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Monday, February 13, 2012

Team Scaffolds: Enhancing Group Effectiveness

Posted on 4:44 AM by Unknown
Melissa Valentine and Amy Edmondson of Harvard Business School have published an intriguing new working paper about team effectiveness.  Valentine and Edmondson explore a concept that they call "team scaffolds" in this paper.   The scholars ask the question: "It is increasingly necessary for 24/7 shift operations to include some component of team-based work. But how can organizations support such work among constantly changing groups of people in a setting where stable teams are not feasible?"  They examine this question by studying an urban hospital's emergency room.  However, the findings apply to other settings in which people often work in unstable/transitory teams. 

The scholars begin by pointing out that many organizations cannot design and use stable teams for certain types of work.  How then can they make these teams effective, given that the team design literature suggests a certain level of structure and cohesion boosts group performance?   Valentine and Edmondson explain that scaffolding proves quite effective in the emergency room setting that they studied.  Team scaffolds consist of "a bounded role set with collective responsibility for interdependent tasks."   In other words, team roles have been so well-defined that members can step into a role and interact effectively with their peers, even though they haven't worked together as a unit on a regular basis.

The emergency room in the study underwent a major transformation.  The ER did not have a team structure prior to the change.  Patients were treated in a sequential/linear process with various functions performed by different staff members who did not work as a team.  The hospital changed its organization structure, creating what they called "pods" - a physical location with dedicated computers, counters, supplies, beds, and crash rooms. The authors explain:

The pods were each staffed by one attending, one in-charge resident and possibly another resident or intern, and typically three nurses, one of whom was designated the “Pod Lead.” The pods themselves were stable structures that persisted over time, but the staffing of the pods changed constantly. Within some five-hour periods, all of the individuals staffing the pod composition may have turned over completely as a result of shift changes staggered across roles. The nurses, residents, and attendings (collectively called providers) were assigned to a pod at the beginning of each shift. Provider pod assignments were made more-or-less at random, and a provider may have been assigned to a different pod every shift. Their “pod mates” were typically different every shift as well. Education tended to happen within each pod following the redesign, rather than through a department-wide formal rounding process. The attending and resident worked closely together as they cared for patients and informally rounded together several times during the shift, as well as during the shift change between attendings or residents. Note that the pod system connected a clearly defined set of roles (the attending, one or two residents, and three nurses) with collective responsibility for a set of tasks (the patients assigned to the pod) bounded by a shared physical location.

What happened as a result of the structural transformation?   Valentine and Edmondson found that patients’ average time in the ER fell by nearly 40% after implementation of the pods.  The key, though, is that these pods did not constitute stable teams.  However, people worked together quite effectively in these group structures.  The authors argue that the well-defined boundaries and roles facilitated effective coordination.
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Posted in group dynamics, team scaffolds, teams | No comments

Thursday, February 9, 2012

Leaders, You Should Read History

Posted on 4:43 PM by Unknown
Fortune recently interviewed Bob Rodriquez, CEO of First Pacific Advisors. He explained the best advice he ever received. The guidance came from Charlie Munger of Berkshire Hathaway, when he visited a class Rodriquez was taking at USC in the 1970s. Rodriquez said, "After the class was over, I walked up to Charlie and asked him if there was one thing that I could do that would make me a better investment professional. His answer was, 'Read history, read history, read history.' And so I became a good historian, reading both economic and financial history as well as general history.What I learned is that people relate to the crises they have experienced. So when the crisis of 2008 came, it felt like an old friend to me because it had so many similarities to the banking crisis of 1907. Asking Charlie's advice and then reading history allowed me to put those things in context." I agree wholeheartedly. However, I would note that one must scrutinize historical analogies very carefully. We have a tendency to focus on similarities and ignore differences when drawing historical analogies. For more on reasoning by analogy, I highly recommend the work of Ernest May and Richard Neustadt - great book called Thinking in Time.
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Wednesday, February 8, 2012

Old Milwaukee: A Low-Budget Super Bowl Ad?

