Disney to Focus More on Boys

The Wall Street Journal has an article about Disney making a new push to target boys aged 6-14. After all, Disney has been wildly successful in recent years focusing on young girls with platforms such as High School Musical, Hannah Montana, and the like. They have not had the same type of success tapping into the market of young boys.

There is no question that a fair amount of specialization tends to occur among companies focused on toys, games, and media for children. For instance, in the toy market, we have two behemoths: Hasbro and Mattel. Hasbro has traditionally been very successful targeting young boys with products such as G.I. Joe, Spiderman, Transformers, Tonka, etc. Mattel has been very successful focusing on young girls with brands such as Barbie and American Girl. Both companies do sell to boys and girls, but they have not had equal success with both genders. In many ways, that has been a good thing. It's meant that the firms have been able to both generate high profits, because their competition has not been completely head-to-head. They've differentiated from one another a bit.

Now, Disney will find itself venturing into an area where they have had some success, but they haven't been as dominant. The question is whether Disney understands the boys market well enough, and has the ability to develop characters successfully, for that market. What new competitors will they bump up against with this new focus on boys? Perhaps most interestingly, this new strategic initiative may renew rumors that Disney is interested in acquiring a large videogame company, such as Electronic Arts, given that video games are particularly popular among young boys.

Apple's New iTunes Pricing

Lots of big news from Apple over the past few days. On the iTunes front, the company announced a new three-tiered pricing structure, as opposed to the prior pricing strategy of having all songs available at 99 cents each. At the same time, Apple will remove digital rights management protection from all its songs. This appears to be part of a grand compromise between the record companies and Apple. The record companies sought the tiered pricing, so that they could charge a slight premium for new songs. This could help produce a surge in revenue for the record companies for those songs that become big hits. Meanwhile, Apple's consumers will be happy that the songs can now be copied onto other devices. The removal of the DRM protection could lead to a new surge in iTunes sales, and it could help fuel even further growth of the iPhone, iTouch, and iPod businesses. The biggest news, however, concerns Steve Jobs' health. Rumors have swirled for months now, and finally, the company disclosed some news about Jobs' situation. Still, many investors wonder about succession planning at the company. Rarely have we seen a company for which investors seem to believe that the performance is so dependent on one person. While it may or may not be true, the investor sentiment is very powerful.

Our MBA Program

For those interested in learning about Bryant University's MBA program, as well as my philosophy on teaching, you might wish to take a look at this brief video.

Gullibility and Financial Scams

Psychologist Stephen Greenspan has an interesting article today in the Wall Street Journal about why human beings are so gullible at times, applying his research to the issue of our vulnerability to financial scams of one kind or another.

The Internet, Transaction Costs, and Investment Bubbles

As the Internet blossomed in the 1990s, many economists argued that the web improved information flow, reduced transaction costs, and thereby made capital markets more efficient. I believe this to be true. After all, the availability of information to all investors makes it even more likely that a new piece of data will quickly get factored into the price of a stock. According to the conventional wisdom, it's even harder to beat the market as an individual investor if stock prices so quickly incorporate new information. Emory Professor Paul Rubin expands upon this argument in a recent column in the Wall Street Journal. While he agrees that the web reduced transaction costs, he also argues that it may have inadvertently contributed to a greater propensity for bubbles. As he says, "It may be that bubbles and crashes are a natural part of capitalist markets. What's more, it may be that the very factors that have recently increased the efficiency of markets have also led to an increased propensity for bubbles."

In sum, because of the internet, people all around the world can quickly learn about "hot" new thing that seems like an attractive investmnet. Word can quickly spread to others through social networks, blogs, email, etc. Reduced transaction costs make it easy and cheap to then make a trade based on that new information. Soon, a bubble can emerge as word spreads quickly about a potential profit-making opportunity. Of course, it becomes a bubble when people are still investing long after the initial profitable opportunity was spotted; by the time the later investors have put money into the asset, the opportunity for a profitable return has greatly diminished. Yet, people are still chasing the idea. Why did the profitable opportunity vanish? Well, of course, the very efficiency of the market due to lower transaction costs has caused the "arbitrage" opportunity to vanish fairly quickly, yet many investors don't realize this until far too late. They are simply jumping on a social bandwagon.

Turnaround at Talbots

The Boston Globe has an interesting article on Trudy Sullivan's attempt to execute a successful turnaround at Talbots. The retail chain's troubles actually began with some fundamental strategic problems, not simply with the poor economy. First, the company had a difficult time integrating its acquisition of the J. Jill apparel chain several years ago. Second, the company had wasted resources with diversification attempts including the opening of men's and children's stores. Finally, the company's clothing increasingly appealed to a narrower and narrower demographic - namely older women.

