Kindle, iPad, and Switching Costs

I'm quite intrigued by the Kindle app designed for the iPad. Several months ago, my wife purchased me a Kindle. I love the device, particularly when I travel. With the introduction of the iPad, I began thinking about the issue of switching costs. Would I be reluctant to buy an iPad because there would "costs" associated with switching platforms. Specifically, I worried that I would not have access to all the books I've purchased from Amazon on my Kindle. Well, with the Kindle app, those switching costs go away. You can read your Kindle e-books on the iPad with no trouble at all. iBooks purchased from Apple's e-book store cannot be read on the Kindle at this time. It's relatively rare to have situations such as this one, where the switching costs are not symmetrical. Clearly, this situation may make it much easier for folks to abandon their Kindles and adopt the iPad.

This conclusion about switching costs leads to one obvious question: Why would Jeff Bezos and Amazon decide to make it so easy to switch? Clearly, Amazon wants to be a big player in the e-book market. While they would like to also be a key player in the e-reader market, they don't want to lose out on the e-book market of the future simply because they are trying to protect the Kindle device sales. By making the Kindle app for the iPad and iPhone, they insure that they can compete on multiple platforms for e-book customers. They avoid simply forfeiting all iPad consumers to Apple.

How about Jobs? Is he happy about the Kindle app? Sure, he's quite content in many ways. After all, Apple's iStrategy involves making hefty margins on each of these devices. The broader the array of apps and digital content (music, books, movies), the more likely consumers will purchase high-margin devices such as the iPad from Apple. Since Amazon's e-book library is larger than Apple's at this time, the Kindle app can be helpful in increasing adoption of the iPad.

Ryanair: Paying to Pee

Well, Michael O'Leary has done it. O'Leary's airline, Ryanair, will indeed be charging customers to use the bathroom - an idea it first floated last year. At the same time, the firm will be removing several of the bathrooms on board its planes to make room for a few additional seats. Everyone knows that the airline business has high fixed costs and very low marginal costs. With each new effort to reduce costs and find new sources of on-board revenue, Ryanair continues the move toward a day when the marginal cost of a passenger on board one of its planes might be zero. For those not familiar with O'Leary, take a look at this video:

Will Customer Service Suffer?

I have a question to pose to my readers today: Will customer service at many companies suffer as we emerge from this recession? Now, why would I ask this question... Many firms have reported strong earnings in recent months, surpassing investor expectations on numerous occasions. These firms have cut costs dramatically during the recession, in large part due to employee reductions. Now they are experiencing a surge in profits as revenues begin to grow again while costs remain tightly controlled. One wonders, though, whether revenue growth may strain some firms' abilities to serve customers well given how much they pared their workforces over the past two years. In other words, what if revenue growth bounces back quickly in the coming months and surpasses the firms' abilities to staff up appropriately to keep pace with the new sales? I believe some firms will feel this strain if the pace of economic recovery quickens significantly in the near future.

Journal of Organizational Excellence

Thank you to Professor Gillian Rice of Thunderbird School of Global Management for writing a terrific review of my book, Know What You Don't Know, for the Journal of Organizational Excellence (March/April 2010 issue).

The Superstar Effect

Jonah Lehrer, author of How We Decide, wrote an article for the Wall Street Journal this weekend about the "superstar effect." Lehrer described the research of Northwestern economist Jennifer Brown. In her research on professional golf, Brown found that the presence of Tiger Woods in a tournament tended to be associated with poorer performance on the part of the other golfers. Brown surmised that the presence of this dominating superstar tended to have a negative effect on the performance of other players, perhaps because they "cut their losses" in the face of inevitable defeat and exert less effort.

Lehrer and Brown conclude that this finding about a superstar effect has implications for companies as they design incentive compensation systems. If a huge bonus awaits the few people who are rated at the top in a particular organizational unit, with a large drop-off for those who fall short of the top tier, then we may see this negative superstar effect on many people's performance.

Are there other explanations for the superstar effect? One thought that I have is that we may be seeing excessive risk-taking behavior in the face of a superstar's presence. After all, if one has to compete against a dominant superstar, then a person may gamble on high risk, high return strategies, knowing that their usual performance won't be good enough to succeed. In short, perhaps we roll the dice more often if competing against a superstar, rather than expending less effort. The risk-taking may explain why we observe what appears to be abnormally poor outcomes in the presence of a superstar such as Woods in a golf tournament.

