The NBA, Referees, and The Wisdom of Crowds

The NBA has an interesting and quite serious problem these days. The league appears to have a lack of credibility among many fans. Disgraced referee Tim Donaghy claims that some games were intentionally manipulated by the officials, and NBA commissioner David Stern dismisses the claim as the desperate accusations of a criminal. However, many fans question the league's credibility when it comes to the officials. One of the games mentioned by Donaghy (Game 6 of the 2002 Lakers-Kings Western Conference Finals) raises serious questions in the minds of both sportswriters and fans. The commissioner cannot simply dismiss all of this as the fraudulent claims of a criminal. Whether true or not, the real issue is the credibility problem that the NBA has with its own fans.

What should the NBA do about it? Peter Keating has an interesting solution in this month's issue of ESPN: The Magazine. Keating draws on the work of James Surowiecki, the author of the best-selling book, The Wisdom of Crowds. He suggests that perhaps the NBA should allow fans to vote on key calls in an NBA game. After all, Suroweicki and others have shown that the collection of thousands of independent opinions often may yield an answer that is better than the judgment of any particular expert.

Keating's suggestion may sound preposterous, but perhaps there is a different solution that the NBA might experiment with, drawing on the same logic of mass collaboration. Companies in a variety of industries have employed mass collaboration effectively. For the NBA, perhaps fan voting could be used to EVALUATE referees, rather than to actually make calls in a live game. Rather than simply relying on an expert in the league office to judge the competency of officials, perhaps the NBA could take a look at how its millions of fans think referees have performed. Comparing the fans' collective judgment to the ratings by experts could be quite interesting. Not only might it yield informative results, but such a system might go a long way toward restoring the league's credibility in the eyes of its customers.

Airline Pricing

We have all seen the reports of new fees being imposed by the airlines, particularly for checked luggage. It's amazing to me that an industry with such an awful reputation for customer service would now choose to nickel and dime its customers in this fashion, rather than raise fares slightly. It's especially befuddling to charge for checked luggage, because this scheme creates an even bigger incentive for customers to try to carry on everything that they have. More carry-on bags means a slower boarding process and longer turnaround times. That means planes sitting on the ground rather than flying... which decreases profits, as well as angers customers.

Then, we have the befuddling news that United Airlines may require minimum stays on some routes. I'm not sure that I understand this policy. Does it mean that I can't fly from Boston to DC and back on the same day with United? Why would they turn away that business, when their goal should be to fill the planes so as to spread their fixed costs over as many passengers as possible? If this is true, then perhaps there is some economic reason for doing so, but again, it sure does not seem like a move designed to please its customers.

Exxon Mobil Selling Gas Stations

News reports indicate that Exxon Mobil plans to sell its 2,200 company-owned gas stations over the next few years. The articles suggest that, despite high gas prices, the company does not make sufficient margins in gas retailing, because the business is highly competitive. While that may be true, there is a larger strategic issue at play here. The company simply recognizes that the case for forward integration into gas retailing simply is not a strong one. That is why most of the Exxon Mobil gas stations around the United States already were operated by distributors, rather than being company-owned.

Apple owns its retail stores because it wants to control the consumer purchasing experience, gather critical marketplace information, and further enhance its product differentiation. Exxon Mobil has no such powerful rationale for forward integrating into retail gas operations. They can accomplish their goals by licensing their brand to distributors who own and operate the locations. Let those who are more adept at operating these businesses do so... after all, gas retailing is about much more than fuel these days. The business is much more about operating convenience stores profitably than it is about pumping gas.

The 3,000 Mile Oil Change

The state of California recently launched a campaign to persuade consumers that they may not need to change the oil in their cars every 3,000 miles. In fact, for most new cars, the manufacturers recommend that you change your oil less frequently. For my car, Honda suggests changing the oil every 5,000 miles, for instance. (For older cars, the 3,000 mile benchmark may still make sense.) If everyone changes their behavior, Americans could reduce their consumption of oil and reduce the amount of waste generated.

