Developing the Leadership Capabilities of Your Children

Michael McKinney of The Leading Blog points parents to a great article by Tim Elmore of GrowingLeaders.com about the attributes that we should be nurturing in our children. I especially liked the points about humility, gratitude, and being teachable - i.e. being willing to seek advice and wisdom from others, and being a good listener in those situations. We can all work on being more teachable - children as well as adults. As a faculty member, I think this list is useful to think about in terms of how we can nurture the development of our students personally as well as professionally.

Challenging the Tipping Point

Great article in Fast Company about Columbia sociologist Duncan Watts and his research that challenges a key assertion in Malcolm Gladwell's book - The Tipping Point. Watts studies social networks. He has done a number of studies, using computer simulations, to examine Gladwell's assertion that a small group of influential and connected people tend to trigger social trends. He concludes from his work that these influencers don't have nearly as much influence as Gladwell believes. It's a fascinating debate about how social trends emerge, and not surprisingly, many marketers are deeply skeptical about Watts' research findings.

Evaluating Companies...Lessons from the Jim Rice Debate

This week, Jim Rice, a famous Boston Red Sox slugger of the 70s and 80s, was denied entry into the Hall of Fame once again. To explain this, many sportswriters point out that he "only" hit 386 career home runs. Yet, he played when hitting thirty home runs in a season actually meant something. Many others have played during a more recent era in which balls have flown over the fences at an unprecedented rate. Rice was one of the game’s most feared hitters for a decade. How should we measure his performance? For starters, we should not focus on raw numbers alone, because today’s offensive numbers are grossly inflated relative to the 1970s (thank you, steroids and HGH). Instead, we ought to see how a player fared relative to others who competed during the same era.

Let’s see how Rice stacks up . One good measure of preeminence in a particular era is the Most Valuable Player award voting. Right away, we see a stark contrast between Rice and many other great ballplayers. Jim Rice earned one MVP award, but he also finished in the top five in the MVP voting on six separate occasions - a remarkable feat. To put this in perspective, Rice finished in the top five more often than many Hall of Famers including Reggie Jackson, Willie McCovey, Willie Stargell, Dave Winfield, George Brett, Tony Perez, and Boston's own Carl Yastremski!

Why do I bring up the example of Jim Rice? For one, I'm a Red Sox fan who believes that it is wrong for him to have been repeatedly denied entry into the Hall of Fame :-) However, I also bring up Rice's case because, too often, journalists, students, and practicing managers make the mistake of looking at company's financial results in isolation, rather than thinking about how they are doing relative to their competitors. They make the same mistake that sportswriters have made with regard to Rice.

With the economy slipping perhaps into recession, many firms are experiencing a deterioration in their financial results. The key question, however, is this: Are some firms able to weather the storm more effectively than others? The headlines shouldn't be: XYZ retailer experiences downturn in comparable store sales growth. Why is that newsworthy these days? Almost all retailers are experiencing softness in their numbers. What we really want to know, particularly as investors, is this: Is XYZ retailer experiencing more or less of a downturn in performance relative to its rivals? Too often, articles fail to explore this very important comparative data.

Entrepreneurship Myths

On Guy Kawasaki's blog, Professor Scott Shane of Case Western has a phenomenal post on the ten biggest myths about entrepreneurship. It's a must-read.

Schultz Returns as CEO of Starbucks

Breaking news this afternoon that Howard Schultz has returned to the role of CEO at Starbucks. The news comes on the heels of a front page article in the Wall Street Journal today, which focuses on how McDonald's is expanding its direct competition with Starbucks in terms of coffee sales. That article proved very interesting, because it is clear that the strategies and product offerings of Starbucks, Dunkin' Donuts, and now even McDonald's have been converging over time. Strategy convergence generally isn't a good thing in industries; it tends to enhance direct and intense rivalry among firms and diminish overall industry profitability.

