The Pile of Cash at Apple

At the Apple shareholder meeting, Steve Jobs declared that he has no intention of using the company's giant cash balances (nearly $25 billion) to pay dividends to shareholders. Instead, he hopes to use that cash to fuel future investments.

Now, in most situations, I would be highly skeptical of a firm hoarding this amount of cash. I would be concerned that a CEO might use the cash to pursue a variety of value-destroying diversification strategies, or other profit-damaging initiatives. In Apple's case, though, I'm more willing to allow the company to hold these types of cash reserves. Why? In the end, the question for shareholders is this: Does the company have a sufficient amount of net present value positive projects in which it can invest this cash? If not, then the shareholders should be demanding dividends. They would want the cash so that they can invest it more productively on their own. However, if the firm does appear to have some very promising net present value projects in which to invest, then we would be much more comfortable letting the cash remain within the firm. To some extent, the best way to answer this question is to look at the firm's recent track record. Is it growing? Is it innovating? Is it delivering solid returns on investment? In Apple's case, they have a great track record of making sound investments that deliver profitable innovations. Their markets and products do not appear mature. It would seem reasonable to believe that Jobs and his team can use the cash very productively. Of course, though, that assessment needs to be updated continually as conditions change.

GM and Fritz Henderson

Alex Taylor of Fortune reports that GM is paying ex-CEO Fritz Henderson $59,090 per month for 20 hours of consulting work on international operations. I don't doubt that Henderson may have institutional knowledge that the firm wants to tap, but is this really worth $3,000 per hour? Wow...

Board Mentors at Frontier

The Wall Street Journal had a thought-provoking article yesterday about succession planning at Frontier Communications. At that firm, CEO Maggie Wilderotter has asked her Board members to serve as mentors to key executives who appear to be her potential successors. The rather novel process has some clear benefits for a firm as it plans succession, though it certainly takes a certain breed of CEO to be willing to adopt this approach.

Healthcare Summit

This week President Obama brings together Congressional leaders from both parties to discuss healthcare reform. Unfortunately, the cameras will roll at these meetings. The President should consider changing those plans. He should consider making them closed meetings. Why? Consider that our Constitutional Convention more than 200 years ago took place in private so that delegates could discuss big ideas frankly and candidly, and so that they could introduce innovative ideas for discussion. Similarly, in a more recent example, the 1983 Social Security reform took shape behind closed doors. Ultimately, of course, the ideas from both of these private, momentous meetings had to be approved in a public vote. However, people crafted these ideas in an atmosphere that promoted candid dialogue and open discussion of novel ideas.

Creativity and Youth

This article from the weekend edition of the Wall Street Journal describes the research of Professor Dean Simonton and others regarding the productivity of researchers in various fields. Simonton sought to examine whether breakthrough work seemed to be the product of the young, i.e. scientists and scholars in their 20s and 30s. Indeed, Simonton's work shows that, in fields such as physics, scholars perform groundbreaking work in their late 20s. In a number of fields, scholars seem to peak in their 20s and 30s. Simonton explains that scientists may peak at an early age in many fields because they are more willing to challenge conventional wisdom and consider novel explanations. Is the early peak age true in all fields? According to Simonton, it is not. Areas with well-defined theories and principles, such as chess, math, and physics, tend to see people peaking at a young age. Fields with more ambiguity skew toward a later age for peak productivity.

A lesson for all of us can be derived from these conclusions. We all need to seek out novelty as we grow older, to combat the natural tendency for us to get wedded to ideas, theories, and principles to which we are accustomed. Cognitive science now shows that novelty spurs the brain in many ways. Attempting to learn new things as we grow older forms a sort of exercise for the brain that may have many benefits.

Breaking Amazon's Monopsony

Do you know what monopsony is? Economists define monopsony as a market where you have only one buyer. It's the mirror image of monopoly - a market where there is only one seller.

Why do we care about the definition of monopsony? Well, the recent developments in the e-book market sparked some curiosity on the part of many folks. How is that book prices rose after Apple announced the introduction of the iPad? After all, doesn't competition reduce prices? My colleague, Keith Murray, has a terrific blog post on this subject.

Here's my take: Prior to Apple's entry into this market, Amazon had something closely resembling a monopsony in the e-book market. They dominated the market. They were the principal buyer of e-books. Thus, they had a great deal of market power relative to book publishers. The entry of Apple into this market, with the iPad, has essentially broken the monopsony. Now, there are multiple significant buyers of e-books. As a result, the book publishers have gained some leverage, and they can command a higher price for their products. Now, in the long run, prices may again fall as the market evolves. For now, though, we have an interesting scenario whereby prices have risen as a monopsony situation comes to an end.

Smart Planet Blog

Smart Planet's Pure Genius blog has posted an interview with me, titled "Decisions, decisions: Expert sheds light on how to make better choices."

Duane Reade Acquisition

Walgreens announced today that they are acquiring Duane Reade, a 257 store pharmacy chain in New York City. The deal provides Walgreens a powerful position in New York, where Duane Reade locations seem to be on every other corner, particularly in Manhattan.

The articles written about the acquisition all note that Duane Reade has the highest sales per square footage in the industry. Let's consider that for a moment. What does that mean? Typically, we think of sales per square foot as a critical metric of retail success. However, in the case of Duane Reade, we have to proceed with caution. The New York City locations involve very expensive real estate. Thus, one needs a great deal more sales per square foot simply to cover the additional overhead costs.

Yes, the Duane Reade locations generate a great deal of revenue per square foot since they are in such a high population, high traffic area. In addition, Duane Reade perhaps has some market power given their dominant position in the geographic area. However, the appropriate way to assess Duane Reade, and really any retailer, is to understand the return on investment for a square foot of retail space. That number would incorporate the revenue per square foot, but it would also account for the investment required to pay for that space, institute capital improvements, and the like. By the way, capital improvements will be a key factor for Walgreens, as many of the Duane Reade locations are not in very good physical shape. Walgreens will have to make further investments to upgrade the appearance of the stores.

Retailers Get Tough on Brands

CNN Money's website has a good article documenting how large retailers are streamlining the number of branded products on their shelves. As you might expect, Wal-Mart features prominently in this development. The article describes how retailers are reducing their product assortments, i.e. Do we really need 50 different types of toothpaste on the shelf?

Why might retailers streamline brand and product assortment?

1. Private label offers an attractive, value-oriented option for consumers, and it provides attractive margins for the retailers.

2. Reducing assortment offers an opportunity to drive higher volumes on a smaller set of SKUS, thereby increasing inventory turnover (thus driving return on assets higher).

3. Fewer SKUs means less confusing displays for the consumer, and more opportunities to showcase particular products in a more prominent way.

4. A reduction in SKU count and brand assortment may reduce logistics costs and administrative expenses, particularly if the retailer now has to deal with fewer suppliers and supplier locations.

5. Pitting brands against one another in a battle for shelf space enables retailers to extract concessions from key suppliers, thereby reducing costs of goods sold and increasing margins.

6. Retailers may have an opportunity to reduce the square footage of their store footprint, particularly as they experiment with urban and "neighborhood" store types.

Of course, large retailers are not necessarily breaking new ground here. Smaller retailers have been very successful with this limited SKU strategy for some time. Consider, for instance, the small but highly successful New England grocer, Stew Leonard's, as well as the popular national chain, Trader Joe's.

Earnings Manipulation

The Wall Street Journal reported over the weekend on a fascinating new study by Professor Joseph Grundfest of Stanford Law School and doctoral student Nadya Malenko of Stanford Business School. The authors studied 27 years worth of earnings reports (489,000 quarterly earnings reports). They examined earnings not just to the penny, as usually reported, but actually looked to the tenth of a cent. Of course, each digit should appear in the tenths place 10% of the time. However, these scholars found that an earnings report that ended with a "4" in the tenths place tended to occur less often that statistically expected (only 8.5% of the time, in fact). the numbers "2" and "3" also occurred less than expected by chance. The scholars coined the term "quadrophobia" to describe this phenomenon!

What about firms that later restated results or were found to have irregularities in their financial statements? It turns out that their earnings end with a "4" in the tenths place more than expected by chance. Hmmm... What's going on? It appears that companies may be edging up their earnings to the point where a "5" ends up in the tenths place, so that then they can round up to the next cent. That may not seem substantial, but consider for a moment how stock prices rise and fall significantly when a company misses earnings estimates by just a penny, or beats expectations by a cent.

