I just came across this item from WSJ online: Best Buy Founder Gets Green Light to Pursue Buyout. I’ve long been a Best Buy customer — it is typically my go-to store for need-it-right-now purchases of not-too-exotic electronics items. Lately, the firm has been having financial trouble, consistent with the now-familiar story of bricks-and-mortar succumbing to online competition.
What’s interesting is that Richard Schulze (the original founder of 46 years ago) is considering buying back the company as part of a turnaround effort. This is interesting because, as a strategy scholar, I cannot help but wonder what, exactly, he thinks he can do to return the firm to health that couldn’t be done without him. According to this article, his plan is: cut prices to be competitive with online retailers like Amazon.com, improve the customer experience, and avoid cost reductions. Am I missing something or does this sound akin to making up for negative margins with increased volume?
For those of you who also follow twitter, LDRLB, an “online think tank that shares insights from research on leadership, innovation, and strategy” has just posted a list of Top Professors on Twitter. The categories are Leadership, Innovation, and Strategy (15 profs in each category). Good lists — all good folks with thoughtful views on the world of strategy. Nice to see a number of StrategyProfs bloggers listed.
There is now a large stream of scholarly literature on “platforms” – loosely, third-party services designed to bring transacting parties together. Amazon.com and eBay are obvious examples. Broadly interpreted, so are services like online dating sites (see the work by Hanna Halaburda and colleagues).
With this in mind, I came across the following article: Ghostery: A Web tracking blocker that actually helps the ad industry | VentureBeat. Ghostery is an app offered by the advertising technology company Evidon. The app is used by privacy-conscious web surfers to block web tracking services. When a new tracker attempts to install a tracking cookie on a browser sporting Ghostery, the tracker is blocked and Ghostery sends the tracker information back to Evidon to be added to the company's database of web trackers, which improves the quality of the app.
The interesting twist in the business model is that Evidon then turns around and licenses its tracker database to the very ad networks its app is designed to block. In fact, says Evidon CEO Scott Meyer, “When a new web tracker comes on the scene, they often want to be listed in Ghostery. It’s proof that they’ve arrived and have influence.”
So, what do we call a service that helps side A avoid side B while helping side B pursue side A? Seems as if this phenomenon should have its own, suitably clever-yet-scholarly term.
My colleague Josh Gans recently turned me on to UBER, a smartphone-based taxi service. I used it for the first time yesterday to get to the Toronto Airport. I’ll be surprised if this technology doesn’t eventually kill the taxi business as we know it.
From the user’s perspective, you simply download an app and sign up for the service online. When you want a cab, you open the app. It shows you all the Uber vehicles around you on a google map. It tells you how many minutes it will take for one to get to you (in my case 8). You hit a button and, if you are so inclined, you can watch your car approaching on the map. A few minutes later, viola!, you receive a message telling you your cab has arrived. Our car was a spotless black limo-style sedan. The transaction is handled through your account with them via your credit card. No money changes hands with the driver (tip is included) and a detailed receipt is immediately emailed to you (great for expense reports). The cost in our case was identical to the standard fare + tip.
As far as I’m concerned, the experience dominated that of the status quo by a significant margin. It got me to thinking about the business model. As an investor, I would always be wary of any business 3 computer science grads from MIT could replicate in a basement. I can’t imagine there is anything in the Uber technology that creates a meaningful entry barrier. Moreover, unlike a Facebook type business, there don’t seem to be any network externalities working to the advantage of the first-mover.
On the other hand, there are non-technology features of the business that are central to its success and, perhaps, not so easy to replicate. The most obvious is setting up a base of independent drivers. I was chatting with our driver and learned that substantial resources are devoted to vetting drivers and, once they are on board, regularly checking up on them to make sure the standard of service (car cleanliness and so on) remain high. That requires some infrastructure and know-how.
Then, there are the reputation effects. Strong reputation is going to be a substantial benefit on the supply side – i.e., recruiting and maintaining good drivers. Plus, for the first time, a supplier of taxi services can build up not just a national but international retail brand. That’s a big deal. Apparently, Uber does not have to contend with local medallion laws — the cars are not marked and cannot be hailed from the street. This will help them a lot in expanding their business.
