Should Companies Rethink the Practice of Offering Product Bundles?

You've all seen plenty of promotions that offer two or more products for one bundled price.  Think of a combo meal at McDonald's, an offer for an airline ticket and hotel reservation, or a special for a blazer and pair of slacks.  Does offering these bundles make sense?   New research by Aaron Brough and Alexander Chernev suggests that companies should proceed with caution.    Chernev explains that, " When we show people a burger and ask them how many calories it has, they might say 500. For a side salad, they might say 100. But if you pair the same burger with the side salad, people will often think that the whole meal has fewer calories—say 400—than the burger alone. That seems counterintuitive, as if the salad somehow has ‘negative’ calories.”  The scholars document a similar effect on consumer willingness to pay.  They conducted experiments in which they paired expensive items with an inexpensive item in a bundle (example: a home gym and a fitness DVD).  They found that bundling decreased customers’ willingness to pay substantially.  In fact, consumers sometimes end up valuing the bundle less than the expensive item on its own!  

IBM: What explains the sustained success?

IBM serves as a rare example of a very large organization that went through a near-death experience and came back to become one of the most successful and admired companies in the world.  If you look at the top 10 most admired companies on Fortune's original list in 1983 and compare it to today's list 30 years later, only 1 company is in the top 10 in both years - IBM.   In the middle years, of course, the company nearly did not survive.  Lou Gerstner led a remarkable transformation during the 1990s.

What accounts for IBM's remarkable sustained success over many decades?  One answer may be found in a quote from CEO Ginny Rometty in the current issue of Fortune magazine.  She says, "To be 100 years old, you can never define yourself by a product."  What an astute observation.  Too many firms become defined by a particular product that becomes very popular and profitable.  Then, as  the world changes, they can't adapt and newer, better products pass them by.   In IBM's case, they have not let a particular product become paramount.  They have been able to move beyond one generation of technology and embrace a new wave, and they have done that multiple times.  It's rare.  One wonders whether that "defined by a particular product" phenomenon serves as an explanation for the struggles of firms such as Blackberry.  

Customers Still Clamor for Trucks

When the auto industry bailouts occurred, we heard much talk about the need for the automakers to shift their focus toward smaller, more environmentally friendly vehicles.   We heard that a focus on trucks and SUVs was the reason for the collapse.  Well, where do things stand now in 2013?  Ford and GM just reported September sales.  Pick-up trucks accounted for 29% of their total vehicle sales in the past month (that does not include SUVs).   The chart below, from Bespoke Investment Group, shows Ford pick-up truck sales reaching pre-recession levels:



In the end, companies produce what consumers demand.   The evidence suggests that consumers in the US still like their trucks.   Will things change if gas prices spike once again?  Surely, they will.  How are Ford and GM positioned to respond to such a future shock?  It appears Ford is in a better position, even though it actually has the leading market share in pick-up trucks.  Ford has higher margins in the US, and thus, more room for error.  Moreover, it has several well-regarded passenger vehicles that offer strong gas mileage.  Time will tell, but the story here certainly reinforces the notion that, in the end, the customer is boss.  Companies deliver what customers want, and like it or not, many American consumers still want their trucks.  

Do We Pay For Status?

Conventional wisdom holds that consumers are often "duped" into paying exorbitant prices for luxury goods that serve as status symbols.   Is that true?  Are we paying a significant premium for status?  HBS Professor Daniel Matter has been studying this question for some time.  He argues, "We like to believe that people pay for status for purely symbolic reasons, but the empirical evidence for that has been weak at best."  He explains, "To get at the symbolic value of status, we have to find evidence that buyers are willing to place a premium on status, holding constant quality and the reputation for quality... Look around and you may be hard-pressed to find a high-status producer that consistently produces second-grade products or a low-status producer that consistently produces first-grade products."  Matter's research suggests that the conventional wisdom may not be true. Consumers aren't being duped after all.  They aren't paying for status over substance, in most cases.  It's an interesting perspective.  For more, check out this article on the HBS Working Knowledge site.

