Principles for Effective Observation

More and more firms are shifting their focus in marketing research away from surveys and focus groups toward direct observation of consumers in natural settings. This type of anthropological research has been a mainstay of the great product design firms for many years, and it has now become commonplace for many consumer goods companies as well. Here are a few tips on the do's and don'ts of observation, taken from my most recent book:

Principles for Effective Observation

Dos	Don’ts
Try to wipe away preconceived notions before starting your observations	Begin with a strong expectation of what you expect to see
Collect observations under different circumstances and from varied perspectives	Draw major conclusions from a very small and/or biased sample of observations
Seek informants wisely	Rely on the lone voice of a so-called expert
Take good notes, including quotes from key conversations, and collect important artifacts	Try to commit everything strictly to memory
Engage in active listening	Ask leading questions
Keep systematic track of observations that surprise you or contradict your prior beliefs	Seek and record data primarily to prove a pre-existing hypothesis

When New Execs Disappear

We have all heard the following from a candidate in an executive search process: "I will be very accessible, open to listening and hearing ideas from everyone, especially in my first few months as I learn about the organization.". Then, after a few months on the job, employees witness a disappearing act. They never see the executive. The new hire seems to always be in meetings or traveling. They never seem to be around for informal conversations, such as in the cafeteria.

What can new executives do to avoid falling into this trap, where their people lose faith because they feel the new leader has disappeared? First, one must schedule informal conversation time; in other words, allot time in your schedule for walking around a bit. Second, remind your administrative assistant not to become too overprotective about your calendar. Third, use email to solicit and invite ideas, input, and feedback, as well as to provide frequent updates on key initiatives. Fourth, make sure you stay in touch throughout your travels. Finally, hold "office hours" like a professor, where folks can just drop in without an appointment.

Complaints about Google

According to the Wall Street Journal, some companies such as Yelp, WebMD, and TripAdvisor have complained recently that Google has been favoring its own local sites over the sites of these firms. Google has responded by arguing that it is simply trying to provide the best experience for its users. The firms argue instead that Google is favoring its own local businesses when displaying search results.

The spat represents a classic example of the conflicts that emerge from vertical integration. Hmmm... you might wonder how I could use the term vertical integration to describe a "virtual" firm such as Google, that has no manufacturing plants or brick-and-mortar retail stores. Well, vertical integration involves any strategy in which a firm chooses to bring multiple steps of the value chain in-house. In this case, Google has in some sense "vertically integrated" by launching its own local sites, which it then "markets and distributes" to the world through its search business. As a result, Google now finds itself competing with its own customers, and when that occurs, accusations of favoritism are not all that rare. Many vertically integrated firms have to navigate these types of conflicts; some do it more effectively than others. It will be interesting to see how Google handles this situation.

Does Economic Growth Increase Life Satisfaction?

The question of whether economic growth increases life satisfaction has been the subject of debate in some circles for many years. In fact, the issue came to the forefront back in the early 1970s, when Richard Easterlin published a paper arguing that no relationship existed between growth and life satisfaction. The finding became known as the Easterlin paradox. He has published more recent papers re-emphasizing this point. Justin Wolfers, writing on the Freakonomics blog over at the New York Times, offers a strong and very persuasive rebuttal. Here's an excerpt from Wolfers' column:

Easterlin’s Paradox is a non-finding. His paradox simply describes the failure of some researchers (not us!) to isolate a clear relationship between GDP and life satisfaction. But you should never confuse absence of evidence with evidence of absence. Easterlin’s mistake is to conclude that when a correlation is statistically insignificant, it must be zero. But if you put together a dataset with only a few countries in it — or in Easterlin’s analysis, take a dataset with lots of countries, but throw away a bunch of it, and discard inconvenient observations — then you’ll typically find statistically insignificant results. This is even more problematic when you employ statistical techniques that don’t extract all of the information from your data. Think about it this way: if you flip a coin three times, and it comes up heads all three times, you still don’t have much reason to think that the coin is biased. But it would be silly to say, “there’s no compelling evidence that the coin is biased, so it must be fair.” Yet that’s Easterlin’s logic.

Wolfers makes a compelling case. Moreover, he ends his column by displaying a graph from data generated by the Gallup World Poll. This chart, shown at the top of this blog post, looks at levels of satisfaction and GDP, as opposed to rates of change/growth - which are the measures used in the Easterlin studies. As Wolfers points out, "If rich countries are happier countries, this begs the question: How did they get that way? We think it’s because as their economies developed, their people got more satisfied. While we don’t have centuries’ worth of well-being data to test our conjecture, it’s hard to think of a compelling alternative."

Surowiecki on Groupon

James Surowiecki, author of the fantastic book - The Wisdom of Crowds, has written a good column for The New Yorker about Groupon. He makes some great points, particularly in contrasting the company to many other "revolutionary" firms of this decade.

The Perfect Brand Name

The Heath brothers have a column in Fast Company this month about selecting the ideal brand name. They take an inside look at the process employed by Lexicon, a boutique firm that has helped create 15 brand names that have generated more than $1 billion in revenue.

What I find most fascinating about the Lexicon process is the fact that they often have multiple small teams working in parallel on a project, rather than getting a large team together in a room to brainstorm. Here's an excerpt from the Fast Company article:

Notice what's missing from the Lexicon process: the part when everyone sits around a conference table, staring at the toothbrush and brainstorming names together. ("Hey, how about ToofBrutch -- the URL is available!") Instead, Lexicon's leaders often create three teams of two, with each group pursuing a different angle. Some of the teams, blind to the client and the product, chase analogies from related domains. For instance, in naming Levi's new Curve ID jeans, which offer different fits for different body types, the excursion team dug into references on surveying and engineering.

Here are a couple of lessons that I draw from this example. First, too many firms form very large, unwieldy teams when trying to perform creative work. Yes, adding members adds to the cognitive diversity, but the size of the group eventually gets too large for the dialogue to be productive. Second, the parallel work of multiple subgroups may seem inefficient, but in fact, it offers a wonderful mechanism for stimulating divergent thinking. Finally, the use of analogies from different domains opens up people's minds to new, creative possibilities. While reasoning by analogy can be dangerous at times, in this case, the analogies are useful because they aren't being used simply to imitate what has occurred in some other domain. Instead, the analogies provide fuel for creative thinking, for the invention of a new idea based on examining what has happened in another domain.

How Budgets Distort Spending Behavior

Two economists, Jeffrey Liebman and Neale Mahoney, have written an interesting paper about how budgets affect spending in the federal government. In particular, they hunted for evidence of wasteful expenditures at year end, driven by the "use it or lose it" nature of government budgets. Here is what the Boston Globe reported about their study:

Not only does information technology spending across the federal government jump by a factor of seven in the last week of the fiscal year, but those end-of-year projects are much more likely to earn lower quality scores, based on cost overruns, delays, and management evaluations. The authors recommend allowing the rollover of unused funds.

Businesses and other organizations should be cautious about this same phenomenon. Draining unused budgets at year-end is a universal phenomenon, unless other controls are put in place (including policies such as the rollover of unused funds).

The Grinch Teaches Economics

Check out how the story of the Grinch can teach us a fair amount about externalities and economics!

Southwest Expands and Slips

Are we seeing the first signs of slippage in the Southwest model given its aggressive expansion of late? As readers of this blog now, I'm always concerned when firms begin to violate their tradeoffs, which made them unique, in an effort to drive growth. In the past few years, Southwest has moved into congested airports such as LaGuardia and Boston's Logan Airport. Now, we read from Business Week that Southwest has slipped to eighth in on-time arrivals, after being first or second for many years. Moreover, turnaround time has increased from twenty minutes to thirty minutes. Can Southwest stop the slide? How will the AirTran deal affect this decline in performance? Southwest bears close watching in the next year or so.

Chasing Stars: Should You Hire Away Stars From Your Rivals?

