Why Bricks and Clicks Failed at Blockbuster

I found this article about the demise of Blockbuster to be quite interesting. In particular, note this comment by Michael Pachter, an analyst at Wedbush Morgan Securities, in an excerpt from the article in the New York Times:

I called Mr. Pachter, who is now managing director of equity research at Wedbush Securities. “Blockbuster should have won — and didn’t. I was wrong,” he said. He ticked off the ways that Netflix executed flawlessly and Blockbuster stumbled when it tried to replicate Netflix’s online service.

“I honestly believe most consumers would like a bricks-and-clicks solution,” Mr. Pachter said. “The reality is, they do have it. It’s just two different companies: Netflix and Redbox.” With video-rental vending machines that sit within grocery stores, drugstores and other retail hosts, Redbox uses the bricks of its partners.

Here is a great learning point for strategists. Yes, it is two different companies, and that is NOT surprising. The fact is that executing two fundamentally different business models within the same corporation is VERY difficult. Thus, it should not shock us that we have two "pure plays" who have done better than Blockbuster, which tried to create a hybrid model of bricks and clicks.

LearnVest: Who else knows how to target women effectively?

How do you begin to create an attractive new product or service that caters to a specific customer segment? One way is to look to existing companies in other industries that have been very successful tailoring a product or service to that demographic. Then, the key is not to simply copy them, but to identify interesting and effective things that they are doing, and to then translate and adapt those to your business. Consider LearnVest, for instance. The start-up promotes and teaches financial literacy to women, particularly those aged 22-40. The firm has done a marvelous job of borrowing concepts from firms such as Weight Watchers (from whom it borrowed the concept of counting points). As Dan Macsai of Fast Company writes, "The trick, says von Tobel (founder Alexa von Tobel), is borrowing elements from products and services that women already love -- the high-gloss aesthetic of magazines like Glamour, the track-your-points monitoring of Weight Watchers -- and applying them to personal finance."

Tweeting Burger Creations

Underdog Brands

Harvard Business School Professor Anat Keinan has done some interesting new work on what she calls "underdog brands." According to her, "Through a series of experiments, we show that underdog brand biographies are effective in the marketplace because consumers identify with the disadvantaged position of the underdog and share their passion and determination to succeed when the odds are against them." An underdog brand story largely recounts the tough external conditions faced by a firm and the amazing persistence, determination, and resilience of the firm/brand in overcoming those obstacles. As examples, she points to the many Silicon Valley firms who often refer to their garage origins, most famously firms such as Google, Apple, Clif Bar, and HP. She also points to firms such as Nantucket Nectars, which refer to starting out "with only a blender and a dream." Keinan also argues that these underdog stories may be particularly useful during tough economic times, as people gravitate toward stories of overcoming adversity. In some sense, the stories give people hope. On the down side, Keinan points out that various actions, including an acquisition by a larger company, can erode the authenticity and credibility of an underdog positioning.

Non-price competition: Building the Category

As companies think about rivalry in their industry, they ought to make a crucial distinction between price wars and intense non-price competition. The latter actually can have some very positive benefits for long term profitability, while price wars generally lead to very unfavorable outcomes for many industry participants. Why can non-price competition (rivalry in marketing, merchandising, advertising, etc.) be a positive force? This type of give-and-take among competitors can help grow a product category overall. Take, for instance, the non-price competition over many decades between Coca-Cola and Pepsi. For much of the 20th century, these two players competed intensely, but not on price. In fact, they tended to raise concentrate prices in lock step with one another over long stretches of time, particularly in the latter decades of the 1900s. However, non-price competition such as the Pepsi Challenge and other major advertising campaigns led to growth in the carbonated soft drink market, and it enabled Pepsi and Coke to swamp many smaller players. Too many firms jump to price as the primary competitive weapon, and in so doing, they destroy industry margins. Before worrying about the market share battle vs. the competition, every firm ought to first ask: Can we grow category demand? After all, a rising tide lifts all boats.

