Many firms ultimately encounter two fundamental liabilities of being large. First, they reach a point where increased size no longer translates into lower costs, i.e. they face diseconomies of scale. Second, they must address a large numbers problem, namely that growing revenues at historical rates becomes mathematically difficult, if not impossible. For instance, suppose a firm has grown revenue at a historical rate of 12% per year. That means that they are doubling sales every six years. That may be fine when a firm has $50 million in revenue, but it becomes a much more formidable challenge when the firm has reached $50 billion in sales.
What can firms do about this problem? Companies may want to consider the benefits of shrinking in the short term, and then recharging growth from that smaller platform. I mean more than simply selling off underperforming businesses from time to time, or disposing of unrelated units. I mean actually purposefully shrinking the scope of the corporation, even if certain businesses are related and performing fairly well - simply for the purpose of bringing the corporation back to a more manageable size, solidifying the firm's financial position, and returning a chunk of cash to shareholders.
Have firms done this in the past? Let's take General Dynamics, for example. Back in the early 1990s, General Dynamics was a Fortune 50 company, almost entirely focused on defense (with the exception of a few small businesses, such as its Cessna aircraft unit). In 1991, the firm had $10 billion in revenue, putting it 48th on the Fortune 500 list. The company, however, was not performing well at all. Moreover, its prospects did not appear bright, given the fall of the Berlin Wall and the demise of the Soviet Union, which brought about defense spending cuts.
During Bill Anders' term as CEO, he shrunk the company dramatically. I remember it quite well, because I was working at the company at the time. By 1995, the company had $3.7 billion in revenue, and it was ranked 307th on the Fortune 500 list. Anders didn't simply sell underperforming assets, nor did he sell off only noncore businesses. For instance, Anders sold the company's fighter jet unit, which produced F-16s for the U.S. Air Force. That business was considered by many to be "the crown jewel" of the company at the time - a solid business that was clearly related to the firm's other defense units. By the time Anders was done shrinking the company, General Dynamics was a far smaller firm. The firm focused entirely on two major businesses - shipbuilding and land combat systems.
What happened next? Starting in 1995, Anders' successor begin growing the business once again through a careful acquisition program - focusing first on the two major platforms remaining after the reorganization, and then gradually adding two other lines of business. General Dynamics begin by acquiring Bath Iron Works, a firm that fit nicely with the company's shipbuilding business (it already produced submarines at its Electric Boat subsidiary). Today, General Dynamics is 87th on the Fortune 500 list, with $27 billion in revenue.
During the intervening years, the company has produced an incredible amount of value for shareholders since the early 1990s. During Anders' time, the company sold off businesses and returned much of that cash to shareholders in the form of stock buybacks and special dividends. Later, the company enhanced shareholder wealth by producing a steady stream of earnings growth by driving revenue gains both organically and through acquisition, and by constantly improving productivity.
What's the moral of this story? Sometimes, retrenchment and rebirth can be an effective strategy. Diseconomies of scale are real, and managers must be aware that growing $50 billion behemoths at double digit rates simply may not be feasible - at least not in a profitable manner. Moreover, charging ahead for growth at that rate and scale may lead to some very poor strategic choices. But, how many CEOs do you know that want to see their company fall from 48th on the Fortune 500 list to a 307th? Therein lies the problem in many large companies...
Thursday, May 22, 2008
Wednesday, May 21, 2008
Starbucks and Licensing
We have recently learned that activist investor Nelson Peltz has taken a stake in Starbucks. Peltz, of course, has taken stakes in companies such as Heinz, Wendy's, Kraft, and Cadbury Schweppes in recent years, and he's pushed for strategic changes to bolster shareholder value. In a Wall Street Journal story about Peltz's investment, we see some conjecture about the types of changes that he might propose:
"John Glass, an analyst at Morgan Stanley, said Mr. Peltz could urge Starbucks to cut spending and use more licensing or franchising in opening locations. The money saved from that could go to buying back shares or a larger dividend for shareholders."
I can see why Mr. Glass has come to this conclusion. There is no question that licensing or franchising would reduce the capital investment required to continue to expand the Starbucks footprint around the globe, and it would free up cash to be returned to shareholders. However, Starbucks has relied on owning a majority of its locations for good reason (it does use some licensing in locations such as airports, as well as in other countries).
There's an important lesson about vertical integration here. Many firms rightfully employ franchising, because it gives local entrepreneurs great incentive as they run their own businesses. Moreover, it conserves capital. However, a company tends to own its own retail locations when they have concerns about controlling the experience, atmosphere, and customer interaction that takes place. Starbucks sells much more than coffee.
Some firms with premium differentiated strategies face challenges when they try to write into contracts the specific behaviors and atmosphere that they want to create and stimulate in their stores. Thus, one can see why these firms tilt toward owning their retail locations. Take Apple, for example, which operates its own retail stores; the retail location is about the entire Apple experience, not just selling computers and iPods. Apple doesn't want to leave that responsibility for guarding the brand, the relationship, and the experience to a licensee. Similarly, a Starbucks location is supposed to be about much more than selling coffee. It entrusts that relationship and experience to others at some peril.
