The Real Reasons Companies Are So Focused on the Short Term
Anne Marie Knott

https://hbr.org/2017/12/the-real-reasons-companies-are-so-focused-on-the-short-term


Quite thought provoking.

We have a slight change for our April Driving Org Growth class at Kellogg because of a conflict with Easter Sunday. We will begin the class on Monday, April 2, 2018 and end on Thursday at 4:00PM.

As this will be my last posting this year, I would like to wish all of you the best for the New Year!!

This has been a remarkable year for the markets.  The S&P and the Dow indexes are up 18% and 19%, respectively.  But this run-up isn’t based on solid business foundations.  Quarterly profits have only increased 5% since 2012, but investors’ valuations of those profits (as measured by earnings per share) has increased 59% over the same period. What’s behind the disconnect?  Some argue that profits are stagnant because of short-termism—that decades of focusing on current profits over long-run innovativeness has resulted, now, in companies that are hollowed out. 

Indeed, a study by Rachelle Sampson and Yuan Shi found that company short-termism is negatively correlated with innovativeness, measured as RQ (“research quotient,” a measure of the return on R&D investments). Investors punish companies with a short-term orientation by applying higher discount rates to them, which increases the cost of capital for those companies. In contrast, companies with a long-term orientation are rewarded with a lower cost of capital, which allows them to afford more innovation—a virtuous cycle. 

Most attempts to combat short-termism are flawed because they focus on changing CEO behavior through some combination of pleading and incentives. While well-intentioned, these efforts fail to recognize that CEO behavior is largely circumscribed by firm structure.  In particular, there are three widespread, interrelated structural trends that have fostered short-termism and reduced corporate innovativeness: increased hiring of outside CEOs (particularly from the late 1980s through the 2008 recession); the decentralization of R&D (over a similar time frame); and a focus on the “development” side of R&D rather than the “research” side. Below, I’ll expand further on these trends and explain how reversing them would reduce short-termism and revive growth.
Instead of hiring outside CEOs, hire insiders—or at least CEOs with domain expertise.
One trend that has contributed to short-termism and lower innovativeness is the increased prevalence of outside CEOs.  From 1970 to 2004, the percentage of CEOs hired from outside the firm increased from 12% to 39%. 

While outside CEOs are valued because they bring new perspective, my colleague, Trey Cummings, and I believe they impose a hidden cost to innovation at firms whose growth derives from R&D (roughly 49% of firms).  We came to this conclusion through interviews with CTOs across a range of industries, which we conducted as part of an NSF study to identify factors explaining differences in firms’ RQ.
A recurring theme in those interviews was bemoaning major changes in R&D strategy that occurred as a consequence of new, often outside, leadership.  In these stories, firms shifted from an orientation of “R&D as a driver of growth” to “R&D as an expense.”  What was reported to happen as a consequence of this shift was a steady decline in firms’ R&D intensity (R&D/Sales) and a corresponding decline in firms’ R&D capability. In other words, the new leader’s disinvestment cut meat as well as fat.
While the identity of the interviewed firms is confidential, it is easy to find similar examples from publicly available accounts in other firms. Consider GE during Jack Welch’s tenure, Trimble Navigation under Steve Berglund, or IBM under Lou Gerstner. In all three cases, our analysis shows, there was a decline in R&D investment followed by a decline in the returns on that investment (RQ). 

We also know some details about how R&D strategy changed in these cases:  GE shifted to strategy of divesting businesses in which they were neither number one or two in their markets (televisions, semi-conductors, and aerospace) and expanding into businesses that didn’t rely on R&D (NBC, GE capital); Trimble shifted from a strategy of developing its own technology to one of acquiring other firms for their technology; and IBM shifted to a strategy of reducing R&D while patenting the stock of existing innovation (increasing patents almost 500%).  The shift in patenting policy was not to protect innovations, but rather to license them and/or to use them as chips to gain access to other firms’ technology. 

Why do these shifts occur? We believe, and now have correlative evidence, that it’s because outside CEOs are less likely to possess the technological domain expertise necessary to drive growth from R&D. When CEOs lack this expertise, they are more likely to manage R&D “by the numbers,” despite the fact that those numbers are more elusive than those for capital and advertising.  Indeed, we found that companies with outside CEOs have lower innovativeness as measured by RQ, and that those effects become more pronounced the more R&D intensive the company is and the more technologically different it is from the CEO’s prior company. 

Note the solution is not to avoid outside CEOs. There are many reasons companies benefit from hiring an outsider, such as to effect change.  Moreover, not all outside CEOs lack domain expertise (e.g., CEOs from rival firms); conversely not all inside CEOs have it (CEOs promoted from finance).  Rather, the solution is to ensure that companies whose growth derives from R&D hire CEOs with technological domain expertise.
Instead of decentralizing R&D, recentralize it. 

