​According to Bloomberg BusinessWeek, “several analysts have consistently suggested the shares are depressed because of Barger’s focus on passenger-friendly initiatives that leave shareholders at a disadvantage.”

Fortune Magazine echoed these sentiments, reporting “above all, {analysts} hate that JetBlue provides the most leg room of any domestic U.S. carrier in coach, with a seat pitch of 33 inches standard. By comparison, the legacy carriers have cut their seat pitch in coach down to 30 inches, which has allowed them to stuff more seats on their planes… {Analysts} view Dave Barger, JetBlue’s chief executive, as being “overly concerned” with passengers and their comfort, which they feel, has come at the expense of shareholders.”
Wolfe Research chimed in with additional advice to management: “JetBlue has ample opportunities to unlock value including a first checked bag fee, increasing seat density, cutting capex, dropping hedging, simplifying the fleet, and overbooking… to name a few.”

Some analysts such as Helane Becker of the Cowan Group have gone even farther,  openly calling for Barger’s head:  “We believe a management change would lead to a change in philosophy and likely morph the model similar to one of Spirit Airlines although not as extreme.”

This week, Wall Street naysayers got their wish, as jetBlue announced that Barger’s contract would not be renewed.  In February, Robin Hayes, jetBlue’s COO will succeed Barger as CEO, perhaps presaging a concerted pruning of jetBlue’s signature passenger-friendly perks.

This melodrama is reminiscent of Wall Street angst towards Amazon, where many analysts also feel that CEO Jeff Bezos has also been putting the welfare of customers ahead of shareholders.  For example, Slate columnist Matthew Yglesias has called Amazon ”a charitable organization being run by elements of the investment community for the benefit of consumers.”

Since when has superior customer service become viewed as a management liability?
CEO’s like Dave Barger and Jeff Bezos have managed their companies with a decided bias towards long-term value creation, brand distinctiveness and customer loyalty, rather than short-term profit maximization.

In this regard, Barger’s track record is actually considerably better than assessed by jetBlue’s critics.  In May, 2007, Barger inherited a seriously over-extended airline that was reeling from an existential crisis of mortifying customer service meltdowns.  Barger had to engineer a turnaround during a severe depression that wreaked havoc on airline balance sheets and income statements for at least three years, ultimately driving American, Frontier, Aloha and others into bankruptcy.  But by 2011, the results of Barger’s transformation of jetBlue were clearly evident.
​
The figure below compares jetBlue’s stock price appreciation  vs. the North American airline industry as a whole during Barger’s tenure.  As shown, stockholders who invested in JBLU on or after January 3, 2011 have enjoyed returns at or mostly above the industry as a whole through September, 2014.

Imagine you’re a brand manager for a consumer packaged goods product, clawing for tenths of a percent of market share against aggressive national and store-brand competitors.  The pressure to add product line extensions are constant and seemingly compelling:

• Your competitors recently launched new flavors, packaging designs and value-priced variants, supported by increased promotional spending for end caps, coupons and print advertising which have begun to eat into your market share
• Your product line has begun to look stale and you haven’t had a new “story” to tell to retailers or consumers for a while
• Your company’s Big Data quants have detected pockets of untapped demand in certain ethnic, gender and geographic segments that arguably could be better served with targeted new offerings.
  
  

Each of these market signals suggests a strong incentive to push for new variants in your product lineup.  Moreover, you believe (but can’t prove) that improvements in warehouse automation and logistics systems at all levels of the supply chain have reduced the costs of coping with complexity.  Under these circumstances, marketing professionals are seemingly free to unleash their full creative talents to craft targeted offerings for ever-smaller micro-markets to boost demand.  Hallelujah!
​
Examples of product line proliferation abound:

• The typical US supermarket now carries between 30,000 to 50,000 SKUs, up from 15,000 two decades ago.
• The four major US wireless service providers now offer a total of nearly 700 pricing plans
• Across wide ranging industries including automotive, chemicals, machinery,  pharmaceuticals and fast moving consumer goods, product complexity has increased by 220% over the past 15 years while product life cycles have shrunk by 30%
• Amazon is putting pressure on manufacturers and brick and mortar retailers by putting an astonishing array of goods just a mouse click away from all consumers.  For example, if you’re in the market for dog biscuits, Amazon gives you (and Fido) well over 100 unique unique choices.

The tech sector also often falls prey to allowing excessive product-line complexity to weaken brand images and value propositions, as exemplified by Evernote. Founded in 2008, Evernote is a cross-platform, “freemium” app designed for note taking and organizing and archiving personal information. In other words, Evernote is designed to help individuals and work teams store and retrieve any information in any format on whatever devices they happen to be working on.

By 2013, the company seemed to be on a roll; it had registered eighty million users and attracted over $300 million in investment from venture capitalists who valued the company at one billion dollars. But over the next two years, the company ran into trouble. In 2015, Evernote laid off nearly 20 percent of its workforce, shut down three of its ten global offices and replaced its CEO.

It turns out that the vast majority of Evernote’s users only signed up for the free app and didn’t see enough value to upgrade to a paid subscription. Struggling to generate revenue, Evernote lost its focus
and continuously released new products that added complexity, and often performed poorly. The company developed so many features and functions that it became increasingly difficult to explain to newcomers or even veteran users exactly what the product was.

As Evernote’s former CEO Phil Libin explained, “people go and they say, ‘Oh, I love Evernote. I’ve been using it for years and now I realize I’ve only been using it for 5 percent of what it can do.’ And the problem is that it’s a different 5 percent for everyone. If everyone just found the same 5 percent, then we’d just cut the other 95 percent and save ourselves a lot of money. It’s a very broad usage base. And we need to be a lot better about tying it together.” Evernote wound up spreading itself too thin and lost sight of its core identity and primary consumer value proposition.