Kudos to Schultz for finally recognizing that Starbucks needed to re-think its strategy. They had drifted from their core strengths in recent years, and ultimately, it began to affect financial performance. In the letter Schultz posted on the Starbucks website, he notes that the company will scale back the growth of domestic locations and even close some underperforming stores. Moreover, Schultz states that Starbucks will seek to reconnect emotionally with their customers, enhance differentiation relative to rivals, and launch new products.

Here are some issues that should definitely be on the table as Starbucks considers its strategy moving forward:

• Should the company continue to serve breakfast sandwiches? Does this really fit with the Starbucks experience? Do the sandwiches take away from the atmosphere in the store, and from the focus on coffee?
• Should the company continue to build drive-thrus? Do these fit with Schultz' initial vision of Starbucks as a "third place" where people gather and enjoy coffee together?
• Should the company take some products off of the menu? Is the product proliferation diluting both product quality and the quality/speed of the service by the baristas?
• Should the company consider offering free wireless, as competitors such as Panera Bread do, so that customers may come and spend more time in the stores?

Naturally, the list goes well beyond these questions. Schultz' return provides a tremendous opportunity for Starbucks to confront key strategy issues such as these and rekindle the magic that drew in so many customers over the past twenty years.

Training Generation Y

Fortune magazine had an article last month about how UPS transformed its training practices to address the unique ways that Generation Y tends to gather information, communicate, and learn. The story is fascinating for me as a professor because it shows the power of active learning.

Let me explain. Lectures invite passive learning; the student sits and listens quietly as the professor drones on and on... The student isn't involved in the creation of knowledge; they are an empty vessel hoping to be filled up with knowledge. Active learning involves participation by the student in the educational process. It involves discussion, hands-on projects, simulations, experiential exercises, etc. Ideas and knowledge emerge from the process of trying to apply concepts to real problems.

UPS recognized that Generation Y tends to react in a particularly negative way to passive learning techniques. Thus, they shifted to an approach that emphasizes hands-on training - very much an active learning orientation. Here is one great example from the article:

The final kinetic-learning module - or for non-academicians, hands-on learning tool - is the crowd-favorite slip-and-fall simulator. UPS incurs significant costs every year from slips and falls, and it is first-year drivers who succumb the most. Lucky for first-years then that Thurmon Lockhart, director of the Locomotion Research Laboratory at Virginia Tech, has devoted his entire life to the issue. In his studies Lockhart has found that the only way to help people avoid falling is to "perturb" them - i.e., to put them through the motions of falling - which causes their bodies to adjust during subsequent encounters with falling hazards.
To that end, Lockhart's lab houses a falling machine - a nine-foot-high metal frame with a body harness attached to it. A subject puts on the harness and gets comfortable walking back and forth, and then someone sneaks up behind her and spills soapy water, causing the subject to slip, scream, and flail around before getting caught by the harness. It sounds funny - until you wipe out. For the record, having experienced this first-hand, I was perturbed, and my gait remains adjusted. "This type of research has been going on since the 1920s," Lockhart says, "but UPS is going to be the first to apply it. And when their guys get out of the program, they'll almost be ergonomists. The training is that good." Now there's a shiny new brown version of the simulator at the training center.

The article reports that UPS has experienced much success with these new training methods. My belief is that active learning always trumps passive learning, though perhaps that is even more true with Generation Y. The lesson of this UPS story applies in a range of settings... from the classroom at business schools, to corporate training programs such as the driver training at UPS, and even to corporate leadership development programs populated by senior executives. Let the lectures cease!

Develop Teams, Not Just Individuals

Fortune recently published an article on how great companies develop future leaders. While the article did not provide any earth-shattering new insights, it did point out some key practices that are often discussed, but not always put into practice. One technique that warrants a great deal of attention has to to with team development. The article suggests that companies should "develop teams, not just individuals." They point out that General Electric now sends entire management teams to Crotonville, and each team goes through a developmental experience in which they apply what they are learning to their business. Given that many leadership development programs seek to address topics such as team dynamics, communication, decision-making, and the like, it makes sense for intact teams to experience these programs together.

