GM Making Subprime Loans?

Forbes reports that General Motors has agreed to acquire AmeriCredit, an automobile financing company. Here is how Forbes explained the deal:

GM executives have said for months that they were missing sales opportunities due to lack of credit for lease deals and financing for subprime buyers, those with credit scores below 620 on a 300-to-850-point scale. About 40 percent of U.S. customers have below prime credit scores, said Chris Liddell, GM's chief financial officer. "Clearly there's an opportunity to bring more people into our showrooms and help them with finance," he said after the deal was announced on Thursday.

Hmmm... Let's put aside the issue of sub-prime lending for a moment (I know, you are probably shaking your head at those comments!). The article goes on to explain that, "The two companies have had a financial relationship for years. AmeriCredit, which already works with about 4,000 GM dealers, now gets about one-third of its business from financing new and used GM vehicles, GM said." That comment actually intrigues me, because one has to then question why GM needs to acquire the firm in order to accelerate sales. When a merger occurs, we should always ask: Why do these firms need to join together to cooperate? Why would a simple contract not do the job just as well? In this case, these firms appeared to be cooperating and working together quite a bit. What is it about that arrangement that was insufficient? Why the need to now merge? Perhaps there is a very good explanation, but I didn't see it in this article.

Book Review by Daniel Price

Thank you to Daniel Price of the University of the Rockies for this wonderful review of my book, Know What You Don't Know!

Trading Places

The Boston Globe reports on an "trading places" initiative at Conover Tuttle Pace, a public relations and advertising firm. The company runs a Summer Sublet desk swap, in which the company's employees (approximately 35 people) trade office spaces for the summer months. The initiative includes all employees, even the firm's president. The company chose to implement this initiative to help people communicate more effectively and to break down barriers between silos, particularly to foster better integration between the creatives and the account executives. Here's one interesting result, as reported by the newspaper:

"The department heads, on the other hand, have found that they enjoy sitting next to their employees. The president of the company liked the experience so much last summer that he stayed out on the floor all year. 'I just become a little bit more aware of what’s going on here,' Conover said."

Fooled by a Small Token?

Dan Ariely has a new blog post about a concept that behavioral economists called "medium maximization." Ariely writes in response to a note he received from a certified financial planner. The planner express surprise that his clients often choose Fidelity over other mutual fund companies because of an offer to receive 25,000 frequent flyer points. The planner is amazed that these points, which have a fairly limited value - perhaps several hundred dollars, tilt people's decision-making about how to invest very, very large sums of money.

Ariely responds by pointing to this academic paper by University of Chicago Professor Christopher Hsee and his colleagues, which outlines the concept of "medium maximization." The authors refer to something like the frequent flyer point offer as a token or "medium" that has no value itself, but can be traded for something of value in the future. Hsee and his co-authors show that a "medium presents an illusion of advantage to an otherwise not so advantageous option." Why does this occur? Essentially, individuals tend to focus on optimizing the near-term goal, rather than focusing on the bigger, long term picture (which is often more cognitively complex to analyze). Thus, the seize the opportunity to take the option which enables them to grab the value of the small token right away. The question for us: Are we allowing such small tokens to distort our decision-making? Are we making suboptimal long term choices in some situations in which we are presented an option with a small token?

Redbox vs. NetFlix: Strategy Convergence?

Over the past few years, NetFlix and Redbox have both been very successful, each taking aim at Blockbuster from different directions. NetFlix provided a deep movie library and great recommendations that matched consumer tastes quite well. It did not focus on renting new releases. Blockbuster, with its brick and mortar stores, could not match the selection offered by NetFlix. Meanwhile, Redbox took aim at the new release business at Blockbuster. It went with a very lean product inventory, only carrying a very small number of recent hits. Redbox offered incredible convenience at a very low price. Blockbuster found itself attacked from each flank, and it has suffered as a result. Redbox and NetFlix thrived in part because they were each attacking the weakened Blockbuster, but not threatening each other much at all. They had distinct strategies, meeting quite different consumer needs.

Now, that may change. Business Week reports that Redbox is contemplating a move to the web. We don't know the details of such a web strategy yet, so it's impossible to judge the chances of success. However, we do know that the two firms could be moving toward increased head-to-head competition. A collision could harm profits for both firms.

Nissan: Dangers of a Lean Supply Chain?

Nissan has been forced to stop production at six manufacturing plants in Japan and the United States this week due to a supply chain disruption. This episode illustrates one of the downsides of some efforts to develop lean and efficient supply chains. As firms drive efficiency in their supply chains, they can make those systems much more tightly coupled (i.e. each element of the chain is much rigidly interconnected with the other elements). That tight coupling means that one small disruption can cause major negative consequences for the entire chain. That is precisely what happened to Nissan. A problem at a Hitachi unit that supplied engine parts has actually shut down a large amount of Nissan's production capacity, because Nissan did not have an alternative supplier for that component. That problem pertained to a scarcity of semiconductor chips needed for the manufacturing of the engine components at Hitachi. As other firms observe this incident, they must consider the trade-offs that they are making when trying to drive efficiencies in their supply chains. Are efforts to drive out costs in the short term potentially enhancing the risk of a major disruption at some point?

Leadership Transitions

Tom Magness has some great posts recently on his blog about leadership transitions, based on his own experience this summer as he transitions to Kabul, Afghanistan to lead an Army Corps of Engineers unit there. Good luck to Tom, and may you stay out of harm's way.

Evaluating Emerging Markets

London Business School Professor Don Sull has a good post over at his blog about how companies evaluate emerging markets. Sull based his post on a panel discussion that he moderated with Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte. Sull argues that firms cannot evaluate emerging markets simply based on GDP growth. Instead, they should consider other factors, such as industry structure, regulatory and political environment, etc.

Honest Tea and Coca-Cola

The New York Times ran an intriguing article recently about Honest Tea's relationship with Coca-Cola. Coke purchased a 40% stake in the company two years ago, with an option to acquire the entire firm in 2011. The article describes the tensions and challenges that inevitably emerge when an entrepreneur sells a small, highly authentic, "natural" food/beverage brand to a large consumer products company. Not surprisingly, challenges center on the issue of how to capitalize on the scale and scope economies offered by the corporate parent while staying true to certain values and principles that made the small up-start quite distinct in the marketplace from its larger rivals. In this case, Honest Tea had explicitly marketed itself against some of the larger beverage giants, celebrating, for instance, the lack of high fructose corn syrup in its drinks. Coca-Cola managers apparently worried that Honest Tea was essentially condemning an ingredient that it had in many of its own Coke products.

The story illustrates an important lesson for entrepreneurs considering a sale to a larger player in their marketplace. To me, the days before an acquisition takes place serve as the critical time for important conversations about brand values and positioning. Entrepreneurs should not wait until after the deal to then learn about potential tensions around values and principles. Both target firm and acquirer need to have these conversations upfront, and to the extent that it is possible, some firm commitments need to be made by both sides about how they want to work together. Entrepreneur-founders have the most leverage BEFORE the sale. Once they have been acquired, their ability to stake out their ground on certain core values drops precipitously.

Bryant University Alumni Venture Contest

I'm very excited that Bryant University has launched its first alumni new venture contest, modeled after the very successful competition created at Harvard Business School. Business plans are due December 1st. Finalists will be announced on January 15th, and the final round of the competition will take place on campus in the spring of 2011. The cash prize equals $10,000. We hope that many alumni will enter this exciting new contest.

New Markets for Teen Retailers

The Wall Street Journal reports today on the attempts by various teen retailers, such as American Eagle, to develop retail store brands aimed at younger children. The article points out that several teen retailers have stumbled in their attempts at broadening their reach to an adult demographic. Thus, they are now turning to the children's market.

I don't know whether these efforts will succeed, but I do find the approach taken by American Eagle to be quite intriguing. The firm has branded its children's unit as 77kids (1977 is the year in which the firm began). What's most interesting is how American Eagle has experimented with the concept before opening retail stores. First, the company has spent 18 months marketing the 77kids line via its online store. Secondly, it also used a pop-up store in the Pittsburgh market to test out the 77kids concept. These low cost, low risk experiments have presumably enabled American Eagle to learn a great deal before sinking a substantial investment into 77kids retail stores. I think using online and pop-up sales as a means of experimentation does seem like a very desirable and fruitful approach, one surely to be used more often by other retailers as they try to minimize the risk of major new expansions in their brick and mortar locations.