The Talbots story is interesting, because many management professors like me constantly preach that companies should stay focused. However, in some cases, that focus can lead to a dangerously narrowing target market over time. In Talbots case, the target market shrank as the average consumer became older and older. The clothes no longer appealed to younger working women who used to frequent the company's stores. So, one moral of the Target story is that a firm should focus on its core customer, but it must take great care not to do so in a way that causes that target market to shrink over time. A second moral is that a firm should be wary of trying to overcome slowing growth in its target market by diversifying through either brand extensions (men's stores) or acquisitions (J. Jill). Instead of expanding elsewhere, a firm in that situation should make sure that it fixes its core market first.

Recommended Reading List

At the end of the semester, I often put together a recommended reading list for my students. Typically, I recommend "classics" rather than new releases (though, by classics, I don't necessarily mean only books published decades ago). Here are some classic books that are worth reading if you are interested in the topic of decision-making:

Janis, I.L. 1982. Victims of Groupthink. 2nd Edition. Boston: Houghton Mifflin.

Klein, G.A. 1998. Sources of Power. Cambridge, MA: MIT Press.

James Surowiecki. 2004. The Wisdom of Crowds. New York: Doubleday.

Neustadt, R. and E. May. 1986. Thinking in Time: The Uses of History For Decision Makers. New York: Free Press.

Allison, G. and P. Zelikow. 1999. Essence of Decision: Explaining the Cuban Missile Crisis. 2nd Edition. New York: Addison-Wesley.

Andrew Grove. 1996. Only the Paranoid Survive. New York: Currency.

Peter Drucker. 1954. The Practice of Management. New York, Harper.

Michael Lewis. 2003. Moneyball: The Art of Winning an Unfair Game. New York: W.W. Norton.

George, A. 1980. Presidential Decision Making in Foreign Policy. Boulder, Colorado: Westview Press.

Snook. S. 2000. Friendly Fire: The Accidental Shootdown of U.S. Black Hawks Over Northern Iraq. Princeton, NJ: Princeton University Press.

Strategy in a Structural Break

Richard Rumelt, highly respected strategy professor at UCLA, has written a wonderful article for McKinsey Quarterly in which he discusses how companies can exploit the economic downturn to build and enhance competitive advantage for the long term.

Cost/Benefit Analysis

Companies are facing some interesting choices as they cope with the economic downturn, and these hard decisions call for careful cost/benefit analysis. Some retailers have expanded their hours dramatically, even staying open 24 hours, to attract shoppers just before Christmas. The question, of course, is whether the additional expenses incurred by remaining open those extra hours will pay off in terms of incremental revenues. Similarly, we have some firms engaging in substantial layoffs, while others are eschewing layoffs in favor of four-day workweeks. Clearly, the four-day workweek means you retain talented, well-trained people, and thus, you can scale back up quickly when the economy rebounds. You also avoid paying the severance that might be associated with layoffs. However, you typically have to continue paying all these employees' benefits. Thus, the fully-loaded hourly wage rate for these workers rises substantially under the four-day workweek scenario. If the firm chooses the layoff strategy, they incur some severance expenses, but they save not only the hourly wage rate but also the benefit expenditures. The challenge, however, will be the expenses down the road that will be associated with hiring and training new employees who might have to be hired as the economy comes back. To me, getting these cost-benefit analyses right are essential for any firm hoping to navigate this downturn successfully. The answer won't be the same for every firm; a good cost-benefit analysis will take into consideration the unique aspects of a particular business model. Companies have to think carefully about their specific workforce's characteristics as they make this type of decision. Similarly, retailers have to think about their particular customers as they consider the decision to expand shopping hours substantially in the final days before Christmas.

A Culture of Deference at GM

Alex Taylor wrote an article about the demise of General Motors in a recent issue of Fortune. In that article, he has a wonderful anecdote that suggests a great deal about the culture at GM. Here's the story. I leave it to the reader to draw the obvious conclusions...

Back in 2004, when it was still relatively flush, General Motors invited automotive journalists to the South of France for a three-day "global product seminar." The idea was that writers like me would drive new cars, consume loads of free food and wine, pal around with executives, and develop favorable opinions about GM.