Posted on 7:14 AM by Unknown
Companies spend enormous sums of money advertising during the Super Bowl.   If you are Budweiser, you can afford to invest in this type of marketing.  However, if you are Old Milwaukee beer, it becomes more difficult to justify that type of marketing expense.   The firm simply doesn't have the scale to support that type of advertising.  Moreover, it's not a premium beer; the firm has a simple, low cost strategy.  Old Milwaukee came up with an ingenious solution though.  They developed a simple TV commercial with Will Ferrell, who happens to love their beer.   It didn't run nationally though.  The firm ran the commercial in only one market - North Platte, Nebraska.  The town has approximately 15,000 homes.   It's the second smallest TV market in the country by Nielsen standards.  Why run the ad in this market?  Old Milwaukee actually leveraged that low-cost TV ad to create excitement via social media.   Boston-based advertising agency Mullen has reported that the Old Milwaukee ad generated more mentions on Twitter Sunday night than many nationally aired Super Bowl ads.  Moreover, a user uploaded a low-quality copy of the ad onto YouTube.  Old Milwaukee set up a link to YouTube on its official Facebook page.  Soon, the ad had been viewed more often than Budweiser's primary Super Bowl commercial!

What's the lesson here?  If your firm has a low cost strategy, it must think creatively about how to market its products.  Social media offers an opportunity to promote a brand at very little expense.  However, many firms are blitzing social media platforms these days.  It's become a cacophony at times.  Therefore, you have to think about how to emerge from the clutter.  Old Milwaukee did just that with an ad that not only generated buzz initially on Twitter and Facebook, but that also had a second life as a story picked up in the mainstream media about an innovative marketing strategy.  That story, of course, will live on far longer than the immediate surge of interest generated on Twitter and Facebook Sunday night.  After all, look at this blog and many others which are writing about it!

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Posted in advertising, marketing, Old Milwaukee, social media, Will Ferrell | No comments

Tuesday, February 7, 2012

Do Colleges Need to Change Their Pricing Model?

Posted on 6:25 AM by Unknown
CNNMoney writer Blake Ellis wrote today about the substantial tuition reduction enacted by the University of Charleston in West Virginia.   According to the article, "After seeing enrollment decline for the first time in a decade, the University of Charleston, in West Virginia, slashed tuition by 22% for the upcoming school year hoping to entice more students."  Interestingly, applications haven't increased since the move, but deposits have risen substantially.  Obviously, the jury is still out on the move. 

How did the university afford the move?   They cut some costs, but they also chose to reduce financial aid.  Thus, the net price did not actually fall by 22%.  What rationale drove the change in pricing strategy?  Here is an excerpt from Ellis' interview with the university's president, Dr. Edwin Welch:

We realized parents and families were now considering the overall price, not just the discount [financial aid and scholarships] they would be able to get. As universities we tend to market education the same way Joseph A. Banks advertises clothes, thinking the advertised price is not that important but the discounts are the most important part. But that's what is driving middle-class students away. So it seemed we needed to take a fresh look.

Could he be right?  Does the price tag at many universities drive away certain families, because they fixate on the overall list price rather than the net price (after aid and scholarships)?  After all, families don't learn their net price until late in the process?  By then, perhaps the overall list price has framed their view of a school.  I wonder if other schools might try this "Everyday Low Pricing" model of college tuition, in hopes that prospective students will look first at them because they have the lower "everyday price."  
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Posted in college, pricing, tuition, universities | No comments

Monday, February 6, 2012

The Changing Composition of Top Management Teams

Posted on 8:19 AM by Unknown
Maria Guadalupe, Hongyi Li, and Julie Wulf have published an interesting paper that examines the changing size and composition of senior management teams.   The scholars compiled a dataset of US firms from 1986 to 2006.   They found that the size of the top management team doubled during this twenty year period (from 5 members to 10 members).   What drove the increase in size?  The researchers found that CEOs tended to add more functional executives to their senior teams (rather than more general managers with P&L responsibility for specific business units).   For instance, many senior teams now have a Chief Technology Officer, EVP of Human Resources, EVP of Supply Chain, etc.   Finally, the study shows that, "General manager pay decreases as functional managers join the executive team suggesting a shift in activities from general to functional managers-a phenomenon we term 'functional centralization.'" 

