Over the past few years, NetFlix and Redbox have both been very successful, each taking aim at Blockbuster from different directions. NetFlix provided a deep movie library and great recommendations that matched consumer tastes quite well. It did not focus on renting new releases. Blockbuster, with its brick and mortar stores, could not match the selection offered by NetFlix. Meanwhile, Redbox took aim at the new release business at Blockbuster. It went with a very lean product inventory, only carrying a very small number of recent hits. Redbox offered incredible convenience at a very low price. Blockbuster found itself attacked from each flank, and it has suffered as a result. Redbox and NetFlix thrived in part because they were each attacking the weakened Blockbuster, but not threatening each other much at all. They had distinct strategies, meeting quite different consumer needs.
Now, that may change. Business Week reports that Redbox is contemplating a move to the web. We don't know the details of such a web strategy yet, so it's impossible to judge the chances of success. However, we do know that the two firms could be moving toward increased head-to-head competition. A collision could harm profits for both firms.
Monday, July 19, 2010
Sunday, July 18, 2010
Nissan: Dangers of a Lean Supply Chain?
Nissan has been forced to stop production at six manufacturing plants in Japan and the United States this week due to a supply chain disruption. This episode illustrates one of the downsides of some efforts to develop lean and efficient supply chains. As firms drive efficiency in their supply chains, they can make those systems much more tightly coupled (i.e. each element of the chain is much rigidly interconnected with the other elements). That tight coupling means that one small disruption can cause major negative consequences for the entire chain. That is precisely what happened to Nissan. A problem at a Hitachi unit that supplied engine parts has actually shut down a large amount of Nissan's production capacity, because Nissan did not have an alternative supplier for that component. That problem pertained to a scarcity of semiconductor chips needed for the manufacturing of the engine components at Hitachi. As other firms observe this incident, they must consider the trade-offs that they are making when trying to drive efficiencies in their supply chains. Are efforts to drive out costs in the short term potentially enhancing the risk of a major disruption at some point?
Saturday, July 17, 2010
Leadership Transitions
Tom Magness has some great posts recently on his blog about leadership transitions, based on his own experience this summer as he transitions to Kabul, Afghanistan to lead an Army Corps of Engineers unit there. Good luck to Tom, and may you stay out of harm's way.
Evaluating Emerging Markets
London Business School Professor Don Sull has a good post over at his blog about how companies evaluate emerging markets. Sull based his post on a panel discussion that he moderated with Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte. Sull argues that firms cannot evaluate emerging markets simply based on GDP growth. Instead, they should consider other factors, such as industry structure, regulatory and political environment, etc.
Friday, July 16, 2010
Honest Tea and Coca-Cola
The New York Times ran an intriguing article recently about Honest Tea's relationship with Coca-Cola. Coke purchased a 40% stake in the company two years ago, with an option to acquire the entire firm in 2011. The article describes the tensions and challenges that inevitably emerge when an entrepreneur sells a small, highly authentic, "natural" food/beverage brand to a large consumer products company. Not surprisingly, challenges center on the issue of how to capitalize on the scale and scope economies offered by the corporate parent while staying true to certain values and principles that made the small up-start quite distinct in the marketplace from its larger rivals. In this case, Honest Tea had explicitly marketed itself against some of the larger beverage giants, celebrating, for instance, the lack of high fructose corn syrup in its drinks. Coca-Cola managers apparently worried that Honest Tea was essentially condemning an ingredient that it had in many of its own Coke products.
The story illustrates an important lesson for entrepreneurs considering a sale to a larger player in their marketplace. To me, the days before an acquisition takes place serve as the critical time for important conversations about brand values and positioning. Entrepreneurs should not wait until after the deal to then learn about potential tensions around values and principles. Both target firm and acquirer need to have these conversations upfront, and to the extent that it is possible, some firm commitments need to be made by both sides about how they want to work together. Entrepreneur-founders have the most leverage BEFORE the sale. Once they have been acquired, their ability to stake out their ground on certain core values drops precipitously.