To avoid this common management trap, let’s pause for a reality check on the true impacts of product complexity.  The harsh reality is, the vast majority of product line extensions do not make financial sense.
Virtually every management consulting company has an online white paper outlining their approach to dealing with the problem of excessive product line complexity.  Try Googling “Product Complexity + _______” and you’ll see what I mean from McKinsey, BCG, Bain, Booz, Accenture, AT Kearney , Roland Berger et al.  Academics have also weighed in with innumerable scholarly studies on the same issue.
If you’re not familiar with the literature, I’ll spare you the effort by recounting four main takeaways:

1. Most companies have too much complexity in their product and service lines, i.e. hidden but real costs that outweigh the market benefits of product variety
2. The adverse impacts are pervasive, including increased cost, decreased quality, brand dilution, customer dissatisfaction and sometimes decreased sales due to increased forecast errors, stockouts and other factors
3. These impacts are difficult to isolate and measure, complicating corporate efforts to reign in the insidious drag of excess complexity
4. But each consulting company promises to crack the code with a 5- or 7-step process designed to optimize product assortment.
   
   

These proposed complexity reduction “solutions” are highly technocratic and frankly pretty boring exercises .  The typical approach seeks to quantify (with some simplifying assumptions) the costs and related impacts associated with each increment of product line complexity.  The art and science lies in determining the “break points” in product line complexity beyond which costs spike due to the need for expensive new production lines, warehouse space, logistics systems, etc. to cope with burgeoning product variety.  The resulting costs-as-a-function-of-complexity estimates are compared to an analysis of demand, which typically manifests an 80/20 rule, i.e., a few product variants account for the bulk of total sales.  Invariably this exercise points to an optimal point beyond which additional complexity engenders more cost than justified by minimal increases (or possibly decreases)  in revenue (see exhibit).

These solutions are analytically elegant, mathematically precise and rigorously prescriptive.  Have the quants really provided an viable approach to avoid the pervasive challenge of excess product line complexity?

Actually, no.

The problem is that these efforts typically treat the symptoms but not the root cause of excessive product line complexity.  Unless companies address the underlying drivers of bloated product lines, they are likely to slip back into bad habits after a crash complexity reduction initiative.  Not unlike yo-yo diets, when it comes to excessive product line complexity, recidivism rates are quite high.

Moreover, technocratic solutions to optimize SKU counts overlook the profoundly more important link between product line complexity and overall business strategy.  Both these points warrant explanation.
​
Why do companies tend to add too much product line complexity?
Marketing professionals pride themselves on their creativity and responsiveness to evolving customer needs.  The urge to pursue new market opportunities and/or to respond to competitive threats are considered hallmarks of strong management.

Consider for example the following rationales a brand manager might use to justify  product line extensions:

• Attack new market opportunities
• Defend a strong market share position
• Adapt to shifting consumer tastes
• Respond to competitive moves
• Preempt new entrants
  
  

Since the real costs of increasing product line complexity are widely dispersed across the organization and largely invisible, the “free” choice of attacking, defending, adapting and responding to the marketplace provides an often irresistible justification for product proliferation.

Fundamental strategic choice: broad market coverage vs. targeted distinctiveness  
By this rationale, Apple should have responded to Samsung’s introduction of a large screen smartphone a long time ago.  And Chipotle should have added a breakfast burrito. And In-N-Out Burger should have tried to appeal to new customers with a variety chicken, fish, egg and sausage menu items.  What’s wrong with these companies?!
Each of these companies has made a concerted choice to limit the range of merchandise they bring to market, focusing instead on delivering dominantly superior products in selected categories.  Limiting product complexity thus lies at the very core of these companies’ business strategy.  Their success — each has significantly outperformed sector competition —  is driven as much by what they are NOT willing to do as by what they are willing to pursue.

Take In-N-Out Burger for example.  When is the last time you heard anyone rave about the taste of McDonald’s cheeseburgers in the same reverential terms as In-N-Out’s customer evangelists?  Why is that?
On the surface, both fast food chains are selling similar products at similar price points.  But In-N-Out burgers taste better because:

• Hamburgers are made from fresh patties, delivered daily, with no freezing before use
• Buns are baked fresh on premises, multiple times per day
• Fresh vegetables are delivered daily from local area farms, strictly controlled for product quality
• Hamburgers are cooked to order, with no heat lamps before serving
  
  

If these business practices yield a consistently better tasting product, why doesn’t McDonalds replicate In-N-Out’s approach?  The answer is, they can’t, given their chosen high level of product line complexity.
Unlike In-N-Out, whose only entrée is hamburgers, and who restricts store hours to reflect  minimal menu offerings and who limits geographic coverage to territories where the quality of locally sourced food items can be strictly controlled , McDonalds has chosen to compete on the basis a broad menu choice, global store ubiquity and extended service hours (often 24X7).

But carrying such a wide array of food products around the globe complicates McDonalds’ logistics and service operations, requiring bulk shipments of frozen food products, in-store freezers, and pre-cooked orders kept warm by heat lamps in each establishment.  The resulting quality differences are very real, dictated by structural differences in the underlying product line strategies.

This isn’t a case of a right vs. wrong strategy (both have been successful), but simply a reflection of two companies that have chosen to compete on very different terms. The fact remains, product complexity DOES affect quality, and the choice of ever-expanding line extensions is never without adverse consequences.

Chipotle provides another example of competing on the basis of limited product complexity.  In a recent article, Fortune Magazine noted that: “the Chipotle menu is limited to four core basics, but it offers a range of garnishes like salsa and cheese and guacamole that can produce scores of combinations.  Chipotle serves neither dessert nor coffee (too complicated). There’s no ‘dollar menu’ or ‘limited time offers’ (too gimmicky). And While the Dulles Airport restaurant serves scrambled eggs for breakfast, Chipotle has declined to begin breakfast operations in any of its other 1,150 restaurants.”