If you examine what Schultz has done since returning as CEO, he's focused extensively on the Starbucks experience within their stores. He has always talked about the importance of Starbucks as a "third place" - outside of home and office. Shifting dramatically in the direction of franchising and licensing would seem to be at odds with his strategic direction. Starbucks would not have full control over the quality and the experience if they don't own these retail locations.
"John Glass, an analyst at Morgan Stanley, said Mr. Peltz could urge Starbucks to cut spending and use more licensing or franchising in opening locations. The money saved from that could go to buying back shares or a larger dividend for shareholders."
I can see why Mr. Glass has come to this conclusion. There is no question that licensing or franchising would reduce the capital investment required to continue to expand the Starbucks footprint around the globe, and it would free up cash to be returned to shareholders. However, Starbucks has relied on owning a majority of its locations for good reason (it does use some licensing in locations such as airports, as well as in other countries).
There's an important lesson about vertical integration here. Many firms rightfully employ franchising, because it gives local entrepreneurs great incentive as they run their own businesses. Moreover, it conserves capital. However, a company tends to own its own retail locations when they have concerns about controlling the experience, atmosphere, and customer interaction that takes place. Starbucks sells much more than coffee.
Some firms with premium differentiated strategies face challenges when they try to write into contracts the specific behaviors and atmosphere that they want to create and stimulate in their stores. Thus, one can see why these firms tilt toward owning their retail locations. Take Apple, for example, which operates its own retail stores; the retail location is about the entire Apple experience, not just selling computers and iPods. Apple doesn't want to leave that responsibility for guarding the brand, the relationship, and the experience to a licensee. Similarly, a Starbucks location is supposed to be about much more than selling coffee. It entrusts that relationship and experience to others at some peril.
If you examine what Schultz has done since returning as CEO, he's focused extensively on the Starbucks experience within their stores. He has always talked about the importance of Starbucks as a "third place" - outside of home and office. Shifting dramatically in the direction of franchising and licensing would seem to be at odds with his strategic direction. Starbucks would not have full control over the quality and the experience if they don't own these retail locations.
Thursday, May 01, 2008
A Great Board of Directors
A recent article on Business Week's website discusses how a firm can create an excellent board of directors. The article makes a key point, namely that while a board can meet all of the structural requirements advocated by governance experts, that does not mean it is an effective board. In other words, one can have the correct percentage of outsiders, a nonexecutive chairman, and the like, and yet still not provide effective goverance. I have always believed that far too much attention is paid to structural dimensions of the board, and far too little attention is paid to process. Great boards of directors have highly effective group processes for dialogue and deliberation. Their process distinguishes them from less effective boards, not their structural characteristics.
Wednesday, April 23, 2008
Credit Rating Agencies
Roger Lowenstein has a great new article in this week's NYT magazine about the role that the credit rating agencies played in the mortgage meltdown. He speaks at length about the conflict of interest that the credit rating agencies face, since they collect fees from the very clients that they are evaluating. Of course, these conflicts have always existed, but Lowenstein explains why the conflicts are most pronounced and worrisome when it comes to mortgage-backed securities, as opposed to corporate bonds:
The evidence on whether rating agencies bend to the bankers’ will is mixed. The agencies do not deny that a conflict exists, but they assert that they are keen to the dangers and minimize them. For instance, they do not reward analysts on the basis of whether they approve deals. No smoking gun, no conspiratorial e-mail message, has surfaced to suggest that they are lying. But in structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody’s has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.”
The evidence on whether rating agencies bend to the bankers’ will is mixed. The agencies do not deny that a conflict exists, but they assert that they are keen to the dangers and minimize them. For instance, they do not reward analysts on the basis of whether they approve deals. No smoking gun, no conspiratorial e-mail message, has surfaced to suggest that they are lying. But in structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody’s has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.”
Oil Bubble?
I'm not an expert on the crude oil market, but naturally, we are all very interested observers. I was struck by this recent article in the Wall Street Journal, in which a number of people express the argument that we are in the midst of a massive bubble in the oil market. It will be interesting to watch this play out over the coming months and years.
Tuesday, April 22, 2008
Inside-Outsiders
One of my mentors, Joe Bower, has published new research on the very important topic of CEO succession. In his new work, Bower argues that firms should aspire to elevate "inside-outsiders" to the CEO post. Here is Bower's explanation:
The answer to problems with CEO succession is what I call inside-outsiders. These are men and women who have performed well and risen high, but have maintained their objectivity. They are aware ofhow much change is needed to sustain success or turn around a failure, but they also know the organization, its culture, and its people. They can do more than bring in consultants or make across-the-board cuts. Beyond getting short-term profits, they can build for future growth. These unusual people are often found at the periphery of the organization, managing new businesses or new markets.
The idea is that companies should try to find someone who combines the experience and knowledge of a typical insider with the fresh perspective and divergent thinking typical of an outside hire. I think it's good advice, and it's particularly interesting to note that these people often may have spent a great deal of time at the periphery of the organization, forging into new markets, launching new products, or coming up with entirely new business models. Those experiences at the periphery expose executives to new ways of thinking and give them a fresh perspective on deeply held assumptions and mental models to which many insiders perhaps become overly wedded over the years.