If more attention on this issue spreads across the country, we could see important implications for businesses such as Jiffy Lube and other auto maintenance centers. They have profited from the disciplined approach that many Americans take to changing their oil every 3,000 miles. If people begin to adhere to manufacturers' guidelines for new cars, we may see substantial challenges for these firms. It will be interesting to watch to see if this trend takes hold, and how the auto maintenance centers respond. With oil above $130 per barrel, it's also interesting to see how many different ideas are being pursued to eliminate wasteful consumption.

Guest Post on Decision-Making

Heather Johnson sent me the following guest post, with her take on a subject that I've spent a great deal of time studying over the years.

The Choices we Make

Any student of management should be familiar with the process of decision-making – describe and understand the problem, identify the objective, determine the alternative options available, evaluate each of these options either objectively or subjectively, and choose the one that fits best. Unfortunately, the simplicity of the statement of the process does not carry over to the actual process itself, which is why most people find the procedure of making decisions extremely difficult.

On one end of the spectrum you have people who agonize over every small thing, from what to eat to what to wear; and on the other, you have those who save their energy to rationalize choices that are life-changing, if not for them, then for the people whose livelihoods depend on them. I’m not trivializing the first category, only trying to highlight the fact that every one of us considers the decisions we have to make as the most important choice we make at the moment.

The art of making decisions is a theory that has been thrashed about, debated on, and put to effective use in almost every boardroom across the globe. But it’s not something that’s applied when it comes to the individual - personal decision-making is a process that’s often intuitive, based on circumstances that prevail at that point, and influenced by people who control aspects of our lives. From where I sit, this is what I’ve learnt about people and the decisions they make:

· The majority is happy to go with the flow; they do not take decisions that change their lives overnight or even set in motion the harbinger of positive change. Any change that happens is forced, and these people then rearrange their lives to fit around the change.
· Some people straddle the fence; they know they have to take a decision one way or the other (mostly a yes-no decision where there is no in-between ground) and they’re hesitant or afraid to choose. The more daring in this category call the shots and finally choose while the meek (who I don’t think will inherit the earth) fall on one side after being either pulled or pushed. If the decision is a success, the one who chose is elated that he made the right decision; if it’s a failure, the one who fell blames the one who pushed him over, a case of passing the buck once again.
· Some let other people decide; they are the laidback kind who are ok with following the leader rather than taking the lead themselves.
· A rare few are go-getters; they plan their lives and map out where they should be at what point of time. These people live their dreams, and if one or two of the dreams die a premature death, they’re back to the drawing board mapping out new strategies and alternatives. This kind thrives in challenges – they do not fear to take the road less trodden and delight in finding offbeat paths that lead them to the pinnacle they hope to achieve.

The choices we make have repercussions, both on ourselves and the people whose lives are intertwined with ours. Unfortunately, there’s no writing on the wall to guide us as we take decisions that sometimes, may be the difference between success and failure, wealth and mediocrity, and even life and death. But the fear of failure should not be a deterrent to attempting – just as you’d get back on a horse asap after a fall, do not hesitate to make a new choice even if the one you made earlier turned out to be a mistake.

The best way to make decisions is to let your head rule your heart and not vice versa. Rational scores way over emotional when it comes to decision-making. The time taken to make a decision should not outweigh the value of the decision itself – it’s not worth it to spend a whole day deciding the color of pants you want to buy. Think your choices over, and when you’re done, your instinct will tell you what’s right.

This guest post is written by Heather Johnson, who frequently writes on the subject of grants for nursing college degree. She welcomes your comments and freelance writing inquiries at:
heatherjohnson2323@gmail.com

Inbev Makes Bid For Anheuser Busch

Inbev officially announced its takeover bid for Anheuser Busch. They offered $46.4 billion for the American brewer, valuing the target firm at a 35% premium to the 30-day average stock price prior to recent speculation about the acquisition.

As I mentioned in a recent Reuters article, I think the Anheuser Busch board of directors will have a hard time turning back this bid without making other strategic moves. (Consider what has happened at Yahoo after that firm rejected the Microsoft bid). Shareholders are not likely to be pleased if the board simply rejects a bid that offers a substantial premium. The family only owns about 4% of the shares, so it cannot block the deal on its own.