Looptworks: An "Upcycling" Story

Fast Company has an article about an interesting company called Looptworks. The firm buys excess fabric from textile factories, and then uses that scrap to create a line of outdoor clothing. It's a wonderful story of reducing waste and enhancing sustainable business practices.

However, that's not the entire story. To me, two additional aspects of the business are worth considering for a moment. First, Looptworks has chosen to focus on outdoor clothing. To me, that demonstrates a very smart choice of target market. Why? Many outdoor enthusiasts care a great deal about the environment. Thus, they are quite inclined to purchase these "upcycled" products. There's a perfect match between the upcycling aspect of the production process and the target customer for outdoor clothes.

Secondly, the company commands a premium price not simply because of the "green" dimension to the business, but because they produce many limited editions given the finite amounts of certain scrap fabric that they are able to acquire. Of course, producing limited editions and small batches of clothing also means that they are much less likely to have to employ markdowns to sell off excess inventory of less popular items. Markdowns often prove to be a major profit killer for apparel producers and apparel retailers. All in all, it's a creative business model with great potential.

What Women Want

Today's Wall Street Journal offers a review of Paco Underhill's new book, What Women Want. As readers of this blog may recall, I recommended Underhill's earlier bestseller, Why We Buy. Underhill is an expert on retail shopping, and he has unearthed his insights by anthropological study, i.e. close observation, of consumers in stores. In this new book, he turns his focus to female consumers in particular. Here's an excerpt from the review:

What do women want? Cleanliness, as we've learned. Also control, safety and considerateness. Give women these intangibles and a few others, Mr. Underhill suggests, and they will give your business their custom. As a case study, he invites us into Best Buy, the chain of cavernous electronics stores with the big blue-and-yellow sign. While its competitors Circuit City and Comp USA have disappeared into bankruptcy, Best Buy has survived, Mr. Underhill says, by adapting itself in distinctly female-friendly ways. Digital cameras are laid out on tables that are curvy and organic- looking rather than hard-edged and angular. Employees reassure the customer that they don't work on commission (women dread being hustled). Giant photos on the walls show people warmly enjoying the store's products. The central concept that Best Buy gets, Mr. Underhill says, is this: "Men buy instruments of technology, whereas women buy instruments of relationship."

I look forward to reading the book, and I'll have some observations once I've completed it.

Social Security Reform: The Power of Compounding

In today's Wall Street Journal, Fred Barnes writes about a proposal by Robert Pozen, former vice chairman of Fidelity Investments. For several years now, Robert Pozen, a Democrat, has offered a bipartisan approach for restoring Social Security to long term solvency. His proposal calls for using the historical inflation rate, rather than wage growth data, to index earnings as part of the calculation of Social Security benefits. He would exempt lower income individuals from this shift, and instead, continue to use wage indexing for them. That's why Pozen calls it "progressive indexing."

How does indexing work? Indexing occurs as Social Security takes your earnings from each year of your life, and then converts them into "current dollars" for the year of your retirement. Then, they use this average earnings in current dollars number as the basis of their benefit calculation.

Historically, wages risen over 1 percent faster per year than prices. Thus, shifting to wage indexing would shave benefits. Your average earnings in current dollars is significantly lower if we gross up your wages by 1% less per year. Barnes explains that this subtle change would "erase more than two-thirds of Social Security's long-term shortfall of $4 trillion."

At first, I was shocked by that claim. Yet, I then spent some time thinking about how that 1% slower growth per year in the indexing calculation might affect benefits. Of course, the power of compounding turns out to be enormous. We all know this, of course, but until you actually run the numbers, you often do not realize how great an impact compounding can have. Over a 35 year career, if we index each year's earnings at a 1% less growth rate per year, we end up with quite a different number for average earnings in current dollars. It's substantially lower, and thus, benefits are significantly lower as well.

Overall, Pozen's proposal seems like a sensible reform that could help put Social Security on much more stable footing, all without raising taxes at a time when the economy cannot tolerate an added distortion in the labor market. Let's see if the deficit commission moves forward with a recommendation to embrace this idea.

Simulation as the Means to Integration

Chip and Dan Heath tell the fascinating story in Fast Company magazine of how JetBlue recovered from the February 2007 fiasco when the company angered customers due to its poor handling of disruptions associated with snowstorms in the Northeast. They describe how JetBlue created a simple simulation scenario in which thunderstorms forced the cancellation of many flights at JFK airport in New York. It brought together a cross-section of front-line employees in many different functional areas to examine how the airline would typically respond to such a situation. Here's the result:


In total, the group identified more than 1,000 process flaws, small and large. Over the next few weeks, the group successively filtered and prioritized the list down to a core set of 85 problems to address. Most of them were small individually, but together, they dramatically increased the risk of a dropped baton. JetBlue's irregular-operations strike force spent nine months in intense and sometimes emotional sessions, working together to stamp out the problems.

The effort paid off. In the summer of 2009, JetBlue had its best-ever on-time summer. Year over year, JetBlue's refunds decreased by $9 million. Best of all, the efforts dramatically improved JetBlue's "recovery time" from major events such as storms. (JetBlue considers itself recovered from an irregular-operations event when 98.5% of scheduled flights are a go.) The group shaved recovery time by 40% -- from two-and-a-half days to one-and-a-half days.

Many companies can benefit from creating these types of simulation experiences. In fact, firms can create these for a wide variety of situations, not just "crisis" situations. The key, though, is to get the people who actually do the work involved in such scenarios, and to make sure that you have people focused not just on what they do in their functional areas, but also on how on how they interact with others in various "silos" in the organization. You want to watch particularly for "fumbled hand-offs", i.e. occasions where critical information does not pass smoothly from one unit to another, thereby causing a lack of effective integration.

Curves: Not Such a Blue Ocean After All

I really like some of the concepts and frameworks offered by Kim and Mauborgne in their best-selling book, Blue Ocean Strategy. However, I think they do a disservice to themselves by positioning their framework against Michael Porter's classic work on strategy. To me, they set up a straw man for the purpose of making their argument more interesting and provocative, but it's not an accurate depiction of Porter's ideas. Moreover, some of the assertions they make simply don't hold water. For instance, they hold up Southwest Airlines as one of their examples, yet how can one possible argue that they are an example of a firm that has achieved both low cost and differentiation? Remember, in Porter's framework, differentiation does NOT mean simply being different. It means charging a price premium, and in so doing, driving a wider wedge between willingness to pay and cost than the average industry rival. Southwest clearly is not about differentiation in that sense. They are a classic low cost competitor.


In their work, Kim and Mauborgne use Curves, the women's fitness center, as one of their examples of a blue ocean strategy. Yet, today, we read in the Wall Street Journal that Curves has hit hard times. The firm has closed roughly 1/3 of its outlets in the past three years. What's interesting to me is that I've often taught a case study about the fitness center industry as a mechanism for introducing Porter's five forces framework of industry analysis. Using that framework, one concludes rather quickly that the fitness center industry is a horrible one. It's incredibly unattractive. It seems, then, that the unattractive industry structure has overwhelmed the "blue ocean" aspects of the Curve strategy. Perhaps Porter's framework is more useful than Kim and Mauborgne care to acknowledge.

It reminds me of a great quote from Warren Buffett: "When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact."

We Love Pointing Fingers

Best-selling author Joseph Grenny has a terrific article on the Business Week website titled "Ass-Kicking as an Influence Strategy." Grenny examines the BP catastrophe and examines the impulse on the part of many actors, including President Obama, to "find the bad people who did bad things and punish them for their malicious motives." What's wrong with that impulse? Well, Grenny certainly does not seek to defend BP's management. However, he's making a much larger and more important point. He's making it clear that we may not learn as much as we should from an incident if we frame it simply as a case of individual error or maliciousness. As a result, we find ourselves failing again in the future because we have not fully understood the true causes of a failure. Here's Grenny's explanation:

"Frame it as "whose ass needs kicking?" and your solution will naturally be reduced exclusively to punishing, reproving, or replacing. And while these actions may seem appropriate after thoughtful analysis, to begin with them as the sole focus or dominant objective undermines the quality of the search. If fixing blame eclipses fixing problems, the former often comes at the expense of the latter."