The answer to problems with CEO succession is what I call inside-outsiders. These are men and women who have performed well and risen high, but have maintained their objectivity. They are aware ofhow much change is needed to sustain success or turn around a failure, but they also know the organization, its culture, and its people. They can do more than bring in consultants or make across-the-board cuts. Beyond getting short-term profits, they can build for future growth. These unusual people are often found at the periphery of the organization, managing new businesses or new markets.
The idea is that companies should try to find someone who combines the experience and knowledge of a typical insider with the fresh perspective and divergent thinking typical of an outside hire. I think it's good advice, and it's particularly interesting to note that these people often may have spent a great deal of time at the periphery of the organization, forging into new markets, launching new products, or coming up with entirely new business models. Those experiences at the periphery expose executives to new ways of thinking and give them a fresh perspective on deeply held assumptions and mental models to which many insiders perhaps become overly wedded over the years.
Tuesday, April 08, 2008
Capitalizing on a Recession?
Can companies actually grow stronger during a recession? What can they do to capitalize on the problems that their rivals encounter during tough economic times? Suppose you have a sturdy balance sheet, low debt, and plentiful amounts of cash. How can you employ these strengths to take on rivals who have been weakened considerably?
First, invest heavily in research and development now so that new products and services are ready for launch as the economy begins to grow again. Your competitors may be inclined to cut R&D, particularly if they face high interest payments, substantial drops in revenue, and the like. If so, your acceleration of investment now will yield a strong product advantage in the coming years.
Second, spend some time learning about the customers of your weakest competitors. You might be inclined to go after their largest and most attractive clients. However, be aware that your rivals are probably working desperately to save those customers. They might not, however, have the time and resources to focus on smaller clients. Focus your attention on these potential new customers, particularly those with attractive growth prospects and strong balance sheets.
Third, identify your most critical suppliers and distributors, and determine if any face the possibility of severe impairment to their business due to the economic downturn. Assess the risk to your business if they should falter badly or even fail completely. Then, examine ways in which you might help those supplies and distributors weather the downturn. Even the smallest gesture can sometimes build an enduring loyalty that will pay off for years to come.
Finally, think carefully about your talent needs. As weak companies lay off employees, many good people will find themselves searching for work. Other skilled workers may still have a job, but they may be disenchanted with their struggling firms. Capitalize on this opportunity to identify and attract talented employees, while slack exists in the labor market.
I'm reminded of the importance of considering these questions when I read Steven Jobs' recent quotes about Apple's strategy in the days and months ahead. Jobs promises to expand the firm's research and development efforts this year, even if economic growth does turn negative. Here is what he told Fortune magazine a few weeks ago, reflecting on the last recession as well as the current economic climate: "In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time." Of course, Apple sits in an enviable position. They have an impressive balance sheet, mountains of cash, and no debt. If your firm also finds itself in such a position of strength, remember that it too can use the recession to become even stronger relative to the competition.
First, invest heavily in research and development now so that new products and services are ready for launch as the economy begins to grow again. Your competitors may be inclined to cut R&D, particularly if they face high interest payments, substantial drops in revenue, and the like. If so, your acceleration of investment now will yield a strong product advantage in the coming years.
Second, spend some time learning about the customers of your weakest competitors. You might be inclined to go after their largest and most attractive clients. However, be aware that your rivals are probably working desperately to save those customers. They might not, however, have the time and resources to focus on smaller clients. Focus your attention on these potential new customers, particularly those with attractive growth prospects and strong balance sheets.
Third, identify your most critical suppliers and distributors, and determine if any face the possibility of severe impairment to their business due to the economic downturn. Assess the risk to your business if they should falter badly or even fail completely. Then, examine ways in which you might help those supplies and distributors weather the downturn. Even the smallest gesture can sometimes build an enduring loyalty that will pay off for years to come.
Finally, think carefully about your talent needs. As weak companies lay off employees, many good people will find themselves searching for work. Other skilled workers may still have a job, but they may be disenchanted with their struggling firms. Capitalize on this opportunity to identify and attract talented employees, while slack exists in the labor market.
I'm reminded of the importance of considering these questions when I read Steven Jobs' recent quotes about Apple's strategy in the days and months ahead. Jobs promises to expand the firm's research and development efforts this year, even if economic growth does turn negative. Here is what he told Fortune magazine a few weeks ago, reflecting on the last recession as well as the current economic climate: "In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time." Of course, Apple sits in an enviable position. They have an impressive balance sheet, mountains of cash, and no debt. If your firm also finds itself in such a position of strength, remember that it too can use the recession to become even stronger relative to the competition.
Wednesday, April 02, 2008
Deciding how to Decide
Noted political scientist and former Assistant Secretary of Defense Joseph Nye applies my framework on decision-making in the opening to a commentary in yesterday's Financial Times. It's an interesting read, regardless of where you stand on the political spectrum.