The story illustrates an important lesson for entrepreneurs considering a sale to a larger player in their marketplace. To me, the days before an acquisition takes place serve as the critical time for important conversations about brand values and positioning. Entrepreneurs should not wait until after the deal to then learn about potential tensions around values and principles. Both target firm and acquirer need to have these conversations upfront, and to the extent that it is possible, some firm commitments need to be made by both sides about how they want to work together. Entrepreneur-founders have the most leverage BEFORE the sale. Once they have been acquired, their ability to stake out their ground on certain core values drops precipitously.
Bryant University Alumni Venture Contest
I'm very excited that Bryant University has launched its first alumni new venture contest, modeled after the very successful competition created at Harvard Business School. Business plans are due December 1st. Finalists will be announced on January 15th, and the final round of the competition will take place on campus in the spring of 2011. The cash prize equals $10,000. We hope that many alumni will enter this exciting new contest.
Thursday, July 15, 2010
New Markets for Teen Retailers
The Wall Street Journal reports today on the attempts by various teen retailers, such as American Eagle, to develop retail store brands aimed at younger children. The article points out that several teen retailers have stumbled in their attempts at broadening their reach to an adult demographic. Thus, they are now turning to the children's market.
I don't know whether these efforts will succeed, but I do find the approach taken by American Eagle to be quite intriguing. The firm has branded its children's unit as 77kids (1977 is the year in which the firm began). What's most interesting is how American Eagle has experimented with the concept before opening retail stores. First, the company has spent 18 months marketing the 77kids line via its online store. Secondly, it also used a pop-up store in the Pittsburgh market to test out the 77kids concept. These low cost, low risk experiments have presumably enabled American Eagle to learn a great deal before sinking a substantial investment into 77kids retail stores. I think using online and pop-up sales as a means of experimentation does seem like a very desirable and fruitful approach, one surely to be used more often by other retailers as they try to minimize the risk of major new expansions in their brick and mortar locations.
I don't know whether these efforts will succeed, but I do find the approach taken by American Eagle to be quite intriguing. The firm has branded its children's unit as 77kids (1977 is the year in which the firm began). What's most interesting is how American Eagle has experimented with the concept before opening retail stores. First, the company has spent 18 months marketing the 77kids line via its online store. Secondly, it also used a pop-up store in the Pittsburgh market to test out the 77kids concept. These low cost, low risk experiments have presumably enabled American Eagle to learn a great deal before sinking a substantial investment into 77kids retail stores. I think using online and pop-up sales as a means of experimentation does seem like a very desirable and fruitful approach, one surely to be used more often by other retailers as they try to minimize the risk of major new expansions in their brick and mortar locations.
Wednesday, July 14, 2010
Looptworks: An "Upcycling" Story
Fast Company has an article about an interesting company called Looptworks. The firm buys excess fabric from textile factories, and then uses that scrap to create a line of outdoor clothing. It's a wonderful story of reducing waste and enhancing sustainable business practices.
However, that's not the entire story. To me, two additional aspects of the business are worth considering for a moment. First, Looptworks has chosen to focus on outdoor clothing. To me, that demonstrates a very smart choice of target market. Why? Many outdoor enthusiasts care a great deal about the environment. Thus, they are quite inclined to purchase these "upcycled" products. There's a perfect match between the upcycling aspect of the production process and the target customer for outdoor clothes.
Secondly, the company commands a premium price not simply because of the "green" dimension to the business, but because they produce many limited editions given the finite amounts of certain scrap fabric that they are able to acquire. Of course, producing limited editions and small batches of clothing also means that they are much less likely to have to employ markdowns to sell off excess inventory of less popular items. Markdowns often prove to be a major profit killer for apparel producers and apparel retailers. All in all, it's a creative business model with great potential.
However, that's not the entire story. To me, two additional aspects of the business are worth considering for a moment. First, Looptworks has chosen to focus on outdoor clothing. To me, that demonstrates a very smart choice of target market. Why? Many outdoor enthusiasts care a great deal about the environment. Thus, they are quite inclined to purchase these "upcycled" products. There's a perfect match between the upcycling aspect of the production process and the target customer for outdoor clothes.
