The View from Harvard Business

The great thing about running an “everything under a buck” chain is that competitors won’t under price you. Ever.

The bad thing?

You have to sell more than a billion items to make a profit.

“Yes, that’s right — we have to sell a huge number of items to generate that figure,” reports 99 Cents Only CEO Eric Schiffer. “Our average price works out to be about 80 cents because we also price many items at well under a buck, so we sell around 1.5 billion items annually. It really is a transaction-intensive business, and our systems have to be able to deal with that.”

Anyone involved in retail will have a blast reading this interview, which is in the current issue of Harvard Business School’s Alumni Bulletin.

Some other highlights.

Every penny counts. Literally. “If I add a penny of cost to an item, that’s 1 percent of my profit… So we try to eliminate waste and increase productivity in every aspect, whether it’s compliance, shipping, handling, distribution, storage — we strive to find ways to deal with costs creatively.”

The first sale is the hardest. “Our biggest hurdle is getting someone to come into a store for the first time. They may be nervous: ‘Where’s this from? Did it fall off a truck?’ No, it hasn’t — it’s a good quality product. So the first time they may only buy some cleaning items. On the second visit, maybe a name-brand shampoo. Next, they try some Arizona Iced Tea: ‘Well, it looks safe. I’ll buy it.’ Then they buy some bananas.”

Don’t confuse your taste for the customer’s. Schiffer’s purchase of shrimp deveiners and clam knives sat on the shelves for years. “I would always walk by the section to remind myself that it doesn’t matter if I like something.”

Curious. Have you shopped 99 Cents Only? What was your experience? Why are they successful?

Related Reading About Strategic Pricing

Be a Price Maker, Not a Price Taker (HBS Working Knowledge)

Seven steps toward naming your own price.

(Image by loop oh, CC 3.0)

New ideas must be exposed to challenge, question, and clarification.

But if managers don’t understand the right way to run an evaluation process, even a cure for the common cold will collapse under a barrage of “what about?” questions from well-meaning (or not) colleagues and partners.

“It’s just hard to have robust answers about an unknown future state,” writes innovation expert Scott Anthony on HBR.org. “Too frequently, taking the time to answer ‘What about…’ questions doesn’t bring you any closer to achieving the goal of creating booming growth businesses.”

Many of us already know this is true. It’s the moment just after glorious inspiration strikes, when we start to ponder how we can sell it to the organization. We can largely predict who is going to raise questions in order to:

• Appear smart to the boss by offering a wide range of (largely unfounded) negative scenarios.
• Make sure they are on record as being skeptical about an idea should it go down in flames, but offering “supportive”  vetting should it be a winner.
• Promote their own career and ideas by throwing water on the good work of others.

Anthony offers another reason why what ifs kill ideas. It’s because they are often raised from established interests and powerful incumbents inside the company who have a stake in the status quo.

The solution? Replace rounds of what if with early and persistent market testing. Says Anthony:

“Substitute early action for never-ending analysis. Figure out the quickest, cheapest way to do something market-facing to start the iterative process that so frequently typifies innovation.”

Read his incredibly insightful post, How to Kill Innovation: Keep Asking Questions, for more details, then come back here and tell us how you deal with getting the “What about?” runaround.

(Why image by e-magic, CC 3.0)

“Hey, I see your door is closed, but can I interrupt you for just a second; it’s important.”

“No, sorry.”

“What? Just need a second of your time.”

“No. Come back when my door is open.”

You don’t want to interrupt management consultant Peter Bregman when he has his Do Not Disturb sign out. Even if you are his children. “Out” he told his two young daughters as they invaded his home office recently.

“But, we just . . .”

“‘Out.’ I said once more, feeling like a jerk,’” he writes. “I wanted to see them. I even worried for a second that they really needed me. What if one of them was hurt? What if there was a fire in the kitchen? But I didn’t look up. My wife was home. If there was a fire, she would put it out.”

Jeez, he IS a jerk, you might be saying. But Bregman is making an important point when it comes to rules. If rules protecting your work time are to work, you have to stick to them. Even when it’s very uncomfortable to do so. Otherwise, people will keep breaking them. He writes in his post, The Cardinal Rule of Rules:

“Setting a rule and then letting people break it doesn’t make them like you, it just makes them ignore you.”