Still a little jet-lagged, I arranged to drive with chairman and CEO Rick Wagoner in a yellow Corvette. Our route would take us from the Four Seasons resort in Provence, where we were staying, through the French countryside and on to the Paul Ricard race circuit near Marseille in time for lunch. My job was to navigate while Wagoner drove, but I used the face time to pepper him with questions rather than pay attention to the route book.

Polite and good-humored as usual, Wagoner mostly ignored my directions and followed the car in front of us. Two hours later we found ourselves back at the hotel. I had been navigating from the wrong map, and the car in front of us, driven by Chinese journalists, was just as lost as we were. Lunch would be delayed while we hurriedly made our way to the track, meaning I had effectively kidnapped the chairman of General Motors for three hours.

Sure, we had been tailed the whole time by Wagoner's security detail, but it remained behind at a respectful distance and never stopped to ask us where we were going. What I learned from the incident were several things. First, never underestimate the ability of a know-it-all journalist to get it wrong. And second, at some point good manners and civility become a liability rather than an asset.

Serial Enterpreneurs: New Research

The Boston Globe reports on a new paper by Paul Gompers of Harvard Business School and his co-authors. The paper focuses on entpreneurship. Gompers finds that enterpreneurs who have started a company and launched an IPO have a higher success rate for their second venture than the usual success rate for first-time entrepeneurs. Here's what Gompers and his co-authors write:

"We show that entrepreneurs with a track record of success are much more likely to succeed than first-time entrepreneurs and those who have previously failed. In particular, they exhibit persistence in selecting the right industry and time to start new ventures. Entrepreneurs with demonstrated market timing skill are also more likely to outperform industry peers in their subsequent ventures."

Globe writer Scott Kirsner also points out his favorite finding from the paper, which is intriguing and makes it worth reading the paper to explore further:

"For instance, one of my favorite conclusions that Gompers compellingly makes is that venture capitalists do not add value to the companies they invest in. How does he know this? Not surprisingly, the top-tier VC firms are better at picking unknown "star entrepreneurs," but once they've been successful in their first ventures (i.e. their "star" qualities are now public information) then the success of subsequent ventures is unaffected by whether the venture backer is a top-tier firm or a bottom-tier one. Ouch!"

To read the entire working paper by Gompers and his colleagues, click here.

John Chambers on Dealing with Economic Downturns

Cisco CEO John Chambers has some interesting comments on how companies should cope with severe economic downturns in this month's issue of Fast Company.

Team of Rivals

A great deal of attention has been paid to President-Elect Obama's desire to build a "team of rivals" where divergent points of view will be represented around the table when he has to make crucial decisions. He was particularly impressed with this concept as it was described by Doris Kearns Goodwin in her fabulous book about President Lincoln, which was called "Team of Rivals."

As many of you now, my research has focused a great deal on how leaders must foster constructive conflict as a means of improving their decision-making processes. In other words, I have tried to write about effective techniques for preventing groupthink. Bringing people with diverse backgrounds and views to the table is certainly a great start. However, it's not sufficient for producing a healthy dialogue and debate. President-Elect Obama, or any other leader, must keep in mind several other things.

First, as soon as Obama becomes the actual President holding meetings in the White House, the atmosphere will naturally change. Many people who may have been very open with him will almost certainly become more deferential out of respect for the office he will hold and because of the atmosphere within the Oval Office.

Second, to stimulate a vigorous debate, one needs specific tools and techniques for generating a healthy give-and-take. Irving Janis wrote about his theory of groupthink by studying the Bay of Pigs fiasco. That's a telling case because Kennedy built a superstart set of advisers which included several Republicans. Thus, he had a diverse set of people around the table, yet groupthink occurred. Later, in the Cuban Missile Crisis, Kennedy employed a number of techniques for helping to force more debate among his advisers.

Finally, President-Elect Obama must remember that debates can easily become counterproductive. One has to be able to manage the interpersonal conflict that often arises in diverse teams. If that does not occur, then group harmony suffers, as will the ability to execute decisions that are made.

The Perfect Storm?

Steven Pearlstein has a phenomenal article in today's Washington Post about the over-use and mis-use of the "perfect storm" excuse being offered by many executives as they try to explain the failures of their organizations. It's a must-read. Here's a brief except from the article:

"... at the heart of any economic or financial mania is an epidemic of self-delusion that infects not only large numbers of unsophisticated investors but also many of the smartest, most experienced and sophisticated executives and bankers. It's not that they don't see the excesses and dangers in front of them -- how could they not? But somehow they convince themselves that the world has changed, that the old rules no longer apply or that, because of competitive pressure, they had no choice but to run with the herd."