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CEO Tenure and Stock Gains

The Wall Street Journal reports today on a study conducted for the paper by Spencer Stuart, the executive recruiting firm. Among firms in the S&P 500, 28 non-founder CEOs have served more than 15 years. 25 of these 28 firms have seen their stock outperform the S&P 500 index over this time period.

What jumps out at me from this study? First and foremost, we have to beware the tendency for people to confuse correlation with causation! Lengthy CEO tenure, in and of itself, may not be causing high stock performance. Some other factors, correlated with CEO tenure, may be causing high stock performance. Moreover, we could have reverse causality here. High stock performance may diminish the likelihood of turnover at the top. In short, that high stock performance may be driven by a number of factors. For instance, these firms may be in especially attractive industries. These CEOs may have certain qualities, or be operating under certain incentive systems, that drive performance. Tenure is simply a result, then, of the fact that successful CEOs tend to retain their jobs. The lengthy experience, by itself, may not be causing the high performance.

The Wall Street Journal acknowledges this point about correlation vs. causation, but I don't think it gets enough attention in the article. Moreover, as others are reporting on it, they are drawing quick conclusions about causation. I would caution strongly against jumping to those types of conclusions.

Peggy Noonan on Thomas Jefferson

Peggy Noonan has a wonderful, thoughtful piece in today's Wall Street Journal about Thomas Jefferson and the Declaration of Independence. She writes particularly about some of the crucial edits made to the document during deliberations by Congress. These edits pertain to the special relationship between the British and the American people, a relationship that endures and that, hopefully, will not ever be allowed to weaken or fade. I highly recommend the article on this 4th of July weekend. Happy Independence Day everyone!

Swatch's Nicolas Hayek

Over at Forbes, Preston Bottger writes about the genius of Swatch's Nicolas Hayek, who died this week. Bottger writes:

"He (Hayek) decided that the customer had to be sold on the idea of wearing a watch as a personal statement. If an astronaut wore an Omega watch, a consumer could identify with the adventure of walking on the moon by wearing the same watch. For Swiss watches, the message counted more than functionality."

Undoubtedly, Hayek began a transformation in many product categories. In a wide variety of industries, other companies began to position their products as "personal statements" of one kind or another. People began to recognize that many products could be positioned as much more than a set of tangible attributes and functionalities.

The question for you is: Does your product have the potential to be positioned as more than a collection of tangible characteristics and qualities? Can it be positioned to help people tell others something about their personality and values?

Blowout Preventers, BP, and Compensatory Behavior

Much attention has focused on why the blowout preventer failed on the BP oil well in the Gulf. I'd like to raise a different question. Could it be that the very presence of blowout preventers do not raise the safety of deep-water oil drilling, but instead actually enhance risk? Consider an essay that Malcolm Gladwell wrote many years ago, around the time that Diane Vaughan wrote her famous book about the Challenger space shuttle accident. Gladwell explained that people and organizations often engage in compensatory behavior after new safety systems have been put in place. He provides an example from a study of anti-lock braking systems conducted in Germany with taxi drivers. The study demonstrated that these new braking systems did not lead to enhanced safety because the taxi drivers engaged in compensatory behavior, i.e. they drove in a riskier fashion, knowing that they had this better braking system to "protect" them from their own behavior. Of course, organizations implement redundancies such as blowout preventers in pursuit of higher safety and lower risk of catastrophe. However, Gladwell's point about compensatory behavior, drawn from others' in-depth research, shows that redundancies do not always make systems safer. It could be that the very presence of blowout preventers has caused some oil drilling companies to become comfortable with taking additional risks. The same idea, of course, applies to many different types of redundant systems.

Benefits of Pay Disparities?

Many have argued that large pay disparities among employees can harm organizational performance, in large part due to fairness concerns that can harm morale and affect productivity. However, the Boston Globe reports on an intriguing study by Northwestern Professor Adam Galinksy, who found that NBA teams with large salary differentials outperform those clubs with more equal pay among the players. Galinsky offers an explanation for this finding:

“Status is such an important regulating force on people’s behavior, hierarchy solves so many problems of conflict and coordination in groups,” says Adam Galinsky, a psychologist at Northwestern University’s Kellogg School of Management who did the research on social hierarchies on basketball teams. “In order to perform effectively, you often need to have some pattern of deference.”

I'm not suggesting that this study endorses the notion that CEOs should make 100 times what front-line employees take home in pay. However, the study does perhaps have implications for smaller teams within an organization, perhaps including the senior management team itself. It makes sense that an NBA team excels if people understand their role, rather than having multiple players competing to be the go-to guy. Putting aside the pay issues for a moment, management teams surely benefit in most cases from the same type of crystal-clear role definition.

Risks of Combining Banking and Private Equity

INSEAD's Lily Fang and Harvard's Josh Lerner and Victoria Ivashina have a new working paper that examines the impact of combining banking and private equity. According to their paper:

"Between 1983 and 2009, bank-affiliated private equity groups accounted for over a quarter of all private equity investments. Banks' involvement increases during peaks of the private equity cycles. In particular, deals done by bank-affiliated groups are financed at significantly better terms than other deals when the parent bank is part of the lending syndicate, especially during market peaks. Investments made by bank-affiliated groups have slightly worse outcomes than non-affiliated investments, despite the targets having superior performance prior to investments. Investments during market peaks by commercial banks have significantly higher rates of bankruptcy."

New CEO To-Do List

Sheila Bair on Financial Reform Bill

Haier and the Appreciation of the Yuan

Several weeks ago, Fortune ran an article about several Chinese manufacturers setting up shop here in the US. Writer Sheridan Prasso explained that reliable power, affordable land, skilled labor, transportation cost savings, and generous tax incentives had lured Chinese manufacturers to places such as Camden and Spartanburg, South Carolina. For instance, Haier has begun to produce appliances in Camden, SC. Perhaps most interestingly, Haier even ships some of the high-end refrigerators produced at that factory to China,India, Australia, Mexico, and Canada.

What does the appreciation of the yuan mean for Haier and other Chinese manufacturers setting up factories in the US? It certainly confirms the logic of that strategic move and sets up the opportunity for further expansion. Moreover, it may offer the opportunity for further exports of goods produced at these American factories. If the yuan does continue to appreciate relative to the dollar, one might expect other Chinese multinationals to follow Haier's lead into the US, most probably in states with competitive tax rates and affordable land and labor costs.

Complacency Regarding the U.S. Debt

Former Federal Reserve Chairman Alan Greenspan argues in today's Wall Street Journal that low interest rates and low inflation are fostering complacency with regard to the massive U.S. debt. We should not take comfort in the fact that global investors have flocked to the U.S. dollar as a safe haven in the wake of the debt problems in Europe. After all, U.S. debt levels as a percentage of GDP rival those in many European nations. Moreover, as Greenspan points out, the U.S. may face a sudden rise in interest rates if our debt levels persist, or worse yet, continue to grow unchecked. Greenspan reminds us that, "Long-term rate increases [in interest rates] can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points."

BP Spills Coffee - Very Funny

The Invisible Gorilla: Six Everday Illusions

I recently finished reading a great new book: The Invisible Gorilla and Other Ways Our Intuition Deceives Us, by Christopher Chabris and Daniel Simons. These two scholars conducted the famous "gorilla" video experiment several years ago. Now, they have written a book, drawing on that line of research, to examine six powerful everyday illusions that impair our decision making.

They describe, for instance, the illusion of attention: "We experience far less in our visual world than we think we do." Put simply, we often see what we expect to see... and, here's the dangerous part: we aren't well aware of the limits to our attention. Here's one great finding that they share. Researcher Peter Jacobsen found that, "Walking and biking were the least dangerous in the cities where they were done the most, and the most dangerous where they were done the least." Now why would that be? According to Chabris and Simons, expectations explain this phenomenon. In a city with lots of pedestrians and bikers, we expect to see them on the streets when we are driving our cars. Thus, we are more likely to see them. When we don't expect to see pedestrians and bikers, we are far less likely to see them.