If the Busch family does not want to sell to Inbev, what can they do? I think that one possibility would be to find a private equity buyer who would be willing to retain and work with the current management team in place, particularly CEO August Busch IV. Mature companies with strong, stable operating cash flows and valuable brands make attractive targets for private equity investors. The only question would be whether a private equity firm (or group of firms) could raise the required capital at the right price given this year's turmoil in the capital markets.

Regardless of what happens, I think you will see prospective buyers (Inbev, private equity firms, or some other white knight) taking a close look at some of Anheuser-Busch's ancillary operations. While the theme park business (Busch Gardens, Seaworld, etc.) is quite profitable, it's hard to make a case that strong economies of scope exist between the beer business and the theme park operations. One way to generate cash to help finance a deal would be to sell the theme parks. Other business units, such as the firm's packaging operations, might also receive scrutiny.

Shrinking Retail Floorplans

Gap announced this week that it plans to reduce the size of many of its stores, and suspend the opening of new U.S. locations. In particular, many of its 12,000 square foot stores will shrink to somewhere between 6,000 and 10,000 square feet. Now, Gap has struggled mightily this decade; thus, it's not surprising that they are undergoing such changes. However, one could argue that we could be seeing the start of a trend in retail.

Over the past two decades, retail formats have gotten larger and larger, with superstores cropping up everywhere. It's not just the mass merchandisers such as Target and Wal-Mart, but a whole array of other specialty retailers as well. These giant stores perhaps made sense in an era of $25 oil, but executives will have to rethink the notion of optimal store size given oil prices in excess of $130 per barrel.

Heating costs represent a largely fixed cost. As they rise, the breakeven point for a retail store suddenly rises as well; in short, you need far more revenues to cover your fixed costs today. Given near term pressures on sales, companies need to rethink their cost structure. Reducing variable costs such as labor may be one option, but retailers do not want to cut too deep in that area, for fear of harming customer service. They may find that shrinking the size of the store helps bring down the breakeven sales figure, while also helping to improve inventory turns. Slower moving items can simply be sold on-line today, something that wasn't possible two decades ago. Overall, retailers may lose some revenue from shrinking their floorplans, but they could more than make up for it in higher asset efficiency (more sales per square foot, greater inventory turns, etc.).

Product Launch Failures

G. Michael Maddock and Raphael Louis Vitón have a thought-provoking new blog post at Businessweek.com featuring the top 10 reasons why new product launches fail. It's definitely worth reading.

My personal favorite on their list is what they call the "lemming effect" - i.e. companies decide to imitate their competitors' new products, rather than trying to truly deliver a distinctive product to the market. Me-too strategies are everywhere in the business world. Companies seem to so easily forget that enduring competitive advantage comes from distinctiveness, not imitation.

Walmart & Food Price Inflation

Fortune has an article about how Walmart is working to maintain low retail prices despite the surge in commodity costs. Here is a brief excerpt from the article:

Ever wonder why that cereal box is only two-thirds full? Foodmakers love big boxes because they serve as billboards on store shelves. Wal-Mart has been working to change that by promising suppliers that their shelf space won't shrink even if their boxes do. As a result, some of its vendors have reengineered their packaging. General Mills' Hamburger Helper is now made with denser pasta shapes, allowing the same amount of food to fit into a 20% smaller box at the same price. The change has saved 890,000 pounds of paper fiber and eliminated 500 trucks from the road, giving General Mills a cushion to absorb some of the rising costs.

The interesting thing about these types of moves is that they reduce costs, AND they are environmentally friendly. More and more companies are searching aggressively for ways to eliminate waste, and particularly, to reduce fuel consumption. The high oil prices are, in fact, driving fundamental changes in behavior. We are seeing innovation and increased efficiencies result from the desire to counter the high price of oil/gas. In the long run, such moves may have wonderful positive effects for companies as well as for the economy as a whole.

Retail as Entertainment

As I was shopping with my brother at a Stew Leonard's supermarket in Connecticut a few weeks ago, I began thinking about how successful some retailers have become by making shopping an entertaining experience. For those who are not familiar with it, Stew Leonard's is an independent grocer with several stores in the Northeast. The stores do a phenomenal amount of sales per square foot, despite a far more limited number of SKUs than the typical grocer. Stew Leonard's is known for what it calls its "WOW" factor. The stores aim to entertain customers, particularly children, as they shop the stores. Stew Leonard's has everything from petting zoos to costumed entertainment to fun animatronics throughout the stores. The company focuses on a simple truth: parents often bring their children to the grocery store, and that can be quite a challenge! Why not make it easier on parents as they shop?