Anatomy of a Meltdown

For a good summary of the global economic crisis, and specifically, Ben Bernanke's role as Fed Chairman, I suggest taking a look at John Cassidy's recent article in The New Yorker. Here is the link.

Paul Ingrassia on The Auto Industry

Paul Ingrassia has a fabulous op-ed piece in the Wall Street Journal today about the auto industry. The title of the article is: The Auto Makers are Already Bankrupt. Ingrassia dispels a number of myths about the situation regarding the Big Three:

Myth 1: Bankruptcy is not an option.
Myth 2: Management changes would be pointless.
Myth 3: Bankruptcy means death.
Myth 4: Banning executive bonuses or requiring more fuel-efficient cars will save Detroit.
Myth 5: A GM-Chrysler merger will help save both firms.

This is definitely worth a read. Ingrassia has covered the auto industry for years, and he brings all that expertise to bear with a concise and insightful argument regarding a potential bailout.

General Motors and Bankruptcy

Business Week has a good, balanced article on the pros and cons of various scenarios for General Motors, as it pertains to a potential Chapter 11 filing. The article does a very nice job of pointing out how the government may actually step in to help facilitate an orderly Chapter 11 restructuring. In other words, the government might not execute a bailout to help GM avoid bankruptcy, but instead, would provide funds to help GM work through a Chapter 11 filing with the least amount of disruption to the rest of the economy. The article also points out that a successful Chapter 11 restructuring would put a great deal of pressure on Ford and Chrysler, as they would then face a domestic competitor with potentially much lower costs due to the restructuring. Thus, any bailout would have to consider how to deal with all three firms, not just GM.

The Financial Crisis and Groupthink

Robert Shiller had a very interesting article in the New York Times on November 1st about the global financial crisis. Shiller notes that a number of people did foresee oncoming troubles in the housing market and the financial system several years ago. However, he argues that the Federal Reserve downplayed the warnings being sounded by various people. Here is an excerpt from Shiller's article:

"But why weren’t the experts at the Fed saying such things? And why didn’t a consensus of economists at universities and other institutions warn that a crisis was on the way?
The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group."

I think Shiller has made a good point about social pressures for conformity that arise in groups and organizations, and that cause warning signs to be downplayed at times. However, I don't think the term groupthink technically applies here. Janis' work on groupthink tends to focus on pressures for conformity that arise within a team, such as the advisers to a President of the United States. In this case, Shiller is talking about a much more widespread pressure for conformity that extends beyond a team, and in fact, well beyond one organization.

A Vertically Integrated Clothing Retailer?

Business Week had an article about Zara, the Spanish apparel retailer, a few weeks ago. I actually just taught a case study about Zara, as I often do in my MBA strategy course. It's a fascinating company. While many clothing retailers outsource all production to low wage nations, particularly in Asia, Zara actually produces a substantial percentage of their clothes in their own factories in Europe.

Their vertical integration strategy is designed to enable them to react very quickly to market trends, and to produce fashionable clothes very quickly as part of their "fast fashion follower" strategy. The fast replenishment model and massive flexibility means Zara makes fewer mistakes, and when they do make a fashion error, it is less costly becuase they haven't ordered a huge shipment of the item from Asia. Because of this, they have fewer markdowns, and their markdowns tend to be smaller. That helps create higher operating margins.

Vertical integration always has its risks, but in this case, Zara has found a way to make it very profitable. It also has helped to create a unique business model that is very hard to imitate.

Should Disney Acquire Electronic Arts?

The Wall Street Journal on Saturday, in the Heard on the Street column, speculated on the potential value that could be created if Disney were to make a bid for Electronic Arts. The column focused, in particular, on the fact that EA's stock price had been knocked down recently due to less-than-expected earnings. It's an interesting notion, given the links between the video game publishers and the creators of entertainment content, such as movies and music. Over the past decade, firms such as EA have become more dependent on the film companies, because they have been licensing more and more content for their games. Many entertainment companies, including Disney, have been forward integrating or looking at forward integrating into video game development. The increased dependency on the film studios, as well as the threat of forward integration, both have put pressure on the margins at video game companies such as EA. Perhaps there is some possibility here for a vertical integration play. Of course, there are always downsides to vertical integration. How would Disney handle the possibility of licensing deals with other video game producers? How would EA handle licensing deals with other film studios? At this point, it seems as though the Wall Street Journal report is not indicating rumors of a deal in the works; it appears to simply be a suggestion that this deal might make sense. It will be interesting to watch if anything comes of it.