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June 2012h t t p : / /www. G l o b a l B u s M a g . c o m /i n f o @ g l o b a l b u s m a g . c o mPapegaaistraat 76,9000 GentBelgium

INSIDE this issueBehind the Olympics 4

What's Wrong with This Picture: Kodak's 30-year Slide into Bankruptcy 6

Price: the nuclear weapon of marketing 10

Upended 12

So, you think you have a strategy? 14

Consumer spending in China: To buy or not to buy 17

Putting the Brand Back Together 19

The Arab Spring: How soon will foreign investors return? 21

An innovative approach to marketing 23

Successful Leaders Share Five Traits, Says Ian Davis 24

The Killer Question: Phil McKinney on How to Spark Innovation 26

The Art of Retreat 31

Behind the Olympics: New Research Sheds Light on How the Host City is Chosen and Why Rivalries Form

By Marilyn Harris

The road to the Olympics is always long for participants and for the cities that host them. The XXX Olympiad kicks off July 27 in London, and the frenzied couple of weeks till the closing ceremony will be the culmination of years of hard work for the 10,500 athletes from 204 nations expected to compete in 26 sports – and for the Londoners preparing for the onslaught. Rivalries both friendly and fierce will be resumed, whether between Chinese and Japanese gymnasts or Australian, Chinese, and British divers or American, Swiss, and Spanish tennis players.

In the intense competition to host the Games, the Olympic Committee’s choice of London took most people by surprise – but not Professor Amitav Chakravarti, who believes that the very process of screening bidders made it almost predictable that a dark horse would win. You can read Chakravarti’s reasoning in the following article about his research on decision-making.

And as for rivalries, Gavin Kilduff, assistant professor of management and organizations, has focused on how competitors become rivals and whether that metamorphosis is a positive force. His groundbreaking research is described here.

To buy or not to buy

Whether purchasing cereal or selecting an Olympic host city, human decision-making is an imperfect system.

The human mind is a wondrous thing, but it can be distinctly un-wondrous when making multifactor, multistage decisions. Faced with a wall of cereal choices, for instance, a shopper

could stand befuddled for many minutes weighing the attributes of fiber, sugar, fat, and carbohydrates, not to mention price and, perhaps as a final criterion, taste. As each element is considered in turn, the initial ones often fall by the wayside. The winning cereal may have fewer carbs and an acceptable price, but too much sugar and too little fiber. But at that point, who cares? The marvelous human brain had simply hit tilt. Choosing which grains to pour in your cereal bowl, it turns out, isn’t that much different a process than far more complex, weighty, and even world-shaking decisions, according to Amitav Chakravarti, associate professor of marketing at NYU Stern.

A wide variety of decisions are conducted in multiple stages, says Chakravarti. The process works like this: People first look at an array of all possible choice options, mentally screen those options to create a short list, and then examine the shortlisted options more carefully in order to arrive at a final choice. This sequence applies whether people are purchasing consumer products, hiring employees, finding apartments, selecting beauty pageant or science competition winners, and even selecting Olympic venues.

In a paper published in the Journal of Marketing Research and awarded the 2009 Google-WPP Marketing Research Award (an unrestricted grant of $50,000), Chakravarti and his co-authors, Chris Janiszewski and Gülden Ülkümen, showed that inferior decision-making might start with the act of screening itself.

In their research, the authors investigated how consumers – in this case undergraduate students – chose among several brands of microwave popcorn with such different attributes as sodium level, crunchiness, calories, and price.

The results demonstrated that “the act of screening alternatives and creating short lists induced a tendency to neglect the screening information in subsequent stages of decision-making.” In other words, the attributes they

originally deemed important were forgotten by the time they made their choice. Perhaps predictably, decision makers who screened and then chose made consistently different final choices than did decision makers who skipped screening and chose directly.

This phenomenon persists even when the screening criteria are regarded as more important than the post-screening information and are based on attributes that remain constant. The studies showed that how highly an option ranked when initially screened had little influence on the likelihood it was ultimately chosen. In fact, variations in the final choice were largely explained by how attractive the options were, independent of the screening attributes that were used.

Dark horse takes the gold

The London Olympics, as most others, is a case in point, Chakravarti explains: London was ranked third during the candidate city stage, with Paris and Barcelona as clear frontrunners. Yet, as has happened in previous Olympics, the city that was ranked lower down – in this case, London, in third place – went on to become the final host, while the early favorites fell by the wayside.

Chakravarti explains how Olympic venues are selected in two rounds of decisions. The process begins with the Olympic Committee inviting cities all over the world to bid for the next Olympics. Cities that submit a bid – usually 10 or so – are referred to as applicant cities. In the first round, the selection committee, comprising 10 to 12 judges, then shortlists five cities for the second round. These cities are typically referred to as the candidate cities. In round two, one of these candidate cities is crowned as the host.

The choice of the host city is governed by a set of 11 different criteria, seven of which are used to select the candidate cities, and then all 11 criteria are mandated, or at least strongly recommended by the Olympic Committee, to be

used as input for making the final choice. This is what should happen, says Chakravarti.

In reality, however, the professor adds, there is very strong evidence of the screening effect. The research suggests that judges would tend to wipe the slate clean and discard all or most of the information they encountered in stage one. In fact, this is exactly what happens - frontrunners in stage one, the candidate city stage, seldom get to host the Olympics. This aberration is so common that betting sites have arisen to take advantage of the arbitrage opportunity.

The research has important implications for businesses. For one thing, consumers who screen alternatives based on price may be less price-sensitive when they make their final choice. Thus, Chakravarti pointed out in his paper, “It may be possible to encourage screening on less valued attribute tradeoffs so that more valued attribute tradeoffs are emphasized at choice.” Also, retailers could organize merchandise to encourage consumers to do their initial screening based on low margin attributes, leaving them with higher margin attributes when they make their final purchase decision.

To be continued with “How competitors become rivals and why it matters”

AMITAV CHAKRAVARTI is associate professor of marketing at NYU Stern. CHRIS JANISZEWSKI is professor of marketing at University of Florida’s Warrington College of Business Administration. GÜLDEN ÜLKÜMEN is assistant professor of marketing at USC Marshall School of Business.

The article above is republished courtesy of http://www.stern.nyu.edu/sternbusiness/

What's Wrong with This Picture: Kodak's 30-year Slide into Bankruptcy As Eastman Kodak begins to adapt to the challenges of bankruptcy, David A. Glocker's company, Isoflux, is expanding -- thanks to technology he developed in Kodak's research labs. He didn't steal anything. In fact, before he founded Isoflux with Kodak's blessing in 1993, Glocker approached his managers at the company and suggested they market the coating process he had developed.

"In a nutshell, I went to them and said, 'I think this is valuable technology and it's not being commercialized.... I'd like to do that if Kodak is not interested,'" he recalls. "And they said, 'Fine, do it.'" So he did, in his spare time, for five years while still working at Kodak, then full-time after leaving in 1998. Today, several patents and innovations later, Isoflux is a growing company in Rochester, N.Y., that coats a range of three-dimensional products, from drill bits to optical lenses to medical devices.

The technology is one of countless innovations that Kodak developed over the years but failed to successfully commercialize, the most famous being the digital camera, invented by Kodak engineer Steven Sasson in 1975. Digital technology has all but done in the iconic filmmaker. Since 2003, Kodak has closed 13 manufacturing plants and 130 processing labs, and reduced its workforce by 47,000. It now employs 17,000 worldwide, down from 63,900 less than a decade ago.

When new technologies change the world, some companies are caught off-guard. Others see change coming and are able to adapt in time. And then there are companies like Kodak -- which

saw the future and simply couldn't figure out what to do. Kodak's Chapter 11 bankruptcy filing on January 19 culminates the company's 30-year slide from innovation giant to aging behemoth crippled by its own legacy.

Adapting to technological change can be especially challenging for established companies like Kodak, Wharton experts say, because entrenched leadership often finds it difficult to break old patterns that once spelled success. Kodak's history shows that innovation alone isn't enough; companies must also have a clear business strategy that can adapt to changing times. Without one, disruptive innovations can sink a company's fortunes -- even when the innovations are its own.

It wasn't always this way. When Kodak founder George Eastman first began using his patented emulsion-coating machine to mass produce dry plates for photography in 1880, hewas the one being disruptive. For more than a century thereafter, Kodak dominated the world of film and popular photography, with sales surpassing $10 billion in 1981. Ringing up profit margins of around 80%, film drove the company's expansion. Leo J. Thomas, senior vice president and Kodak's director of research, told the Wall Street Journal in 1985: "It is very hard to find anything [with profit margins] like color photography that is legal."