Still, the service only works for people with smartphones — a big limit to growth, at least for now. Also, it is hard to imagine that one or two competitors won’t take a run at them, especially if (as I suspect) this business really takes off. When that happens, who is going to appropriate the value? What is scarce in this situation? There appears to be no shortage of taxi drivers, though being able to find and maintain top-quality ones should confer some advantage. Also, my intuition is that the market will support two or three such businesses, not tens or hundreds. So, oligopoly prices under constrained capacity, at least for the high-end, high-quality version of the service, are likely to obtain.
Yet, the arrival of competition will surely send some additional value the consumer’s way in the form of lower prices. And this is not exactly a high-margin business to begin with. Therefore, at some point in the future, expect to see an established Uber lobbying local governments to regulate its segment of the business — waxing poetic on why it is in the public’s interest for cities to issue them some form of competition-inhibiting, medallion-like licenses of their own.
This is sobering: The looming student loan bubble – Almost half of all student borrowers were not making payments. 1 out of 4 in debt repayment past due on student debt.: “The looming student loan bubble – Almost half of all student borrowers were not making payments. 1 out of 4 in debt repayment past due on student debt.”
A terrific paper by Cormac Herley, Microsoft Research, came out entitled, “Why do Nigerian Scammers Say There are from Nigeria.” It turns out that 51% of scam emails mention Nigeria as the source of funds. Given that “Nigerian scammer” now make it regularly into joke punch-lines, why in the world would scammer continue to identify themselves in this way? The paper was mentioned in a news item here, if you want the executive summary version but, really, I can’t imagine readers of this blog not finding the actual paper worthwhile and fun (it contains a terrific little model of scamming).
In a nutshell, the number of people who are gullible enough to fall for an online scam is tiny compared to the population that has to be sampled. This creates a huge false positive problem, that is, people who respond in some way and, hence, require an expenditure of scammer resources but who ultimately do not follow follow through on being duped.
As the author explains, in these situations, false positives (people identified as viable marks but who do not ultimately fall for the scam) must be balanced against false negatives (people who would fall for the scam but who are not targeted by the scammer). Since targeting is essentailly costless, the main concern of scammers is the false positive: someone who responds to an initial email with replies, phone calls, etc. – that require scammer resources to field – but who eventually fails to take the bait. Apparently, it does not take too many false positives before the scam becomes unprofitable. What makes this problem a serious issue is that the size of the vulnerable population relative to the population that is sampled (i.e., with an initial email) is minuscule.
Scammer solution? Give every possible hint – including self-identifying yourself as being from Nigeria – that you are a stereotypical scammer without actually saying so. Anyone replying to such an offer must be incredibly naive and uninformed (to say the least). False positives under this strategy drop considerably!
UPDATE: Josh Gans was blogging about this last week over at Digitopoly. He’s not convinced of the explanation though. To the extent there are “vigilante” types who are willing to expend resources to mess with scammers, the Easy-ID strategy could incur additional costs. As an interesting side note, in discussing this with Josh, he at one point suggested the idea that when legit firms come across scammers, they should counterattack by flooding them with, e.g., millions of fake/worthless credit card numbers (setting of something like a false positive atom bomb). Just one snag: US laws protect scammers from these kinds of malicious attacks.
Let me begin by acknowledging that the scientific process is far from perfect. It often heads off in wrong directions for extended periods, operates in fits and starts and isn’t cheap. Yet, science is to the discovery of knowledge what democracy is to the governance of society (Churchill’s dictum: the worst form, except for all the others that have been tried). Presumably, the “biases” Freek and Steve are talking about have been with us since Galileo. Yet, science advances all the same.
I put the word “biases” in scare quotes because I’m wondering how one would distinguish the scenario Freek identifies from one containing objective researchers with strong priors. Objective researchers are allowed to have strong priors, especially those who are experts in a field.
Still, suppose we stipulate that researchers’ emotions or preferences often lead them to hold dogmatic beliefs with respect to some favored, yet false, views (i.e., they completely ignore new, contradictory information). If the following conditions hold, then a field that follows the scientific method will eventually discard the false views: 1) not everyone in the field believes the false view; and, 2) it is possible to collect facts that refute the false views.
