Exclusive Lines at Retailers: It's the Experience, Stupid!

The New York Times has an article written by Stephanie Clifford today about how many department stores and other retailers are offering exclusive lines of products as a means of trying to differentiate from the competition. According to the article, "In an effort to stave off rounds of price-slashing with competitors over the same brands, stores are increasingly relying on merchandise that can be found nowhere else. Retailers can mark these exclusive lines down at their own pace, with a far more profitable outcome than with a national brand."

Interestingly, many of the examples in the article relate to exclusive product lines tied to a particular celebrity. The stars include Selena Gomez, Jennifer Lopez, Tony Hawk, and Sean Combs. What's the risk of this strategy? By promoting these celebrity product lines, the retailers tie their brand to these stars. What if these stars engage in some inappropriate or unlawful action? How might they damage the retailer's brand? Will the retailer be stuck with a line that suddenly becomes very unpopular?

The notion of exclusivity deserves attention. Retailers do need to differentiate. However, I think retailers need to think beyond celebrities, and they must find other ways to offer exclusive products that are appealing and that draw customers to their store. Beyond that, retailers need to think about the shopping experience. Customers don't simply choose retailers because of the products they sell. They choose an environment and an experience. In some ways, a truly differentiated experience can be much harder to imitate than product moves are. In the end, creating an inimitable experience will be one of the most substantial ways to create and defend competitive advantage.

The Power of War Games

Leonard Fuld, author of The Secret Language of Competitive Intelligence, has a column on Business Week's website today regarding the power of war games for companies. As Fuld writes, "A successful war game not only removes blind spots about the present but also helps anticipate competitive surprises and prepare strategic options should any of those surprises occur."

How do they work? In a business "war game" companies create multiple teams, each representing a competitor or potential entrant into their industry. Then, the teams develop strategic alternatives, trying to generate ideas for how rivals might act in the near future. Then, the company can put some people to work thinking about how the firm might respond to these various moves. In a war game, you ask managers to step into the shoes of the leaders of rival firms. You want them to think and act like them. To the extent possible, you don't simply want a team to think about a rival as a monolithic organization. You want them to really get into the heads of the competitor's executives. What do they care about, and what drives them? What are their backgrounds and how might that influence their future strategies?

You need to be creative, considering multiple scenarios for the future... not just one possible outcome. While the idea may be simple, few firms actually engage in this type of game in a serious way. I've found that the firms that commit to these kinds of role reversal exercises find great benefit in them.

Big Flats Private Label Beer

We are hearing lots of jokes about Walgreen's new Big Flats private label beer. Everyone from my students to Stephen Colbert is commenting on beer that's selling for 50 cents per can ($2.99 per six pack). However, I think there is a bigger point to be made here. This example shows that private label continues to invade more and more categories. Beer will not be immune. More private labels are likely coming. Some of those will likely be higher quality private labels, much as we have seen in some food categories.

Cat Groomers and Tattoo Artists: Building Barriers to Entry!

One of my MBA students this semester sent me a link to this article in the Wall Street Journal about people from an eclectic set of occupations who are trying to create state licensing requirements for their professions. The occupations include cat groomers and tattoo artists. You may be laughing, but the article reminds us of an important concept regarding competitive strategy.

In nearly every business school on earth, students learn about Michael Porter's "five forces" model of industry analysis. However, many students develop a key misunderstanding about the model. They come to think of industry structure as something that is imposed on companies within a particular market. It's as if industry structure falls from the sky, landing on a particular set of industry rivals. In reality, of course, companies can and should shape their industry structure to their advantage. This article reminds us of that important idea.

In this case, the cat groomers, tattoo artists, and others are trying to build more significant barriers to entry in their markets. If they succeed, they will enhance their ability to earn high profits. We can quarrel over whether these state licensing requirements are beneficial for society, but we should all recognize that these firms are trying to shape industry structure to their advantage, rather than simply accepting their external environment as fixed. Good companies shape their environment. Every strategist must remember that notion.

Do Rich People Have a Hard Time Reading Others' Emotions?

A new study published in Psychological Science by Michael Kraus, Stephane Cote, and Dacher Keltner finds that people from wealthier socioeconomic backgrounds tend to have lower emotional intelligence than those with lower socioeconomic status. In their study, these authors asked 300 people to interpret the emotional state of people in photographs and mock job interviews. Individuals of higher socioeconomic status fared quite poorly when trying to determine the emotions of the people that they were observing, as compared to those of lower socioeconomic backgrounds.

In this article on MSNBC's website, study co-author Michael Kraus offers his interpretation:

Kraus says that's likely because people from lower-economic backgrounds may have to rely on others for help. “You turn to people, it’s an adaptive strategy,” he says. “You develop this sort of heightened independence with other individuals as a way to deal with not having enough individual resources." Upper-class people, on the other hand, don’t need to ask for help that often. “One of the negative side effects of that is that they’re less concerned and less perceptive of other people’s needs and wishes. They show a deficit in empathic accuracy.”

On the Chief Learning Officer website, Dr. Casey Mulqueen, explains how these findings are consistent with other research: “This new study is consistent with other research showing that people in positions of leadership or influence often have performance blind spots or shortcomings in their ability to work effectively with others. Fortunately, emotional intelligence and interpersonal effectiveness skills can be learned and developed with practice.”

Why not fire your CEO?

