The current financial crisis provides a useful learning opportunity for all organizations as they consider their risk of a catastrophic failure of any kind - be it physical, technical, or organizational.
The global financial system is a good example of a complex system, as first defined and described by sociologist Charles Perrow. Complex systems are vulnerable to catastrophic failure, according to Perrow, if they have two attributes: high interactive complexity and tight coupling. By interactive complexity, he means that the system has many elements that interact in ways that are hard to predict and know in advance. By tight coupling, he means that different elements of an organizational system are highly interdependent and closely linked to one another, such that a change in one area quickly triggers changes in other aspects of the system. If we have learned anything over these past few weeks, it is that the global financial system exhibits high interactive complexity and tight coupling.
In a system with these attributes, large-scale failures result from a series of small errors and failures, rather than a single root cause. These small problems often cascade to create a catastrophe. Accident investigators in fields such as commercial aviation, the military, and medicine have shown that a chain of events and errors typically leads to a particular disaster. We see the same thing here with the global financial system. A problem that began with failures in the subprime mortgage market has cascaded to cause huge disruptions in many different parts of the global financial system and the economy more broadly.
Organizations of all kinds should take note. Do they operate systems with high interactive complexity and tight coupling? Could a small failure cascade to create a chain of errors that leads to major catastrophe? Every organization should look in the mirror and examine its vulnerability in light of these concepts.
Friday, September 26, 2008
Monday, September 22, 2008
Helping Employees Cope with Economic Turmoil
With turbulence and turmoil in the capital markets, employees in all industries are feeling a bit anxious these days, both about their net worth and their job security. For good reason, employees find themselves distracted from their day-to-day work. It's very easy for rumors to spread in the workplace about potential problems at a particular company, as well as the prospect of layoffs. The rumors and distractions can have a serious detrimental effect on employee productivity. How can managers cope with this problem?
First, they must communicate even more often than usual. They have to be very transparent about the economic condition of the firm. Managers also need to provide updates as to how external events are affecting the firm's business, i.e. how does overall economic growth correlate with the firm's profitability? How does Wall Street's woes affect the firm's profitability?
Second, they must go to great lengths to educate the workforce about the financial drivers of the business and the current state of the business. Many employees will need help understanding key financial metrics, as well as key causes of stock price changes.
Third, managers must be brutally honest about the state of the business. Just as top managers never like to be surprised by bad news, so too lower level employees don't want to be shocked. People will appreciate the candor.
Fourth, don't let the remedies come out in dribs and drabs (if possible). It's much better to assess the whole situation and announce the entire regimen of tough medicine required to cure the patient, rather than issuing one prescription after another over the course of many months. The initial pain will be great, but then the company can move on.
Finally, managers need to be very proactive about rooting out and disproving false rumors that pop up around the workplace. Letting fears, doubts, and misinformation linger can be very harmful.
First, they must communicate even more often than usual. They have to be very transparent about the economic condition of the firm. Managers also need to provide updates as to how external events are affecting the firm's business, i.e. how does overall economic growth correlate with the firm's profitability? How does Wall Street's woes affect the firm's profitability?
Second, they must go to great lengths to educate the workforce about the financial drivers of the business and the current state of the business. Many employees will need help understanding key financial metrics, as well as key causes of stock price changes.
Third, managers must be brutally honest about the state of the business. Just as top managers never like to be surprised by bad news, so too lower level employees don't want to be shocked. People will appreciate the candor.
Fourth, don't let the remedies come out in dribs and drabs (if possible). It's much better to assess the whole situation and announce the entire regimen of tough medicine required to cure the patient, rather than issuing one prescription after another over the course of many months. The initial pain will be great, but then the company can move on.
Finally, managers need to be very proactive about rooting out and disproving false rumors that pop up around the workplace. Letting fears, doubts, and misinformation linger can be very harmful.
Saturday, September 13, 2008
Is Television Good for Kids?
The Wall Street Journal had a provocative article last week about new research exploring whether television might actually be good for children and families in some ways. Here is a short excerpt from the opening to the well-written, in-depth article:
"University of Chicago Graduate School of Business economists Matthew Gentzkow and Jesse Shapiro aren't sure that TV has been all that bad for kids. In a paper published in the Quarterly Journal of Economics this year, they presented a series of analyses that showed that the advent of television might actually have had a positive effect on children's cognitive ability."
The article goes on to cite the findings from the study:
"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did. The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure. The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower."
Now, of course, there are limits to how much we can generalize from this study, as the article points out. The findings are from a different era, when the content on television was quite different (i.e. far less trashy). Moreover, they are seeing positive effects specifically in households where English was not the first language, i.e. immigrant households. Yet, I find the research intriguing, because I was raised in a household where English wasn't the first language. My parents came over from Italy just three years before I was born. We did watch a fair bit of television when I was young. Since my parents didn't speak much English at the time (or at least it was broken English), the television may have been beneficial in helping me learn the language. I think it's at least plausible that it could have had some positive effect. Having said that, I don't think my kids are in the same situation. They have plenty of other avenues for learning to speak, read, and write English, and they don't need the television to help them!