What's the implication for business leaders? Clearly, we miss many threats to our business because they come from unexpected sources. Our attention is distorted by our pre-existing expectations. That's why we even have to be careful about decisions which we think we are making based on extensive quantitative data analysis. We have to ask ourselves: Did our expectations shape how we gathered the data, and are we seeing a conclusion or pattern in the data simply because that's what we expected or even hoped to see?

Fooling yourself on differentiation

Many executives are fooling themselves about the extent to which their firms are differentiated from the competition. They make three classic mistakes. First, they are defining and judging differentiation for themselves, rather than asking customers. Second, if they are talking to customers, it's often only their best customers, not the less loyal buyers or those folks who are not customers at this time but could be. Finally, these executives are not asking if points of differentiation are truly driving choice among rival firms, as opposed to distinctions that may be real, but largely inconsequential to the consumers' buying decision.

Are you studying your near misses?

The Wall Street Journal had a great article over the weekend titled, "Near Misses are a Hit in Disaster Science." The article discussed how various industries study "near misses" - i.e. incidents which almost result in catastrophe, so as to gain a better understanding of the true probability of so-called low probability events.

While the article is very useful, it does not emphasize enough the most important value that an organization derives from studying near misses. I don't think the most valuable result is a better understanding of probability. I think the real value from near-miss examination and analysis comes from an understanding of the small problems, errors, and breakdowns that could result in a catastrophe. In a near miss, a redundancy in the system or an astute individual caught that small breakdown and prevented a catastrophic failure. However,a catastrophe was only narrowly averted in many instances. Examining the near miss carefully can help solve that problem or prevent that breakdown so that it doesn't occur again.

The key is that near-misses occur much more frequently than large-scale catastrophes. Thus, a true learning organization wants to surface and discuss near-misses, because you can learn and improve more frequently and more quickly, rather than waiting to conduct a lesson learned exercise after a terrible failure.

You can still call it a Chevy!

Several days ago, the New York Times reported about an internal GM memo indicating that the firm no longer wanted employees and dealers referring to its vehicles using the word "Chevy" - instead, they should be referred to by the full and proper brand name: Chevrolet. The memo argued for the importance of brand consistency. Of course, that memo referred to Coke as an example of brand consistency. Um, well, ok... but, isn't Coke a nickname for Coca-Cola? Isn't the reference to Coke actually completely counter to the argument against letting people use the "Chevy" nickname? I mean, you can't make this stuff up. Is the use of the Chevy nickname really the root of the numerous problems at GM? Is this really what they should be focusing on?

Thankfully, the Wall Street Journal reports today that GM has backed off its initial stance, blaming a "poorly worded memo" for the controversy. However, the article goes on to describe the explanation from a GM spokesperson:

It does, however plan to boost its level of formality by focusing on the brand’s full name as it expands into global markets. Spokesman Klaus Peter Martin said the company wants potential customers in new markets to recognize the brand by its full name. He says it is important that people searching information about Chevrolets for the first time are not confused by nicknames they won’t necessarily recognize.

Now that is one interesting explanation. Apparently, you and I might not know that people are talking about Chevrolet vehicles when we see the word "Chevy" on a web search. We might think they are referring to Toyotas or BMWs. We ignorant folks need GM marketing to tell us that indeed it is a Chevrolet.

By the way, how long have the two authors of this internal memo worked at GM? 31 years and 22 years respectively. That's fresh blood infusing fresh thinking into the Chevy brand.

Rethinking the Relationship between Pay and Performance

As I read Dan Ariely's new book, I was particularly intrigued by his research findings regarding the effects of bonus compensation on human performance. Ariely conducted an interesting experiment in India along with several colleagues. They created a a variety of games and tasks for subjects to complete, and they created three conditions (low, medium, high bonus). They chose India so that the bonuses would be small in absolute dollar terms, but very high in terms of their worth to an average Indian citizen. The highest bonus level actually constituted approximately five months’ pay for the subjects in the experiment.

What were the results? You might expect performance to rise with bonus level. After all, that fundamental belief underlies compensation schemes in most companies. However, Ariely and his co-authors found that performance was lowest in the highest bonus condition. The same results held in the United States. What happened? Some combination of stress, fear of losing the money, and other psychological pressures, such as over-attention to the bonus as opposed to the task itself, seemed to cause participants in the highest bonus condition to actually perform poorly on the games and other tasks in the experiment. One can certainly relate to this finding. Consider how many business executives may find themselves obsessing over their compensation toward the end of the year, and perhaps becoming distracted from the actual work that they must accomplish.

By the way, these results hold when the tasks involve some level of cognitive skill. If the tasks are purely mechanical in nature, then higher bonuses yield higher performance. That finding indeed suggests that stress may play a factor in diminishing performance on tasks that require thinking and reasoning (such as many business tasks).

Lingering Effects of Emotions

I just finished Dan Ariely's new book, The Upside of Irrationality. Ariely, of course, is a very accomplished behavioral economist and previously wrote the best-selling and insightful book, Predictably Irrational. Ariely's experimental research provides thought-provoking insights into how the human mind works. Take, for instance, a study he conducted regarding how emotions affect decisions.

Ariely and a colleague, Eduardo Andrade, first began by using two different movie clips to either put individuals in a positive or negative emotional state. Then, they had the subjects play the ultimatum game. In this simple game, participants are given $20. One individual is given the right to decide how much of the $20 they wish to share with another person. If the "receiver" rejects the offer, however, then neither party receives any money. While a "rational" person might accept any offer, given that some money is better than none, most people actually will reject an offer that is perceived to be unfair out of a desire to punish the sender for their selfish behavior. It turns out that a person's emotional state amplifies the effects of this experiment. In other words, being in a negative emotional state raises the odds that you will reject unfair offers. No surprise there, I guess. However, the most interesting part of the research concerns the lingering effects of emotions. Ariely and Andrade find that the amplified effect from a person's emotional state still holds even when you conduct the ultimatum game again later on, after the emotions have apparently subsided. In other words, we aren't just affected by the heat of the moment. If we make decisions in the heat of the moment, we may be setting the stage for a pattern of similar behavior over time.

CVS and the Risks of Vertical Integration

Yesterday, Walgreen's announced that it no longer plans to participate in drug benefit plans offered by CVS Caremark. They apparently are still miffed by what they suspect is inappropriate steering of Caremark drug benefit plan customers to CVS retail stores.

While it is unclear who is right in this dispute, one thing does remain quite clear. The episode highlights the risks of vertical integration. CVS Caremark is both a competitor to Walgreen's, but also a historical partner in that consumers used Caremark drug benefit plans at Walgreen's retail stores in the past. As a firm vertically integrates, it inevitably finds itself competing with its customers and other partners. That often raises apparent conflict of interest concerns, and it can be damaging to the business. Of course, the question remains: Which firm will suffer more from this dispute?

Does the Web Make Us Dumber?

Nicholas Carr and Clay Shirky have a terrific point-counterpoint in today's Wall Street Journal. Carr proves particularly provocative, as he often is. He argues that multi-tasking using a variety of new technological tools, can actually make us "dumber" in many ways. Carr points to some interesting new research conducted by social scientists, which shows that our increasingly divided attention may have harmful effects on our cognitive abilities. For instance, here is what Carr writes about one study performed at Stanford:

"In another experiment, recently conducted at Stanford University's Communication Between Humans and Interactive Media Lab, a team of researchers gave various cognitive tests to 49 people who do a lot of media multitasking and 52 people who multitask much less frequently. The heavy multitaskers performed poorly on all the tests. They were more easily distracted, had less control over their attention, and were much less able to distinguish important information from trivia."

Other research shows that students using web-connected laptops in class may retain less knowledge. Carr provides a good overview of a stream of literature all pointing to such detrimental effects of divided attention driven by technological use.