My former colleague, Boris Groysberg, has a new book out titled, "Chasing Stars:
The Myth of Talent and the Portability of Performance." Groysberg's work over the years has examined what occurs when "star performers" are hired away by another firm. His work shows that, in many cases, those stars experience a performance decline in their new organization. Why? Many reasons exist for that drop-off. Groysberg focuses on the notion that, often, exceptional performance is a function of not just the individual's capability, but also the support structure in their previous organization. What talent surrounded them? What systems supported them? What culture enabled their high performance?

Other reasons exist for this drop-off as well. For instance, sometimes star performers fall in love with the way they did their work at their prior organization so much so that they try to replicate that approach exactly in their new firm. They don't recognize the need to adapt certain practices and approaches to the new culture and context.

One might jump to the conclusion that home-grown talent is the way to go, given Groysberg's findings. One note of caution though... these same reasons for star performer drop-off can pertain to internal promotions as well. People can move from one team or one unit of an organization to another and experience the same type of decline for the same reasons cited above.

Do You Need an MBA to Become a CEO?

Compensation consultants from Equilar have conducted an interesting study for Business Week. They evaluated the 50 highest-paid CEOs among a list of companies with more than $1 billion in revenue. Here are a few of the key findings:

1. Less than 50% of those CEOs had earned MBA degrees.

2. Only 9 of the top 25 highest-paid CEOs received MBAs from schools ranked in the top 10 by Business Week in 2010.

3. 7 of the top 25 received MBAs from schools ranked outside the top 30 by Business Week, or they did not receive an MBA at all.

Am I surprised? Not really. We've always known that many of the most successful CEOs lack MBAs. Jack Welch and Andy Grove had PhDs. Steve Jobs and Bill Gates dropped out of college.

Having said that, what else might explain the findings, particularly given the growth in MBA programs over the past few decades? First, the magazine does note that many of today's CEOs went to school during a time when the MBA degree was not as widespread as it is today. Perhaps the percentage of chief executives with MBAs will rise if we conduct the analysis ten years from now.

Second, Business Week points to another interesting study by two scholars that highlights the value, or lack thereof, associated with an MBA. Professors Aron Gottesman and Matthew More of Pace University's Lubin School of Business published a study in the Journal of Applied Finance in which they report no relationship between company performance and a CEO's educational background. The authors explain that executives who have not earned degrees from top schools may make up for that by simply outworking others on their way to the top. Gottesman also explains, "Business schools tend to focus on technical skills, while success at the executive level is a function of broader, more subtle skills such as communication skills, interpersonal skills, and the ability to make bold decisions quickly."

Introvert vs. Extravert Leaders

Professors Francesca Gino, Adam M. Grant, and David A. Hofmann have conducted a thought-provoking new study about the role of extraverted vs. introverted leaders. The HBS Working Knowledge site has profiled their findings. Here is an excerpt:

A new study finds that extraverted leaders actually can be a liability for a company's performance, especially if the followers are extraverts, too. In short, new ideas can't blossom into profitable projects if everyone in the room is contributing ideas, and the leader is too busy being outgoing to listen to or act upon them.

An introverted leader, on the other hand, is more likely to listen to and process the ideas of an eager team. But if an introverted leader is managing a bunch of passive followers, then a staff meeting may start to resemble a Quaker meeting: lots of contemplation, but hardly any talk. To that end, a team of passive followers benefits from an extraverted leader.

The authors present interesting data from a study of managers and employees at a large national pizza delivery chain. Their work will be published in the Academy of Management Journal in 2011. I find the work fascinating, though I think one needs to consider whether the appropriateness of extraverted vs. introverted leaders may not only be dependent on the profile of the followers, but also on the external context of the firm as well as the firm's competitive strategy. For instance, if a start-up enters a highly relationship-oriented business, where the founder/CEO must be highly engaged in selling to potential new customers, it may be difficult to achieve high performance with an introverted leader, regardless of who the followers are. Simply sending an extraverted follower to close the deal with a key client may not be effective at all. Those situations may require the leader to make the sale. In sum, the study is fascinating, but I do wonder about the contextual factors that may impact the extent to which we can generalize the findings.

Neglecting the Core

Many companies face a formidable challenge when they try to launch a new internal venture. Many consultants and researchers have focused on the phenomenon of how "big companies eat their young" i.e., the core business sometimes strangles the new venture's efforts to get resources, organize differently, and develop a unique business model.

I find, however, that an equally challenging issue emerges for many companies with regard to what I call "neglect of the core." In this circumstance, so much attention gets paid to the promising, but not yet profitable, new venture that the core business fails to get the attention and resources it needs to continue to thrive. Cross-subsidization from the "cash cow" helps the new venture, but it stifles innovation efforts at the core. It also becomes harder, as a result, to attract young talent to the core. Over time, the core business falters, and it brings down the entire organization.

Showing Some Empathy to Your Customers

Sometimes, customers experience a problem, and companies simply cannot do anything to rectify the problem. In fact, the customer may have made a mistake, not the firm, and that led to a deeply dissatisfying experience. Let's take our family's own experience over the holiday weekend. We traveled by plane to Chicago for the weekend, and for the most part, we had an incredibly smooth trip. However, one of our children managed to leave an entire folder of schoolwork on the plane, including a project on which she had been working diligently for weeks. You can imagine the tears when she realized her error. I rushed back to the airport terminal from the rental car location to try to retrieve the folder. Unfortunately, the cleaning crew had already emptied all the seat pockets and thrown away all the contents.

Now, we clearly made the mistake. It was not the airline's fault that we left all this material in the seat pocket. The airline did nothing wrong. However, when I returned to the gate, the agent showed ZERO empathy toward us. She had checked the plane, having been alerted by the folks at the ticket counter to do so. She had found that the trash had been thrown away. When I arrived at the gate, she said, "The material is not there. The trash has all been thrown away." That was it. She showed no emotion. She didn't express how she understood the emotion that my daughter must have been feeling. It was Thanksgiving day, and you might expect a bit of warmth in the exchange, but we felt none. It left me upset. I didn't expect anything from the airline. I knew that we had made a big error. However, the lack of empathy troubled me.

What I learned from this experience is that good customer service requires empathetic front-line employees. Companies need to teach their employees how to handle these emotional moments. In some cases, the firm has made an error, and an apology is in order. In other cases, the firm has done nothing wrong, but it can still show that it understands the customer's pain. That may seem trivial, but to the customer in that very moment, it may have a lasting impact.

How to Avoid Becoming the Next Genzyme, Toyota, or BP

I recommend this article by Forbes columnist Saj-nicole Joni and appreciate very much her suggestion that folks take a look at my book on preventing large-scale failures.

Signs You are a 21st Century Teacher

I love this post, found on the SimpleK12: Changing Education Through Technology blog. The post is titled "21 Signs You are a 21st Century Teacher." Thank you to Bryant student Kevin Mandeville for alerting me to this terrific read.

Worker-Manager Huddles: Problem-Finding

Business Week has an article about the corporate actions that are driving productivity gains across the economy. Many firms are finding ways to do more with less, and they're avoiding the need to hire as a result. At Campbell's Soup, each shift at a North Carolina factory starts with a worker-manager huddle where the front-line employees discuss ways to reduce waste, cut costs, and streamline processes. Here's an excerpt:

"The daily worker-manager huddles are about "getting everybody involved," says "Big John" Filmore, a 28-year plant veteran. "Instead of being told what to do, we get to tell people about our problems." He helped streamline production to better fit with the plant's cleaning schedules. Now operators such as Filmore review all line schedules."

To me, this quote shows how much employees appreciate being given voice and being empowered to discuss the problems that occur each day on the front lines. In my work, I talk about how leaders must become better problem-finders. It starts with going directly to the people doing the work, listening to the issues and obstacles they deal with every day, and collaborating to define the problem that must be resolved.