"University of Chicago Graduate School of Business economists Matthew Gentzkow and Jesse Shapiro aren't sure that TV has been all that bad for kids. In a paper published in the Quarterly Journal of Economics this year, they presented a series of analyses that showed that the advent of television might actually have had a positive effect on children's cognitive ability."
The article goes on to cite the findings from the study:
"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did. The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure. The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower."
Now, of course, there are limits to how much we can generalize from this study, as the article points out. The findings are from a different era, when the content on television was quite different (i.e. far less trashy). Moreover, they are seeing positive effects specifically in households where English was not the first language, i.e. immigrant households. Yet, I find the research intriguing, because I was raised in a household where English wasn't the first language. My parents came over from Italy just three years before I was born. We did watch a fair bit of television when I was young. Since my parents didn't speak much English at the time (or at least it was broken English), the television may have been beneficial in helping me learn the language. I think it's at least plausible that it could have had some positive effect. Having said that, I don't think my kids are in the same situation. They have plenty of other avenues for learning to speak, read, and write English, and they don't need the television to help them!
Can winning sports teams make us more productive employees?
The Boston Globe had an interesting article last week on the topic of whether a winning team can actually enhance the financial well-being of its fans. It cites research by economist Michael Davis and psychologist Christian End. The article explains the study:
"A winning NFL football team increases the incomes of the people who live and work in its hometown by as much as $120 a year. And while the study doesn't identify exactly what causes the boost, the authors point to psychological literature suggesting that winning fans are at once harder workers and bigger spenders. In short, buoyed by the team's success, we work longer hours, take bigger risks, and shop more avidly, all of which helps the local economy."
I'm not at all sure that this psychological impact on a team's fans merits the large public subsidies often given to sports teams to build new stadiums, but it is certainly fascinating research about how our moods might affect our productivity as workers.
"A winning NFL football team increases the incomes of the people who live and work in its hometown by as much as $120 a year. And while the study doesn't identify exactly what causes the boost, the authors point to psychological literature suggesting that winning fans are at once harder workers and bigger spenders. In short, buoyed by the team's success, we work longer hours, take bigger risks, and shop more avidly, all of which helps the local economy."
I'm not at all sure that this psychological impact on a team's fans merits the large public subsidies often given to sports teams to build new stadiums, but it is certainly fascinating research about how our moods might affect our productivity as workers.
Tuesday, September 02, 2008
Guest Post - Leading from the Wings
Leading From the Wings
This post was contributed by Heather Johnson, who writes on the subject of California teaching certificate. She invites your feedback at heatherjohnson2323@gmail.com
Walking down memory lane, I recall a friendly basketball match that I played against the sophomores as a freshman in college. I was new, and so were the others on my team. We had not yet had time to get to know each other well, the strengths and weaknesses that each of our games brought out. So when it came to choosing a captain, a teammate was chosen at random. But as the game progressed, we seemed to be drifting like a rudderless boat thrown at the mercies of a wild sea. We had no game plan, no team work, and most of all, no commitment.
After a poor show in the first half, I decided to take control of things even though I was not the designated leader. The game we’d played so far had offered me a peek into both the strengths of my teammates and the weaknesses of my opponents. Armed with this insight, I outlined plays and strategies for the second half during the interval. We didn’t win that day, but the loss was far from humiliating. We had redeemed ourselves during the latter part of the match.
I learnt a valuable lesson in leadership that day – it’s not just designated leaders who must lead all the time. Team members with a sense of responsibility and an innate aptitude for management are equally at fault if the team goes astray. In fact, they are more to blame, because they know what they must do and yet they fail to do it for various reasons. They may fear alienating or offending the appointed leader, they may be too lazy to take on the onus of leading the team, or they may be too shy and apprehensive to come forward with their ideas.
We can use these points to define a true leader – one who knows what needs to be done and is not afraid, reluctant or timid to do it in a way that is appreciated and admired by everyone else on the team. A leader guides rather than controls, listens rather than talks all the time, works with the team rather than make them do all the work, shares credit with everyone and takes blame alone, and thinks things through before actually implementing them. A good leader knows that the best way to motivate is through encouragement and not fear and that praise is more important than recriminations.
A true leader does not ask for credit for a job well done, which is very important in the kind of scenario I outlined above. Leadership driven by a love for the spotlight is as fleeting as a shooting star – a flash of brilliance reduced to ashes and dust. Leadership must focus on the goals at hand and take the right decisions using the right people to reach those goals in the most efficient way possible. Publicity lets others know that you’re a good leader, but fame is a fickle friend that deserts you the moment you make a mistake. Leadership that’s driven by a love of achievement alone is the kind that’s head and shoulders above the rest, the kind that lasts a lifetime, no matter where the cameras are focused. You don’t have to be the star of the play to feel a sense of achievement; it’s infinitely better to be the director in the wings who pulls the strings and calls the shots. After all, no matter how entertaining the puppets are, there’s no show without the puppeteer!
