R&D
- In VMI Partnerships, the Devil is in the Data
- News in the News Biz
- Steel Tax
- History Matters
- The Mind Speaks, Marketers Listen
- Ads Improve Consumer Decisions
Books
In VMI Partnerships, the Devil is in the Data
The expression “letting the fox guard the henhouse” comes to mind when you first hear about Vendor Managed Inventory (VMI) systems, where a product manufacturer actually places orders for the retailer, determining quantities based upon consumption data provided by the store chain.
In the past decade, however, influential manufacturers such as Procter & Gamble and Campbell Soup initiated such partnerships to help smooth production cycles and improve profits. Retailers were wooed by the potential efficiencies of better inventory management and, in some cases, lower wholesale prices.
The win-win scenario carries a caveat, though, according to research by HBS assistant professor Susan Kulp. Her work suggests that the profit gains of VMI depend on both the retailer's willingness to provide detailed demand information and the manufacturer's ability to process such transmissions accurately.
In other words, if a retailer only gives the manufacturer warehouse stock information rather than actual sales data, or if the data is sent by fax instead of electronic transfer (which can be more efficiently verified), VMI may not pay off. To the degree the system operates without superior information, it lacks advantages over the traditional model where the retailer just places orders.
“When I started my research, there was a belief that these systems were unambiguously beneficial,” says Kulp, whose research on the topic is forthcoming in the Accounting Review. “I set out to analyze the conditions under which such systems were or were not beneficial to the manufacturer.” Interviewing leading VMI-experienced manufacturers and retailers, Kulp identified information transfer as a potential trouble spot. Her insights were supported by survey responses from 53 divisions of food and consumer packaged-goods companies indicating that VMI is more prevalent where retailers deliver detailed demand data via highly reliable transfer methods.
In short, manufacturers should think twice about implementing VMI if retailers are supplying only limited information or if information-processing capabilities aren't top-notch. Says Kulp: “We want to make sure people who are entering these contracts know what type of information environment they need.”
— Laura Singleton (MBA '88)
News in the News Biz
Professor Joseph Bower brought his expertise in management and economics to the newspaper trade in an article titled “News Is Strategic in the Newspaper Business,” which appeared in last fall's issue of Nieman Reports. “If the dissemination of news is not going to depend on the philanthropic spirit of wealthy individuals, then the newspaper business has to generate profit. Since 75 percent of newspaper revenue comes from advertising, and staff — at 16 percent of total cost — is the most important cost after newsprint, it is not surprising that publishers resort to layoffs when advertising turns down,” he wrote. But such layoffs, he warned, should take into account the paper's unique contribution to its readers. Bower advised most local papers to save money by not sending reporters into the field to cover national and international news. Instead, he said, they should take advantage of the larger news sources that provide extensive coverage from afar. “It is, however, essential to have local figures — byline reporters or the equivalent — who can interpret these national and international events in local terms,” he added. “The typical news conference in which hundreds of reporters compete to ask questions of the same celebrity, politician, or entertainer is economic nonsense. Quality is not enhanced by these huge numbers of journalists assembled to hear and disseminate similar news.”
Steel Tax
When President George W. Bush (MBA '75) imposed a tariff of up to 30 percent on most types of steel imported into the United States, the Boston Globe (March 10, 2002) turned to HBS professor Debora Spar to explain the implications. Noting that there are a lot of countries that can produce steel more cheaply than the United States, Spar said, “The industry has been seeking and receiving protection for almost thirty years. Parts of the industry have already restructured and become quite competitive in certain niches.” However, she continued, “there are higher costs in the United States that are unlikely to go away. Over the long run, you want firms to change their cost structures and move into different parts of the market.” That, she admitted, “is easy to say and hard to do.”
Asked what the likely fallout with trading partners will be, Spar gave a grave response. “It's only going to get messier. Countries like Russia, Korea, Brazil, and Japan are major producers of steel. They are going to retaliate, and the United States is a major exporter to those countries,” she said, adding that free trade has worked particularly well over the last decade because the United States has been in a period of economic growth. “As things slow down, industries get hurt,” Spar noted. “For individual groups, it's easy to see protectionism as the solution, even though in the long run it becomes part of the problem.”