What I find truly amazing is how much attention continues to focus on earnings, when all those finance professors around the world preach that cash flow, not earnings, should be the focus of investor analysis. Still, journalists report extensively on EPS results, and many companies appear to spend a great deal of time "massaging" those numbers.

Uniqlo's Expansion Strategy

Fast Retailing Company of Japan, which owns the very successful global retailer Uniqlo, indicates in today's Wall Street Journal that they will be on the hunt for acquisitions in Europe and the United States. The company has tried to gain a foothold with its Uniqlo brand in these western markets, but it has struggled at times. I visited the company's flagship store in New York City (in SoHo) with a group of my students. The store is terrific and apparently quite successful. However, the company closed several suburban locations that it attempted to open in the Northeast.

One thing that I found fascinating about Uniqlo was the T-shirt design competition that they conduct each year. People submit thousands of entries each year, and Uniqlo produces and sells the top submissions. In New York, the store features an amazing wall of t-shirts with innovative designs. This competition represents yet another wonderful example of how to truly engage your customers, while also reaching outside the firm to tap into innovative ideas.

As for the acquisition strategy, Fast Retailing will have to be cautious about following in the Gap's path. The Gap operates multiple chains (Banana Republic, Old Navy), and it has struggled to maintain true distinctiveness among these brands at times. The lines have become blurred, and that has hurt the core brand in particular. Of course, the Gap operates these chains in the same geographic market. Fast Retailing appears to be focusing on acquisitions in areas where Uniqlo is not strong, so perhaps they have less of this overlap concern.

CFO Magazine Interview

You might wish to take a look at this CFO magazine article for which I was interviewed at length. The title is: "Escaping the Executive Bubble."

Hermes, Coach to Open Men's Stores

The Wall Street Journal reports today that luxury good firms Hermes and Coach plan to open stores catering specifically to men. The strategy has a number of appealing features. Certainly, they appear to have evidence that many men do not enjoy having to shop for themselves in a store predominantly catering to females. Perhaps more importantly, data clearly show that more men are shopping for themselves when it comes to apparel, as opposed to our parents' generation, when wives often did a great deal of the apparel shopping for their husbands.

What challenge will the stores face? The last line in the article struck me as perhaps the most important one: "Still, there is one kind of customer brands are careful not to alienate in the men's stores: 'women who want to buy gifts for a guy,' Coach's Mr. Tucci says." Herein lies the critical issue facing these luxury retailers. How does one create a store atmosphere and shopping experience that caters to men without alienating the female shopper there to purchase for her husband, son, etc.? These luxury retailers will have to strike a delicate balance: make the atmosphere highly appealing to men, and clearly distinct from their other stores that cater mostly to females, while not alienating women.

Switch: Finding Bright Spots

Fast Company has published an excerpt from Chip and Dan Heath's upcoming book, Switch: How to Change Things When Change is Hard. As you may know, the Heath brothers wrote a best-selling book titled Made to Stick a few years ago.

In the excerpt, the authors explain how we can be easily overwhelmed when we face a complex problem that has a wide array of causes. How do we approach such a situation? They argue that we should search for bright spots. What do they mean? The authors tell the story of Jerry Sternin and his attempts to address malnutrition in Vietnam. Sternin went to a village and identified the children who were larger and healthier than the typical child. He examined how those families lived and how they ate. He discovered some important differences in eating habits and diet. Then, Sternin worked with the community to bring small groups of families together to prepare meals in a new manner consistent with how the better-nourished families cooked and ate. That village and many others achieved wonderful results. It's a remarkable story! Here is the Heaths' conclusion:

"In tough times, we'll see problems everywhere, and "analysis paralysis" will often kick in. That's why, to make progress on a change, we need to provide crystal-clear direction -- show people where to go, how to act, what destination to pursue. And that's why bright spots are so essential: They provide the road map... You may not be fighting malnutrition, but if you're trying to change things, there are going to be bright spots in your field of view. And if you learn to identify and understand them, you will solve one of the fundamental mysteries of change: What, exactly, needs to be done differently?"

I look forward to reading the book, due out next week!

SuperFreakonomics and Car Seats

I just read SuperFreakonomics by Steven Levitt and Stephen Dubner, and I enjoyed the book as much as the best-selling original Freakonomics book. While much has been made of the chapter on global warming, I actually found the material on children's car seats to be more fascinating, particularly as a father of three young children. Levitt's research suggests that car seats may not prevent fatalities more effectively than traditional lap and shoulder seat belts for children older than the age of 2. To examine the empirical work behind the book, take a look at this scholarly paper. Here's an excerpt from the conclusions to that research paper:

"The empirical evidence presented in this paper, however, suggests that for children aged two and up, child safety seats provide no discernible advantage over traditional lap and shoulder belts, and only a marginal improvement relative to lap-only seat belts in preventing fatalities. These conclusions are robust to the inclusion of a wide array of covariates, analyzing a variety of sub-samples of the data, including vehicle fixed-effects, and correcting for sample selection in the way the FARS data set is constructed. An obvious question to ask, although one which is beyond the scope of the FARS data, is the extent to which the failure of child safety seats to outperform seat belts is a consequence of child safety seats frequently being improperly installed. Indeed, NHTSA (1996)estimates that more than 80 percent of all child safety seats are incorrectly installed. Based on crash tests, Kahane (1986) argues that properly installed car seats reduce fatailities by 71 percent, compared to 44 percent for improperly installed safety seats. Thus, there may be potential gains to achieving better installation. On the other hand, it is worth noting that when I conducted my own crash tests at an independent lab using lap and shoulder belts on dummies corresponding to children aged 3 and 6, the seat belts performed well within the guidelines the federal government has established for child safety seats, and just about as well as the (properly installed) child safety seats that I tested. While far from definitive, the crash tests I conducted suggest that even with proper installation, there may not be clear advantages of car seats over seat belts."

I must say that I admire Levitt for taking on such controversial topics. I also liked his response to Transportation Secretary Roy LaHood's criticism of his research.

Peyton Manning and the Recency Effect

In the aftermath of an exciting Super Bowl, let's consider a lesson we all can learn from the hoopla surrounding Peyton Manning in the days leading up to the Super Bowl. During the entire two weeks leading up to the big game, we heard expert after expert pronounce Peyton Manning as the greatest QB to ever live, or perhaps right on par with the great Joe Montana. Everyone presumed that he would win the Super Bowl. Was all that hype really justified? (As a Patriots and Tom Brady fan, I was perplexed, to say the least!)

Overall, going into last night's game, Peyton Manning had 9 wins and 8 losses in his playoff career. Until his only Super Bowl win in 2006, he had a reputation for performing poorly in the postseason. That championship season changed perceptions. Yet, he lost both of his playoff games in the two seasons after that championship. This year, though, he led his team to the Super Bowl once again. People seemed to forget his postseason struggles, his inability to play his best on the big stage. Even in 2006, when his team won 4 games and lost none in the playoffs, he had only 3 touchdowns and 6 interceptions during the postseason... not exactly stellar. No one seemed to remember these facts.

Last week, no one also seemed to remember that Joe Montana won 4 Super Bowls and didn't lose any, while throwing 11 touchdowns with ZERO interceptions in those games. Overall, he won 16 games and lost only 7 in the playoffs. Yet, people proclaimed Manning the greatest ever last week.

What happened to all the experts, who surely don't forget Joe Montana's greatness or Manning's playoff struggles of the past? The lesson is that humans are incredibly vulnerable to what psychologists call the recency effect. We have a strong tendency to place too much emphasis on information and evidence that is readily available, such as recent events. We are incredibly myopic. The Manning hype provides a powerful example of the recency effect in action.

Toyota: A Cultural Defect

Many people have expressed surprise at Toyota's recent quality troubles. Naturally, one should be surprised to see such a highly regarded quality leader encounter trouble of this scale and scope. Many observers, including me, have noted that Toyota's quality issues have been building for awhile, as the company's rapid recent growth stressed the Toyota Production System. However, this Los Angeles Times article suggests that Toyota's problems run much deeper than many observers have suspected. The LA Times documents a history at Toyota of hiding or denying quality problems, or trying to delay product recalls. If we concur with the newspaper's assessment, then we must conclude that Toyota has a much deeper cultural problem, not just a short term issue related to the torrid growth of the past few years. Interestingly, the company is so well known for encouraging workers on the front lines to speak up when they see a defect or problem. This open culture has enabled them to surface problems on the line, and to fix them proactively so as to achieve high quality. Yet, it appears that this same frank and candid dialogue may not be occurring when it comes to top management communicating with its dealers and customers. Today, Toyota's chief executive finally spoke to the press about the firm's recent troubles. His late communication with the public may also be another indicator of the cultural challenges the firm faces. Toyota has a great deal of work to do. They must not only fix this set of defects and understand how to prevent them in the future; the firm must also address the issue of whether and why it has been slow to come clean on defects over time.