Wharton Finance Professor Luke Taylor has published a thought provoking new study in the Journal of Finance. Taylor examines the issue of CEO dismissals. He built a complex model to examine the issue, and specifically, to quantify various elements of the decision process by a Board to fire a CEO. Taylor identifies two types of costs associated with the forced dismissal of a CEO. Direct costs constitute the first category. They include severance for the dismissed CEO, executive search firm fees for the new hire process, and other negative effects on profit due to the turmoil caused by a CEO firing. Entrenchment costs constitute the second category, and they involve the intangible costs borne by the Board, but not the shareholders, during the dismissal process. For instance, the Board members' personal relationships with the CEO may be irreparably harmed. Taylor finds that these entrenchment costs are quite substantial, and they cause far fewer CEOs to be fired than if Boards only considered the direct costs of dismissal. In fact, his empirical work shows that 2% of CEOs in his sample were fired each year. He estimates that over 10% of CEOs would be fired each year based on poor performance if entrenchment costs were not considered by Boards. While the study surely will provoke great reaction, and many will disagree with its conclusions, the notion of entrenchment costs resonates with me. Undoubtedly, these costs have a key role in the Board's decision process.

Myths about American Manufacturing

Jeff Jacoby had a terrific article about the alleged demise of U.S. manufacturing in yesterday's Boston Globe. He presents a few interesting bits of data that would shock most people who read the business press these days:

• U.S. manufacturing output is twice as high as it was in the early 1970s.
  
• American manufacturing output exceeds China's production by by nearly 46 percent.
  
• The U.S. share of world manufacturing output is essentially the same as it was in 1990.
  
• America manufactured more goods in 2009 than the combined total of Japan, Germany, Italy, and the UK.
  

How could this be? All we hear lately is that the U.S. manufacturing sector is in decline. The answer, of course, is that American jobs in manufacturing have decreased substantially since the 1970s. What has occurred? First and foremost, manufacturing productivity in the United States has soared since the 1970s. Secondly, we have shifted from manufacturing goods that require lots of unskilled labor to producing goods that required many fewer people with much higher skill levels.

Interconnectedness and Supply Chain Risk

The Wall Street Journal has an excellent article today on how global interconnectedness increases supply chain risk. For those who want to read more about the academic underpinnings of this idea, I recommend reading Charles Perrow's famous work on the Three Mile Island accident. In that work, Perrow explained that tight coupling, or rigid interconnections, increase the risk of catastrophic failure in a system. In many supply chains today, the efforts to become more lean have actually increased tight coupling. This article in today's WSJ does a nice job of looking at the issue.

Super Ads vs Super Campaigns?

As we watch the Super Bowl ads this weekend, we should ask whether these firms are launching a great 60 second commercial that is essentially a standalone act, or is this ad part of a broader campaign? Does this ad fit into an integrated marketing campaign? Has social media been used effectively before and after the ad runs? I suspect that some firms expend a great deal of money and energy coming up with a hilarious or provocative ad, bit they haven't worked out the big picture as well as possible. That is a wasted opportunity.

Potential Sale of BJ's Wholesale

Various news organizations report this morning that BJ's Wholesale Club has decided to explore strategic options, including the possible sale of the company. This news comes after substantial external pressure has been placed on the company in recent months, particularly as a private equity investor (Leonard Green) took a significant equity stake in the firm.

Why has BJ's ended up in this predicament? On the one hand, the company has improved its financial position in many ways over the past few years. Specifically, the firm has established a much stronger balance sheet, with an elimination of most long term debt and an increase in cash on hand. On the other hand, investors have clamored for faster growth, something that the firm has been unable to deliver. Recently, the firm has taken some actions to try to mollify investors; for instance, it has shut several underperforming stores. However, investors want more substantial change.

Here's the irony: BJ's has actually made itself much more attractive to a private equity firm because of its strengthened balance sheet. Putting itself on more stable financial footing has now meant that they may lose control of the firm.

Can the firm improve its performance, perhaps under different ownership? It certainly has great potential, but one wonders about the disadvantages that the firm faces because it cannot exploit the same economies of scale available to Sam's Club and Costco. For years, the firm has walked a fine line, by trying to offer great value to consumers, while at the same time attempting to do some things to differentiate from their bigger rivals. BJ's knows that it cannot simply compete in a head-to-head battle against its rivals in terms of price because of lack of scale. However, differentiating successfully, particularly against the Costco, can be very challenging. Costco achieved such success in this market, even more than Sam's Club, because it created a retail concept that was more than just about having low prices.

Info BEFORE the meeting!

If leaders want meetings to be more productive, they ought to require that documents and other presentation materials be distributed at least 24 hours prior to the session. They then must hold people accountable for reviewing these documents before attending the meeting. In so doing, leaders will cultivate much more robust dialogue during meetings and avoid lengthy PowerPoint dog and pony shows. People can offer useful comments and critiques, because they have had time to digest the information. Team members will not be reacting on the spot to something they have never seen. It takes discipline to accomplish this type of meeting norm, but it can be done.

Scorecasting and Omission Bias

Psychologists have documented many cognitive biases that affect our judgments and decisions, including the omission bias. According to the work on omission bias, individuals tend to view a harmful act as worse than an equally harmful instance of inaction. In their fantastic new book, Scorecasting, University of Chicago Professor Tobias Moskowitz and Sports Illustrated writer Jon Wertheim write about how various biases manifest themselves in sports. They spend a great deal of time, in particular, on how referees affect the game and how they make decisions.