This post was contributed by Heather Johnson, who writes on the subject of California teaching certificate. She invites your feedback at heatherjohnson2323@gmail.com
Walking down memory lane, I recall a friendly basketball match that I played against the sophomores as a freshman in college. I was new, and so were the others on my team. We had not yet had time to get to know each other well, the strengths and weaknesses that each of our games brought out. So when it came to choosing a captain, a teammate was chosen at random. But as the game progressed, we seemed to be drifting like a rudderless boat thrown at the mercies of a wild sea. We had no game plan, no team work, and most of all, no commitment.
After a poor show in the first half, I decided to take control of things even though I was not the designated leader. The game we’d played so far had offered me a peek into both the strengths of my teammates and the weaknesses of my opponents. Armed with this insight, I outlined plays and strategies for the second half during the interval. We didn’t win that day, but the loss was far from humiliating. We had redeemed ourselves during the latter part of the match.
I learnt a valuable lesson in leadership that day – it’s not just designated leaders who must lead all the time. Team members with a sense of responsibility and an innate aptitude for management are equally at fault if the team goes astray. In fact, they are more to blame, because they know what they must do and yet they fail to do it for various reasons. They may fear alienating or offending the appointed leader, they may be too lazy to take on the onus of leading the team, or they may be too shy and apprehensive to come forward with their ideas.
We can use these points to define a true leader – one who knows what needs to be done and is not afraid, reluctant or timid to do it in a way that is appreciated and admired by everyone else on the team. A leader guides rather than controls, listens rather than talks all the time, works with the team rather than make them do all the work, shares credit with everyone and takes blame alone, and thinks things through before actually implementing them. A good leader knows that the best way to motivate is through encouragement and not fear and that praise is more important than recriminations.
A true leader does not ask for credit for a job well done, which is very important in the kind of scenario I outlined above. Leadership driven by a love for the spotlight is as fleeting as a shooting star – a flash of brilliance reduced to ashes and dust. Leadership must focus on the goals at hand and take the right decisions using the right people to reach those goals in the most efficient way possible. Publicity lets others know that you’re a good leader, but fame is a fickle friend that deserts you the moment you make a mistake. Leadership that’s driven by a love of achievement alone is the kind that’s head and shoulders above the rest, the kind that lasts a lifetime, no matter where the cameras are focused. You don’t have to be the star of the play to feel a sense of achievement; it’s infinitely better to be the director in the wings who pulls the strings and calls the shots. After all, no matter how entertaining the puppets are, there’s no show without the puppeteer!
7 Ways to Fail Big
Paul Carroll and Chunka Mui have a provocative article (Seven Ways to Fail Big) in this month's issue of Harvard Business Review. They studied the 750 of the most significant business failures from 1981-2005, and they identified some key lessons from those cases. While one might quibble with their methodology or even with some of their conclusions, it certainly makes for interesting reading. The article should be commended for not only providing a list of the mistakes that were most often made, but also for offering some suggestions on how to avoid these catastrophes. I especially liked their two sidebars titled "The Devil's Advocate" and "Questions Every Company Should Ask." I think executives would be well-served to consider the techniques presented in those portions of the article.
Saturday, August 30, 2008
Ann Fulmer on Mortgage Fraud
Yesterday, Ann Fulmer spoke at the Economic Summit we held at Bryant on the topic of mortgage fraud. Fulmer made herself into one of the nation's leading experts on the subject when the problem invaded her own upscale neighborhood in the suburbs of Atlanta. She gave a dynamic presentation, in which she showed us how much it may have contributed to the mortgage meltdown, while providing vivid examples of how fraud simply decimates some neighborhoods (because there's some benefit to the criminals of clustering their activity in particular areas). It was truly frightening to see how mortgage fraud works, and to see that it can affect upscale suburban neighborhoods, bringing other more dangerous crime along with it. For more on Ann Fulmer, see this story about her in Business Week, and this one in the New York Times.
Thursday, August 28, 2008
Ethnography, Failure, and Diaper Design
Fortune has a great article on how Kimberly-Clark designed a new line of premium diapers, in part to cope with declining future demand due to demographic trends (lower birth rates). The article highlights two important practices that firms are employing these days. First, it points out the importance of ethnographic marketing research, i.e. direct observation of consumers in natural settings using a company's products. Firms are employing these observational methods, rather than relying solely on focus groups and surveys, because they have learned that people often say one thing and do another. Moreover, consumers often aren't even aware of key aspects of how they use particular products. Observation yields great insights about the specifics of consumer behavior. Here is an excerpt from the article on this point:
"In many cases they went into homes to do interviews; in others, they placed motion-activated cameras in the home to observe diaper-change routines and then watched the hours of footage at K-C headquarters... Nelson plays some footage of a newborn getting its diaper changed, taken from one of the videocameras. You see the baby's legs continually springing up and the mom trying to straighten them as she puts on the diaper; clearly it's a struggle. Footage like that started pushing the team in the direction of thinking that a better diaper would be shaped to get around those legs and follow the curves of a baby's body."