Black Friday and Markdowns

As Black Friday approaches, we should consider how retailers are affected both in the short term and the long term by a deep discount strategy. If retailers offer steep markdowns on occasion, such as on Black Friday, that may drive foot traffic to the store. While shoppers are there, they will buy other full price items. Thus, the store generates a good return on the "investment" of offering a steep discount on a popular item.

However, retailers also have to consider the long term effects of offering steep markdowns. If a retailer finds itself offering these markdowns rather frequently, then customers will begin to wait to make purchases until the sale occurs. Thus, we may see customers cherry picking items when they go on sale, leading to sharply lower profitability for the retailer.

What's a retailer to do though if its competitors are all offering huge sales, particularly on a day such as Black Friday? One thing retailers must consider is how to increase the number of customer visits. How can we get customers to come back more frequently? Offering items that consumers must purchase more often, which might even be necessities, can drive traffic. That's one reason, for instance, that Target has expanded its food offering. The Target P-Fresh initiative helps drive more frequent consumer visits. For apparel retailers, they might consider offering certain items on a limited basis or in smaller batches. That scarcity effect may drive consumers to want to visit more often, lest they miss an opportunity to see a unique new item. So, as retailers enter Black Friday, they must think about how to use this opportunity not just to cross-sell full price items on that particular day, but also to encourage customers to visit more often in the days and weeks ahead. That increased frequency of visits will make those steep markdowns much more palatable for the retailer.

Probing Your Assumptions

Often, leaders and organizations make flawed decisions because they do NOT make key assumptions explicit and then scrutinize those assumptions carefully. Here are seven questions that I proposed in my last book for helping leaders evaluate the validity of key assumptions being made by decision-makers:

1. What are the facts in this situation?

2. What issues remain ambiguous or uncertain?

3. What explicit and implicit assumptions have we made?

4. Have we confused facts with assumptions?

5. How would an outsider with an unbiased perspective evaluate each of our assumptions?

6. How would our conclusions change if each of our key assumptions proves incorrect?

7. Can we collect data, conduct a simple experiment, or perform certain analysis to validate or disprove crucial assumptions?

Losing Your Overqualified Employees

The Wall Street Journal reports that many recruiters have begun to warn that firms risk losing certain overqualified employees if the economic rebound picks up speed. What's happening? They argue that many people took jobs for which they were overqualified, or at a pay rate substantially below their previous job, during the recession. They chose that perhaps suboptimal employment opportunity because they faced limited options during the downturn. Now, they want promotion opportunities and/or better pay, or they may look elsewhere as the economy recovers.

What can firms do about these overqualified employees who may bolt for the doors in the next year or so? Naturally, it would be great to promote them immediately or pay them more, but these may not be economically feasible options for some firms. What else can these companies do to retain this talent? First, the companies might think about lateral transfers for that employee. No, it's not a promotion, but it could be a great developmental opportunity and a substantial challenge for the employee. They might be tasked with taking on a new role in a different business unit, and they may find that stimulating and interesting. Second, the companies might sit with these employees and chart out a future career path with milestones in the months and years ahead, showing them how they can achieve promotions in the future provided the firm improves its performance and the employee achieves certain objectives. Third, the company can think about investing in other educational and development opportunities for the employee. Employees may be more willing to stay if the firm is giving them opportunities to participate in various leadership development programs that the firm offers. Finally, the firm might consider giving the employee more autonomy over how they do their work. Research shows that employees value autonomy, and that it increases intrinsic motivation. Providing more autonomy might also improve retention for these overqualified workers.

Ten Myths about Job Interviews

Annie Fisher has a terrific column at Fortune about the top ten myths regarding job interviews. Here is Fisher's top 10 list:

Myth #10: The interviewer is prepared.

Myth #9: Most interviewers have been trained to conduct thorough job interviews.

Myth #8: It's only polite to accept an interviewer's offer of refreshment.

Myth #7: Interviewers expect you to hand over references' contact information right away.

Myth #6: There's a right answer to every question an interviewer asks.

Myth #5: You should always keep your answers short.

Myth #4: If you've got great qualifications, your appearance doesn't matter.

Myth #3: When asked where you see yourself in five years, you should show tremendous ambition.

Myth #2: If the company invites you to an interview, that means the job is still open.

Myth #1: The most qualified person gets the job.

I especially like Myths #10 and #6. I think it's a serious mistake to assume that the interviewer is well-prepared and has spent a lengthy amount of time reviewing your cover letter and resume. A smart interviewee makes sure to highlight key aspects of their record, rather than simply presuming that the interviewer knows that already. As for Myth #6, interviewers clearly ask questions to probe the thought process of an applicant. The case interview represents the best example of that approach. In a case interview, no single right answer exists in most instances. Instead, the purpose of the case question is to develop an understanding of how an applicant approaches the problem. Moreover, many interviewees forget that they can ask questions in return during a case interview. Those questions can help to clarify the situation, access additional information, and show the type of problem-solving skills that a firm often seeks.

Executive Education: Beyond High Potentials?

Tim Westerbeck, President of Management Education Enterprises, has a thought-provoking article over at Business Week's site about executive education. He argues correctly that companies increasingly want more customization in the leadership development offerings provided by business schools, consultants, and other management education entities. Despite all the talk about customization, many business schools offer very limited amounts of it. The "off-the-shelf" nature of executive education continues to frustrate many companies.

Beyond that, Westerbeck argues that companies should not only focus on high potentials in their development programs. They have to think about the whole enterprise, including senior leaders. He argues that you can, in fact, teach an old dog new tricks.

I would take his argument one step further. Many firms do have multiple programs, with each development program tailored to a different segment of the employee population (i.e. each program focuses on a different level in the organization). I would argue that firms should consider programs designed at mixed populations. Get senior leaders in a room with more junior executives. Connecting people across levels of the hierarchy has great potential for improving collaboration, communication, and innovation in organizations. Moreover, connecting senior folks with promising young people can help executives understand better social and technological trends, as well as frustrations that young people feel in large, complex organizations.

Breaking up Microsoft?

At today's shareholders' meeting for Microsoft, Steve Ballmer responded to a question about whether Microsoft should be broken up. The question did not just out of the blue. In fact, Goldman Sachs asked a similar question recently. Ballmer argued that the whole is worth more than the sum of the parts. He and Gates explained that value would actually be destroyed by trying to pull things apart that were closely linked together. In short, they argued that diseconomies of scope would result.

I think the "whole vs. sum of parts" issue is very interesting for a firm such as Microsoft. The company is not a conglomerate with distinct business units that have few scope economies. Clearly, synergies do exist, and the businesses do have strong linkages. That doesn't mean that the firm should be kept together, but it does mean that one has to be careful when analyzing the "sum of the parts." Determining the value of a part in a related diversifier can be very, very difficult. I would be cautious about any banking analyst's calculations, and I would want to really understand the extent to which a break-up would disrupt scope economies.

Customers vs. Tasks: Stop Ignoring Me!

How many times have we waited in line at a retail establishment, while one or more employees perform some task rather than helping out a customer? The "focus on tasks, not customers" problem proves pervasive. On Sunday morning, I watched in amazement as an employee stood, with their head down buried in some paperwork, while a long line built at an allegedly "fast casual" restaurant. Her poor co-worker tried to handle the onslaught of customers, but she surely could have used some help from her colleague.

Now, retailers and restaurants clearly need employees to perform crucial tasks in order to ultimately provide customers the products and services that they desire. However, all too often, employees prioritize the task ahead of customers when they need not do so. Sometimes, the task simply must be performed before the associate can help out any more customers. What should happen then? A simple acknowledgment of the waiting customers would be helpful. That did not happen on Sunday morning. The associate simply should say: "Good morning, folks. I will be right with you. I have to complete this task in order to provide you the exceptional service that you expect. I promise that it won't be more than a few moments." Alternatively, the associate could call on one of their other co-workers to come assist with the waiting customers.