Tuesday, April 01, 2008
Guest Post: Leadership Training Through Virtual Worlds
The rise of virtual worlds like Second Life and World of Warcraft has led to innovative new ways to train corporate leaders. In a virtual world, people are represented by avatars and can practice their skills in a variety of settings with other professionals. This is a cost-effective way to train a large amount of people in various situations. In short, this is business training of the future.
While many video game aficionados were always told that their hobbies were pointless, even the youngest players are gaining leadership training without realizing it. John Seely Brown and Douglas Thomas of Wired magazine write:
When role-playing gamers team up to undertake a quest, they often need to attempt particularly difficult challenges repeatedly until they find a blend of skills, talents, and actions that allows them to succeed. This process brings about a profound shift in how they perceive and react to the world around them.
They become more flexible in their thinking and more sensitive to social cues. The fact that they don't think of gameplay as training is crucial. Once the experience is explicitly educational, it becomes about developing compartmentalized skills and loses its power to permeate the player's behavior patterns and worldview.
It isn't just the "accidental" training that companies are interested in, however. The aforementioned Second Life serves as a training ground and collaboration tool for many different industries. The Coalition Connection, for example, is a University of Maryland project that provides virtual training for a group of emergency responders.
Is this new age in leadership training free of problems? Certainly not, as there are cultural and technical obstacles people must overcome. Not everyone is Web-savvy and trained in PC gaming, after all. However, more companies are relating virtual world training to their bottom line. It is extremely cost effective to undergo this sort of widespread training, especially when remote workers must be brought together.
Elastic Collision is one of many consulting firms that helps businesses to develop their own virtual world presence. As the company states, corporate training sessions can "leverage the educational potential of virtual worlds." Will every company adopt this new technology? Perhaps not, but the most innovative companies already have.
Susan Jacobs is a freelance writer as well as a regular contributor for CollegeDegree.com, a site helping students select an online college degree. Susan invites your questions, comments and freelancing job inquiries at her email address susan.jacobs45@gmail.com.
While many video game aficionados were always told that their hobbies were pointless, even the youngest players are gaining leadership training without realizing it. John Seely Brown and Douglas Thomas of Wired magazine write:
When role-playing gamers team up to undertake a quest, they often need to attempt particularly difficult challenges repeatedly until they find a blend of skills, talents, and actions that allows them to succeed. This process brings about a profound shift in how they perceive and react to the world around them.
They become more flexible in their thinking and more sensitive to social cues. The fact that they don't think of gameplay as training is crucial. Once the experience is explicitly educational, it becomes about developing compartmentalized skills and loses its power to permeate the player's behavior patterns and worldview.
It isn't just the "accidental" training that companies are interested in, however. The aforementioned Second Life serves as a training ground and collaboration tool for many different industries. The Coalition Connection, for example, is a University of Maryland project that provides virtual training for a group of emergency responders.
Is this new age in leadership training free of problems? Certainly not, as there are cultural and technical obstacles people must overcome. Not everyone is Web-savvy and trained in PC gaming, after all. However, more companies are relating virtual world training to their bottom line. It is extremely cost effective to undergo this sort of widespread training, especially when remote workers must be brought together.
Elastic Collision is one of many consulting firms that helps businesses to develop their own virtual world presence. As the company states, corporate training sessions can "leverage the educational potential of virtual worlds." Will every company adopt this new technology? Perhaps not, but the most innovative companies already have.
Susan Jacobs is a freelance writer as well as a regular contributor for CollegeDegree.com, a site helping students select an online college degree. Susan invites your questions, comments and freelancing job inquiries at her email address susan.jacobs45@gmail.com.
Thursday, March 27, 2008
Harvard Business School's 100th Anniversary
Geoff Colvin of Fortune has written a very interesting piece about my alma mater's 100th anniversary. Colvin sets out to ask some very succcesful alumni what they learned at HBS. After listening to their answers, he concluded, "All their answers are different, but they're all the same: none are about the content of the courses; all are about the experience." He goes on to say, "It makes sense that the content of the classes isn't what it's all about. That's constantly being commoditized."
At HBS, students learn to think, both individually and collectively, through the case method. It's active learning each and every day. At one point, Colvin quotes Yale Professor (and former HBS student and faculty member) Jeff Sonnenfeld, who says, ""I learned that yellowed lecture notes and blackboards filled with algorithms don't teach professionals how to think."
As a graduate and former faculty member of the school, I can attest to what Colvin and Sonnenfeld have concluded. We do easily forget the frameworks and theories that we learned at HBS, but we never forget the learning experience. As former Dean John McArthur once said, "How we teach is what we teach." In other words, the faculty member leads a process of collective inquiry, using the Socratic method, that can and should be emulated by leaders in any business. What do students learn at HBS? They learn the process of asking tough questions, stimulating debate, questioning assumptions, and generating alternatives. They learn to work as a group to identify and solve tough problems. These are the skills any aspiring business leader must master.
At HBS, students learn to think, both individually and collectively, through the case method. It's active learning each and every day. At one point, Colvin quotes Yale Professor (and former HBS student and faculty member) Jeff Sonnenfeld, who says, ""I learned that yellowed lecture notes and blackboards filled with algorithms don't teach professionals how to think."