History Matters
History shows us that when economic times are tough, customer relations are more important than ever, according to HBS professor Nancy Koehn. In “Chasing Dreams during Troubled Times: Lessons from the Past” (Boston Globe, January 22, 2002), Koehn acknowledged the difficulties facing today's marketing strategist in the wake of a softening economy, shrinking advertising budgets, and eroding consumer confidence, in addition to the aftershocks of September 11. “In this volatile environment, marketers and CEOs realize with new urgency that staying close to their customers is crucial,” she wrote, citing examples of business success stories that were launched in rocky times, including Estée Lauder and Microsoft. Koehn offered several bits of advice, such as “learn from your customers,” “use customer information to respond quickly to new priorities,” and “values matter,” and showed how companies like Intuit, Heinz, and Whole Foods benefited from following these maxims. “Past experience offers several landmarks to help guide marketers' thinking as they plot a course through choppy strategic and tactical seas,” concluded Koehn.
The Mind Speaks, Marketers Listen
Calling HBS professor Gerald Zaltman “a maverick marketing professor,” the New York Times reported on the interactive technique he developed to gauge consumer preferences using visual images, semiotics, and neuroscience. “While the conventional wisdom in his field says to take consumers at their word — to grill them about their tastes, buying habits, and favorite brands — [Zaltman] seeks to converse directly with their brains instead,” the Times observed (February 23, 2002). The Zaltman Metaphor Elicitation Technique (ZMET), the first patented marketing research tool in the United States, has been used by the likes of Coca-Cola, General Motors, and AT&T to craft marketing strategies. “Most new products are developed and launched using focus groups and questionnaires,” Zaltman said, “and 60 to 80 percent of all new products fail.” Because he believes that consumers' deepest thoughts are unconscious and often visual, for the last decade Zaltman has solicited visual images from subjects to chart thoughts about a wide array of products. While skeptics may see the ZMET as a passing fad, others consider it evidence of a growing trend toward the use of methods that take a deeper, more psychological look at consumer behavior.
Ads Improve Consumer Decisions
Advertising can be good for you! Sounds fishy to the average consumer, but it's implied by conclusions from research by HBS associate professor Bharat Anand and his colleague, Ron Shachar, of Tel Aviv University.
The pair began by studying TV ads that promoted all prime-time shows during one week in 1995. Linking this with Nielsen viewer panel data on over fifteen hundred individuals, Anand and Shachar developed a model to determine how well TV viewers' choices of programming “matched” their likely viewing preferences (based upon their demographic profile and certain observed viewing habits). Results, published in a recent working paper, showed that the number of promotional spots viewed had a positive impact on the “match” between viewer and show. Essentially, the more promotions they had seen, the more likely viewers were to pick a show judged by their viewing habits and external measures to be “right” for them. Anand notes that, despite the wide availability of TV schedule listings, this study showed that promotions do play a significant role in informing viewer choices. A novel aspect of the research was the creation of a model that could distinguish two key effects of advertising: the persuasive (building interest and awareness) and the informative (educating the consumer about product attributes).
Separating these effects allowed Anand and Shachar to identify another, less-heartening reality for advertisers: When a match of consumer and product is poor, more exposure to advertising can actually decrease the probability of a consumer choosing that product. This boosts the case for precision target marketing, which, though often controversial for perceived breaches of privacy, could be beneficial to consumers in that it educates them about products they need.
“If in fact we believe consumers are generally ill-informed about products, there's a utility cost to the individual of not receiving ads,” says Anand. “Imagine a world where there's no advertising — essentially we'd be making some very uninformed decisions.”
— Laura Singleton (MBA '88)
Books
Buy, Lie, and Sell High
by D. Quinn Mills
(Prentice Hall )
Any investor or person involved in America's financial-services industry will be interested in Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble. In this, his latest book, HBS professor Quinn Mills argues that until plummeting stock valuations in the spring of 2000 burst the Internet stock “bubble,” venture capitalists, investment bankers, mutual funds managers, accountants, and corporate leaders had sponsored a financial mania at the expense of the average American investor and of the American economy. While Enron made the headlines, Mills says, these other actors were culpable as well.
The title of Mills' book derives from a comment made by former SEC chairman Arthur Levitt regarding the actions of teenager Jonathan Lebed who broke federal regulations as a day trader on the Internet. Buy, Lie, and Sell High includes chapters explaining the events leading to the creation of the Internet bubble, from the Internet's humble beginnings in the 1960s as a federally funded defense research tool to the “wild excitement” generated several decades later by discoveries of its vast commercial applications. Mills shows how capitalism's financial value chain — comprising venture capitalists, bankers, and entrepreneurs and compelled by the lure of potential fortunes to be made — failed in its role to exercise caution in the formation and financing of new businesses. “Like sheep to the slaughter” (the title of one chapter), these groups ignored several fundamental tenets of business development: choose leaders with experience, don't grow new companies too fast, and take companies to IPOs only after several quarters of profitability. Without blaming any one group, Mills illustrates how the missteps of each affected the actions of others, culminating in the “mass hysteria” (another chapter title) leading to the crash.