The second key point in this article is that Kimberly-Clark is intentionally creating failures in their research labs to learn more about diaper technology. Only through intentionally causing many types of diaper leaks can they discover how to create a diaper that fits comfortably, yet does not leak. Here is the excerpt on that point:
"Fit diapers in varying states of sagginess, are noisily playing with trucks and watching SpongeBob SquarePants. They're an adorable collection of diaper blowouts about to happen, and when they finally do, K-C's researchers record each failure in obsessive detail: how much the diaper weighed at the end, where the leak seeped out, how the diaper fit around the legs.
The goal of this forced-failure test, as Kimberly-Clark calls it, is to check that the diapers being churned out at the company's factories match the rigorous standards for Huggies Supreme Natural Fit..."
As the father of three, with one still in diapers, I found the article quite interesting. It's rather amazing how much time and money is spent trying to perfect diaper "technology" at Kimberly-Clark.
"In many cases they went into homes to do interviews; in others, they placed motion-activated cameras in the home to observe diaper-change routines and then watched the hours of footage at K-C headquarters... Nelson plays some footage of a newborn getting its diaper changed, taken from one of the videocameras. You see the baby's legs continually springing up and the mom trying to straighten them as she puts on the diaper; clearly it's a struggle. Footage like that started pushing the team in the direction of thinking that a better diaper would be shaped to get around those legs and follow the curves of a baby's body."
The second key point in this article is that Kimberly-Clark is intentionally creating failures in their research labs to learn more about diaper technology. Only through intentionally causing many types of diaper leaks can they discover how to create a diaper that fits comfortably, yet does not leak. Here is the excerpt on that point:
"Fit diapers in varying states of sagginess, are noisily playing with trucks and watching SpongeBob SquarePants. They're an adorable collection of diaper blowouts about to happen, and when they finally do, K-C's researchers record each failure in obsessive detail: how much the diaper weighed at the end, where the leak seeped out, how the diaper fit around the legs.
The goal of this forced-failure test, as Kimberly-Clark calls it, is to check that the diapers being churned out at the company's factories match the rigorous standards for Huggies Supreme Natural Fit..."
As the father of three, with one still in diapers, I found the article quite interesting. It's rather amazing how much time and money is spent trying to perfect diaper "technology" at Kimberly-Clark.
Tuesday, August 26, 2008
The Perils of Going Green
Fast Company has an article about how Clorox struck up a partnership with the Sierra Club when it launched its Green Works line of more environmentally friendly cleaners. The deal means that the Sierra Club label to appear on all Green Works products. Naturally, the environmental organization receives a payment in return for the use of its logo. This partnership has been very beneficial for Clorox, but it has created much internal furor within the Sierra Club. Some members apparently do not agree with this type of commercial deal.
This case illustrates the perils of "green" strategies, both for the for-profit firms and the environmental organizations. In this case, the environmental organization found itself on the hot seat for its commercial tie-ups. In other situations, we find that firms who are trying to "go green" find themselves inviting much more scrutiny than they had ever experienced. Sometimes, claiming progress on the environmental front only invites more attention, and perhaps criticism, from various constituencies and activitists. In sum, becoming more environmentally friendly has many merits, but it can be a perilous activity for all involved.
This case illustrates the perils of "green" strategies, both for the for-profit firms and the environmental organizations. In this case, the environmental organization found itself on the hot seat for its commercial tie-ups. In other situations, we find that firms who are trying to "go green" find themselves inviting much more scrutiny than they had ever experienced. Sometimes, claiming progress on the environmental front only invites more attention, and perhaps criticism, from various constituencies and activitists. In sum, becoming more environmentally friendly has many merits, but it can be a perilous activity for all involved.
The Importance of Design
From the remarkable success of Apple to the popularity of kitchenware products made by Alessi, we see many examples of the power of innovative design. More and more companies have rediscovered the basic notion that success in the marketplace is not simply a function of a product's quality or technological superiority; design matters. Now, Business Week reports that Coca-Cola has taken a fresh look at how design can freshen up the iconic brand's look and feel. There's no question that great designers can not only help to improve the products we purchase and use, but they also can help connect consumers more closely with brands. A good design can and should convey the meaning of a brand. Some of Coca-Cola's recent work seems quite interesting, particularly because the firm does have some interesting design roots - particularly with the famous glass bottles of old.
Monday, August 25, 2008
Prewards- Coupons for a Digital Age
Business Week has a fascinating article about a new Web 2.0 technology that marketers are using to court millenials. The concept is called a preward. Here is how Business Week describes it:
"Edo Interactive, a Nashville-based firm that deals with Web 2.0 technology, is trying to change the game. After spending a year studying young consumers, they developed Facecard, a prepaid credit card aimed squarely at millennials and the businesses that court them.