Secondly, the company commands a premium price not simply because of the "green" dimension to the business, but because they produce many limited editions given the finite amounts of certain scrap fabric that they are able to acquire. Of course, producing limited editions and small batches of clothing also means that they are much less likely to have to employ markdowns to sell off excess inventory of less popular items. Markdowns often prove to be a major profit killer for apparel producers and apparel retailers. All in all, it's a creative business model with great potential.
Tuesday, July 13, 2010
What Women Want
Today's Wall Street Journal offers a review of Paco Underhill's new book, What Women Want. As readers of this blog may recall, I recommended Underhill's earlier bestseller, Why We Buy. Underhill is an expert on retail shopping, and he has unearthed his insights by anthropological study, i.e. close observation, of consumers in stores. In this new book, he turns his focus to female consumers in particular. Here's an excerpt from the review:
What do women want? Cleanliness, as we've learned. Also control, safety and considerateness. Give women these intangibles and a few others, Mr. Underhill suggests, and they will give your business their custom. As a case study, he invites us into Best Buy, the chain of cavernous electronics stores with the big blue-and-yellow sign. While its competitors Circuit City and Comp USA have disappeared into bankruptcy, Best Buy has survived, Mr. Underhill says, by adapting itself in distinctly female-friendly ways. Digital cameras are laid out on tables that are curvy and organic- looking rather than hard-edged and angular. Employees reassure the customer that they don't work on commission (women dread being hustled). Giant photos on the walls show people warmly enjoying the store's products. The central concept that Best Buy gets, Mr. Underhill says, is this: "Men buy instruments of technology, whereas women buy instruments of relationship."
I look forward to reading the book, and I'll have some observations once I've completed it.
What do women want? Cleanliness, as we've learned. Also control, safety and considerateness. Give women these intangibles and a few others, Mr. Underhill suggests, and they will give your business their custom. As a case study, he invites us into Best Buy, the chain of cavernous electronics stores with the big blue-and-yellow sign. While its competitors Circuit City and Comp USA have disappeared into bankruptcy, Best Buy has survived, Mr. Underhill says, by adapting itself in distinctly female-friendly ways. Digital cameras are laid out on tables that are curvy and organic- looking rather than hard-edged and angular. Employees reassure the customer that they don't work on commission (women dread being hustled). Giant photos on the walls show people warmly enjoying the store's products. The central concept that Best Buy gets, Mr. Underhill says, is this: "Men buy instruments of technology, whereas women buy instruments of relationship."
I look forward to reading the book, and I'll have some observations once I've completed it.
Monday, July 12, 2010
Social Security Reform: The Power of Compounding
In today's Wall Street Journal, Fred Barnes writes about a proposal by Robert Pozen, former vice chairman of Fidelity Investments. For several years now, Robert Pozen, a Democrat, has offered a bipartisan approach for restoring Social Security to long term solvency. His proposal calls for using the historical inflation rate, rather than wage growth data, to index earnings as part of the calculation of Social Security benefits. He would exempt lower income individuals from this shift, and instead, continue to use wage indexing for them. That's why Pozen calls it "progressive indexing."
How does indexing work? Indexing occurs as Social Security takes your earnings from each year of your life, and then converts them into "current dollars" for the year of your retirement. Then, they use this average earnings in current dollars number as the basis of their benefit calculation.
Historically, wages risen over 1 percent faster per year than prices. Thus, shifting to wage indexing would shave benefits. Your average earnings in current dollars is significantly lower if we gross up your wages by 1% less per year. Barnes explains that this subtle change would "erase more than two-thirds of Social Security's long-term shortfall of $4 trillion."
At first, I was shocked by that claim. Yet, I then spent some time thinking about how that 1% slower growth per year in the indexing calculation might affect benefits. Of course, the power of compounding turns out to be enormous. We all know this, of course, but until you actually run the numbers, you often do not realize how great an impact compounding can have. Over a 35 year career, if we index each year's earnings at a 1% less growth rate per year, we end up with quite a different number for average earnings in current dollars. It's substantially lower, and thus, benefits are significantly lower as well.