Many say film's profitability contributed to Kodak's demise. "I believe the single biggest mistake that Kodak made for two decades or more was the fear of introducing technologies that would disrupt the film business," Glocker says. "There were excellent scientists and engineers at the bench level and through several layers of management who generated some of the world's leading innovations. The company, however, was almost never willing to risk the high film margins by introducing them. The irony is that many -- CCD arrays, digital X-rays, etc. -- eventually did Kodak in."

Kodak was never short on innovation, adds Glocker, but there was a disconnect between the research labs and upper management. When he joined Kodak in 1983, research was funded on what was known as Eastman's nickel -- that is, for every dollar of Kodak film sold, research got five cents. The culture in the labs was "relatively laissez-faire," and research managers often pursued projects for a long time before management decided whether or not to bring a product to market.

From Glocker's viewpoint, things started changing in the late 1980s when the company tried to align research more closely with business objectives. "The business units were interested in product-driven research rather than technology-driven research," he says. He remembers one time his boss discovered a new coating technology that he presented with excitement to the business units. "The reception was cool, so to speak," Glocker recalls. "Eventually, the funding dried up. We mothballed the equipment and went on to other things." A few months later, the business units showed up at the lab with a competitor's product that used the very technology they had rejected. "The business unit people came to us and said, 'Look at this. Look at what they're doing! Can we do this?'"

Creating and Capturing Value

Companies often have trouble managing innovation, says Wharton operations and information management professor Christian Terwiesch, director of Wharton's Strategic R&D Managementprogram. "Either they are focused on what they currently do and seek incremental innovation, or when they talk of research, they talk about what will happen in 10 years," he notes. "Innovations that reach a middle ground --

such as envisioning new product lines in the next two to five years -- are much more elusive and often don't have a champion pushing for them in the organization."

Another pitfall: knowing where to focus innovation. Innovation is "the match between a solution and a need, connected in a novel way," Terwiesch says. Kodak had a choice in how it pursued innovation: If it focused on the need, it would have to find new ways to take and store photos. If it focused on the solution, it would have to find new markets for its chemical coating technologies. Kodak's competitor, Tokyo-based Fujifilm, focused on the solution, applying its film-making expertise to LCD flat-panel screens, drugs and cosmetics. "You have to make a decision: What are you as a company? Is it understanding the need or understanding the solution?" Terwiesch asks. "These are simply two very different strategies that require very different capabilities."

When disruptive technologies appear, there is a lot of uncertainty in the transition from old to new, according to Wharton management professor Rahul Kapoor. "The challenge is not so much in developing new technology, but rather shifting the business model in terms of the way firms create and capture value." For years, Kodak operated under the classic razor blade model: Like blades to razors, Kodak made most of its money off film, not cameras. When the company began to shift to digital, it "thought of digital as a plug-and-play into Kodak's existing model," Kapoor says. The company didn't envision making money off cameras themselves, but rather the images it assumed people would store and print. "If you look at R&D, they were superfast. In terms of the business model, they were quite the opposite."

Kodak failed to build a strategy based on customer needs because it was afraid to cannibalize its existing business, suggests Wharton marketing professor George S. Day, co-director of Wharton's Mack Center for

Technological Innovation and author of Strategy from the Outside In. "It succumbed to inside-out thinking," says Day -- that is, trying to push forward with the existing business model instead of focusing on changing consumer needs. Accustomed to the very high film margins, the company tried to protect its existing cash flow rather than look at what the market wanted. "Long-run strategies work better if you stand in the shoes of your customers and think how you are going to solve their problems," Day noges. "Kodak never really embraced that."

The company's isolation probably didn't help, Day adds. "They had a very insular culture, sitting up there in Rochester." The company might have been able to innovate more quickly on the digital front if it had set up a separate lab in Silicon Valley, then allowed it to grow independently and tap into the area's tech culture and expertise. Instead, Kodak "got sucked into the Rochester environment. They recognized the threat, but tried to deal with it on their own terms."

This view is shared by Kodak insiders as well. Some people in the company saw a need for change but they couldn't make it happen, says John Larish, a photography writer who worked at Kodak from 1969 to 1984 as a senior markets intelligence analyst. He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but "it just didn't work." Venture companies in Silicon Valley are "pretty wild," Larish adds. "In Rochester, people come to work at 8 and go home at 5."

Kodak was invested so heavily in film technology that it became difficult to abandon, according to Robert Shanebrook, who worked at Kodak from 1969 to 2003 and has documented the process in his book, Making Kodak Film. Shanebrook began his career in Kodak's research labs, working on the camera that Neil Armstrong used to snap photos of moon rocks. Later, he worked on a project using liquid crystals to

create electronic photographs. In 1975, he moved to the company's photographic technology division to work on black-and-white emulsion film because the company didn't seem focused on developing digital technologies. "They told me it was going to become increasingly difficult to fund my projects in the future," he recalls. At the time, "they weren't particularly interested in the digital photography stuff."

Over the years he watched digital projects lose battles for research dollars. Even though film's market share was declining, the profit margins were still high and digital seemed an expensive, risky bet. "It would have been difficult to just give [film technology] up," says Shanebrook. "It meant abandonment of the entire capital structure." Kodak's core competency was being a vertically integrated chemical manufacturer, he adds. "The core competency of being a digital camera manufacturer is electronic.... Trying to convert from being a chemical company to making digital cameras -- which are like computers more than anything else -- you wouldn't expect [Kodak's expertise] to be there."

Nevertheless, it would be wrong to say that Kodak wasn't extremely active in digital research, Shanebrook notes. "They were very, very aware" of digital technologies. "There were people who did nothing but watch the evolution of digital imaging. That's why Kodak has so much intellectual property in the area."

Refocusing the Company

In January, Kodak filed patent infringement lawsuits against Apple and Research In Motion (RIM), claiming the iPhone and BlackBerry devices infringed on Kodak's digital imaging technology. Kodak inventors earned 19,576 U.S. patents between 1900 and 1999, and the company holds a portfolio of more than 1,000 patents in digital imaging alone. The company now hopes to sell some of those patents as part of its restructuring.

Kodak's legacy goes beyond patents and capital equipment. In the U.S. alone, the company also has 38,000 retirees and up to $200 million per year in health care, insurance and pension obligations, says Bob Volpe, president of EKRA, a Rochester-based association of Kodak retirees. Chief executive Antonio Perez has vowed to "right-size" the company's legacy operations, Volpe points out. "Retirees are the center of the target. We're in the bull's eye of the company's efforts to reduce costs."

Kodak could have avoided this fate if it had used the resources it earned during better times to acquire the technologies it lacked, says Wharton management professor Saikat Chaudhuri. The company made a number of acquisitions over the years, but most were "bit players" that didn't help Kodak gain an edge. "They should have gone for one of the electronics manufacturers. It's better to cannibalize yourself in a calibrated way than to let others do it to you." The problem was that Kodak had built up a lot of inertia and could not react quickly. "Those very systems that serve you well and allow you to build your lead -- once conditions change, they become a rigidity in and of themselves."

On top of foot-dragging into the digital world, Kodak had become "bloated" in its heyday, and didn't know how to scale back during the past decade, according to Wharton operations and information management professor Kartik Hosanagar. "It was never clear whether Kodak wanted to be a products company or a services company. Or a consumer company or a B2B company," he says. "The lack of a clear strategy for digital coupled with being in too many areas led to the current situation. The confusion was also visible in its M&A work. Acquisitions have been all over the place."

Kodak will need to streamline going forward, Hosanagar adds. It is "in too many lines of business. A struggling company like Kodak has no business being in so many areas. It needs to articulate a clear strategy and figure out whether

to focus on the consumer or business segment and which specific divisions within that segment."

Wharton management professor David Hsu agrees. The digital era pushed Kodak into "a position of reacting," and the company seemed to lose focus. "They had reorganization efforts ... [and] brought in CEO after CEO. When you have that much disruption and change," it becomes difficult to implement a long-term strategy, Hsu says. Going forward, Kodak has to figure out what its business is going to be, and focus on that. "It's okay to specialize in one part of the value chain.... They can't be the best at everything. It's a moment in time where they should put their start-up hats on and refocus the company."

It's business advice that Glocker of Isoflux is taking to heart. As his company has grown, other start-ups have emerged with new technologies for coating complex shapes. Glocker's team is now exploring the possibility of investing in those technologies, even if it means using its own technology less. "It wouldn't hurt my feelings to bring [the technologies] in house and learn how to do it." After all, he figures, his customers don't really care which technology he uses -- they just want to get the job done. It's a lesson he learned from watching Kodak: "Don't assume that just because you're not willing to do it, somebody else won't."

"Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania."