As a graduate and former faculty member of the school, I can attest to what Colvin and Sonnenfeld have concluded. We do easily forget the frameworks and theories that we learned at HBS, but we never forget the learning experience. As former Dean John McArthur once said, "How we teach is what we teach." In other words, the faculty member leads a process of collective inquiry, using the Socratic method, that can and should be emulated by leaders in any business. What do students learn at HBS? They learn the process of asking tough questions, stimulating debate, questioning assumptions, and generating alternatives. They learn to work as a group to identify and solve tough problems. These are the skills any aspiring business leader must master.
Wednesday, March 19, 2008
The Collapse of Bear Stearns
The collapse of Bear Stearns brings to mind a fascinating quote by a very accomplished CEO: "I am well aware that humans will always make errors. My irritation comes from the fact that these errors are not caught immediately." That quote is from Alan “Ace” Greenberg, former Chairman and CEO of Bear Stearns, in a book titled Memos from the Chairman, which was published in 1996.
Tuesday, March 18, 2008
Steve Jobs on Apple's Strategy
This Steve Jobs' quote in the current issue of Fortune magazine (Most Admired Companies) exemplifies Michael Porter's idea that business strategy is as much about choosing what NOT to do as it is about determining what a company will do. Here is the quote:
"Apple is a $30 billion company, yet we've got less than 30 major products. I don't know if that's ever been done before. Certainly the great consumer electronics companies of the past had thousands of products. We tend to focus much more. People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully (italics added). I'm actually as proud of many of the things we haven't done as the things we have done. The clearest example was when we were pressured for years to do a PDA, and I realized one day that 90% of the people who use a PDA only take information out of it on the road. They don't put information into it. Pretty soon cellphones are going to do that, so the PDA market's going to get reduced to a fraction of its current size, and it won't really be sustainable. So we decided not to get into it. If we had gotten into it, we wouldn't have had the resources to do the iPod. We probably wouldn't have seen it coming."
"Apple is a $30 billion company, yet we've got less than 30 major products. I don't know if that's ever been done before. Certainly the great consumer electronics companies of the past had thousands of products. We tend to focus much more. People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully (italics added). I'm actually as proud of many of the things we haven't done as the things we have done. The clearest example was when we were pressured for years to do a PDA, and I realized one day that 90% of the people who use a PDA only take information out of it on the road. They don't put information into it. Pretty soon cellphones are going to do that, so the PDA market's going to get reduced to a fraction of its current size, and it won't really be sustainable. So we decided not to get into it. If we had gotten into it, we wouldn't have had the resources to do the iPod. We probably wouldn't have seen it coming."
Thursday, March 13, 2008
The Isolated Executive
Far too many senior executives at large companies become isolated in the corner office. Their professional lives involve a series of handlers - people who take their calls, screen their email, drive them places, run errands for them, etc. They live in gated communities, travel in first class, and stay at five-star hotels. They have worked hard for these privileges; few would suggest that they don't deserve them. However, executives often find themselves living and working in a bubble. They lose touch with their front-line employees, their customers, and their suppliers.
Yes, many senior executives conduct town-hall meetings with employees, and they go on customer visits periodically. They tour the company factories or stores, and they visit supplier locations. However, these events are often highly orchestrated and quite predictable. People typically know that they are coming... which clearly alters the dynamic a great deal. Often, executives simply witness a nice show, put on by lower level managers to impress them. They don't actually come to understand the needs and concerns of people who work in their factories or consume their goods. Such isolation breeds complacency and an inability to see new threats or opportunities.
How can executives protect against becoming isolated at the top? First, engage your consumers and employees in authentic, unscripted conversations. At Xerox, CEO Anne Mulcahy and fellow corporate officers rotate serving as "Customer Officer of the Day" at the company's headquarters (one day per month for each executive). In that role, they must deal personally with all customer complaints that come to the headquarters that day. As Mulcahy says, "it keeps us in touch with the real world. It grounds us."
Second, go watch how consumers behave, rather than simply relying on the data summarized after marketing research folks have conducted surveys or focus groups. People call this "ethnographic marketing" because the researcher acts as an anthropologist watching people in their natural environment. At Proctor and Gamble, CEO A.G. Lafley engages in such direct consumer observation. A 2003 Forbes article describes Lafley making visits to consumer homes "incognito" so that he can learn directly from watching how people live and use his firm's products.
Third, go put yourself in your front-line employee's shoes for a day. Go work on the line - whether that be at the cash register in a supermarket or at a station along an assembly line. When I began working at Staples in the mid-1990s, after completing my MBA, my first assignment was to spend several days stocking shelves and running a cash register in a store. You learn a great deal about the business in this manner. Executives too need to periodically go to the front lines.
Finally, executives must interact with young people. Time spent with young people exposes executives directly to new societal and technological trends, as well as a different perspective on the world. They should visit college campuses, spend time learning about social networking sites, as well as listen to and watch some of the multimedia (music, books, television) that young people enjoy. Within their own firms, executives might even take up Gary Hamel's suggestion that they set up a "shadow executive committee" consisting of employees 20 years younger than the actual top team (2003 Harvard Business Review article). Seeking feedback from these young workers can provide a fresh perspective on the firm's strategies and initiatives.