Ritz Carlton Adds Loyalty Program

For years, Ritz Carlton hotels did not offer a royalty program. Of course, many mainstream hotel brands do (Starwood, Marriott, etc.). Now, facing reduced occupancy rates and pricing pressure since the financial crisis began, Ritz Carlton has decided to offer a program. The Four Seasons has responded by saying it has no plans to offer such a rewards program. What are the risks for the Ritz? The real issue is whether the program is simply viewed as a price discount. If all you are offering is free rooms after a certain number of stays, then you may be harming the brand and hurting margins over time. However, a loyalty program can be much more than just a discount program. First, you can capture information about your customers and use that information to enhance service and drive new revenue opportunities. Second, you can use a loyalty program as a vehicle for gathering crucial feedback from customers about how to improve your product or service. Third, you can use a loyalty program to offer unique, even tailored, benefits and services associated with their stay at the hotel. That tailoring can make customers feel very special. If the Ritz can fully capture these sorts of benefits from a loyalty program, they will be creating value, and perhaps even raising willingness to pay for their product, rather than simply offering price discounts.

Corporate Recruiters Demand Critical Thinking

The Wall Street Journal has published a fascinating new report titled, "Paths to Professions." In this report, Marisa Taylor wrote an article about how corporate recruiters are bemoaning the lack of critical thinking and problem-solving skills among college graduates. Here is an excerpt:


"While the ability to think critically is, well, critical in the workplace, employers have long complained that many of the young college graduates they hire seem to lack this skill. Now, universities are trying to fix the problem before their grads ever meet a recruiter. When asked which skills new college graduates needed to improve most, more than half of the respondents to the question on The Wall Street Journal's survey of 479 college recruiters named some combination of critical thinking, problem solving skills and the ability to think independently."

I think colleges and universities deserve a fair amount of blame for the lack of critical thinking and problem-solving skills among graduates. Far too many classes at many schools still involve large lectures with very little, if any, interaction among students. Far too many examinations require regurgitation rather than reasoning. Witness the large number of multiple choice exams which simply require a good memory to recall key facts from the book. Cold calls during class, oral exams, and other such didactic interactions between professor and student do not happen often enough. The bottom line: We need to change the way we teach. Some of us keep saying this, of course, but overall, universities have been slow to change.

Greasing the skids

We have all been to the infamous "pre-meeting" that precedes the "actual" meeting. This where an advocate "greases the skids" for their proposal, securing key support so that an idea will sail through without dissent at the actual meeting. We have all done this at times to get our ideas enacted. What's wrong with this practice? Well, the players invited to the actual meeting may see the issue as a fair accompli and wonder why their time is being wasted. If this happens too often, people become very cynical. They may not commit to decisions because they perceive the decision process as pre-ordained and highly unfair. Moreover, a leader may not hear all dissenting views as people may self-censor if they perceive a fair accompli.

Shopping Carts at Aldi

As many of you know, Aldi - the German discount retailer - has been opening many new stores in the United States. Aldi operates a small footprint, discount store largely stocked with private label products. It sells a limited range of SKUs in those stores. The firm offers products at such low prices because it has perfected a model that drives costs incredibly low.

One cost reduction effort that I find quite interesting is the shopping cart strategy at Aldi. We all know that shopping carts are a messy problem at many supermarkets. Shoppers leave the carts all over the parking lot. The wind catches some carts and causes damages to parked automobiles. The stores has to pay someone to go retrieve carts all over the lot so as to make sure that shoppers will have available carts when they enter the store. How does Aldi deal with all these issues? It charges refundable 25 cent fee for a shopping cart. You pay 25 cents to get a cart before you shop, and you only get your money back when you return the cart at the end of your store visit. What's the impact of this very small fee? Here's where human psychology works wonders for the firm. Despite the very small amount of money, the overwhelming majority of shoppers returns their cart and gets their 25 cents back.