Firms should take notice. For a variety of reasons, associates seem to fixate on prioritizing tasks ahead of customers at times. Firms need to train associates more effectively in how to handle these situations, when conflicting demands fall upon them.

Abbott and Costello Job Interview

For all my students headed to job interviews, as well as all my faculty colleagues who struggle teaching quantitative analysis to their students...

Deficit Panel's Recommendations

I may not agree with all of their recommendations, but I must give Erskine Bowles and Alan Simpson a ton of credit for their bold recommendations for curtailing the federal budget deficit. Already, we hear folks railing against the notion of eliminating popular tax deductions such as the home mortgage interest deduction. However, Bowles and Simpson have also recommended lowering marginal tax rates substantially. The plan to lower rates but broaden the tax base through the elimination of many deductions makes good economic sense. A lower rate/broader base system is not only much simpler, but also more conducive to promoting economic growth. High rates coupled with many deductions yield many distortions and inefficiencies in the economy. Now, we need to educate Americans on why this type of tax reform is pro-growth. Again, I'm not suggesting that I understand or agree with all their recommendations yet, but I like the general direction in which they are heading.

Google's 10% Pay Raise

Google has announced a 10% across-the-board pay raise for all employees. CEO Eric Schmidt explained that the firm is concerned about retention as the labor market begins to heat up in Silicon Valley. Moreover, we have been reading numerous reports of defections to Facebook, whose COO Sheryl Sanberg is ex-Google.

I'm intrigued by this move given that it's not clear if this raise will improve retention substantially. Job satisfaction, motivation, and retention are driven by many intrinsic factors, not just extrinsic factors such as salary and bonus. In fact, Google has attracted incredible talent over the years because it has created a work environment that enhances intrinsic motivation. Could things have changed? As Google has grown and matured, could the challenges and excitement and potential for growth and development at other firms now exceed those at Google? If so, a 10% pay raise won't have a long term substantial impact. Clearly,a pay raise can be very helpful if coupled with a series of other moves designed to motivate talented young folks.

Danone Selling Evian, Other Bottled Water Brands?

The Wall Street Journal reports today that Danone is exploring the potential sale of its bottled water business to a Japanese beverage firm. Danone markets a variety of bottled water brands around the world, including 2 of the world's top 5 brands: Evian and Volvic. Why might Danone be considering exiting the business? The paper indicates that Danone has become less enamored with the business because of slowing growth, associated in part with short term recessionary pressures coupled with longer term environment concerns about bottled water. Of course, the paper also indicates that the French government may be concerned about losing national control of a iconic brand such as Evian.

A broader lesson exists here though. Consider bottled water relative to the soda business. Why is the bottled water business not as attractive as the soda business (think carbonated cola)? Clearly, the carbonated cola business has a much higher degree of product differentiation than bottled water, not in tangible terms but in the all-important intangibles. As a result, we see much more price competition in the bottled water business. Moreover, the cola business has much more substantial barriers to entry, particularly with regard to distribution. Bottled water also has a much closer substitute, namely tap water! We could go on. The point is simple: while these two businesses might appear quite similar at first glance, a closer look reveals stark differences in industry structure between carbonated cola and bottled water.

What Apple and IBM Have in Common

The New York Times has an interesting story today comparing Apple with IBM. In that article, my former colleague at Harvard Business School, David Yoffie, argues that the two companies actually have a great deal in common... despite the many superficial differences that seem quite stark. Here's an excerpt from that article:

I.B.M. and Apple pursue different markets, but there is a similarity in their strategies, according to David B. Yoffie, a professor at the Harvard Business School. The big shift at I.B.M., he notes, came about 15 years ago, when the company tilted increasingly toward technology services and software and relied less on hardware. (The change began under the former chief executive Louis V. Gerstner Jr. and accelerated under the current chief, Samuel J. Palmisano.)

The goal, Mr. Yoffie adds, was to build a profitable business with a lot of recurring revenue, based on service contracts and software licenses, and to attract industry partners and software developers to use its technology.

Over the last 10 years, Apple has embraced much of the same strategy — in broad strokes. The company’s partners and developers build on its iPhone and iTunes software and share with Apple their revenue for music and software applications sold on the iStore. These complementary offerings encourage more sales of Apple’s hardware, and have become money makers on their own.

“Each company has created an ecosystem of partners and developers around its core products,” Mr. Yoffie says. “And both depend on ongoing innovation.”

Brand Deposits and Brand Withdrawals

I found this exchange between a Wall Street Journal interviewer and Disney CEO Bob Iger to be quite interesting:

WSJ: You're spending $1 billion to overhaul Disney California Adventure, Disneyland's less-famous neighbor. Why?

Mr. Iger: [Apple CEO] Steve Jobs is fond of talking about brand deposits and brand withdrawals. Any time you do something mediocre with your brand, that's a withdrawal. California Adventure was a brand withdrawal.

We debated, "Should we make it one park?" Raise the price at Disneyland, and suddenly one ticket buys you the whole thing. I even had Imagineers design that.

[But] we would have had to put in transportation systems. It would have cost us so much money to put the monorail in. And to do other things to create one park. That didn't make sense.

We all concluded that the only way we would improve returns on that park is if we made it better and we made it bigger. And we decided to put what is now [around] $1 billion into that.

The exchange proves interesting, because it stresses that few moves by a successful differentiated brand are "neutral" - you are either adding to brand equity or you are diluting it. If you are accustomed to providing "wow" experiences, and charging premium prices for it, then you can't just settle for providing an "ok" experience. That can detract from the brand overall, and it can affect customers' willingness to pay for a wide range of your products.

Taxpayer Funding of Stadiums

According to the Wall Street Journal, taxpayers across the US are pushing back at funding new sports stadiums. Surely, that trend is not surprising given the economy and the concerns over excessive government spending and debt. However, perhaps there is more to the story. Perhaps taxpayers are getting more savvy with regard to the costs and benefits of these projects. When these proposals emerge, we always see studies arguing for a huge stimulus effect to the local economy. However, many of these studies have a fatal flaw, namely that they don't consider the fact that much of the new spending by consumers on tickets, parking, and concessions is not really "new.". It's really just a shift in consumers' spending patterns, with these new purchases displacing other forms of entertainment consumption. Thus, the economy isn't really seeing a net positive. Moreover, these estimates always must be taken with a grain of salt, since the consultants performing the studies are often paid by team owners. Finally, cost estimates foe these big projects are notoriously optimistic; costs can easily exceed original estimates, as with many large public projects.

Fortune's Businessperson of the Year

Fortune has been running an on-line election for its Businessperson of the Year. Here is how Fortune describes the contest:

On Nov. 18, Fortune magazine will name its Businessperson of the Year, an honor that goes to the leader who made the biggest mark in business in 2010... We start with 32 contenders, seeded and matched-up by the editors of Fortune. Go through each contest and pick which leader you think made a bigger impact in 2010. You must select a winner in each bracket to submit your results. At the end of the week, we'll close voting, find the winners, and return Monday with a new round, repeating until the winner is revealed on Monday, November 8th.

Of course, I find the contest fun and interesting. I'm particularly intrigued by the two finalists: Alan Mulally, Ford's CEO, and Steve Jobs, Apple's iCEO. While it's fun to take a look at this matchup, as well as the entire bracket, the entire premise of the contest should not cause us to miss a key point about leadership. The vote is supposed to be about who made the biggest impact. However, the situations faced by these leaders are quite different. In 2010, Mulally was in the midst of engineering a massive turnaround. At the same time, Jobs led an already very successful company who was trying to bring the next big breakthrough innovation to market. It's like comparing apples to oranges. They both made a huge impact, but in a quite different way. Let's take it one step further.