Stew Leonard's is not alone in making shopping more entertaining. Consider Jordan's Furniture, a small chain in Massachusetts founded by the Tatelman brothers and now owned by Warren Buffett. My local Jordan's is designed to around a New Orleans theme, with the main portion of the store made to look like Bourbon Street. The store has hourly entertainment, someone handing out beads to at the front door, a virtual reality ride, and an IMAX theater inside as well. We could go on with many other examples, including Build-a-Bear and American Girl stores.

The trend is clear. Each of these retailers is trying to differentiate itself from the competition, and thus increase willingness-to-pay by enhancing the shopping experience. Retailers also compete more effectively against internet competition by making their stores more than simply a place to conduct transactions. Retail is a tough business with low margins in many sectors. Price competition can be ruinous at times. Differentiation can be difficult to achieve. These retailers have found a way to stand out from the pack by focusing on making shopping a truly entertaining experience that's about much more than buying products that can be found elsewhere, including on-line.

"Learning Jobs"

Vicki Swisher has an interesting piece on Businessweek.com about the types of jobs that can be the most powerful learning/developmental experiences for managers.

Swisher points to research by the Center for Creative Leadership (CCL) which shows that formal training accounts for only a small fraction of the learning/knowledge that managers need to to develop critical skills; the rest comes from experience. This finding is certainly no surprise. Formal training can only do so much. The real role for formal training has to be in helping managers accelerate the learning through experience that takes place on the job. It can do so in a number of ways. For instance, formal training can introduce managers to new ideas or perspectives, enable sharing of knowledge across the organization, help managers reflect on their experiences and identify ways to improve, and give executives access to practices and techniques being employed in other organizations so as to prevent a firm from becoming overly insular.

Still, Swisher rightfully points out that not all experiences are equally useful as development learning opportunities. Her list of what research shows to be the most useful developmental jobs is quite intriguing.

Blackberries and the Information Sharing Problem

At first glance, you might think that a Blackberry is a powerful tool for sharing information. After all, it enables people to stay in constant communication with others if necessary. It provides rapid access to data, regardless of where you are located. However, I have come to believe that Blackberries impede information sharing in one very important way.

Let's step back and consider the research on information sharing in teams. We know from academic research (by Gerald Stasser) that groups do not share information effectively when members possess private information. When members of a group have different pieces of information, Stasser observed an interesting phenomenon: people tend to discuss the information that they all posses in common, and they do not always share or emphasize the information privately held by each group member. The lack of proper information sharing and integration inhibits group problem-solving effectiveness.

Now consider what you surely have observed at many management meetings over the past few years. Someone is presenting at the front of the room, while others around the table listen and ask questions. However, people frequently duck their hands under the table to read an email on their Blackberry or to type out a quick reply. Sometimes, people duck out to take "important" phone calls. It's hard to imagine that effective listening takes place in such environments.

Given this behavior, consider this fact: Stasser's research shows a lack of information sharing in groups, even when everyone appears to be paying close attention! Imagine how much worse the information sharing problem has become given the distraction of Blackberries.

China's Cheap Gasoline

Donald Straszheim has a fascinating article about oil prices in China on the Forbes website. Here is what he reports:

Consider the following: Since January 2007, global crude oil prices have risen by 109%; gasoline prices in the U.S. have risen by 77% (roughly apace); gasoline prices in China have risen only 9%.

Gasoline in the U.S. now sells for around $4 per gallon, but it sells for $2.49 per gallon in China. Beijing last raised domestic gasoline prices in November 2007, by 9%, and that was the first and only hike since January 2007, when crude was $87 per barrel.