Why is the return rate so high? Perhaps we see this effect because the typical Aldi shopper is in search of value and very conscious of their spending. Most people think there is more to it though. There's just something about paying for a shopping cart that probably bothers people; they want that quarter back. Moreover, as one Aldi employee told me, perhaps people simply don't want to give the next shopper who comes a long a free cart, which would be the case if they left the cart by their car. Of course, I find that interesting. It would seem that otherwise very charitable people do not want to "give" others a free shopping cart rental. The specifics of this setting seem to make them far less altruistic! Of course, social psychologists have long argued that small changes in a situation or setting can drive behavioral changes; here we see that quite clearly.

By the way, what does Aldi get from this policy? They save the money associated with having to pay someone to go retrieve carts all day, and they have customers who don't get annoyed by dents and scratches on their cars from roaming shopping carts. Not bad at all! Just one more piece to their low-cost model...

Social Media: You Can't Always Listen to Your Customer!

Leah Bourne has written an interesting article at Forbes.com about the use of social media in the fashion industry. At first, it did not appear that the article offered anything new. Yes, fashion companies are using social media to listen to their customers and to adapt quickly based on feedback that they receive via Facebook and Twitter. However, the article goes further and offers an important word of caution for companies who are engaging their customers via social media. Here is the key excerpt:

"Hakim and other fashion designers also must learn to balance responding to digital customer feedback while maintaining a consistent brand identity. 'It's an enormous challenge,' Hakim says. 'A brand today has to be both a reflection of a designer while remaining open to the suggestions of customers.' Shauna Mei, who is launching online specialty retailer AHALife this month, aims for her site to be a two-way conversation. 'I want to create a dialogue between my site, brands and shoppers, but it isn't a democracy,' she says. 'We need to filter our customers' suggestions.'"

Every company should pay close attention to this point about the trade-off between responding to customer feedback via social media vs. maintaining a clear, consistent strategy and brand identity. Firms cannot succeed if they become "excessively flexible" in response to customer feedback. Managers have to cultivate an ongoing conversation inside the company about what fulfilling certain customer requests means for the brand. They have to constantly ask themselves: Are we being so responsive and adaptive that we have begun to muddle our competitive positioning in the marketplace?

Starting College: A Few Words of Advice for Freshmen

Inspired by Greg Mankiw's great New York Times column titled "A Course Load for the Game of Life," I decided to offer a few comments of my own for college freshmen.

1. Pick your faculty, not just your courses. Ten years from now, it won't matter much if you took "18th Century French History" or "Cognitive Psychology" in your freshmen year, but you will remember the faculty member who made a huge difference in your life. Seek out the professors who care the most, who have a passion for teaching, and who are willing to spend time outside the classroom with students. Building those relationships early in your college career, and finding good mentors, can have a huge impact.

2. Be smart about personal finance. Think carefully about how you manage your money. The habits you cultivate at 18 years of age will last a lifetime. Have a great time, but don't take on unnecessary debt and don't spend carelessly.

3. Redefine how you study. For many students, studying means reading or re-reading the textbook and their notes from class. I would encourage you to think differently about studying. As you prepare for an exam, sit down with all your class materials, and write out a detailed review of the entire course. Then, boil that review down to just 1 or 2 pages. Then, boil it down again to just a few note cards. That process of having to synthesize and integrate all your learning in writing will have much more impact than a few extra hours spent re-reading the same tired words from a textbook.

4. Seek out your own space. Don't count on studying in your dorm room. Far too much distraction exists in the dorm room. Find a spot on campus in which you are comfortable, and in which you can focus. For many, it will be a spot in the library. However, there may be other locations as well. If you do go to the library, don't sit in a high traffic area where you will constantly be approached by friends.

5. Care for your whole self - mind, body, and soul. Don't just focus on academics. Stay in physical shape, take care of your spiritual well-being, and be mindful of your stress level.