PRICE: THE NUCLEAR WEAPON OF MARKETING!Slashing prices isn't the same as having a marketing strategy: When you cut your price, there’s often no way back

By President Dominique Turpin - May 2012

When business conditions are as tough as they are today, and sales flat or even declining, too many marketers often see a price decrease as an easy and reversible choice. However, what may look like a quick short-term strategic option can have devastating long-term consequences. A price cut may lower the perceived value of products and services, depreciate the brand or even trigger a price war.

Slashing prices isn't the same as having a marketing strategy! Cutting price is a bit like firing a nuclear weapon; once you push the button there is often no going back. Not everyone will agree with this, of course. For many companies, lowering their price is the only survival option when dealing with rising competition, shorter product life-cycles, declining product differentiation, smarter buyers, more private labels and an increasing value-for-money segment.

Companies might also consider a price cut if they

are dealing with a rising currency in their home market that could make their products and services uncompetitive. We have seen this over the past couple of years in Switzerland, where the rise of the Swiss franc has made local companies and service providers some 20-25% more expensive than before relative to their European or American competitors.

However, it's generally wiser to give more to the customer than to cheapen your value proposition since the purpose of price is to reflect the value of a product or a service. By slashing prices, marketers often nullify all the hard work that has been done in creating perceived value in the eyes of their customers.

Why are many marketers behaving in such a way? There are two main reasons. Firstly, pricing is a decision that can be taken relatively quickly. You can decide tomorrow to decrease your price by 20%, whereas it takes much longer to rethink your product or service, your communication or your distribution.

Secondly, price cuts look like a cheap option. If you take the "four Ps" of the marketing mix – the product, the place (distribution), the promotion (communication) and the price – then price is the only one that does not generate money.

As much as possible, therefore, cutting price should be your very last course of action. For a start, price cuts are almost always complex. How should a price be set? When should a company change its prices? Should it seek to follow or lead? And should it cut prices across the board, or only for certain products and segments? In mature markets, we know that today's consumer typically wants either the best product or the cheapest one, so there is not much room in the middle for many products.

Price cuts are also hard to reverse, because very often, your competitors tend to lower their prices in response. Hence my analogy with nuclear weapons; once you cut your price, there's often

no going back.

So what can companies do instead of cutting their prices? There are several things, all of them connected with adding value to the consumer or the client.

The first thing is to rethink your value proposition by offering more for the same price. These can be things that cost relatively little but have a meaningful impact for the customer. Car companies can increase their warranties, chocolate manufacturers can sell packs of 25 instead of 20, or training companies can add a free session for a client. The key is to think in terms of value to the customer.

The second is to rethink your segmentation and brand portfolio so that you can appeal to more clients. Because as we all know, one product and one offer cannot please everybody. This is why a major tire manufacturer like Michelin uses various brands, from premium Goodrich tires for sports cars to retailer brands for price-sensitive consumers at Wal-Mart or Norauto. Similarly, Singapore Airlines has equity in three different brands (Singapore Airlines, Virgin Airlines and Tiger Airways) to address three different price segments.

Third, companies should reconsider their communications strategy to augment the offer and make the product or service better known to potential clients. Marketing and advertising spending often come under pressure during a downturn. But this is counter-intuitive, because it's precisely when business conditions are difficult that you need fresher ideas. As advertising guru David Ogilvy once said: "When times are good, you advertise, and when times are tough, you must advertise." Unfortunately, most companies do the reverse — when times are good they spend, and when times are tough they cut everything.

Fourth, and finally, use some good common sense and have another look at your costs. I'm

not suggesting you should necessarily cut your costs by cutting people. I mean you should rethink your cost equation. This is an exercise companies do anyway, and it should be part of your daily best practice. But there may still be scope to go through your budget line by line with the goal of finding some extra fat to cut. Only after going through these four steps should companies reluctantly decide that they have no other choice but to cut their prices. But for me, this should be the very last option, because competing on price is always terribly risky!

Dominique Turpin is the Nestlé Professor and President of IMD. He co-directs IMD’s Orchestrating Winning Performance program.

The article above is republished courtesy of http://www.imd.org/research/challenges/

UpendedContrary to conventional wisdom, stocks are riskier in the long run

Investors are often told that stocks are highly risky for anyone investing for a period of five years or less. Extend that horizon to 15 years or more, however, and the risk of owning stocks falls dramatically—they are told—because a longer investment period allows more time for a bull market to cancel out a bear market. Thus, investors who hold on to stocks for a long time can expect to earn high real returns with low risk. This conventional wisdom has become the cornerstone of long-term investing. Popular target date mutual funds, for instance, start with a high allocation in stocks and glide toward a lower stock allocation as investors move closer to retirement.

The idea that stocks are less risky in the long run is supported by the historical performance of stocks. Indeed, the classic book, Stocks for the Long Run, by University of Pennsylvania professor Jeremy J. Siegel, shows that stocks have consistently outperformed bonds over various 30-year periods since the early nineteenth century. Investors might use this evidence as reason to put more stocks in their long-term portfolio. But according to a recent study, "Are Stocks Really Less Volatile in the Long Run?" by Chicago Booth professor Lubos Pastor and Robert F. Stambaugh of the University of Pennsylvania, investors should pay attention not only to historical estimates, but also to the uncertainty associated with those estimates.

What matters to investors, say Pastor and Stambaugh, is a measure of volatility that captures the uncertainty about whether the average future stock return will resemble its historical counterpart. This uncertainty compounds over time, so that its effect on the volatility of stocks increases with the investment horizon. In fact, the volatility of stock returns over long periods of time can be so high that it can overturn the conventional view, which is exactly what Pastor and Stambaugh find. "When investors take the uncertainty associated with historical estimates into account, they discover that stocks are riskier in the long run," Pastor says.

Uncertainty Trumps Mean Reversion

From the 1950s to the 1980s, the view that dominated investors' understanding of stocks was that stock prices followed a random walk; that is, stock price changes cannot be predicted based on past price movements. Because changes in stock prices are independent from one another, the volatility of stock returns is expected to be equal at all investment horizons. In other words, a person who invests in stocks for one year and another who invests for 30 years would face the same amount of risk on a per-year basis.

Beginning in the 1980s, people started to realize that it was somewhat possible to forecast stock prices—just enough to induce a slight "mean reversion" in stock returns. The idea is that bull markets tend to be followed by bear markets, so that stock returns end up close to the historical average. The concept of mean reversion makes stocks less volatile in the long run, a powerful idea that was popularized by Siegel's book, which presents evidence of mean reversion using more than 200 years of stock returns. Today, almost anyone who wants to save for retirement or their children's college tuition is given the same advice—to load up on stocks and hold on to them for a long time, because stocks are safer and the returns higher than bonds over comparable periods.

This conventional wisdom, however, is based on backward-looking historical measures of volatility, which Pastor and Stambaugh feel are only somewhat relevant to forward-looking investors. "The reason we arrive at a different conclusion is that we take the investor's perspective," says Pastor. They argue that mean reversion is only one of a handful of components in measuring long-run volatility. In particular, there are three types of uncertainties that pull in the opposite direction of mean reversion.

The first is the uncertainty about the current equity premium, which is the expected stock market return in excess of the Treasury bill rate. "The equity premium is one of the most important numbers in finance and also one of the hardest to pin down," Pastor says. Investors have diverse views on what the equity premium is today and what it will be in the future, which is the second type of uncertainty that makes stocks more volatile in the long run. The third involves all the other parameters that affect stock market returns that, like the equity premium, may be very different from historical estimates.

Pastor and Stambaugh find that these uncertainties rise rapidly as the investment horizon lengthens. As a result, the combined effect of these three forces outweighs mean reversion, making the volatility of stock returns higher in the long run.

Taking Stock

To find out if investors share their views, Pastor and Stambaugh analyzed a series of surveys that asked chief financial officers (CFOs) where they think stock market returns are headed, particularly in the next year and in the next 10 years. The authors inferred from the results that the typical CFO views the annual variance of 10-year stock returns to be at least twice the variance of one-year stock returns. In other words, CFOs seem to perceive stocks as more volatile at longer investment horizons.

If stocks are more volatile in the long run, then those who have been investing based on the conventional wisdom should consider adjusting their portfolios. "If on a scale of one to 10 you thought the risk of investing in stocks was only three, and you put half of your money in stocks based on that view, then you should probably reduce your stock allocation if I tell you the risk is actually five," Pastor says.

In fact, the study reveals that investors in target date mutual funds would find the predetermined asset mix typically offered by this investment strategy less appealing if they took parameter uncertainty into account. In particular, investors with sufficiently long horizons would choose an asset mix with initial and final stock allocations that are lower than those of investors with shorter horizons.

Pastor and Stambaugh's results also have implications for how investors should change their mix of assets as they get older. Financial advisors often tell investors to start with a high stock allocation when they are young and to reduce it over time for two reasons: first, younger investors have mean reversion on their side—that is, they have more time to go through the ups and downs of the stock market; second, they have more human capital—that is, they can look forward to a long stream of income. But if mean reversion's contribution to the measurement of volatility is overcome by the various uncertainties investors face, as the study shows, then the first reason ceases to be a good argument for reducing stock allocations as investors get older.