Launching nationally Sept. 1, Edo's gimmick works like a fiscal Facebook: After applicants create profiles on Facecard.com, they get a card in the mail that allows them to borrow, lend, or give away money to buddies electronically. For a fee, retailers can send them "prewards," small denominations of instant store credit, based on their age, location, and personal interests. Because the $2 to $3 gifts are redeemed via credit card, tracking consumer response is a cinch."
Now, I found this technology rather interesting, but I was also struck by the amount of spending by millenials, and thus the amount of marketers' attention focused on this demographic. According to the article, "America's 80 million millennials (and their folks) shell out roughly $200 billion annually, according to Chicago-based investment firm William Blair & Co.." Wow! Those are some huge numbers.
Well, this leads me to my main point. Both college faculty and parents need to be paying a great deal of attention to the importance of teaching young people about responsible personal finance. These young people are being hit with massive marketing efforts aimed at getting them to use credit cards and spend their money (and their parents' money!). Yet, many young people do not understand certain essential basics of personal finance. Unfortunately, that means that they leave college in far worse financial shape than simply the debt load of college loans. I don't think we can start too soon by the way. We need to begin educating young people about financial matters when they are in elementary school, and gradually introducing more complex ideas about how to manage one's money.
"Edo Interactive, a Nashville-based firm that deals with Web 2.0 technology, is trying to change the game. After spending a year studying young consumers, they developed Facecard, a prepaid credit card aimed squarely at millennials and the businesses that court them.
Launching nationally Sept. 1, Edo's gimmick works like a fiscal Facebook: After applicants create profiles on Facecard.com, they get a card in the mail that allows them to borrow, lend, or give away money to buddies electronically. For a fee, retailers can send them "prewards," small denominations of instant store credit, based on their age, location, and personal interests. Because the $2 to $3 gifts are redeemed via credit card, tracking consumer response is a cinch."
Now, I found this technology rather interesting, but I was also struck by the amount of spending by millenials, and thus the amount of marketers' attention focused on this demographic. According to the article, "America's 80 million millennials (and their folks) shell out roughly $200 billion annually, according to Chicago-based investment firm William Blair & Co.." Wow! Those are some huge numbers.
Well, this leads me to my main point. Both college faculty and parents need to be paying a great deal of attention to the importance of teaching young people about responsible personal finance. These young people are being hit with massive marketing efforts aimed at getting them to use credit cards and spend their money (and their parents' money!). Yet, many young people do not understand certain essential basics of personal finance. Unfortunately, that means that they leave college in far worse financial shape than simply the debt load of college loans. I don't think we can start too soon by the way. We need to begin educating young people about financial matters when they are in elementary school, and gradually introducing more complex ideas about how to manage one's money.
Wednesday, August 20, 2008
Knowing Your Target Market
One of my MBA students, Judd Taylor, has shared with me an interesting example of a firm perhaps not being fully aware of how its pricing strategy shapes its target market, particularly given the recent run-up in fuel prices. Taylor wrote:
"I recently completed a new stone patio adjacent to the deck on my house. In the process of researching suppliers for the stone pavers, I noticed that one local company offered free delivery for any amount of goods purchased. I wondered how they got away with this given the recent increases in fuel prices. Further investigation revealed that their stone prices were noticeably higher than their local competitors, indicating that they must transfer their transportation costs onto the price of their products. The ability to offer “free delivery” must be an important advertisement for this firm as it is indicated in all of their flyers and brochures. Conceivably, this pricing strategy would appeal most to homeowners who cannot amortize the cost of the delivery over a large order. Contractors might prefer to pay the delivery charge in exchange for a lower price on the materials, especially for large orders."
Taylor's example is an interesting one, because one wonders if the firm understands how its pricing strategy may be shaping its target market. Does the company understand that it will attract homeowners much more so than contractors with this pricing strategy? Perhaps it does, but in some cases, firms may not understand how a particular pricing strategy may shape who shops, and who does not shop, for their products.
How about the implications of oil price increases? Well, a free delivery ad might play well given high gas prices. However, those increases in gas prices certainly will result in higher and higher item prices for the stones, if the firm wishes to continue make profit with its free delivery strategy. This will only drive more contractors away, and it will mean that homeowners with very small jobs will be the most likely purchases of their products. Will this be economically attractive for the firm? What will its cost structure look like with a high frequency of deliveries of small batches of items? The cost of these kinds of deliveries, naturally, is higher than traveling to a job site to deliver a very large order.
The point is simple: Every firm should be clear on how its pricing strategy shapes the kinds of customers who will purchase its product. Does the pricing strategy attract the kind of consumers that a firm wishes to target? Or, is a firm attracting customers which it does not want, or with which they cannot make an attractive profit?