Chanos on China

Hedge fund manager and famous short seller Jim Chanos explains his views on the potential overheating of the Chinese economy in this video. Chanos, you may recall, became very well known for his investment call on Enron long before others saw the problems at the company.

Power Corrupts

Lord Acton once said, "Power corrupts. Absolute power corrupts absolutely." This week, The Economist reports on some new research by psychologists Joris Lammers and Adam Galinsky. In an experiment they conducted, they examined people in four different states: 1) high power, believed to be achieved legitimately, 2) low power, believed to be legitimate, 3) high power, believed to be achieved illegitimately, 4) low power believed to be illegitimate.

These scholars found that high power individuals who believed that, "they were entitled to their power readily engaged in acts of moral hypocrisy." On the other hand, low power individuals did not engage in moral hypocrisy. In fact, they tended to be harder on themselves than on others, when judging immoral behavior (such as stealing an abandoned bicycle). Lammers and Galinsky coined the term "hypercrisy" to describe that behavior. Now, here is the most interesting part: the high power individuals who believed that they had been ascribed that power, but were not really entitled to it, actually behaved just as the low power individuals did. What's the conclusion? It appears that the feeling of entitlement among powerful individuals actually becomes the fundamental driver of misbehavior and immoral behavior. Of course, we all knew this intuitively, but the stark findings here provide some persuasive empirical evidence, while also showing us the interesting "harsher on themselves than others" effect for low power individuals.

Does Easy = True?

The Boston Globe had a fascinating story in its Sunday edition about the burgeoning literature on what is known as "cognitive fluency." Cognitive fluency refers to how easy it is to think about something. Psychologist have demonstrated that making a statement easier to think about can increase the likelihood that people will believe the statement to be true. What do we mean by easier to think about? Psychologists have shown that printing a statement in an easier-to-read font, or making sentences rhyme, can increase the probability that individuals will conclude that the statement is true. Studies have also shown that stocks with easier to pronounce company names tend to outperform those with very difficult pronunciations.

On the other hand, psychologists have also shown that, in some circumstances, cognitive "disfluency" can have a profound impact. Put simply, making something more complex or difficult to comprehend can sometimes jar us into thinking more carefully about a subject. We might even catch mistakes. For instance, scholars have found that printing the question “How many animals of each kind did Moses take on the Ark?” in a more difficult-to-read font can raise the number of correct responses quite significantly (What's the answer? Noah took the animals on the ark, not Moses!).

I believe this current stream of research has some important implications for marketers, as they consider how to persuade and influence consumers to purchase their products. All marketers should explore these new studies about cognitive fluency.

Calorie Counts at Starbucks

Scholars at the National Bureau of Economic Research conducted an interesting study recently, which was profiled in the Boston Globe's Uncommon Knowledge column today. The researchers set out to study the impact of new legislation in some cities that forces restaurants to list calorie count information on their menus. The scholars found that such posting of calorie information caused a decrease in the amount of calories found in food purchases by customers. Interestingly, the disclosure of dietary information had no impact on the caloric content of the drinks purchased and consumed by Starbucks customers. The key question: Did the law curtail revenues at Starbucks? Perhaps surprisingly to some observers, the law did not affect sales totals. Actually, those Starbucks locations located in close proximity to a Dunkin' Donuts actually realized in a small increase in revenue. The researchers hypothesized that customers may have compared calorie counts at the two chains, and then concluded that the healthier option was Starbucks. The Boston Globe does not mention if the customers' conclusions about calorie counts at the two chains were actually true. Nevertheless, the broader conclusion is perhaps the most interesting, namely that listing dietary information did not hurt Starbucks' sales.

What Every Student Should Know About Economics

From a letter sent to economics professor and textbook author Greg Mankiw, by Professor Gordon Boronow: http://gregmankiw.blogspot.com/2010/01/economics.html

Succession Planning

Tom Magness, over on his Leader Business blog, has a great post on succession planning, drawing on the example of the University of Texas having to deal with a serious injury to its star quarterback during the opening quarter of the national championship game earlier this month. During that game, Texas had to rely on a very young, inexperienced backup. Magness provides some great simple lessons on succession including the following:

"Simulations and contingency plans must address the loss of key leaders. Most of our "what if" drills involve things like the loss of a key customer, the failure of an important system or piece of equipment, or the interruption in the supply chain. But "what if" we lose a key leader? Are we prepared? Have we practiced under those conditions? Have we established contingency plans so that we can quickly integrate new leaders without losing momentum? Are we prepared to adjust the game plan to be able to operate under the new conditions and still accomplish the mission?"

I can recall one company with whom I've worked that ran a very interesting exercise for it senior leaders. The exercise focused on a major catastrophic event that could impact the business. Each senior executive reported to the CEO's office at the start of this exercise, and immediately, several of them were told that they had been injured/incapacitated during the disaster. Thus, they were not available to work during this time. They were told to leave the exercise. Now, the simulation proceeded with several junior people asked to step in for their bosses. What a wonderful way to evaluate the organization's capability to respond to a crisis, while also evaluating how well prepared the bench was to "go into the game."

Doing Business In China

My colleague, Crystal Jiang, is an exceptional young faculty member who studies and teaches international business strategy. She has done some excellent work, particularly on Chinese businesses. In one recent study, she found that Chinese executives trust their overseas partners differently depending on whether or not these partners were of Chinese ethnicity. Many Chinese have emigrated to other nations, particularly in Asia, over the years. Overseas Chinese are a very important economic force behind foreign direct investment in China.

Jiang distinguishes between two forms of trust: cognitive and affective. Cognitive trust is about your "head" - it's based on one's assessment of another person's knowledge, competence, and reliability. Affect-based trust is socio-emotional in nature - it's about your heart, not your head.

Jiang finds that trust plays a key role in investment relationships between Chinese firms and foreign partners. In particular, she finds that Chinese executives have higher affect-based trust, but lower cognition-based trust, in overseas Chinese than non-Chinese partners. As people think about doing business in China, they should consider how critical the role of affect-based trust can be, as well as the important role that overseas Chinese can play in forging key business relationships with Chinese firms.

What Happened to Toyota?

We read shocking news today that Toyota has suspended sales of 8 popular models in the United States due to a problem with the throttles sticking open. The news comes after a series of other indicators over the past two years which have demonstrated slippage in Toyota's once-vaunted quality record. What happened to Toyota, renowned for its exceptional quality? It appears that the rapid growth of the past few years, as other automakers stumbled badly, may have stressed the organization to a breaking point of sorts. Perhaps, too, Toyota has finally hit a point at which certain diseconomies of scale began to become more pronounced. In the automotive business, every executive seems to have bowed at the altar of scale economies for years, yet it seems that many failed to see how powerful diseconomies of scale can be.

What should we watch for as Toyota tries to minimize the damage from this move? First and foremost, it will be critical for Toyota to communicate often, and in a myriad of ways, with consumers to educate them about why they have made this move and how they are fixing the situation. Second, Toyota has to do all it can to expeditiously correct the problem on models already sold. Third, Toyota must have a well-orchestrated campaign for re-launching these models in the United States.

What does the Toyota decision mean for its rivals? At first glance, this news does appear to be very positive for firms such as General Motors and Ford. However, each of the rivals must take great care in their response. After all, they too have their share of quality issues from time to time. Will Toyota set an expectation for suspensions of sales that these rivals will not want to emulate? Will people begin to ask questions about why rivals aren't "taking quality issues as seriously as Toyota did?" In the end, Toyota may have raised the bar for everyone in the industry when it comes to handling quality concerns.

SNL's Take on the NBC Mess

Check out Saturday Night Live's hilarious take on the Leno/Conan mess over at NBC

Video Recaps | Full Episodes | Webisodes

Apps for the Kindle

Amazon has announced that it will be soliciting applications for the Kindle from outside developers. The firm plans to sell these apps through an online store. Naturally, Amazon has taken this step as a preemptive move to address the enormous threat posed by Apple's new tablet-like device.