One of the changes we learned outside CEOs make is decentralizing R&D.  Decentralizing is a natural consequence of managing by numbers because it shifts R&D investment decisions to divisions, where R&D investment can be more readily linked to outcomes.  The problem with giving division managers control of R&D, is that their compensation is typically based on division profits (which they largely control), rather than on the company’s market value (over which they have little control). 

The distinction between current profits and market value is important because market value takes into account future profits, so in principle it captures the long-run returns to R&D.  In contrast, current profits penalize R&D, because accounting rules require R&D to be expensed.  This means all R&D is subtracted from operating income in the year it’s expended, while the payoffs to R&D don’t occur until future periods. Thus the further out the fruits of R&D, the less likely operating divisions are to conduct it. 

My research indicates that companies in which R&D is decentralized have 40 to 65% lower RQ than companies with centralized R&D.  This means they generate less revenue, profit and market value per dollar of R&D.  Perhaps more problematically, a study by Nick Argyres and Brian Silverman found that decentralized R&D produces innovations that have a smaller and narrower impact on subsequent innovation.   

Instead of over-focusing on “development,” shift the portfolio back toward “research.”
The logic underlying the push for decentralization and greater relevance of R&D is that R&D directed by divisions will be more responsive to what the customer wants. While responding to the customer sounds completely unobjectionable, its vulnerability is best captured in the Steve Jobs quote, “A lot of times, people don’t know what they want until you show it to them.” 

When R&D is directed by divisions, the company fails to invest in the early stage technologies that open up new opportunity. Again, this occurs because division manager compensation is tied to division profits. So in addition to causing R&D to disproportionately favor development rather than research, it also causes R&D to be parochial to the funding division.  This is because there is little incentive to conduct R&D that benefits multiple divisions. 

A real-world illustration of this parochialism comes from the “Organization 2005” initiative at Procter and Gamble (P&G).  The initiative decentralized R&D in an effort to make the big company “feel small” (e.g., to provide greater managerial control and break bureaucratic inertia), as well as to more closely fit the needs of customers.
The result was a dramatic shift at P&G from 90% centralized control of R&D in the 1990s to 90% decentralized control of R&D by 2008. In the words of then-R&D chief Bruce Brown, making business-unit heads responsible for developing new items inadvertently slowed innovation by more closely tying research spending to immediate profit concerns.  Relatedly it led to smaller, more incremental innovation.  While the number of innovations doubled, the revenue per innovation decreased 50%.
One reason revenue per innovation decreased is that early stage research dwindled.  Prior to the decentralization, P&G was known for creating entirely new product categories: first synthetic detergent (Dreft in 1933), first fluoride toothpaste (Crest 1955), and more recently: Febreeze odor fresheners (1998), Swiffer (1999) and Crest Whitestrips (2001). Following the decentralization, and the shift away from research, P&G failed to introduce a single blockbuster. 

This is not a surprise.  In a study with my colleague, Carl Vieregger, we found that across the five most common configurations of R&D allocation, the configuration with the highest RQ allocates twice as much of its total R&D investment to basic and applied research than does the average company. 

While a long horizon is necessary for innovation and growth of companies (as well as the economy), a call to resist the forces of short-termism is unlikely to yield results.  This is because short-termism is now built into company structure, due to the rise in outside CEOs, a trend toward decentralized R&D, and a move away from basic research.  Each of these trends on its own is associated with lower RQ.  Moreover the trends are interrelated: Outside CEOs tend to decentralize R&D, and decentralization tends to decrease basic research. 

But fortunately, these trends can be reversed.  Boards in firms whose growth derives from R&D can begin taking domain expertise into account when hiring CEOs. Further, firms can begin recentralizing R&D, and increasing the levels of basic and applied research.  Prudently applying these prescriptions should increase a company’s RQ, and accordingly its revenues, profits, and market value from R&D.  This will generate fundamental growth of firms, rather than merely growth in their valuations.

The Fallacy of The Next Big Thing

https://medium.com/@kumarmehta_16246/the-fallacy-of-the-next-big-thing-2db25e969f58

I thought this was pretty interesting.

Just want to announce that our next Org Growth class at Kellogg is scheduled for April 2 to the 6th. In case you were unaware, the class was extended for a full day which enabled us to add two additional, critical discussions-- how to most effectively build the new Capability Platform from acquisitions to alliances AND a more in depth discussion on on decision biases that are critical to understand in any process or endeavor. The ratings are through the roof for the program.

