The Executive Team Is a Body of Equals
Myth 3: Team Members Should Always Adopt a CEO Perspective

My research confirms Frisch's conclusions regarding Myth #1. Many people speak of the "top management team" as the key strategic decision-making body of the organization. However, my research - along with work by Professors Ann Mooney and Allen Amason - confirms that strategic choices are made a bit differently. Typically, a subset of the top team is involved in all key strategic choices, and then they pull in different people based on the nature of the decision. In short, what we have is a stable core of decision-makers and a dynamic periphery. Mooney and Amason describe that core as the "inner circle". The question is: How does a CEO manage the relationship between the inner circle and the broader management team, and how does that affect the performance of the organization? I believe that the CEO can do significant damage if he or she does not manage that relationship effectively.

Economic Gangsters

I just finished reading Economic Gangsters by Ray Fisman and Edward Miguel. I picked up the book based on the fact that it happened to be on Harvard economics professor Greg Mankiw's freshman seminar reading list this fall (as posted on his blog). I immediately recognized Ray's name, since we went to graduate school together, and decided to take a look at the book.

Economic Gangsters offers a fascinating examination of the challenges associated with promoting economic development in the world's poorest nations. Fisman and Miguel examine the behavior of corrupt officials and governments, using ingenious research methods to learn more about their actions and the impact of their actions. They do a great job of analyzing the link between corruption and poverty.

One of the most interesting aspects of the book involves the examination culture and its link to corruption. They study the likelihood that various countries' United Nations diplomats will park illegally in New York City and not pay those parking tickets. By looking at parking tickets in New York, they gain insight as to whether culture may play a role in making people less likely to adhere to the rule of law.

In another part of the book, they examine violence in Africa. They trace the impact of droughts in Africa, showing that they substantially increase the risk of a subsequent civil war. Thus, they recommend intervening with economic aid during droughts, so as to reduce the odds of violence and war.

All in all, it's a very interesting read for those eager to learn more about the challenges associated with promoting economic development in some of the world's poorest nations.

Private Sales at Saks

I read with great interest that Saks has launched a "private sales" experiment. What are private sales? For some time now, a few retail startups such as Gilt Groupe and HauteLook have used viral marketing techniques to launch intense limited-time sales of discount designer apparel. Vanessa O'Connell of the Wall Street Journal explains:

"The sites had carved out a niche with a new retail formula: Short, intense sales, usually of 36 hours—and constant Web updates on which items "sold out"—to create a sense of urgency and a deadline for shoppers. Sites like Gilt have been a boon to high-end designer brands such as Marc Jacobs and Tory Burch, because their sales of discounted merchandise are held in a controlled setting that is perceived to be more discreet and upscale than the typical off-price chain store."

Saks and other high-end department stores have traditionally relied on their own outlets (Off Saks) or other discounters to sell out of season or older merchandise. Naturally, such discount selling comes with risks. Could the brand be damaged by too much discounting? These private sales offer an opportunity to create a controlled environment for selling such merchandise, while creating an intense feeling of scarcity that can create buzz among fans of the high-end merchandise for sale.

Interestingly, though, Saks did not use this private sale experiment to sell old merchandise typically sold through its outlet stores. Instead, it specifically purchased items to sell via this private sale. This represents an interesting twist on the strategy employed by startups such as Gilt Groupe. Achieving competitive advantage is always about finding a unique way to compete, rather than just employing a me-too strategy. Thus, it's refreshing to see Saks experiment with a slightly different model than that adopted by their upstart rivals. I'm sure more experimentation will follow by Saks and others, and perhaps new revenue streams for high-end department stores will result.

Cash for Clunkers - What a Clunker!

According to an analysis by Edmunds.com, the Cash For Clunkers cost taxpayers roughly $24,000 per additional car sold, beyond the number of cars that would have sold anyway even without the program. Naturally, automakers and government officials dispute the Edmunds.com conclusions, but those critics are highly biased, of course. Edmunds.com does not seem to have a vested interest in offering a slanted evaluation (though I may be missing something). I'm inclined to believe that we simply changed the timing of many new car purchases through this program, rather than affecting the overall annual volume in a meaningful way.

Interview Podcast

Andy Kaufman of the Institute for Leadership Excellence and Development interviewed me recently about my latest book. Here's the link to the podcast.

Jordan's Furniture: Shoppertainment

Have you ever shopped at Jordan's Furniture? This small Massachusetts furniture chain generates more sales per square foot than any furniture retailer in the country. Jordan's generates $950 of revenue per square foot compared to $150 per square foot for the typical furniture retailer in the United States. Jordan's also has incredible asset efficiency, turning its inventory 13 times per year! Those kind of results attracted the interest some years ago of Warren Buffett, who now owns Jordan's. He purchased the company from the Tatelman brothers several years ago, though one of the brothers continues to lead the firm.

What makes Jordan's so special? It's hard to list all the special features of this retailer in a short blog post, but one thing certainly stand out to me. They have mastered the notion of shopping as entertainment, with special attention to families. The Natick store that I shopped at the other day has an IMAX theater, a re-creation of Bourbon Street in New Orleans, and loads of fun for folks of all ages. Most interestingly, though, they have created an entertaining atmosphere that enables young families to enjoy a satisfying shopping experience.

One of the biggest challenges for young families is always how to handle bored children while trying to shop for furniture. Jordan's engages the kids so that the parents can actually shop with less distraction. What an ingenious way to drive customer satisfaction and sales! So many firms do the exact opposite. They do not make parents comfortable, because they have a "hands off" type environment where children are made to feel very unwelcome. How can you provide a high quality shopping experience for 25-44 year olds if you push away their children? Too many firms trying to sell to parents forget that the kids are very much part of the buying process. Turn off the kids, and you turn off the parents. Engage the kids, and you just might make a big sale!

Should Insider Trading Be Legal?

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.

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.

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.

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.

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?

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.

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!

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.

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.

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

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."

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.

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!

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.

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.

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.

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.

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.

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.

Top 50 Education Bloggers

Here's a new list of the top 50 education blogs. For some reason, I like the list! :-)

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.

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.

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.

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.

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.

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.

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.

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.

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.

Book Review

Harvey Schachter reviewed my book, along with John Maxwell's new leadership book, in yesterday's Toronto Globe and Mail.

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.

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.

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?

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.

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.

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.