Several days ago, I blogged about new research suggesting that email may make it easier for individuals to lie. Now, we have Carr's column that warns us about the dangers of multi-tasking. Hopefully, this new work will cause us to exercise a bit more caution as we proceed with the implementation of technology in our workplaces and classrooms. I'm a big believer in using technology to enable and enhance learning, but I'm certainly sensitive to the divided attention problem.

BP Oil Disaster: Lesson from Other Catastrophes

As a scholar who has examined a number of catastrophic failures, I have been tracking the BP oil spill with great interest. I hope to be able to write an in-depth case study about the failure. With details still coming out about the events leading up to the catastrophe, I'm not yet ready to draw any conclusions. However, I can offer a review of a few of the major conclusions from my research, as well as others' work, on prior catastrophic failures in a broad range of fields stretching from space travel to health care.

1. Catastrophic failures generally do not have a single root cause. They are typically the result of a chain of errors, mistakes, and small failures.

2. People and organizations often downplay ambiguous threats, i.e. warning signs, that crop out in the days, weeks, and months prior to the catastrophe.

3. Organizations often have cultures that don't promote sufficient candor and open dialogue. Thus, people with knowledge about critical risks may not speak up about their concerns regarding a potential failure.

4. People with intuitive concerns about certain risks sometimes are dismissed because they lack extensive data to support their concerns.

5. Organizations often overestimate how human and system redundancy they have in place to protect them from catastrophe.

6. People often underestimate the probability of what they perceive to be extremely low probability events.

7. Cognitive biases often distort managerial judgments, contributing to catastrophe.

Email Makes Lying Easier

The Uncommon Knowledge column from the Boston Sunday Globe reports on a new study by Naquin and colleagues published in the Journal of Applied Psychology. Here is what the Globe reports:

In one experiment, anonymous business students were asked to divvy up an imaginary pot of money between themselves and another person. Students who were required to submit their decision by e-mail were more likely to misrepresent the size of the pot than students who were required to submit their decision using pen and paper. Likewise, in an experiment involving real money and without anonymity, business managers misrepresented the size of a pot of money in an e-mail communication more than they did in a paper communication.

I find the results very intriguing. They suggest that technology doesn't always help us be "more connected" to others. In some ways, it makes our relationships more distant or less personal perhaps. As a result, we may not apply the same ethical and moral code when using technology to communicate with others. This research certainly makes you think.

Myths about Speaking Up

My classmate from the HBS doctoral program, Jim Detert, and several coauthors have published some fascinating findings about why people are afraid to speak up. They examined the impact of income, education, and gender on the likelihood that someone would be unwilling to speak up due to fear or a sense of futility. They found that people with higher incomes were just as likely to withhold their input from senior managers as those with lower incomes. Similarly, education levels did not make a significant difference on the likelihood of speaking up. Finally, contrary conventional wisdom, they found that women were no more likely to withhold their input than men. Of course, this research is not saying that large status differences within a small team don't matter. People may fear speaking up if they perceive themselves as low in expertise, power, or status relative to other team members.

Google Builds a Trading Floor

Business Week reports that Google has created its own in-house trading floor to manage its $26.5 billion in cash and short-term investments. The company has hired a number of top traders and analysts from Wall Street firms to run its in-house operation. Does this make sense? One could justify this move only if you believe that Google can be more effective and efficient at managing its own investments than it could under any other organizational arrangement. In other words, is this better than Google outsourcing the function? Is it better than Google creating an alliance or joint venture with an outside entity to do this together? Why should we believe that Google can manage its investments more effectively than outside experts?

The article suggests one reason why Google may be able to do this well. Business Week reports that Google has developed a proprietary technology that enables them to track their portfolio more effectively than many outside investment firms. Of course, we don't know how true this claim is. Perhaps some investment firms would challenge this assertion. However, even if we grant that Google has developed a technological edge, we have to ask: Would Google be better served selling this technology to investment firms? Would Google realize more value by making a business out of the software that it has developed as opposed to simply using it to manage its own cash holdings? Perhaps that is what they intend to do. Maybe they are simply testing the technology first in-house. We shall see.

Do Younger Siblings Take More Risk?

You are hiring a new executive for your company. He or she will have the opportunity to make some large, high stakes investments that will shape the future direction of the firm. Should you care whether that individual was a first-born child or a younger sibling? Why would that matter?

Well, past research has shown that younger siblings engage in riskier behavior than their older brothers or sisters. A new study extends this body of work, examining whether we can see such birth-order effects in the course of the "daily work" of certain professionals. Researchers Frank J. Sulloway and Richard L. Zweigenhaft studied siblings who have played major league baseball. Sports, after all, offers a unique opportunity for scholars because of the extensive body of historical statistics that measure actions and results. The question: Do younger siblings steal more bases than older brothers? Amazingly, in more than 9 out of 10 cases, the younger sibling tried to steal more bases than the older brother, suggesting a propensity to take more risk. For more about this research, take a look at this story in the New York Times.

How to Say No at Work

Do you have a hard time saying no at times? Does this cause you to find yourself completely overwhelmed at times, juggling many more projects than you can handle effectively? Helen Coster has written an article titled "How to Say No at Work" for Forbes. She interviewed me for this very useful column, in which she offers some advice on how to tell your boss that you cannot handle another task.

The BP Oil Spill

Kate O'Sullivan has written an article for CFO magazine about lessons for chief financial officers from the BP oil spill disaster. She interviewed me for the piece, asking about my prior research on catastrophic failures.

Consumer Brands Achieving Social Currency

Fast Company has a terrific feature this month on how consumer brands can achieve social currency. Let's take a look at a few of their conclusions drawn from research by Vivaldi Partners, an international brand consultancy. First, they argue that gimmicks marginalize trust. They compare Wendy's to Burger King. In the last year, Wendy's ran advertisements and used social media to get out the message that it's burger patties were never frozen and were cooked to order for customers. Burger King ran stunts such as the one where consumers could win a free burger if they dropped a certain number of friends on Facebook. Vivaldi's data show that 50% of people believe customers of Wendy's share valuable information about the brand, while only 28% of people believe the same about Burger King customers. Similarly, more people believe Wendy's creates products that they can trust.

The Fast Company article also comes to the conclusion that advocates trump followers. The Vivaldi research shows, for instance, that Dunkin Donuts has far fewer followers on major social media platforms than Starbucks. However, Dunkin' has used social media to more effectively stimulate its customers to become passionate advocates for the brand. The research shows that many more people are likely to have heard positive things about Dunkin' than about Starbucks. These advocates appear to have a powerful impact. A core group of passionate advocates beats an army of followers according to this research. Dunkin' has used a variety of fun and inexpensive social media campaigns and contests to mobilize these advocates in ways many other brands have not. How can your brand do this? That's a question every firm should be considering.

Do Firms Retrench as Government Spending Increases?

The Harvard Business School Working Knowledge site profiles a fascinating new study by finance professors Joshua Coval, Lauren Cohen, and Christopher Malloy. The research examined the effect on local firms when a legislator from that state rose to a powerful chairmanship in Congress. Not surprisingly, these scholars found that, "The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three congressional committees. In the House, the average is around 20 percent."

Much more surprisingly, however, the research shows that, "In the year that follows a congressman's ascendancy, the average firm in his state cuts back capital expenditures by roughly 15 percent." What's happening? Federal spending appears to be crowding out private investment to a very large degree. The professors offer three possible explanations. In some cases, the government spending directly supplants private investment. Second, federal projects may hire away talented employees and secure other resources that private firms need to expand. Third, the heavy government involvement in the local economy may create high uncertainty, making private firms much more hesitant about making large capital investments.

Remember that this study does not even take into account the negative effects of the taxation required to pay for these government projects. The scholars certainly should give us pause as we consider whether stimulus funds can bring the economy back from its doldrums, as well as whether government efforts can truly drive local economic development to the degree many officials often expect.

When Mentoring Fails

Scholars Dawn Chandler and Lillian Eby have an informative article in the Wall Street Journal today about the pitfalls that one may encounter in mentori-protege relationships. They offer five great questions to consider as you assess a mentoring relationship:

1. If you are mentoring someone, are you giving them enough of your time and interesting work?

2. Are the personality and work habits of your protégé similar to yours, and if not, are you able to make sure that doesn't get in the way of working together?