As we assess all these folks as leaders, we ought to ask: Are their leadership capabilities well-suited to the current situation they face, and would they be less appropriate for a very different context? We love comparing people, but we have to remember that some leaders' skills are particularly amenable to certain kinds of situations. Some folks are great turnaround artists, but might not be the right fit for a young start-up trying to get off the ground. Others may be great at launching a new business, but not so effective at scaling a business. Of course, some leaders are incredibly adept at adapting their approach to different situations and contexts. However, not all leaders can do that; some simply have an approach that works better in particular contexts.

Hayek vs. Keynes: The Sequel

Are you a strategic leader?

On Forbes' website, Kate Beatty, from The Center for Creative Leadership, has a terrific article that seeks to define the key attributes of an effective "strategic leader." By that, she means someone who isn't just delivering short-term operational results, but who is a good strategist positioning the firm effectively against its rivals for the long term. She identifies three key characteristics, which she describes as strategic thinking, acting, and influencing:

1. "First, strategic thinking is grounded in a strong understanding of the complex relationship between the organization and its environment. It requires taking a broad view, involving the right people, with important information and perspectives, asking probing questions and facilitating conversations. Strategic thinkers then identify connections, patterns and key issues."

2. "Next, strategic acting involves taking decisive action that is consistent with the strategic direction of the organization--despite all ambiguity, complexity and chaos. A strategic plan is only a plan; an organization's actual strategies lie in the decisions and choices people make."

3. "Finally, strategic influencing is about building commitment to the organization's strategic direction by inviting others into the strategic process, forging relationships inside and outside the organization, and navigating the political landscape."

Cultural Differences in Decision Making

I'm reading Sheena Iyengar's book, The Art of Choosing, which I'm enjoying a great deal. In the book, Iyengar describes some critical cultural differences in how individuals make decisions. She talks about one broad distinction in cultures around world: individualism vs. collectivism. Some cultures, such as the U.S., are much individualistic, while other cultures, such as Japan, are much more collectivist. These cultures differ in a number of ways. For instance, individualistic cultures tend to emphasize choice, while collectivist cultures tend to emphasize one's duty.

Iyengar describes some fascinating studies she has done on cultural differences in decision-making. Take one study with 7-9 year old students, half of whom were Asian American and half of whom were Anglo-American. She assigned the students randomly to one of three groups. One group looked at some anagrams and colored markers and told, "Here are six piles of word puzzles you can choose from. Which one would you like to do? It's your choice." Children could choose which category of anagrams to work on and which color marker to use. A second group of children were told by the person running the study to work on a particular category of anagrams and to use the blue marker. A third group was told that their mother wanted them to work on a particular category of anagrams and use a particular color marker.

Interestingly, the Anglo-American children did best when given total personal choice, while the Asian American children did best when they felt that their mothers had chosen for them. The Asian-American children who thought their moms had chosen for them "solved 30 percent more anagrams than those who were allowed to choose their materials themselves." These children also spent much more time playing with the anagrams than those children who had chosen for themselves. Anglo-American children, in contrast, reacted with embarrassment when told their moms had been consulted about the exercise!

The point is that people raised in individualistic cultures tend to value autonomy and choice very highly, while the collectivist culture emphasizes shared goals and objectives. Consequently, we see individuals taking a very different perspective with regard to how decisions are made, and how they feel that they should be made.

Value-based pricing

Many companies selling industrial products employ value-based pricing. By that, I mean they calculate the economic benefits for the customer of their product vs rivals' products. Many of those benefits occur over time, not just at the point of purchase. In those instances, firms must be very aware of the time horizon and discount rate of their customers. If they have a short horizon, if they are going to upgrade to a new product in just a few years, then that limits the benefits your product will provide, and limits the price you can charge. Similarly, if the buyer has a high discount rate, they will devalue benefits in the out years, decreasing their willingness to pay for your product. If a firm is selling it's product in developing markets where buyers have less access to capital, they may not be able to charge as much, because buyers will have much higher discount rates.

Should leaders NOT be brand loyal?

Should a business leader be completely loyal to his or her firm's products? That may seem like a stupid question. You might think that it's obvious that they should be loyal. After all, if they aren't dedicated to their own products, why should customers be? However, if leaders want to keep their thumb on the pulse of the competitive marketplace and stay in touch with key trends, they must purchase and consume competitors' products on a regular basis. They can't just observe those products from afar. They need to dig in and understand the purchase process for those products, and then they need to understand what's it like to be a typical consumer of that product. That means you have to do more than just casually handle the product once or twice. You need to become a regular user of some competitors' products or services. Regular use proves critical, because you often do not understand the key benefits and disadvantages of a product or service at first glance; you may learn the key advantages, as well as pain points, as you consume the product or service over time.

Your New Venture: Try Selling Aspirins, not Vitamins

The Heath brothers have another terrific column in Fast Company magazine this month. In their article, they describe how entrepreneurs must not just build a better mouse trap, but make it clear why that mouse trap addresses a "felt need" of the consumer. Here is what they say:

If entrepreneurs want to succeed, as venture capitalists like to say, they'd better be selling aspirin rather than vitamins. Vitamins are nice; they're healthy. But aspirin cures your pain; it's not a nice-to-have, it's a must-have.

The must-have vs. the nice-to-have: it's a wonderful distinction that all entrepreneurs must keep in mind. Find those pain points for consumers and then design a product or service that addresses that well. The Heaths have some nice examples in the article, including NetFlix, which discovered a felt need when it eliminated late fees. As an another example not found in the article, consider Commerce Bank. It created a very different kind of bank, one much more focused on providing a pleasant customer experience. In fact, that experience was so satisfying for consumers that it could attract savers without offering higher interest rates than rivals. Commerce Bank, for instance, discovered that one pain point for many consumers was the limited hours during which banks were open. Thus, Commerce became one of the first consumer banks to have extended hours during the week, as well as hours on weekends.

GM IPO

This article from Fortune suggests that financial planners are fairly negative on the forthcoming GM IPO. The article raises several good points, including the fact that GM employees and dealers might want to be cautious about buying some of the 5% of shares set aside for them in the IPO. After all, they already have their livelihoods tied substantially to GM's performance and survival. Adding to their level of risk by purchasing large amounts of stock would not be prudent at all.

Overall, the article raises legitimate questions about the IPO, including the issue of whether an investor will be comfortable purchasing shares in a firm that is now on its fourth CEO in the past year or so. When you invest in a stock, you don't just invest in that firm's technologies, products, and strategy. You invest in its leadership team. It's hard to invest in this team, given the turnover over the past year. Perhaps they will do a fantastic job, but a great deal of uncertainty exists. All of these issues point to the big overarching question: Is this really the best time from a financial standpoint for an IPO? It's hard to answer that question affirmatively given all these concerns and questions.

After Action Reviews

I spent yesterday at the US Air War College at Maxwell Air Force Base in Alabama. During a series of seminars, I had the opportunity to discuss a range of leadership topics with some of the best officers in each branch of our military. One topic involved After Action Reviews and examinations of near-misses. We discussed why they are so effective in the military, and why it's been difficult for companies to emulate this practice successfully. A number of issues arose. First, the military handles the lesson learned exercise separate from any examination if potential wrongdoing. Second, leaders are taught from their first days in the military how to examine themselves critically and how to accept a critique of their actions. Third, they don't rest on success. They don't let a successful outcome reduce the level of scrutiny applied to processes and decisions. The outcome is almost irrelevant in terms of how they go about evaluating a mission with a critical set of eyes. Finally, they never avoid doing a review simply because "they are busy" - something business managers say all the time. Those are just a few of the key ideas that emerged. I'm quite sure many firms would benefit if they made lessons learned as high of a priority as these soldiers do. What a pleasure to learn from these fine men and women who defend our freedoms. May God bless them and keep them out if harm's way.