6. Read constantly about world events. You might think I'm crazy. After all, you will have tons of assigned reading in your courses. Who has time for more reading? Actually, staying abreast of current events in world affairs, business, science, and the like will be very helpful in your college career. As you read, you can and should try to make connections to what you are learning in class. By applying what you are learning in class as you read about world events, you will engage in much deeper learning. The lessons will sink in much more effectively.

7. Thank your parents. Be sure to express appreciation early and often to your parents and other family members who are supporting you throughout your college experience. Be mindful of the sacrifices that your parents are making for you. Don't dismiss the fact that it may be emotionally difficult for them to see you leave home. Surely, you should seek out and affirm your independence from your parents, but don't trample on your parents' feelings as you do so.

Immersion Experiences

In this article at Forbes.com, Donna Sturgess argues that immersion experiences are highly valuable for executives. From time to time, they should get out of the office and go experience how another industry works. Here's an excerpt from Sturgess' article:

Choosing an immersion should be based on what you can learn from worlds outside of your industry. Taking a one-day glass-blowing class illuminates decision-making and process thinking for a team. Attending a Nascar race for a day puts you up close and personal with mass-market consumers and grass-roots promotions. Putting in a full workday on an organic farm makes sustainability issues real for business leaders. Taking a physical deep dive in storytelling at the Tenement Museum in Manhattan stimulates the power of story to connect to customers. You will be surprised at how the learning and novelty of the physical experience triggers conductive thinking to germinate into unrestrained innovation for your business.

While I would definitely attest to the value of immersion experiences, I would offer one important caveat. An immersion experience must be well-designed so that the executive team understands the purpose/objectives up front and then works together to translate and adapt lessons for their own business on the back end. The team also needs some help so that they know what to look for and what to think about as they go about the immersion experience. If not, then the executives may just have a "fun day" and perhaps some stimulating conversation, but they won't necessarily mine the experience fully for its true value in surfacing new ideas for their business.

Do you solve other's problems, but not your own?

I loved Rajesh Setty's recent blog post, which is titled "Why Smart People Are Better At Solving Other People's Problems." I recommend that you take a look.

People Dislike Ambiguity

The Heath brothers have a terrific column in Fast Company about how managers should "break down the play" when trying to enact change in an organization. Chip and Dan Heath explain that human beings dislike ambiguity. Given a choice between two situations - one quite clear and one rather murky - they will choose the clearer one even if there's no other reason to prefer one over the other. They explain that managers should capitalize on this aversion to ambiguity as they plot change efforts. They recommend "breaking down the play" - i.e. acting like a football coach who creates explicit directions for each of the 11 players on the field so that a complex play will be executed according to plan. The idea is to make the steps as concrete as possible, so that people understand what you are expecting them to do. They need to understand precisely which behaviors must change to accomplish your broader goals.

Millenials: Think Before You Share!

Andy McAfee has a great blog post out that is titled, "Mistakes Millenials Make at Work." McAfee argues that, "Gen Y's misbegotten emphasis on egalitarianism and tendency to share too much information can be a detriment." He explains that millenials may overshare information, and in so doing, they may simply annoy their colleagues or embarrass themselves. Moreover, millenials may express opinions so freely about matters far and wide that they run afoul of those who believe strongly in adherence to hierarchy and respect for past accomplishments. As McAfee puts it, "Most if not all of the digital communities where Gen Y has spent time are highly egalitarian. They're indifferent to pre-existing hierarchies and credentials, and sometimes even hostile to them." Of course, business organizations are quite different than many of those egalitarian online communities!

He offers some solid advice for millenials as they consider how to act in the workplace. First, he proposes that they ask themselves whether a colleague they have never met might find the information that they wish to share interesting or useful. Second, he argues that they should, "understand the political and organizational lay of the land before engaging in egalitarian online interactions and fearless truth telling."