Every company is continually looking for the next big thing. I can’t count the number of times I have heard executives say something along the lines of “I want to know what’s going to be the next iPhone before it becomes the next iPhone.” Corporations are looking for someone to tell them what trends and products are going to be the big hits. Once they know what the next big thing is (ideally, before everyone else knows about it), they can invest early, create a dominant presence, and reap the rewards. Simple.
Unfortunately, it does not work that way. While my research on innovation has revealed some distinct factors necessary to create breakthrough offerings, it also highlighted some of the misconceptions and fallacies that impede corporations as they try to become more innovative. One of the prime misconceptions in the corporate world today is that companies must continually quest for the next big thing. 

There are three problems with looking for the next big thing. They are, in order, (1) next, (2) big, and (3) thing.
NextRarely do innovations and trends take the world by surprise. One of the consistent themes in the history of innovation is the concept of slow burn, or a slow evolution. Most industry trends are visible and provide clues about the next breakthrough. …Most innovations in history have had a slow evolution process. Things move slowly, but not because they have to; rather, it is because people often don’t see the value in what is being developed and don’t adopt the innovations…..In the technology industry, where I spent the majority of my career, the trends have always been clear. They were the PC, the Internet, mobile devices, the smartphone, and the cloud. Today the trends include AI, machine learning, and other developments. The innovators were the ones who rode these trends to create fantastic products that customers embraced. They created business models that produced gravity-defying profits, and ecosystems that built a generation of entry barriers. Microsoft did not create the first computer operating system. Google did not create the first search engine. Facebook did not create the first social platform. Apple did not create the first portable music player or the first smartphone. None of these trends were a secret; they were available to everyone to build societal value. None of these companies were first to market; instead they did it better or engaged their users in better ways..BigThe second fallacy of the continual search for the next big thing is “big.” Looking at the history of innovations, rarely does something become big right from the start, and rarely does the innovator know that what they are developing is going to change the world. Few world-changing innovations started with a view to change the world. Few billion-dollar businesses started with a view to earn a billion dollars. The one thing they had in common was that they altered customer experience through a unique approach and, in the process, created an immense amount of value for their users.As we know now, Google became big — very big. The “big” happened not by executing a plan to build a world-changing company but by providing a big improvement to the experience of users — a large experience delta, the difference between the current experience and the new one. The business model (based on advertising revenues) that created over half a trillion dollars of market value was not part of a grand plan, but as the company increased its value to society, society figured out a way to reward the company…..…In looking for the next billion-dollar opportunity, corporations spend countless hours doing strategic planning and modeling how their new initiatives will generate massive financial returns... .l. These plans rarely focus on customer experiences, because these are nebulous, or on products that inspire customers on a small scale, because although these small changes might add up to enormous changes for society as a whole, they don’t visibly move the corporate needle…..Worse yet, inspiring ideas and innovations that could be breakthroughs often get shoved aside (like the first digital camera developed at Kodak) because they don’t fit with the existing business model or have a billion-dollar plan…...So keep in mind that the big opportunity you are chasing may actually appear as something quite small. The key is to learn to recognize the opportunities that alter experiences and to understand and articulate how these customer experiences are transformed. Once you can do this, even at a small scale, the chances are high you’ll find the right opportunities that will evolve into the big game changers we are all looking for.ThingThe third flaw in the relentless search for the next big thing is the “thing.” My research has shown that there are two main problems with this. The first is that an innovation is often not a physical thing — a product. The second misleading aspect of “thing” is that the value of the innovation is often not in the thing that is being developed; the real value is in how an invention is supported — something I call the “thing behind the thing.” Let me explain both of these misconceptions.The thing is not a thing..…..companies have always enjoyed unparalleled success not by selling things but by providing value in other ways. Innovation can come in many forms, and even if you are a product company, it would be wise not to think about innovation as solely the creation of new products.
The thing behind the thingThe second issue with focusing on the thing is that the invention we think of as being the innovation is often not the main creation — it is something else. Sometimes, the key to the success of an innovation is an entire system of supporting developments. These supporting developments are the thing behind the thing, essential elements without which there wouldn’t be an innovation. For example, everybody thinks of the wheel as one of the greatest inventions of all time, enabling the first information and commerce highway in history. When you study the invention of the wheel, you learn that creating the wheel was the easy part; the hard part was connecting it to a stable platform. The true innovation was in the development of the axle, and it was the combination of the wheel and the axle that allowed the wheel to have a transformative effect on society. The axle was the thing behind the thing…..How to think about innovation in light of the next-big-thing fallacy…..Given the fallacies about the next big thing, your company should take a new approach when thinking about innovation. To start with, you need to have a deep-seated understanding of the trends in your business and of new developments that are being worked on within your own organization, other companies in your sector, and other sectors.. .…You will also need to experiment more and increase the number of new bets you make. Your rate of success will increase once you have a culture of innovation — when launching new offerings to customers is part of your company’s DNA. Not all the new bets will have breakthrough success, but if you get in the habit of launching offerings geared toward transforming customer experiences, the rate of innovation will increase.Finally, don’t think about new product introduction as the only way to innovate. Think about all the other forces that can make your product more successful. Think of the things behind the thing. Think of ancillary benefits that can provide insanely high customer value and make an existing product irresistible. .