The Cost of College Tuition

Everyone is very focused on the cost of college tuition these days. Some say we are in the midst of the next bubble to burst. Are there any good ideas for reducing costs? After all, to get prices down, we have to get costs down. One intriguing idea offered by several folks is to operate colleges on a 12 month calendar, as opposed to the current 8-9 month calendar, whereby the campuses are underutilized in the summer months. The key benefit, of course, is that you could leverage fixed costs more effectively by better utilizing expensive assets.

Does Groupon Help or Hurt Businesses?

The Street.com reported recently on a new study by Utpal Dholakia, associate professor of marketing at Rice University's business school. He conducted a survey of 150 businesses that had signed up with Groupon in 19 different cities. Interestingly, and rather surprisingly, 2 in 5 businesses reported that they were not likely to use a Groupon promotion again.

What happened to cause dissatisfaction at a number of businesses? Well, it turns out that some firms aren't well-equipped to handle the huge surge in customer volume. As a result, some customers have a rather negative experience. Moreover, employees can become frustrated by the hectic situation. Interestingly, some of the customers who may be the most dissatisfied are the loyal, local customers who visit that business regularly, and who may not even be aware of the Groupon promotion. They are not used to waiting for a table at the restaurant, for instance. Now, they find themselves with a long wait, delayed service, and the like.

Firms, then, must take great care when using a Groupon promotion. First, they have to be ready for the surge in volume. That means taking a close look at core business processes as well as manpower levels. Second, they have to consider how their most loyal customers will respond to the sudden surge in new customers. Of course, it's not just the increased volume that may turn off new customers. Companies need to be mindful that the customer responding to the Groupon promotion may be different in kind from the core loyal customer. Those differences, if substantial enough, can cause challenges in providing high levels of service. Clashing customer expectations, needs, and wants must be considered carefully, as this new set of customers arrives.

Can a Product Recall Help Your Brand?

New research suggests that how your firm handles a product recall cannot only help preserve brand equity, but perhaps even enhance it. Consider these findings from research conducted by Chris Malone and his colleagues at Relational Capital Group, in conjunction with Dr. Nicolas A. Kervyn at Princeton University and independent market research provider Candice Bennett & Associates. Here is Chris Malone's description of the findings:

In September 2010, my firm, the Relational Capital Group, collaborated with Dr. Nicolas A. Kervyn at Princeton University and independent market research provider Candice Bennett & Associates to conduct an online survey of 1,000 U.S. adults regarding several recent product recalls. Importantly, we examined customer beliefs about the handling of these recalls, as well as the purchase intent and loyalty for each recalled brand relative to its key competitors.

Overwhelmingly, respondents indicated (93 percent) that product recalls reveal the "true colors" of companies and brands, presenting a unique opportunity for them to demonstrate they care more about the safety of customers than their own profits. Moreover, 87 percent agreed they are more willing to purchase from, and remain loyal to, a company that handles its product recall in an honest and responsible way. These startling findings fly in the face of our instincts to hide our mistakes from customers.

Luxury Brands and Online Customer Reviews

Interestingly, many luxury brand firms have resisted allowing customers to post on-line reviews of products for many years. Things have begun to change though. As the Wall Street Journal reports today, some luxury brands have followed the lead of Nordstrom, which began enabling customers to post feedback about products last fall.

Why have luxury brand firms been late to the customer review party? Well, they like to think of themselves as being on the leading edge of fashion. They do not want to be seen as developing products simply by focus group and customer survey; instead, they want to be pioneers who bring new creative ideas to their customers, ideas that perhaps would not have even come to the usual customer's mind before they see them on a store shelf.

While I can understand the rationale of the luxury brands, I think they ultimately must embrace customer reviews. Whether it's on their site or not, customers are talking about their brands and products on-line. Ignoring the power of customer reviews seems a perilous move. After all, reviews can not only provide the company important feedback; they also create network effects. By that, I mean that customers will derive more value from a luxury retailer's website as the number of users go up, if many users are offering interesting reviews. Amazon, NetFlix, and others all benefit from that network effect phenomenon. Why should the luxury retailers miss that opportunity? Finally, just because customers are offering that feedback does NOT mean that luxury retailers can't still be fashion pioneers. What it does mean is that they can't simply blame the customer when a new product falters. In the end, fashion isn't leading edge unless someone chooses to actually wear it. Blaming the customer never gets you anywhere.

New JetBlue Ad Campaign

Some funny new ads from JetBlue, which make a powerful point...

Job Rotations: Too Fast?

Generally, I'm a proponent of developing leaders within an organization by rotating individuals through a series of increasingly challenging assignments, particularly early in their career. However, some firms' practices concern me, because they seem to move people at a very rapid pace. Why worry about fast rotations? As people advance in their career, they work on increasingly complex projects. These projects, from conception to complete execution, often take quite some time. If their job rotation is too short in duration, then individuals may not see a plan that they conceived all the way through to completion. In that type of situation, we may actually not be maximizing their learning and development by moving them on to a new assignment so quickly. Moreover, it may become very difficult, if not impossible, to judge their performance, if they have moved on before an project has been implemented fully. To some extent, then, fast rotations encourage and reward people with big ideas, but don't actually examine whether they have the skills and capabilities required to translate those ideas into action.

Starbucks: Better Drinks, Longer Lines?

Starbucks has announced some changes in the way it makes coffee drinks in an effort to enhance quality, reduce errors, and increase consistency over time and across locations. For instance, the firm has instructed baristas to not make more than two drinks at a time, to steam milk for each drink individually (as opposed to making a whole pitcher and using for multiple drinks), and to use only one espresso machine at a time. Today's Wall Street Journal reports that some baristas worry that the wait times could increase.

As a frequent Starbucks customer, I certainly applaud the efforts to enhance consistency and quality. The quality vs. speed issue raises some interesting questions though. In many ways, Starbucks has two types of customers. Some devoted fans are coffee aficionados who care about quality above all else. Others are more "casual" coffee drinkers who place a priority on speed, particularly in the morning on their way to work. Starbucks wants to maintain its brand credentials with the coffee aficionados, and thus it's taking these steps to enhance quality and consistency. On the other hand, a large stream of revenues comes from the "less expert" customer who just wants their drink quickly. To some extent, meeting the needs of one subset of customers may come at the expense of the other. Many companies face this type of tension as they grow from their original differentiated niche strategy toward a mainstream brand.

Now, the article today also mentions though that Starbucks has been working on many process re-engineering efforts to reduce waste, eliminate unnecessary steps, and streamline key processes. All these efforts may have the "double benefit" of increasing quality and enhancing speed. To the extent that these efforts prove successful, Starbucks customers may not face longer wait times. What Starbucks seems to be doing is slowing the baristas down in a few key areas where it can really enhance quality, while trying to offset that impact on wait times by eliminating other steps and processes that do nothing to contribute to increased quality. If it works, everyone wins - Starbucks, its baristas, and its customers.

More on the Sun Chips, Gap Logo Backlash

There is more news regarding both the Sun Chips and Gap logo controversies that I blogged about last week. As you may recall, Sun Chips pulled most of its biodegradable bags off the market because of complaints, many via social media, about how loud the bags were. Similarly, Gap faced a major backlash via social media in recent weeks. They had launched a new logo, which was criticized widely on many social media platforms. Gap responded by saying that they would use crowdsourcing to see if consumers had better logo ideas.

Now, Sun Chips has faced a counter-reaction via social media. Many people are now coming forward to criticize the company's decision to pull the biodegradable bags from the market. As you can imagine, many of these people think that the environmental benefit should outweigh concerns about noise. Similarly, Gap faced a counter-reaction about the use of crowdsourcing to design a better logo. The firm now has abandoned the crowdsourcing idea.

What do these two stories illustrate? Perhaps most importantly, they tell me that firms have to be careful about how quickly they react to commentary via social media platforms. They have to consider the response bias question: Are the folks who are commenting actually representative of typical customers? Moreover, firms have to consider the new and varied reactions that will emerge from any decision made in response to an initial batch of feedback from social media users. What will the chain of events be that might be unleashed by a reaction to social media feedback?