Coming back to corporate incentive systems, perhaps the superstar effect explains why we observe excessive risk-taking in some corporations. Perhaps some individuals conclude that their usual performance won't get them to the top, that only a roll of the dice will enable them to top the superstar(s) in the competition for bonuses, promotions, and the like.

How to Start a Movement

Derek Sivers gave this terrific, funny talk at TED about how to start a movement. Indeed, he draws some insightful lessons from a silly scene. Take a look!

Twitter Predicts Movie Hits

According to Fast Company, two researchers at HP Labs have conducted a fascinating new study that shows how Twitter use can predict a new movie's success at the box office. In fact, they find that Twitter performs slightly better as a predictor than the Hollywood Stock Exchange (a prediction market for movies). I'm not surprised by this finding, given that Twitter essentially serves as a tool for collecting the "wisdom of crowds" - and it has a much bigger pool of information providers than the Hollywood Stock Exchange.

Many companies already use Twitter to try to market new products. Now they have to also ask themselves: Can they use Twitter to judge the success of new product introductions in the early stages? Unlike movies, new product introductions are not just about the first few weeks after release. In the film business, a movie usually either becomes a hit during those first two weekends, or it does not. Movies rarely become hits weeks after their initial release. Moreover, a film's life at the box office is usually fairly short, even if it is a hit.

Most products have longer shelf lives than movies, and they don't peak in sales during the first two weeks. Thus, most companies have time to adjust if a new product launch does not go well in the early going. Twitter, then, can become a critical tool for learning and improvement during the very early stages of a new product launch, which of course includes the days leading up to the actual release as well as the first few weeks on the shelves.

Are You a Good Listener?

When I wrote my first book, I discussed the issue of listening skills. That topic came to mind again when I was asked by a journalist recently to comment on people's tendency to read/send email in meetings. Here are some key questions (from that book) to consider with regard to assessing your own listening skills:

1. Do you avoid eye contact when others are speaking to you?
2. Do you multi-task during meetings?
3. Do you interrupt often when others are talking?
4. Do you rarely pause to solicit feedback or questions while you are speaking?
5. Do you become easily distracted when others are presenting their ideas?
6. Do you engage in side conversations on a regular basis during meetings?
7. Do you provide many more answers than questions during group discussions?
8. Do you rarely rephrase people’s statements and confirm your interpretation?

One more key question comes to mind now as well. Do you begin to formulate your response before someone has finished making their point? That's a sure sign that you aren't listening well. We all do it, of course. It's quite natural. However, we need to be mindful that thinking ahead in this fashion probably means we are missing some critical elements of what a colleague is trying to communicate to us.

Anne Mulcahy: Reflecting on her Tenure at Xerox

Anne Mulcahy retired as Chairman of the Board of Xerox this week. She had already turned over the reins as CEO some time ago. In this Business Week video, she reflects on her tenure, with specific emphasis on what she did as she took charge and began the turnaround at Xerox.

Using Social Networks to Drive Change at Houlihan's

The March issue of Fast Company featured an article about the Houlihan's restaurant chain's efforts to recharge growth. The article describes how Houlihan's "created its own social networking site, HQ, an invite-only 'brand community' of 10,500 'Houlifans' to serve as a virtual comment card." The firm used extensive feedback from the dedicated customers on the social networking site to retool a new "tapas style" set of small plate menu items and make the place an attractive venue for young adults to hang out, eat light, and enjoy a drink.

How do you get millenials to provide such rich feedback to you? Houlihan's understood that you have to offer something in return, namely information. These fans liked the fact that they were given priority access to information about new product offerings, recipes, and the like. They enjoyed talking about the changes and felt great about the fact that the company was listening to them. Perhaps most importantly, Houlihan's found that engaging customers so intensely led these fans to bring friends along with them on future visits.

What's most interesting about the firm's approach is that they did not use a public social media platform to engage with these customers. They chose to form their own site so that they could gain exclusive access to these insights from their customers. Of course, a company can only be successful with such a private site strategy if they can attract customers to visit the site and interact on it. If you can accomplish that, naturally you can enjoy the fact that rivals cannot access the information you are gathering from consumers.

I don't think, however, that firms should rely only on exclusive sites such as this one. An effective strategy of engaging customers must include interaction on public social media platforms as well. In that way, firms avoid the risk of missing key insights and feedback that more casual customers may provide, as well as input from those people who have chosen NOT to be customers any longer for some reason.