How Coca-Cola, Netflix, and Amazon Learn from Failure
Bill Taylor
NOVEMBER 10, 2017

https://hbr.org/2017/11/how-coca-cola-netflix-and-amazon-learn-from-failure

Thoughts on failure well captured

Why, all of a sudden, are so many successful business leaders urging their companies and colleagues to make more mistakes and embrace more failures? 

In May, right after he became CEO of Coca-Cola Co., James Quincey called upon rank-and-file managers to get beyond the fear of failure that had dogged the company since the “New Coke” fiasco of so many years ago. “If we’re not making mistakes,” he insisted, “we’re not trying hard enough.” 

In June, even as his company was enjoying unparalleled success with its subscribers, Netflix CEO Reed Hastings worried that his fabulously valuable streaming service had too many hit shows and was canceling too few new shows. “Our hit ratio is too high right now,” he told a technology conference. “We have to take more risk…to try more crazy things…we should have a higher cancel rate overall.” 

Even Amazon CEO Jeff Bezos, arguably the most successful entrepreneur in the world, makes the case as directly as he can that his company’s growth and innovation is built on its failures. “If you’re going to take bold bets, they’re going to be experiments,” he explained shortly after Amazon bought Whole Foods. “And if they’re experiments, you don’t know ahead of time if they’re going to work. Experiments are by their very nature prone to failure. But a few big successes compensate for dozens and dozens of things that didn’t work.” 

The message from these CEOs is as easy to understand as it is hard for most of us to put into practice. I can’t tell you how many business leaders I meet, how many organizations I visit, that espouse the virtues of innovation and creativity. Yet so many of these same leaders and organizations live in fear of mistakes, missteps, and disappointments — which is why they have so little innovation and creativity. If you’re not prepared to fail, you’re not prepared to learn. And unless people and organizations manage to keep learning as fast as the world is changing, they’ll never keep growing and evolving. 

So what’s the right way to be wrong? Are there techniques that allow organizations and individuals to embrace the necessary connection between small failures and big successes? Smith College, the all-women’s school in western Massachusetts, has created a program called “Failing Well” to teach its students what all of us could stand to learn. “What we’re trying to teach is that failure is not a bug of learning it’s the feature,” explained Rachel Simmons, who runs the initiative, in a recent New York Times article. Indeed, when students enroll in her program, they receive a Certificate of Failure that declares they are “hereby authorized to screw up, bomb, or fail” at a relationship, a project, a test, or any other initiative that seems hugely important and “still be a totally worthy, utterly excellent human being.” Students who are prepared to handle failure are less fragile and more daring than those who expect perfection and flawless performance. 

That’s a lesson worth applying to business as well. Patrick Doyle, CEO of Domino’s Pizza since 2010, has had one of the most successful seven-year runs of any business leader in any field. But all of his company’s triumphs, he insists, are based on its willingness to face up to the likelihood of mistakes and missteps. In a presentation to other CEOs, Doyle described two great challenges that stand in the way of companies and individuals being more honest about failure. The first challenge, he says, is what he calls “omission bias” — the reality that most people with a new idea choose not to pursue the idea because if they try something and it doesn’t work, the setback might damage their career. The second challenge is to overcome what he calls “loss aversion” — the tendency for people to play not to lose rather than play to win, because for most of us, “The pain of loss is double the pleasure of winning.” 

Creating “the permission to fail is energizing,” Doyle explains, and a necessary condition for success — which is why he titled his presentation, with apologies to the movie Apollo 13, “Failure Is an Option.” And that may be the most important lesson of all. Just ask Reed Hastings, Jeff Bezos, or the new CEO of Coca-Cola: There is no learning without failing, there are no successes without setbacks.

Changing Company Culture Requires a Movement, Not a Mandate

• Bryan Walker
• Sarah A. Soule
https://hbr.org/2017/06/changing-company-culture-requires-a-movement-not-a-mandate


Just a fabulous, thought provoking article

Culture is like the wind. It is invisible, yet its effect can be seen and felt. When it is blowing in your direction, it makes for smooth sailing. When it is blowing against you, everything is more difficult. 

For organizations seeking to become more adaptive and innovative, culture change is often the most challenging part of the transformation. Innovation demands new behaviors from leaders and employees that are often antithetical to corporate cultures, which are historically focused on operational excellence and efficiency.
But culture change can’t be achieved through top-down mandate. It lives in the collective hearts and habits of people and their shared perception of “how things are done around here.” Someone with authority can demand compliance, but they can’t dictate optimism, trust, conviction, or creativity. 