However, the human capital argument still rings true. Younger investors are in a better position to place their financial capital in stocks because they can more easily adjust their consumption habits should they find themselves temporarily unemployed. Those closer to retirement, on the other hand, have relatively little guaranteed income ahead of them and would not be able to withstand a shock as well as younger people

could. Thus, Pastor says, for most people, it makes sense to hold fewer stocks as they get older, but the reduction in the stock allocation should not be as steep as the conventional wisdom suggests.

"Are Stocks Really Less Volatile in the Long Run?" Lubos Pastor and Robert F. Stambaugh. Journal of Finance, April 2012.

The article above is republished courtesy of www.ChicagoBooth.edu/capideas.

http://www.chicagobooth.edu/capideas/may-

So, you think you have a strategy?Does your company have a strategy? Freek Vermeulen doubts it. And he posits the five main reasons why, too often, a firm’s strategy is nothing more than a pipe dream.

Most companies do not have a strategy. Okay, I admit it: I do not have any solid statistics (if such a thing were possible) as evidence to back up this statement, but I do observe a heck of a lot of companies. And I get the chance to meet with and listen to strategy directors and CEOs while they present their ‘strategies’ and, I tell you, I think nine out of 10 (at least) don’t actually have a genuine strategy.

Sure, such a conclusion depends on us being able to agree on the answer to the pervasive question, what is strategy? But, even if you would accept the most lenient of definitions, few companies actually meet the definition. Beyond that, when I test managers on whether they know what they’re doing and why (when it comes to matters such as positioning, branding, pricing and other strategic factors), most of their firms would simply fall short. To be emphatically blunt: most companies and their top executives do not have a good rationale for doing the things they are doing and cannot explain coherently how their actions should lead to superior performance.

Even the CEO

Curiously, this problem does not usually reflect a case in which the CEO knows the strategy and everyone else on the management team just fails to ‘get it’. No, when it comes to strategy, I’d say there are three types of CEOs:

• Those who think they have a strategy — they are the most abundant

• Those who pretend to think that they have

a strategy, but deep down are really hesitant because they fear they don’t actually have one (and they’re probably right) — these are generally quite a bit more clever than those in the first category, but, alas, are fewer in number

• Those who do have a strategy — there are preciously few of them, but they often head very successful companies

So what do all these CEOs do when confronted with the question, “What is your strategy?” Well, of course, most will strongly insist that they do have one and will promptly retaliate against a seeming challenge with a dazzling Powerpoint presentation composed of effusive colours and animated fades in and out. I love the omnipresent title slide: ‘Our Strategy’. And there are always many more slides to follow. Trouble is: it’s a nice pitch, but it just ain’t strategy.

Strategic tanking

When I view such presentations, I often wonder why such bright CEOs and their deputies miss the most basic necessities of cogent and executable strategy. They fail because they:

• Are not really making choices Strategy, above all, is about making choices; choices in terms of what you do and what you do not do. Future Plc, for example, has chosen to focus on specialty magazines for young males (decent magazines, by the way) in Britain. Their strategy contains some very clear choices. For example, publishing a magazine for middle-aged women might potentially be very profitable; but that is not what they want to do, because they think concentrating on a clear set of alternative consumers and products will help them do better. Most companies don’t concentrate; they cannot resist the temptation of also doing other things that, on an individual basis, look attractive. As a consequence, they end up with a bunch of alternate (sometimes even opposing) strategic directions that appear equally attractive but strangely enough don’t manage to turn into

profitable propositions. Too many strategies lack focus.

• Are stuck in the status quo Another variant of this is the straightjacket of path dependency, meaning that companies write up their strategy in such a way that everything fits into what they were already doing anyway. This is much like generating a to-do list of activities you have already completed. Last year. There might be nothing wrong with sticking with the tried and true, if it so happens that what you were doing represents a powerful, coherent set of activities that propels your company forward. Regrettably, more often than not, strategies adapted to what you were doing anyway results in some vague, amorphous marketplace statement that would have been better off in a beginners’ class on esoteric poetry, because it is meaningless and does not imply any real decision about what needs to be done in order to be a vital company in the next one to three years. The worst of the lot I have seen (although low on poetic value) was Ahold’s strategy, which ended up doing so many different things in so many different corners of the world that the company descended the management ladder all the way to the basement by calling their strategy ‘multi-format, multi-local, multi-channel’. This — not coincidentally — was shortly before the company collapsed.

• Have no relationship to value creation Sometimes companies make some decisive choices, but it is wholly unclear why these choices would do the enterprise any good. Strategy is not just about making choices; executives need a good explanation why these choices are going to create the company a heck of a lot of value. Without such logic, I cannot call this line of thinking a strategy at all. Let me give you an example, which happens to be the most common strategy I have seen among multinational corporations: The Matrix. On the horizontal axis, one puts countries; on the vertical axis, one puts business lines. And the strategy is to tick boxes, as many as possible, as

quickly as possible (preferably through acquisitions). But why would performing all your activities in all your countries be a good strategy? If you can give me an explanation of why this would lead to superior value creation, I might label it a strategy; but such an explanation is usually conspicuously absent. Without a proper rationalisation of why your choices are going to help you create value, it’s not a strategy. It’s a dartboard.

• Are mistaking objectives for strategy We want to be number one or two in all the markets we operate in. Ever heard that one? I think it is bollocks. A CEO who wrote to me the other day, after having read my book, Business Exposed: The Naked Truth About What Really Goes on in the World of Business (FT Prentice Hall, 2010), said that too many strategies read as if an athlete were saying, “I am going to win the 400 metres during the 2012 Olympics by running faster than anyone else.” Yes, that is very nice, but the real question is how. We want to be number one or two in the market; we want to grow 50 per cent next year; we want to be the world’s pre-eminent business school — and so on. These are goals, possibly very good and lofty ones, but in terms of amounting to a strategy, they do not. You need an actionable idea and a

rationale — a strategy — of how you are going to achieve all this. Without a true plan of action, lofty goals are but a tantalising aspiration.

• Keep it a secret The final mistake I have seen, scarily common, as to why CEOs who think they have a strategy don’t actually have one (despite circumventing all of the above pitfalls) is because none of their lower-ranked employees actually know about it. A strategy only becomes a strategy if people in the organisation alter their behaviour as a result of it. And, in order to achieve that, they must know about it. A strategy by itself does nothing; the Powerpoint presentation — regardless of how colourful and fine-tuned — is not going to result in improved performance unless the choices and priorities it contains result in competitive actions by middle managers and people on the work floor. A good litmus test is to simply ask around: if people within the organisation do not give you the same coherent story of how the company is to prosper in the future, chances are it does not have a strategy, no matter how colourful the Powerpoint slides. These slides may fade in powerfully on the projection screen, but (in the marketplace) they fade out into strategic oblivion.

The article above is republished courtesy of London Business School http://bsr.london.edu/lbs-article/629/index.html

Consumer spending in China: To buy or not to buy

--- by Mrinalini Reddy ---

Retailers have looked at the Chinese consumer as the saviour of economic growth. But as recession hovers on the horizon, will these consumers be putting away their pocketbooks?

The thrill of that first-time purchase of a Louis Vuitton bag is long gone. Chinese consumers are no longer innocent, experiencing new products and services for the first time. Rising incomes have allowed the Chinese to become increasingly familiar with brands, savvier shoppers – and the second largest consumers of luxury goods, not far behind the United States.

By 2020, the mainstream Chinese consumer – some 400 million people or 51 percent of the urban population – will have annual disposable incomes between US$16,000 and US$34,000, according to a McKinsey study. [In 2010, this bracket accounted for just 6 percent.] Normally, this should spur spending. But China’s hot growth streak of the past decade has slackened due to falling demand and unsteady global markets. As the country continues to modernise, will uncertainty in the global and domestic economy change the habits of Chinese consumers? Could their love for luxury eventually wane?

“It is likely to continue,” says Michael Witt, INSEAD Professor of Asian Business and Comparative Management, “even though headline growth numbers for GDP are expected to slowly decline.” General consumption levels are projected to rise 11 percent each year. For luxury, growth projections are more than twice as high at 25 percent. “So if anything, growth will not just continue, it will actually be disproportional in the luxury bracket.”

Luxury is king

China’s newfound love for luxury has already seen several of the world’s most prestigious brands firmly established in the booming market. Luxury giant Louis Vuitton has grown to 36 stores in 29 cities across mainland China, compared to stores in just 10 cities in 2005. Hermes quadrupled its number of stores, from five in 2005 to 20 today. Even in the teeth of the global recession in 2009, luxury goods saw a 16 percent sales growth. By 2015, China is expected to account for more than 20 percent of the global luxury market or RMB 180 billion (US$27 billion) of global luxury sales.