Of course, organizations must not allow the intact teams to isolate themselves in these types of leadership development experiences. One key benefit of leadership development programs is that emerging leaders have the time to network with their peers in other parts of the organization. Often, these peers work in far-flung parts of the world, and they don't know one another quite well at all. The leadership development program offers them time to get to know one another, share best practices, and explore collaboration opportunities to advance the business. If intact teams attend these leadership development programs, one has to be careful that managers don't spend all their time with their own team, thus spending far too little time networking, sharing, and learning from their peers in other parts of the business.

Apple Video Rentals

Yesterday, Apple made major headlines with news of a possible deal with Fox to offer video rentals via iTunes. The fundamental question, in my view, is how Apple will leverage a movie rental business into the sale of more hardware. It's hard to imagine a dramatic new surge in iPod sales because of the movie rental launch. Moreover, it's easy to imagine price battles among the major players, such as NetFlix, who compete in the movie rental business . On the other hand, perhaps Apple is poised to build upon its early Apple TV product, or launch an altogether new product designed for consumers to easily view movies downloaded via iTunes. If Apple can couple the on-line movie rentals from iTunes with an easy-to-use piece of hardware, then they can generate substantial profits. Once again, they will have executed a successful blades and razors strategy, i.e. selling inexpensive blades (movie rentals) to generate high profits from hardware sold at a price premium (Apple TV or some other product used to view the movies, transfer them easily from PC to TV, etc.).

Moneyball & The Lessons for Business Leaders

Several months ago, I was interviewed by Bret Dougherty, author of The IronDog Chronicles, a very interesting blog about sports, media, and entertainment. Bret co-hosts WXYC’s ‘Sports Rap’ on Sunday nights in Chapel Hill, North Carolina, while also pursuing his MBA at UNC-Chapel Hill. Here is the link to the recorded interview, which focused on my case study about the rise of sabermetrics in baseball, and some of the lessons for business decision-makers.

Dsylexics as Entrepreneurs

Business Week had a fascinating article about new research suggesting that dyslexics may tend to become successful entrepreneurs, particularly in the United States. Here is a brief excerpt from the article:

That kind of rejection, along with a penchant for creativity, may help explain why so many dyslexics are inclined to become entrepreneurs. Julie Logan, a professor of entrepreneurship at Cass Business School in London, believes strongly in the connection.

In a study to be published in January, Logan found that 35% of entrepreneurs in the U.S. show signs of dyslexia, compared to 20% in Britain. Logan attributes the gap to a more flexible education system in the U.S., vs. rigid tracking in British schools, and better identification and remediation methods. "Most of the people in our study talked about the role of the mentor and how important that had been," Logan says. "The difference seems to be somebody who believes in you in school."

The broader implication, she says, is that many of the coping skills dyslexics learn in their formative years become best practices for the successful entrepreneur. A child who chronically fails standardized tests must become comfortable with failure. Being a slow reader forces you to extract only vital information, so that you're constantly getting right to the point. Dyslexics are also forced to trust and rely on others to get things done—an essential skill for anyone working to build a business.

The article raises some interesting points regarding dyslexics as entrepreneurs, but I think it also should cause us to consider some more fundamental questions about our entire education system . In the era of self-esteem promotion during the 1990s, our schools often heaped praise on children. They sought to bolster each child's self-image. For me, this article suggests that we should make sure that we also focus on building our children's capabilities with regard to coping with failure. All of us fail many times in life, and entrepreneurs, in particular, must be able to deal with failure. They must be able to experiment, learn from those experiments, and then adjust or adapt their strategies.

Back to the Blog

Sorry to those readers who have been wondering where I have been for the past two months. Well, it's been a busy time in the Roberto household, as we have welcomed a third child into the family. Baby Luke Roberto was born in November, and he's doing very well. I'll be posting again on a regular basis going forward.