Given this information, we clearly can see that artificial price controls have driven the voracious demand for oil within China. Is it sustainable though? Straszheim estimates that the Chinese government is providing $40 billion per year in subsidies to maintain cheap gasoline throughout the nation. The Chinese government is in a bit of a quandary though. Inflation has hit 8% in China, and if the government lifts the price controls on gasoline, it will rise substantially - moving well into double digits perhaps. How will the Chinese economic growth engine be affected if inflation gets uncomfortably higher? Meanwhile, we have to remember that China is the second biggest consumer of oil in the world. If prices rise substantially, how much will that curtail demand in that nation? A correction in the Chinese domestic market could stem the rapid increase in the global price of oil that we have been experiencing.

GE Appliances

There has been a great deal of talk recently about GE selling its appliances division. Some observers seem to think that selling off this "low margin, low growth" business will help boost the company's stock price, which has languished for some time, and which took a hit when the firm missed its earnings target last quarter. However, I think that there are three big questions that must be answered before making a judgment on a potential appliance division sale. First, can we really expect the stock to make a substantial leap when the appliance division only accounts for $7 billion of the firm's $173 billion in annual revenue? Talk about a drop in the bucket. I do not think the sale of appliances is a panacea for the stock price. Second, how will GE deal with the brand name? A potential buyer clearly would want the GE brand name, which has such significance with the consumer. Allowing a buyer to license the brand name is risky. Third, and most importantly, what precisely are GE's criteria moving forward for what should and should not be part of the company's portfolio? Until GE answers that question clearly and concisely, I do not think investors will be completely pleased. It's not enough to say that the firm wants to be in higher growth, higher margin businesses, as some observers suggest that GE should be. That's not very limiting. Does any high growth, high margin business on earth fit at GE? Moreover, what about some of the other businesses within the portfolio, such as NBC? Broadcast networks clearly are not a high growth, promising business these days. Why does it stay and appliances have to leave? Clear answers to these questions must be provided for investors to feel comfortable with the GE strategy moving forward.

Anheuser Busch and Sam Adams

While Anheuser Busch worries about fending off a potential hostile takeover bid from InBev, leading craft brewer Sam Adams adopts an interesting strategy of actually helping the competition. What an interesting contrast... First, at Sam Adams, founder and CEO Jim Koch has described how he recently shared 10 tons of hops at cost with other craft brewers to help them deal with the rising cost of commodities. Why did he do it? Koch explains that he wants the craft brewing segment of the beer industry to thrive, and the price of commodities could cause some craft brewers to fail, and others to sacrifice quality to control costs. He doesn't think either is good for Sam Adams. Koch wants to grow the overall size of the craft brewing market, rather than fight for share with other microbrews. It's an interesting strategy of trying to cooperate with other craft brewers in their collective fight to continue taking share from large mass brewers, as well as other alcoholic beverages. Koch knows that he can make more money by growing the overall craft brewing segment than he can by fighting for tiny market share gains against other microbrews.

Meanwhile, at Anheuser Busch, the firm faces a hostile bid for a few reasons. First, the firm has struggled recently with a substantial change in consumer tastes in US. Consumers are buying more craft brews or imports when they drink beer, but the bigger problem is that they are substituting spirits and wine for beer. Spirits has grown with the innovations in that market in recent years (pre-mixed drinks, flavored spirits, etc.) Wine has grown with the continuing efforts to educate the public about the health benefits of wine, as well as with the branding efforts of major wineries. Second, Anheuser Busch is highly reliant on the North American market. They have not been able to expand successfully in many parts of the world. Thus, as American consumers have shifted away from beer, they have been quite vulnerable.

In general, the large brewers find themselves fighting for share in mature markets, and looking for growth in emerging markets. It's not surprising to see consolidation given the slower overall industry growth. The interesting question is whether further consolidation will yield the benefits that firms have seen to this point. How big is big enough?

In addition, the question is what will happen to diversified alcoholic beverage firms that own beer businesses. Will a firm such as Diageo, which is largely a spirits company, keep a hold of Guinness - its prime beer brand - in the face of beer industry consolidation? Will Foster's Group keep its beer businesses now that it's primarily a wine company (it owns Beringer's, Wolf Blass, Lindeman's, etc.)? Will these companies focus on wine and spirits and move out of beer? Or, will we see beer companies increasingly expand into wine and spirits to deal with the declining consumption of beer in some countries such as the US?

Retrenchment and Rebirth

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...

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.

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.

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.”

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.