Buy, Lie, and Sell High provides specific suggestions for reforms to the regulation process in the United States that could help to avert another such disaster in the future. It also includes a section about Germany's similar experience with Internet commercialization, as well as contributions from ten industry participants and observers.
“Unless fundamental changes are made,” Mills says, “another bubble is a certainty, with the likelihood of another recession following it and of another serious setback for further privatization of pensions in America.”
— Nancy O. Perry
When All Else Fails
by David A. Moss
(Harvard University Press)
Although Associate Professor David Moss completed his draft of When All Else Fails: Government as the Ultimate Risk Manager five months before September 11, 2001, that day's tragic events offer a precise illustration of the book's theme: the all-important role of government in managing risk, catastrophic and otherwise. In an era when the purpose of government has been debated and the privatization of many governmental responsibilities — schools, prisons, and garbage collection among them — has been attempted, When All Else Fails argues that government has been and will inevitably continue to be the nation's ultimate risk manager and insurer of last resort.
Drawing on history and economic theory, Moss investigates the formation of policies as diverse as limited liability, deposit insurance, Social Security, and federal disaster relief, paying particular attention to the original thinking behind them. He concludes that the nation's lawmakers, finding shortcomings in the private sector's ability to manage risk, have ensured over time that individual citizens are protected.
Tracing governmental involvement in risk management to the early 19th century, Moss shows how government institutions have served to promote capitalism and economic growth by shifting risk from shareholders (through limited liability) and from entrepreneurs (via bankruptcy laws) to creditors, and by spreading risk throughout the population (via deposit insurance and even the use of government-issued money). He discusses how the rise of big business provoked reforms that, by the early 20th century, transferred the risks of industrial accidents and worker safety to the employer. Later governmental measures protected workers in the event of unemployment and provided for security in retirement. Today, the government protects citizens from an array of hazards ranging from defective products, to environmental pollution, to floods and other natural disasters.
Adam Smith's free markets notwithstanding, Moss reminds the reader that government involvement in the management of private-sector risks is nothing new in the United States. “Policymakers have long played a vital role in helping to manage risks in the private sector,” says Moss. “Never has this been more evident than it is today, in the aftermath of September 11. When all else fails, government truly does emerge as the ultimate risk manager.”
— Nancy O. Perry
HBS Press Books in Brief
(Harvard Business School Press)
The Weather Channel: The Impossible Rise of a Media Phenomenon, by Frank Batten (MBA '52) with Jeffrey L. Cruikshank (51st PMD), is the story of a cable network that succeeded when all the experts predicted it would fail. Former chairman and CEO Batten offers a personal account of high-stakes entrepreneurship and a fascinating case study of a large media business both experiencing and driving change.
In their groundbreaking book, The Venture Imperative: A New Model for Corporate Innovation, Heidi Mason and Tim Rohner — leading voices in venture strategy — prove that corporate venturing is the best way to intelligently and successfully test and launch innovative corporate growth strategies.
Through vivid stories from all walks of life, Leadership on the Line: Staying Alive through the Dangers of Leading, by Ronald A. Heifetz and Marty Linsky, presents straightforward strategies for navigating the perilous straits of leadership. Whether parent or politician, CEO or community activist, leaders will learn how to exercise leadership and survive and thrive to enjoy the fruits of their labor.
Winning through Innovation: A Practical Guide to Leading Organizational Change and Renewal, 2nd edition, with a new preface by authors Michael L. Tushman and Charles A. O'Reilly III, reveals why short-term corporate success often increases the chance of long-term failure. Drawing on lessons from firms worldwide, this book provides systematic tools that managers can use to overcome the success syndrome, manage innovation, and develop action plans to attain — and maintain — industry leadership.
From the Harvard Business Review Paperback Series:
Harvard Business Review on Breakthrough Leadership. In this important collection, well-respected authorities such as Daniel Goleman and Lieutenant Gen-eral William G. Pagonis explore what it takes to be a leader in the exciting — and ever-changing — work world.
Harvard Business Review on Advances in Strategy. Featuring all-new articles from experts such as Michael E. Porter, Kathleen M. Eisenhardt, and Robert S. Kaplan, this collection presents the latest breakthroughs in strategic planning from some of the most preeminent names in the field.
Harvard Business Review on Culture and Change. This diverse series of articles provides insights into the confusing and often difficult process of changing workplace culture. The authors examine why people resist change, show how passive aversion to cultural problems affects company performance, and provide an actionable framework for transforming corporate culture.
To order HBS Press books, call 800-545-7685 or visit www.hbsp.harvard.edu. Other books by HBS authors are available at the Business School Coop (617-499-3248; 617-547-5003 fax).