"I recently completed a new stone patio adjacent to the deck on my house. In the process of researching suppliers for the stone pavers, I noticed that one local company offered free delivery for any amount of goods purchased. I wondered how they got away with this given the recent increases in fuel prices. Further investigation revealed that their stone prices were noticeably higher than their local competitors, indicating that they must transfer their transportation costs onto the price of their products. The ability to offer “free delivery” must be an important advertisement for this firm as it is indicated in all of their flyers and brochures. Conceivably, this pricing strategy would appeal most to homeowners who cannot amortize the cost of the delivery over a large order. Contractors might prefer to pay the delivery charge in exchange for a lower price on the materials, especially for large orders."
Taylor's example is an interesting one, because one wonders if the firm understands how its pricing strategy may be shaping its target market. Does the company understand that it will attract homeowners much more so than contractors with this pricing strategy? Perhaps it does, but in some cases, firms may not understand how a particular pricing strategy may shape who shops, and who does not shop, for their products.
How about the implications of oil price increases? Well, a free delivery ad might play well given high gas prices. However, those increases in gas prices certainly will result in higher and higher item prices for the stones, if the firm wishes to continue make profit with its free delivery strategy. This will only drive more contractors away, and it will mean that homeowners with very small jobs will be the most likely purchases of their products. Will this be economically attractive for the firm? What will its cost structure look like with a high frequency of deliveries of small batches of items? The cost of these kinds of deliveries, naturally, is higher than traveling to a job site to deliver a very large order.
The point is simple: Every firm should be clear on how its pricing strategy shapes the kinds of customers who will purchase its product. Does the pricing strategy attract the kind of consumers that a firm wishes to target? Or, is a firm attracting customers which it does not want, or with which they cannot make an attractive profit?
Tuesday, August 19, 2008
Productivity of Scientific Researchers
The Wall Street Journal had an interesting article yesterday about the productivity of scientific researchers. The article cites studies about the period during one's lifetime when a researcher tends to be most productive. The Wall Street Journal cites research by Benjamin Jones of Northwestern, who argues that innovators tend to make their peak contributions around the age of 40, but then their contributions decline markedly in their early to mid-50s. Thus, the period of peak productivity is fairly limited. Naturally, these studies simply report the averages; there are many outliers, both young inventors who make substantial contributions at an early age as well as people who continue to innovate well beyond their early 50s.
The article points out that some companies are trying to find ways to extend the peak period of research productivity for their most talented people. They are trying to find ways to both help the young promising stars accelerate their learning curve and become more innovative at an earlie age, and they are trying to help older workers maintain their pace of innovation beyond their early to mid 50s. For instance, companies such as Sun and Texas Instruments are pairing up young engineers with experienced mentors; the partnerships benefit both the young and the old. The young come down the learning curve faster, and the old get access to new ideas and fresh perspectives.
As an academic, from time to time I think about this issue of research productivity over one's lifetime. I've seen plenty of scholars who make great contributions at a relatively early age and then become rather stale. They continue to work in a very narrow domain for decades, and they don't branch out to learn and discover new things. I think it takes a concerted effort on the party of any researcher, whether commercial or academic, to keep exploring new territory and exposing one's mind to completely new perspectives. It's easy to continue to mine the same territory upon which one has built their reputation; it's harder, but ultimately more beneficial, to take the risk to go beyond one's comfort zone and stake out new ground. In sum, I think all of us need to set some personal goals about the new bodies of knowledge and new skills that we would like to develop in the next 3-5 years; we need to keep setting these goals over time, so that we truly become lifelong learners. Hopefully, this will keep us innovative and productive for decades to come.
The article points out that some companies are trying to find ways to extend the peak period of research productivity for their most talented people. They are trying to find ways to both help the young promising stars accelerate their learning curve and become more innovative at an earlie age, and they are trying to help older workers maintain their pace of innovation beyond their early to mid 50s. For instance, companies such as Sun and Texas Instruments are pairing up young engineers with experienced mentors; the partnerships benefit both the young and the old. The young come down the learning curve faster, and the old get access to new ideas and fresh perspectives.
As an academic, from time to time I think about this issue of research productivity over one's lifetime. I've seen plenty of scholars who make great contributions at a relatively early age and then become rather stale. They continue to work in a very narrow domain for decades, and they don't branch out to learn and discover new things. I think it takes a concerted effort on the party of any researcher, whether commercial or academic, to keep exploring new territory and exposing one's mind to completely new perspectives. It's easy to continue to mine the same territory upon which one has built their reputation; it's harder, but ultimately more beneficial, to take the risk to go beyond one's comfort zone and stake out new ground. In sum, I think all of us need to set some personal goals about the new bodies of knowledge and new skills that we would like to develop in the next 3-5 years; we need to keep setting these goals over time, so that we truly become lifelong learners. Hopefully, this will keep us innovative and productive for decades to come.