Overall, Pozen's proposal seems like a sensible reform that could help put Social Security on much more stable footing, all without raising taxes at a time when the economy cannot tolerate an added distortion in the labor market. Let's see if the deficit commission moves forward with a recommendation to embrace this idea.
How does indexing work? Indexing occurs as Social Security takes your earnings from each year of your life, and then converts them into "current dollars" for the year of your retirement. Then, they use this average earnings in current dollars number as the basis of their benefit calculation.
Historically, wages risen over 1 percent faster per year than prices. Thus, shifting to wage indexing would shave benefits. Your average earnings in current dollars is significantly lower if we gross up your wages by 1% less per year. Barnes explains that this subtle change would "erase more than two-thirds of Social Security's long-term shortfall of $4 trillion."
At first, I was shocked by that claim. Yet, I then spent some time thinking about how that 1% slower growth per year in the indexing calculation might affect benefits. Of course, the power of compounding turns out to be enormous. We all know this, of course, but until you actually run the numbers, you often do not realize how great an impact compounding can have. Over a 35 year career, if we index each year's earnings at a 1% less growth rate per year, we end up with quite a different number for average earnings in current dollars. It's substantially lower, and thus, benefits are significantly lower as well.
Overall, Pozen's proposal seems like a sensible reform that could help put Social Security on much more stable footing, all without raising taxes at a time when the economy cannot tolerate an added distortion in the labor market. Let's see if the deficit commission moves forward with a recommendation to embrace this idea.
Friday, July 09, 2010
Simulation as the Means to Integration
Chip and Dan Heath tell the fascinating story in Fast Company magazine of how JetBlue recovered from the February 2007 fiasco when the company angered customers due to its poor handling of disruptions associated with snowstorms in the Northeast. They describe how JetBlue created a simple simulation scenario in which thunderstorms forced the cancellation of many flights at JFK airport in New York. It brought together a cross-section of front-line employees in many different functional areas to examine how the airline would typically respond to such a situation. Here's the result:
In total, the group identified more than 1,000 process flaws, small and large. Over the next few weeks, the group successively filtered and prioritized the list down to a core set of 85 problems to address. Most of them were small individually, but together, they dramatically increased the risk of a dropped baton. JetBlue's irregular-operations strike force spent nine months in intense and sometimes emotional sessions, working together to stamp out the problems.
The effort paid off. In the summer of 2009, JetBlue had its best-ever on-time summer. Year over year, JetBlue's refunds decreased by $9 million. Best of all, the efforts dramatically improved JetBlue's "recovery time" from major events such as storms. (JetBlue considers itself recovered from an irregular-operations event when 98.5% of scheduled flights are a go.) The group shaved recovery time by 40% -- from two-and-a-half days to one-and-a-half days.
Many companies can benefit from creating these types of simulation experiences. In fact, firms can create these for a wide variety of situations, not just "crisis" situations. The key, though, is to get the people who actually do the work involved in such scenarios, and to make sure that you have people focused not just on what they do in their functional areas, but also on how on how they interact with others in various "silos" in the organization. You want to watch particularly for "fumbled hand-offs", i.e. occasions where critical information does not pass smoothly from one unit to another, thereby causing a lack of effective integration.
In total, the group identified more than 1,000 process flaws, small and large. Over the next few weeks, the group successively filtered and prioritized the list down to a core set of 85 problems to address. Most of them were small individually, but together, they dramatically increased the risk of a dropped baton. JetBlue's irregular-operations strike force spent nine months in intense and sometimes emotional sessions, working together to stamp out the problems.
The effort paid off. In the summer of 2009, JetBlue had its best-ever on-time summer. Year over year, JetBlue's refunds decreased by $9 million. Best of all, the efforts dramatically improved JetBlue's "recovery time" from major events such as storms. (JetBlue considers itself recovered from an irregular-operations event when 98.5% of scheduled flights are a go.) The group shaved recovery time by 40% -- from two-and-a-half days to one-and-a-half days.