This article on Business Week's website focuses on the possibility of games being developed for the Kindle. While that may be promising, the device itself may need to be overhauled to make the platform amenable to high quality game development. Of course, one could imagine simple "brain" games such as crosswords and Sudoku working quite nicely on the Kindle. Beyond that, the opportunity, and perhaps necessity, exists for Kindle to make its device much more interactive with regard to book and periodical content. The article mentions the education market and the possibility of interactive content in that space. The potential of interactive content, I believe, stretches far beyond the education market.

The question is: Can Amazon court enough developers to cope with the Apple threat? Does Apple have too much of a head start with the developer community, based on the iPhone platform? Ultimately, Amazon has to decide what business it is in. If the fundamental purpose of the Kindle business is to drive book sales, then Amazon must take great strides to make it economically attractive for developers. More apps means more Kindle sales means more e-book revenue. That seems to be the equation. The revenue potential of the apps, as well as the hardware revenue of the Kindle, appears to mean far less than the huge opportunity to drive book sales through this platform.

Healthy Casual Dining

The Wall Street Journal has an article today about casual dining firms such as Applebee's, and others such as Starbucks, introducing healthier menu items. The article discusses how customers will react, as the firms balance taste vs. calorie count. Perhaps more interestingly, I wonder whether one of these large casual dining firms will break from the pack and shift radically to an "all-healthy" menu. After all, this industry is very crowded right now, and many firms are struggling to differentiate themselves. Why not stake out a unique position? It's risky... That's why. CEOs don't like walking away from some of their customers. Yet, the payoff long-term would be tremendous if a firm could be the first mover, and if it could really stake out a differentiated position. If none of the existing firms reposition themselves, it will leave an opening for a smart new entrant.

Uno's Bankruptcy

Uno's Chicago Grill (formerly Pizzeria Uno) filed for bankruptcy today - sad news for an icon in the pizzeria business. The company announced a restructuring that would reduce the debt burden substantially, and hopefully, enable the firm to return to profitability in the near future.

The company's bankruptcy raises some interesting strategic questions. Some may attribute its demise to the economic recession. However, one has to question whether the firm's changing identity in past years lies at the heart of its current troubles. In past years, the company has broadened its menu quite substantially, and as a result, it ultimately chose to change its name from Pizzeria Uno to Uno's Chicago Grill. These changes spur me to ask: Did the company lose focus with these changes? Did it create confusion among its customers? Did the menu expansion cause a significant loss of efficiency? Was the company trying to be all things to all people in recent years, instead of having a laser focus on a particular target market?

New Performance Metric

Geoff Colvin's recent column in Fortune describes a new performance metric, called EVA Momentum. Bennett Stewart, one of the creators of the EVA (Economic Value Added) metric, has developed this new one as well. The original EVA metric measures after-tax profit beyond a company's opportunity cost of capital. EVA Momentum simply equals a firm's EVA divided by the prior period's sales. Achieving high EVA Momentum means that a firm has generated profitable growth.

Stewart claims in the article that this new metric cannot be manipulated - a grand claim indeed. According to Stewart, "It's the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."

It remains to be seen whether Stewart is correct, but I find the concept intriguing to say the least.

China and Enron

Thomas Friedman penned an interesting article the other day in the New York Times. The title could not have been more provocative: "Is China the Next Enron?" In the piece, Friedman writes that James Chanos, the famous short seller who foresaw Enron's demise, now believes that China represents a bubble due to burst in a magnificent way.

Friedman dismisses Chanos' concerns, and he explains why: "I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us)."

Here is what struck me about Friedman's comments: One could have said the exact same thing about Japan in the late 1980s. How did that work out for them?

Crash Course by Paul Ingrassia

I just finished reading Paul Ingrassia's new book, Crash Course: The American Automobile Industry's Road from Glory to Disaster, on my new Kindle. I thought it might be worth commenting both on the book as well as on the electronic reader.

First, regarding the book, I thoroughly enjoyed Ingrassia's history of the auto industry. He does a wonderful job of documenting the evolution of the American auto companies, while contrasting their decisions to those of Honda and Toyota. He takes both management and the union to task equally for their incompetence, explaining ludicrous decisions such as the Job Ban. He also does a nice job of describing how change efforts, such as the Saturn experiment, did not succeed. Lastly, he explains how Ford made the tough decisions that enabled it to avoid bankruptcy, while GM management did not have the courage to make similar choices. I would like to have seen him look forward a bit at the end to talk more about how the firms will have to position themselves to succeed in the long term, and I think he seemed overly positive on the entire federal bailout. For instance, he never criticizes the federal task force for not demanding more change in the top management ranks at GM when they removed Wagoner. Overall, though, it's definitely worth reading.

As for the Kindle, I enjoy having the opportunity to purchase a book in seconds via wireless from the comfort of my home or office. That is incredibly convenient. The screen technology is easy on the eye as well. I do wonder, though, if tablet PC technology will leapfrog the Kindle in terms of user interface.

Latest CEO Accessory

Fortune published an article this week titled, "Latest CEO Accessory: A Chief of Staff." Writers Beth Kowitt and Alyssa Abkowitz explain that more CEOs have hired someone to fill the role of chief of staff, a position traditionally found in politics, but not often in business. The article mostly extols the benefits to CEOs of having someone in this role. Surely, a chief of staff may bring benefits, particularly as the leader's "confidential sounding board" as the article mentions. However, I think the article misses out on the potential negative aspects putting someone in this role. A chief of staff becomes a powerful filter of information, and at times, that can be harmful. The chief of staff may shield the leader from communicating directly and often with key people at lower levels, and may actually filter out bad news that the leader should hear. The gatekeeper function bestows a great deal of power on an individual. Some individuals, unfortunately, choose to abuse that power to advance their agendas. Many times, though, the chief of staff may simply filter out critical information without any nefarious intentions. They are trying to help the chief executive manage their busy schedule, and in so doing, they package and streamline information flowing to the top. However, they may be contributing to an increasing isolation of the CEO from the rest of the organization.

Marchionne on Market Share vs. Profits

I always teach my students that market share does not necessarily equal profitability. Plenty of firms with sizeable market share fail to make good profits, and plenty of niche firms achieve high profitability. Still, far too many executives remain obsessed with market share, and they pursue unprofitable volume growth.

With that in mind, I was very pleased to read about Sergio Marchionne's attempts to change the mindset at Chrysler. Here are Marchionne's refreshing comments at the North American International Auto Show, as reported by the Wall Street Journal:

"There's almost a fanatical, maniacal interest in [market] share. Unprofitable volume is not volume I want. We have a very good track record for how to destroy an industry - run the [plants] just for the hell of volume, and you're finished."

As you may recall, on this blog post a few months ago, I worried about GM's Board Chairman (and now CEO)Edward Whitacre's emphasis on market share gains. I'm glad to see Marchionne questioning Detroit's past obsession with volume growth.

Undercover Boss

Over the past few days, I've seen a number of previews for a new CBS reality show titled "Undercover Boss." I'm generally not a fan of reality shows, but this one has attracted my interest. According to CBS:

"The series follows high-level chief executives as they slip anonymously into the rank and file of their companies... Each week a different executive will leave the comfort of their corner office for an undercover mission to examine the inner workings of their company. While working alongside their employees, they will see the effects their decisions have on others, where the problems lie within their organization and get an up-close look at both the good and the bad while discovering the unsung heroes who make their company run."

I'm very intrigued because my last book argues that CEOs can derive great value from this type of interaction with front-line employees and customers. In the book, I wrote:

"Discovering your organization’s problems requires more than a few town hall meetings to ask for employee input. Effective leaders become adept at watching how customers shop, employees work, and competitors behave. They break out of the isolation of the executive suite and “get out and look.” They do not simply “manage by walking around.” They become careful and systematic observers of people, processes, and facilities. They immerse themselves in the everyday contexts in which work is being done, and in which consumers buy and use their products. They engage with people on the front lines of organizations, and they get their hands dirty doing some of the real work that must be done to serve customers. Working alongside their employees, they see how things actually get done."

I give some examples in the book of CEOs who did this effectively, including David Neeleman, founder of JetBlue. When Neeleman boarded one of his planes, he would introduce himself to the passengers over the intercom system. Then, he would join his flight attendants in providing drink and snack service. Neeleman actually donned an apron with his nickname – “Snack Boy” – as he worked the aisles. He found these interactions with employees and customers to be incredibly valuable.