How Ethical Are We?

The Uncommon Knowledge section of the Sunday Boston Globe featured a synopsis of an interesting new study about ethical decision making. The University of Toronto's Chen-Bo Zhong and several co-authors explored the question of whether poor ethical choices tend to occur more frequently during snap judgments or situations involving time for more extensive thought and reflection. Interestingly, Professor Zhong's results suggest that ethical lapses occur more often when people take time to consider their decisions. It may have to do with the fact that individuals assess their "morality bank account" if they have time to consider their decisions. The authors suggest that we may come to believe that we have earned some amount of "morality credits" after making ethical choices. Unfortunately, that means we then become comfortable making less ethical choices, because perhaps we see it as just drawing upon the credits that we have earned over time. In other words, we may come to think of less ethical choices as akin to withdrawing from a savings account that we have done a good job of building previously.

LinkedIn: Where the Jobs Are!

Fortune has a new article titled, "How LinkedIn will fire up your career." Everyone should read this article, but particularly the college and MBA students out there. In the article, John Campagnino, Accenture's head of global recruiting, points out that he plans to do at least 40% of his hiring in the next few years through social media. By and large, that means LinkedIn. Who will you find out there on LinkedIn? It's an impressive group of folks. "The average member is a college-educated 43-year-old making $107,000." Not bad company at all!

In the end, though, you have to be able to communicate personally with a prospective employer to actually land the job. LinkedIn may get you a conversation, but then you have to be able to communicate well in person. You have to be articulate, thoughtful, and passionate. You need to be able to beyond the profile to truly differentiate yourself and make the case for why you can add value to a particular organization. As the article concludes, "You work the network. You connect with people like John Campagnino at Accenture if you want a job in consulting. Then you turn off the computer, and you call your connections on the phone. And you invite them to lunch." In sum, keep in mind that LinkedIn is just the ticket to the game. It's true, however, that it's becoming of the best sources of tickets in town.

Groupon

Have you heard of Groupon? Dan O'Connor, the head of the retail research and advisory firm RetailNet Group, informed me about this innovative new company a few months ago. Last week, Fortune's Jessi Hempel wrote about Groupon. As Hempel puts it, the company "marries coupons with the wisdom of crowds." Here's the way Groupon works: 2 million people have become subscribers to the firm's emails. Each day, Groupon offers one deep discount coupon in each of forty cities across the United States. One deal, for instance, might be for a spa in New York City. Subscribers receive an email about the offer. If enough subscribers express interest in the deal, then each respondent receives the coupon. For example, Groupon might offer a 50% discount to a particular spa, provided that 100 subscribers respond to the offer. If the offer does not attract enough subscribers, then the coupon is not given to anyone. How does Groupon generate revenue? They receive a fee from the businesses offering these deals, provided of course that they can get enough subscribers to meet the quota on a particular offer. Why do firms offer such steep discounts via Groupon? First, it provides a way to drive volume at times when they might have excess capacity? Second, it offers an opportunity to create some buzz among social groups within an urban area. Finally, many companies find that such deep discounts lead to follow-on visits from customers who are pleased with their first encounter with the particular company. Is Groupon successful, or are they just another start-up with lots of buzz and little profit? According to founder Andrew Mason, they've been profitable since June 2009, and they aim to achieve $100 million in revenue this year. That's pretty remarkable stuff, and it is transforming the way that many people purchase certain products and services.

Edges vs. Fringes

John Hagel, John Seely Brown, and Lang Davison have an intriguing blog post over at Harvard Publishing. They make a crucial distinction between fringes and edges. Fringes exist on the periphery of mainstream society, and they are unlikely to ever grow to transform the core. Edges also exist on periphery, but they have the potential to transform and supplant the core in various industries. Hagel, Brown, and Davison try to identify some characteristics that distinguish fringes from edges. Naturally, companies would love to know what activity at the periphery has the potential to become a large mainstream market opportunity.