Bregman points to studies we’ve chatted about here that show when our work is interrupted, it can take hours to get back on track. That’s right, hours. If at all. And the average worker is interrupted numerous times during the day.

If you are suffering Workus Interruptus, however, the first step if NOT to close your door. Rather, it’s to figure out why you are being interrupted in the first place. Are you not making yourself available as much as necessary? Are your reports picking up the balls you are constantly dropping? Once these issues are taken care of, don’t be bashful about carving out time to focus on your priority work. And don’t give in.

How good are you at protecting your time? What strategies do you use to tell people, in essence, buzz off!

(Image by Ahd Jal, CC 3.0)

Introduced by Harvard Business School professor Robert Kaplan and colleague David Norton, the Balanced Scorecard has remained an enduring tool used by thousands of organizations to align business activities with strategy.

But it was lacking a crucial piece, a shortcoming driven home by the economic crisis, says Kaplan. Now the Scorecard might undergo some changes or additions, Kaplan tells SearchCIO.com.

“If I had to say there was one thing missing that has been revealed in the last few years, it’s that there’s nothing about risk assessment and risk management. My current thinking on that is that I think companies need a parallel scorecard to their strategy scorecard — a risk scorecard.”

The risk scorecard, he continues, would prompt thinking about things that could go wrong, hurdles that could be raised, and ways the organization can get early warning signals to suggest corrective action.

“[Risk management] turned out to be an extremely important function that was not done well by many of the [financial services] companies we talked about earlier. Risk management was siloed and considered more of a compliance issue and not a strategic function. Now we see that identification, mitigation and management of risk has to be on an equal level with the strategic process.”

Risk management is a hot-button topic all over the economic and political landscape. Retiring Harvard Business School Dean Jay Light has discussed at length the need for business management schools to give students the skills to identify, evaluate and manage risk.

In a recent letter to Berkshire Hathaway shareholders, Warren Buffett said business leaders must not only be better risk managers, but be held accountable:

“A board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. If he fails at it — with the government thereupon required to step in with funds or guarantees — the financial consequences for him and his board should be severe.”

Are you giving a fresh look at risk in your own organization?

More Reading

Strategy Execution and the Balanced Scorecard (HBS Working Knowledge)

Here is something they don’t teach you in business school, but should: How to delicately dislodge one’s self from the Conversation from Hell. This is incredibly important knowledge, especially if the chat you’re having is with someone who can help your career.

We all dread these awful encounters. Topics usually covered include the following.

• Their preposterous views on: nitwit bosses, American Idol contestants, yoga instructors, Sarah Palin, and simple fixes for global warming.
• Their petty annoyances with: clueless spouses, undeserving Academy Award winners, temperamental garage door openers, lavish salaries earned by postal carriers, and the new pain in some body part suffered upon awakening this morning.
• Their obsessive and somewhat disturbing hobbies including: HO gauge model trains, ballroom dancing, Victorian tea parties, collections of Naziana and converting PCs into fish tanks.

Lacking a Jaws-of-Life tool to pry ourselves from an unfortunate encounter, is there an artful way to disengage?

Jodi Glickman Brown — who I’m sure is a stunning conversationalist — offers up a three-step process in her unlikely post on HBR.org, Exiting a Conversation Gracefully. She summarizes:

1. Start with “Thank you.”
2. Discover a spontaneous transition.
3. Suggest forward momentum or a consolation prize.

Here is her real-life example:

“Thanks so much, what an interesting perspective. Unfortunately, I’d better get going, but I will definitely tell my father in law about the exhibit, he’s an avid history buff. Thanks again.”

I think we can do better. Share with us your technique for delivering the ‘K Bye.

(Yawn image by Orin Zebest, CC 3.0)

The term “organizational silo” really doesn’t do them justice. Silos are actually heavily guarded fortresses called the Marketing Department or Finance or Operations, which are protected by impenetrable vines of bureaucracy, entrenched interests and Established Ways of Doing Things.

It is here that all good thoughts of collaboration come to die.

