Commencement

The seniors at Bryant University asked me to write the faculty reflection that is published in the commencement edition of the student newspaper. Here is what I wrote to them:

You will fail! Everyone does at various points in their lives. As you leave Bryant, I encourage you not to simply dream of the success you wish to achieve in your lives. I hope that you will dream big dreams and pursue them with invigorating passion. However, you must also consider the role of failure in a successful person’s life. How will you react when you stumble and fall? You will stumble after all. We all do. Great innovators encounter failure numerous times. The most successful people exhibit remarkable persistence and resilience in the face of failure. They pick themselves up, learn from their mistakes, and move forward. Thomas Edison failed many times in his career. Reflecting on his missteps, he said, “I have not failed. I've just found 10,000 ways that won't work.”

Consider the case of James Dyson. Described as a “tireless tinkerer,” he perfected his revolutionary bagless vacuum cleaner after years of trial and error. Today, Dyson ranks as one of the richest men in the world. Despite all that success, Dyson loves talking about the importance of failure in his life. “I made 5,127 prototypes of my vacuum before I got it right,” said Dyson. “There were 5,126 failures, but I learned from each one. That's how I came up with a solution. So I don't mind failure.” He argues that we often fool ourselves into believing that successful products emerge from a moment of “effortless brilliance.” To him, failures provide keen insights that enable invention. Dyson explains, “We're taught to do things the right way. But if you want to discover something that other people haven't, you need to do things the wrong way. Initiate a failure by doing something that's very silly, unthinkable, naughty, dangerous. Watching why that fails can take you on a completely different path. It's exciting, actually.”

Maxine Clark founded and continues to serve as chief executive of Build-a-Bear Workshop. Clark has built an incredibly successful company. She has done so by delivering a world-class customer experience in her stores. Clark credits her store associates, who constantly find ways to innovate and improve. How do the associates do it? For starters, they tend not to fear admitting a mistake. Clark’s attitude toward mistakes explains her associates’ behavior. She does not punish people for making an error or bringing a problem to light; she encourages it. Clark credits her first grade teacher, Mrs. Grace, for instilling this attitude toward mistakes in her long ago. As many elementary school teachers do, Mrs. Grace graded papers using a red pencil. However, Mrs. Grace gave out a rather unorthodox award at the end of each week. She awarded a red pencil prize to the student who had made the most mistakes! Why? Mrs. Grace wanted her students engaged in the class discussion, trying to answer every question - no matter how challenging. As Clark writes, "She didn't want the fear of being wrong to keep us from taking chances. Her only rule was that we couldn't be rewarded for making the same mistake twice."

Clark has applied her first grade teacher's approach at Build-a-Bear by creating a Red Pencil Award. She gives this prize to people who have made a mistake, but who have discovered a better way of doing business as a result of reflecting upon and learning from that mistake. Clark has it right when she says that managers should encourage their people to "experiment freely, and view every so-called mistake as one step closer to getting things just right." Of course, her first grade teacher had it right as well when she stressed that people would be held accountable if they made the same mistake repeatedly. Failing to learn constitutes the bad behavior that we should deem unacceptable.

At Bryant, you have not only learned many ideas and concepts. You have learned to think more critically. You have learned how to learn. The faculty has tried to nurture and develop you, so that you can become effective lifelong learners. We hope that you will not fear failure in your lives. Embrace it and learn from it. Even in his later years, after remarkable accomplishments, the great Renaissance artist and sculptor Michelangelo used to say, “I am still learning.” I hope that you will maintain that attitude throughout your lives, particularly in those moments when you stumble and fail. Pick yourselves up and move forward, with confidence that you have the ability to fulfill your dreams. Remember that failing to learn represents the only true failure in our lives.

The Boss of the Future

Wayne Miller of the Providence Journal wrote an article about the "boss of the future" in which I was interviewed. Click here for the article.

Why ROI is Broken

The Corporate Executive Board has an interesting article on Business Week's website. They argue that ROI is being used incorrectly by many IT organizations. In particular, they argue that the problem is not the difficulty in accurately measuring the benefits of an IT project. Instead, they explain that, "The real reason to actively distrust ROI projections is the other side of the equation: Most IT shops are punting when it comes to capturing the true cost of the investment."