Amazon vs. Apple

Amazon made big news lately when they launched a new digital music service to compete with iTunes. Some news reports suggested that Amazon would pose a threat to iTunes' dominance. Perhaps that may prove to be true, but there is one important way in which Amazon may actually HELP Apple. How is that?

iTunes songs and iPods are complementary goods. If consumption of digital music rises, it will fuel more demand for digital music players - and iPod is the dominant player in that market. Where does Apple make their money? They appear to make far more profit from selling iPods than from selling songs on the iTunes stores.

Think of it the way that Harvard Professor David Yoffie explains it in his classic case study about Apple. Yoffie draws on several sources that describe the Apple business model as razors-and-blades in reverse. He quotes Steve Jobs stating that Apple makes very little profit on a song sold through iTunes. Yet, the profit margins on iPods are very healthy. They essentially provide the blades (songs) at a low price as a means of driving demand for the razors (the very profitable iPods).

If this is indeed the business model, then Amazon's latest move in digital music may actually HELP Apple... by fueling further demand for iPods, iPhones, and iPod accessories.

The Ethics of Guerilla Marketing

This article, about a singer named Marié Digby, caught my attention. It appeared in the Wall Street Journal last week. One has to wonder about the ethics of such marketing tactics, in which a young woman presents herself on YouTube as a complete amateur, while in fact, she has been working with a large media company for some time. The record company helps create quite a stir on the web about this supposed amateur sensation. Then, the firm announces the signing of this young YouTube phenom, without making it clear that they had been supporting her rise in on-line popularity all along.

Selling Home Depot Supply

This article describes critics who think Home Depot should not be selling its Supply unit, which serves contractors. The critics argue that the firm is forsaking the potential growth in that segment simply because it wants to "exorcise Nardelli's ghosts." The critics argue that the private equity firms will make a great deal of money on the Supply unit.

The critics are missing a crucial point. The issue is NOT whether the Supply unit is an attractive and potentially quite profitable business. This issue is whether the Supply unit is BETTER OFF as an independent company vs. within Home Depot. Moreover, the issue is whether Home Depot's retail business is better off on its own or when combined with the Supply unit.

This example demonstrates a larger point. When firms consider diversification, they must not only look at whether a new business unit will provide higher growth and profits... they must also consider whether that new unit will perform optimally as part of the diversified firm, or whether it will be better off on its own or as part of some other corporation. Shareholders benefit most when a business unit is located in an organizational situation in which it can perform best.

Mike Watkins on The Mistakes New Executives Make

Michael Watkins has a wonderful new post on his blog about the mistakes executives make when they join a new firm. He points out that many executives stumble because they try to recreate the organizations from which they came. There is no question that this is true. I have seen this so many times in my research and consulting.

I can recall one remarkable incident in my class several years ago, when Emerson Electric's former Chairman and CEO, Chuck Knight, visited my class. We discussed Emerson's highly regarded strategic planning process. I told the class that there is no one best way to conduct strategic planning; instead, a firm must match its strategic planning approach to the industry dynamics, firm strategy, organizational culture, and leadership style of the CEO. To bolster this point, I shared a quote from Charlie Peters, one of Knight's top executives at Emerson. Peters once said, "

• "Many companies come to Emerson wanting to find out what we are doing and why it works. But often, the trip is wasted. Our process works for us because of the type of impact we are trying to have on our businesses and because of our CEO, Chuck Knight – how he likes to operate and his relationship and status with the divisions. Other companies can’t duplicate that."

Interestingly, a student then asked Chuck Knight if he would have tried to replicate the Emerson strategic planning process if he had gone on to another firm, rather than retiring after he stepped down as CEO of Emerson. Knight offered a fascinating answer. He said that it probably would have been the wrong thing to do, in that the new situation most likely would have called for a substantial adaptation of the Emerson process to fit the needs of that particular company. However, he said that he would have been tempted to simply transport what he done at Emerson to the new firm. He said that this is what CEOs do...they rely on what made them successful. It's easy to convince oneself that this approach will work anywhere.