Who knew that I'd find a reality show profiling an activity which my research uncovered as a valuable leadership activity?! Undercover Boss premieres after the Super Bowl on CBS. I have no idea if it's a good show, but I'll be watching to find out! Here's a preview from CBS:

The Jay Leno Experiment

News reports today indicate that NBC will be moving Jay Leno back to a late night television time slot. The low ratings of his new prime-time show had upset NBC affiliates throughout the country, who were seeing an adverse impact on their late night local news. At the same time, Leno's replacement, Conan O'Brien, had fallen far short of the ratings achieved by his predecessor on the late night Tonight show. What can we learn from this failed experiment?

It seems that NBC failed to fully grasp the fundamental differences in the audiences at these different time slots and for these different hosts. First, the habits of the loyal Tonight Show audience during the Leno tenure did not appear to fit with a new prime-time slot. In other words, the Tonight Show appeared to be a ritual for many people, something they watched after the late night news. They liked that sequence, and they enjoyed ending their day with the Leno monologue. That didn't mean, however, that they would watch Leno during prime-time, when he was competing with very different alternatives. At the same time, the loyal viewers who watched Leno did not necessarily connect well with a much younger, quirkier Conan O'Brien, who had a very different style. Thus, O'Brien watched Tonight Show ratings fall as he took over. Again, his ratings success at a different time slot (after the Tonight Show) did not translate well to the earlier period, as the viewership demographic differs.

Did NBC understand all these demographic differences? We would think so, yet they seemed to convince themselves that these highly accomplished comics could overcome these issues. They learned that viewing habits and patterns have a more powerful, enduring influence than they imagined. Talent doesn't necessarily trump customer habits, needs, and rituals! The lesson is that companies really need to understand the rituals and habits of their customers, and they must comprehend why these habits may be difficult to break. They also have to understand at a deep level why people enjoy a particular product, and how their happiness may derive from precisely how they consume the product.

One positive from the Leno experiment: At least NBC cut their losses quickly. One big potential negative: One of their talented comics (or more) may depart over the whole way that this has been handled.

Bryant University - Info for Prospective Students

For all high school students interested in applying to Bryant University, the deadline is approaching soon! Applications are due on February 1st. Our admissions office is holding a series of winter receptions for prospective students in different locations, including Greater Boston, Long Island, Hartford, Bermuda, and Puerto Rico. For additional information about Bryant, you might take a look at the two videos below:

The Impact of Private Equity

In this new working paper, Shai Bernstein, Josh Lerner, Morten Sørensen, and Per Strömberg examine the impact of private equity on industry performance across many nations. They find that industries with active private equity investments in the past five years have experienced more growth in production, value added, and employment. These industries also do not appear to be more volatile than those without private equity investment activity. The results appear to not be a situation of reverse causality, i.e. it's not the case that private equity appears to be investing disproportionately in industries already with rapid growth and low volatility.

The Cost of a Meeting

This article in the Wall Street Journal describes how small businesses are trying to make their meetings more efficient. I thought that Iowa-based Russell Construction had developed a method that could be applied by many firms to great effect. As WSJ writer Emily Maltby explains,

"Managers at Russell Construction Co. introduced a new device at a recent quarterly meeting that calculates the average salary of those in attendance and determines exactly how much the meeting is costing the company based on those figures. 'I don't think people thought of time as an expense before,' says Angela Bagby, director of marketing and client relations for the 70-employee firm, which is based in Davenport, Iowa. That initial 90-minute meeting cost the firm roughly $5,000, according to the $25 cost-management gadget, which is made by Bring TIM LLC. Since then, employees have used the device at smaller group meetings, helping to shave off as much as $100 per meeting, Ms. Bagby estimates."

Have you estimated the cost of people's time at your staff meetings? I encourage all managers to consider conducting this simple calculation, and then raising people's awareness as to the opportunity cost of having a meeting. Perhaps it might make people think twice about how they spend their time, as well as how they ask their subordinates to spend their time.

Target's Great Save Event

According to this article by Sarah Gilbert, Target will be launching a "Great Save Event" in its stores from now through February 21st. In this event, Target will sell large bulk items, such as large packages of paper towels, in its seasonal aisles. In a sense, Target will create a Costco-type section within its stores for a seven week period. They hope people will seek out the treasure hunt experience in this special section, and perhaps visit the store a bit more often than usual in this post-holiday time period.

Does this make sense? I think it does. The seasonal aisles are probably not very productive in terms of sales per square foot in the period immediately after Christmas. Why not use that square footage to do something exciting and innovative? Moreover, consider the typical Costco customer. You might think that lower income folks who are eager to save tend to be the ones shopping warehouse clubs. That is NOT the case! In fact, the typical warehouse club customer tends to have a bit higher income. Why? Well, you may save on a per unit basis at a wholesale club, but the total cash outlay when buying items in bulk is quite high. Plus, you must pay an annual fee. Moreover, you need a decent-sized vehicle to carry these items home, as well as a good-sized house to store these items. Small business owners also tend to shop warehouse clubs quite often. All that adds up to a customer demographic that is more affluent than you might think at first. Just take a look at the brands of vehicles in a typical Costco parking lot!

Why is this information about the demographics important? Well, Target aims to serve customers who are a bit wealthier than the typical Wal-Mart customer. They have a differentiated strategy, which includes selling some designer-type items at a premium price. Thus, their target demographic fits nicely with the typical warehouse club customer demographic. Target's customers should be attracted to this Great Save Event.

Making College Relevant

The New York Times ran a thought-provoking article this week titled "Making College Relevant." Writer Kate Zernicke describes a change in the nature of questions being asked by parents and children as they visit campuses:

"Even before they arrive on campus, students — and their parents — are increasingly focused on what comes after college. What’s the return on investment, especially as the cost of that investment keeps rising? How will that major translate into a job?"

I think those in the ivory tower who dismiss this line of questioning by parents as incorrect or inappropriate are making a grave error. In the end, the parents and students are the customers. We cannot simply ignore the reality of the marketplace. Yes, a broad, well-rounded education is critical. Yes, the selection of a particular undergraduate major is often not as critical as people think. Yes, critical thinking and communication skills (written and oral) are often essential building blocks to a successful career, regardless of your major. Yes, college is more than about an ROI calculation based on expected salary upon graduation. All these things are indeed true.

However, a college must prepare students for success both personally and professionally. We must help students discover their calling, and then prepare them to be successful in that vocation. We have to connect ideas and theories to the real world in which our students will have to live and work. Professors do need to spend less time pushing their ideological views on students and more time helping students truly discover their own beliefs, as well as the type of career about which they will have a great passion. In the end, it is about ROI broadly speaking, though the return should not be measured simply by the expected salary upon graduation.

The Unfocus Group

Readers of this blog know that I've been quite critical of focus groups in the past. Put simply, the problem with focus groups is that people often say one thing and do another. In the real world, they do not behave in a manner consistent with their responses in focus group settings. Those inconsistencies emerge for a number of reasons including the use of leading questions by the facilitators and the emergence of social pressures for conformity within the groups.

I'm currently reading IDEO CEO Tim Brown's book, Change by Design. I am thoroughly enjoying his discussion of design thinking, particularly as it is practiced at his firm. One practice that jumped out at me was the "unfocus group." Over at Design Thinking Blog, IDEO founder Tom Kelley offers a description of the "unfocus group" technique. He notes:

"Our alternative to the focus group in the early phase of the process is the ‘unfocus’ group where we deliberately bring in people who are on the tails of the normal distribution curve. A lot of these sessions happen in our San Francisco office, and we include really unusual people in the group.

In The Ten Faces of Innovation, I talk about our work on a different kind of shoe. Among others, we included in the ‘unfocus’ group someone who had a shoe fetish and someone else who was a dominatrix. Clearly they aren’t in the wide part of the random bell curve commonly known as ‘normal’. The process involved having these very unusual people tell their stories, and think out loud about what kind of new products or services they would like to have.

By looking at the needs of people at the edge of the distribution curve we sometimes find hints and clues about how we can ratchet their ideas back a bit and serve the big market in the center of the distribution curve. The “unfocus” group is not going for normalcy, not going directly for the center of the distribution curve. It’s going for the tails but getting insights that can be applied to the big markets in the center."