Chipotle’s approach also demonstrates the power of “versioning”, wherein a company sharply limits its core product line offering (to control costs and enhance quality), but still caters to varying consumer tastes with low cost add-ons and accessories which are simple to provide.

Chipotle’s product line strategy was highly successful in the fast casual restaurant category, propelling the company's stock to grow  nearly 40 percent per year during the first five years of this decade.  But a series of food poisoning outbreaks in 2015 shook customer and shareholder confidence in the company's quality control processes, from which Chipotle has yet to fully recover.
​
Less Can Be More
Determining optimal product line strategy is not strictly an analytical exercise to be turned over to technocrats armed with elegant analytical models.  While companies should certainly seek to selectively  thin out non-performing product lines over time, a far more important strategic imperative is choosing the basis upon which your company wishes to compete: broad market coverage vs. targeted product superiority.

For companies like In-N-Out Burger, Chipotle’s, Apple and many others, there is no such thing as a free lunch. These companies could not have consistently achieved product superiority without explicitly choosing to limit the range of their product offerings.
​
When it comes to product line complexity, less can be more.

Let’s be clear; the world does not need another article pounding Ron Johnson for his ignominious fall from grace.  And so I won’t.  Except to use this painful episode as a “teachable moment,” rather than just gratuitous schadenfreude.

So what have we learned from JCP’s failed strategy?  In broadest strokes, it’s that a strategy flawed in both concept and execution has little chance to succeed. 
​
Let’s start with a reminder that JCP had to do something to change its game, which is why the Board reached out  to a proven executive who had helped transform retailing at Target and Apple.  Prior to Johnson’s arrival, JCP had become the somewhat dreary champion of promotion-driven selling, with predictably damaging impacts on the company’s financial performance and image .  

• JCP’s merchandising and product selection was undistinguished, arguably positioning their stores in the bland middle ground between WalMart and Target
• JCP ran 590 sales promotions in 2011… more than10/week!  That takes a lot of flyers, and merchandise repricings and advertising and marketing dollars to hammer home a message that “our stuff is cheap!”
• The average customer visited a JCP store only four times a year, which means that customers were ignoring 99 percent of JCP’s sales promotions.  The constant barrage of JCP promotions merely reinforced consumer expectations that no one pays full ticket prices at Penney
• Almost three-fourths of JCP revenue came from products sold at a discount of at least 50 percent
• JCP lost money in 2011 and only earned only a 2% net income margin in 2010.

Bottom line, JCP was broken and Ron Johnson was hired to fix it by reinventing a more imaginative and profitable reason than sales-du-jour for customers to visit their stores.
By all accounts, Johnson is smart, hard working and decisive and it didn’t take long for the new CEO to stake out a bold and transformative strategy, defined by three major initiatives:   

1. Replace perpetual discounting with “fair and square” pricing, featuring far less frequent sales promotions
2. Upgrade the cachet and style of JCP’s merchandise, with heavier emphasis on recognized quality brands of clothing and housewares
3. Redesign the stores to showcase designer brands in a store-within-a-store boutique format

On the surface it’s hard to argue with the strategic direction and intent of Johnson’s strategy, except for three niggling details — a veritable trifecta of conceptual and executional flaws in the strategy:

1. The company never demonstrated compelling evidence that JCP’s customers were clamoring for such changes
2. Moreover, the company did not or could not articulate the benefits of its strategy in terms that were easily understood by consumers or, for that matter, stockholders
3. To complete the trifecta, the company raced to implement its strategy on a national scale without regional pilots to iteratively test and refine new concepts

Now this is about the point in the story that most observers conclude that Ron Johnson was either clueless, reckless, or an idiot.  But we’re not going to pile on, right? 

So let’s try throwing Johnson another lifeline.  We’ve already noted that Johnson had to take bold, imaginative action.  And he’s certainly not alone in radically transforming a sick company by aggressively rolling out an ambitious but largely untested strategy.  For example, nearly thirty years ago, Nicolas Hayek raced to implement a national rollout of Swatch in the US, ignoring pilot tests indicating little consumer interest in his boldly fashioned creations from Switzerland.  And of course Steve Jobs was famously dismissive about the need for market research or pilot tests before launching massive rollouts of the iPod/iPhone/Tablet. 

Needless to say, Swatch’s and Apple’s product launches achieved runaway and enduring success.  And Ron Johnson was there, at Apple, close to the throne of the master! 

So little wonder that Johnson would take a page out of Steve Jobs’ (and Hayek’s) playbook to transform JCP by going bold, going big and going fast!!

So why are Jobs and Hayek regarded as geniuses and Johnson a goat?  Was Johnson just unlucky?  On the other hand, maybe Jobs and Hayek were just lucky, and not deserving of their reverential acclaim.  Bad luck or bad strategy; which is it?
I’ve run out of lifelines and can no longer cut Johnson any more slack.  The reality is strategy iscontextual.  The fact that a  particular strategy worked well in one context most assuredly does not mean that it will thrive in another.  There are profound differences between the circumstances surrounding the launches of Swatch and Apple’s innovative consumer entries that simply don’t carry over to JCP’s situation.  An understanding of these differences — had JCP taken the time to think it through — would have indicated ex ante that JCP’s commitment to a rapid national rollout of an untested strategy was unwise, unnecessary and breathtakingly risky.

Let’s take the flaws in Johnson’s strategy one at a time.