It’s a phenomenon that’s typified the Chinese consumer – luxury items as signals of socio-economic success – and one that’s unlikely to abate anytime soon for the growing middle class. “Given this signalling function, what we are also seeing is that there tends to be an enormous concentration on individual brands and well-known brands, in particular,” explains Witt. For instance, with handbags, this could be Louis Vuitton and consequently “the” bag to own is Louis Vuitton. The implication is that it’s not going to be easy for new brands, and even Chinese luxury brands, to break into this market, says Witt, because that niche of what is really prestigious is already occupied by very powerful, creative and high quality Western producers.

Trading-up and trading-off

The increasing exposure and sophistication among consumers is also seeing consumers trade up and purchase more expensive or better quality versions of existing products. Sales of premium skin care products, for instance, grew at a rate of more than 20 percent a year in the past decade against an industry average of 10 percent. Annual sales growth rates of more than 20 percent are expected for luxury SUV cars, compared with around 10 percent for basic family cars. These developments are not surprising, says Witt, where you begin to see

experienced consumers become more demanding and discerning. Today, even for a commodity item such as laundry detergent, things like packaging and scents matter, Witt explains.

However, despite growing wealth Chinese consumers are traditionally pragmatic and conservative spenders. “Price still matters and the value for money is still more important than brand and actually more important than quality at this point,” says Witt. Consequently, there will be more of a trade-off between consumption in one area and a lack of it in others, says Witt. That’s a bit unusual because in other countries, usually, part of trading up is driven by a rise in personal credit. “It’s not that easy to get personal credit in China and Chinese consumers prefer to not be in debt.” That dynamic of credit-driven consumption is weak.

Chinese and/or foreign brands?

Consumer surveys show that Chinese consumers have been far less loyal to brands than their Western counterparts. With millions in line to join the ranks of the middle class, do domestic or foreign brands carry an advantage when it comes to wooing new consumers? “In terms of market understanding and arguably speed, it’s the local players that have an advantage.” But it does eventually depend on the segment. Luxury, for one, has been difficult for Chinese and Asian companies. Additionally, a string of food contamination scandals in China have helped foreign companies dominate in food, health and infant-related products.

Could quality concerns be holding Chinese manufacturers back? Witt believes the negative perception of quality is misplaced. “Of course you get shoddy products from China…but you can also get extremely good quality manufacturing.” Consider electronics for instance. The tricky part for the Chinese has been in capturing the entire value chain – R&D, design, manufacturing, branding, marketing, logistics and distribution. This is true not just for

creating luxury brands but pretty much all products, he notes, where it’s really a management challenge rather than a manufacturing challenge.

Still, the allure of the Chinese consumer could see new approaches to the value chain, Witt concludes. The rules in China are still being written – understanding how consumers will continue to evolve will be imperative for businesses to succeed.

Michael A. Witt is Professor of Asian Business & Management at INSEAD

The article above is republished courtesy of INSEAD Knowledge http://knowledge.insead.edu

Putting the Brand Back Togetherby Kirk Kardashian

Starbucks was in bad shape in 2008. After steady growth since the early 1990s, it was experiencing its first major decline. The company seemed to have lost its way, ditching personal attention, great coffee, and a unique experience for more automation and efficiency. Then, in 2009, Howard Schulz came back to the CEO office to turn things around. He closed 7,000 stores for three hours one day, just so the baristas could learn how to make a proper espresso. He invested in new coffee makers. And from the depths of its doldrums Starbucks has emerged again as the premier provider of specialty coffee with style.

The lesson in all this, says Kevin Lane Keller, the E.B. Osborn Professor of Marketing, is to never underestimate the power of brand revitalization. Keller has helped scores of major corporations refine their image, and teaches courses on branding and strategic brand management at Tuck. Revitalizing a brand, he says, is a process that exists on a continuum from a “back to the basics” simplification of purpose to a complete reinvention, and all companies, at one point or another, have had to do it. “Whether it’s the economy, consumers, or competition,” says Keller, “there are a lot of reasons why brands’ fortunes take a turn. The question becomes how to bring them back.”

With a reinvention, “the brand’s old strategy just doesn’t work anymore,” Keller says, “and the company has to come up with a new one.” The classic example is Mountain Dew. It had the best-case scenario for reinvention because the product already had good distribution and awareness, but it had a dated image, and people had all but forgotten about it. Over the course of decades, Mountain Dew’s taste didn’t change at all, yet its image got a total makeover. It morphed from

rural to urban, relentlessly pursued a young audience with its “Do the Dew” campaign, and turned into an edgy soft drink that was a precursor to energy drinks like Red Bull. Today, Mountain Dew is one of the top selling sodas in the U.S.

By contrast, Harley Davidson wasn’t forgotten, it just forgot how to make good motorcycles. “People loved the brand,” Keller says, “but the product just failed.” The company almost went bankrupt two or three times. With a strong image, however, all it had to do was go back to the basics. So Harley invested a lot of money into its factories. When it once again produced motorcycles that lived up to their image of freedom and rebellion, the company had a great run. It even swept up a new market segment: “Rolex riders,” the older, more affluent crowd who saw a Harley as a ticket to cool cultural capital.

When companies want to figure out where on the spectrum of “back to the basics” to “complete overhaul” they must land, they do a brand audit. Keller runs his students through such audits in his Branding course, which entails looking at a brand’s strengths and weaknesses and coming up with a set of recommendations. Since the value of a brand is in the mind of consumers, consisting of all their thoughts, feelings, images, experiences, and beliefs about the product, the audit is very consumer focused. And it reaches beyond consumers’ feelings about the brand in question and asks how they feel about competitors’ brands. “It’s not just what you’re doing and what you haven’t been doing,” Keller explains, “but also maybe what other brands have been doing.”

A recession can spur brand audits because sales often drop and consumers become more price conscious. “Brands have to justify their value a little more during a recession,” he says, “and really deliver on their promise.” Such conditions often highlight a brand’s weaknesses, making it a good time to reevaluate strategy.

By the same token, brands that have the worst trouble in a recession are the ones “that were kind of hurting to begin with,” Keller says. A prime example of this is the Gap. It had a strong stretch in the 1990s, establishing itself as the maker of simple yet smart clothing. Keller, however, was on the lookout for a downturn, because he expected consumers to get bored with the Gap’s offerings. That reaction did indeed happen, and the Gap made a classic brand revitalization mistake. “The one thing with revitalization you have to be really careful about,” Keller asserts, “is that you don’t panic when your sales go down.” When the Gap panicked, it tried to bring in much more fashion-forward clothes, chasing after customers that they never would have lured in the first place. “In the process, they disappointed and confused their core customers,” Keller says. “They’ve had a decade of that, and the recession has made it especially hard to get back on track.”

Audi has actually used the soft economy as a time to change its image, something Keller says smart companies can do. Over the past few years, it has invested heavily into its brand—overhauling design elements like the shape of its headlights and breathing new life into its marketing campaign, which now includes a series of Internet thriller movies starring Justin Timberlake. The strategy has paid off: Last year, the luxury car maker sold 50 percent more vehicles in China than it did the year before, and its October sales in the U.S. were up 25 percent from 2010’s figures. Twenty-five years ago, it accounted for just one percent of luxury auto sales; today it’s more like 10 percent.

Although most companies see their brand slip every now and then, it is not an inevitability. The antidote to sales slumps and periods of soul-searching is the process of “always reinforcing the brand, always innovating and staying relevant, always moving forward in the right direction,” Keller says. Great brands, such as Nike, do that well. They have so much momentum that they overpower any crises that come up. And such brands make quality an imperative. “The branding is important,” Keller says, “but it means nothing if your product isn’t any good.”

The article above is republished courtesy of http://www.tuck.dartmouth.edu/

The Arab Spring: How soon will foreign investors return?by Paul Antony Barbour, Persephone Economou, Nathan M. Jensen, and Daniel Villar*

The events of the Arab Spring have dramatically increased the risk perceptions of foreign investors. In directly affected countries, these events led to disruptions in economic activity including plummeting tourism and foreign direct investment (FDI) flows, all of which negatively impacted economic growth. While the economic impact was uneven across the Middle East and North Africa (MENA) region, for the region’s developing countries the growth rate assumption underpinning survey analysis in the Multilateral Investment Guarantee Agency’s (MIGA’s) World Investment and Political Risk Report for 2011 was 1.7%. [1] How much will these developments affect future FDI?