What Does a Movement Look Like?
We often think of movements as starting with a call to action. But movement research suggests that they actually start with emotion — a diffuse dissatisfaction with the status quo and a broad sense that the current institutions and power structures of the society will not address the problem. This brewing discontent turns into a movement when a voice arises that provides a positive vision and a path forward that’s within the power of the crowd. 

What’s more, social movements typically start small. They begin with a group of passionate enthusiasts who deliver a few modest wins. While these wins are small, they’re powerful in demonstrating efficacy to nonparticipants, and they help the movement gain steam. The movement really gathers force and scale once this group successfully co-opts existing networks and influencers. Eventually, in successful movements, leaders leverage their momentum and influence to institutionalize the change in the formal power structures and rules of society. 

Practices for Leading a Cultural Movement
Frame the issue. Successful leaders of movements are often masters of framing situations in terms that stir emotion and incite action. Framing can also apply social pressure to conform. For example, “Secondhand smoking kills. So shame on you for smoking around others.” 

In terms of organizational culture change, simply explaining the need for change won’t cut it. Creating a sense of urgency is helpful, but can be short-lived. To harness people’s full, lasting commitment, they must feel a deep desire, and even responsibility, to change. A leader can do this by framing change within the organization’s purpose — the “why we exist” question….. 

…Demonstrate quick wins. Movement makers are very good at recognizing the power of celebrating small wins. Research has shown that demonstrating efficacy is one way that movements bring in people who are sympathetic but not yet mobilized to join.
When it comes to organizational culture change, leaders too often fall into the trap of declaring the culture shifts they hope to see. Instead, they need to spotlight examples of actions they hope to see more of within the culture. Sometimes, these examples already exist within the culture, but at a limited scale. Other times, they need to be created….  

…Harness networks. Effective movement makers are extremely good at building coalitions, bridging disparate groups to form a larger and more diverse network that shares a common purpose. And effective movement makers know how to activate existing networks for their purposes….. 

Create safe havens….
…The dominant culture and structure of today’s organizations are perfectly designed to produce their current behaviors and outcomes, regardless of whether those outcomes are the ones you want. If your hope is for individuals to act differently, it helps to change their surrounding conditions to be more supportive of the new behaviors, particularly when they are antithetical to the dominant culture. Outposts and labs are often built as new environments that serve as a microcosm for change. 

Embrace symbols. Movement makers are experts at constructing and deploying symbols and costumes that simultaneously create a feeling of solidarity and demarcate who they are and what they stand for to the outside world. Symbols and costumes of solidarity help define the boundary between “us” and “them” for movements. These symbols can be as simple as a T-shirt, bumper sticker, or button supporting a general cause, or as elaborate as the giant puppets we often see used in protest events. 

The Challenge to Leadership
Unlike a movement maker, an enterprise leader is often in a position of authority. They can mandate changes to the organization — and at times they should. However, when it comes to culture change, they should do so sparingly. It’s easy to overuse one’s authority in the hopes of accelerating transformation. 

It’s also easy for an enterprise leader to shy away from organizational friction. Harmony is generally a preferred state, after all. And the success of an organizational transition is often judged by its seamlessness. 

In a movements-based approach to change, a moderate amount of friction is positive. A complete absence of friction probably means that little is actually changing. Look for the places where the movement faces resistance and experiences friction. They often indicate where the dominant organizational design and culture may need to evolve. 

And remember that culture change only happens when people take action. So start there. While articulating a mission and changing company structures are important, it’s often a more successful approach to tackle those sorts of issues after you’ve been able to show people the change you want to see.

Retailers Experiment With a New Philosophy: Smaller is Better

https://www.nytimes.com/2017/11/17/business/retailers-showrooms.html

When confronted with business models that are under attack, change must occur ideally at a time early in the broader trend change while you still have the resources –both financial and human—to make the necessary changes.

I apologize for the lack of postings this month –it has been a bit crazy on my end.

Brick-and-mortar retail chains, known for sprawling stores that stock a bit of everything, are trying to lift sagging sales using a different strategy: cozier spaces that sell very little of anything. 

Showrooms — a retail model popular with bridal designers, car dealers and, recently, online apparel start-ups — are now inspiring mass-market heavyweights like Nordstrom and Urban Outfitters. 

In intimate salons, some the size of a cafe, shoppers can examine a limited selection of merchandise and place orders for products to be delivered or collected later. The customer service is often luxurious, but so is the time commitment for shoppers.
This is the antithesis of the standard shopping mall experience, with the overwhelming assortment of products, the glazed apathy of part-time store workers, the disrobed patrons bellowing from fitting rooms for another size. 

But the sector is desperate to evolve after a brutal year of bankruptcies (Toys “R” Us, Payless Shoe Source, The Limited and more) and store closings (J. C. Penney, for example, plans to shutter up to 14 percent of its stores this year). E-commerce rivals — Amazon, most significantly — are chewing deeper into sales. 