1. The company never demonstrated compelling evidence that JCP’s customers were clamoring for its new strategy; and relatedly, JCP did not or could not articulate the benefits of its strategy in terms that were easily understood by its customers
What made JCP think that its consumers hated sales promotions?  After all JCP had trained their consumers for over 100 years to expect items on sale.  One could surmise that JCP catered predominantly to “bargain hunters” for whom finding an unexpected bargain was part of a game that its customers felt they could always win at JCP.  Ron Johnson changed the rules of a game that too many of his customer were enjoying and winning.  As same store sales stats soon confirmed,  customers either didn’t understand or didn’t like “fair and square pricing”.  Either way, they voted with their feet and not their pocketbooks to shop elsewhere.
So what is “fair and square pricing?”  I put this question to my MBA class this week, and as expected found that JCP had done a poor job clearly communicating its structure and intent.  One student correctly suggested that “it had something to do with less reliance on sales promotions.”  Fair enough, but to be effective, JCP had to not only say what they were not going to do, but also to clearly explain what made “fair and square” better than what consumers had become accustomed or at least inured to for decades.
And on that score “fair and square” pricing turns out to be pretty complicated and confusing.  Here’s a primer:

• All merchandise starts a “Fair and Square” price tag ~40% lower than previously undiscounted sticker pricing
• No prices will end in $xx.99… all items will now have even dollar pricing
• Each month a new theme sale will be launched, where products related to a holiday or time of year get a “Monthly Value” discount below “Fair and Square” pricing
• Either on the first or third Friday of each month, Monthly Value items that don’t sell will be further discounted at special clearance prices.
  
  

If simplicity and value were meant to be the cornerstones of redefining the JCP brand,  “fair and square” pricing as implemented falls confusingly short as transformative strategy.

In contrast, consider Swatch’s launch strategy which also was seeking to create a brand centered around value and style. With the acknowledgement that transparent pricing is easier to implement in a company with a few dozen rather than a few thousand SKU’s,  here’s Swatch’s pricing approach:  
All watches — no matter how popular, no matter how new to market, and no matter what rock star designer inspired the creation — will be priced at $40.  And that same $40 price tag will stay in force not for one month, or for one year, but for a decade.  The same simple price strategy extended around the world, with prices set at 60 DM in Germany and 7,000 Yen in Japan.

That’s how you create a brand that meaningfully conveys style and value!

One could also argue that by moving its merchandise focus upscale, further away from Sears and WalMart, JCP was distancing themselves from their core customer base in search of new clientele already well served by brands well known for higher quality merchandise — e.g. Macy’s, Bloomingdales and Target. 

Along with the new pricing scheme, did the JCP really think it its new merchandising strategy would gain more new customers than it risked losing during their strategic transition?  Apparently so.
​
2. JCP raced to implement its strategy on a national scale with no regional pilots to iteratively test and refine new concepts
As already noted, there are some inspirational examples of companies that also made big bets on untested big bang launches that paid off.  So why pick on JCP on this score? 
The companies cited earlier operated under three profoundly different circumstances that  do not apply to JCP.

1. Apple and Swatch’s product launches were seeking to create NEW MARKETS that simply didn’t exist before.
2. As such, even if their big bang launches failed, it would not alienate the company’s core customer base for existing products (e.g. Apple’s desktop and laptop computers; Swatch’s parent company’s luxury brands like Omega and Longines)
3. The launches in question radically redefined their respective product categories. Nothing anything like the original iPod/iPhone/Tablet/Swatch existed before, necessitating an extremely aggressive launch campaign (in scale and marketing communications) to literally shatter consumers’ prior product perceptions.

Go down this list and you’ll see JCP’s strategic context was fundamentally different on every one of these elements. 
JCP was fighting for current market share within a well defined industry structure, not creating new markets.  It’s strategic direction clearly risked alienating its current core customers, and there was no particular reason that the strategy would have been seriously compromised by a more deliberate and staged implementation incorporating testing and iterative refinement.  After all, one could argue that Macy’s, Bloomingdales and Target were already occupying the very same space JCP was trying  to break into, so there was nothing particularly shocking or new about their brand aspiration.
Given JCP’s strategic context, Ron Johnson’s strategy reflected exceptionally poor risk management.  Ask yourself this: did the upside potential of a big bang success more than offset the downside risk of failure? 

​As viewed in this risk/reward assessment grid, the answer is decidedly not!

Lessons Learned
As a parting shot, two salient lessons learned emerge from the JCP story.

1. Strategy is context sensitive    
   Before copying and applying a strategic plan that worked before, make sure the strategic contexts between the old and  new situation are closely aligned.         
2. Strategy includes execution    
   I simply don’t buy the oft cited senior executive excuse that “my strategy was sound but the team let me down”.  CEO’s are responsible for delivering results.  If the CEO fails to fully anticipate and plan for implementation challenges — in terms of execution, technology risk and market acceptance risk  — then the strategy in question is flawed and incomplete.  A risk mitigation plan should be a part of every strategic plan to make it resilient and responsive to inherent uncertainties.  And remember, the bolder the plan, the greater the unknowns.  You better have a Plan B (and C) in mind, and a learning oriented culture before you take that big bang strategic leap.

​We’ll never know whether Ron Johnson’s strategy would have eventually proved itself in the marketplace, but we do that he ended his career with a bang and unnecessarily put his company in grave peril.

Imagine this scenario.

Your 103 pound slobbering Labrador Retriever Goofy (name changed to protect the guilty) is sitting around the house one day bored and hungry — a perpetual state of being.  For no particular reason (is there ever?),  he jumps on the couch and stares at you with a self-satisfied grin.

“No! Off!”, you urge, but Goofy stands pat with a defiant tongue dangling well below his jowls.  Thinking you can outsmart the beast, you say: “Goofy, do you want a dog bone?”  Within nanoseconds, Goofy is at your side, drooling helplessly as you dig a dog bone out of the bin.
​
The next day, Goofy is once again bored and hungry and looks expectantly at you for a treat. But alas, you’re too busy pounding out text messages on your iPhone. Then Goofy gets an idea — when it comes to food, he’s shrewd — and repeats yesterday’s transgression.  The plot replays like groundhog day.