Silos are tough to destroy short of an ugly scorch-the-earth reorg. So when management gurus advise you to “break down the silos!” — the corporate boundaries that stand between you, your customers, and innovation — think bridges, not hammers.

Ranjay Gulati, a Harvard Business School expert on how organizations work (or don’t), puts it this way in a recent interview with livemint.com.

“You need to find ways to connect all the silos in your organization. This would involve task forces and working groups. Companies need to bridge all the silos through their employees. You cannot mandate it.”

“Connect all the silos” is the key idea here. Here are three ways to build these necessary bridges.

• Empowering. In traditional organizations, information was power, so it was locked away by the holders of that information like a king protected gold in his depository. Today, information must be shared to be of any use, says Gulati. “Businesses must ensure that their people in various units have access to knowledge about the customers they are catering to and have opportunities to use that knowledge to better serve the marketplace.”
• Hiring. As you hire, look for people who value collaboration over turf building, who enjoy team work over solo endeavors. Organizational behavior changes one hire at a time.
• Rewarding. The organization needs to motivate collaborative behavior. “Your employees must be encouraged to bust through silos when necessary and should be rewarded for collaborations that produce successful customer solutions,” Gulati writes.

HBS Working Knowledge has more on Gulati and his new book, Reorganize for Resilience.

What’s your plan of attack for silo busting?

(Castle image by lilCystar, CC 3.0)

A new study from Harvard’s Belfer Center for Science and International Affairs warns that reducing carbon dioxide emissions in the transportation sector may require gas prices greater than $7 per gallon by 2020.

“Options now being discussed in Congress cannot by themselves achieve the significant reductions in the transportation sector needed to meet the Obama administration’s targets for total U.S. greenhouse gas emissions by 2020,” the report concludes.

The problem. We drive too much, and are driving more. Nothing gets us out of our cars like high fuel prices (See Summer of 2008). Thus, we need increased gas prices, combined with sale of more efficient vehicles, to repair our deteriorating environment.

The good news for the economy, however, is that “aggressive climate change policy need not bring the economy to a halt,” the report states.

“Even under high-fuels-tax, high-carbon price scenarios, losses in annual GDP, relative to business-as-usual, are less than 1%, and the economy is still projected to grow at 2.1-3.7% per year assuming a portion of the revenues collected are recycled to taxpayers.”

Here’s a summary of the study, which includes a link to the report itself.

What trade offs are you willing to make to help the environment?

(Gas pump image by Charles Williams, CC 3.0)

A recent post on HBR.org concludes that the onslaught of negative media coverage of Toyota is not hurting the company, at least with current customers. In the poll, a high number of owners say they would buy Toyota again.

“Our results show Toyota has brand insulation,” state the three authors of the post, Does Media Coverage of Toyota Recalls Reflect Reality? “Customers refute the overly pessimistic views being taken by many reporters and business experts. So, it was a great story, the Fall of Toyota. But so far, it’s just a story.”

Proof positive that brand equity works, right? Not so fast.

This brings me back to a great debate that BNET blogger Geoffrey James, who writes the highly informative and provocative Sales Machine blog, recently had with his readers. James contends marketing investments in brand marketing campaigns just wastes money that could better be spent on sales generation. It’s the success or failures of the products themselves, and what customers say about those products, that create brand equity, he argues — not what a company gins up in the marketing department.

I thought James had it all wrong, but now I’m starting to wonder. Toyota customers clearly are remaining loyal because of the great experiences they’ve had with their cars and service dealers in the past. This fits with the James hypothesis: Good product = good brand.

His argument takes on much more weight when you look at U.S. vehicle sales in February. While GM and Ford both posted double-digit gains, Toyota’s numbers fell 9%. Toyota spent decades building a reputation for quality, both by building great cars and by developing a brand reputation built around quality and reliability. Clearly that brand equity is eroding in the minds of recent car buyers. Bad product = bad brand.

Sure, Toyota can rise to the top again. But it will only do so by building great cars and pleasing customers, not by shoveling money into brand marketing.

So what’s your take on the value of branding? Are you, like me, starting to rethink the boundaries of this idea? Or do you believe that it is exactly the power of Toyota’s brand that has saved it from further disaster?