Moskowitz and Wertheim provide very convincing evidence that the omission bias plays a role in how we judge referees, as well as in how referees act. The omission bias would suggest that we would judge a referee much more negatively if he or she made a bad call than if that person simply did not make a call at all in a particular situation... even if that non-call was just as egregious.

Does evidence from sports demonstrate the potential existence of omission bias? Indeed, the authors claim that it does. The authors use data from the Pitch FX system that documents the speed and location of every pitch in all major league ballparks to conduct their study. First, they point out that umpires are generally very accurate overall in major league baseball. However, accuracy lags in a few situations. They show, for instance, that baseball umpires call fewer strikes than they should when the hitter already has two strikes. In other words, the strike zone shrinks. On the other hand, if the count is 3 balls and no strikes, the umpire tends to not call ball four as often as he should. In other words, the strike zone expands. The umpires tend to make bad "non-calls" rather than possibly make the incorrect "active call" that would take the "bat out of the player's hands."

Does omission bias affect business leaders, as well as those who observe and evaluate them? It certainly does. Consider these questions: Do we tend to come to harsh conclusions about the leader who hired the wrong person? Are we just as tough on the leader who passed on the chance to hire a terrific individual? Do we even know about these bad "non-calls" that leaders make? In many instances, outside observers, such as journalists, don't even know about these bad "non-calls" in business situations.

The Dark Side of Creativity - A Rebuttal

My former colleague and co-author Lynne Levesque has written a thoughtful guest post about the Gino and Ariely research on the "dark side of creativity" (about which I blogged a few days ago). Lynne and I wrote an article for the MIT Sloan Management Review on "making change stick" several years ago. She has a great deal of expertise in the area of creativity, and she raises some good points about this new research on the possible relationship between creativity and dishonest behavior. Here is her guest post:

Since creativity is a competence in high demand these days, especially among leaders, it needs to be appropriately understood. Such understanding is also critical since I believe that we all have the potential to be creative – at least at some level -- and that recognizing and appropriately valuing this vital quality is essential for personal and organizational excellence, dare I say even survival. Accordingly, I have several comments about this paper on the “Dark Side of Creativity:”

First: It should be recognized that the authors limit themselves to only part of what creativity is really all about. The most current definition of creativity is that it is “the ability to produce novel and useful work” – not just ideas. As such creativity involves much more than the two processes studied by the authors -- divergent thinking and cognitive flexibility. True creativity also involves convergent and deliberate thinking, planning, strategizing, and implementing.

Secondly, the authors do not indicate that creativity causes dishonest behavior, only that “high levels of divergent thinking and cognitive flexibility are likely to be associated with dishonest behavior” and even then only under certain circumstances. I might add that, without limits, divergent thinking is also associated with and may even cause chaos and craziness!

Thirdly, the tests that the authors use to judge creativity are self-rated measures of “divergent thinking.” Is it possible that those participants in the research who exhibited dishonest behavior in the exercises also manipulated their answers on the “creativity” tests?

Finally, I agree with the authors that creativity can be used to justify unethical behaviors and to push boundaries. These dangers put even more emphasis on leaders to understand creativity and their crucial role in defining constraints, in terms of clearly articulated goals and organizational values. Enron didn’t fail because of the creativity of its employees and leaders. It failed because leaders got carried away with their own success and greed and neglected to set and enforce ethical boundaries and necessary controls.

Thus topics for further research, as the authors suggest, should include the role of leaders and organizations in ensuring that promotion of creativity and innovation is closely coupled with education and enforcement of standards of ethical behavior. Hopefully this further research agenda will also include accounting for all the good that creative thinking has contributed to the world. How do those who are recognized for their creative contributions manage to walk on the Bright Side of Creativity?

Lynne C. Levesque, Ed.D, author of Breakthrough Creativity: Achieving Top Performance Using the Eight Creative Talents (Davies-Black, 2001)

Remembering Challenger and Its Lessons

25 years ago today, the tragic explosion of the Challenger Space Shuttle took the lives of seven brave astronauts including New England high school teacher Christa McAuliffe. The ABC News video below looks back at the tragedy. On this day, we remember the courage of those astronauts and mourn their loss. Hopefully, we also remember the key lessons from that catastrophic failure.

For those who have not read it, sociologist Diane Vaughan wrote the seminal book on the Challenger accident back in 1996. That book provides a detailed systemic explanation, looking specifically at the culture of the organization. Vaughan argued that a process that she called the "normalization of deviance" had taken place over the years and led to the tragedy. By that, she means that O-Ring erosion had gradually become an accepted risk and even taken for granted at NASA. By 1986, O-Ring erosion essentially did not constitute an anomaly that triggered widespread concerns in the organization. As she says, when the normalization of deviance occurs, "the unexpected gradually becomes the expected, and then becomes the accepted." That process takes place over years, and it means that we gradually go down this slippery slope at times whereby we normalize greater and greater risks over time. All organizations prove vulnerable to the normalization of deviance and should be aware of this phenomenon.

The "Moving the Needle" Fallacy

In a discussion yesterday with senior leaders at a large consumer goods company, we discussed an important challenge facing managers who are trying to build new ventures or launch innovative new products in large organizations. Many managers face what I call the "moving the needle" fallacy. In many firms, senior executives will only endorse new ventures or products if they believe that they will "move the needle" in terms of top line revenue for the firm. In other words, they want the business to be big, not just a tiny increment to overall sales. They don't think small ventures are worth the time and effort.