Where's Your Focus? Underperformers vs. High Performers

Building on my last post, I noticed an interesting column in Fortune by Anne Fisher this week.  The title is, "Tell-tale signs your employees are job hunting."  In the article, Fisher quotes Paul McDonald, an executive at staffing firm Robert Half International.  McDonald talks about how managers can improve talent retention.  He says,

"As managers, we spend most of our time on problems, including underperforming employees, and on getting our own work done. Budgeting time for high performers becomes almost an afterthought," he observes. "What works a lot better is flipping that order on its head, putting top employees first, then our own work, then problem employees." Easier said than done but, as holding on to stars gets harder, it's worth a try."

I am in total agreement with McDonald on this point.   I think managers have to ask themselves five questions about how they are managing underperformers vs. high performers:
1.  With which group am I spending the bulk of my time?

2.  Am I checking in regularly with my most talented folks to see what their needs and goals are?

3.  In what ways, beyond pay and promotion, am I recognizing high achievement, both publicly and privately?

4.  Do I invest my development resources mainly to improve the skills of low performers or to help take high performers to next level?

5. Am I dragging my feet in addressing poor performance issues, and as a result, creating disillusionment and frustration among my top employees?

Executives Are Not Loyal Either

How many times have you heard senior leaders in an organization complain about the lack of loyalty among lower-level employees?  They bemoan how hard it is to retain key talent.  Some even get quite frustrated about what they perceive as disloyal behavior on the part of those who choose to leave for other opportunities.  Well, a new study by Peter Cappelli and Monika Hamori shows that senior executives perhaps should look in the mirror.   Cappelli and Hamori studied information collected from a leading executive search firm. They discovered that 52% of the senior executives approached by the recruiters responded with an expression of interest in an outside opportunity.   They became candidates for an outside position.  Cappelli found the number quite surprising. 

What's the implication here?   Certainly, senior executives need to think about the conflicting messages that they are sending their employees.  If they are frequently entertaining outside inquiries, then how can they expect different behavior from their staff?   Moreover, executives need to think about their talent development programs and succession planning processes.  Why do many people consider leaving?  Their firms aren't investing in their development, and/or they don't see a clear path to advancement. 

One final interesting finding from the study:  Executives with greater career breadth, either outside the firm or within the firm, tended to be more likely to become candidates for outside positions.  In other words, moving people around to different units, regions, and functions can be good for your company and for the employees' development, but it may have one adverse effect.  It may actually make those people more open to moving to a new opportunity outside the firm. 

The Problem with Enterpreneurs' Pitches

Steve Blank, lean startup guru, has made a strong argument for what's wrong with how investors often judge entrepreneurs.   In many startup accelerators, "demo day" is when the entrepreneurs get to pitch their concepts to prospective investors.  However, Blank argues that, these demo days often turn into "beauty contests in bikinis for investors."  He stresses that the tendency exists for investors to focus on the quality of the presentation, rather than the content/substance of the business concept.  I think he's right.  Being able to craft an "elevator pitch" is a very useful skill, but in the end, we can end up focusing too much attention on how articulate the person is.  We need to remember that substance should trump style.

How The Brain Works

Belle Beth Cooper has a terrific column at Fast Company today, focusing on 10 surprising findings from research on how the brain works.   I highly recommend reading the entire article.  Let's focus on a few highlights here.  Cooper cites some interesting research on multi-tasking. She writes:

Multitasking is something we’ve long been encouraged to practice, but it turns out multitasking is actually impossible. When we think we’re multitasking, we’re actually context-switching. That is, we’re quickly switching back and forth between different tasks, rather than doing them at the same time.  The book Brain Rules explains how detrimental “multitasking” can be:  "Research shows your error rate goes up 50%, and it takes you twice as long to do things."

Cooper also writes that, "Our vision trumps all other senses."  She excerpts from the book, Brain Rules again:  

Hear a piece of information, and three days later you’ll remember 10% of it. Add a picture and you’ll remember 65%.  Pictures beat text as well, in part because reading is so inefficient for us. Our brain sees words as lots of tiny pictures, and we have to identify certain features in the letters to be able to read them. That takes time.