Knight's remarkably thoughtful comments reinforce the point that Mike Watkins makes in his blog. It is incredibly tempting for executives to want to replicate the the methods and techniques that worked for them in other organizations in the past. However, in business, there is often not "one best way" to do things. Success in business is so often about fit or alignment. The methods and practices must be adapted to fit the current situation and context.

China, Outsourcing, and Transaction Costs

Each day seems to bring new headlines regarding tainted products from China. Mattel has been hit especially hard, with the discovery of many toys containing lead paint. For me, the news about tainted Chinese products offers an opportunity to remind students and executives how to think strategically about outsourcing, rather than focusing singlemindedly on manufacturing cost reductions.

Let's go back to the fundamental strategic choice regarding vertical integration. What should drive the decision by a firm to produce its own inputs (or to conduct its own manufacturing in-house) versus outsourcing these activities to external vendors? Firms need to consider more than simply the direct manufacturing costs of performing these activities in-house vs. outsourcing them. They must consider the transaction costs associated with outsourcing production. In other words, how expensive is it to write contracts with external vendors, to monitor vendor behavior, enforce contractual provisions, control quality, etc.? Many firms underestimate these "costs" associated with using the market (i.e. outsourcing to an external vendor) versus keeping certain activities within the firm.

Quality control can be a very important reason why production is kept in-house instead of outsourcing it. We are learning from the tainted Chinese products situation that the transaction costs associated with quality control of outside vendors can be very high. The transaction costs come not only in the form of expenses associated with monitoring external vendors, but also in the form of a damaged brand in the event of a major recall.

Let's take a simple example of how control can be a key reason for keeping certain activities in-house. Why does Apple choose to operate its own retail stores? One reason is that they want to control the customer experience and the quality of the customer service that people receive. Of course, there are other reasons as well, but control is a critical one. Similarly, Disney owns some hotels in and around its theme parks because it wants to control the quality of the customer experience. Consider the risks and costs associated with having external parties in charge of the experience that families have at a Disney resort.

My argument is not that outsourcing should never occur. I simply aim to remind managers that they must consider the nature of transaction costs when making the outsourcing decision. Of course, there are transaction costs associated with keeping production in-house. The key is to compare the transaction costs of using the market (outsourcing) vs. keeping production in-house.

Finally, firms have to remember these strategic decisions are dynamic in nature. It may make sense to keep certain activities in-house at this point in time, but then outsourcing may become more attractive down the road. For instance, Disney used to own its retail store chain. One can see why they might want to control that customer retail experience. However, once they had operated this chain for some 15 years, they made the decision that they now could establish a licensing agreement, and allow an experienced retailer (Children's Place) to run the chain. Think of it this way. In the 1980s, when they launched the retail chain, they might have felt it was quite difficult, costly, and risky to establish a contract with an outside firm to operate Disney stores. However, now that Disney has run the stores for many years, they may feel more comfortable that they can write an enforceable contract that allows them to maintain quality control without running the store themselves.

Merck & Sunk Costs

The sunk cost effect refers to the tendency for people to escalate commitment to a course of action in which they have made substantial prior investments of time, money, or other resources. If people behaved rationally, they would make choices based on the marginal costs and benefits of their actions. The amount of any previous unrecoverable investment is a sunk cost and should not affect the current decision. However, research demonstrates that people often do consider past investment decisions when choosing future courses of action. In particular, individuals tend to pursue activities in which they have made prior investments. Often, they become overly committed to certain activities despite consistently poor results. They “throw good money after bad”, and the situation continues to escalate.