The reason for this is that scientific institutions provide enormous incentives to the “young Turks” of a field to overturn conventional wisdom. It’s true that there is also strong pressure on young scientists to conform to the CW. And one may well be able to enjoy a quiet career as a scientist by going whichever way the wind blows. But, you’ll never get famous that way. The history of science is loaded with examples of now famous scientists who are famous exactly because they broke with the CW.
Nor do I agree with Steve that some form of external refereeing is necessary for the system to work. True, it might take a generation for the up-and-comers to pry the CW from the cold, dead fingers of their senior colleagues but, eventually, that does happen. No external audience is required.
The problem with strategy (and most areas of social science) is that many of the objects in our theories are difficult, if not impossible, to measure. When this is true, the scientific process breaks down because item (2) above does not come in to play. So, for example, we have a theory known as “Porter’s 5 Forces” being taught without refinement from its original form for over 30 years. Indeed, in strategy, scholars are able to stake out a wide variety of sloppily constructed, ambiguous, and logically suspect theories for extended periods precisely because the lack of key data make them impossible to refute.
Start with Why, by Simon Sinek Came across this TED presentation by Simon Sinek. Normally, I skip the practitioner-oriented stuff, but this sounded sufficiently coherent and interesting to cause me to buy the book.
This online education thing seems to be picking up steam: Stanford Professors Daphne Koller & Andrew Ng Also Launching a Massive Online Learning Startup. The missing piece is still certification. Once that exists, bricks-and-mortar delivery of higher ed will face some nasty competition … and we’ve seen how people feel about BaM — just ask Best Buy, Borders, or Blockbuster.
Of course, retail shopping is not the same thing as getting educated. There are similarities. For example, BaM is expensive and inconvenient in both cases. Also, in both cases, the younger generations are extremely comfortable with the online technology. Yet, it’s the differences that should be most concerning. Education-on-demand has the potential to solve many problems. This feature will be highly appealing to most potential students. Even more threatening to the traditional model: the price of online education taught by professors from top schools is not just lower by the savings in BaM distribution costs — it’s zero. Think about that – zero.
Most of the colleagues with whom I discuss these developments argue that there is simply no substitute for the real-time, in-person, interactions available in the traditional classroom setting. They believe that this will continue to motivate students to pay a premium for the experience. I wonder. It is not obvious to me that students get some special utility premium from classroom interactions. Ask yourself this: do your students consider “cold-calling” a welcome feature of sitting in your class? In my judgment, most students would actually pay to avoid it.
Besides the assessment problem, there is another hurdle for the online education model. Clearly, no professor can answer the specific questions of 100,000 students. The online institutions are going to have to find a way to staff some form of virtual office hours in which students can get answers to their questions. My sense is that there is plenty of well-trained talent in India to staff office hours for these courses. Heck, in ten years, online course providers will be able to pick up highly experienced, unemployed domestic PhDs to man the chat rooms on the cheap.
If you want to see just where the MBA business may soon be heading, read this – just in from Balkinization (HT: Instapundit): The Law School Crunch Is Here–Finances and Quality to Suffer. New numbers released by LSAC show applicants to law school for 2012 are down in every region of the US vs. previous year, with the majority experiencing drops of 15%-20%. Enrollment is also dropping – 2012 may see the lowest enrollments since the 1990s (from 52,000 enrolled in accredited programs two years ago to a possible 43,000 this year). With such a precipitous enrollment drop comes low quality students and severe financial difficulties. The bad news is that even at these low numbers, the number of graduates far outstrips the number of available jobs. Tamanaha estimates the equilibrium number of first year enrollments to be around 35,000. The good news is hard to find.
The law school industry appears to lead its b-school counterpart by a few years. Many of the trends affecting law schools – the most salient being the discouraging cost/benefit ratio facing prospective students – are also affecting graduate business schools. The lag between the two may be due to the fact that, for law schools, the immediate value of a law degree is much more transparent. One cannot be a lawyer without a law degree and the only purpose in having a law degree is to become a lawyer. When the bottom falls out of the market for lawyers, one would expect it to fall out of the market for law education in short order. Since MBAs are, ostensibly, useful in any business endeavor, the connection between the education and practitioner markets is less obvious.