3. Have you and your protégé clearly outlined his or her professional-development goals?

4. If you are being mentored, is the work interesting, and does your mentor give you credit for any projects you complete for him or her?

5. Do you feel like part of a team, and are you treated in an open, respectful manner?

At the end of the article, they suggest that people should prepare for the end of a mentoring relationship, i.e. how and when will the relationship have run its course and reached the point of no longer adding value for either party. I think this point can be taken one step further. Specifically, we have to consider what might happen when the protege becomes the equal, or even surpasses, the mentor. That occurs in many situations, and it can become very difficult to manage. For instance, consider the situation that unfolded when Theo Epstein, GM of the Boston Red Sox, began to become much more of an equal to Larry Lucchino, his long-time mentor and CEO of the team. That dynamic became very difficult to manage, and their working relationship nearly came to a permanent end until differences were finally resolved. I think scholars Chandler and Eby make a good point when they recommend thinking in advance about how a mentoring relationship will unfold and even end as people's careers progress. Those preparations may help avoid a falling out in the future.

Pricing Baseball Tickets

Business Week has an interesting article this week about a young economics PhD, Barry Kahn, from the University of Texas. Kahn has devised software that enables baseball teams to dynamically price their tickets, much like the airlines price seats. According to the article, "The software helps the Giants set prices based on past ticket sales, the day and time of the game, the teams' records, the pitching match-up, the weather, the going rate on resale Web sites like StubHub, and other data." The software holds the promise that teams can not only fill more seats, but generate more revenue overall.

Why does this type of dynamic pricing, used by airlines for years, fit the baseball market. Consider, for a moment, the key features of both markets. In each case, the costs are almost entirely fixed. The marginal cost of one additional person flying on a plane or attending a baseball game is almost zero. Moreover, the organizations sell seats which are "perishable" - i.e. once the plane takes off, or the baseball game begins, the seat can no longer be sold. This is not a good that can be held in inventory. Finally, there are a number of indicators that can help the organizations identify precisely those occasions and customers for which willingness to pay is quite high, and other situations in which it is much lower. One could see a number of other markets in which such dynamic pricing might apply, particularly in sports and entertainment.

Sam Adams: Less Than 1% Market Share!

Have you see the new Sam Adams TV advertisements, in which they proudly proclaim that the company has less than 1% market share in the US beer market? Have you ever seen a company boast of having low market share? What are they doing?

Actually, it's very understandable and even shrewd. Sam Adams wants to make sure they stay true to their roots, that they brand retains its authenticity. The firm wants to be known as a classic microbrew, not a mainstream mass market brand. However, they clearly are a very large company relative to many microbrews on the market. Yet, the ads remind people that they are still very small relative to the mainstream beer giants. The ads help them to preserve that "us vs. them" positioning relative to the Busch and Millers of the world.

I personally love the ads because I always remind my students that market share should not be the goal of business leaders; profits should be the goal. Striving for maximum market share is not always the path to a great strategy and high profits. Far too many executives obsess about market share, and as a result, do not achieve the type of sustainable competitive advantage that they should.

Women Negotiating Pay Raises

The New York Times recently featured my friend and doctoral classmate Hannah Riley Bowles' research on why women may earn less than men in part because of what occurs at the negotiating table. Bowles is a professor at Harvard's Kennedy School. She has found that women are less likely to request raises, and she notes, "We have found that if a man and a woman both attempt to negotiate for higher pay, people find a woman who does this, compared to one who does not, significantly less attractive."

What is so terrific about Bowles' research is that she has identified ways in which women can frame their requests so that they are much more likely to succeed in getting a compensation hike. Bowles finds that women should frame their requests in terms of the good of the firm as a whole, and they should make clear that they care about maintaining good relationships at work (while making their case on why a hike is deserved). They also must take care when using an outside offer as a bargaining chip, as this may cast them in a negative light - something men do not have to be concerned about as much.

Advice to Graduates

A few words to those graduating from college this year...

As you leave this place, you will become builders. You will build a career, a home, and hopefully a family. For many of you, life will take on a certain rhythm eventually. Routines and rituals will mark your days. You will experience a measure of comfort with the familiar – familiar people, places, and activities. As you grow older, the unfamiliar will jar you, unsettle you, at times. You will want to retreat to that which is comfortable and familiar.

My advice to you today: Do not become wedded to the old and familiar in your lives. Cherish the past, but always look ahead. Seek out novel experiences. Keep breaking new ground, even as the hairs become gray. When in his 80s, Michelangelo, the great Renaissance painter and sculptor, once said, “Ancora imparo.” – I am still learning. I hope that you will live to such a ripe old age, and that you will utter those same words. Researchers have shown that novelty stimulates the brain. So, I tell you know: Exercise your minds throughout your lives. Memories do not nourish the brain. New challenges do. They say that you cannot teach an old dog new tricks. Do not listen to such rubbish. I’m confident that you have the ability to transform yourselves, to make yourselves new, time and again throughout your lives.

As you experience the new and unfamiliar, you will feel discomfort, even fear, at times. Do not let that apprehension get the best of you. Dr. Peter Carruthers of Los Alamos National Laboratory once said, “There’s a special tension to people who are constantly in the position of making new knowledge. You’re always out of equilibrium. When I was young, I was deeply troubled by this. Finally, I realized that if I understood too clearly what I was doing, where I was going, then I probably wasn’t working on anything very interesting.”

As you learn and grow as individuals, do not keep your new knowledge and skills to yourself. Share your knowledge and insight with others. Do more than that; serve as an exemplar to others. Mentor young colleagues, teach your children well – through actions as well as words. Your impact on the next generation will become your enduring legacy.

Singer and songwriter Ben Folds once wrote to his daughter Gracie, “One day you’re gonna wanna go. I hope we taught you everything you need to know.” I love that song, but I know that we have not taught you everything you need to know. I sincerely hope, though, that we have cultivated your intellectual curiosity and nourished your love of learning. May that spark of youthful curiosity remain with you all the days of your lives.

CVS' Office of the Chairman: Three's a Crowd?

This week, CVS announced that CEO Tom Ryan will be stepping down next year, to be replaced by Larry Merlo, who has led the firm's retail operations in recent years. Now, Merlo becomes President and COO of CVS until May 2011, when he will succeed Ryan as CEO. As part of this transition plan, CVS will create an office of the chairman, which will include Ryan, Merlo and Per Lofberg, the head of the company's pharmacy benefit management business.

CVS deserves credit for what appears to be a well-designed succession process, with a successor who has been groomed for some time, and who will spend the next year making the gradual transition to the CEO role. However, one must wonder a bit about how the three-person Office of the Chairman will function. Several months ago, a CEO at another firm mentioned to me that three people in a top executive group can be problematic because one person often will find himself feeling left out. After all, many informal conversations occur one-on-one. The third person not involved in that conversation automatically feels left out if they discover that important issues were discussed in their absence. The Office of the Chairman at CVS will face this challenge of how to handle the normal informal conversation that it will inevitably occur between two of the three parties. Maintaining as much transparency as possible around one-on-one conversations that occur will be critical. Moreover, insuring that the three parties get together often to share information and opinions openly will be essential.

Is Your CEO Beautiful?

I don't even know what to say... From the WSJ Deal Journal:

Duke University researchers, in connection with the National Bureau of Economic Research, have found that CEOs are perceived to have more competent faces than non-CEOs. The Duke researchers also concluded that people responded more favorably to the faces of CEOs from large companies than from small business.

Another interesting finding from the 20-page report: that “baby-faced” CEOs received lower “competence” scores than more-mature looking CEOs and tended to be paid less, though on the plus side, the baby facers got higher likability ratings.

And yet, “we find no evidence that the firms of competent looking CEOs perform better,” the study concludes. Essentially, the ‘look’ of competence says very little about effective competence.”

Risking Brand Equity?

I was asked an interesting question today by a marketing manager at a larger consumer products firm. She asked how she should respond to her boss, who was pushing for continued strong growth from a successful brand - growth which she felt might cause the brand to extend itself too far, and perhaps erode brand equity. It's a tough situation for any manager.