I found these two findings particularly interesting, because leaders often fail to adhere to these principles.  They find themselves multitasking very frequently.  Often they complain about how many meetings they attend, how little time they have to think, how many emails they respond to, etc.  However, they never confront the fact that multitasking may not be increasing their efficiency at all.  Instead, it may be harming their effectiveness.  Similarly, leaders often forget to communicate visually.  They give speeches, send emails, and the like... but they don't offer a good visual to tell their story.  I'm not suggesting the use of more Powerpoint!  I am thinking about the use of pictures, storyboards, and other mechanisms to communicate a vision or a strategy. 

 

ESPN Faces New Competition

The Wall Street Journal reports that ESPN is launching a significant advertising blitz in support of its "SportsCenter" franchise.  For the first time, ESPN will be advertising the program on other platforms besides its own networks. 

What has triggered the new campaign?  Clearly, the launch of Fox Sports Network and its flagship nighttime news and highlights show has caused some concern in Bristol (headquarters of ESPN).   ESPN, in fact, faces a number of new rivals.   NBC and CBS both now have cable sports channels, and many of the regional sports networks run their own nighttime news and highlights shows to compete with ESPN SportsCenter.

What's caused all the new competition to emerge?  In my view, television networks have focused even more intensely on sports in recent years, because live sports draws young audiences in a world where those young viewers can access other programming content via DVR, Netflix, HBO, the web, etc.

At this point, many of the competitors offer shows that do not look and feel dramatically different than SportsCenter.  The real threat will come if someone figures out how to differentiate successfully.  Beyond that, the threat to ESPN comes as much from substitution as it does from imitation. What do I mean by that?  A preoccupation with new rivals should not preclude ESPN from thinking about the fact that many young people can learn about scores and watch highlights from their tablets and smartphones, and therefore, may be less likely to watch SportsCenter than in years past.  ESPN has done a great job of offering other ways of accessing content, but of course, there are a plethora of options out there for news, scores, and highlights.  Just in the way that SportsCenter made the sports segment on local evening news fairly irrelevant, now digital platforms may be putting a dent in SportsCenter.

Kind Healthy Snacks and Starbucks

BusinessWeek has an interesting article this week about Daniel Lubetzky, founder of Kind Healthy Snacks.  His natural snack bar company has become quite a success, amassing $120 million in sales last year.  The article describes how Starbucks wanted to acquire Lubetzky's firm or engage the company to produce private label snack bars for the coffee giant.  Lubetzky refused.  He explains his thinking:

I’ve had years to internalize the question, and for me the answer is that building a brand that’s obsessed about quality is inconsistent with offering people private-label solutions. If you start competing in the private-label business, it’s all about cost. A competitor might offer to do something for 5¢ less, and now you have to start cutting corners. It’s our reputation.

Note the word inconsistent.  Great strategies exhibit high internal consistency, that is the whole is worth more than the sum of the parts.  The different choices and activities of the firm are well-aligned.  Lubetzky viewed private label production as inconsistent with the premium differentiated strategy that he was pursuing.  He goes on:

We couldn’t see ourselves running two businesses. If you’re training a team to obsess over quality, do you blow the whistle and say: Now we’re going to run a shift where we’re going to focus on cutting costs? If you’re in a volume-driven business, it’s probably OK. But if you’re building a brand and an experience, it’s incompatible.

Too many companies want to be all things to all people.  They don't recognize that it becomes very difficult to operate two fundamentally different strategies within the same organization.  Take a look at the cola business. Cott is a private label giant in the soda business.   They can focus intensely on the notion of driving down costs and operating efficiently.  Coca-Cola produces a premium branded portfolio of products. They can focus intensely on creating a brand that resonates emotionally with customers.  The two each have perfected the activities that support the very different missions.  Trying to do both would, in many cases, mean being not as good as either "pure play" strategy could achieve.   

Whole Foods Parody

If you haven't seen comedienne Kelly MacLean's hilarious essay about Whole Foods, you must take a look.  Her post appeared this week on the Huffington Post blog, and it has become a viral sensation.  I'm a big fan of the store, as is MacLean, but it's still very funny.  I haven't seen any official response from the firm.  It would be interesting to see if they have fun with a response, or if they choose to just ignore the blog post.