I would argue that there is a much more substantial reason to question ROI calculations by IT departments, even if they are tracking labor time and costs accurately. The fundamental challenge lies in the decision-making process leading up to the launch of a major IT project. What we often see is that the IT managers, the hardware and software vendors, and the consultants who will aid in the implementation all collaborate to build the ROI. What's the problem with that? Well, of course, all three parties are advocates for the project. They want it to be approved. Why would they ever come up with an ROI calculation that suggested that the project should not be done? In short, the advocates are the primarily analysts in many of these situations. We don't have an unbiased perspective. ROI is not a purely objective measure... it's only as good as the assumptions and information that you put into it. If advocates drive the inputs, the output of an ROI calculation is likely to be flawed/biased.

$300,000 per job saved!

The Deal.com calculates that the Chrysler bailout costs American taxpayers approximately $300,000 per job saved. Even if we include all other jobs that are "touched" by Chrysler, the number comes to $80,000 per job saved, but surely, not all those jobs would be lost with the demise of Chrysler. Here is an excerpt from thedeal.com:

The relevant question is what the U.S. taxpayer is getting in return for its largess. It is hard to argue that what is left of Chrysler is pivotal to the survival of the U.S. industrial base. The automaker's U.S. operations are significantly smaller than that of either General Motors Corp. (NYSE:GM) or Ford Motor Co. (NYSE:F), and unlike Toyota Motor Co., Honda Motor Co. Ltd. (NYSE:HMC), Hyundai Motor Co. or others, Chrysler's manufacturing presence is shrinking and not growing.

Rather, the best way to justify the Chrysler bailout is the jobs saved, but even by that measure the plan appears expensive. Chrysler on its Web site boasts that it "touches" 100,000 jobs in the U.S., costing taxpayers $80,000 per job saved. But that number almost certainly includes dealers, suppliers, mechanics and others who are also touched by other, healthier automakers, and who may not necessarily be out of work had Chrysler failed.

Chrysler is coy on its exact number of U.S. employees, but the company according to United Auto Workers records had about 26,800 union members in the U.S., prior to the last buyout offer. Using that figure, the government is spending almost $300,000 per job saved.

Monte Carlo Simulations

The Wall Street Journal has an article today about the limitations of using Monte Carlo simulations for retirement portfolio planning. The article properly notes that the real issue is not the simulations, but the fundamental assumptions that these models often make. Most Monte Carlo simulations that were being used by financial planners assumed that market returns adhered to a bell-curve-shaped distribution. Of course, this means very thin tails on the distribution, i.e. an extremely low probability of an "extreme" event such as the 2008-2009 market collapse.

Of course, these planners and the simulations they used were not the only ones improperly assuming a bell-curve-shaped distribution. Most experts also ignored the possibility of "fatter tails" on the distribution. In other words, extreme events might not be as rare as once thought. For a great book on this subject, check out The Black Swan by Nassim Nicholas Taleb.

The Name Says It All

Fast Company has a fun addition to their website; it's short comedy clips from the Rooftop Comedy group. To check out the collection of clips, click here. To sample one funny bit of stand-up, see below.

Disney-Hulu Agreement

Business Week has a good article on the looming battle between Apple and Hulu. Disney now has established an agreement with Hulu to provide content for the site. This means Hulu has become an even more formidable competitor to Apple as a place where consumers can access video content. Hulu, of course, relies on advertising to support its free distribution model. Some question whether this popular site can ever be profitable relying predominantly on advertising for its revenue. Apple charges consumers for video downloads. The two economic models will be tested against one another in the months to come. As the article states, the success of Apple's strategy will be dependent on the further evolution of its hardware technology. Thus, it will be interesting to watch new developments on the product side in the next year. Meanwhile, the article mentions the possibility of a Hulu app for the iPhone... meaning that the two firms will be collaborating as well as competing in this space. To top it all off, Steve Jobs remains Disney's largest shareholder, adding another interesting twist to this latest news about Hulu.

Sunk Costs in Detroit

Something tells me that I will be able to write a great (but sad) paper several years from now about the sunk cost trap as it pertains to the federal government and the U.S. automobile industry. The sunk cost trap refers to the tendency for people to escalate their commitment to failing courses of action in the face of high sunk costs, i.e. to throw good money after bad. I fear that we will continue to engage in this type of escalation over time in Detroit.

Index Funds Still Win, Even in a Bear Market

As noted on Greg Mankiw's blog, Standard and Poor's reports that, over the five year period of 2004-2008, "The S&P 500 outperformed 71.9% of actively managed large cap funds, the S&P MidCap 400 outperformed 75.9% of mid cap funds, and the S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003."

These results are important because many people have argued that perhaps index funds would not outperform actively managed funds in a bear market. However, this study's findings demonstrate that trying to beat the market is just as difficult in a bear market as in a bull market.