Thursday, August 14, 2008
The Fall of Oil Prices
It's been amazing to watch the rapid decline of oil prices in recent weeks, driven in large part by the fact that demand has dropped. People and companies have finally begun to make substantial changes in their behavior, as witnessed by AAA's data on the reduced amount on miles driven by Americans this summer.
If there is one positive from the high oil prices that we've experienced, it is that firms have implemented major changes to eliminate wasteful use of energy. Such cost reductions will help them become more competitive in the long run. It's interesting that the U.S. productivity numbers have been rather strong during the past few quarters, despite the downturn in economic activity. Perhaps the productivity growth is a reflection of firms trying to become more efficient to offset the high price of energy. Whatever the cause, the growth in productivity in 2007-2008 bodes well for long term economic growth, despite the short term economic troubles.
One last thought on oil prices... One does have to wonder about the timing of the shift in the oil market. Is it just a coincidence that prices began to fall when the goverment began discussing ways to crack down on short sellers who may have been acting inappropriately? Short sellers clearly play a useful role in our capital markets, but there are some questions regarding the appropriateness of some behavior.
If there is one positive from the high oil prices that we've experienced, it is that firms have implemented major changes to eliminate wasteful use of energy. Such cost reductions will help them become more competitive in the long run. It's interesting that the U.S. productivity numbers have been rather strong during the past few quarters, despite the downturn in economic activity. Perhaps the productivity growth is a reflection of firms trying to become more efficient to offset the high price of energy. Whatever the cause, the growth in productivity in 2007-2008 bodes well for long term economic growth, despite the short term economic troubles.
One last thought on oil prices... One does have to wonder about the timing of the shift in the oil market. Is it just a coincidence that prices began to fall when the goverment began discussing ways to crack down on short sellers who may have been acting inappropriately? Short sellers clearly play a useful role in our capital markets, but there are some questions regarding the appropriateness of some behavior.
Saturday, July 26, 2008
Global vs. Local
Ford announced this week that it was shifting more of its production to small cars, and that it was going to bring some of its popular European small cars to the United States. The news reports suggest that Ford is finally making more progress toward standardizing models across countries, whereas in the past, the company focused on building different models for different local markets.
The Ford situation reminds us that there are two different reasons that firms customize their products for local markets. First, they might do it to tailor their products and services to local customer tastes and needs. This is a perfectly viable reason for localization, though of course, companies must weigh the benefits of local customization against the foregone economies of scale. However, there is a second reason that firms customize for local markets, and it is not value maximizing. As companies grow and develop local management in various countries, those organizational units grow in power. Sometimes, they become fiefdoms run by managers behaving like feudal lords. These managers insist of building their own products for those markets, rather than adopting global product platforms. Yet, they might be doing so because they want to control their region and accumulate more resources under their control, rather than because it is actually the right thing to do for the business. The Ford story suggests that firms need to be particularly attuned to this second, value destroying reason for local customization in different geographic markets.
The Ford situation reminds us that there are two different reasons that firms customize their products for local markets. First, they might do it to tailor their products and services to local customer tastes and needs. This is a perfectly viable reason for localization, though of course, companies must weigh the benefits of local customization against the foregone economies of scale. However, there is a second reason that firms customize for local markets, and it is not value maximizing. As companies grow and develop local management in various countries, those organizational units grow in power. Sometimes, they become fiefdoms run by managers behaving like feudal lords. These managers insist of building their own products for those markets, rather than adopting global product platforms. Yet, they might be doing so because they want to control their region and accumulate more resources under their control, rather than because it is actually the right thing to do for the business. The Ford story suggests that firms need to be particularly attuned to this second, value destroying reason for local customization in different geographic markets.
Wednesday, July 23, 2008
Airline Service
Sorry about the long delay between postings. I was finishing up the manuscript for my next book, and then I flew here to Tokyo to teach an executive program. I did have an interesting experience on the flight over here. I flew from Boston to Dallas, and then from Dallas to Tokyo on American Airlines. I've flown this route every year now for the past five years, and I always fly American Airlines as I have elite frequent flyer status with them. I was quite surprised, though, when I landed in Dallas. As I walked off the jetway into the gate area, a woman from American Airlines stood there with a placard with my name on it, as well as the name of one other passenger. She offered to drive us to our gate for the departure to Tokyo. Now, Dallas is a huge airport, and it was quite some distance between the gates. However, we had plenty of time before our next flight. I had never been offered this type of service on prior flights to Tokyo. I think it's interesting that American Airlines appears to be going that extra mile to provide service to its best customers, even while cutting back in many areas. While we have read so much about labor reductions, here we had a person driving us through the airport. It seems clear that the airlines are very focused on trying to enhance service to their core customers. It's always been tough for the airlines to differentiate their products. Flying has simply become a commodity product. Yet, here we have an airline trying to make sure that it offers a small amenity that may help it retain its best customers. It will be interesting to see if more attempts are made at differentiating their products and services, and if these efforts are any more successful than they have been in the past.