In sum, executives must work hard to break out of the bubble that often forms around them as they rise to the top of large organizations. It takes a concerted effort, but the payoff is great. They will keep themselves grounded, as Mulcahy notes, and they will create bountiful opportunities for learning. That learning can drive innovation and improvement in their organizations.
Yes, many senior executives conduct town-hall meetings with employees, and they go on customer visits periodically. They tour the company factories or stores, and they visit supplier locations. However, these events are often highly orchestrated and quite predictable. People typically know that they are coming... which clearly alters the dynamic a great deal. Often, executives simply witness a nice show, put on by lower level managers to impress them. They don't actually come to understand the needs and concerns of people who work in their factories or consume their goods. Such isolation breeds complacency and an inability to see new threats or opportunities.
How can executives protect against becoming isolated at the top? First, engage your consumers and employees in authentic, unscripted conversations. At Xerox, CEO Anne Mulcahy and fellow corporate officers rotate serving as "Customer Officer of the Day" at the company's headquarters (one day per month for each executive). In that role, they must deal personally with all customer complaints that come to the headquarters that day. As Mulcahy says, "it keeps us in touch with the real world. It grounds us."
Second, go watch how consumers behave, rather than simply relying on the data summarized after marketing research folks have conducted surveys or focus groups. People call this "ethnographic marketing" because the researcher acts as an anthropologist watching people in their natural environment. At Proctor and Gamble, CEO A.G. Lafley engages in such direct consumer observation. A 2003 Forbes article describes Lafley making visits to consumer homes "incognito" so that he can learn directly from watching how people live and use his firm's products.
Third, go put yourself in your front-line employee's shoes for a day. Go work on the line - whether that be at the cash register in a supermarket or at a station along an assembly line. When I began working at Staples in the mid-1990s, after completing my MBA, my first assignment was to spend several days stocking shelves and running a cash register in a store. You learn a great deal about the business in this manner. Executives too need to periodically go to the front lines.
Finally, executives must interact with young people. Time spent with young people exposes executives directly to new societal and technological trends, as well as a different perspective on the world. They should visit college campuses, spend time learning about social networking sites, as well as listen to and watch some of the multimedia (music, books, television) that young people enjoy. Within their own firms, executives might even take up Gary Hamel's suggestion that they set up a "shadow executive committee" consisting of employees 20 years younger than the actual top team (2003 Harvard Business Review article). Seeking feedback from these young workers can provide a fresh perspective on the firm's strategies and initiatives.
In sum, executives must work hard to break out of the bubble that often forms around them as they rise to the top of large organizations. It takes a concerted effort, but the payoff is great. They will keep themselves grounded, as Mulcahy notes, and they will create bountiful opportunities for learning. That learning can drive innovation and improvement in their organizations.
Tuesday, March 04, 2008
The Powerpoint Doldrums
We've all been in meetings where a presenter slogs through a seemingly endless Powerpoint presentation. The graphics are wonderful; the fonts are just right. Still, it's boring. People are multi-tasking right and left. The Blackberries are all in hand. The questions are few and far between. Thus, I found it interesting when I read the following quote in a recent Business Week article:
Stephen Pratt, chief executive of Infosys Consulting, understands the power of the pen; he rarely walks into a meeting with a formal presentation. "People tend to fall asleep when they see very long PowerPoint presentations full of text," Pratt says. "But if you start drawing on the board, people sit up in their chairs."
I found this particularly interesting, because as a professor, I know that many faculty members rely on Powerpoint heavily. It can easily become a snoozefest. I do use Powerpoint, but for most of my classes, I use the chalkboard or the whiteboard much more often. My drycleaning bill can attest to the fact that I love chalk! I find that students are much more engaged when you use the chalkboard to communicate an idea and to trigger a conversation with them. That's why I think Infosys CEO Stephen Pratt is correct. If the chalkboard or whiteboard works more effectively in the classroom, then I think there's no question that it can have a powerful impact during management meetings as well.
Stephen Pratt, chief executive of Infosys Consulting, understands the power of the pen; he rarely walks into a meeting with a formal presentation. "People tend to fall asleep when they see very long PowerPoint presentations full of text," Pratt says. "But if you start drawing on the board, people sit up in their chairs."
I found this particularly interesting, because as a professor, I know that many faculty members rely on Powerpoint heavily. It can easily become a snoozefest. I do use Powerpoint, but for most of my classes, I use the chalkboard or the whiteboard much more often. My drycleaning bill can attest to the fact that I love chalk! I find that students are much more engaged when you use the chalkboard to communicate an idea and to trigger a conversation with them. That's why I think Infosys CEO Stephen Pratt is correct. If the chalkboard or whiteboard works more effectively in the classroom, then I think there's no question that it can have a powerful impact during management meetings as well.