I find this concept very intriguing. These folks in the tails of the distribution are often incredibly passionate about a product, and they often have incredible knowledge about the features that they look for as they make purchase decisions. I think the key challenge with an unfocus group is to remember, however, that you ultimately want to adapt the lessons from these sessions for a larger mainstream audience. One key challenge for many mainstream consumers, for instance, is that they can become intimidated in a retail environment by a feeling that they are a novice among experts. In his book, Why We Buy: The Science of Shopping, Paco Underhill explains how mainstream bike shoppers often can be intimidated by retail employees who are die-hard bike enthusiasts who cannot relate to someone who just wants to pedal around their community with their kids. To use the unfocus group effectively, then, one has to be able to make sure that the new product ideas that emerge remain accessible to the mainstream consumer who is far less passionate and knowledgeable about the product category.

Old Time Recession

The American Economic Association (AEA) is holding its annual meeting this weekend in Atlanta. The Wall Street Journal has a funny article today about whether economists are particularly frugal. The piece cites some interesting research that examines this issue. For instance, WSJ writer Justin Lahart writes that, "University of Washington economists Yoram Bauman and Elaina Rose found that economics majors were less likely to donate money to charity than students who majored in other fields. After majors in other fields took an introductory economics course, their propensity to give also fell."

Speaking of the AEA meetings, a wonderful humor session is taking place this weekend at the meetings featuring, among others, Yoram Bauman and the incomparable Merle Hazard. For an example of Hazard's work, take a look at this video:

Champagne Blues!

Several articles this week described the rampant price cutting taking place in the champagne market, including among premium brands. Are we surprised? Not at all! Will an economic recovery endcthe discounting? Not necessarily! In fact, this price cutting is not simply about the recession. Over the past decade, more and more wine has been sold in large national and global grocery chains, wholesale clubs, and the like. This increase in buyer power, relative to the days of retailing wine through mom and pop stores, is a key driver in squeezing winery margins and causing rampant discounting. Champagne producers, beware. Consumers, rejoice!

The Anti-Mainstream Brand

This fun article about the resurgence of Pabst Blue Ribbon beer, over on Fortune's website, provides a vivid example of how a small brand can be successful by positioning itself as anti-mainstream, directly in opposition to the values of the market leaders.

Pabst sales have risen by approximately 30% this year. Fortune writer Beth Kowitt writes that, "But the lagging economy isn't the only thing energizing PBR. The brand has also cultivated a reputation as a hipster, offbeat beer -- or what the president of the National Beer Wholesalers Association, Craig Purser, likes to call "retro chic" -- positioning itself as an alternative to big, mainstream brands."

Interestingly, the new brand positioning did not emerge from the Pabst marketing team's minds. Instead, they noticed a surge in sales in Portland, Oregon. Upon visiting the city, they learned that Pabst had found a loyal following among the members of the hipster, music crowd. A new brand positioning was born! Customers drink Pabst specifically because it is not Budweiser, and because it does not market itself the way that those mainstream brands do. It seems to me that many other smaller brands in other markets have an opportunity to position themselves as anti-mainstream, or anti-market leader in their image and values. One way to start understanding how to cultivate that image might be to look closely at a particular area where a small brand seems to be having local success, as Pabst marketers did.

Splitting Chairman-CEO Role

Senator Charles Schumer has proposed mandating that public companies split the role of Chairman and CEO. Dennis Carey, a partner at executive search firm Korn Ferry, argues in the Wall Street Journal that such legislation would not be productive. Carey raises some interesting points, and I do agree that government should not be legislating any such change. However, I do not think that citing successful situations such as those at IBM or Proctor and Gamble necessarily provides a compelling argument for not splitting the role. One could easily cite plenty of counterexamples of firms where perhaps splitting the role would be beneficial. We have seen too many examples of all-powerful Chairman/CEOs who have had boards effectively in their back pocket.

What Carey hints at but does not address specifically is that, fundamentally, corporate governance will not improve simply by making structural or legal changes in the way Boards operate. Companies need to focus on the dynamics in the boardroom and the process of monitoring and control. In the end, the quality of the dialogue in the boardroom will drive performance more so than any structural change.

Meaningful Work

In the 1970s, scholars Richard Hackman and Greg Oldham developed their job design model, in which they argued, among other things, that people will exhibit high degrees of internal motivation if they believe they are performing meaningful work. In this article on the Business Week website, Nick Tasler argues that making the meaning of work more clear to employees can be a very effective, low cost mechanism for enhancing organizational performance. For instance, Tasler describes how Volvo encourages customers and employees to share stories of how people avoided serious injury in a car crash thanks to the automaker's safety features. Similarly, Medtronic invites customers to corporate meetings to share their stories of how the firm's medical devices saved their lives.

Tasler's article cites the research of Wharton Professor Adam Grant in this area. Here is an excerpt from the Business Week column:

"According to research by Adam Grant, an associate professor of management at the Wharton School, making this connection doesn't just improve morale. It also has a huge impact on the bottom line. Grant has discovered that when people get to meet a living, breathing person who benefits from their work, their job performance skyrockets. In one study, Grant found that university fund-raisers who listened to a scholarship recipient tell how the assistance had benefited him increased by 200% the number of weekly calls they made to potential donors. The average amount of funds they brought in jumped 500%, from $400 per week to more than $2,000 per week.

That's an impressive increase in performance by any standard. It's especially so when you consider what did not happen to create the surge in productivity. The callers were not offered a raise. They did not go through extra training to sharpen their interpersonal skills or persuasion techniques. Their managers did not receive extra training on how to be more charismatic or transformational. It required no internal branding effort to communicate a newer, more inspiring vision. The only expense incurred by the organization—time or money—for this dramatic increase in productivity was the 10 minutes of time that fund-raisers spent listening to the beneficiary of their work."

As I read this article, I was reminded of a visit that I paid to Edwards Lifesciences several years ago in southern California. Edwards Lifesciences produces heart valves. The company executives explained that they occasionally brought customers in to meet the person who had worked on their actual valve replacement. These meetings often proved remarkably emotional, incredibly inspiring, and of course, motivational to all. Executives credited these types of efforts to demonstrate the meaning of the work with helping to create an incredibly dedicated workforce which also exhibited remarkably low turnover.

Your Next Move

My friend and former HBS colleague Michael Watkins has a new book out titled Your Next Move. In this follow-up to his best-seller, The First 90 Days, Michael has identified eight typical career moves that managers make in their careers. He explores the challenges one faces with each type of move, and then offers sound, practical advice for how to navigate the pitfalls a manager is likely to encounter during that transition. Michael grounds his work in extensive field research, as well as his consulting work with thousands of managers around the globe. I think every manager ready to navigate a career transition will find this book insightful and useful.

Technology that Harms the Consumer Experience

In the past year, Bank of America has introduced new ATM technology. Instead of depositing checks in an envelope, you insert checks directly into the ATM. The machine scans the check and reads the amount, and then it completes the deposit. Sounds great, right? Well, the technology certainly has promise, but I find that it actually worsens the consumer experience if you have multiple checks to deposit. The process becomes considerably slower than the old envelope method if you are trying to deposit three or four checks. Moreover, it becomes very tedious if the scanning technology fails to read the check amount properly. In that case, if you have forgotten the precise amount of the check you wish to deposit, you face a very frustrating further slowdown.

I raise this example not to bash Bank of America. The technology clearly has great promise. However, Bank of America's ATM provides a vivid example of a company rolling out a new technology that has great benefits for the bank, but actually has some serious negatives for the customer. The bank is not alone. Many companies do this, focusing on how a technology can improve efficiency or accuracy for the firm, without understanding how it may hurt a critical feature of the user experience (in this case, speed).

Best Business Books of 2009

Thank you to Leadership Now's blog for naming my book - Know What You Don't Know - one of this year's best leadership books!

Research on Social Networking

In this article on the HBS Working Knowledge site, Professor Mikolaj Piskorski explains his research on social networking, including some interesting findings regarding the demographics of MySpace vs. Facebook users, gender differences in the use of social networking, and how Twitter usage patterns differ from other platforms.

Making Tech Complex but not Frustrating

My former HBS colleague Andy McAfee has a great column at Forbes.com about how companies such as Apple, Amazon, and Google have been able to enhance their technologies and make them more complex without frustrating consumers. McAfee focuses on four key principles:

1. Evolve, don't upgrade: Focus on making a series of smaller incremental improvements rather than major upgrades that can be disconcerting and confusing to users.

2. Keep the core interface constant: Think about the consistency of the Amazon's website or Apple's iPod interface.

3. Don't even talk about it: Let the consumers discover the enhancements on their own.

4. Let the users opt in: Provide new features that are optional for the consumer, and that the customer can begin to use as they become comfortable with these technological changes. Think about the App Store from Apple.