While I think these thought leaders offer some intriguing ideas, I found myself still unsure whether their insights can enable better decision-making. For instance, they argue that scalability distinguishes edges from fringes. They discuss scale in terms of both supply and demand. Here's what they say at one point. "Scalability also matters on the demand side. Is there a sufficiently big addressable market?" What's wrong with that statement. Nothing, really... except that the trouble with most disruptive innovations remains that, ex ante, one often finds it extremely difficult to size the market opportunity. In short, I think we often can only assess the true size of a market opportunity well after innovative businesses have begun to grow. What we need are better ways to actually make the distinction between edges and fringes in the very early stages. The authors have made some progress, but there's much work to be done on that point.

Do Family Firms Have Incentive Problems?

A new Harvard Business School working paper by scholars Oriana Bandiera, Luigi Guiso, Andrea Prat, and Raffaella Sadun examines whether family firms pay differently than companies that have dispersed ownership. They find that, "Family firms use contracts that are less sensitive to performance; these contracts attract less talented and more risk averse managers; these managers work less hard, earn less, and display lower job satisfaction." Why do family firms offer lower-powered incentives to managers? The authors argue that they do so because they want to preserve family control over the business. Thus, they do not want to provide a high degree of equity upside to professional managers who are not family members. They conclude with a thought about how large concentration of family firms in a country may affect overall economic performance. The authors write, "Economies where family firms prevail because of institutional or cultural constraints are also economies where the demand for highly skilled and risk tolerant managers languishes." The underlying paper may be a tough slog for some to read, as it is highly academic. However, family business owners should take a look, as the conclusions surely are relevant to them.

My financial adviser is a yes-man!

Fortune this week features new research by Harvard behavioral economist Sendhil Mullainathan. The research shows that most financial advisers tend to reinforce the biases in a client's investment strategy, rather than fundamentally altering the approach. Advisers seek to keep the first-time client coming back. Thus, they fail to confront the client and challenge the flaws in the investment portfolio. Do you have a financial adviser? Is he or she a sycophant? Does this person reinforce your predispositions?

"Brand Radar"

Over at the Business Week site, consultant and former Harvard professor John Sviokla reflects on an interesting episode that took place on a Virgin America flight just a few days ago. On March 13th, A Virgin America flight from Los Angeles to New York ended up being diverted to Newburgh, N.Y., because of very poor weather. Passengers suffered through a four-hour wait in the plane on the tarmac at Newburgh. You can imagine the scene. We have heard of similar horror stories in the past. David Martin, CEO of Kontain.com, documented the entire episode on his company's iPhone social-media application. Virgin America learned about Martin's social-media writings, and the CEO ultimately called him. Each passenger ended up receiving full refund for the flight and a $100 voucher for future travel.

Sviokla writes that we can learn some important lessons from this episode. Specifically, he argues that, "Every company must have 'a brand radar system' to constantly monitor social media. The good news is that if a company commits to this notion of having a brand radar system, there are many tools to help build this surveillance capability." Many people have talked about this idea of monitoring social media constantly both for good and bad feedback regarding your brand. What's interesting is the speed and agility required on the part of companies. Do all firms have that type of flexibility and fast response capability? Does yours?

Sviokla points out that Disney's Chief Technology Officer informed him that it used to take until the end of opening weekend for the company to determine if a movie was doing well. Now, social media enables Disney to detect within hours of a premiere how customers are feeling about the film. Word of mouth spreads via social media in a matter of hours, not days. Thus, firms need to have a sophisticated brand radar system, but that's not enough. They also need an incredibly fast and agile response system as well.

Idea Monkeys

G. Michael Maddock and Raphael Louis Vitón have written a useful column over at Business Week's website about innovation. In that article, they describe the concept of "idea monkeys" - those people in your organization who are an endless source of ideas and suggestions for how to do things better. They warn against the tendency to become overwhelmed by these individuals. One doesn't want to curb their energy. Instead, Maddock and Vitón recommend finding ways to direct their enthusiasm and efforts. Call on them to innovate in a particular area that needs improvement, for instance.

One thought struck me as I read the article. Leaders not only have to learn how to work with such "idea monkeys"... they must help those innovators persuade and influence others to adopt their ideas. The most creative and innovative folks in organizations do not always have the skills required to sell others on those ideas. Leaders in the organization have to help them build buy-in and commitment.

NetFlix Prize Sequel

NetFlix has announced the cancellation of its NetFlix Prize sequel. The contest, designed to solicit ideas for improving its recommendation engine, has prompted serious concerns about the improper disclosure of private customer information. Apparently, two researchers were able to uncover personal information for NetFlix users, and they disclosed this issue in a Wired magazine article. According to the Wall Street Journal, one researcher, Arvind Narayanan, "has written that privacy incidents like the one involving Netflix 'have shown that people responsible for data release at these companies do not put themselves in the potential attacker’s shoes in order to reason about privacy.'"