Friday, July 11, 2008
A Friendly Deal for Bud?
The Wall Street Journal reports this morning that Inbev may be raising its bid from $65 per share to $70 per share in an effort to secure a friendly deal with Anheuser Busch. It's not surprising to see Inbev up its offer, given that a friendly deal likely means a smoother integration process than a hostile takeover. Achieving key synergies becomes crucial to justify the takeover premium, and those synergies require the cooperation of Anheuser-Busch managers and employees. Most experts believe Anheuser-Busch would have a hard time devising a strategic plan that would allow it to argue to shareholders that it can get to $70 per share on its own, even if it sells noncore assets such as the theme parks and packaging business. It will be interesting to see if the two firms can hammer out a friendly deal. Moreover, it will be interesting to see how analysts and investors react to the larger takeover premium being offered by Inbev. Will they think that the potential synergies justify that acquisition price?
Thursday, July 10, 2008
Deliberate Practice and Simulations
Research by K. Anders Ericsson and others has shown that elite performers in a wide variety of fields do not excel simply due to innate talent. Instead, these stars engage in a great deal of what Ericsson calls "deliberate practice." It's more than just hard work. Elite performers engage in practice that is aimed at a very specific performance improvement goal, and which provides immediate feedback. Moreover, deliberate practice involves focusing on the things that elite performers don't do well; many of us tend to practice that at which we already excel in our leisure sport activities. Finally, deliberate practice consists of extensive repetition of the very same activity, so as to hone a particular skill. It emphasizes focus over variety in the building of skills - i.e. working on one thing at a time. As famous tennis instructor Vic Braden has said, "“Losers have tons of variety. Champions just take pride in learning to hit the same old boring winning shots."
Can businesses leverage the power of deliberate practice to develop their human capital? Surely, they can. We can engage in deliberate practice when it comes to key activities such as drafting and making presentations. Leadership development programs can provide opportunities for deliberate practice at a variety of skills related to communication, negotiation, and the like. Beyond that, we can employ technology to create opportunities for deliberate practice. One innovative new methodology for doing so involves the use of simulations and video game technology to train employees. For instance, Hilton Garden Inn employs an interactive training game called "Ultimate Team Play." This game allows individuals to immerse themselves in various scenarios that take place in a hotel. They have to make decisions about serving customers, and they have to complete various tasks. The game provides immediate feedback to the trainees, enabling them to see how their efforts impacted measures such as customer loyalty and satisfaction.
Can businesses leverage the power of deliberate practice to develop their human capital? Surely, they can. We can engage in deliberate practice when it comes to key activities such as drafting and making presentations. Leadership development programs can provide opportunities for deliberate practice at a variety of skills related to communication, negotiation, and the like. Beyond that, we can employ technology to create opportunities for deliberate practice. One innovative new methodology for doing so involves the use of simulations and video game technology to train employees. For instance, Hilton Garden Inn employs an interactive training game called "Ultimate Team Play." This game allows individuals to immerse themselves in various scenarios that take place in a hotel. They have to make decisions about serving customers, and they have to complete various tasks. The game provides immediate feedback to the trainees, enabling them to see how their efforts impacted measures such as customer loyalty and satisfaction.
Wednesday, July 09, 2008
Starbucks Closing Locations
Starbucks recently announced that it was closing 600 locations this year. Interestingly, it appears that the company will close company-owned locations, rather than any of its licensed locations (such as small airport shops). While this closure strategy may make sense economically, one still wonders about the strategic logic of the company's massive growth of licensed locations. It seems quite likely that the proliferation of licensed locations, including the abundant licensing to food service companies, has diluted the Starbucks brand.
It's hard to argue that you are one of the highest quality coffee companies in the country when you have your coffee being brewed and then sold from air pump dispensers in tons of different locations. How long does that coffee sit in those dispensers before it is sold? Is it really fresh? Does it always taste as good as Starbucks drip coffee sold in its company-owned locations?
In my view, the company must address this fundamental strategic question. The craving for growth above all else clearly drove them to expand at a frenetic pace in recent years. Now, retrenching can be painful. Stepping back from its licensing strategy won't be easy. It may even be economically a negative in the short run, but it may be precisely what the company must do strategically to position itself for the future.
It's hard to argue that you are one of the highest quality coffee companies in the country when you have your coffee being brewed and then sold from air pump dispensers in tons of different locations. How long does that coffee sit in those dispensers before it is sold? Is it really fresh? Does it always taste as good as Starbucks drip coffee sold in its company-owned locations?
In my view, the company must address this fundamental strategic question. The craving for growth above all else clearly drove them to expand at a frenetic pace in recent years. Now, retrenching can be painful. Stepping back from its licensing strategy won't be easy. It may even be economically a negative in the short run, but it may be precisely what the company must do strategically to position itself for the future.
Wednesday, June 25, 2008
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.
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.
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