Understand vs. Like: Changing the Question

I had the opportunity today to teach a 1/2 day session at the Defense Acquisition University in Ohio.  One defense program manager offered me an important lesson.  He said that he always encourages his team members to ask two questions about any decision that he makes:

1.  Do I like this decision?

2. Do I understand this decision?

He points out that nearly everyone asks themselves the first question.  He focuses on shifting the conversation to the second question.   He stresses to his team members that they may not always like the decisions he makes.  However, he has failed if they do not understand the decisions.  Do they comprehend the rationale? criteria?  role they will play during implementation?   He cannot always please everyone on the team.  However, he must have strong shared understanding, if the implementation is to be successful.   I love it.  What a simple way to communicate to the team the importance of shared understanding, as well as to remind them that it's unlikely that all decisions will have unanimous support.  

Four Behaviors of Innovative Leaders

Forbes has produced a great interview titled, "The Four Behaviors of Innovative Leaders" to complement its article on the most innovative companies in the world.  Check it out.

Valuing Generalists over Specialists

City University of Hong Kong Professor Long Wang and Kellogg Professor Keith Murnighan and have conducted a series of studies to examine whether we value generalists over specialists in various types of hiring and compensation decisions.   They found that we do seem to undervalue specialists.  First, they took a look at 3-point shooting specialists in the National Basketball Association.  In this article on Kellogg Insight explains the conclusion:

"In one study, Wang and Murnighan used salary and performance data for over 300 NBA players to find that, on average, the three-point specialists’ salaries are tied not to their three-point shooting, but to their two-point shooting—even though their three-point shooting has the bigger impact on their team’s performance. In other words, these specialists, unlike their generalist teammates, are not compensated based on the actual role they play in their teams’ success."

The two scholars also examined how workplace managers make hiring decisions.  They found a tendency for managers to favor the generalist even if the specialist had skills better suited to the specific role being filled.   The researchers also examined job ads on sites such as Monster.com.  They found that, "Even positions flagged for specialists asked applicants to have skillsets in two distinct domains about 36% of the time. Moreover, larger organizations—those organizations best poised to take advantage of specialists’ unique skillsets—were more likely to demand multiple skillsets from their specialists than smaller organizations." 

Why the bias toward generalists?  The authors argue that risk aversion plays a role.  It's safer to pick someone who has a broader set of skills, in case the job changes or the person turns out not to be a perfect fit for that role, but may still have a place in the firm.   Moreover, our tendency to hire people like ourselves may play a factor.  Managers at higher levels tend to be more generalist than specialist, and thus, they may look for people who are similar to them.  

I think the studies are fascinating, but I do wonder whether this "bias" is truly a bad thing or not.  Perhaps, in a fast-changing world, we need more generalists.  Perhaps strategy, organization, and markets are changing too quickly to bank on specialists.   In a highly ambiguous situation, it may be quite the rational thing to do to select people with a wider range of skills.  It's a tough balancing act for any manager.  Perhaps the research is most useful at least in making us aware that we may be a bit too inclined to dismiss the specialist candidates.  

Wisdom of Crowds vs. Herd Behavior

The Wall Street Journal reports this morning about a new study by scholars Lev Muchnik, Sinan Aral, and Sean Taylor.  The researchers examined, "positive online ratings can be strongly influenced by favorable ratings that have come before."  They found that initial positive ratings did create herd behavior.  Ratings that followed were more likely to be positive as a result of the influence of the initial evaluations.  However, initial negative ratings did not lead to similar herd behavior.  

What's the lesson here?  First, the wisdom of crowds depends upon the notion that each individual is making an independent judgment.  Unfortunately, human beings are subject to social influence.  We aren't as independent-minded as we would like to believe.  Second, social influence doesn't just affect us when we are in a group having a discussion.  It can affect us in virtual settings as well.   Third, social influence does not just affect us when we know the other people involved.  An anonymous individual can exhibit influence over us, as is the case in this study.   Well, those conclusions paint a rather bleak picture, don't they?  We have to be aware of the power of social influence, and we cannot pretend that we are somehow immune to such bias.  Herding behavior is everywhere. 