What's the fallacy here? In my view, this requirement actually drives people to broaden the potential market for their innovative new product or service to the point where it becomes far too generic and similar to rivals' offerings. They essentially are pushing their managers to be less focused. Instead of tailoring a product to a very specific target market, managers end up trying to be all things to all people in search of a large enough target market to move the needle in terms of total firm revenue. In sum, to attract a broader range of customers, they offer a product that is far less distinctive. We get the opposite result from good strategy!

Academically Adrift

A new book, titled Academically Adrift, has raised some troubling questions about how much students actually learn at college. The study, by Professors Richard Arum and Josipa Roksa, examines the progress made by a nationally representative sample of more than 2,000 students who entered 24 four-year colleges in the fall of 2005. The study finds that 36% of students showed no gains in reasoning and writing skills over four years of college, based on a test called the Collegiate Learning Assessment. Some people already have raised concerns about the book's approach. However, many people acknowledge that the book makes some strong points, particularly with regard to writing skills. I look forward to reading the book and learning more about the research methodology and details of the findings. Every college educator should read this book and take the findings seriously.

Dark Side of Creative Individuals?

Francesca Gino and Dan Ariely have conducted a startling new study that provides evidence suggesting that creative individuals may be more likely to engage in dishonest behavior. Here is an excerpt from their working paper abstract:

In four studies, we show that participants with creative personalities who scored high on a test measuring divergent thinking tended to cheat more (Study 1); that dispositional creativity is a better predictor of unethical behavior than intelligence (Study 2); and that participants who were primed to think creatively were more likely to behave dishonestly because of their creativity motivation (Study 3) and greater ability to justify their dishonest behavior (Study 4). Finally, a field study constructively replicates these effects and demonstrates that individuals who work in more creative positions are also more morally flexible (Study 5). The results provide evidence for an association between creativity and dishonesty, thus highlighting a dark side of creativity.

Wegmans' Employee Retention

As many of you know, Wegman's Markets - a privately Rochester, NY based supermarket - has been ranked in the top 10 of Fortune's best places to work this year. The company attracts and retains employees through a number of unique initiatives. Perhaps most impressively, their extensive employee education program helps to attract and retain people. This program began in 1984. Since that time, Wegmans has offered $77 million worth of scholarships to more than 24,000 employees. These scholarships attract talented, hard-working staff members, beginning with teenagers who work part-time and are interested in earning tuition assistance for college. The group of young people most interested in this form of compensation, of course, are precisely the type that you would like to have on your staff. That's what makes this program so great - it creates a powerful self-selection process with regard to applicants.

Since supermarkets by nature have many part-timers, including many young people, this program does a particularly good job of finding and retaining talented high school and college-aged employees. Some go off to college and return afterward, though the company scholarships do not dictate that they return. Does it work? According to some statistics that I have seen, Wegmans has substantially lower turnover than the usual grocery chain. Moreover, they have a substantial group of employees who have lengthy tenures at the firm.

Quantitative Easing Explained

Bad Process vs. Good People

I read this great quote in yesterday's Wall Street Journal. General Jim Mattis said, "When capable people with good intentions meet bad processes, bad processes win 9 times out of 10." How true! So many talented people become frustrated by bad processes in organizations. The question is: How do organizational leaders respond when capable people identify what is clearly a flawed process? Do they become defensive? Do they demonstrate an unwillingness to take a fresh look? Do they refuse to change simply because the process does have some valid reasons for being?

Have you heard of Hot Mama?

Have you heard of Hot Mama? No, we aren't talking about some new reality television show, nor are we describing a new segment on the Howard Stern radio program. Hot Mama is a fast-growing Minneapolis-based retailer which targets young mothers who want to dress fashionably. The retailer's 17 stores generated over $15 million in sales last year according to this Fast Company magazine article.

What's novel about this concept? The store doesn't just offer attractive apparel. It provides a complete experience that is tailored to the young mom. Specifically, the store provides an entertaining experience for the children, so that the mom can actually shop for clothes without constantly being distracted, or without having to rush. Hot Mama provides toys, coloring books, video games, and movies to entertain kids. The layout of the store makes it easy for moms to shop, while not losing sight of their little ones. The store associates, known as stylists, also have been trained to specifically help moms find clothes that work well with their particular body type. Moreover, the store associates help to watch over the children as the moms try on clothes.

Does the concept work? According to the article, each mom spends one hour per visit to the store. That metric is astounding to me. In most retailers, moms with young children struggle to rush through the store quickly. At Hot Mama, they've found a way to provide an environment whereby the mother can take her time, and as we all suspect, the more time in the store, the more likely that customers will spend. It will be interesting to watch to see whether the concept can be scaled up successfully, as well as how other apparel retailers respond.

Breaking up Conglomerates is NOT Simply Financial Alchemy!

The most recent "Deal Professor" column on the New York Times' website chronicles the rise and fall of conglomerates, and it describes break-ups of these giants as "financial alchemy." Steven Davidoff, a UConn law professor and former corporate attorney, writes this interesting blog. While I enjoy reading the column, I strongly disagree with the premise of this recent article. The article suggests that the demise of conglomerates may be a fad, much in the way that tracking stocks were a fad during the internet boom. While I agree that trading stocks were a passing fad and perhaps did resemble financial alchemy, I don't think the same holds true for break-ups.