Are these trends all positive?  It's not clear to me.  In particular, I worry about the growing size of these teams.  Groups have a hard time being productive and efficient when they grow to double digits in terms of members.  The opportunity arises for more fragmentation within the teams.  Scholars have described a phenomenon called "fault lines" - where subgroups form along certain demographic lines, and friction emerges among the subgroups.  Communication patterns and information sharing may also suffer as team size increases, even if the group remains fairly cohesive. 
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Posted in leadership, organization structure, top management teams | No comments

Friday, February 3, 2012

Will Facebook Acquire Zynga?

Posted on 6:11 AM by Unknown
The Wall Street Journal has a good article describing the co-dependency that has evolved between Facebook and Zynga.  The paper reports the following statistics about the two firms:

"Facebook, based in Menlo Park, Calif., derived 12% of last year's $3.71 billion in revenue from Zynga, according to the social network's IPO prospectus released Wednesday.  Meanwhile, Zynga, the San Francisco-based social gaming company that makes many games that are played on Facebook, received 93% of its revenue last year from virtual goods it sells on the social network."

Economic theory suggests that the two firms may be headed for a merger.  Why?  Oliver Williamson, the Nobel-prizing winning economist, has argued that companies consider transaction costs when determining how to organize themselves.  Put simply, firms compare the efficacy of using the market to organize economic activity to the efficacy of organizing such activity within the firm.  Often, companies establish contracts, strategic partnerships, or formal alliances with other firms if the arrangement provides value to both parties.  However, these market-based transactions sometimes become problematic.  Why? One reason is that the potential for opportunism and hold-up occurs.  That is, the firms may try to take advantage of each other.  Such holdup tends to occur in situations of co-dependency. 

Let's take a classic example from Williamson's work.  Imagine an oil refinery adjacent to a pipeline, each owned by separate parties.  What if the refinery and the pipeline each had no alternative uses.  That is, the only way to ship the oil from the refinery was from the pipeline, and the only use of the pipeline was to ship that refinery's output.  In that situation, each party would be beholden to the other, and they might find it hard to work together amicably via contract or alliance.  Merger tends to be an outcome in such circumstances.

We had a similar situation in the entertainment business recently.  Disney and Pixar had worked together through a contractual relationship for many years.  Then, Disney and Pixar entered into contract renewal negotiations in 2005, and the relationship became strained.   Why?   I would argue that the two firms had become co-dependent over time.  Disney needed Pixar, because its own animation studios had fallen on hard times.  Meanwhile, Pixar needed Disney because the original contract had given Disney certain rights even if Pixar terminated their relationship.  Disney could continue using the characters from the early Pixar movies, and they could make sequels to those movies, even if Pixar partnered with someone else in 2006.  Pixar really didn't want to see that happen to their beloved characters.  Not surprisingly, Disney acquired Pixar in 2006, thereby choosing horizontal integration over a market-based relationship - just as Williamson's theory would predict.

Now, we could have a similar co-dependency emerging between Facebook and Zynga.  Could a merger be in the cards?  It's certainly something to watch.  On the other hand, Zynga has been working to diversify its revenue base lately.  That may lessen the co-dependency over time.
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Posted in acquisitions, Facebook, mergers, transaction costs, Zynga | No comments

Thursday, February 2, 2012

Overestimating economies of scale

Posted on 5:23 AM by Unknown
The Wall Street Journal's Heard on the Street column yesterday discussed Fiat's relationship with Chrysler.  The article cites the risks that Fiat faces, particularly in its home market given the EU fiscal crisis.  It suggests that Chrysler and the American market may be even more key to Fiat's future viability than many people originally thought.  The column stresses, however, that Fiat remains a sub-scale automaker, with only about 2 million units of production annually.  It points out that Fiat CEO Sergio Marchionne believes automakers must reach 6 million units to be cost competitive in the global market.  I think it's dangerous to simply take a CEO's assertions about economies of scale at face value.  CEOs often over-estimate minimum efficient scale for several reasons.  First, they assume market share is more highly correlated with profitability than it actually is.  Second, executives are often obsessed with top line growth, believing it will always bring greater profits.  Of course, undisciplined growth often harms earnings.  Third, CEOs derive personal satisfaction from running bigger and bigger firms.  They garner power and fame as a firm expands in size.  Fourth, leaders often overestimate synergies that will emerges they merge entities to go after scale economies.  Finally, executives forget to account for the very real possibility of diseconomies of scale that may emerge as large firms become more complex and bureaucratic.  
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