That said, business schools face other challenges. For example, law schools still provide an important certification function and, as such, have presumably retained a requisite level of educational content. This maintains their position as a necessary link in the professional chain. Business school educational content, on the other hand, has been on a downward glide path ever since the advent of Business Week surveys in the late 80s (and the Northwestern response innovation to treat students as “customers”). With no objective certification requirement, b-schools have been free to dumb down the education, admit large numbers of questionably-qualified-but-able-to-write-a-check students, and increase activities that have little to do with learning (e.g., social networking). Simultaneously, we see the stirrings of competition from untraditional sources, such as high quality schools in Europe, China and India (previously a growth segment of the domestic MBA education market), free online courses from top schools such as MIT and Stanford, and alternative forms of education (such as E[enstitute]‘s apprenticeship approach). These differences suggest that the bottom, when we hit it, may be worse than that for law schools.
During a discussion of these developments the other day, a young colleague objected to (what he interpreted as) my Cassandra-like apocalypticism on this topic. The objection was misplaced. I do believe the market for MBAs is going to get a lot tougher in the near- to mid-term – perhaps catastrophically so for programs outside the first tier. In the long-term, however, the turbulence is going to force our institutions … wait, I mean us, the faculties … to revise our business and educational models to compete effectively. The reason to start thinking about the bad-news scenarios now is to prepare. So, when the crunch comes, clear-thinking colleagues can step up to implement successful responses. In my judgment, the market for business education is going to become much more fragmented and diversified. This strikes me as a good thing, with one winning strategy being to take the research-education link and its attending certification role seriously once again. And, that, in my opinion, would be a wonderful development.
Yahoo Job Cuts: Dan Loeb Remains Unsatisfied – Deal Journal – WSJ: “Yahoo Job Cuts: Dan Loeb Remains Unsatisfied”
When times get tough, coherent, long-term strategy often goes right out the window. Instead of thinking through a comprehensive plan and using it to guide tactical decisions, panicky managers start slashing staff, capital projects and resource outlays helter-skelter. Morale fails, the best employees jump ship, core assets and capabilities languish or are sold outright. And thus begins the death spiral. A comprehensive, coherent plan not only guides reallocation of resources and cost reduction activities, but it also provides reassurance to the employees, suppliers, customers and investors you want to keep.
Ron Adner is a colleague and long-time friend at Dartmouth’s Tuck School. This practitioner-oriented book is based upon his highly original research on innovation. More when I have had a chance to read and digest.
This is the answer to those who think we will keep our research-based MBAs above water by making the curriculum more “relevant in the real world” … by which people seem to mean sacrificing academic content for: external projects with business sponsors, “living” case studies, 1st summer internships, support services for personal grooming, etc. As I have long argued, research faculty are not efficient providers of substitute “real world” experiences.
Apropos this discussion, last week, E[nstitute] launched in NYC by founders Kane Sarhan and Shaila Ittycheria. The idea is to pick up promising candidates with a high school diploma and put them through a two-year apprenticeship program mentored by some of NYC’s top entrepreneurs. Impressive.
And, it isn’t just business schools this program threatens — in a recent article, Brad Mcarty, editor at Insider points out, “… the average public university (in the US) will set you back nearly $80,000 for a 4-year program. And a private school will cost in excess of $150,000. At the end of that time, you have a bellybutton,” he writes. “Oh sure, you might have a piece of paper that says you have a Bachelor of Science or Art degree but what you actually have is something that has become so ubiquitous that it’s really not worth much more than the lint inside your own navel.”
That’s strong stuff and, sadly, uncomfortably close to the truth. Moreover, it speaks to strong potential demand for apprenticeship-style entrepreneurship programs like the one mentioned above. Personally, I think it’s terrific. The existence of programs like this create more value at the society level. From the b-school foxhole, they also force research-based MBA providers to think more carefully about what, if any, comparative advantage we have vis the many non-traditional competitors we now see invading our industry.
Hint: the answer will have to involve our research. This is what we do. And, contrary to the whining and hand-wringing of so many traditional MBA providers, teaching young people cutting-edge general principles (i.e., research-based knowledge) has substantial market value. We just stopped doing it a couple of decades ago.
This is what happens when the b-school market has excess capacity. ROI for students is negative, enrolment declines and, at some point, it is literally the case that the value of the land the school is built upon becomes more valuable in some alternative use.