​Congratulations!  You’ve just trained Goofy to jump on the couch whenever he wants a dog bone, which is, like, all the time.
This is of course a case of incentivizing the wrong behavior.  And business leaders make this same mistake at least as often as dog owners.  Why?  There tends to be a couple of reasons:
1. Unintended consequences of well intentioned but misguided incentives
The first explanation is the most benign.   In these cases, managers simply fail to think through the logical consequence of their directives.
In retrospect, you may think some of these examples are ludicrous knowing in advance that I’m highlighting incentives that backfired, but I can assure you that each of these situations draws on real world examples — and there are plenty more to choose from.

• Consider first the case of a new CFO who joins a high tech company to bring more discipline and financial accountability to the product development process — a  critical determinant of corporate success.  By way of background, assume the company had previously been quite sloppy, carrying too many dead-end projects for too long, avoiding clear accountability for market outcomes and lacking a clear methodology to prioritize projects in the development pipeline.
  To ensure a more rigorous process, the CFO declares (with CEO backing) that he will not approve any new project with a payback longer than two years while simultaneously suspending funds for any current program in development for more than three years without a saleable product.  Furthermore, the CFO announces that he will strictly apply IRR measures to prioritize surviving projects and require any approved project’s rate of return to exceed the company’s hurdle rate of 25%.
  “I know there will be some pain in implementing these new rules, but there’s nothing like some quick wins to demonstrate the benefits of our new disciplined approach”, declared the CFO in announcing the new program.  Now you can’t fault this CFO for ambiguity.  He certainly laid his chips on the table.  But it didn’t take long for the new evaluation metrics to heavily skew the company’s development efforts towards near term incremental product improvements, rendering the company highly vulnerable to more ambitious game-change disruptive product initiatives from competitors.

The trouble with incentives is that they work, and the unintended consequences may be far worse than the benefits initially sought.

• Another example involves incentives that unwittingly train consumers to behave in ways that harm business performance.  For example consider the case of a B2B company that incentivizes its salespeople to meet quarterly sales quotas while discounting prices as necessary near the end of each quarter to meet revenue guidance for Wall Street.  It doesn’t take long for salespeople to learn that it will be a lot easier to sell products with end-of-quarter discounts and it takes even less time for customers to learn that they’ll get a much better deal by holding off purchases until salespeople are desperate to hit their sales quotas.  This is a perfect example of the dog-on-the-couch scenario, because this company has essentially trained its customers to behave badly.  The net result is highly peaked sales patterns with resulting strains on manufacturing operations, cost and quality,  excess inventories and customer addiction to discounts.  The sad thing is that customers probably wouldn’t have figured out how to game the system on their own; they needed misguided corporate incentives to teach them!

​

• JC Penney is discovering that once customers have been incentivized to behave badly, it’s very hard to retrain them.  For decades, JC Penney used a variation of the B2B example above to train customers to buy primarily on weekly promotion days.  When a new CEO arrived on the scene in 2011 and replaced JC Penney’s longstanding reliance on promotion-based selling with purportedly “fair and square” every day low  prices, customers  abandoned the company in droves.  Moreover, despite the radical change not only in their pricing and merchandising policy, but even in the 100+ year old company name — now known simply as jcp —  the company has been unable to attract nearly enough new customers with their uncharacteristic emphasis on quality and value.  In Q4, 2012, jcp’s same-store sales declined by a staggering 32%, year-on-year.  Apparently, the dogs aren’t eating the new dog food!
• As a final example, perhaps the earliest recorded case of unintended incentive consequences dates back to colonial India, where the ruling British government became concerned with the growing number of  venomous cobras infesting Delhi.  A well meaning government official came up with the scheme to pay any citizen a monetary reward for each cobra carcass.  At first, the program appeared be a tremendous success, as huge bounties were paid for scores of dead cobras.  But citizens continued to complain about ubiquitous snakes lurking in Delhi, and a cobra census was commissioned to confirm that there indeed appeared to be no change in the urban cobra population!

• What could explain such a disconnect?  Well, it turns out that enterprising entrepreneurs had built cobra breeding farms on the outskirts of town for the sole purpose of claiming the generous bounty — a far easier task than actually hunting for snakes in Delhi!  When the government became aware of the ruse, the reward program was scrapped, causing cobra breeders to set the worthless snakes free. Delhi wound up being inundated with even more venomous snakes than before the program began.  The eponymous “cobra effect” has become a poster child of misguided incentives with unintended consequences.

The antidote to unintended consequences is to carefully think through how all potentially impacted stakeholders, including those who do not share management’s intent will react to new incentives.  In each of these cases, executives imputed their values and intent on stakeholders — employees, citizens, customers — whose behavior was in fact motivated by very different objectives.
2. Disingenuous unwillingness to incentivize allegedly desired behaviors
Dogs learn early on to watch what their owners do, not what they say.  They are after all, dogs.
A common example of this same phenomenon in business is when executives disingenuously say the politically correct thing about their priorities but blatantly and knowingly incentivize contrary behaviors.  Examples abound.