I think many firms conduct market research to see if a growth strategy will yield new customers as expected. At times, though, firms fail to see how existing loyal customers will react to growth strategies, brand extensions, etc. Thus, they fail to see how growth plans may compromise a brand's "credentials" with loyal, hard core consumers. So, this manager might commission a study to see how the firm's most loyal customers might feel about the company chasing new consumers and segments. Such a study might see that customer losses or price premium erosion might offset new customer gains to a large degree.

College Graduate Reading List

Here's my 2010 suggesting reading list for college graduates entering the business world. I've included only books that have been published in the last few years.

Predictably Irrational, by Dan Ariely
Switch, by Chip and Dan Heath
Made to Stick, by Chip and Dan Heath
Outliers, by Malcolm Gladwell
SuperFreakonomics, by Steven Levitt and Stephen Dubner
Different, by Youngme Moon
Change by Design, by Tim Brown
Free, by Chris Anderson
The Long Tail, by Chris Anderson
The Big Short, by Michael Lewis

Customized Coke

Today's Wall Street Journal reports on the design and testing of Coca-Cola's new Freestyle machine. This new high-tech soda fountain enables the customer to design their own drink. For instance, as the article mentions, you can create a Caffeine-Free Diet Raspberry Coke if you wish.

The technology has been difficult to develop, but the early tests show promise. According to Coca-Cola, beverage sales at the Firehouse Subs restaurants in Atlanta, where the machine is being tested, have risen 13%. Overall revenue is up 7.6%. The Freestyle machine offers an important opportunity for Coca-Cola, since soft drink sales in the United States have been decreasing for the past five years.

The article brings to mind an important strategic issue for a firm such as Coca-Cola. In many instances, when a firm's core business begins to erode due to societal trends, company leaders look to diversification to address their woes. For Coke, that might mean selling more waters and other healthier beverages given concerns about the caloric content of its soft drinks. However, companies need to be careful not to accelerate the demise of their core business through inattention. Moreover, innovative firms do not simply accept a decline due to societal trends. They find ways to rekindle demand. The Freestyle machine may be just one of those innovations that helps revitalize the firm's core soft drink business.

One thing to note: The article mentions that the Freestyle machine costs 30% more than traditional fountains. However, Coca-Cola may wish to reduce the price premium that they are commanding for the high-tech fountain if they indeed find that the machines generate double-digit increases in soda revenue. Why not discount the "hardware" to sell more "software" after all?

Letterman on Goldman Sachs

Nestle Chairman on Corporate Philanthropy

Over at Business Week, I read the following about Nestle's approach to corporate philanthropy:

"Nestle SA Chairman Peter Brabeck- Letmathe said he opposes corporate philanthropy because it misuses shareholders’ money and said government, business and civic groups should team up to tackle society’s problems. 'I’m personally very much against corporate philanthropy,” Brabeck said in a television interview in London. “You shouldn’t do good with money which doesn’t belong to you. What you do with your own money, this is absolutely fine.'

Nestle’s strategy in corporate and social responsibility focuses on areas that are key to its own business strategy and that boost shareholder value as well as helping society, 65- year-old Brabeck said. The maker of Nescafe, based in Vevey, Switzerland, has three main areas of action: helping boost productivity among the more than 500,000 farmers it works with, reducing water use and developing more nutritious products."

I'm curious as to what readers think about Brabeck's comments. He has a point that companies shouldn't be using shareholder funds without their agreement/support. The question, it seems to me, is how one interprets the question of how philanthropy fits with a firm's strategy, and how it relates to long term shareholder value. One can interpret that very narrowly, or much more broadly. That is where things get tricky.

Cognitive Bias Song

With thanks to Authentic Organizations blog for pointing me to this fabulous YouTube video, which reviews the major cognitive biases that impair human decision-making.

Hostile Brands

I'm continuing to read HBS Professor Youngme Moon's terrific new book, Different: Escaping the Competitive Herd. I recently finished her chapter on "hostile brands" - what a thought-provoking notion. She argues that some brands have differentiated very successfully by almost daring you to purchase their product. They polarize in many ways, causing some customers to love them with great passion while others hate them with equal fervor. These brands make it very clear that they are not for everyone. For instance, she talks about the Mini Cooper's entry into the United States. The brand made no apologies for being a small vehicle in a country that, at the time, was completely in love with the SUV. They actually boasted of the fact that the vehicle was very small, the anti-SUV if you will. Similarly, she describes Hollister's strategy. The store environment is quite hostile to parents, and that is quite intentional. Professor Moon makes the point that the brand, in many ways, is quite hostile to girls who are not slim. She finds that disturbing to some degree, but at the same time, she acknowledges that it may be a successful differentiation strategy in the marketplace. I love the fact that she concludes that hostile brands may make us uncomfortable at times, but in the end, their polarizing nature makes them stand out in a sea of homogeneity.

Are You Blind to the Truth?

C.J. Prince has written a good new article in Chief Executive magazine. The article, in which I'm quoted several times, is titled "Are You Blind to the Truth?"

Google Ventures: Does Corporate VC Work?

In this post on the New York Times "Bits" blog, Claire Cain Miller writes about Google Ventures - the corporate venture capital fund established by Google in March 2009. According to the article, Google has increased the amount of investment activity lately and aims to invest approximately $100 million per year.

As I read the article, I began thinking about the literature on corporate venture capital. What did scholars find when they studied the effectiveness of corporate VC funds? The work of Gary Dushnitsky of Wharton and Michael Lenox of Duke seemed particularly interesting. These scholars argue that corporate VC funds pursue both financial returns and so-called "strategic benefits" i.e. they provide a "window on cutting-edge technologies" being developed by start-ups. Dushnitsky and Lenox have found that corporate VC funds can increase value for the corporate parent, but the results are specific to particular industries. They specifically find that corporate VC funds tend to do well in the devices, semiconductor, and computer industries - whereas the results do not appear positive in industries such as chemicals, metals, pharmaceuticals, and vehicles. Moreover, these scholars find that corporate VC funds create value when they explicitly seek strategic benefits, not simply financial returns.

Well, what about Google? From an industry perspective, it operates in a sector that has seen corporate VC funds achieve success according to the work of Dushnitsky and Lenox. However, this quote in the NY Times blog seems to suggest that Google has a strategic orientation in some cases, but not in all situations:

"Many corporations, including Cisco, Intel and Disney, have venture arms. Most have a strategic goal to fund projects that might someday be useful to the company. But Google executives emphasized that the fund is not an incubator for companies that Google wants to someday buy. It invests in Internet and advertising companies, but also in biotech and clean tech."

United and Continental Merger

In the Heard on the Street column over the Wall Street Journal, I read the following about the United-Continental merger:

"Like a jet cutting across a clear blue sky, a merger between UAL's United Airlines and Continental Airlines could be seen coming miles off. And no wonder. Announced synergies, when taxed and capitalized at 10 times, equate to two-thirds or more of the airlines' combined market capitalization. Roughly three-quarters of this is revenue synergies. Longer-term, that should worry competitors like American Airlines."

Hmmmm... I found the synergy numbers quite interesting. 75% of the synergies are on the revenue side, and only 25% on the cost side, according to this article. Typically, investors find cost synergy estimates by executives to be much more credible. After all, cost synergies typically represent more tangible estimates based on concrete actions such as facility closings and consolidations. Revenue synergy estimates often are less credible. After all, they represent much less tangible projections of how two companies can drive more sales by working together. In sum, like most investors, I would have liked to have seen a greater percentage of the projected synergies on the cost side of the equation. I would have much more confidence that those merger benefits could be achieved.

By the way, for more on the merger, see my favorite airline industry blogger, Dan Webb.

Hottest Employers 2010

Business Week has published their 2010 list of hottest employers for college graduates, based on a survey of 56,900 college students conducted by Universum USA. Google tops the list, followed by Disney. I'm proud to say that, in the past two years, I've had students who have each landed their dream job, one at Disney last year, and one at Google this year. Their determination, work ethic, and can-do attitude helped them fulfill their dreams. They serve as a model for every student. The lesson: Dream big, but also be ready to pursue that dream with incredible persistence.