I would add one more piece of advice. Each millenial should ask himself or herself these three simple questions before they opine on an organizational matter beyond their particular area of responsibility: What might I need to learn more about before I express my views? What person(s) might be helpful to me in getting a broader perspective and more knowledge about this issue? What risks do I face if I offer my views without gathering more background information? Asking those three questions might help millenials step back and reflect before they act.

The Sports Hub vs. WEEI

We have a fascinating competitive battle continuing to unfold on the radio airwaves here in Boston. For many years, WEEI ruled sports radio, driving a number of competitors out of town (including ESPN radio's local station). However, The Sports Hub (98.5) has now presented a major challenge to WEEI. Here's what Boston Radio Watch has reported about recent ratings:

WEEI averaged 497,000 weekly listeners to WBZ's 397,000. However, WBZ 98.5 scored some major victories in both drivetime commute dayparts among its target male demographics. "Toucher and Rich" on 98.5 won the 18-49 male listeners demographic over "Dennis and Callahan" on 850. And, "Felger and Massaroti" bested the "Big Show" in both key male demos - 18-49 and 25-54.

What I find so interesting is HOW The Sports Hub 98.5 has chosen to compete. Michael Felger, a popular and outspoken host on The Sports Hub, has talked about openly about his strategy for targeting these various under-served niches in the sports radio market. During the winter months, The Sports Hub chose to talk hockey extensively. Over at WEEI, hockey had been a very minor topic on the radio for years. Hockey fans often complained about the lack of talk about their sport, but WEEI hosts always claimed that they didn't have any bias against hockey; they simply talked about what listeners wanted to talk about. They cited the lack of hockey calls to the station and the strong ratings associated with lots of football and baseball talk. However, The Sports Hub really focused on this hockey niche, and they brought many fans to the radio. They showed that a dedication to the sport can bring listeners, particularly if you have knowledgeable hosts and guests on the station. They seemed to have attracted those hockey fans who were frustrated with their rival.

Similarly, the Sports Hub - particularly the Felger and Massaroti show in the afternoon - talked a great deal of World Cup Soccer this summer. Again, most sports radio stations have believed that this was the kiss of death, given that baseball and football are so much more popular than soccer in the US. Yet, Felger and Massaroti took quite a few soccer calls in July, and they had strong ratings. Some of these fans may have been taken from WEEI, or perhaps they are bringing new listeners to the sports radio market. Now, just this week, I heard Felger and Massaroti talking extensively about Mixed Martial Arts, given the recent event in Boston. I've never heard discussion of this topic on sports radio in Boston until now, and sure enough, they attracted quite a few callers.

In the past, most sports radio stations trying to compete with WEEI just pursued me-too strategies. The Sports Hub seems to have taken a different path, mixing in a focus on these under-served niches with the usual talk about popular sports such as football and baseball. This novel mix seems to have found a nice audience. Now, how will WEEI respond?

HP, 3PAR, and Finding a new CEO

We have all watched with some fascination as HP and Dell fight it out in an all-out bidding war for 3PAR, the young data storage company. Many writers, including this article from the CNN Money website, have speculated as to whether the winner of this bidding war will ever be able to earn an attractive return on investment, given the high price premium being offered. However, I find another aspect of this bidding war perhaps even more intriguing. HP does not have a successor to Mark Hurd at this point (Cathie Lesjak is serving as interim CEO). If HP wins the bidding war, how will that outcome affect the search for a new permanent CEO? Will potential candidates be at all reluctant to take the job, given that they will be on the hook for making this very pricey acquisition pay off? I think that issue will be an interesting one to watch in the coming months, if HP ends up acquiring 3PAR. Of course, the 3PAR deal does not represent a large fraction of the market value of HP, but still, this highly visible deal will attract attention. If HP pays a very high premium for the firm, investors will be watching to see if the deal pays off. A new CEO may also have questions about the integration process. What promises will be made, if any, to the 3PAR managers and employees as the deal is made? Will the potential new CEO be willing to live with any commitments made prior to their arrival? To me, these questions will be fascinating ones to consider in the days and months ahead.