• Consider the car dealer whose advertising slogans tout “customer satisfaction is our number one priority”, but salesmen’s bonuses are strictly based on total gross profit, with an extra generous spiff going to the salesperson achieving the highest grossing sales transaction each month.  So where it counts — in employee pocketbooks — such dealers are encouraging their salespeople to “rip customers’ eyeballs out” as the cynical trade jargon goes, while pretending to promote customer friendly business practices.
• Further up the value chain, some car manufacturers have also averred unabashed commitment to customer satisfaction, only to preferentially allocate their hottest selling cars — a prized incentive — to dealers with the biggest order bank, irrespective of track record on customer service.
• Another common example relates to enterprises that operate two distinctly different business models under one roof, but skew valued incentives to support just one of the business functions.  Many top tier research-oriented universities are a case in point.  Such institutions proudly proclaim their commitment to groundbreaking research and  educational excellence.  And there is no reason to doubt that college administrators truly would like to excel at both.  But tenure track faculty  quickly learn that promotion criteria are heavily skewed towards research achievements over teaching excellence.  So where it counts — the marginal allocation of faculty time —  research takes precedence over teaching effort.

The trouble with incentives is that they work! If dogs can figure out how to interpret and respond to incentives, customers and employees certainly can as well.  In each of the examples cited above, canine and human stakeholders learned to watch what management rewards and not what they say.
When there is a clear disconnect between stated objectives and incentivized behavior, institutions lose credibility and authenticity in the eyes of their customers and employees.
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As I put the finishing touches on this blog entry, my Labrador Retriever is besides me, where else, but on the couch.  My protestations not withstanding, I lost credibility a long time ago on canine couch rights with my misguided incentives.

In their excellent Harvard Business Review article aptly titled “Big-Bang Disruption”, Paul Nunes and Larry Downes make the case that disruptive new entrants will radically transform more industries far faster than originally envisioned by Clay Christensen in his landmark treatise on this subject 18 years ago.
The authors attribute the accelerating pace and scope of disruption to:

• The increasing role of IP rather than physical product attributes in creating disruptive product performance gains
• The substantial decline in IP-driven development costs as inventors exploit  off-the-shelf SaaS technologies and cheap server and storage capacity to create new product mashups at breakneck speed.

Take Twitter for example, born out of a daylong brainstorming session, launched in alpha form within days and released to the public within four months, this information sharing platform has disrupted newspapers and national governments in ways which could not have been easily foreseen.  Or consider the plight of dedicated GPS navigation device makers Garmin and Tom Tom whose market has been obliterated by the explosive growth of smartphones equipped with Google’s free map app.

Truth tellers play a particularly important role in presaging the need and opportunity to develop new business models which disrupt incumbent business positions, long before the need to change becomes obvious (by which time it’s often too late to stop the destruction of your business by a disruptive newcomer).
By their nature, truth-tellers make most business leaders uncomfortable:

• Truth tellers are often eccentric, and their conviction can easily be mistaken for arrogance and stubbornness
• They generally have no respect for current achievements which are a source of considerable pride to top management (e.g. “we are the global market share leader!”, “our sales topped $5 billion last year!”)
• They don’t think/talk/act like “team players” in top management
• They argue with passion and conviction, but lack the thick binders of market research that management has come to expect
• They convey a message that is threatening to the organization. Believing it — even a little bit — requires a willingness to contemplate highly disruptive, unpopular and risky changes to the established order
• Truth-tellers’ view of the world creates FUD on steroids!

Most corporate executives thrive on the ability to manage their business in an orderly fashion — to harness the firm’s resources to deliver predictable, reliable and steady earnings growth.  Unfortunately, there is nothing orderly or predictable about big-bang disruption, and companies who ignore early signals foretold by truth-tellers do so at their peril.Thus how executives deal with truth-tellers is actually a good indicator of whether a company is likely to exploit opportunities as a disruptor, or be flattened as the disruptee.

Sadly, over a long career in senior management consulting, I’ve witnessed far too many cases where executives not only fail to continuously seek the counsel of truth-tellers, but rather willfully prevent such voices from being heard and evaluated within the organization.

What are some of the mechanisms executives use to stifle truth teller input?:

1. Ignore/dismiss/deny access
   The first line of defense is against dissonant ideas is simply to ignore, dismiss or deny access of truth tellers to the executive suite.  In too many cases, executives simply  deny any forum for truth tellers to air their views.  They are not invited to executive conclaves, their emails are ignored and if a truth teller does manage to lob in a point of view on disruptive threats (or opportunities), their views are publicly rebuked as quackery.  The upshot of course is truth tellers will find other forums more receptive to their views, including jumping ship to other companies who may emerge as industry disruptors
2. Grin-f*#k truth tellers
   When the voices of truth tellers become too loud to ignore, some executives move to a second line of defense.  With apologies to PC readers, grin-f*#king is a common and insidious technique to discount the input of truth tellers, while creating the illusion of responsiveness.  GF’ing is defined as  “when someone in business smiles and shakes your hand assuring you that they have heard and will act upon your ideas or concerns when in truth you have already been ignored and dismissed.”  The first time a truth teller gets GF’d, he or she may fall for the ruse of feigned responsiveness.  But actions speak louder than words, and persistent truth tellers soon learn to recognize when they’re being GF’d rather than taken seriously.
3. Create task forces to reinforce status quo behaviors
   The final line of defense of the established order in the face of an inherently uncontrolled disruptive threat is to establish a task forces stocked with “team players” who can be counted on to limit the strategic assessment to safe choices within the organization’s comfort zone.  Such task force initiatives are often publicized with great fanfare as a testament to a company’s commitment to cutting edge innovation.  But in reality, these companies are confusing activity for progress, and by design, task force initiatives wind up reinforcing the status quo.

If you see some or all of these behaviors in your organization, be afraid; be very afraid.  Big bang disruption is likely to be lurking sooner than you think and will take your company by self-imposed surprise.

The New York Times carried an ominous story this week on the souring outlook for  Barnes & Noble’s Nook business, portending perhaps its exit from the e-reader and tablet markets.  The Nook’s decline comes despite its technical competence and the recent infusion of $600 million of capital by Microsoft.