By the way, if you are not familiar with Andy's work, I highly suggest that you check out his blog.

Helping a friend who's been laid-off

Keith Murray offers advice to anyone who has a friend who's been laid-off over on his blog. It's a terrific post, particularly as we approach the Christmas holiday.

100 Day Plans

This article at Fortune.com describes the culture and management practices at a small boutique innovation consulting firm in NYC called Fahrenheit 212. While much of what is described may only be applicable in a start-up environment, the "100 Day Plans" that the firm employs seem quite interesting and more broadly applicable. Writer Nadira Hira explains:

"Every 100 days, everyone gets together, locks the doors, ditches the cell phones, and sits down to a company-wide strategy session. Together, they set the company's goals for the next 100 days. And they go around the table to hear how each staffer -- execs included -- did on his personal deliverables over the last 100 days. They ask each other questions, weigh in with their own perspectives on their colleagues' work, and do lots of ribbing, reflecting, and cheering. And if the fear of being embarrassed in front of rowdy colleagues weren't enough, staffers work directly with their managers to lay out their individual plans for the next 100 days and actually grade themselves on their last 100-day plan -- and at the end of the year, the scores are added up to help determine incentive bonuses and future compensation."

Why do I love this practice? First, it moves away from strategic planning as an annual exercise that's more about creating piles of documents than it is about candid dialogue. In a fast-moving world, it seems much more appropriate to revisit the strategy every three months or so, and to do so via a vigorous open dialogue as opposed to "death by Powerpoint." Second, this 100 days exercise creates a powerful sense of accountability, with people being held responsible by their peers, not just their bosses. Third, the process promotes transparency, which ultimately has many positive effects. Finally, the meetings provide opportunities for prompt feedback, giving people time to engage in corrective action as they work on projects... rather than waiting until a year has passed and the project is complete before hearing any formal feedback.

Are you a micromanager?

The Wall Street Journal has an article today about CEOs getting into the weeds much more during this downturn. While the article explains why leaders feel the need to be more hands-on at this tumultous time, it also cites the risk of micromanagement. This leads to the question: how do you know if you are micromanaging with possible negative consequences? Here are three signs:

1. You begin to find many decisions being kicked up to you on issues you feel do not belong on your desk... A sign that people may be afraid to make decisions on their own.

2. Your schedule becomes increasingly crowded with meetings at which you are being asked to essentially validate decisions made at lower levels, or to review numerous minor status update meetings on projects.

3. People seem to wait for you to express your opinion before offering ideas at meetings. That sign is most dangerous of all. It shows that folks are afraid to speak up and are waiting for a cue from you rather than offering original and creative thoughts without fear of repurcussions.

Tired of Boring Training Sessions

Nearly all employees have taken part in mandatory training that they found boring, repetitive, and difficult to apply to their daily work. In this column in Fast Company, Chip and Dan Heath explain how one technology consulting firm created a highly engaging ethics training video. This firm created a fictional TV series, patterned after the popular NBC hit The Office. The series profiled a variety of ethical transgressions in hilarious fashion. Employees clamored for more, as they enjoyed it so much! Check out the video below:

Aggrieva Season 1, Episode 6 from Resonate Pictures on Vimeo.

Keynes vs. Hayek

Listening to vs. Understanding Your Customers

Michael Norton, assistant professor of marketing at Harvard Business School, has published a case study about elBulli, a unique and incredibly popular restaurant in Spain. In this article discussing the case, Norton makes an interesting distinction between listening to customers vs. understanding them. Norton explains the chef/owner's thinking: "Adrià's idea is that if you listen to customers, what they tell you they want will be based on something they already know," Norton observes. "If I like a good steak, you can serve that to me, and I'll enjoy it. But it will never be a once-in-a-lifetime experience. To create those experiences, you almost can't listen to the customer."

Congress and the Auto Dealers

Here we go again! As many predicted, Congress cannot help but meddle in the auto industry, particularly given the government ownership stakes. Alex Taylor of Fortune writes:

"Last week, House and Senate leaders agreed to a proposal to give the right of arbitration to terminated GM and Chrysler dealers, which are said to number more than 2,000. In other words, Congress, after complaining that the two companies don't know how to make a profit, is imposing a new requirement that will make it more difficult for them to make a profit."ress

Dealer rationalization must occur for the American automakers to turn the corner toward a sustainable profit-generating business model. No one with any sense of how businesses and markets work would argue otherwise.

The Design of Business

I just finished reading Roger Martin's new book, The Design of Business: Why Design Thinking is the Next Competitive Advantage. Martin, the Dean of Toronto's Rotman School of Business, has become a thought leader in the area of how design thinking can be applied to business, and I enjoyed his prior work on the "opposable mind." I think this book does a nice job of highlighting the power of what Martin calls "abductive thinking" - while also exposing the dangers of over-emphasizing reliability in organizations at the expense of exploratory, creative work. The book, however, has one substantial weakness. Martin fails to actually take the time to explain to the reader how designers do their work. As a result, the discussion of design thinking remains rather abstract and conceptual. It would have been helpful to walk the reader through the design process, and THEN show how that process has application to the broader field of business.

Why We Buy

I am thoroughly enjoying the book, Why We Buy: The Science of Shopping by Paco Underhill. The author explains how his firm has mastered the power of observation to understand how shoppers behave and how retailers can use that understanding to drive sales. Every retailer, large and small, should read this book. I especially love ideas such as the "butt-brush" effect - the idea that customers don't like being jostled from behind as they shop. I also like the "decompression zone" - the idea that customers make a transition as the enter a store, and they often walk right past signs and other materials in this decompression zone. The book has many more interesting conclusions based on intense observation over many years. It's a great read for consumers too; you will never think about shopping the same way again.

Colbert on the Federal Reserve

With thanks to Greg Mankiw, on whose blog I discovered this great clip from the incomparable Colbert:

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Fed's Dead
www.colbertnation.com
Colbert Report Full Episodes Political Humor U.S. Speedskating

Restructuring at Talbots

Talbots announced a complex financial restructuring this week, along with news that the company had returned to profitability. The earnings report provided an unexpected surprise to Wall Street analysts.

What has Talbots accomplished with its recent restructuring? First, the divestiture and shutdown of non-core assets and unsuccessful diversification plays has left Talbots more streamlined and focused on its core women's apparel business. Second, the financial transaction announced this week enabled Japanese retailer Aeon to divest its stake in Talbots, and it reduced Talbots' leverage substantially. As a result, the company finds itself with a stronger balance sheet. Moving forward, it has secured a credit facility from GE Capital to help it finance future growth plans. Third, the earnings report indicates substantial progress toward streamlining the company's cost structure. All these moves position Talbots more securely as they prepare for what is hopefully a stronger economy in the year ahead.

What still troubles us about this once-great company? Well, Talbots reported a same-store sales decline of 15.9%. That's a huge decline. If the company cannot reverse that steep decline, then all these financial maneuvers will be for naught. Ultimately, Talbots has to find a way to walk a tight rope... specifically, it must continue to freshen its image and product line while not alienating its traditional demographic. The company has always faced an interesting question: to what extent should it try to appeal to younger women? In my view, a laser focus on women 35 and older probably has merit. Trying to be all things to all people surely will lead to disaster. Having said that, the company has to find a way to adjust to the fact that the 35 and older demographic looks like quite different than it did a decade ago. That target market's wants and needs have changed, and the company must find a way to adapt to those changes without alienating long-time, loyal customers.

Behaving at the Office Holiday Party

Susan Adams at Forbes writes a column on how not to behave at the office party. The photos are hilarious.

Virtual Teams

Anne Fisher of Fortune has a very good article on making virtual teams more effective at IBM. In addition to the points that Fisher makes, managers should consider what I call the "three Rs" of successful virtual teams.

First, what are the ground RULES by which the teams will operate? How will they communicate with one another? What are the shared norms of behavior? What will be expected of folks in terms of availability, response times, etc.?

Second, what are the ROLES of each team member? Making sure each person has a clearly defined role can be especially critical for a virtual team.

Finally, what are the RESPONSIBILITIES of each member? How is the task divided among the members? What are the interim deliverables? One challenge with any team is the diffusion of responsibility: when everyone is responsible, no one is responsible. Making sure accountability is clear proves especially critical with virtual teams.

Should Film Studios Acquire Videogame Companies?