This episode highlights a broader lesson for company executives. They often don't spend enough time stepping into the shoes of other key parties such as customers, suppliers, competitors, or potential hackers. That role play exercise can be vital in determining a company's critical weaknesses.

Getting Younger at L.L. Bean

The Boston Globe published an interesting article about L.L. Bean's efforts to attract a younger demographic with its new Signature line of products. The paper reports that L.L. Bean's average customer age is 50 years old. One can see why L.L. Bean has chosen to launch a product line aimed at customers in their 20s and 30s.

This article stood out for me, though, not because of L.L. Bean's new product line, but for the way in which an enterprising young college student named Charlie Carey and his friend, Charlie Hale, have become ambassadors for the company. Carey, a Bates freshman, contacted L.L. Bean when he discovered the new product line. He had some ideas for how to promote the line to college students. The folks at the company headquarters did not dismiss this young student's inquiry. Instead, they invited Carey and Hale to headquarters to meet the marketing team. Company managers took notes as the two college students offered ideas on how to appeal to young people. Soon, they had signed on to be brand ambassadors, receiving free clothing in return for their marketing efforts on behalf of the company. According to the article:

"The students created a code name for their preppy endeavor — “Bean in the wiL.L.d’’ — and developed a private online forum where they plan to write updates for L.L. Bean on how the clothes are fitting, what styles are working, and post photos of the outfits they put together. L.L. Bean will use this feedback, along with other customer input, to drive style, marketing, and price updates for the collection."

What's the lesson for other companies? Let's begin by asking: Would my company respond so enthusiastically and openly to such a customer inquiry? Would we be open to collaborating with customers in this way, particularly if they are young people who are not our core customers traditionally? I would argue that most firms would die to have such dedicated, loyal fans... yet, many companies might dismiss such an email from two college students without much thought. How would your firm react?

Problems in Napa Valley

Business Week reports that, "As many as 10 premium wineries and vineyards in the area—home to the nation's priciest grapes—will change hands in distressed sales or foreclosures this year and next, according to an estimate by Silicon Valley Bank." The article explains that many people entered the wine business during the economic boom, buying up very expensive land in Napa Valley and trying to produce high-end wines. While revenue growth for wine had been strong for many years, things have changed with the economic downturn. Fewer people are buying super and ultra premium wines, and more folks are turning to lower-priced, but good quality imports from countries such as Chile, Argentina, and Australia.

What the article does not mention is that the economics of producing high-end wines in places like Napa proves especially challenging because of the long time horizon in the ultra premium wine-making business. First, the firm must make a substantial capital investment to purchase the land and equipment. Second, a long time lag exists between the year in which vines are planted and the point at which aged wine is finally sold to consumers. If a firm purchases land and plants vines today, it harvests the first grapes from those vines three years from now. The winery sells the first aged ultra-premium wine in Year 5, and full-scale wine production does not occur until between Year 7 and Year 10. That's a very long time to wait for a return on a very expensive investment. One has to be very patient, and you have to be able to command a strong price for high quality wine to make the returns attractive. Falling real estate values and high mortgage payments can make it impossible for small wineries to survive, as we are seeing now. Frankly, even with stable real estate values, the payoff for such a real estate investment can be way off into the future.

Doritos Poking Fun at Apple

Here is a hilarious new YouTube video - a Doritos commercial spoofing the introduction of the iPad. Talk about creative viral marketing!

Coupons!

My colleague, Keith Murray, tells you everything you wanted to know about coupons over at his excellent marketing blog. If you have time, check out some of his other terrific posts with topics ranging from Sandra Bullock to Dove's attempt to target male consumers.

Jon Stewart on Toyota's Troubles

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Van Halen, Brown M&Ms, and Operational Excellence

Do you have a simple way of testing whether the processes in your company are operating as you expect? Can you tell if people are paying adequate attention to detail?

As readers of this blog know, I'm a fan of the work of Dan and Chip Heath, authors of the best-selling book, Made to Stick. I'm now reading their second book, Switch, and thoroughly enjoying it. I recommend the book for those interested in creating change in their organizations and communities.