Many companies face the problem of the sunk cost effect. In fact, it's particularly problematic for firms involved in extremely expensive and lengthy product development projects. In those situations, the sunk costs can be enormous, and it can be very difficult for managers, scientists, and/or engineers to walk away from a project in which they have not only invested a great deal of money, but also much time, energy, and personal reputation.

A recent Business Week article suggests that Merck has found a way to try to combat this problem. Here's a snippet from the article (for the entire article, click here):

Merck is rewarding scientists for failure. One of the hardest decisions any scientist has to make is when to abandon an experimental drug that's not working. An inability to admit failure leads to inefficiencies. A scientist may spend months and tens of thousands of dollars studying a compound, hoping for a result he or she knows likely won't come, rather than pitching in on a project with a better chance of turning into a viable drug. So Kim (Merck R&D head Peter Kim) is promising stock options to scientists who bail out on losing projects. It's not the loss per se that's being rewarded but the decision to accept failure and move on. "You can't change the truth. You can only delay how long it takes to find it out," Kim says. "If you're a good scientist, you want to spend your time and the company's money on something that's going to lead to success."

Jensen vs. Langone

Business Week has a good wrap-up of an interesting exchange about private equity between Harvard Professor Emeritus Michael Jensen and Home Depot founding investor Ken Langone. These kinds of spirited discussions aren't typical for the Academy of Management meetings. I wish that we could find more ways to infuse the meetings with these kinds of exchanges between practitioners and academics.

Private Equity IPOs

Private equity seems to be all over the headlines these days, with a range of issues coming to the fore. I'd like to focus here on the issue of private equity shops going public. To me, the rationale is very weak. One of the fundamental reasons why private equity firms add value is their superior model of governance and control. As I have written previously, private equity firms have expanded rapidly, in part because they solve some of the governance problems posed by the large publicly traded corporation, with its separation of ownership and control. In short, I believe the ownership and governance structure of a private equity firm has the potential to dramatically reduce agency costs relative to a publicly traded firm.

Going public changes things significantly. For years, strategic management scholars and consultants have argued (and shown empirically) that conglomerates (unrelated diversified firms) trade at a discount, that they are worth less than the sum of their parts. You all know the reasons - they have been well-articulated over many years. Well, if a private equity firm goes public, then precisely what is the difference between it and the typical conglomerate? The private equity firm begins to look much more like the usual unrelated diversified firm. A private equity firm no longer can argue that its governance structure poses a substantial advantage over the old style publicly traded conglomerate.

I have heard many of the reasons why private equity firms are going public, beyond the fact that it offers an opportunity for enhancing personal wealth. Access to capital, ability to recruit and retain talent, management successsion... none of these seems like a persuasive argument. These firms have been wildly successful raising capital and attracting talent, while remaining privately held. Even if there were some advantages to going public, they must be weighed against the substantial disadvantage outlined here with respect to agency costs and corporate governance. To me, those disadvantages clearly outweigh the possible benefits of conducting an initial public offering.

Why More People Don't Buy Hybrids

Forbes.com has a very good article about how and why many hybrid automobiles have not become big sellers. Many people buy the Prius because they have a personal desire to reduce their energy use, and perhaps because they would like to make a social statement about environmental protection. However, hybrid technology comes at quite a cost. For many consumers, a hybrid's price premium proves far too substantial; affordability becomes a major concern. Let's do the math. According to the EPA, a Prius averages 46 miles per gallon. A Toyota Corolla averages 29 miles per gallon. Suppose that the typical person drives 12,000 miles per year, with gas at $3 per gallon. The Prius owner saves $459 per year in gasoline expenses over the course of one year. However, the sticker price for a Prius exceeds that of a Corolla by approximately $7,000. In other words, it would take roughly 15 years for the Prius owner to recoup his or her extra investment ($7000 divided by $459 per year), and that doesn't even take into account the present value of money. In conclusion, I think hybrid technology is very promising, with great potential to help us reduce gasoline consumption and carbon emissions. However, the automakers have quite a way to go before they can make hybrid technology affordable for many consumers.