Breakingviews.com has a short piece over at Fortune.com about whether film studios should acquire video game makers. Rolfe Winkler and Rob Cox write that:

The argument for entertainment companies buying video-game makers is compelling. Publishing video games is like making movies: Invest millions developing titles and pray for blockbusters... These larger groups could lay claim to content and corporate synergies that offset the volatility in performance of the film business.

I do think a strong argument exists for film companies acquiring video game makers. Disney owns a film studio and a theme park, thereby leveraging a common resource - i.e. its characters. Similarly, it could leverage characters developed in its film studio into the video game business as well. Some arguments can be made that integration makes sense, as opposed to always relying on licensing arrangements.

However, offsetting volatility is NOT a valid argument for acquiring video game firms. That argument smacks of the classic arguments for conglomerates, i.e. diversification of risk. Shareholders can diversify on their own; they don't need firms to do this for them.

Compensation Committees

James Citrin of Spencer Stuart, the executive search firm, offers an interesting suggestion for how we can restructure the work of the compensation committees on a firm's Board of Directors. Citrin advocates broadening the mandate of the committee to include not only pay issues, but also leadership development and succession.

Public Speaking Myths

Every executive should take into consideration these three myths about public speaking, outlined by Nick Morgan over at Forbes.com

Southwest Airlines - Linda Rutherford

Linda Rutherford, an executive at Southwest Airlines, spoke at Bryant University this morning. She delivered a terrific presentation, with particular focus on the airline's culture. Rutherford explained that Southwest puts people first, customers second, and shareholders third - a unique way of thinking about how cultivating the right work environment can lead to great benefits for customers and investors.

She also explained how the Golden Rule sits at the heart of the company culture; everyone is reminded that the Golden Rule should permeate all decision-making and interactions with internal and external customers.

Finally, Rutherford offered some great insights into how Southwest hires. She noted that they hire for attitude, though they do not use personality tests. They also use a 3x3x3 rule: at least 3 interviews, with 3 different people, at 3 different times of day. I thought the last part was particularly intriguing - Rutherford explained that people are different at various points in the day, and Southwest wanted to see how people interacted in early morning, mid-day, and late in the day. All in all, I learned a great deal from this presentation about a company that truly stands out in an industry which has incredibly low profitability overall.

Luxury Ate My Morals

From the Ideas Section of the Boston Sunday Globe:

Luxury ate my morals

IF POWER corrupts, then what does luxury do? In a new study, business school researchers fi nd that it doesn't take much for luxury to do its thing. Students reviewed pictures of either luxury or nonluxury shoes and watches. Later, they were asked to evaluate several business scenarios from the perspective of a CEO. Students who had been exposed to the luxury items were significantly more willing to produce a polluting car, sell buggy software, and sell a violence-inducing video game. In addition, these students were also less likely to identify prosocial words in a letter scramble. In other words, priming people with luxury makes them more selfish. The authors wonder if managers make different decisions "at a luxury resort as opposed to a modest conference room."

Chua, R. & Zou, X., "The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making," Harvard University (November 2009).

Final Round: Classics for Leaders

Two final books to profile: Made to Stick by the Heath brothers and Influence: The Psychology of Persuasion by Robert Cialdini. Every leader must be able to influence and persuade others. Richard Neustadt once wrote that even US Presidents cannot get things done merely by giving orders. That goes for military generals too. Historian Stephen Ambrose wrote that Eisenhower knew he could not succeed in leading the Alkied forces by being a table thumper. He needed to persuade many people on both sides of the Atlantic, and he needed buy-in. These two books really help us learn how to exercise influence and how to present our ideas in ways that have a lasting impact.

Round 4 Classic Books for Leaders

Today we feature two classics on negotiation and conflict resolution: Getting to Yes by Roger Fisher and William Ury, and Ury's complementary book - Getting Past No. Every leader must negotiate with external parties, but also with colleagues and subordinates. The ability to resolve disputes is essential for a leader. These books provide sound, practical advice rooted in extensive scholarship over many years. One example of the terrific advice: Focus on interests, not positions when a dispute emerges. In so doing, you can often discover mutual potential gains rather than remaining stuck in a zero sum game mentality.

Fresh Blood at GM?

Fritz Henderson resigned at General Motors yesterday. Will we finally see fresh blood at GM? Several months ago, I ran a post in which I calculated the average tenure at GM for the top management team, based on data found in Fortune magazine. The average tenure at the firm was 28.5 years! Since that time, two members of the top team have resigned: Fritz Henderson and Mark LaNeve, VP of US Sales. Henderson was replaced by the Chairman of the Board, while LaNeve was replaced by Susan Docherty. You would think that this should dramatically reduce the average tenure. However, it has not. LaNeve had only been at GM for 8 years, while his replacement has been there for 24 years. Thus, with these two changes, and even though Whitacre has zero years of tenure at GM, the average tenure of the top team members remains 27.1 years. Fresh blood? Not much. 77 year old Bob Lutz has the lowest tenure at GM of anyone other than Whitacre!

Round Three: Classic Leadership Books

Today, I would like to highlight two classics written decades ago. In 1962, the preeminent business historian Alfred Chandler, Jr. published Strategy and Structure: Chapters in the History of American Industrial Enterprise. He examined four companies in great depth: DuPont, General Motors, Standard Oil of NJ, and Sears. Chandler traced the evolution of the administrative structure of large American companies, and he argued that "different organizational forms result from different types of growth." Simply put, structure follows strategy. Of course, over time, many strategy scholars and consultants turned this descriptive observation into a normative statement: strategy should drive structure. Chandler's book proves to be quite profound because it shows us the challenges and weaknesses associated with various organizational forms, and it demonstrates that structure must be dynamic, adjusting to the market realities and the changing strategic objectives of the firm. At the same time, you can see that there is no "perfect" structure for a company; all organizational forms have their weaknesses.

Joseph Bower published his book, Managing the Resource Allocation Process, in 1970. In that book, Bower examined how companies make capital investment decisions. He provided great insight into how firms actually allocate resources; he demonstrated how the financial analysis is just a small part of the picture. He also showed how many new strategies emerge from below in organizations. Most importantly, he demonstrated how structure drives strategy at times in corporations - providing a great complement to the arguments put forth by Chandler. Bower defined structural context as more than just reporting relationships. It included the monitoring and control systems, as well as rewards and punishments, that a firm puts in place. He argued that the structural context shaped the types of investment proposals that emerged in organizations. In that way, structure shaped the evolution of strategy. Senior executives, thus, had to take great care in how they shaped the structural context, not only in terms of how it fit the current strategy, but in terms of how it might affect the emergence of new ideas, adaptations, and innovations over time.

Round 2: Classic Leadership Books

In today's post, I'm focusing on two more complementary classics that every leader should go back and read. Today's books: Victims of Groupthink and The Wisdom of Crowds.

In The Wisdom of Crowds, by James Surowiecki examines how "none of us is as smart as all of us." He shows us how and why the pooling of our collective intellect can lead to much better conclusions and decisions. For instance, he starts the book with the example of the game show, Who Wants to be a Millionaire? He tells us that, when contestants ask the audience to vote, the answer with the most votes is the correct one a whopping 91% of the time. Surowiecki explains how various forms of mass collaboration, including prediction markets and open innovation efforts, capitalize on the wisdom of crowds. Of course, he also points out that the collective wisdom only materializes if "independence" exists among the parties contributing in the process. In other words, once we put people in a group where social influence processes can unfold, then we are not always able to achieve such collective wisdom. Put people in a conference room and allow group dynamics to unfold, and suddenly, collective wisdom turns to faulty logic. That point leads us nicely back to another management classic by Irving Janis.

Janis wrote the book, Victims of Groupthink, back in 1972. The term groupthink soon became part of the management lexicon around the world. Janis examined a series of very important presidential decisions, and he showed how a very smart, well-intentioned, and capable group of people can sometimes make poor decisions because of pressures for conformity that arise within teams. In short, he showed how and why we sometimes "go along to get along" in groups. His theory offered an explanation of how group cohesiveness can sometimes become unproductive, leading to a premature convergence on a single alternative, self-censorship on the part of many members, and direct pressure on those trying to put forth dissenting views. His classic fiasco was the Bay of Pigs, and he then offered the Cuban Missile Crisis as a contrasting positive example of how a group can combat groupthink effectively. Janis' theory and examples show us how and why many groups do not achieve their potential, i.e. why we often do not marshal and integrate the intellect of team members in a way that produces true collective wisdom.