As the Times notes, “going into the 2012 Christmas season, the Nook HD, Barnes & Noble’s entrant into the 7-inch and 9-inch tablet market, was winning rave reviews from technology critics who praised its high-quality screen. Editors at CNET called it “a fantastic tablet value” and David Pogue in The New York Times told readers choosing between the Nook HD and Kindle Fire that the Nook “is the one to get.”

Unfortunately, high marks from pundits didn’t translate into sales.  Nook sales stalled over the Christmas season, losses mounted and profit and revenue guidance has been reduced.
What happened?
The Times article shares this explanation: “In many ways it is a great product,” Sarah Rotman Epps, a senior analyst at Forrester, said of the Nook tablet. “It was a failure of brand, not product. The Barnes & Noble brand is just very small.”
I beg to differ.  The Nook’s problems go far beyond B&N’s brand strength. There are three fundamental reasons for Nook’s failure that have implications for any company (and eventually this means every company) facing technology disruption:

1. Demise of single-purpose devices 
   The Nook was initially developed as an e-reader, i.e. a single-purpose device.  So too were digital cameras, wristwatches, travel alarm clocks, miniature flashlights, GPS navigators and Apple’s iPod.  The demand for each of these products has been decimated by all-encompassing smartphones and tablets, which include good-enough or better performing apps, often for free.
   
   For example, if you’re Garmin or Tom Tom trying to sell a standalone GPS navigator for $120 against a free Google Maps app on an Android or iOS smartphone, good luck to you!  Each of these product categories has suffered steep sales declines in the face of multi-function mobile devices.While purists may argue that purpose-built e-ink e-readers like the Nook Simple Touch (pictured above) has better readability in bright sunlight and longer battery life than tablets, I sure wouldn’t want to bet my business on these advantages against the relentless improvements (lighter, brighter, faster cheaper) in mobile devices from industry leaders.
   Undoubtedly this is why Barnes & Noble bet a lot of their own and Microsoft’s money to develop their own tablet devices.  But if oddsmakers were handicapping the tablet race between Barnes & Noble, Apple, Samsung, Google, Amazon and Microsoft, I think it’s fair to say that a bet on B&N would be a prohibitive longshot.  When it comes to dedicated e-readers, the market may be big enough to profitably support one major supplier, but that will be Amazon, not B&N.

     2.  Disruption redux
More broadly the Nook story is yet another example of how disruptive technologies transform value chains, destroying incumbents who no longer create value in the new industry order.  With the advent of e-reading devices and digital publishing, book retailers and publishers are severely threatened. We’ve been to this dance before in the music industry, where incumbent retail leaders were essentially wiped out.

For a variety of reasons, bookstores (if not the Nook) are likely to survive for quite some time, but only at a fraction of their former scale.Was B&N’s decline inevitable, given the transition from print to digital books?  One could ask the same question of Amazon, whose dominance of book sales on amazon.com was equally threatened by e-reader technology.  But to Jeff Bezos’ credit, Amazon chose to disrupt itself by aggressively launching the Kindle business, which quickly established itself as the dominant digital book platform.  By the time B&N responded with its own Nook devices and e-bookstore, it was too late.The willingness to disrupt one’s own core business before someone else does it to you is a hallmark of inspired leadership.
Bezos rules.

3.    Stuff Happens!  What’s up with Microsoft?
As a play on the well known adage, “Disruption Also Happens”!  In every industry, the question isn’t whether but only when.  The only way to  survive and prosper through successive waves of disruption is to be the disruptor, not the disruptee!One would think Microsoft would have learned this lesson by now.  Over the past decade, Microsoft has managed to miss five of the most transformative disruptions in the high tech sector:

• Internet Search
• Mobile Devices/Apps Ecosystems
• Social Networking
• Cloud-based SAS
• TabletsTo add insult to injury, Microsoft has tried to cover their innovation lapses with a series of über acquisitions and/or investments (>$500 million) in companies who themselves have lost the disruption race and/or have failed establish a viable business model.

​

• Cases in point include:
  
• Yahoo ($44.6 billion failed acquisition bid; ~2X Yahoo’s current market cap)
• Nokia (>$1 billion invested in partnership deal)
• Nook ($600 million invested for equity stake in Nook spinoff)
• aQuantive ($6.3 billion digital marketing acquisition, since fully written off)
• Skype ($8.5 billion acquisition)
• Yammer ($1.2 billion Social Networking acquisition)
• Dell (>$1 billion investment offer pending for LBO deal)

——————————————————————–
Bottom line: Serial innovation is the only proven antidote to the accelerating pace of disruptive technologies.  It certainly looks like Barnes & Noble and Microsoft have not been up to the task.

In theory, effective business strategy is straightforwardly simple.  The building blocks are strategic clarity and alignment:

• develop products and services that deliver a compelling value proposition in terms that can be clearly articulated to consumers, employees and stakeholders (clarity); and
• build capabilities which create a competitive advantage in your ability to deliver a superior value proposition (alignment).
  
  

So if it's that simple, why is it that ~90% of new product launches fail to meet their business targets or that more than three-fourths of mergers and acquisitions fail to create shareholder value or that fewer than 15% of Fortune 500 enterprises are able to sustain above market growth over multiple decades??  In short, why do so many strategies fail to sustain long term profitable growth?

A sage piece of investment advice is relevant in answering this question for established businesses.
It has been suggested that when deciding whether to hold or sell a stock, it's useful to ask oneself: "would I buy the stock now if I didn't own it?"  If the answer is yes, hold. If no, sell.
What guidance does this  advice provide to business managers about  strategy?  In a similar vein, managers should periodically ask themselves two questions:

1. If I didn't have my current products on the market, are these the "clean sheet" designs I'd want to be launching today?
2. If I were starting from scratch, is this the organization and skills I'd want in my company?
   
   

If the answer to either of these questions is no, your current strategy is not positioned to succeed and your primary focus must be on retooling your products, your organization or both.