Instead of slashing prices and accelerating delivery times, praying for fickle customers to stay loyal, many retailers are aiming higher, to become a desirable place to shop.
“People don’t have to go to stores anymore; they have to want to go,” said Lee Peterson, an executive vice president at WD Partners, a strategy, design and architecture firm. “And that goes a long way when thinking about what retail has to become.”

Order Off a Tablet, Pick Up Later
Nordstrom opened its first showroom-style store, called Nordstrom Local, on an upscale stretch of Melrose Place in Los Angeles last month. 

The 3,000-square-foot space — Nordstrom balks at calling it a showroom and instead refers to it as a concept store focused on service experiences — employs a handful of specialists. Ten minutes to the west of the location, hundreds of store associates roam a full-size, 122,000-square-foot Nordstrom department store. 

Nordstrom Local was designed as a kind of neighborhood hub, where customers can get manicures, have a shirt altered, pick up parcels purchased online or sip rosé from the well-stocked bar. They do not come to shop — at least not in the traditional sense.
The store has no inventory for sale, other than the occasional set of bejeweled boots exhibited on a shelf or the floral caftan hanging in the lounge. 

Customers work with personal stylists to put together ensembles, using tablets or phones. The outfits are usually requested from a nearby full-size Nordstrom store and delivered — sometimes within hours — for customers to try on amid the sleek settees in Local’s dressing area. 

Without providing precise numbers, Nordstrom said shoppers had used the services thousands of times in Local’s first four weeks. 

Some, like S. Y. Chen, 29, a graduate student in Los Angeles, stopped by out of curiosity.
“It was like going to someone’s room to hang out, not like going into a store at all,” she said. “I would use it if I was busier, but because I like to browse, I’ll probably just keep going online or to a bigger store with more products.”

Items ordered on line wait for pickup at local Nordstrom store 

Maybe Not Appealing to All
Major chains are trying everything to adapt to market pressures — a wardrobe-in-a-box subscription service from Gap for babies, a personal shopping option from Walmart, shrinking stores from Target and Kohl’s. 

Showrooms are just another experiment. 

The rationale is simple: Instant gratification takes a back seat to visceral experience.
Online vendors such as Rent the Runway and Warby Parker have opened showroom-style spaces in recent years to offer customers a chance to touch their products. For some companies, the facilitiesincreased local online sales and sometimes produced as much as five times the revenue per square foot recorded by traditional shopping center tenants.


Showrooms may encourage customer to make more purchases, especially compared with pop-up stores and those with self-check-out options, according to research conducted by WD Partners. 

More than half of millennials surveyed in recent years said that visiting showrooms could prompt them to make a purchase, according to the firm. The share of older shoppers who said this surged to 57 percent this year from 22 percent in 2015.
By matching shoppers to the products they want and recording the preferences, showrooms can help limit the number of items that are returned, while encouraging repeat visits. 

They also require less storage space, which makes them more affordable to lease, especially in expensive urban areas. Inventory is centralized, dispatched only when ordered. Merchandise theft is minimal. 

Employee turnover, a costly problem at mall-based retailers, is lower in showroom-style stores, said Nadia Shouraboura, who founded the retail technology company Hointer.
“It’s just not pleasant to spend most of your time folding stuff, cleaning displays and having piles of products to maintain,” said Ms. Shouraboura, a former executive at Amazon. “Showrooms help the progression of a numbingly boring job into something more exciting, like being a stylist.” 

But showrooms have their drawbacks. Apparel basics, like the socks, T-shirts and other items that support many midrange retailers, might not fare as well in showrooms because the items can be easily bought online, according to a report from the consulting firm Strategy&.
The showroom model could also alienate younger shoppers, who cherish the anonymity of online shopping, analysts said. Older consumers might enjoy the focused attention but want to be able to buy as well as browse.
“This is just a slower, more expensive version of online,” said Bob Phibbs, chief executive of The Retail Doctor, a consulting firm.

A Nation of Retailing Labs
Full-fledged showrooms can be a tricky endeavor for mall-based retailers, known for providing lower prices, higher volumes and impulse purchases. Many chains are exploring the model cautiously. 

Nordstrom has no immediate plans for another Nordstrom Local.
Urban Outfitters opened a temporary showroom in Los Angeles last year, displaying furniture, artwork and decorations that shoppers could order online at kiosks. This fall, the company, which is known mostly for its apparel and beauty offerings, put furniture showrooms in several of its stores; its sister company, Anthropologie, did something similar with scenes of living and dining rooms. 

Walmart said it was holding off on showrooms for its namesake stores. But in March it acquired Modcloth, a vintage-style e-commerce retailer with only one physical store, a showroom in Austin, Tex. 