Many companies can benefit from creating these types of simulation experiences. In fact, firms can create these for a wide variety of situations, not just "crisis" situations. The key, though, is to get the people who actually do the work involved in such scenarios, and to make sure that you have people focused not just on what they do in their functional areas, but also on how on how they interact with others in various "silos" in the organization. You want to watch particularly for "fumbled hand-offs", i.e. occasions where critical information does not pass smoothly from one unit to another, thereby causing a lack of effective integration.
Wednesday, July 07, 2010
Curves: Not Such a Blue Ocean After All
I really like some of the concepts and frameworks offered by Kim and Mauborgne in their best-selling book, Blue Ocean Strategy. However, I think they do a disservice to themselves by positioning their framework against Michael Porter's classic work on strategy. To me, they set up a straw man for the purpose of making their argument more interesting and provocative, but it's not an accurate depiction of Porter's ideas. Moreover, some of the assertions they make simply don't hold water. For instance, they hold up Southwest Airlines as one of their examples, yet how can one possible argue that they are an example of a firm that has achieved both low cost and differentiation? Remember, in Porter's framework, differentiation does NOT mean simply being different. It means charging a price premium, and in so doing, driving a wider wedge between willingness to pay and cost than the average industry rival. Southwest clearly is not about differentiation in that sense. They are a classic low cost competitor.
In their work, Kim and Mauborgne use Curves, the women's fitness center, as one of their examples of a blue ocean strategy. Yet, today, we read in the Wall Street Journal that Curves has hit hard times. The firm has closed roughly 1/3 of its outlets in the past three years. What's interesting to me is that I've often taught a case study about the fitness center industry as a mechanism for introducing Porter's five forces framework of industry analysis. Using that framework, one concludes rather quickly that the fitness center industry is a horrible one. It's incredibly unattractive. It seems, then, that the unattractive industry structure has overwhelmed the "blue ocean" aspects of the Curve strategy. Perhaps Porter's framework is more useful than Kim and Mauborgne care to acknowledge.
It reminds me of a great quote from Warren Buffett: "When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact."
In their work, Kim and Mauborgne use Curves, the women's fitness center, as one of their examples of a blue ocean strategy. Yet, today, we read in the Wall Street Journal that Curves has hit hard times. The firm has closed roughly 1/3 of its outlets in the past three years. What's interesting to me is that I've often taught a case study about the fitness center industry as a mechanism for introducing Porter's five forces framework of industry analysis. Using that framework, one concludes rather quickly that the fitness center industry is a horrible one. It's incredibly unattractive. It seems, then, that the unattractive industry structure has overwhelmed the "blue ocean" aspects of the Curve strategy. Perhaps Porter's framework is more useful than Kim and Mauborgne care to acknowledge.
It reminds me of a great quote from Warren Buffett: "When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact."
We Love Pointing Fingers
Best-selling author Joseph Grenny has a terrific article on the Business Week website titled "Ass-Kicking as an Influence Strategy." Grenny examines the BP catastrophe and examines the impulse on the part of many actors, including President Obama, to "find the bad people who did bad things and punish them for their malicious motives." What's wrong with that impulse? Well, Grenny certainly does not seek to defend BP's management. However, he's making a much larger and more important point. He's making it clear that we may not learn as much as we should from an incident if we frame it simply as a case of individual error or maliciousness. As a result, we find ourselves failing again in the future because we have not fully understood the true causes of a failure. Here's Grenny's explanation:
"Frame it as "whose ass needs kicking?" and your solution will naturally be reduced exclusively to punishing, reproving, or replacing. And while these actions may seem appropriate after thoughtful analysis, to begin with them as the sole focus or dominant objective undermines the quality of the search. If fixing blame eclipses fixing problems, the former often comes at the expense of the latter."
"Frame it as "whose ass needs kicking?" and your solution will naturally be reduced exclusively to punishing, reproving, or replacing. And while these actions may seem appropriate after thoughtful analysis, to begin with them as the sole focus or dominant objective undermines the quality of the search. If fixing blame eclipses fixing problems, the former often comes at the expense of the latter."
Tuesday, July 06, 2010
Colbert - Lube Job
| The Colbert Report | Mon - Thurs 11:30pm / 10:30c | |||
| Lube Job | ||||
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CEO Tenure and Stock Gains
The Wall Street Journal reports today on a study conducted for the paper by Spencer Stuart, the executive recruiting firm. Among firms in the S&P 500, 28 non-founder CEOs have served more than 15 years. 25 of these 28 firms have seen their stock outperform the S&P 500 index over this time period.