Is there another explanation for the rise and fall of conglomerates, one that would make the case for the efficiency of breaking up these unrelated diversifiers? Of course! Most corporate strategy scholars would argue that conglomerates made more sense in decades past when product, labor, and capital markets were less efficient than they are now. Thus, the corporate parent in one of these conglomerates perhaps could move money and people around more effectively than would otherwise happen if the divisions were completely separate. However, over time, external markets became more and more efficient. Thus, it became hard to justify the notion that the corporate parent could allocate resources more efficiently than the external markets. Moreover, the complexity of these conglomerates, and insufficient transparency, made it very difficult for investors to properly value them. Thus, we have seen the decline of unrelated diversifiers over time. Yet, in emerging markets, conglomerates still exist, and many do quite well. Scholars have argued that it may be because markets are not efficient in those countries, resembling conditions from decades past here in the United States.

The Indispensable Leader

The Steve Jobs' leave if absence raises some interesting questions about leadership. When an employee joins an organization at the entry level, he or she often wants to make themselves indispensable to the firm. After all, the more crucial your role, the more job security... Or so goes the conventional wisdom. At this point, you are an individual performer, not a manager. As you rise in the organization, it still feels as though you are evaluated based on how indispensable you are. People often worry about delegating too much, because they fear that others will realize "they aren't really needed" around here. However, at some point, great firms hold leaders accountable for building a leadership bench and an organization that can thrive without them. The challenge, though, is how you make this transition in your career from those early days as an individual performer who hopes to be indispensable to the leader who strives for sustainability. It's a tricky transition, with no recipe for how to get it done well.

It's Not Simply What You Say, but How You Say It

Adam Bryant had a terrific article in the New York Times this weekend, in which he interviewed Robin Domeniconi, Senior Vice President and Chief Brand Officer of the Elle Group. Domeniconi describes her philosophy of leadership, and I particularly enjoyed her discussion of how she promotes candor and constructive conflict within her management team. She stresses that people can engage in vigorous debate, but how they articulate their disagreements matters a great deal. I concur completely. Language matters. Here is an excerpt:

One lesson I learned is from a phrase I picked up called M.R.I. It means the “most respectful interpretation” of what someone’s saying to you. I don’t need everyone to be best friends, but I need to have a team with M.R.I. You can say anything to anyone, as long as you say it the right way. Maybe you need to preface it with: “I’m just curious, and I want to understand what you’re saying better. Right now, my point of view is quite different. So can you help me understand why you don’t want to do this, or why you wanted to do this?”

Let me point out one key idea here. Domeniconi does not simply argue for being polite. She's telling us that people need to adopt an "inquiry" orientation when working collaboratively with others. They need to seek deeper understanding of others' points of view, and they need to maintain a healthy curiosity. They cannot simply advocate for their own views. They have to be trying to learn more about others' reasoning. In so doing, they can find better solutions together than simply engaging in a win-lose, zero-sum battle that can lead to very dysfunctional interpersonal conflict.

Herd Behavior in the Hedge Fund Industry?

The Wall Street Journal has a thought-provoking article today about herd behavior in the investment choices made by hedge funds. Are these firms actually mimicking each other a great deal? It seems odd, given that the typical notion we have of successful hedge fund managers is that of the independent-minded genius willing to make moves that run counter to the conventional wisdom. After all, by betting against the majority, an opportunity arises to make out-sized gains.

Many explanations can be put forward for the increase in herd behavior, and the article articulates some of those quite well. One notion focuses on the sharing of information that regularly takes place among hedge fund managers. For instance, some of these investors get together for "idea dinners" in which they share philosophies and judgments about particular firms. On the one hand, such sharing of information seems natural given that many of these investors have social ties - they went to the same schools, came from the same larger banking and asset management firms, etc. On the other hand, why do they share so freely? Are they giving away competitive advantage when they share their investment conclusions with others?

My sense is that herd behavior does not derive from the sharing of major secrets at idea dinners per se. Why would investors give away competitive advantage in this way? However, as more and more young MBAs flood the field, we may be seeing people with very similar analytical toolkits, educational backgrounds, prior work experiences, and the like. These folks may have training, but not deep expertise and the pattern recognition ability that comes with lengthy experience in a field. As a result, they may be applying the same models and the same way of thinking. That may be different from the early days of the industry, when you had a few very experienced investors using unconventional and idiosyncratic methods to determine their investment strategies.

Pension Incentives

Joel Klein had a terrific op-Ed in the Wall Street Journal a few days ago about teacher pensions. In that essay, the former head of the NYC schools argues that hefty pensions distort incentives. First, the way we compensate teachers tends to be very back-loaded. We pay them low amounts of salary in the early years, and promise them pensions decades from now. That discourages some talented folks from entering the profession. These people might prefer more money now rather than later. Secondly, the pensions create a lock-in effect, a disincentive for teachers to leave the job in the later years. They might hang on to preserve or enhance pension benefits. Together, these two incentive effects from the way we compensate teachers may be lowering overall teacher quality considerably.

Twitter Becomes an E-Newspaper

Have you heard of Paper.ly? Check out this interview with founder Edouard Lambelet.