Bryant University Open House

I look forward to seeing many prospective students and their families at the Bryant University Open House on Saturday, October 23rd. Learn all about Bryant's business programs. I like to say that Bryant offers a business education that extends "Beyond Books, Boundaries, and Borders." By that, I mean we engage students in learning well beyond the standard textbooks; we offer real-world applied education with lots of active/experiential learning experiences involving various kinds of companies and organizations. We extend beyond boundaries because we offer an interdisciplinary education, including the arts and sciences alongside business education. Finally, we extend beyond borders with our global focus, various study abroad opportunities, and diverse international faculty. Come learn more about us on October 23rd!

What makes a group intelligent?

Anita Woolley of Carnegie Mellon and several of her colleagues have conducted a fascinating new study on group intelligence, which they just published in the journal Science. The scholars found that a group's ability to perform certain cognitive tasks is not correlated with the individual intelligence of team members. (It's also not correlated with motivation or happiness of individual members.) In fact, groups that deferred to an apparent expert in the group tended to not do so well on these tasks. Instead, groups with more balanced participation tended to perform well. Moreover, they found that groups with a higher proportion of women tended to do well.

Why do groups with more women perform better? Woolley explains that it's not so much about gender in and of itself that drives performance, but the fact that women tend to have a higher degree of social sensitivity. By that, she means that they are more able to identify and react to emotional cues during a group conversation. That social sensitivity tends to insure that people with diverse perspectives and knowledge all speak up and contribute to the team conversation. That balanced, open dialogue enhances group performance on cognitive tasks.

The Gap: Crowdsourcing to Correct An Error?

This week, the Gap introduced a new brand logo. The response, via various social media platforms, has been quite negative. How did the company respond? It posted this message on its Facebook page:

Thanks for everyone’s input on the new logo! We’ve had the same logo for 20+ years, and this is just one of the things we’re changing. We know this logo created a lot of buzz and we’re thrilled to see passionate debates unfolding! So much so we’re asking you to share your designs. We love our version, but we’d like to... see other ideas. Stay tuned for details in the next few days on this crowd sourcing project.

What do we make of this rapid reaction by the company? At first glance, it seems quite ingenious to turn to crowdsourcing to address the negative feelings many consumers have about the new logo. They certainly have created a ton of buzz about this logo change. On the other hand, the move raises some fundamental questions. First, how does the company know if the negative reactions are coming from loyal customers, or just folks who like opining on various topics via social media? Second, how does the firm know if the negative reaction will translate into any lost sales? Third, will this move make it difficult for the firm to work with professional designers in the future? Won't they be upset by the rapid abandonment of something created by one of their professional colleagues and the turn to free crowdsourcing instead? Initial reactions from some in the design community have not been positive. Finally, won't the very same people who chose this logo be sifting through all the submissions in this crowdsourcing effort? What makes the firm feel that they will make a better decision this time. Clearly, the Gap needs to think carefully about its criteria and its process for selecting a new logo before it starts to pour over these submissions. Otherwise, it may make yet another error.

Hasbro's New TV Channel

Hasbro will be launching its own television channel on Sunday, according to the Wall Street Journal. The network, called The Hub is a joint venture with Discovery Channel, and it will target boys in the six to twelve year old age group. That segmentation strategy fits with Hasbro's product portfolio, which has many products targeted toward young boys (vs. Mattel, which is more girl-oriented with its product line).

Is this a wise move? We can debate whether Hasbro can succeed in a somewhat crowded market, up against rivals such as Disney and Nickelodeon. We certainly know, however, that firms such as Disney have succeeded by driving synergy between a consumer products division and a stable of television networks.

The broader question, though, is whether it makes sense for Hasbro to be in both the toy and television business. After all, Hasbro's ultimate goal here is not simply to have a popular television channel. It's goal is to sell more toys. The central issue is whether Hasbro will be able to sell more toys and games by owning its own TV channel than it could otherwise do through partnerships with established television networks, who have extensive experience in developing children's programming.

Moreover, another issue will be whether Hasbro's strategy will lead to conflicts with other TV networks, such as Disney, with whom it regularly works on licensing deals. For instance, Hasbro sells a great deal of Marvel merchandise. Yet, Disney now owns Marvel. Presumably, Disney will want to air many Marvel-oriented shows on its own channels. This article in the Wall Street Journal suggests that Hasbro is unlikely to show Marvel programming on its new channel. Will other issues such as this arise moving forward? Will it hurt Hasbro's core toy business if they are now increasingly competing with companies that have been strategic partners in the past?

How Companies Solicit Ideas from Inventors

The Wall Street Journal has an article today about how companies are soliciting new product ideas from inventors. According to the article,

In an effort to better connect with inventors, some large manufacturers including Clorox Co., Kraft Foods Inc., , General Mills Inc., Staples Inc., Procter & Gamble Co. and GlaxoSmithKline PLC, have launched websites in recent years for soliciting product ideas. Some of the sites occasionally feature specific requests from the companies' research-and-development teams.

Several years ago, a Bryant University Honors student (Taryn Beaudoin) and I worked on some research at Gamewright, an innovative game and puzzle company based in Massachusetts. Gamewright similarly solicits ideas from outside game inventors from all over the world. What we found, though, is that one of the crucial tasks in this process is the filtering mechanism. Several people sifted through these thousands of ideas, looking for gems. We found that this process often relied heavily on the intuitive judgment of those performing this filtering task. Moreover, the ideas that came from inventors often needed substantial refinement.

Thus, the task of the creative folks at the company was to not only filter out the best ideas, but then to figure out how to take the idea to the next level. The research showed us that mass collaboration and open innovation can be quite powerful, but companies must master this "filter and refine" process if they wish to truly derive innovative new products from these efforts.

The Stand-up Economist

Sun Chips: The Law of Unintended Consequences

In the rush to make their products more "green," lots of companies are adapting their products and packaging. The story of Sun Chips offers a cautionary tale to those rushing ahead with efforts to burnish their green credentials. Several months ago, Sun Chips came out with biodegradable bags for their chips. The company marketed the bags as 100% compostable, as they were constructed from biodegradable plant material. Unfortunately, the new bags are very loud, which annoyed many customers. Talk about an unintended consequence. What's interesting, of course, is that the noise level of the bag turns out to be very important to the consumer. That's not something that one might readily consider as a crucial product attribute. In fact, it probably wasn't top of mind at all for either the firm or the consumer, until the technology changed. Suddenly, this became a critical attribute to the customer.

How did the consumer backlash grow? Social media, of course! Here's a funny story from the Wall Street Journal about how customers complained via social media:

It is louder than "the cockpit of my jet," said J. Scot Heathman, an Air Force pilot, in a video probing the issue that he posted on his blog under the headline "Potato Chip Technology That Destroys Your Hearing." Mr. Heathman tested the loudness using a RadioShack sound meter. He squeezed the bag and recorded a 95 decibel level. A bag of Tostitos Scoops chips (another Frito-Lay brand, in bags made from plastic) measured 77.

Flagship Retail

My students and I received a tour of the Toys R Us flagship store in Manhattan today. We learned a great deal about the keys to running a successful flagship. These include:

1. Provide product demonstrations to encourage trial of new and exciting products.

2. Create entertainment opportunities to draw people to the store (the Ferris Wheel at Toys R Us).

3. Partner with product companies to create special events for product launches, movie openings, etc.

4. Partner with firms to create special products tailored to that particular city.

5. Use the store to experiment with concepts and ideas that might then be rolled out to all regular stores in the chain.

Controlling the JetBlue Experience

I spent this afternoon touring JetBlue's operations at JFK airport. I was so impressed by how the airline completely controls the flying experience in Terminal 5. JetBlue branding, image, and values permeate the terminal. It reminds of how Apple and Disney want to control the entire customer experience. So many airline customers spend a great deal of time in the terminal. Leaving that phase of the flying process in the hands of others isn't the way to insure high customer satisfaction and a consistent image. Scale is key though. You need enough critical mass to be able to operate an entire terminal.