Selling Out? People Question Groupon's Strategy

Groupon runs a wildly popular promotion for national retailer The Gap, and suddenly, people begin to question whether the firm is "selling out." Wow. We have always seen these types of questions emerge as young firms grow and expand beyond their original core customer base, but it seems that these types of questions are cropping earlier and more often in the social media age.

I think an important distinction has to be made when we observe young firms beginning to expand their horizons. The critical question should be: Does attempting to expand in this way somehow compromise the experience/service/value for the company's core customers? If so, then we can rightfully question the growth strategy. However, there may be many situations where attempts to expand do not compromise the value and experience for the original consumers. In those cases, I think it's unfair to argue that a firm is "selling out" in any way.

Another important point should be made here. Firms can and should experiment as they try to formulate their growth strategy. As noted in the article cited above, Groupon has viewed the Gap promotion, and a subsequent Fandango promotion, as experiments. That's good solid management. Firms should test out various growth options, rather than diving headfirst into an expansion program. As customers, we need to scrutinize our favorite company's moves, but we also have to willing to tolerate some level of healthy experimentation.

NFL: Ignoring a Very Real Threat?

Roger Goodell, commissioner of the National Football League, has indicated that he would like to see the league move to an 18 game regular season schedule(up from 16 games). The NFL has talked about this for some time. What's interesting though is the timing of the announcement. Just this week, we have read news reports, and seen an HBO special, which document new medical research indicating a potential link between head injuries and ALS or ALS-type illnesses. This work has been done by researchers at Boston University and Veterans Administration Hospital in Bedford, MA. Has the NFL made a serious mistake by moving ahead with this discussion of the 18 game schedule just at the time when this new research suggests very harmful effects from head injuries? It seems that they may have miscalculated here. We could be seeing the start of a major public relations challenge for the NFL. Will various constituencies begin examining this research in more detail and challenging the NFL? Might we see lawsuits, or even the potential for government getting involved from a regulatory standpoint? It seems that the NFL needs to be careful at this point in time, despite the massive popularity of their sport.

Myopic Experts

Over at Business Week's website, G. Michael Maddock and Raphael Louis Vitón make the case that innovation is often "beginner's luck." They argue that industry experts often prove quite myopic. They become trapped by the conventional wisdom within a particular industry, and it takes someone from the outside to totally rethink the business model. Of course, many people have put forth this basic argument over the years - nothing new here in a sense. However, I do like some of the suggestions the authors make about trying to overcome expert myopia within your company. For instance, they argue that you can send employees to conferences for other industries, and tap into these outsiders' expertise to try to solve your firm's problems. You also can tap into the ideas and perspectives of new hires much more often, as they are not tainted yet by established mindsets.

Are there other techniques one can use to overcome expert myopia? I'm sure we can come up with many ideas. Let me put forth one overarching skill that I think is essential for leveraging outside ideas to drive innovation in your industry. I believe that you need people to refine their ability to reason by analogy. They need to be able to see situations, ideas, and business models in other industries and then translate and adapt those to your particular circumstance. To do that, they need to be able to draw lessons from analogous situations, without oversimplifying. One risk is that people often focus too much on the similarities between two analogous situations, and they ignore crucial differences. To bring innovation from the outside to your industry, you need creative people who can identify analogies, and see both the similarities and differences. Then, the key is to take ideas from the outside and NOT simply try to apply them as is in your firm. They need to be able to translate and adapt those ideas to fit your situation.