Different: Escaping the Competitive Herd

I'm about halfway through Harvard marketing professor Youngme Moon's new book titled Different: Escaping the Competitive Herd. The book argues that far too many industries are characterized by herd behavior. In most instances, Moon argues that firms compete themselves to a point where the industry becomes incredibly homogenized, rather than differentiated. Yes, we have many more product choices than ever today. However, she points out that product categories have become a blur to many consumers, with a dizzying area of products that aren't all that different. Brand loyalty has dissipated as companies constantly augment their products to catch up to the competition. Imitation is everywhere.

I'm now to the point in the book where Moon offers examples of strategies for escaping the competitive herd. Her first example is what she calls "reverse-positioned brands." Here is how she explains this strategy: "What this means is that there is a commitment to withholding benefits that the rest of the industry considers necessary to compete. Reverse brands say no where others say yes. And they do so openly. Without apology." At this point, she is echoing Michael Porter's long-time argument the necessity of making tradeoffs, i.e. "the essence of strategy is choosing what not to do." However, she goes one step further. She writes that reverse-positioned brands do "a second thing that is equally audacious. They take their stripped-down value proposition and infuse it with some unexpected form of extravagance." She offers examples such as Google, JetBlue, and IKEA. I think the idea of reversal is intriguing, and I've begun thinking about other examples that I know. I'm sure you may have some. Please comment on the blog and share those if you like.

I'll have more on Moon's book as I continue reading, but I definitely recommend this to business executives and students everywhere. Moon's writing style is terrific, and the insights jump off the page.

Seth Godin on the Demise of Higher Education

Seth Godin has a tremendous blog post today on the "coming meltdown in higher education." This is a must-read for all university administrators, faculty, parents, and students. Godin makes a number of interesting points, and I think he's right about rankings and accreditation. Rankings and accreditation bodies have actually contributed to an increasing homogenization of higher education, while costs continue to rise faster than wages. As Godin writes, there's an increasing "sameness" to the education offered at universities. Everyone is focused on the same small set of variables in the rankings, and they are all trying to meet accreditation standards that often leave little room for truly breakthrough, innovative strategies. Standards and rankings have reduced differentiation in the marketplace of higher education, which cannot be a good thing. I'm not suggesting that we abolish rankings or accreditation bodies... we need both, but at the same time, universities need to think more creatively about how to break away from the pack. Herd behavior is everywhere in higher education, and that does not benefit anyone.

Apple Acquires Intrinsity

According to the Wall Street Journal, Apple has acquired start-up chip technology firm Intrinsity. The article explains that, "Some analysts believe that Intrinsity's technology is used in the A4, the Apple-designed chip used in the new iPad." As my students have learned, such an acquisition represents an example of backward integration, i.e. a firm choosing to produce its own components.

In general, I'm skeptical of vertical integration because I believe firms should pursue focused strategies and allow other companies to specialize at points of the value chain in which they have unique and superior capabilities. Moreover, I believe the transaction costs of using the market often are low enough that contracting with outside parties for component manufacturing makes more sense than in-house production.

However, this particular acquisition may have great benefits for Apple. Let's step back and look at several valid reasons to backward integrate. First, firms may do so to enhance the differentiation of their finished product. Apple certainly may want to own a chip technology firm for this reason. Second, firms may backward integrate so as to foreclose access to key inputs for key rivals. Apple may choose to keep certain innovations in chip technology away from competitors. Third, firms can benefit from backward integration if they find themselves in a situation in which asset specificity exists. What does that mean? Well, suppose that Intrinsity has to invest in assets and capabilities completely specific to Apple in order to supply parts for the iPad. Moreover, suppose Apple cannot secure that technology from any other supplier. Both firms would be beholden to each other because of assets specific to each other. That mutual dependence creates the potential for contracting difficulties if they remain independent. A solution to such challenges would be to bring the two firms together, i.e. an acquisition or merger. Thus, we have a potentially very strong rationale for backward integration in this instance.

New Teaching Company Course

The Teaching Company just launched a new course titled "The Art of Teaching: Best Practices from a Master Educator." Emory University Professor Patrick Allitt delivers this series of lectures about teaching excellence. I'm very proud to have been one of six faculty members from around the country that Professor Allitt profiled as part of his course development work. He came to Bryant back in the fall, videotaped me teaching a Disney case study, and then interviewed me and four of my students. He has interspersed clips from that day with us at Bryant throughout his lectures. I just received my copies of the course, and I'm enjoying listening to Professor Allitt explain his perspective on the art of teaching. Every educator should have interest in this new course (and no, I'm not plugging it because of royalties - I don't receive any from this course!).

Financial Regulation and the Establishment

From Greg Mankiw's blog:

A Great Sentence From David Brooks (New York Times):

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.

Journal vs. Times: Murdoch's Battle

Yesterday, the Wall Street Journal launched a frontal assault on the New York Times with the introduction of a metro section covering local New York City news. The managing editor of the Wall Street Journal made some harsh remarks about his rival in the UK's Guardian yesterday:

He lambasted the journalism of the New York Times, citing an average piece as one that began with a theme and then worked backwards to facts. "Themes should emerge after a thorough going-through of the facts, not the reverse, and readers can see through this sort of journalism which is why so many have lost faith in it." He dubbed NYT journalism as "social activist journalism", complaining it had done much harm. "If you want to be a social activist, join Amnesty International." And he went on to castigate the "journalistic elite" which he said had "all the ossification of the traditional bourgeoisie".

From a business standpoint, the key question is: What will happen to advertising rates in the New York metro area? Here, economists and business strategists like to use game theory to think about the answers to that sort of question. After all, we have a competition between two rivals, each trying to anticipate what the other will do in response to a particular action. Game theorists might speculate, for instance, on the likelihood that both parties would engage in a price war, or perhaps avoid one and come to a more cooperative solution.

However, this particular rivalry poses a problem for game theorists. Why? Murdoch and his team clearly aren't thinking "rationally" from an economist's perspective. By that, I mean that they aren't necessarily thinking purely in terms of near-term profit maximization. Murdoch and his team, as evidenced by the quotes above, may have some other non-economic motives in this fight. Moreover, Murdoch tends to take a long term view in his competitive battles, which means he has a history of taking less profit for long stretches so as to damage an opponent. Having considered Murdoch's motives and personality, we now might come to a very different conclusion than the pure game theory models might predict. Will this be an aggressive battle? Almost assuredly. Will it be fun to watch? Absolutely!

Pixar President Ed Catmull

Recently, Martin Giles of The Economist conducted a terrific interview with Ed Catmull, President and co-founder of Pixar Animation Studios (creators of hit movies such as Toy Story and Finding Nemo). It's a lengthy interview, but it's definitely worth watching - particularly for all those interested in making their companies more creative and innovative.

Still Government Motors: Don't Let GM Fool You

Over the past few days, GM CEO Ed Whitacre has made quite a splash with his pronouncements that GM has paid back the entire $6.7 billion loan it received from the U.S. and Canadian government. When I first saw his op-ed in the Wall Street Journal, as well as the advertisements GM placed in major papers, I was a bit puzzled. I knew that GM had taken much more than $6.7 billion in aid. How could Whitacre be claiming that GM had paid the government back, with only this $6.7 billion remittance?

In today's Wall Street Journal, Paul Ingrassia explains. As he points out, the overwhelming majority of federal assistance DID NOT come in the form of loans. Instead, it came in the form of an equity investment. That equity stake equates to more than $50 billion of taxpayer dollars.

I think Whitacre and GM should have been much clearer in their joyous pronouncements. As Ingrassia writes, "Mr. Whitacre should have acknowledged that directly. He would have enhanced the company's credibility compared with the old GM, which seemed to declare victory every other week even in the face of disaster." I think Ingrassia is correct, and frankly, he's being kind in his assessment of GM's actions this week. The company should have been FAR more straightforward with the American public. GM is still Government Motors until we see a public offering, or some other transaction, which enables the taxpayers to extricate themselves FULLY from this company. It has hardly paid the taxpayers back in full.