The bottom line: Your index fund may have taken a beating in 2008, but you are not likely to have been better off with an actively managed fund with its accompanying higher fee structure.

Extending the Illy Coffee Brand

I'm a big fan of Illy coffee, the high end line of espresso coffee from Italy. I discovered it at Whole Foods market, and I'm willing to pay a premium for this very good coffee. Now, I read in Fast Company that Illy is coming out with a new product line... canned coffee beverages. The article reviews the new products, and asks the question: "Is it premium enough?" That certainly seems like a relevant question. One has to wonder whether Illy risks damaging their brand with this product line introduction. Will the firm's quality image suffer at all? We certainly have seen this story before with Starbucks' expansion efforts. It will be interesting to watch consumers' reactions to Illy's growth plans. Of course, this product launch also directly threatens Starbucks' own canned coffee business. The battle is on.

End the University as We Know It

Professor Mark Taylor of Columbia University sparked some vigorous debate in the halls of higher education this week with this thought-provoking op-ed in the New York Times. It's worth reading, not only by faculty members around the country, but also by students and parents as well.

Motivating without Money - Part II

As I think more about the issue of motivating without money, I keep coming back to one of my favorite business books - Soul of a New Machine by Tracy Kidder. Kidder won the Pulitzer Prize for this fantastic book, in which he traces the efforts of Tom West and his product development team at Data General as they develop a new computer in the early 1980s. West employs a variety of unorthodox management methods to drive his team to high performance. Many of my students describe him as manipulative. Whether they approve of his methods or not, however, all students learn from this story that West has created an exceptionally high level of intrinsic motivation among his staff.

One particular lesson that we learn from the book is that many employees are motivated to work very hard on a particular exciting project if they believe that other "cool" projects will be available to them if they perform well in their current work. In Soul of a New Machine, they call this the "pinball theory of management" - i.e. if you excel on this project, you get to work on another exciting one. In short, many people want the promise of interesting future work that will help them grow and develop, and that will challenge them in a unique way. They do not necessarily need to be motivated by a huge bonus at the end of the project (thogh they would like that too!). They might also be highly motivated by the next opportunity that will come available to them.

Motivating without Money

Matthew Boyle has a good article over at Business Week on "Motivating without Money."

There is no question that many firms do not spend enough time thinking about how to enhance the intrinsic motivation of their employees. Far too much time is often spent on trying to perfect the extrinsic reward system.

Scholars Richard Hackman and Greg Oldham developed a job design model many years ago that highlights some of the key drivers of intrinsic motivation. They essentially identified key job characteristics that drive intrinsic motivation, and ultimately, task performance. Here are the five key characteristics of a job to consider:

1. Does the job tap into and regularly require use of a variety of the employee's skills?

2. Does the job entail the performance of the whole task, from start to finish, rather than a tiny portion of the task?

3. Is it clear to the employee that the task is highly significant to the organization?

4. Does the employee have a subsantial degree of autonomy with regard to how to accomplish the work?

5. Does the employee receive clear and immediate feedback regarding the job he or she performs?

Interview on Dan Schawbel's Blog

Dan Schawbel interviewed me about my new book (Know What You Don't Know), and he's posted the interview on his Personal Branding Blog. Dan is the author of Me 2.0: Build a Powerful Brand to Achieve Career Success (Kaplan, April 2009).

GE's Track Record Churning out CEOs

General Electric has a tremendous record developing talent that goes on to lead other companies. Many CEOs have worked for GE at some point in their careers. This article about Bob Nardelli's troubles at Home Depot and Chrysler reminds us that not all GE executives go on to great success elsewhere. Some, such as Bill Anders or Larry Bossidy, enjoy a great deal of success. Others stumble. Why might some executives succeed while others do not? Here are a few theories:

1. The most effective executives may go to companies that resemble General Electric, i.e. large diversified conglomerates (while less successful executives may be trying to make the leap to companies that are quite different than GE (such as a retailer).

2. Some executives may have excelled at GE because of the support network that enabled their success. In other words, they did not excel at GE simply because of their own talent, but because of the people surrounding them and the culture/systems of GE that enabled their success. It is often hard to discern whether a star at GE is capable of excelling without the support network around them.

3. Some GE executives may have tried to transplant GE processes and systems without sufficient adaptation to their new company's industry, strategy, and culture. Others may have had more success because they engaged in more effective adjustments of the "GE way" to fit their new external and internal environment.