Last summer, Walmart also purchased Bonobos, an online men’s wear company with nearly 50 showrooms. The 1,500-square-foot Bonobos Guideshops stock fewer than 250 pairs of jeans, compared with the 3,600 pairs available at the average specialty apparel store, according to the Strategy& report. 

Macy’s tried a showroom of sorts in 2015 at its Manhattan Beach, Calif., store, where it swapped tightly packed racks of swimwear and athletics apparel for a narrower selection, displayed on mannequins. Shoppers used mobile devices to order items to try on, which would arrive in fitting rooms within seconds, delivered from storage via chutes cut into the walls, said Ms. Shouraboura, whose company, Hointer, worked on the effort.
But Macy’s, suffering a continuing sales slump and steadily shuttering stores, dismantled the project within a year, she said. 

Lesso Group, the Chinese holding company, is doing the opposite. This year, it spent $92 million to buy the Source mall and surrounding property in Westbury, N.Y. It plans to turn part of the mostly vacant property into a collection of showrooms for home furnishings, décor and design, and is committing $25 million to the initiative.
The company envisions opening showrooms in Texas, California and elsewhere, said Michael Mai, a lawyer for the company. 

“It’s a leaner system compared to general retail,” he said.

I thought this was a great visual summary of all/most of the cognitive issues/biases we as humans face. Suggest going to the web site to really see it.

http://www.visualcapitalist.com/wp-content/uploads/2017/09/cognitive-bias-infographic.html

I am also not sure if you received the last posting so go to the blog site.

BTW, my new email address is rbrtcooper2@gmail.com

The Haier Road to Growth

Customers always come first for this Chinese appliance maker — even as it continually reinvents itself and expands around the world

 https://www.strategy-business.com/article/00323

This is a great example of how customer insights lead to incredible growth.

Start with 30 million responses on your QZone, Tencent, and other social media platforms — all to a simple question: “What do you want in air conditioning?” Then pay attention to the more than 670,000 people who take part in the online conversation that follows. You’re bound to come up with something cool — or, more precisely, “cool, not cold.” This concept, drawn from online responses, became the tagline for the Tianzun (“Heaven”), Haier’s advanced household heater/air conditioner/air purifier, released in 2014. Many Asian consumers don’t like the chilling effect of conventional temperature control. They’d much prefer to be “cool, not cold.” But there’s more to the concept than temperature. Air from most such devices in China is dry and dusty. The machines themselves are too noisy, or too likely to spread disease (bacteria live in air conditioning systems). Moreover, the machines look — well, like air conditioners.

The Tianzun doesn’t have any of those drawbacks. It is an obelisk-like device with a small wind tunnel that draws air through it from the room where it is positioned. It has an Internet connection, so consumers can use their smartphones to warm or cool the room while on their way home. Some consumers probably knew they wanted that feature, but they didn’t know that they wanted to see the circle’s light shift from red to blue as their air quality improved. Once they saw that happening, they were hooked. The product is targeted directly at a consumer segment that no other company, in the West or the East, has recognized, and that could end up being much bigger than a niche.

By building cooling machines based on this in-depth and multilayered approach to consumer insight, Haier is following its own core principle: “customer service leadership,” or the necessity to shape the future by giving customers what they want most (but may not have yet realized they can ask for). Even the decision to use the phrase “cool, not cold” in its Chinese advertising campaign reflects this principle. These are the words that customers use themselves, as opposed to a slogan dreamed up by a marketing professional….

… While the marketing staff digested the insights gained from Haier’s online customer interactions, manufacturing was already considering what they would mean for production, procurement was speaking directly to suppliers about sourcing feasibilities, and after-sales service was developing plans for follow-through. Because they worked closely together from the start, managers from all these functions were moving forward in concert, addressing possible disconnects as they arose. This allowed products to go to market as soon as they were designed and developed, instead of waiting for each department to throw its work “over the wall” to the next one. Meanwhile, representatives of each company function conducted conversations directly with customers, thereby adding a responsive new dimension to the company’s consumer insight capabilities…

… The company is known for several distinctive capabilities: a precise understanding of consumer needs, especially in China and other emerging markets; the ability to rapidly innovate new types of appliances that meet those consumer needs; the management of complicated distribution networks, a skill honed in the complex Chinese market; and a high level of execution ability, including the automation of factories to deliver products to consumer specification. 

Four Business Models for the Digital Age

John Sviokla

https://www.strategy-business.com/blog/Four-Business-Models-for-the-Digital-Age?gko=67c74&utm_source=itw&utm_medium=20170914&utm_campaign=resp

Very powerful material that will only gain in importance

Digitization, which is of course happening all around us, is opening up a whole new spectrum of opportunities to create value. But how do you navigate this new horizontal world?