In this month's edition of Fast Company, the Heath brothers describe the reality behind the legend of the brown M&Ms that the rock band, Van Halen, used to insist on banning from the backstage area during their concerts. Van Halen's concert contract used to read, "There will be no brown M&Ms in the backstage area, upon pain of forfeiture of the show, with full compensation." When people heard of this clause, they considered lead singer, David Lee Roth, and the other band members to be the ultimate divas. Actually, the band had a very different reason for insisting on no brown M&Ms. They put on very elaborate concerts back in the 1980s, and they had very detailed contracts specifying all the equipment and procedures required to operate a successful show for their fans. Within that lengthy contract, Van Halen buried a simple clause banning brown M&Ms from the candy bowls backstage. When the band members arrived at a venue, they would check the bowl. If they found brown M&Ms, they knew that the crew had no paid sufficient attention to detail. They knew to take a closer at the overall operation. What a magnificent little test! Every leader should consider what small signs they can look for to determine whether an organization's detailed operational processes are functioning properly.

The Greening of Wal-Mart

This month's issue of Fast Company profiles the world's fifty most innovative companies. Wal-Mart comes in at #9, largely due to its green initiatives. I'm sure many folks questioned Wal-Mart's intentions when it began its major sustainability initiatives in the fall of 2005. However, as we have learned, many efforts to become more green actually have fit nicely with Wal-Mart's low cost strategy. Why? A number of green initiatives at Wal-Mart actually reduce costs because they eliminate waste. Let's take plastic shopping bags. According to Fast Company, Wal-Mart used 2.5 billion fewer plastic bags in the first twelve months of its push toward the use of reusable shopping bags. Well, let's think about how much that is worth. According to this article from National Geographic, a plastic shopping bag costs about one penny. Therefore, some simple math tells us that Wal-Mart saved $25 million in just one year thanks to its efforts to shift consumers away from disposable plastic and toward reusable shopping bags. Talk about a win-win... Wal-Mart helps the environment and saves a big chunk of cash. One could imagine that other green efforts at the firm, such as initiatives to reduce energy and fuel consumption, have also yielded win-win results.

Rethinking the Off-site Meeting

Yesterday, the Wall Street Journal published an article about how firms have developed an alternative to the traditional off-site meeting. Many of you, I'm sure, have participated in the pricey boondoggle known as the "leadership retreat" at many companies. You know... the two days of sun, golf, ropes courses, cocktails, dinners, and oh yeah... a meeting or two about actual substance. Some firms have rejected these expensive affairs and simply chosen to keep their meetings in-house. However, a few companies have found a very productive middle ground. They still go off-site for critical meetings of the senior team, but they do not go to expensive hotels and conference centers. Instead, they hold their meetings at other local companies' offices. Why would they do that? Well, the change in location still gets them away from the frequent interruptions of the office; the different scenery can spark creativity. Beyond that, though, the company that they visit can provide a wonderful opportunity to learn about another firm's best practices, as well as the challenges that they have encountered. Thus, the off-site becomes an opportunity not only for introspection and brainstorming on the part of the management team, but also a fruitful venue for learning.

I have always believed that brainstorming and creative problem-solving works best if managers have some "fuel" to drive the conversation. Thus, I often tell managers to do some homework before a retreat. They should go visit customers and competitors, read a few thought-provoking articles, and spend some time with front-line employees. Then, when they come to the retreat, they have some fodder for conversation. Similarly, touring another company's facilities before sitting down for a retreat can be great fuel to spark an interesting conversation. I love this new economical management innovation!

Bringing SKUs Back at Wal-Mart

On February 16th,in a post titled "Retailers Get Tough on Brands," I wrote about how many retailers have been rationalizing their product assortments. I outlined a number of reasons for this product line rationalization including the profitability of private label, the improvement in inventory turns, and the reduction in logistics costs. Now, we read in a Business Week article that Wal-Mart may be reconsidering some of the streamlining that they have done in product assortments.