Thursday, February 28, 2008
Recessions and Differentiation Strategies
Eac day brings news of slowing economic growth. Moroever, we see many retailers reporting disappointing earnings and/or slicing their outlook for the year ahead. These reports raise an interesting question. How should retailers with a differentiation strategy react during a recession? By differentiation, I mean retailers who try to create better-than-average willingness to pay on the part of their customers, thus enabling them to charge premium prices. Limited Brands, for instance, employs a differentiation strategy in its businesses such as Victoria's Secret. Meanwhile, TJX tends to employ a low cost strategy in its businesses such as Marshall's.
The challenge during a recession is that many differentiated players may suffer larger declines in sales than low cost players, as budget-conscious shoppers flock to outlets that offer rock-bottom prices. My view is that differentiated retailers must be very careful during recessionary periods. The natural inclination might be to slash prices to retain customers during sluggish economic times. However, lower prices means lower margins, unless the retailer can also reduce costs. Herein lies the problem. If differentiated players are not careful in their cost reduction efforts, they may damage their brand, quality, and market reputation - thus compromising their position in the market and their ability to return to premium pricing in the future. Thus, the differentiated players in the retail sector have to be very careful, as efforts to shore up their financials during a recession can have long term detrimental effects that persist long after robust economic growth resumes.
The challenge during a recession is that many differentiated players may suffer larger declines in sales than low cost players, as budget-conscious shoppers flock to outlets that offer rock-bottom prices. My view is that differentiated retailers must be very careful during recessionary periods. The natural inclination might be to slash prices to retain customers during sluggish economic times. However, lower prices means lower margins, unless the retailer can also reduce costs. Herein lies the problem. If differentiated players are not careful in their cost reduction efforts, they may damage their brand, quality, and market reputation - thus compromising their position in the market and their ability to return to premium pricing in the future. Thus, the differentiated players in the retail sector have to be very careful, as efforts to shore up their financials during a recession can have long term detrimental effects that persist long after robust economic growth resumes.
Friday, February 15, 2008
New Strategies for the TV Networks
The Wall Street Journal reports today that the major broadcast networks are considering doing away with some age-old conventions of the television business in an attempt to entice viewers and advertisers back after the lengthy writers' strike. Well, it's about time!!! I've wondered for many years now why the broadcast networks have adhered to certain conventions, while their ratings have deteriorated. It's seems a classic case of a business being caught in a particular mental model, and not able to shake those basic assumptions while the world around them is changing dramatically.
Here are some questions that all the networks should consider: Why should most new shows premiere in September? Why must the season run from September to May for most shows? Why should nearly every series air episodes once per week? Why not have some series that run episodes in a more condensed fashion, perhaps with 2-3 episodes per week for a few months? Why not create an event, some hoopla, out of the testing of new pilots, perhaps creating a 2-3 day block several times per year filled with a whole array of pilots? Why not couple that with a huge web-based effort to collect feedback about those pilots? We could go on and on... this is clearly a business that needs to be re-tooled, and that begins with shaking the old conventions. I'm glad to hear some executives are beginning to question the conventional wisdom in the business.
Here are some questions that all the networks should consider: Why should most new shows premiere in September? Why must the season run from September to May for most shows? Why should nearly every series air episodes once per week? Why not have some series that run episodes in a more condensed fashion, perhaps with 2-3 episodes per week for a few months? Why not create an event, some hoopla, out of the testing of new pilots, perhaps creating a 2-3 day block several times per year filled with a whole array of pilots? Why not couple that with a huge web-based effort to collect feedback about those pilots? We could go on and on... this is clearly a business that needs to be re-tooled, and that begins with shaking the old conventions. I'm glad to hear some executives are beginning to question the conventional wisdom in the business.
Wednesday, February 13, 2008
Selling the Chicago Cubs
The Wall Street Journal has a story today on page B1 about Sam Zell's attempt to sell the Chicago Cubs. Apparently, Zell would like to sell the Cubs and Wrigley Field separately to different buyers. The paper reports that Zell is exploring the sale of the ballpark to a state agency in Illinois, while seeking a private buyer for the team. The paper also reports that "most observers believe he will make more money" by selling the two entities separately.
I wonder about this conclusion. Strong arguments can be made that, in fact, it makes more sense for the Cubs to remain a vertically integrated organization - with both the team and the ballpark sitting under one corporate umbrella. When we think about vertical integration, scholars tend to think about transaction costs, i.e. the costs associated with contracting and coordination between two parties. Some would argue that the transaction costs associated with the team and the ballpark trying to cooperate as separate entities exceed the transaction costs associated with that same cooperation if the two entities were part of the same corporation, with the same owner.
What drives transaction costs? Well, scholars like to think about what they call "transaction-specific assets." An example of a transaction-specific asset would be if a supplier had to invest in specialized technology in order to manufacture components for one of its customers. In that scenario, the two parties can become beholden to one another. The opportunity exists for what economists call "holdup" i.e. one party can try to renege on obligations and perhaps try to extract additional value from the other party. In that type of situation, we tend to see vertical integration arise, i.e. the customer merges with the supplier.
In this case, I think that there may be a high degree of asset specificity... to put it simply, the Cubs are closely linked to Wrigley; it's highly unlikely that the Cubs will have the option to play anywhere else in the foreseeable future. Thus, I think the potential for holdup and opportunitistic behavior exists if the two entities are owned separately and trying to negotiate contracts to cooperate with one another. I think that transaction costs associated with coordination and cooperation might be lower if the team and ballpark are owned by the same corporate parent.