What jumps out at me from this study? First and foremost, we have to beware the tendency for people to confuse correlation with causation! Lengthy CEO tenure, in and of itself, may not be causing high stock performance. Some other factors, correlated with CEO tenure, may be causing high stock performance. Moreover, we could have reverse causality here. High stock performance may diminish the likelihood of turnover at the top. In short, that high stock performance may be driven by a number of factors. For instance, these firms may be in especially attractive industries. These CEOs may have certain qualities, or be operating under certain incentive systems, that drive performance. Tenure is simply a result, then, of the fact that successful CEOs tend to retain their jobs. The lengthy experience, by itself, may not be causing the high performance.
The Wall Street Journal acknowledges this point about correlation vs. causation, but I don't think it gets enough attention in the article. Moreover, as others are reporting on it, they are drawing quick conclusions about causation. I would caution strongly against jumping to those types of conclusions.
What jumps out at me from this study? First and foremost, we have to beware the tendency for people to confuse correlation with causation! Lengthy CEO tenure, in and of itself, may not be causing high stock performance. Some other factors, correlated with CEO tenure, may be causing high stock performance. Moreover, we could have reverse causality here. High stock performance may diminish the likelihood of turnover at the top. In short, that high stock performance may be driven by a number of factors. For instance, these firms may be in especially attractive industries. These CEOs may have certain qualities, or be operating under certain incentive systems, that drive performance. Tenure is simply a result, then, of the fact that successful CEOs tend to retain their jobs. The lengthy experience, by itself, may not be causing the high performance.
The Wall Street Journal acknowledges this point about correlation vs. causation, but I don't think it gets enough attention in the article. Moreover, as others are reporting on it, they are drawing quick conclusions about causation. I would caution strongly against jumping to those types of conclusions.
Saturday, July 03, 2010
Peggy Noonan on Thomas Jefferson
Peggy Noonan has a wonderful, thoughtful piece in today's Wall Street Journal about Thomas Jefferson and the Declaration of Independence. She writes particularly about some of the crucial edits made to the document during deliberations by Congress. These edits pertain to the special relationship between the British and the American people, a relationship that endures and that, hopefully, will not ever be allowed to weaken or fade. I highly recommend the article on this 4th of July weekend. Happy Independence Day everyone!
Friday, July 02, 2010
Swatch's Nicolas Hayek
Over at Forbes, Preston Bottger writes about the genius of Swatch's Nicolas Hayek, who died this week. Bottger writes:
"He (Hayek) decided that the customer had to be sold on the idea of wearing a watch as a personal statement. If an astronaut wore an Omega watch, a consumer could identify with the adventure of walking on the moon by wearing the same watch. For Swiss watches, the message counted more than functionality."
Undoubtedly, Hayek began a transformation in many product categories. In a wide variety of industries, other companies began to position their products as "personal statements" of one kind or another. People began to recognize that many products could be positioned as much more than a set of tangible attributes and functionalities.
The question for you is: Does your product have the potential to be positioned as more than a collection of tangible characteristics and qualities? Can it be positioned to help people tell others something about their personality and values?
"He (Hayek) decided that the customer had to be sold on the idea of wearing a watch as a personal statement. If an astronaut wore an Omega watch, a consumer could identify with the adventure of walking on the moon by wearing the same watch. For Swiss watches, the message counted more than functionality."
Undoubtedly, Hayek began a transformation in many product categories. In a wide variety of industries, other companies began to position their products as "personal statements" of one kind or another. People began to recognize that many products could be positioned as much more than a set of tangible attributes and functionalities.
The question for you is: Does your product have the potential to be positioned as more than a collection of tangible characteristics and qualities? Can it be positioned to help people tell others something about their personality and values?