Nordstrom: Courting the Multi-Channel Shopper

We've heard so much about brick-and-mortar retailers needing to find ways to integrate online and store shopping. Retailers refer to the great promise associated with cultivating the "multi-channel" shopper. However, few retailers have come up with breakthroughs in how to do so. Nordstrom seems to have taken a bold step. The New York Times reports on their efforts:

"The change works this way: Say that a shopper was looking at a blue Marc Jacobs handbag at Nordstrom.com. She could see where it was available at nearby stores, and reserve it for pickup the same day. More significant, if the Web warehouse was out of that bag, it did not matter. Inventory from Nordstrom’s 115 regular stores is also included. Maybe there was just one handbag left in the entire company, sitting forlornly in the back of the Roosevelt Field store — it would be displayed online and store employees would ship it to the Web customer. What Nordstrom did on its Web site — displaying stock from both the Web warehouse and its stores all at once, was unusual. And that, said Jamie Nordstrom, president of Nordstrom Direct, drove 'some pretty meaningful results.'"

Most retailers do not show detailed store inventory information to the online shopper. By doing so, Nordstrom hopes to avoid lost sales, and also invite online shoppers who are browsing via the web to come to the local store to try on an item if they feel that it is necessary before purchasing. They will ship from the stores if needed, essentially converting their stores into warehouses in support of online sales as well. The results have been promising. Same store sales have been strong lately, while other retailers have lagged. Moreover, inventory turns have risen. Of course, this strategy requires great accuracy in a firm's inventory management system. The premium pricing strategy of Nordstorm probably helps make this economically feasible, because there are clearly added costs. It will be interesting to see if other retailers follow, particularly higher end retailers who compete against Nordstrom.

Does B-School Create Narcissists?

Business Week reports on two interesting new studies presented at the Academy of Management Annual Conference in Montreal earlier this month. The first study examines the extent to which business school students are more or less narcissistic than other folks. Scholars Jim Westerman, Jacqueline Bergman, Shawn Bergman, and Joseph Daly used an instrument called the Narcissistic Personality Inventory to evaluate a group of business school students and to compare them to a group of psychology students. The business school students had an average score of 17.67 as compared to 15.19 for the psychology students. The scholars also found that the students today scored higher on the narcissism scale than students in the past (when studies were conducted in 1987 and 1992). Of course, the study does not determine whether business schools are simply attracting narcissists, creating narcissists, or perhaps doing a bit of both. Westerman and his colleagues worry about high levels of narcissism, as it may lead to riskier decision-making, among other dangers.

A second study, however, suggests that narcissism might not be all bad. Several Stanford faculty members confirm that a narcissist can undermine team performance. However, they find that a team with two narcissists may actually benefit from the fact that competition between these two individuals may lead to the uncovering of multiple new alternatives.

I'm quite intrigued by the studies. I'm particularly interested in the question of whether business schools are actually enhancing the narcissistic tendencies of their students. I actually think we might be, and that is worrisome. In what ways do you think business schools may be creating narcissists? Please share your views by leaving a comment!

Corporate Cash Hoarding

Fortune has a good article on the issue of whether 'corporate cash hoarding' is sustainable. The article refers to the fact that many companies have chosen to build up large piles of cash on their balance sheet. President Obama and many others have been arguing that these firms should be investing this capital instead of "hoarding" the cash. This Fortune article suggests that firms may be sitting on the cash for now due to the uncertainty surrounding the economy and government policy, but that this situation cannot last forever. Eventually, firms will be forced by their shareholders to either issue large dividends, or invest the cash in new equipment, employees, and the like. I think that's generally right, though I would offer one very important caveat. Many firms may be revisiting their views regarding their optimal capital structure after this financial crisis. That may mean that they choose to permanently hold more cash and maintain less debt than they had in the pre-2007 world. That means cash levels may fall as firms finally begin to invest, but they may not dwindle to pre-2007 levels. Moreover, that choice may not represent hoarding at all, but instead, a sound decision regarding capital structure.

Does inequity induce cheating?