The financial crisis in 2008 led to declines in aggregate FDI flows into MENA. As events unfolded in 2011, FDI flows into MENA plummeted further in the directly affected countries; for example, in the first quarter of 2011, FDI inflows turned negative in both Egypt and Tunisia, which were two of the most affected countries. [2] The World Bank has forecasted FDI flows into MENA to decline in 2012, but to grow again in 2013. Over the medium and longer term, the region’s economic and demographic factors will continue to attract market-seeking foreign investors, more so under conditions of improved governance.

The findings of a foreign investor survey jointly undertaken in 2011 by the World Bank’s MIGA and the Economist Intelligence Unit [3] found that the turmoil did have a significant impact on corporate investors’ investment intentions concerning MENA: a quarter of investors put

their plans on hold, while others reconsidered (18%), canceled (11%) or withdrew investments (6%). Only just below a third did not alter their investment plans (see the supporting data attached to this Perspective at www.vcc.columbia.edu). Despite heterogeneity among the different countries in MENA, on balance, the turmoil has stressed existing investments and dampened plans for expansions and new investments. While there are differences between investors in extractive industries, these differences do not affect the overall results from a representative sample of investors worldwide. Thus, the findings are probably less negative than they would be if the oil sector was excluded. [4]

Some investors in the countries directly affected by the civil disturbances, especially investors in the energy and service sectors, have reported suspending operations. [5] All of this has been amplified by the worsening state of domestic economies, as current account deficits and budget deficits have widened, private capital flows have weakened, inflation has risen, and production and investment have declined. Political violence -- especially civil disturbance and to a lesser extent war and terrorism -- ranked particularly high as the risk of most concern as did governments’ abilities to honor their sovereign financial obligations.

The survey found greater confidence from multinational enterprises (MNEs) investing in stable democracies relative to stable authoritarian regimes. This pattern has also emerged in the region: just over half of the firms surveyed would invest in MENA, assuming that there is at least a year of stability under a democratic government. Nearly half of the firms in the survey said they would decrease investments should there be significant and persistent instability, even in the presence of democracy. Only 8% of firms would increase their investments under such circumstances. The worst-case scenario would be a period of

prolonged and significant instability, where nearly half of the firms surveyed would substantially decrease investments. In the event of a non-democratic regime that nevertheless succeeds in stabilizing the country for at least a year, 44% of the firms surveyed claimed that they would not change their plans for investment, essentially adopting a “wait and see” approach. This lesson is also supported by evidence from the private political risk insurance market, which stressed the difficulty in selling coverage in seemingly stable authoritarian regimes, but saw the demand for coverage in such countries (both in MENA and worldwide) rise as a result of the events in MENA.

The findings of the survey provide evidence of both pitfalls and possibilities arising from the Arab Spring. Investors will return fairly quickly once stability returns given the vast opportunities in the region. Most investors would prefer this stability to be under a democratic regime. Thus there is long-run optimism that, if political transitions in the region are democratic and coupled with political stability, the Arab Spring could increase FDI and help contribute to economic development in the region.

* Paul Antony Barbour (pbarbour@worldbank.org) is Senior Risk Management Officer for the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group. Persephone Economou (persa.economou@gmail.com) is a consultant for MIGA. Nathan M. Jensen (njensen@wustl.edu) is Associate Professor in the Department of Political Science at Washington University in St. Louis. Daniel Villar (dvillar@worldbank.org) is Lead Risk Management Officer for MIGA. This piece summarizes data and analysis from MIGA, World Investment and Political Risk 2011 (Washington DC: World Bank, 2011), http://www.miga.org/resources/index.cfm?aid=3227. The authors wish to thank Seev Hirsh, Lilach Nachum and Pablo Pinto for their helpful comments on an earlier text. The views expressed by the authors of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives

(ISSN 2158-3579) is a peer-reviewed series.

[1] The developing economies in MENA are Algeria, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Morocco, Syria, Tunisia, West Bank and Gaza, and Yemen. MIGA.

[2] Central Bank of Egypt, “Monthly statistical bulletin,” August 2011; Central Bank of Tunisia, “Development of main flows and balance of external payments receipts,” available at: http://www.bct.gov.tn/bct/siteprod/english/indicateurs/paiements.jsp#qqind.[3] The survey covered a representative sample of 316 senior executives from MNEs investing in developing countries. The survey was conducted in June-August of 2011. Therefore, the particular questions on MENA involved a self-selection of firms active or intending to invest in MENA; however, these were compared with the global questionnaire for consistency of overall findings.[4] Due to sampling size of the MENA specific investors, the survey is not able to clearly draw this distinction.[5] “Arab Spring cleaning: What regional turmoil has meant for Western investment,” Business Law Currents, August 25, 2011

“Paul Antony Barbour et al., ‘The Arab Spring: How soon will foreign investors return?,’ Columbia FDI Perspectives, No. 67, May 7, 2012. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).” A copy should kindly be sent to the Vale Columbia Center at vcc@law.columbia.edu.

For further information please contact: Vale Columbia Center on Sustainable International Investment, Jennifer Reimer, jreimer01@gmail.com or jreimer@lyhplaw.com.

The article above is republished courtesy of http://www.vcc.columbia.edu/

An innovative approach to marketing by Chris Blose

In 2006, when Nike was looking for a new way to reach customers, the company did more than just unveil a new shoe. Noting the rise of the iPod, Nike launched Nike+, an electronic kit that attaches to your running shoe and connects to your iPod.

While runners listen to their favorite tunes, Nike+ tracks their speed, distance, calories burned, and more. Users then can upload results to nikeplus.com, Facebook, and Twitter to share with fellow runners and track progress over time. Nike+ had sold more than 2.5 million units as of 2010. But the innovation goes well beyond sales, says Luc Wathieu, associate professor of marketing at Georgetown University’s McDonough School of Business.

By looking at trends beyond its core business — the growing obsession with personal electronics, the rise of social media, the competitiveness of runners — Nike engaged customers in a way it could not achieve by simply introducing a new shoe. Wathieu and colleague Elie Ofek of Harvard Business School wrote about Nike+ and other such marketing innovations in the 2010 paper “Are You Ignoring Trends That Could Shake Up Your Business?” in Harvard Business Review.

“Usually, innovators look at trends within their industry, and they adjust to them,” Wathieu says. “We think they should think about whatever their customer is passionate about and how they can grab onto it.”

Wathieu is driven by the idea of re-engaging customers. Too often, he says, marketers forget they are trying to break through to busy people amid a cacophony of messages. People will not seek you out simply because you tout the benefits

of your company.

“Marketers usually think about engaging with people in the room,” Wathieu says. “You have to get people in the room first.”

In the Harvard Business Review paper, Wathieu and Ofek outlined three strategies for getting customers in the room. The first, infuse and augment, is the closest to traditional marketing. The idea is to design a new product or service by building on strengths and infusing new value by augmenting its approach. For example, Coach, a luggage line that typically connotes opulence and luxury, struggled during the recession, when opulence and luxury were far from many people’s minds. In reaction to declining sales, they launched the cheaper, but still high-quality Poppy line. Poppy helped turn Coach’s sales back to the positive, and it did so without compromising the brand’s reputation.

Nike+ exemplifies Wathieu’s second strategy: combine and transcend. Nike combined its own expertise with that of Apple. Then it transcended its category by entering the realms of electronics and social media — all with an eye on integrating with the company’s traditional products.

The third approach, counteract and reaffirm, shows up in the Current Card. This prepaid debit card from Discover is aimed at teens and their parents. Parents can use a Web tool to set limits on the types and amount of spending their children can do, and they can track spending online. The goal, Wathieu says, is to counteract concerns about out-of-control online spending while also reaffirming Discover’s core business of facilitating that -spending.

Wathieu’s academic interests are diverse. For example, he and other colleagues have written forthcoming papers on language assertiveness in marketing. These papers blend psychology and linguistics to examine when a direct phrase such as Nike’s famous “Just do it” will work, and

when it will seem too preachy to customers. He also is doing a case study on LivingSocial, a company that has successfully turned customers’ attention to local deals and attractions.

Innovation in marketing can come from identifying trends that matter and seeking what energizes customers. At the very least, Wathieu hopes to shake marketers, especially those in declining industries, out of ruts.

“Sometimes we have to derail the train on which their industry might be stuck,” he says.

The article above is republished courtesy of http://msbmedia.georgetown.edu/

Successful Leaders Share Five Traits, Says Ian DavisSuccessful leaders share five traits that are more important than where they rank within their organizations, retired McKinsey senior partner Ian Davis told a Stanford MBA audience.

STANFORD GRADUATE SCHOOL OF BUSINESS — Ian Davis has advised some of the world's most successful CEOs. As a retired senior partner of McKinsey & Co., Davis says his experience has shown that successful leaders share five traits, regardless of their rank within an organization.

