February 17, 2006

Growth is about focus, not expansion

Steve Jobs, CEO Apple Computer and largest shareholder of the Walt Disney company:

"I'm as proud of what we don't do as I am of what we do."

No low-end products made for sale at Wal-Mart; no movement to markets that don't offer Apple a leadership position. Instead, growth through focus. Not expansion.

February 14, 2006

The bronze medal effect

People who create real growth, rather than just free-riding on rising commodity prices (Feb 7 post), know how to look for opportunities, build support for seizing them, and then use momentum to move things forward. The Olympics provide some insight into the momentum generation part of all this.

Momentum comes from creating a series of small successes. But where does the first early win come from? By focusing time and resources growers find a way to accomplish something, however small, in the direction in which they want to move. Growers know that motivation does not precede action, but it comes from it. So the basic idea behind generating momentum is simple: do something, something easy if possible, but still likely to advance your cause from wherever it is now. This serves to prime the pump and motivate more action, which in turn further ratchets additional motivation.

The idea of initial “small successes” is important. Ironically, limited early success may be more useful for motivational purposes than an initial bigger win. Call it the “bronze medal effect.” Studies of Olympic game winners find that bronze medalists tend to be happier about their victory than those winning the silver (see James Shepperd and James McNulty, “The Affective Consequences of Expected and Unexpected Outcomes,” Psychological Science, Jan. 2002, p. 85.).

Olympians, like the rest of us, tend to compare what occurred with what might have been. For bronze winners, the most likely alternative is getting no medal, while most silver medalists focus more on having lost the gold than on their victory over the bronze holders. It is possible to be objectively better off than others, but feel worse about it - our minds work in strange ways. Expectation management is an important part of momentum creation.

Small wins are also safer. They are visible enough to establish an idea’s viability, but not so large as to arouse jealousy, or threaten already well-established activities. A string of small victories at the outset of a growth initiative can be more useful than one lucky big win. Bronze can trump gold.

February 10, 2006

Is a bigger executive paycheck a better one ? (part 2)

This week New Yorker columnist James Surowiecki joins the chorus of concern about bigness (see Feb 7 post) in executive compensation. He cites a study by professors Gerald Garvey and Todd Milbourn:

“Executives are rewarded far more for good luck in their industry (like rising oil prices that they had no control over) than they are punished for bad luck.”

Overpaid CEOs may be more than just expensive, says Surowiecki. They are often downright destructive:

“One recent study of the market between 1992 and 2001 by economists at Rutgers and Penn State found that the more a CEO was paid, relative to his peers, the more likely his company was to underperform in the stock market.”

Another study, this one by finance professors Jarrad Hartford and Kai Li, concludes:

“Very highly paid executives are more likely than their peers to make acquisitions, and to receive major financial rewards for doing so, even when the acquisition ends up destroying corporate value.”

There are many populist arguments for reining-in executive pay, and relating it to performance, not position. There are also strong ones based on management theory – paying the top people hundreds of times more than those in the rest of the organization isolates them and destroys corporate cohesiveness. But some of the most compelling are those that show how bloated pay also makes poor economic sense.


February 07, 2006

Is a bigger executive paycheck a better one?

It may be, provided the company's other constituents also fairly benefit. That's one way of looking at it.

But what if the pay lifts into the stratosphere because of something the executives had no influence over? Each dollar increase in the price of oil – from, say, the Iraq War and soaring demand in China - drives up Exxon Mobil’s earnings by 1.5%. And earnings growth drives many executive pay packages.

Gretchen Morgenson (in her Feb 5, 2006
New York Times column) observes:

“When a company does well mostly because of a rising commodity price rather than managerial genius, pay-for-performance becomes an unfunny joke.”

Free rides may be nice if you’re the passenger. Just don’t confuse them with real growth. The work-around for this is simple: don't base bonuses on absolute performance. Set them in comparison to how others in the same industry are performing. Pay for moving ahead of the pack, not just riding the rising tide. This might incentivize actual forward movement, not just sitting in the right place at the right time.

February 03, 2006

Coke vs. Pepsi: growing beyond the cola wars

As happened with Dell and Apple (see Jan 16 post), the old Coke vs. Pepsi rivalry took a new turn last December when PepsiCo’s market capitalization surpassed Coca-Cola’s. According to Katrina Brooker, a senior writer at Fortune:

"Losing the cola wars, it turns out, was the best thing that ever happened to Pepsi. It prompted Pepsi's leaders to look outside the confines of their battle with Coke."

Why did Pepsi move forward, while Coke got stuck in the mud? Here’s how it’s explained in Chapter 3 of Bigger Isn’t Always Better:

PepsiCo does not have an iconic product like Coca-Cola. This lack of sentimentality about its core brands has made it easier to grow its business in directions led by changing consumer tastes – Aquafina, Gatorade and snack foods. Coca-Cola, on the other hand, runs the risk of its values hardening into dogmas and its icon becoming a millstone, keeping it from pursuing the expanding markets for New Age teas, gourmet coffees, performance drinks and health beverages. Sidney Finkelstein, a Dartmouth College management professor, warns his students of the danger of learning a lesson too well. He says many business leaders have a “defining moment,” a key decision or choice they once made that has made them famous and thereafter become what they are most known for. Unfortunately many find themselves so defined by that moment that they keep trying to repeat it throughout their careers, regardless of how well it fits current circumstances. It is not that they have not learned, their problem is they have learned one thing too well. Letting go of proven past practices is a struggle, but it is a prerequisite for moving forward. As University of Michigan’s C. K. Prahalad likes to say, the “forgetting curve” may be much more important than the “learning curve.”

The opposite of letting go is “momentum thinking” – assuming what prevailed in the past will continue. Sometimes it does. If the current formula works well, and the world in which the business operates shows no sign of changing anytime soon, it is time to optimize the formula, not to set out in quest of a new direction in which to grow. But when dominating ideas are out of sync with reality, all the operational improvement in the world will not help things. And an escalating commitment to the status quo, in that circumstance, only puts the future at risk.

Coke’s famous formula may have been the driver of its past glory. But it also may be a major roadblock to its future.


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