Opportunities for companies in every industry are occurring on two critical dimensions: knowledge of the end customer and business design, i.e., breadth of product and service offerings. These dimensions combine to form four business models for creating value (see exhibit): Suppliers, Multichannel Businesses, Modular Producers, and Ecosystem Drivers.

Suppliers, in the lower left quadrant, have little direct knowledge of the preferences of their end customers, and may or may not have a direct relationship with them. These companies sell their products and services to distributors in the value chain. Due to the ease of digital search, they are vulnerable to pricing pressures and commoditization as customers look for less expensive alternatives. Washing-machine manufacturers are a good example of Suppliers, as are companies that create mutual funds sold by someone else.

If you are a Supplier, you need to make sure your operations are as efficient as possible, but that’s only the first step. As digitization continues, end customers will increasingly expect you to cater to their likes and needs. So if you don’t know much about your end customers and aren’t intent on solving their problems, you’ll need to find other ways to ward off commoditization. That means making sure that your product is highly differentiated or that it goes through a distribution channel other than one controlled by an Ecosystem Driver, another of the business models, which has a broad supply base. Otherwise, you risk losing all the value your enterprise has created.

Haier, the world’s largest manufacturer of white goods, has deployed various strategies to differentiate itself from competitors. It has developed a variety of niche products, including washing machines that accommodate the long gowns worn by women in Pakistan, and freezers that can keep food frozen for 30 hours in the event of a power outage in Nigeria. More recently, Haier used the Internet to open up its innovation process to people outside the company, enabling an unprecedented level of customization.

Multichannel Businesses, in the upper left quadrant, have deep knowledge of their consumers because they enjoy a direct relationship with them. Companies in this category provide access to their products in various digital and physical channels to ensure the seamless experience their end customers have come to expect. Many banks and brokerage houses are Multichannel Businesses, as are some retailers and insurance companies.

If you are an Multichannel Business, there’s no such thing as too much customer knowledge. Broadening your understanding your customers’ life-event needs is essential for building out the integrated experience that will retain existing consumers and attract new ones.

IKEA, the world’s largest furniture company, is an example of an Multichannel Business that continues to find ways to enhance the range of offerings within its value chain. Building upon its global presence — currently more than 300 stores in 41 countries — IKEA used its extensive knowledge of its customers (gleaned through visits to homes, for example) to develop “products for an everyday life” — from bedroom furniture to prepared food, all under IKEA’s iconic brand. After decades of focus on the customer experience in its stores, IKEA recently launched online shopping, making the purchasing experience truly seamless and gaining a way to learn even more about its customers.

Modular Producers, in the lower right quadrant, offer a distinct capability that spans the ecosystem, but they have little direct knowledge of the end customer. Their plug-and-play offerings can work with any number of channels or partners, but they rely on others for distribution as well as for guidance on what the customer needs. A good example is payment companies that enable the consumer to pay for a wide range of goods and services, such as groceries and college tuition.

If you are a Modular Producer, you need to be the best at everything. As is the case with Suppliers, competition is fierce, so your offerings need to be innovative and well priced.

Square Inc. fits the profile of a Modular Producer. Founded in 2009, the B2B payments company has continuously launched innovative software and hardware products that are ecosystem-agnostic. Square’s point-of-sale, payroll, employee management, and appointment apps can be used on Apple and Android devices alike, as can its chip and magstrip readers.

Ecosystem Drivers, in the upper right quadrant, have the best of both worlds: deep end-customer knowledge and a broad supply base. They leverage these dimensions to provide consumers with a seamless experience, selling not only their own proprietary products and services but also those from providers across the entire ecosystem. Thus, they create value for themselves while extracting rent from others. Large internet retailers in the U.S. and China are good examples of Ecosystem Drivers, as are some healthcare providers.

If you are an Ecosystem Driver, you’ll want to keep pushing the boundaries in both dimensions, increasing your knowledge of end customers and the breadth of offerings available to them.

As Weill and Woerner’s research demonstrates, the prospects for creating value are greatest for companies that participate in ecosystems rather than in value chains, so Ecosystem Drivers have the greatest potential for value creation and Suppliers the smallest. All four paths are viable routes to enduring success, provided you are clear on what your generic strategy is and what that strategy requires. If, however, you are losing customers or growing more slowly than your market, you should consider moving to a different quadrant, either by expanding your knowledge of your end customers or by becoming more of an ecosystem.

Or even by doing both: GE is moving from being a Supplier of industrial products to an Ecosystem Driver in the Industrial Internet of Things, with the help of Predix, the cloud-based operating system it launched last year. Serving as a platform for services provided by third-party vendors as well as GE business units, Predix helps companies collect, analyze, and leverage operational data so they can optimize the performance of their entire system. As Predix’s customer base grows, so will GE’s status as an Ecosystem Driver.

As digital becomes the new normal, the paths to success are there for the taking. But be sure you know your destination before setting out.