Building Buzz for Fall TV Premieres

The ABC television network has announced that three comedies premiering this fall will actually appear first online.   Viewers can watch the premiere online before they will debut on the network.  The comedies are The Goldbergs, Trophy Wife and Back in the Game (see trailer for The Goldbergs below).   The goal is to create some excitement for the show and begin to build word-of-mouth ahead of the network premiere. Presumably, social media will be a big part of that buzz-building strategy.  In general, I'm pleased to see the networks doing some innovating.   As readers of this blog know, I've been critical of how the broadcast networks have stuck to an antiquated model for prime time television (fall premieres, shows on once per week, etc.).   The networks do face one risk with this type of strategy though.  They will have to be very mindful of what's happening on social media, but they should not overreact.   Immediate Twitter reactions are not always representative of the broader audience.  The creators of the shows do not want to change course dramatically without putting social media response in context.    On the other hand, it is very useful information that could be used to adjust the direction of a show.   In decades past, many network shows changed considerably during their first season or two.  We sometimes forget that the shows did not come roaring right out of the box as we now recall them.  As an example, do you remember that the Cunninghams actually had three children during the first season of Happy Days, or that the Cosby family magically added a child during the second season of  The Cosby Show?   Shows do change and adapt a fair amount int that first season or so.  Social media and the early response to these online premieres could be helpful today in adapting shows, not simply in building buzz. 

Price Wars in the Detergent Aisle?

The Wall Street Journal reports that P&G is considering a less expensive version of its Tide laundry detergent again.  The company has witnessed "value" brands taking share from the premium branded products in the detergent aisle.  Several years ago, P&G tried to cope with that threat by offering Tide Basic, but it abandoned that effort as a result of consumer confusion and fears about cannibalization.  Here's an excerpt from the WSJ article: 

A decision to offer a lower-priced version of the premium brand carries the risk that buyers of regular Tide could trade down and stay there.  Indeed, three years ago P&G scrapped a lower-priced powdered detergent called Tide Basic, which was tested for about a year. P&G said consumers were having a hard time distinguishing between the bargain version and the regular priced variety. The company's concern was that regular Tide users would trade down to Tide Basic, for instance, but be unhappy that it didn't clean as well as regular Tide.

As clearly indicated from the excerpt above, P&G faces some significant risks with a decision to offer a lower-priced version of Tide.   The decision also brings other challenges though.  At the end of the article, we see a quote from a rival company's CEO.  Church & Dwight Chief Executive Jim Craigie states, "It'd be a terrible mistake, I think, if they pulled the price lever on some of their businesses.  Nobody wins a price war game."   This quote points out that P&G, as the category leader, has the ability to influence industry structure.   Launching a low-end version of Tide could trigger a price war, and thereby diminish the overall attractiveness/profitability of this category.  P&G may improve market share, but at the expense of profits for themselves and the industry as a whole.

The Church & Dwight CEO recognizes that you can influence the competition through signals and statements.  It appears that he's trying to signal to P&G that the introduction of a low-end Tide product would trigger an aggressive response by his firm.   In so doing, he may be trying to deter entry into the lower-priced segment which his firm has excelled in over the past few years.  One wonders if his firm (and others) are trying to send other signals to deter a Tide entry into the value segment. 

Microsoft Acquires Nokia?

News reports today startled many tech industry observers and analysts... Microsoft will acquire Nokia's mobile phone business for $7 billion.   What can we conclude from this announcement?

1.  Years ago, Apple seemed the outlier when Steve Jobs insisted on being a fully integrated player, creating and selling both hardware and software.   Microsoft, under Bill Gates, chose to build the operating system and other software, leaving the production of PC hardware to others.  At the time, it was a wise move.  The PC industry has been a structurally unattractive market for many years.  Microsoft and Intel made tons of money, but most hardware manufacturers operated on very thin margins (or ceased to exist).   As the shift to mobile occurred, however, owning both the hardware and the software business became more important.  It enabled companies to produce better mobile device experiences for the customer.   As a result, we have seen many players follow Apple toward more integrated strategies.  Google purchased Motorola.  Now Microsoft has acquired Nokia.   What's interesting, of course, is that Microsoft and Nokia have been working together quite closely for several years.  Investors should ask:  What precisely can you now do that you could not do as strategic partners?  Undoubtedly, we will hear Microsoft echoing the kinds of arguments that Steve Jobs often made about the virtues of hardware and software integration.  How ironic is that!