Uniqlo: Fashion vs. Basics

Business Week has a good article about how Uniqlo, the successful chain run by Japanese retail conglomerate Fast Retailing, stumbled last year. The company tried to go toe-to-toe with firms such as Zara, which has been invading the Asian market. Zara, of course, specializes in "fast fashion" - being a very rapid follower on hot fashion trends. Zara has a constantly changing product mix, and it is adept at producing and buying small batches of new fashionable items. Uniqlo's strength traditionally focused on producing large quantities of high quality basics at a reasonable price. As it shifted toward fashion, it stumbled. The Uniqlo value chain simply was not designed for fast fashion, while Zara's was intentionally designed for that type of strategy (and perhaps less cost effective at the basics business). Now, Uniqlo has announced that it is reversing course, focusing back on basics.

Of course, the firm has one additional challenge. It remains highly concentrated in Japan, where the economy continues to be quite stagnant. It has announced plans for aggressive growth in the US, but it has yet to move beyond its flagship store in the Soho section of Manhattan. The firm will need global expansion if it wishes to grow in the future. Building a global brand won't be easy, as the competitive space is crowded. However, remaining so concentrated in Japan will spell trouble for them for sure.

Unlimited Data Plans from Verizon

News reports indicate that Verizon may offer unlimited data plans as part of their service contracts for their version of the iPhone. Of course, AT&T moved away from unlimited data recently, shifting instead to tiered plans based on data usage. At the time, AT&T made this move because heavy users tended to be putting a strain on their network. Many now speculate that Verizon is quite confident that their network can handle heavy usage, and therefore, has decided to battle AT&T by offering these unlimited plans.

What's going on here? To me, this story begins and ends with a simple discussion of the cost structure of providing smartphone service. When we think about price rivalry among competitors, we should always try to understand the nature of the firms' cost structures. How high is the fixed to variable cost ratio? If fixed costs are very high, and variable costs are very low, then we tend to see vigorous price competition. Why? Well, firms are trying to cover their fixed costs. Put another away, if the marginal costs are very low, then any price above those marginal costs tends to add to the bottom line (adds to contribution margin, as accountants say). In the case of Verizon, if they believe the investments in their network are sufficient, then the marginal cost of having a consumer use more data on their smartphone amounts to almost nothing. Meanwhile, the fixed costs of developing that network are high. So, they have every incentive to try to spread those fixed costs among as many consumers as possible. In short, price will fall toward marginal cost in a highly competitive market.

Self-Esteem: Better than Sex?

The Wall Street Journal reported on a new study by Brad J. Bushman, Scott J. Moeller, and Jennifer Crocker. Their work will soon be published in the Journal of Personality. According to the WSJ, these scholars asked 130 college students to consider experiences that boosted their self-esteem. For instance, they might receive praise from a professor, boosting their self-esteem. They also asked subjects to rate other pleasurable experiences such as sex, eating, etc. Here is the newspaper's summary of the key conclusions from the study:

"Overall, the students valued the self-esteem increase more than good food or sex. The ratio of "wanting" to "liking" was used to gauge the addictive qualities of each pleasure: Addicts can want a fix more than they like it. While students said that they liked all of these things more than they wanted them, the gap was narrowest in the case of self-esteem—which hints at the intoxicating effects of ego, the authors said."

Wow! We always about how this generation of young people have grown up constantly being showered with praise, with many teachers and parents thinking that self-esteem boosts were ultra-critical to their development. I just didn't know quite how critical these compliments and pats on the back were to my college students. Better than sex, really?

Reverse Mentorship

Many of you may have heard of the idea of reverse mentorship. In this process, a senior level executive finds a young person in the organization to serve as a mentor to him or her. The relationship focuses on certain skills and ideas that the young employee can share with the more senior person. For instance, the young person may have much more knowledge and expertise with regard to new technologies or social media. The senior executive can use this reverse mentorship opportunity to learn from the young person, to insure that he or she keeps abreast of key trends and developments important to the organization.

I don't know where the concept began, though I recall hearing Jack Welch describe how he discovered this concept in his own organization back in the mid-1990s. According to Welch, a business unit president in London pioneered the concept, when he realized that he did not know enough about the internet and e-commerce. Therefore, the executive found the brightest young person under the age of 30 to teach him as much as possible about e-commerce. Welch loved the idea, and he directed each senior executive at GE to find a young mentor to help them get up to speed on e-commerce if they were deficient in their knowledge and expertise in that area.

Gary Hamel also has argued that CEOs should go out of their way to stay connected with the youngest and brightest in their organizations. Hamel believes that young people will help senior executives see threats and opportunities in a whole new light, and that they can help senior leaders get up to speed with important new social and technological developments.

Some people also have argued that reverse mentorship opportunities enhance a firm's ability to retain talented young people. These young employees will value this relationship and the opportunity to have a direct connection and significant influence with senior leaders. As a result, they may be more satisfied with their jobs and more likely to stay with the firm.

Has your firm developed reverse mentorship opportunities? Would they be helpful to your organization?

Disney's High-Tech Command Center

Last week, the New York Times ran a fascinating article about Disney's High-Tech Operational Command Center at Walt Disney World in Orlando, Florida. According to the article, Disney "has spent the last year outfitting an underground, nerve center to address that most low-tech of problems, the wait. Located under Cinderella's Castle, the new center uses video cameras, computer programs, digital park maps and other whiz-bang tools to spot gridlock before it forms and deploy countermeasures in real time."