University of North Carolina Professor Francesca Gino has conducted some fascinating research on unethical behavior. For instance, her studies have shown that people may be more likely to engage in unethical behavior if they perceive certain unjustified inequities. In short, people become upset and envious in these situations of perceived inequity, and consequently, they may be more willing to cheat as those emotions affect their behavior. The question for managers: are there inequities in your workplace that really seem unfair to some employees? If so, beware the potential dangers.

Amazon: Making Tradeoffs in Razor & Blades Strategy

Today, we learn from the Wall Street Journal that Amazon will be selling its newest Kindle for $189 with 3G and an incredibly low $139 for wi-fi only service. Without a doubt, Amazon is moving to an aggressive razor and blades model, hoping to get Kindles in as many hands as possible, with e-book sales to follow, hopefully in large numbers. What's also interesting is how clearly Amazon has chosen to make a series of trade-offs that distinguish it from the competition, particularly Apple. Here's an excerpt from the article that clearly defines the trade-offs that are at the heart of Amazon's strategy:


Mr. Bezos takes pains to distinguish the Kindle from the iPad, saying the company is committed to making a single-purpose piece of consumer electronics. Mr. Bezos said he intentionally left off some potential whiz-bang features from the new Kindle, like color and touch-screen controls, that would have introduced compromises to the reading experience such as glare. "For the vast majority of books, adding video and animation is not going to be helpful. It is distracting rather than enhancing. You are not going to improve Hemingway by adding video snippets," he said. Underscoring that, Mr. Bezos said he wasn't interested in making an Amazon tablet computer. "There are going to be 100 companies making LCD [screen] tablets," he said. "Why would we want to be 101? I like building a purpose-built reading device. I think that is where we can make a real contribution."

Talk about the essence of competitive strategy being what you choose NOT to do! Naturally, no one knows who will be the eventual winners in the e-reader/e-book space, but one certainly cannot accuse Amazon of following a me-too strategy, or of exhibiting herd behavior. They are clearly setting their own path, choosing not to do what others are doing. They might not end up being the biggest winner, but they certainly look to be a player with such a distinctive strategy.

Brady & Manning: Lessons for Obama

What can President Obama learn from National Football League contract negotiations? Currently, stars Tom Brady and Peyton Manning have not signed new long term contracts with their teams. Why? Well, the teams are reluctant to settle on contracts given the massive uncertainty regarding what rules will prevail under the new collective bargaining agreement. They are reluctant despite the fact that the teams love these two players. The lesson for Obama? The new legislation and massive new regulatory regimes, coupled with questions about new tax hikes possibly coming in 2011, have created huge uncertainty which is making firms reluctant to invest, even in what otherwise might be attractive opportunities. He has to reduce uncertainty and complexity to spur private investment. Less complexity, less ambiguity: that's the key. Thousand page bills are not helpful.

Hayward, BP, and Symbolic Leadership

One major lesson from the fall of Tony Hayward as BP's CEO: Executives must attend to the symbolic aspects of leadership very carefully, particularly when the public spotlight shines upon them. Clearly, Hayward stood on rocky ground on substantive matters related to the accident's causes and the deficiencies of the safety culture at BP. However, he made things far worse through his inability to manage symbolic dimensions of the crisis. His attendance at a yacht race off the English coast in June, for instance, sparked outrage from politicians and the general public. Failing to see the damaging symbolism of such an activity at that time constituted a major leadership failure.

Of course, this yacht race represents an extreme example. However, leaders often fail to attend sufficiently to symbolic matters. They either make mistakes in that regard, or they fail to take the opportunity to use symbolism to their advantage. Small gestures can have a big impact, both positively and negatively. As Alfred North Whitehead once said, "Symbolism is no mere idle fancy or corrupt egerneration: it is inherent in the very texture of human life."

GM's Free Ride?

More on the GM acquisition of AmeriCredit... I recommend reading this column by the "Deal Professor" over at the New York Times. Note that the Deal Professor is Steven M. Davidoff, a former corporate lawyer and now a faculty member at the University of Connecticut School of Law.

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.