Pop-Up Explosion

Recently, Toys R Us announced an expansion of its holiday "pop-up" store strategy, which it employed quite successfully last Christmas. I blogged about that strategy at the time, arguing that it had great potential to grab market share in the down economy given the demise of other mall-based toy stores, while minimizing the long term fixed cost investment that imperils many brick and mortar retailers.

Now, we read today in the New York Times that Borders will be opening 25 pop-up stores for this holiday season. It seems that pop-up stores have become all the rage in retail. The Borders case seems quite interesting, because we all know the severe challenges facing brick and mortar booksellers today. However, perhaps Borders will discover that there is an opportunity for a physical space to be useful on a temporary basis during the holiday season to drive gift purchases.

More broadly, pop-up stores might be useful for more than just driving sales (or building marketing buzz, as Target has used pop-up stores to do in places such as Manhattan). Pop-up stores might be fertile ground for low cost, low risk, fast experimentation that could drive innovation in these retailers. Therein lies the true long term potential of a smart pop-up store strategy.

Developing More Bold, Creative Military Leaders

Renny McPherson has a thought-provoking article in the Boston Globe about why the military may not be producing enough innovative leaders such as General David Petraeus. McPherson argues:

Petraeus may yet be hailed for saving the day. But he also got a new boss and moved one step down the chain of command. How does this happen to the best our military has to offer? Why was there no other general to take the job?The short answer is that the US military has failed to produce enough leaders like Petraeus--the kind of broad-minded, flexible strategic thinkers needed to lead today’s most difficult missions. And a large contributor to this failure is the military’s inflexible system of promotion, which can actively discourage young officers from getting the mind-expanding, challenging experiences that could turn them into potent generals.

McPherson explained the major conclusions from interviews with 37 top military leaders, who were provided assurances of anonymity when they commented:

Given a guarantee of anonymity, they talked openly about the experiences that had helped them become better strategic thinkers. They reported that most beneficial experiences--sustained international experience, civilian graduate education, and taking on special opportunities out of the military mainstream--were the very ones that they felt discouraged from pursuing. As one interviewee said, ”My career has been an aberration. I am surprised I’ve achieved up to this level.”

What's the lesson for companies interested in developing future leaders? Mind-stretching assignments may be "off the beaten path" at times. They may involve multiple lateral moves, different kinds of educational experiences, or assignments to smaller, seemingly inconsequential - yet highly innovative - parts of the business. They may not be on the usual "career track" for managers. However, such challenging, unconventional experiences may be just the right type of diverse experiences required to develop an innovative and creative leader of the future. When charting the career path for a "high potential," the question is not just how to enhance the skills required to climb to the next rung on the corporate ladder. The key is also to think about broadening their perspective and enhancing their critical/strategic thinking skills for the long haul.

Excess Capacity in the Auto Industry

Business Week has an interesting article on its website about European automobile industry manufacturing. The article points out that, "Not a single European automobile plant closed during the recession, while 18 assembly factories have been shuttered in the U.S. since 2008. European governments prevented the biggest automakers from firing workers and used subsidies to prop up sales." In fact, the article goes on to compare two Fiat plants, one of which makes 7 cars per worker per year, versus 53 cars per worker per year at another plant in Italy. How can such productivity gaps be sustained? The answer, of course, is that European governments make it virtually impossible for automakers to rationalize capacity in an efficient manner. For many years, the US automakers also maintained far too much capacity.

What's interesting, of course, is that excess capacity may also become a problem in China in the next few years, one of the fastest-growing automobile markets. The reason, there, is that many players have rushed to build capacity in that market, yet the industry is still much more fragmented in China than in most other parts of the world. The central government recognizes the need for industry consolidation, and it has called for it. However, provincial governments appear to be barriers to rationalization and consolidation, because they either have an ownership stake in a local, state-owned enterprise, or because they don't want to lose local jobs. Thus, we have capacity and rationalization issues in both the East and West, though one is a high-growth market and the other has been either stagnant or in decline for the past few years.

Leaders: Avoid the Rarified Air!

What a wonderful piece of advice for leaders from A&E Television Networks CEO Abbe Raven, published in the New York Times:

Q. Let’s say you’re on a cross-country flight, and you sit down next to someone who, it turns out, is on track to become C.E.O. at her company. And she asks you, “What do I need to know?”

A. I would tell them to avoid rarefied air.

Q. And what does that mean?

A. There are many executives who only travel on private planes, go from office to car to home to a hotel, and you’re not really experiencing the world. I take the train in every day. I look at what people are reading, watching, what devices they’re using. I go shopping. I buy the milk in the house. I watch TV.

You want to make sure that you’re in touch with not only your employees, but also your customers and your viewers, and what they like and don’t want. Be out there. Don’t let yourself get trapped in your office. You need to be in the world. And the world is not just other executives.

Does Education Pay?

From the U.S. Department of Labor

No Frills Airline

For those faculty members and students who examine case studies about low-cost airlines such as Southwest, check out this hilarious old video about "no-frills airlines" from the Carol Burnett Show (yes, I'm dating myself!).

Does Private Equity Outperform the Market?

According to a new study by Chris Higson, professor of accounting at the London Business School, private equity returns over a 25-year period did not surpass the overall market. Here is an excerpt from an article in the Wall Street Journal about Higson's findings:

The majority of private-equity investors made "at best a market return" between 1980 and 2005, according to research by a London Business School professor. Chris Higson, professor of accounting at the London Business School, compiled previous findings by academics on global returns from private-equity funds from 1980 through to the early 2000s. He said that the research found there was a significant split among private-equity investors. While the top 25% of funds outperformed the public markets during this period, the remaining 75% of funds underperformed.

The Closer vs. Network TV

At this time each year, I wonder why the major television networks continue to cling to a very traditional model for airing new shows. Why precisely should most programs debut in mid-September and end in early to mid-May? Yes, some reality shows now run in the summer, and a few other programs debut in January. However, by and large, the major networks continue to operate on a very traditional September to May schedule. The question is: Do their customers like or want this schedule? Would they be better served by engaging in some programming innovation?

Well, they have not innovated, and cable networks have done a marvelous job of stepping into that void. Let's take TNT and USA, both of whom have done a marvelous job of counter-programming. Shows such as The Closer run during the summer months, and then again in December-January, when many network shows are airing re-runs. The Closer built quite a following with this schedule strategy. The success of these shows on TNT, USA, and other cable stations shows that the major networks lost an opportunity by not moving away from their traditional September to May schedule.

What's the broader lesson? Ask yourselves: What are the most rigid aspects of my competitors' business models, and how can I take advantage of those rigidities? That question may result in a very successful innovative strategy for your company.

Where are the Economies of Scale in Your Business?

Many CEOs like to claim that powerful scale economies exist in their industries. Why? Well, if large economies of scale exist, then they can make a persuasive argument for growing the size of their firms. Larger firms means more power and more pay in many cases. However, the question is whether such enormous scale economies exist in every industry. The answer is simple: Of course not! In some industries, such as airplane manufacturing, the scale economies are huge and obvious. In others, such as fitness centers, the economies of scale are rather modest. As investors and analysts of companies, we need to become much more critical and skeptical of scale economy arguments. We can't just accept the assertion that bigger is better.

In some industries, it is especially important for executives, investors, and analysts to understand precisely WHERE the scale economies exist in the value chain. For instance, many people presume that large scale effects exist in the cola business, given that there are two large, dominant players. However, a closer look reveals that the scale effects exist in bottling, distribution, and marketing - much more so than in concentrate production. Similarly, if we look at the personal computer industry, we find that the scale effects are much more pronounced in the operating system business than in the personal computer assembly business.