2.  The timing of the deal seems rather odd.  Ballmer announced his retirement just a week ago. Now, Microsoft announces this major acquisition.  How will this move affect the search for a new CEO?  Wouldn't a new leader not want to be constrained by the strategic moves of his predecessor?  The Board of Directors will find itself with a more complicated search now, particularly if they are looking to outsiders as candidates.  

3.  Can a merger of two companies in weakened positions work?  In many cases, it seems that such marriages do not work.  In fact, acquisition integration becomes a further distraction to organizations already under duress.

4.  Is this move part of a broader strategic reshaping of Microsoft?   Many people have suggested that Microsoft should break itself into several pieces (separating some of the consumer businesses from the enterprise businesses).   I thought that such a move might come under a new CEO, but could it happen sooner?   One could now envision a scenario, though unlikely, where the firm announces a breakup and launches a search for two CEOs, one for each part.  

Physical Tools for Better Brainstorming

Fast Company Associate Editor Margaret Rhodes has written an article about an interesting new set of physical tools designed by Smart Interaction Lab to facilitate better brainstorming.   The Totem series of objects includes Alterego - a set of rings designed to help a group bring Edward De Bono's six thinking hats technique to life during a brainstorming session.  The video below demonstrates the Alterego tool.  The Totem series also includes the Baton - a simple device designed to give one person the opportunity to talk, while others listen carefully and actively.  The third device is called Echo.  According to Smart Interaction Lab, 

"Echo is a recording/playback bell-like device that can fit easily and comfortably into any setting—from creative spaces, to the living room of your home, to cafes. Echo works in two ways: it records the background noise from wherever it is placed, and as soon as a user picks it up and puts it to their ear, Echo will play back what it previously recorded. By shaking it, Echo will randomly play back other sound bytes from other parts of the day. The main aim of Echo is to help users get inspired by other adjacent creative conversations, keywords, and quirky background noises that we would not be able to pick up on without the help of technology."

As the Fast Company article notes, no one has researched the effectiveness of these tools yet.  However, I do believe that these tools are worthy of further testing and experimentation.  Teams should try these out and see if they can enhance the quality of brainstorming dialogue.  Keep in mind though.  The tools alone will not enhance brainstorming effectiveness.   The tools bring to life or remind us of key principles about how to have productive creative conversations.  We still need to have the discipline to use those principles.  The objects are reminders, but they can't dictate the right behavior. 

TOTEM: ALTEREGO by Smart IxD Lab for BCN Maker Faire from Smart InteractionLab on Vimeo.

Questions about Amazon

Vacation was wonderful, and now it's back to preparations for the new academic year... as well as a return to blogging.  As I'm catching up on various business news, I began thinking a great deal about the future of Amazon.  I have a few questions for readers to ponder:

1.  Will Amazon reach a point of  diseconomies of scale and scope sooner rather than later?   Many firms strive to achieve the benefits of size and scope, hoping it will juice their profit margins and overall return on invested capital.  At some point, though, size and scope become a handicap rather than a strength.   The complexity of managing a large, multi-business enterprise becomes problematic.  As we watch Amazon, as well as its founder Jeff Bezos, moving into more and more lines of business, one has to wonder whether the company will reach that point of diseconomies BEFORE it ever generates strong profit.  For years (17 years, in fact), investors have bet on Amazon, in hopes that its strategy would eventually yield high profits.  They have been very patient, incredibly so in fact.   What if the profits never materialize because Amazon gets too big and complex to manage?  I'm not predicting this fate, but I am wondering about how thin Bezos may become stretched as the company expands, and as he engages in other ventures such as the Washington Post.

2.  What exactly is the Amazon business model, and how new is it?    I read the other day that Amazon Prime accounts for a significant share of the company's rather thin profits.   That reminded of another business model.  Think about Costco.   The successful company makes a big chunk of its money from the membership fee.  Amazon Prime is essentially the membership fee.  In other words, Amazon's business model resembles Costco much more so than a traditional retailer.   Most warehouse clubs operate with very thin margins, and they use the membership fee as their profit engine.  Amazon may be the same, more similar to brick-and-mortar retail than many have imagined.