When they see lines building, Disney can send characters to entertain guests while they wait, or add additional boats to a ride so as to accommodate more people. The command center aims to enhance customer satisfaction by making those waits either shorter or more entertaining. According to the article, Disney's command center has helped the average visitor enjoy one more ride, on average, during a trip to the park. That seems pretty significant.

What's the broader lesson from the story? Perhaps other companies can use similar technological systems to spot wait times and other bottlenecks that could be frustrating consumers, and then use that awareness to take proactive action to mitigate the problem. Some firms do, I'm quite sure. Many do not though. I've always wondered, for instance, why physicians could not do a better job of monitoring wait times and adjusting accordingly in their waiting rooms. After all, if a physician is running one hour behind at 10:30am, perhaps they could find ways to alert patients who are scheduled to come later the day (via text, email, or phone). After all, the patient would be much happier simply arriving a bit later, as opposed to sitting in the waiting room. Many other companies have customers who face frustrations because of various delays. Using technology to identify these problems and dynamically adjust seems like very good business to me.

Planet Fitness Commercial: You are NOT our customer

Planet Fitness' new commercial offers a funny take regarding the customers they are definitely not trying to serve. By telling us that they are not targeting the bodybuilder segment, they are trying to tell customers that they are the gym for average folks who just want to get more fit. It's a nice technique, and one that many firms often do not employ. Many firms are afraid to scare away any customer. In a way, this commercial reminds me of the "hostile brand positioning" technique described by Youngme Moon in her new book: Different, Escaping the Competitive Herd. In that book, Moon describes how some brands establish a distinctive positioning by purposefully making themselves hostile to certain types of consumers.

Creativity: Wiping the Slate Clean

Recently, many people have been stressing the importance of enhancing creativity in organizations. Presumably, with more creativity comes more innovative products, services, and processes. However, many leaders and firms forget that the important first step in the creative process involves "wiping the slate clean." Think of it this way: If you have done something wrong, you must first face up to your sins before you can move forward effectively. That is the concept behind confession in the Catholic Church, for instance. You want to get rid of the baggage that is holding you back and move ahead free of those past mistakes, addictions, grudges, etc.

With creativity, a similar process must take place. You have to get rid of old baggage first, before you can truly engage in bold new thinking about a challenging issue. By that, I mean you to engage in a process by which you question existing mental models, assumptions, and conventional wisdom. How does one do that? You have to put all the "givens" of today and yesterday on the table, and then be ready to discard many of them. Even if you think certain assumptions still hold true, you might have to ask yourself: What if this assumption no longer holds? That exercise can help you see the world differently.

To begin, you have to surface and identify all the implicit cognitive frameworks, models, and presumptions that constitute the current ways of thinking and working in your organization, industry, etc. Often, the implicit cognitive elements prove to be more formidable barriers to creativity than the explicit aspects of your organization such as the formal mission statement, strategic goals, etc. Getting at the implicit "ways we think and do things around here" can take awhile. Many of us take for granted certain things and aren't aware of these implicit cognitive elements of our firm's culture and strategy. After surfacing these building blocks, you have to question each of them, and ask: "What if these no longer hold true?" Then, finally, you must ask yourself what alternative mental models and assumptions might replace them. Those three steps can then help you "wipe the slate clean" before you try to "create" new ideas, products, services, and the like.

DVRs and Commercials

Recent news reports described research findings by Nielsen regarding consumer habits with regard to DVRs. Nielsen found that approximately 50% of people age 18-49 watch commercials even when they have recorded a show on DVR. Nielsen also found that homes with DVRs watched more primetime programming than those without DVRs. The Nielsen report concludes, “Contrary to fears that DVRs would wipe out the value of commercials because of viewers fast-forwarding through ads, DVRs actually contribute significantly to commercial viewing."

Well, the news reports that I read seemed to stress a "glass half full" interpretation of these findings, as described above. The conclusion seemed to be, "We thought that DVRs would be the end of TV ads, and they aren't completely. Isn't that great?" Another interpretation, of course, could be that 50% of folks aged 18-49 aren't watching those ads, and that is a HUGE number in my view. The report also found that many people are watching shows on DVR on the same day that the show originally aired. To me, that suggests that some people may be watching shows on slight delay purposefully to avoid the ads. Finally, we all know that some people let commercials run while using their DVR because they are stepping out of the room for a moment anyway, or otherwise multi-tasking. So, are they really watching those ads?

Bottom line: I wouldn't read this report with rose-colored glasses.

Creating Google's Doodles

The Wall Street Journal reports on the creation of the Christmas Doodle this year at Google. By Doodle, we mean the creative modifications to the company logo that appear on the company's main search page to celebrate certain holidays, milestones, achievements, etc. According to the paper, this year's holiday doodle involved the work of a team people, putting in approximately 250 hours over a period of six months.

Now, I happen to find the Google Doodles highly creative. They definitely enhance the company's brand image as an innovative, creative, and fun company. How much value do they have though? Does the company really need to put this much time and effort into something as simple as their holiday doodle? What do shareholders think of these types of uses of their resources? While I don't think there's a clear-cut answer to these questions, I do think that even firms with huge profits and plentiful resources have to be careful about how they choose to use resources. One has to at least question the value of these types of efforts. When the questioning stops, then you know that a firm has become undisciplined about its creative efforts.