When you read this, you realize just how little we really know about learning. Major implications for the study of strategy, of course. But, also, a glimmer of hope that I may one day pursue that long-abandoned rock career. Article here: Guitar Zero: A Neuroscientist Debunks the Myth of “Music Instinct” | Brain Pickings. Book here.
The drumbeat continues: MIT launches free onine “fully automated” course. Aside from the fact that these innovations have major implications for the livelihoods of my friends and I, the economics are interesting per se.
With the elimination of capacity constraints on the distribution side, will brick-and-mortar education providers go the way of Blockbuster and Borders? The market does not like brick-and-morter. It is inefficient – costly and inconvenient.
What happens when one professor can serve the entire market? Will superstars play an even larger role in academia? Will there be a market for top researchers (scarce) or good teachers (less so)? The same question holds at the institution level. Will everyone get a degree (and work for) HBS one day?
UPDATE: Megan McArdle provides a more thoughtful essay on this event at the Atlantic.
Last week I had the great good fortune to attend the Max Planck Institute at Leipzig’s first conference on Rigorous Theories of Business Strategies in a World of Evolving Knowledge. The conference spanned and intense four days of presentations, exploration, and discussion on formal approaches to business strategy. Participants were terrific and covered the scholarly spectrum: philosophers, psychologists, game theorists, mathematicians, and physicists. Topics included cooperative game theory, unawareness games, psychological micro-foundations of decision making, and information theory. It was heartening to see growth in the community of formal theorists interested in strategy and my guess is that the event will spawn interesting new research projects and productive coauthoring partnerships. (Thanks to our hosts, Jurgen Jost and Timo Ehrig for organizing and sponsoring the conference!)
If one had to pick a single, overarching theme, it would have to be the exploration of formal approaches to modeling agents with bounded rationality. For example, I presented on subjective equilibrium in repeated games and its application to strategy. Others discussed heuristic-based decision making, unawareness, ambiguity, NK-complexity, memory capacity constraints, the interaction of language and cognition, and dynamic information transmission.
Over the course of the conference, it struck me just how offensive so many of my colleagues find the rationality assumptions so commonly used in economic theory. Of course, rational expectations models are the most demanding of their agents and, as such, seem to generate the greatest outrage. What I mean to convey is the sense that displeasure with these kinds of modeling choices go beyond dispassionate, objective criticism and into indignation and even anger. If you are a management scholar, you know what I mean.
Thus, at a conference such as this, we spend a lot of time reminding ourselves of all the research that points to all the limitations of human cognition. We detail how humans suffer from decision processes that are emotional, memory constrained, short-sighted, logically inconsistent, biased, bad at even rudimentary probability assessment, and so on. Then, we explore ways to build formal models in which our agents are endowed with “more realistic” cognitive abilities.
Perhaps contrary to your intuition, this is heady stuff from a modeler’s point-of-view: formalizing stylized facts about real cognition is seen as a worthy challenge … and discovering where the new assumptions lead is always amusing. From the perspective of many management scholars, such theories are more realistic, better able to explain observations of shockingly stupid decisions by business practitioners and, hence, superior to the silly, overly simplistic models that employ a false level rationality.
I am not mocking the sentiment. In fact, I agree with it. Indeed, none of the economists I know dispute the fact that human cognition is quite limited or that perfect rationality is an extreme and unrealistic assumption. (This isn’t to say there aren’t those who believe otherwise but, if there are, they are not acquaintances of mine.) On the contrary, careers have been made in game theory by finding clever ways to model some observed form of irrationality and using it to explain some observed form of decision failure. If this is the research agenda then, surely, we have hardly scratched the surface.
Yet, as I thought about it during the MPI conference last week, it dawned on me that our great preoccupation with irrational agents is misdirected. That animals as cognitively limited as us often, if not typically, fail to achieve rational consistency in our endeavors is no puzzle. What else would you expect? Rather, the deep mystery is how agents so limited in rational thought invent democracy, create the internet, land on the moon, and run purposeful organizations that succeed in a free market. Casual empiricism suggests that the pattern of objective-oriented progress in the history of mankind is too pervasive to ascribe to dumb luck. Even at the individual level, in spite of their many cognitive failings, the majority of people lead purposeful, productive lives.