"Organizations tend to assume that the more senior you are, the better leader you are, which is not true," said Davis, who also served as worldwide managing director at the management consulting firm. "There are many CEOs I worked with [who], in my view, are not particularly good leaders, while many people who are never officially recognized as leaders are very good leaders. I think leadership needs to be viewed from the bottom, from the middle, and from the top."

While people think leadership best describes people directing companies or military regiments, Davis said the role is "a multifaceted concept" illustrating the influence wielded by "ring leaders, gang leaders, thought leaders, and faction leaders." In Davis' world, even "technology geeks" can be effective leaders.

It's all about context, he told the MBA audience: "You cannot look at leadership in the isolation of the context you're in. If you are trying to lead the Graduate School of Business or a medical faculty or a regiment, your leadership task is completely different. Leading a high-tech company whose heritage is in Korea or Taiwan is completely different from leading a high-tech company whose heritage is in Silicon Valley or Munich, even though they make exactly the same products."

So, he said, leadership is best explained by what successful leaders actually do — "not what they are, not what they say, but what they actually do."

Effective leaders do five things, Davis said — most importantly, setting a direction, whether it be developing a corporate vision or developing a distinct business culture. "People may not like it, they may not approve of it, or they may disagree with it. But … if you ask most people in the company, they will be able to tell you what that direction is, what the beliefs of the company are."

Secondly, rather than simply maintain the status quo, strong leaders initiate action. "A lot of ineffective leaders have talked about initiating things," said Davis. "Real leaders initiate stuff. That's a characteristic."

Great leaders also follow through with the initiatives they've developed, even if their persistence to achieving those goals comes off as "tenacity, determination, bullheadedness, or obstinacy," he said. "Always, things are going to go wrong. Sticking with things, through good

times or bad times, I think, is a really, really important part of leadership."

Another major quality in good leaders is an ability to motivate workers to carry out goals, using techniques that can range from giving encouragement to awarding financial bonuses to manipulation, he said.

Since workers pay keen attention to what the boss does, leading by example is another crucial trait, Davis said. "Whenever (leaders) say something or do something, people notice. It means whatever you say or do becomes an act of leadership by example."

Now a senior advisor at private equity firm Apax Partners Worldwide, following his retirement from McKinsey last year, Davis shared insights about what makes leaders great during the Dec. 5 View from the Top speaker address at the Stanford Graduate School of Business.

His observations were gleaned from decades spent at McKinsey, as well as his service as a non-executive director of oil and gas giant BP and membership on the boards of The Conference Board business research group and Teach For All, an international education nonprofit. He's also an advisory director of the King Abdullah Petroleum Studies and Research Centre and a member of the President's Council at the University of Tokyo.

Davis warned the MBA audience that they'd likely end up being frustrated in their first jobs out of college, but not to take it personally. Often dissatisfaction results from a lack of understanding of their company and its leadership expectations. Instead, he urged, "Spend time understanding the context, and often that means spending time understanding the history of the founders or the organization itself." He urged them to learn from difficult workplace experiences, but also not to be "seduced" if they get off to "a rocket start" on a

first job, since "that could be the breaking of you as well."

While some leadership skills can be taught, Davis believes other traits come only through doing. For example, communication and team building can be honed in the classroom, while other abilities — such as judgment, diplomacy, and sensitivity — must be acquired through experience, he said. Diplomacy in particular will be an increasingly important skill for corporate leaders as business becomes more global, Davis said, and developing the international savvy and diplomacy needed to succeed in that realm "takes time."

Davis said people don't need to work in the nonprofit sector to have immense social impact. "Don't get trapped by the thought that to do good you've got to be in the social sector," he said. "If you are running a big company or running a successful private equity firm, you build companies, you have a lot of money, you pay a lot of taxes, and you spend time mentoring the leadership. You're doing good."

Michele Chandler

The article above is republished courtesy of http://www.gsb.stanford.edu/news/headlines/VFTT_davis_2011.html

The Killer Question: Phil McKinney on How to Spark Innovation

In order to generate new ideas, remain competitive and unlock breakthrough innovations, Phil McKinney argues that we need to ask more questions. Most recently vice president and chief technology officer for Hewlett-Packard's (HP) $40 billion personal systems group, McKinney retired in December 2011. During his nine-year tenure at HP, McKinney founded and directed the company's innovation program office. In his new book, Beyond the Obvious: Killer Questions that Spark Game-Changing Innovation, McKinney argues that you have to ask "killer questions" to test your assumptions and break through what you know -- to find out what you don't know.

Below is an excerpt from Chapter 1: "Why Questions Matter," which documents the thought process that led to the idea of killer questions.

One day when my kids were still little I was sitting in the car with my daughter Tara. She was about four years old at the time, and as we drove down the street she noticed the curb along the side of the road and got curious about it. Suddenly I was fielding question after question about curbs. Why did we need them? What would happen if there weren't a curb? What were they made of? What's so good about concrete? What's concrete made of? Every parent has had a similar experience, but that afternoon sticks in my mind because it was one of the first times I turned to one of my kids and said, "You know what, I don't know the answer to that. Why don't you find out for both of us?"

When we got home Tara ran to her room and started to try and figure out the answers to the questions. She was excited to find the answers because I hadn't known them, and I'd passed on the responsibility of figuring them out to her. What I realized at that moment was that the natural

curiosity of kids gets lost over time. As adults we use our education and past experiences to solve the problems we face rather than relying on questions. It's these historical assumptions of what works that prevents organizations from generating

new ideas. After all, you can't change your core beliefs about your organization or industry unless you change something in your perspective about your business, industry, your customers or yourself. Think of it this way; if you want to start generating new output you first need new input. And the only way to get new input is to either find new sources of information and inspiration or find new ways of looking at the same existing information you've been looking at for years.

There are many ways to generate new input, but the most effective is to learn to ask the kinds of questions that can lead you to a real discovery. This is true both of the kinds of questions you ask other people, and the ones you pose to yourself. It's also true both in the straightforward semantic sense (you need to be able to use words in order to phrase an effective question) and in the larger philosophical sense (you need to know how, why and when to ask the right kinds of questions).

In that moment with Tara I realized there was a difference questions can make in the discovery process. Learning how to effectively phrase, ask

and use questions became one of the pillars of my innovation philosophy.

The Power of Questions

I've been fascinated by the power of questions, either good or bad, for my entire professional life. The more I thought about them, the more I began to notice how people used them. I started to see how some people had the innate ability to formulate and pose questions that propelled others to make investigations and discoveries of their own, and some people had the less desirable ability to shut their listeners down with bad questions, poorly asked. I believe that a good question is one that causes people to really think before they answer it, and one that reveals answers that had previously eluded them. I began to think more about how an individual could learn to ask good questions and avoid the pitfalls of asking bad questions. I also wondered whether a poor questioning technique could become a crutch, something that allows you to believe you are accomplishing something positive, when in fact you are doing the opposite.

As I listened to my children ask challenging questions of each other I realized I had taught them a profound skill. By passing on a love of questions I'd shared my belief in the importance of getting out there and proactively making our own discoveries about the world. My children weren't afraid or ashamed of not knowing an answer; instead they were invigorated by the process of finding it. I compared this attitude to the converse one that I'd seen throughout my career, namely employees who felt compelled to agree with their superiors or believed that saying "I don't know" would adversely affect their career. These men and women would have benefitted greatly from simply being empowered to admit that they didn't know, to ask good questions, and to seek out the relevant answers.

Bad Questions, Good Questions

The more I started to look at questions, and how essential they are to fostering creativity and

innovation, the more I realized that there are bad questions and there are good questions. And within those good questions, some just aren't relevant to the process of ideation. The key to using this book is to develop the ability to separate the good, useful questions from the bad ones. Here's a quick guide:

Tag Questions:

During my search, I realized that some of the most important questions to avoid are ones that don't really ask for a response at all. For example, tag questions. Tag questions are statements that appear to be questions, but don't allow for any kind of answer except for agreement. A tag question is really a declarative statement turned into a question, and used to get validation for the speaker's "answer." Family members, authority figures, or executives who want to appear to care about the opinion of another person, but really want their instructions carried out without discussion, often favor tag questions. A tag question can show that the speaker is either overly confident of his or her beliefs, or so insecure that he has to bully others into agreeing with him. Either way, his phrasing of the question shows that he is not willing to consider an alternative point of view. You're not actually being asked for an opinion, simply for a confirmation that you agree with them. When lawyers use tag questions in a legal setting, they are sometimes referred to as leading the witness, the questions being posed in such a way as to guide the person in a desired direction, and that is how you should think of a tag question as well.

That presentation was fantastic, wasn't it?

The new brochure will be based on the last version, won't it?