According to the article, "Wal-Mart Stores Inc., the world’s biggest retailer, is bringing back some products it had removed from shelves last year as shoppers turn to competitors for a wider selection of merchandise." This move by Wal-Mart raises some interesting questions about customer expectations. People had clearly come to expect wide product assortments from Wal-Mart, and thus, the rationalization appears to have created some backlash. For retailers such as Trader Joe's, who have always had a limited assortment, customers don't have an expectation of finding a wide variety of brands, pack sizes, and the like. The expectations at mass merchandisers is clearly different. The expectation issue appears to be a key hurdle for companies as they trim product assortments. For large mass merchandisers, the key will be to trim SKUs that can't easily be found at competitors, that don't have a loyal core of fans, or whose removal won't cause a reduction in store visits on the part of loyal customers.

GM Restores Dealerships

General Motors has announced that it has reinstated 660 auto dealerships that it initially had tried to shut down. These dealers had applied for reinstatement. Apparently, GM has made this decision out of a desire to improve sales. The Wall Street Journal article on the move cites CEO Whitacre's desire to improve market share at the firm and to retake Ford, which sold more automobiles than GM last month.

Where does this leave GM in terms of dealerships. Here is what the Wall Street Journal reports:

"Toyota now has 1,452 dealerships in the U.S., each of which last year sold an average of 1,219 vehicles. GM has about 5,500 dealerships and sold 2.1 million vehicles last year, an average of about 376 a store."

Looking at those statistics, one has to wonder whether GM truly wants to change its ways. How can reinstating these dealers make sense given the huge disparity in autos sold per dealer cited above? Does GM truly want to have a rationalized, efficient distribution channel, or is it simply obsessed with market share? Does it matter whether it sells more vehicles than Ford? Shouldn't profit be the objective here, not market share alone?

Direct to Consumer

This Business Week article describes how a number of prominent consumer goods manufacturers have decided to expand their direct selling to consumers. The article cites firms such as P&G, Levi's, Mattel, and Columbia. Why would firms do this? First, many of these popular brands find themselves squeezed at the retail level by the rapid expansion of private label products. Moreover, many large retailers have chosen to rationalize branded product lines in an effort to increase inventory turns and streamline operations. Finally, direct selling offers consumer products companies an opportunity to connect directly with their consumers... to provide customized products in some cases, to gather feedback from users, learn about new trends, and to engage customers emotionally and socially with the brand.

I find it interesting to see this development take place given that we have faced many years of increasing retailer power at the expense of many branded consumer products firms. Over the past two decades, retailer power has risen as consolidation has taken place in the retail channel, and as private label products have proliferated and increased in quality. Now, we see the prominent brands fighting back a bit. For years, many brands could not offset this rising retailer power with the threat of vertical integration, because operating a large number of brick and mortar retail stores was simply too expensive. However, going online direct to consumer offers a much more inexpensive way to vertically integrate without many of the risks, such as the high fixed cost investments and inflexibility associated with owning and operating company stores.

Late Fees at Blockbuster

Apparently, Blockbuster has chosen to reinstate late fees, according to this post by Laura Heller. One wonders whether the revenue generated by this move will make up for the decrease in customer satisfaction. Blockbuster already faces severe challenges. Its very existence is at stake. Driving away more customers with such a move is a real possibility.

According to a Harvard case study by Willy Shih and Stephen Kaufman, when the firm eliminated late fees in January 2005, "Blockbuster chose to forgo about $600 million of revenue by eliminating late fees. While early signs suggested this program resulted in increased traffic and rental volumes, it did not offset the loss of revenue as base movie rental revenue grew only 5%." The question is: Will Blockbuster now realize a $600 million gain? One would expect not. It will be substantially smaller. First of all, base movie rental revenue may now fall as a result of this move, as customers opt for other movie rental or downloading alternatives. Moreover, in 2004, before elimination of late fees, the firm had more than $6 billion in revenue. The company's sales have fallen by more than 10% since that time. Moreover, base movie rental revenues are off by approximately 15% since 2004. Thus, Blockbuster stands to gain something significantly less than what it used to generate in 2004 from late fees.

Colbert on Personal Finance

Stephen Colbert offers a hilarious segment re: teaching your children about credit and personal financial responsibility:

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How Experts Persuade Best

I read a fascinating article about some new research in the field of persuasion. You might think that experts exert the most persuasion when they express their ideas with confidence. You would be wrong! In new research about how experts influence consumers by Stanford Professor Zakary Tormala and doctoral student Uma Karmarkar, we learn that experts are more influential when they acknowledge minor doubts and uncertainty as they express their view. In a press release from Stanford University, Tormala explains:

"Our key finding," Tormala said, "is that although non-experts can become more persuasive by expressing high certainty about their opinions, experts can become more persuasive when they express some degree of uncertainty. Across several studies, we found that expert sources gained interest and influence by expressing minor doubts about their own opinion."