Thursday, July 01, 2010
Blowout Preventers, BP, and Compensatory Behavior
Much attention has focused on why the blowout preventer failed on the BP oil well in the Gulf. I'd like to raise a different question. Could it be that the very presence of blowout preventers do not raise the safety of deep-water oil drilling, but instead actually enhance risk? Consider an essay that Malcolm Gladwell wrote many years ago, around the time that Diane Vaughan wrote her famous book about the Challenger space shuttle accident. Gladwell explained that people and organizations often engage in compensatory behavior after new safety systems have been put in place. He provides an example from a study of anti-lock braking systems conducted in Germany with taxi drivers. The study demonstrated that these new braking systems did not lead to enhanced safety because the taxi drivers engaged in compensatory behavior, i.e. they drove in a riskier fashion, knowing that they had this better braking system to "protect" them from their own behavior. Of course, organizations implement redundancies such as blowout preventers in pursuit of higher safety and lower risk of catastrophe. However, Gladwell's point about compensatory behavior, drawn from others' in-depth research, shows that redundancies do not always make systems safer. It could be that the very presence of blowout preventers has caused some oil drilling companies to become comfortable with taking additional risks. The same idea, of course, applies to many different types of redundant systems.
Wednesday, June 30, 2010
Benefits of Pay Disparities?
Many have argued that large pay disparities among employees can harm organizational performance, in large part due to fairness concerns that can harm morale and affect productivity. However, the Boston Globe reports on an intriguing study by Northwestern Professor Adam Galinksy, who found that NBA teams with large salary differentials outperform those clubs with more equal pay among the players. Galinsky offers an explanation for this finding:
“Status is such an important regulating force on people’s behavior, hierarchy solves so many problems of conflict and coordination in groups,” says Adam Galinsky, a psychologist at Northwestern University’s Kellogg School of Management who did the research on social hierarchies on basketball teams. “In order to perform effectively, you often need to have some pattern of deference.”
I'm not suggesting that this study endorses the notion that CEOs should make 100 times what front-line employees take home in pay. However, the study does perhaps have implications for smaller teams within an organization, perhaps including the senior management team itself. It makes sense that an NBA team excels if people understand their role, rather than having multiple players competing to be the go-to guy. Putting aside the pay issues for a moment, management teams surely benefit in most cases from the same type of crystal-clear role definition.
“Status is such an important regulating force on people’s behavior, hierarchy solves so many problems of conflict and coordination in groups,” says Adam Galinsky, a psychologist at Northwestern University’s Kellogg School of Management who did the research on social hierarchies on basketball teams. “In order to perform effectively, you often need to have some pattern of deference.”
I'm not suggesting that this study endorses the notion that CEOs should make 100 times what front-line employees take home in pay. However, the study does perhaps have implications for smaller teams within an organization, perhaps including the senior management team itself. It makes sense that an NBA team excels if people understand their role, rather than having multiple players competing to be the go-to guy. Putting aside the pay issues for a moment, management teams surely benefit in most cases from the same type of crystal-clear role definition.
Saturday, June 26, 2010
Risks of Combining Banking and Private Equity
INSEAD's Lily Fang and Harvard's Josh Lerner and Victoria Ivashina have a new working paper that examines the impact of combining banking and private equity. According to their paper:
"Between 1983 and 2009, bank-affiliated private equity groups accounted for over a quarter of all private equity investments. Banks' involvement increases during peaks of the private equity cycles. In particular, deals done by bank-affiliated groups are financed at significantly better terms than other deals when the parent bank is part of the lending syndicate, especially during market peaks. Investments made by bank-affiliated groups have slightly worse outcomes than non-affiliated investments, despite the targets having superior performance prior to investments. Investments during market peaks by commercial banks have significantly higher rates of bankruptcy."
"Between 1983 and 2009, bank-affiliated private equity groups accounted for over a quarter of all private equity investments. Banks' involvement increases during peaks of the private equity cycles. In particular, deals done by bank-affiliated groups are financed at significantly better terms than other deals when the parent bank is part of the lending syndicate, especially during market peaks. Investments made by bank-affiliated groups have slightly worse outcomes than non-affiliated investments, despite the targets having superior performance prior to investments. Investments during market peaks by commercial banks have significantly higher rates of bankruptcy."
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