I wonder about this conclusion. Strong arguments can be made that, in fact, it makes more sense for the Cubs to remain a vertically integrated organization - with both the team and the ballpark sitting under one corporate umbrella. When we think about vertical integration, scholars tend to think about transaction costs, i.e. the costs associated with contracting and coordination between two parties. Some would argue that the transaction costs associated with the team and the ballpark trying to cooperate as separate entities exceed the transaction costs associated with that same cooperation if the two entities were part of the same corporation, with the same owner.
What drives transaction costs? Well, scholars like to think about what they call "transaction-specific assets." An example of a transaction-specific asset would be if a supplier had to invest in specialized technology in order to manufacture components for one of its customers. In that scenario, the two parties can become beholden to one another. The opportunity exists for what economists call "holdup" i.e. one party can try to renege on obligations and perhaps try to extract additional value from the other party. In that type of situation, we tend to see vertical integration arise, i.e. the customer merges with the supplier.
In this case, I think that there may be a high degree of asset specificity... to put it simply, the Cubs are closely linked to Wrigley; it's highly unlikely that the Cubs will have the option to play anywhere else in the foreseeable future. Thus, I think the potential for holdup and opportunitistic behavior exists if the two entities are owned separately and trying to negotiate contracts to cooperate with one another. I think that transaction costs associated with coordination and cooperation might be lower if the team and ballpark are owned by the same corporate parent.
Friday, February 08, 2008
Save the planet AND make money
Gary Hirshberg, CEO and founder of Stonyfield Farms, has a great new book about how his company has managed to become very profitable, while adhering to "green" environmental practices and principles. Stonyfield is quite a company; they generate $300 million in annual revenue, and have become the world's largest organic yogurt producer. Hirshberg's book offers practical advice for managers by detailing the specific ways in which his firm has managed to increase revenue and profits, while also promoting sustainable environmental practices. I'm looking forward to hear Hirshberg talk about his book when he visits our campus here at Bryant University on March 19th.
Monday, February 04, 2008
Yahoo in Play
With Microsoft's unsolicited bid for Yahoo, it's now clear that Yahoo is in play. It's likely that other offers will follow, particularly with Google now poised to perhaps help Yahoo find a white knight. My guess is that Yahoo's board and management will try to raise the selling price by attracting other bidders, recognizing that shareholders will not accept a rejection of the bid and maintenance of the status quo.
One key question is: Can Yahoo find a bidder whose culture represents a better fit than Microsoft? Cultural mismatch represents a key hurdle in many acquisition integration efforts, and it surely would be an obstacle if Microsoft purchases Yahoo. Perhaps another company could provide a better match.
Alternatively, we could see a bid by a firm such as News Corporation. Murdoch has a reputation for allowing each of his businesses to run fairly autonomously, though he intervenes selectively on key strategic choices. Perhaps Yahoo's board and management would conclude that they can live with a takeover by News Corporation, because those top managers who remain would maintain some autonomy, rather than facing full integration with other News Corp businesses.
One key question is: Can Yahoo find a bidder whose culture represents a better fit than Microsoft? Cultural mismatch represents a key hurdle in many acquisition integration efforts, and it surely would be an obstacle if Microsoft purchases Yahoo. Perhaps another company could provide a better match.
Alternatively, we could see a bid by a firm such as News Corporation. Murdoch has a reputation for allowing each of his businesses to run fairly autonomously, though he intervenes selectively on key strategic choices. Perhaps Yahoo's board and management would conclude that they can live with a takeover by News Corporation, because those top managers who remain would maintain some autonomy, rather than facing full integration with other News Corp businesses.
Friday, January 25, 2008
The Financial Meltdown: From Blame Game to Collaborative Problem-Solving
The WSJ's Davos Blog has some interesting comments from Charles Dallara, managing director of the Institute of International Finance. Dallara argues that people around the world need to stop pointing fingers at the US for the current crisis, and instead, begin thinking about how central banks and governments can work collaboratively to improve economic conditions. He points out that the financial system is a global one, with many interconnections. All problems can't be solved at the national level.
I think Dallara makes a good point about the need to shift from the blame game to some collaborative problem-solving. Yes, the US regulatory system may need some fixing, but I'm sure that no nation has a perfect system. It's time to work together to iron out some of these issues that led to the current situation.
I find the finger-pointing so interesting because employees in companies do this all the time. Too often, managers spend far too much time assigning blame when a problem occurs, or trying to dodge blame, rather than confronting the issues openly and fixing them collaboratively.
I think Dallara makes a good point about the need to shift from the blame game to some collaborative problem-solving. Yes, the US regulatory system may need some fixing, but I'm sure that no nation has a perfect system. It's time to work together to iron out some of these issues that led to the current situation.
I find the finger-pointing so interesting because employees in companies do this all the time. Too often, managers spend far too much time assigning blame when a problem occurs, or trying to dodge blame, rather than confronting the issues openly and fixing them collaboratively.
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