Tag questions can be incredibly damaging both to an individual and to an organization because they shut down the creative process. Say you've been tasked to come up with a new product but your boss asks you to verify that "the new concepts

that you are coming up with aren't going to be too different from the old ones, right?" By asking this question, she has taken away any power from your team to go out and do something really new. The fundamental point of asking a question is to get information, input, or ideas. Any question that restricts people from feeling free to honestly answer it is offensive; it reduces the quality of information you're going to get and makes the person being questioned feel that they are being dismissed.

Typically, a person who uses tag questions is a manager who believes that his role is to be directive. However, by doing so he misses out on the potential power of a team. Look at the way you communicate with your co-workers; if you find yourself asking tag questions ask yourself why. Do you doubt their ability to come up with their own answers, or do you already have an answer in mind that you would like them to validate? If you are simply looking to get validation for what you already want or believe, this runs counter to every philosophy about generating new and innovative ideas. When I'm working with a team, I'll always use a series of questions to see what they come up with, even when I already have an idea in mind of what the answer may be. Even if I give them that answer, it's always presented as a challenge for them to come up with something better.

Factual vs. Investigative:

After more searching and studying, I came up with two basic categories of good questions: factual and investigative. So, what are the differences between them? The objective of a factual question is to get information: "Do you want coffee or tea?" "How many units did we sell last week?" "Is there gas in the car?" You may not know the immediate answer to a factual question, but you know how to find it. There is no real discovery required beyond expressing your opinion, making a call, or looking at the gas gauge. Factual questions serve an important purpose in allowing us to communicate with

each other and exchange information. They are limited in their ability to do anything more nuanced than gather information.

An investigative question, on the other hand, cannot be answered with a yes or a no and is much more useful for our purposes. By definition, it is a divergent question, meaning that there is more than one correct answer (unlike factual questions). It cannot be answered with one phone call, or a quick check at some stats or figures, and forces us to investigate all of the possibilities.

The Socratic Method:

So how do you generate some good investigative questions? One of my starting points is the Socratic Method. Socratic questions are, in their simplest definition, questions that challenge you to justify your beliefs about a subject, often over a series of questions, rather than responding with an answer that you've been taught is "correct." A well-phrased series of Socratic questions challenges you to think about why you believe your "answer" to be correct, and to supply some sort of evidence to back up your beliefs. At the same time a Socratic set of questions doesn't assume you are right or wrong.

When using this method, Socrates would lead his listener to a deeper understanding of his own beliefs and how and why he justified them. When a student attempted to fall back on a belief prefaced by "I've heard it said that such and such is true," Socrates would gently push further, asking him what he himself actually thought, until the student finally got to the heart of what he thought and believed. Socrates would also find contradictions in a student's expressed belief, and ask him questions that forced him to consider these contradictions. Ultimately Socrates' goal was to help the student unveil his own thoughts and his own beliefs, and see them clearly for the first time. It was only by finally articulating one's own thoughts and bringing them into "open air," that the student could fully

understand the depths of his own knowledge.

Socrates believed that knowledge was possible, but believed that the first step toward knowledge was recognition of one's ignorance. It's the same in the idea-generation process; the first step to freeing yourself to find innovations is to recognize that the knowledge you currently have is insufficient, and that you need to go out and discover new information that will lead to new products or concepts.

My interest in the Socratic Method, and the glaring gap I found between Socrates' method of teaching with questions, and the way innovation and ideation is "taught" today, started me down the path of searching for specific questions that would challenge others to find opportunities for new ideas--questions I now call Killer Questions. It took me a while to determine them, but in the end I hit upon the old engineering standby; find something that works, and figure out why.

From BEYOND THE OBVIOUS, by Phil McKinney. Copyright © 2012 Philip McKinney. Published by Hyperion. Available wherever books are sold. All Rights Reserved.

"Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania."

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THE ART OF RETREATFour common pitfalls in cutting back

By Professor Michael Wade and Peter Tingling - June 2012

You work for an organizationthat has grown steadily by getting the fundamentals right –

hiring and developing good people, instilling a strong work ethic, conducting solid analysis, and making smart choices. Yet, despite these efforts, your company is struggling to make ends meet. The economy has faltered, your reserves are dwindling, and your biggest clients are scaling back. It is time to make cuts, but where do you start?

Many organizations currently find themselves in this situation. Recently, major cost cutting programs have been announced by Hitachi, BNP Paribas, Yahoo, Johnson Controls, Pfizer, and Air France, not to mention many of the world's national and regional governments.

Contraction is a critical part of the business cycle. Unfortunately, most organizations are not very good at it. As a rule, we are much more comfortable expanding rather than contracting, buying rather than selling, adopting rather than discontinuing, and hiring rather than firing.

Our research shows that spending reduction programs tend to be dominated by an inward-looking focus, revolve around emotionally charged arguments, and result in uncourageous decision-making.

In order for companies to succeed in scaling back, we uncover some of the most commonly encountered bad habits:

1. Remaining a slave to the budget cycle

Too many organizations fail to adjust their budgeting process to changing market conditions. Budgets remain on annual cycles, where performance is measured 'to budget,' even after it becomes clear that budget levels are no longer reasonable or sustainable given competitive or market changes. At best, budgets are static representations of last year's reality; and at worse, reflect conditions that were relevant many cycles ago. In place of a planned and deliberate re-consideration of all options, many organizations simply try to 'cut the budget' and thus do less of their original plan. Instead, they should re-evaluate the entire budget in light of changing conditions, and proceed accordingly.

2. Going for the easy wins

When it comes time to make cuts, firms often look no further than the most obvious targets. Unfortunately, the best targets are not always those that are most visible. For example, since they tend to be large and distinct, capital expenditure projects are often the first to be cut. However, in most cases, the lion's share of expenditure (and inefficiency) is hidden in operating costs. Operating expenses should be examined with the same frequency and rigor as capital expenses, ideally on the assumption of zero base budgeting. Courageous decision making means going beyond the most visible targets, and attacking the real sources of inefficiency.

3. Not culling the herd

It is well known by vintners that in order to make great wine, vines must be pruned during the season so that the rich flavor is not spread too thinly among the grapes. Companies should

follow the same practice, particularly during economic downturns. When times are good, companies tend to let a thousand flowers bloom; however, when performance falters, they fail to effectively go through rounds of pruning. Most organizations try to manage far too many initiatives. Only proven or promising projects that show a clear 'path to performance' based on well-defined metrics, and an unambiguous timetable can be spared. Initiatives that do not clearly demonstrate these factors should be considered for cutting.

4. Across the board cuts

A much too-common reaction to a downturn is to decrease spending across the board, perhaps by 10 or 15%. Governments are the main culprits in this regard, although many large corporations have also been known to follow this strategy. CEOs have argued a need to 'spread the pain' so that 'no one will be spared the knife.' This approach to contraction is, in fact, the very absence of strategy! What it really says is that management lacks the courage to act; is disinterested in making the kind of tough choices that are necessary in a downturn; or is unaware of the real priorities and where value is created. Across the board cuts are destructive because they are based upon the unlikely premise that all areas of an enterprise are equally important. Indiscriminate horizontal cuts only serve to penalize managers who have actively and correctly managed their businesses.

Rather, vertical cuts or strategic divestiture, based on clear priorities and rigorous measurement, should drive decision making during these periods. They provide a welcome opportunity to get rid of nice-to-have projects that offer little in the way of profits or synergy.

So, how should executives approach strategic decision making during a recession? We believe that the first step is to define a clear strategic direction, and from this, to develop a set of high-level priorities.

Each funding request, both for new and existing expenditures, should then be rigorously assessed and ranked against these strategic priorities. While there will always be exceptions, like for reasons of safety or compliance, forced ranking enables a stage gate hurdle process that winnows out non-conforming requests and allows management to compare opportunities and clearly delineate preferences. While priorities can be discussed in groups, we believe it is important that the rankings are analyzed and assessed individually, in order to reduce group think and other biases. Only in the final stage should the results should be aggregated into an ordinal ranking.

If managed properly, the objective of budget allocation is not so much to reduce costs as it is to prepare the organization for a better future. This process turns on establishing priorities and ensuring that only activities that support these priorities are advanced.

Due to decades of buoyant economic conditions, few managers today have experience with prolonged periods of contraction. It could be argued, in fact, that a true test of management is the effectiveness of decision-making during a downturn. We are currently in a shakeout period, where some firms will succeed while others will struggle and fail. In the future, we will associate this period with the rise of new global giants and the fall of others. To be successful in today's economy, managers need to carefully and strategically learn to avoid cutting flowers and watering weeds.

Michael Wade is professor of innovation and strategic information management at IMD. He teaches in IMD's Breakthrough Program for Senior Executives.

Peter Tingling is an Associate Professor at Simon Fraser University in Canada.

The article above is republished courtesy of http://www.imd.org/research/challenges/

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