Of course, the Google Doodle represents a relatively small use of resources. I'm asking these questions, drawing on this example, to really point to the much larger resource allocation decisions firms often make during times of plenty. These resource decisions involve things such as shiny new corporate offices and putting the corporate name on a sports stadium. As one CEO once told me, "If you see a company building a very expensive new corporate office and putting its name on a ballpark, you might want to think about shorting the stock."

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Analysts Hit the Mall

The Wall Street Journal published an article today about Wall Street analysts visiting malls to examine what's happening at the store level at major retailers such as The Gap, J Crew, Abercrombie and Fitch, and Hollister. For instance, the article quotes analysts who cite empty shelves as signs that items must be moving briskly, and that excess inventory must not be a problem.

On the one hand, I find the "feet on the street" approach by these analysts to be quite useful and interesting. They should be out there examining what's actually happening in the stores. On the other hand, the approach worries me a bit. One could easily jump to the wrong conclusions based on the unscientific observation of a few stores in selected locations. For example, do empty shelves mean that the store has some hot-selling items, or that its inventory management system has key flaws which left it stocked out of items which should be on the shelf? Do long lines suggest brisk sales or poor customer service?

I find myself thinking and analyzing as I walk through retailers as well. I'm always watching, for instance, for signs of exceptional or poor customer service. I tell my students that they can internalize many of the lessons from their business education by becoming more observant and analytical as they shop. The key, however, is to look for patterns over time and across locations, not to draw sweeping generalizations based on one instance in one particular place. Moreover, one has to consider multiple explanations for the same observed phenomenon, i.e. what precisely does an empty shelf mean?

The Powerful Manage Time Poorly

Heidi Grant Halvorson, blogger and author, has published a list of the top 10 psychology studies of 2010. She cites one interesting study about how we manage our time, published by Mario Weick and Ana Guinote. Halvorson points out that the new study extends our understanding of what psychologists call the "planning fallacy" - i.e., the tendency during a planning phase to under-estimate how long it will take to complete a project. Halvorson writes:

"New research by Mario Weick and Ana Guinote shows that, somewhat ironically, people in positions of power are particularly poor planners. That’s because feeling powerful tends to focus us on getting what we want, ignoring the potential obstacles that stand in our way. The future plans of powerful people often involve “best-case scenarios,” which lead to far shorter time estimates than more realistic plans that take into account what might go wrong."

I find the study particularly fascinating, given that the planning fallacy seems most evident, and most problematic, to me in the case of corporate acquisitions and large public works projects. In acquisitions, executives often under-estimate how long it will take to integrate two firms. In public works projects, politicians almost always get it wrong on both schedule and budget. What do these two situations have in common? You guessed it - the decision-makers are very powerful folks!

Interesting New Research on Pay For Performance

Professors Ian Larkin, Lamar Pierce, and Francesa Gino have an interesting new conceptual paper about pay for performance systems. They use psychology to provide a more nuanced look at how pay for performance systems might affect behavior. According to the authors, agency economists have long been the driving force behind pay for performance, working on the assumption that such compensation systems increase effort on the part of workers. However, they add some caveats based on a deep understanding of human psychology.

First, the authors argue that people naturally compare themselves to others in the workplace, and perceived inequity through wage comparison can have negative effects. Second, they note that overconfidence bias affects many individuals, and that may exacerbate perceived inequity. Moreover, people may choose jobs for which they lack the appropriate skills due to overconfidence bias. Finally, psychological theory suggests that individuals tend to engage in more risk-taking behavior if they perceive themselves to be in a "loss position" as opposed to a "gain position." Thus, the authors argue that if some outside factor has made it quite difficult for them to reach their personal income target that they have set for themselves (put them in a loss frame relative to their original goals) , they may start taking excessive risks in an effort to recoup their losses.

What should be done about these biases? Among other things, the authors argue for more use of team-based compensation systems. Of course, team-based systems have their own handicap, namely that we have the potential for free-riding to occur. In the end, I don't think we can ever find the perfect compensation system, but we do have to have a thorough understanding of the limitations and unintended consequences of our compensation systems, which this paper does help us comprehend. Beyond that, we have to consider the non-financial elements of motivation that are critical to having a productive workforce.

The 50 Best Business Professor Blogs

Check out this list of the 50 Best Business Professor Blogs. I really hate rankings, unless I'm ranked!

Michael Dell on Where to Launch a New Firm

For those considering various entrepreneurial opportunities, I highly recommend taking a look at Dell CEO Michael Dell's advice on what industries are ripe for a new start-up:

The Slow Dismantling of Sara Lee

Most of the once-great conglomerates of the 1960s and 1970s have been dismantled over the years. Think of companies such as ITT, Gulf & Western, Textron, and the like. These companies could no longer justify that the whole was greater than the sum of the parts. Thus, they embarked on break-up strategies. Sara Lee once consisted of a large number of diverse businesses. Over the years, the company has owned brands such as Coach, Playtex, Champion, Jimmy Dean, Piggly Wiggly Supermarkets, and Hanes. Slowly, the firm has been divesting businesses over the past decade. Despite these divestitures, the company's stock performance has not always been as strong as management and the stockholders would like. Now, we hear news that a Brazilian firm is contemplating a takeover offer for Sara Lee. In my mind, the Sara Lee situation raises the question: Should the company have moved more dramatically to break up the firm, rather than going for the "drip, drip, drip" approach to divestitures, gradually shedding businesses year after year? Would a bold move been better than death by a thousand cuts?