In a recent portrait of Avatar director James Cameron, Rebecca Keegan outlines five leadership rules the director brings to each movie set. Reading it I was struck by how Cameron’s style matches what we’ve learned about Apple CEO Steve Jobs.

But don’t go teaching these traits, which admittedly produce incredible innovation, to MBA students. In fact, following any of these styles will get you fired — unless you have the inspiration genius that can deliver results like Cameron and Jobs.

Here are three areas where the computer and cinema wunderkinds overlap.

Bonding Through Innovation

Cameron. “Breaking new ground is Cameron’s raison d’être — nothing interests this man unless it’s hard to do,” Keegan writes. “But innovation has also become a way of bonding his teams… For Cameron, a sense of exploration isn’t just personally enriching, it’s a crucial tool for motivating and uniting his teams.”

Jobs. When Jobs created the original Macintosh team in the early 1980s, he moved the group to a remote building on the Apple campus, raised a pirate flag above the roof, and moved in a popcorn machine to give his people a sense of esprit de corps. Today, management experts prefer you unite your groups rather than pitting them against each other, but they also love the idea of inspiring your team with sense of purpose they can rally around.

More Perfection, Please

Cameron. On Avatar, Keegan reports, “Hours were spent on the smallest details, like getting alien sap to drip precisely right…. It’s hard to argue with Cameron’s nitpicky style, however, when audiences thrill to immerse themselves in the richly detailed worlds he creates.”

Jobs: Just weeks before launch of the original iPhone, Apple decided to replace the plastic touch screen with optical-quality glass. The change not only delayed the introduction, but caused its screen vendor, Balda, to reconfigure parts of its assembly line “causing a material impact on financials,” according to AppleInsider. For Jobs, however, the aesthetic of the product would have been ruined by an inferior screen.

Inspiration Through Fear

Again, not a great trait you’d teach to MBAs, but both Cameron and Jobs are stern taskmasters who demand the most of their employees, and occasionally cross the line to get it.

Cameron. “Many Cameron alumni will share a story from their first film with him, a day they were sure they were going to be fired, almost hoped for it. But Cameron rarely fires people. ‘Firing is too merciful,’ he says. Instead he tests their endurance for long hours, hard tasks, and harsh criticism. Survivors tend to surprise themselves by turning in the best work of their careers, and signing on for Cameron’s next project.”

Jobs. “”It was probably the best work I ever did,” former Apple designer Corsdell Ratzlaff told Inside Steve’s Brain author Leander Kahaney. “It was exhilratating. It was exciting. Sometimes it was difficult, but he had the ability to pull the best out of people.”

If these men, both brilliant in their own fields, managed by the book, I doubt they would be nearly as successful. What they share is passion for the work, and their management styles both demand and instill passion in the people that work around them.

Have you worked for someone with the passion exhibited by Cameron and Jobs? What was the experience like, and what did you take away from the experience?

Here’s a quick thought on measurement to contemplate as you head into the weekend.

Scientists constantly wrestle with the problem of how their very presence in a research setting can change the behavior of what is being studied. This same principle was brought to a business realm by Robert D. Austin in his groundbreaking 1996 book, Measuring and Managing Performance in Organizations.

What Austin learned was that the very act of measuring something often creates the wrong behavior as a result, behavior that is against the goal of the measurement. So if a company chooses to study the failure rates of  parts coming off an assembly line, workers respond by slowing down production to raise quality. And if the company measures unit production, quality may suffer in the rush to get product out the door. In both cases the measures are achieved (yippee!), but the overall goals of the company are perverted.

Microsoft’s Steven Sinofsky, who ran the Window’s 7 product team, writes about this phenomenon in a new book written with Harvard Business School professor Marco Iansiti, One Strategy. Measuring the “bug fix rate”, for example, encourages the withholding of bugs until the fix is assured. He says:

“Thus understanding that if we choose to measure something, we are also choosing both to exclude some data and realize the direct action of the measurement. Trying to correct this by adding yet another counter-measure only yields a Rube-Goldberg status report that few can understand and even fewer acknowledge or act on.”

So think about this time the next time you are deciding on Key Performance Indicators or other measurements in your business.

The way to beat this problem is admittedly difficult: measure everything, not selectively.