Tormala said incongruity between the source’s expertise and level of certainty makes his or her message more intriguing. "Whether it’s a person without established expertise in a given domain expressing very high certainty, or a person with clearly established expertise in a domain expressing low certainty," Tormala said, "the inconsistency is surprising. It draws people in. And as long as the arguments in a message are reasonably strong, being drawn in leads to more persuasion."

The conclusion makes a good deal of sense. You must have a compelling argument. That is a given. Then, a bit of uncertainty draws the consumers' interest, and that interest makes the argument even more influential. Put simply, you cannot persuade the consumer if you haven't got their attention!

The Danger of Trimming Product Costs

The Wall Street Journal has an article today about 3M's efforts to "tweak" its products so as to reduce costs. Undoubtedly, some of these types of efforts make sense, as companies try to compete against efficient rivals, and as they attempt to make their products affordable in a rough economy. However, such "tweaking" efforts come with substantial risk, particularly for firms that have strong brand equity that warrants protection. As John Foraker, CEO of Annie's, mentioned at his talk at Bryant University the other day, many companies develop great products and then spend the next couple years ruining the products... because they reduce the quality of the inputs in an effort to trim costs.

As firms engage in this cost reduction efforts, they must ask themselves repeatedly:

1. How will these "tweaks" affect our brand equity?
2. Will we attract new value-oriented customers at the expense of reducing satisfaction among our current customers?
3. Do we run the risk of encountering serious product quality issues as we change our product inputs?

Thinking Backwards

Over at Office Hero Headquarters blog, I discovered an interesting note about a book titled Psychology of Intelligence Analysis. The post intrigued me both because of my recent research on the FBI's transformation post 9/11, as well as my body of work on decision-making and divergent thinking. I'm eager to read this book, after I learned that it discusses techniques intelligence analysts can employ to insure that they have examined an issue from divergent perspectives.

One such technique involves "thinking backwards." Here is an excerpt from the blog post on this subject:

"As an intellectual exercise, start with an assumption that some event you did not expect has actually occurred. Then, put yourself into the future, looking back to explain how this could have happened. Think what must have happened six months or a year earlier to set the stage for that outcome, what must have happened six months or a year before that to prepare the way, and so on back to the present. Thinking backwards changes the focus from whether something might happen to how it might happen. Putting yourself into the future creates a different perspective that keeps you from getting anchored in the present. Analysts will often find, to their surprise, that they can construct a quite plausible scenario for an event they had previously thought unlikely."

This technique reminds me of Gary Klein's work on "pre-mortem" exercises. Similar to thinking backwards, the pre-mortem involves imagining what a post-mortem analysis will be like BEFORE you actually launch a new project in your organization. Both thinking backwards and pre-mortem exercises help us discover and evaluate different scenarios for how the future might unfold. Leaders must remember that divergent thinking typically just doesn't happen on its own. It must be cultivated in most cases. These techniques help stimulate such productive divergence.

Annie's Homegrown

Last night, Annie's Homegrown CEO John Foraker spoke at Bryant University. He gave a terrific presentation about his firm's strategy, growth, and commitment to social responsibility. I found John's comments about values to be very interesting. He talked about how Annie's values were not written down when he joined the firm. He had not seen the merits of writing down a firm's mission and values in his prior jobs, but at Annie's, he found it invaluable. He described how the explicit statement of values really helped the firm identify who should be hired at Annie's, as well as what strategic options should be rejected because they did not fit with the values.

John also spoke about Annie's decision to expand beyond the organic/natural food channel. He noted that firms have to be very careful when making that leap to other channels such as club stores, mainstream grocery, etc. Conflicts can arise, and firms can lose their core base of customers if they are rejected by that original channel in which they excelled. John explained that Annie's took special care of its original organic/natural food channel partners such as Whole Foods. They worked to develop new and unique products for those partners. That special attention proves critical, particularly since the organic/natural channel proves ideal for many of the new product innovations that Annie's continues to bring to market. Too many firms make the mistake of simply offering the same products and services across all channels. For some companies, they find themselves ultimately rejected by some of their original channel partners, and the damage to the brand can be immense.

Thank you, John, for spending the evening with us last night!

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.