The Art of Critical Decision Making

My new course from The Teaching Company has been released this week (24 half hour lectures available in CD, DVD, and audio download format). The title is "The Art of Critical Decision Making." For more information, click here (or see the advertisement on page B5 of today's Wall Street Journal - Thursday, April 23rd).

Advertising During a Recession

My colleague Keith Murray passed along this insightful piece by James Suroweicki, published in The New Yorker. Suroweicki, of course, is the author of the wonderful book, The Wisdom of Crowds. This article addresses the issue of the impact of cutbacks in advertising during a recession. Here's an excerpt:

A study of advertising during the 1981-82 recession found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets. And a McKinsey study of the 1990-91 recession found that companies that remained market leaders or became serious challengers during the downturn had increased their acquisition, R. & D., and ad budgets, while companies at the bottom of the pile had reduced them.

J&J's Secrets to Success

Geoff Colvin and Jessica Shambora at Fortune have an article about J&J's secrets to success. They point out that J&J has a remarkable record over more than 100 years as a corporation, and they try to identify five key factors that contribute to their success. Such exercises are often futile or counteproductive, but in this case, the rules are simple, but nevertheless valuable to consider:

1. Diversify within a single industry.
2. Focus on the future.
3. Let the experts run the business.
4. Stay financially disciplined - always.
5. Have a purpose beyond profits.

Gladwell on Teacher Quality

My colleague Mary Lyons just forwarded me this intriguing article by Malcolm Gladwell about teaching. Gladwell argues that teacher quality matters much more than class size or school quality when it comes to our children's learning. Here's one excerpt from Gladwell's essay:

Hanushek (Eric Hanushek, an economist at Stanford) recently did a back-of-the-envelope calculation about what even a rudimentary focus on teacher quality could mean for the United States. If you rank the countries of the world in terms of the academic performance of their schoolchildren, the U.S. is just below average, half a standard deviation below a clump of relatively high-performing countries like Canada and Belgium. According to Hanushek, the U.S. could close that gap simply by replacing the bottom six per cent to ten per cent of public-school teachers with teachers of average quality. After years of worrying about issues like school funding levels, class size, and curriculum design, many reformers have come to the conclusion that nothing matters more than finding people with the potential to be great teachers. But there’s a hitch: no one knows what a person with the potential to be a great teacher looks like. The school system has a quarterback problem.


The question then becomes: How does one find great teachers? Gladwell explains that schools face the same problem that NFL scouts encounter. NFL teams have a very hard time determining which college quarterbacks will excel in the professional game. They find it easier to determine which receiver or defensive linemen will excel. The quarterback position involves so many intangibles as well as mental aspects to the game; it's more than physical prowess that drives success at the professional level.

Similarly, Gladwell argues that it is difficult to identify great teachers. He points to research that shows that the usual qualifications don't correlate with success in the classroom. For instance, being certified or having earned a graduate degree do not lead to more effective teaching on average. He concludes that we can only identify great teachers by actually watching them teach for awhile. Observation often yields very meaningful insights which cannot be discerned from a resume. Gladwell points to one researcher's work that suggests that effective teachers have a quick sense of when behavioral problems are emerging in a classroom. The researcher describes this teacher quality as "withitness." One can detect this through observation, but it's a highly intangible, yet crucial, aspect of teacher quality.

While this essay provides insight as to teacher recruiting and selection, it also brings to light some issues for many business firms. Does your firm have a particular position that is similar to the NFL quarterback, where it is particuarly difficult to discern the likelihood of the candidate's success at your firm based on the credentials outlined on the resume? Are some positions easier to fill than others, much as NFL teams have discovered? How can you observe performance, and perhaps your firm's equivalent of "withitness", in the early days of a person's tenure at your firm, so as to discern whether they will succeed in the long term?

The Problem with Stock Options

Dartmouth Professor Sydney Finkelstein provides a clear and concise critique of stock option compensation schemes on BusinessWeek.com. Naturally, his criticism focuses first and foremost on the fact that stock option compensation tends to encourage excessive risk-taking. Finkelstein rightfully also critiques the rush to reprice stock options now in the face of huge declines in stock prices.

In general, pay for performance has the potential to be effective as part of a broader human resource management system designed to attract, retain, and motivate talented people. However, no pay for performance plan is perfect. In the case of stock options, the downside is excessive risk-taking. As companies make key decisions on their compensation plans, they must always remember that the law of unintended consquences will prevail in most situations. While trying to motivate desirable behavior X, the plan often leads to undesirable behaviors Y and Z as well.