This leads me to remind readers that economists invented the rational expectations model precisely because it was the only option that came anywhere close to explaining observed patterns in economy-level reactions to changes in government policies. This, even though the perfect rationality assumption is axiomatically false. There you have it.
Which leaves open the challenge of identifying which features of human cognition lead to persistent patterns of success in highly unstable environments. I conjecture that our refined pattern recognition abilities play a role in this apparent miracle. Other candidates include our determination to see causality everywhere we look as well as our incredible mental flexibility. Social factors and institutions must be involved — and, somewhere in there, a modicum of rationality and logic. After all, we did invent math.
Many of you will have heard by now that Kodak is likely to file for Chapter 11 bankruptcy sometime soon. Their present strategy appears to be to wind down the business by selling off many of their patents. I guess my main surprise upon seeing them back in the news was that they were still in business. Apparently, it takes an extended period for these behemoths to fold for good.
The source of my surprise was the fact that I used to teach Kodak managers in both the executive and part-time MBA programs at the Simon School in Rochester, the home of Kodak’s headquarters. Just to be clear, these men and women were great students … bright, curious, open-minded, and typically well-trained. My purpose here is not to jump on the current bandwagon and blame Kodak’s present troubles on the stupid, selfish, rapacious tendencies of its 1%-er senior managers. Quite the opposite. Rather, I’d like to question what role, if any, the things they learned in b-school strategy classes played in the formation of, ultimately, misguided business plans.
Harking back to the late 90s, when I was teaching EMBA classes that were populated with about 1/3 senior managers from Kodak, I vividly remember initiating class discussions about the disruption digital technology was going to have on Kodak’s legacy business. Unlike the automobile manufacturers of the 70s, who really missed the significance of Japanese competition, Kodak managers fully understood that the new digital technologies were going to change their industry forever. Sure, there was a lot of uncertainty about the speed and path by which transformation would occur. But, it wasn’t the case that these smart people didn’t see it coming. They got it. And they were optimistic and dedicated, in my experience to a person, to implementing strategies that would permit Kodak to successfully ride the new technological wave.
Why were they so optimistic? When challenged to discuss it in class, they proudly explained that Kodak’s “core competency” was “color”. The reasoning went something like, “We understand color and its application to photography better than any other firm. This knowledge will be as important for success in digital applications as it was in analog film. Therefore, we are wonderfully positioned for whatever challenges the market presents.” The problem, from my perspective was two-fold: a) the thinking did not seem to go much deeper than this; and, b) the strategy literature did not have much to offer to help them think deeper than this.
Many have complained that the RBV, which is the source of this core-competency thinking, is a tautology: core competencies are unique resources that cause a firm to persistently outperform its peers; all firms that persistently outperform their peers have core competencies. I don’t agree with this complaint. Indeed, my sense that the pioneers of the RBV were on to something substantially influenced my desire to study strategy. That said, the “theory” underlying the RBV doesn’t go much more than one step beyond the tautology. And, much of where it goes is wrong (e.g., having resources that are inimitable is neither necessary nor sufficient for persistent performance advantage).
So, my energetic, smart, dedicated EMBA students, when presented with a strategy theory that was frustratingly close to a tautology, developed a strategic conceptualization of their firm that was – not surprisingly – frustratingly close to one as well. At the end of the day, it seemed to be an article of faith among my students that “knowledge resources about color” were going to save the day. (As we are all only too aware, smart people are masters at locking onto a favored idea and finding all kinds of arguments to support it.) As a teacher, it was incredibly difficult to push them deeper into a critical analysis of how, specifically, this “color know-how” was going to be their lifeline. New competitors, new product distribution channels, radical changes to how photographs are shared and consumed? No problem — we know color!
Part of my teaching frustration, which became part of my research motivation, was that the extant literature did not offer much in the way of tools to help these folks think about such issues in a complete, consistent, and efficacious way. Worse, in my judgement, teaching those folks a shallow set of ideas actually facilitated their transition into a dangerous state of groupthink. Holding up a piece of tautological thinking as the pinnacle of scholarly theory doesn’t exactly encourage students to think beyond tautology.
Our field has more than its share of interesting conjectures (i.e., informally generated speculations). What we need now are more scholars who are willing to roll up their sleeves and dig into the details. And patience. Lots of patience.