But in fact, most companies trapped with outdated products and/or organizational capabilities fight to defend their losing hand, with predictably poor results. In short, too many executives are guilty of strategic inertia.

Take the book publishing industry for example. Long after the Amazon Kindle had launched, when it was inescapably obvious that ebooks were going to be a major force in the industry,  book publishing CEO's should have been asking themselves what new skills they needed to cultivate in their organizations and what new, enhanced products they needed to succeed in the post-digital industry.

Instead, too many publishing execs took out their frustration with the growth of ebooks -- which they viewed as threatening their value proposition and price realization -- on consumers!
How?  First by selectively delaying the release of popular frontlist books in digital form and then engaging in a nasty, allegedly collusive price fixing fight with Amazon to impose a significant increase in ebook consumer prices.
Early adopters of ebooks were amongst the most avid readers in the country -- the very customers book publishers should most want to serve.  And yet, one Big Six publishing CEO, commenting on her company's decision to start delaying the release of best sellers in ebook form (which had been standard industry practice at the time) noted: "with new electronic readers coming and sales booming, we need to do this now, before the installed base of ebook reading devices gets to a size where doing it would be impossible."
​
Unless your company is committed to continuously update your capabilities to deliver what consumers value, your strategy will not succeed in the long term. The proof that this is easier said than done is that so few companies succeed in sustaining long term profitable gro

In my last blog post, I noted the importance of strategic clarity, in terms of the ability of your company to articulate who you are selling to; what is the value proposition and how you can achieve competitive advantage in delivering designated products and services.

Easier said than done!

But let's stipulate that your company has crystallized its strategy in these terms.  The next step is to ensure you can capture the inherent value in your strategy through strategic alignment. 

Simply stated, strategic alignment is the development of a company's capabilities -- it's processes, operations, management systems and culture -- to uniquely support its strategy and desired value proposition.
Here are a couple examples to break through the jargon.

What do Southwest Airlines and BMW have in common?  Very little actually, starting with distinctly different strategic priorities and value propositions. Southwest strives to deliver frequent, friendly reliable flights to price-sensitive leisure and business travelers at a cost others can't profitably match.  BMW, on the other hand strives to deliver "ultimate driving machines" at a premium price that delivers value to a select segment of automotive enthusiasts.

Each of these value propositions can be highly successful, but only if these companies align their core competencies to consistently, efficiently and effectively execute their chosen strategy.  In Southwest's case, this entails highly standardized and simplified flight operations (e.g. one plane type, one class of service, no meals), industry leading labor relations to foster a service-oriented culture and highly disciplined management to avoid over-extending route coverage in this highly cyclical industry.  The net result has been decades of extraordinary shareholder value growth, with no morale-killing layoffs in an industry where most legacy airline competitors have been in and (sometimes) out of bankruptcy.
BMW on the other hand needs very different core competencies to support its distinctive strategic mission -- namely an organization that emphasizes R&D, state-of-the-art engineering and product development processes and a culture that encourages a commitment to best-in-class products.  These are expensive capabilities to develop and maintain, but the company is explicitly investing to deliver value to a class of customer that is able and willing to pay a premium for consistently superior products.

Companies that succeed in creating a tight linkage between their strategic intent and aligned capabilities are very difficult for competitors to copy.

Sure, it’s easy for an airline competitor to temporarily slash fares to match Southwest, but unless they have the same underlying operational focus, organizational culture and management discipline, their cost structures will not allow a permanent low-fare position.  Similarly, automotive competitors have run ads for years suggesting their products compare favorably with BMW (at a far lower price).  But the marketplace has generally continued to recognize and reward BMW’s product excellence, despite its premium prices.

In sound bite terms, it seems so simple: clearly articulate your strategy (who/what/how) and align all your capabilities to support superior execution.
​
In my next post, I’ll opine on why so many companies struggle to meet these two strategic imperatives.
​

One of the early topics covered in my business strategy course at Columbia Business School is the importance of strategic clarity.  Simply stated, the principle is that a prerequisite for sustained success is the ability of a company to clearly state its business strategy in terms of three defining building blocks:

• The target customers it is intending to serve -- who are you selling to?
• The products and services it will provide to serve the needs of these customers -- what is your value proposition?
• The basis of competitive advantage that will it allow it to most cost-effectively provide value to the target market -- how will you deliver more value than our competitors?

A final element of a well-conceived business strategy should also include the financial objectives your company hopes to achieve by executing its strategy.

It sounds simple doesn't it?  Most of my MBA students think so.... until we put the principle to a test. An excellent Harvard Business Review article on this topic entitled Can You Say What Your Strategy Is challenges companies to articulate their strategy in terms of the elements above in 35 words or less.  

Why reduce strategic intent to a tweet?  Because it stress tests whether your company truly does have strategic clarity that can be easily understood (and hopefully embraced) by your shareholders, employees and customers.
In our class, students are asked to articulate the business strategy of the Coors beer company in the 1970's and contrast it to the company's apparent strategy today.  What emerges is that:

• It's not nearly as easy as it seems to crystallize a company's strategy
• Companies need to adapt their strategy over time; what worked in the 1970s will not likely work today.

​For what it's worth, here's the school solution on Coors' mid-1970s strategy in 35 words (minus the financial objective, which wasn't disclosed in the case study reading):











​While obviously, even the most well conceived statement of business strategy still needs to be effectively executed, strategic clarity is a prerequisite to success.  To demonstrate the relevance of strategic clarity, try this at home: think of the the three best and least well managed companies that first come to your mind.  Now ask yourself, which group of companies appears to have a clearer, more "tweetable" business strategy?
How about your company?  Can you tweet the essence of your business strategy that makes a compelling case for how and why you will win in the marketplace?