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!
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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.
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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.
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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.
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When it comes to product line complexity, less can be more.

Question: how long should it take for a company to come up with an industry-changing, category-redefining, market-dominating new technology with sales of $10 billion or more.
Answer: For the vast majority of companies, the answer of course is never.  For Apple, the answer appears to be, not soon enough.

It has been 2.3 years since Apple’s last game-changer — the iPad, which helped drive year-on-year profitable sales growth of 30+% (and mostly >50%) for ten consecutive quarters.  During this astonishing run, Apple’s annual revenues climbed over $100 billion and its stock peaked at >$700 per share. But predictably — in fact inevitably — Apple’s growth rate has since slowed, and nervous investors have driven its share price down by 45% from peak.  To add insult to injury, numerous pundits have declared that Apple’s uncanny knack for innovation died with Steve Jobs’ passing and its best days are clearly behind it.
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To be honest, it does feel like a long time since Apple launched a home run product, and it’s easy to believe that if Steve Jobs were still around, we wouldn’t still be waiting for some new form of technical wizardry.  But a closer look at Jobs’ legacy for serial innovation suggests that such expectations are unreasonable. 
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As noted in the exhibit below, during his two CEO stints at Apple, Steve Jobs never launched consecutive blockbusters in less than 2.3 years.  In fact, it took six years for Apple to pivot from the iPod to the iPhone.  From Apple II to the MacIntosh took 5.3 years.  And even though Apple was working hard on tablets long before the launch of its smartphone, the iPad was launched 2.6 years after the iPhone.

​At least for now, what we’re seeing or not seeing from Apple is nothing new.  The company’s future — as it always has been — will be determined by whether it can pull off yet another new product game-changer.   Pundits and investors can have legitimately differing opinions on this question, but it is clearly too early to declare that Apple’s inability to launch blockbuster products over the past 2+ years somehow proves that innovation is dead at the company.
So what’s behind the title of this piece — that for Apple, no news is actually good news?

There actually were two shreds of reassurance coming out of Apple’s otherwise mostly inconsequential quarterly earnings report this week.  First, Apple announced surprisingly strong iPhone sales, exceeding analyst estimates for the quarter by 20%.  That iPhone sales remained strong despite Samsung’s recent Galaxy S4 launch, supported by a breathtakingly lavish advertising budget, reaffirms just how strong the now venerable iPhone design really was.

How large is “breathtaking”? Samsung’s global marketing expenditures for mobile devices is estimated to currently be on an annual run rate of $12 billion, more than the advertising spend by Apple, HP, Dell, Microsoft, and Coca Cola combined on all their products!.  In that context, Apple’s market resilience is notable.

Second, and more importantly, Tim Cook’s commentary during this week’s analyst meeting reaffirmed that the company has not abandoned Steve Jobs’ “outside-in” strategic perspective, which focuses the company’s energies on creating great products and customer experiences. 

In response to an analyst question on whether internal growth targets drive Apple’s product development and launch timing, Tim Cook responded:
“The way I think about is, we’re here to make great products and we think that if we focus on that and do that really, really well that the financial metrics will also come… If you don’t start at that level you can wind up creating things that people don’t want.”
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While obviously, it would have been beneficial for Apple to have launched yet another blockbuster product by now in what would have been an unprecedentedly short amount of  time, Apple’s greatest threat would be rushing to market with unimaginative products that  tarnish its stellar reputation for product excellence.
No one, starting with Tim Cook himself, claims he’s another Steve Jobs.  But give the current CEO credit: he gets it.  He is committed to sustaining Apple’s legacy for product excellence. Cook deserves at least as much time as his predecessor to tell if he can deliver.

The New York Times Editorial Board’s opinion on the recent e-book pricing court decision echoes the publishing industry’s longstanding position:
“The big picture is that while Apple’s pact with the publishers raised prices in the short term, it also brought much-needed competition to the e-book marketplace. It is estimated that Apple now controls 10 percent of that market and Amazon 65 percent, with Barnes & Noble and others splitting the rest. That is healthier for the publishers and for consumers, too.”

Underscoring the Times’ argument is a widely held, visceral conviction amongst publishers that Amazon’s growing share of the market for both paper and digital books has been bad for the industry, for consumers and even for society as a whole, given the hallowed role of the written word in our lives.

However passionately held these beliefs are, they ultimately were deemed to hold little legal merit, as U.S. District Court Judge Denise Cote ruled decisively against Apple in the antitrust case — and by extension, against the publishers who had already settled to avoid mounting legal costs.  While the penalty ruling has yet to be rendered, Judge Cote left no doubt that this case was not even a close call in her blistering 160 page opinion.

“Apple and the Publisher Defendants shared one overarching interest that there be no price competition at the retail level. Apple did not want to compete with Amazon (or any other e-book retailer) on price; and the Publisher Defendants wanted to end Amazon’s $9.99 pricing and increase significantly the prevailing price point for e-books. With a full appreciation of each other’s interests, Apple and the Publisher Defendants agreed to work together to eliminate retail price competition in the e-book market and raise the price of e-books above $9.99.”

While throughout this legal dispute, book publishers portrayed themselves as endangered curators of great literary work, what lies at the core of this case is the frightening reality that digital disruption of the book industry leaves publishers in a highly vulnerable and uncertain position.  Even had Apple won this case on the publishers’ behalf (or prevails in its promised appeal), publishers will still need to figure out how to continue to add value in an environment where they no longer serve as the predominant gatekeeper, deciding which books get published, promoted and retailed to consumers.
This is a legitimately scary concern, as exemplified by prior victims of technology-driven disintermediation, including Kodak, Blockbuster and Tower Records.  So it is understandable that book publishers would seek legal relief from the inexorable erosion of their competitive position.

But the ruling in this case was correct, in that accepting the position advocated by Apple, book  publishers and the New York Times would require the willful suspension of belief in the intent of antitrust law and in the realities of free market competition as noted below:

• Since when does more competition — which Apple claims was a key benefit of their actions — result in an increase in prices in a free marketplace, which is of course what happened after the Apple/publisher deal?
• The publishers were earning higher margins and consumers were paying less for e-books under the extant pricing model than what the publishers conspired with Apple to change.  Why should  the traditional, legally sound, individually-negotiated reseller contracts now be considered a bad deal for consumers and the industry?
• Data presented during the trial demonstrated that Amazon’s historically aggressive front list pricing increased book sales, to the benefit of authors and agents.  After Apple’s deal with publishers, prices rose and demand declined, which directly harmed the financial interests of content creators
• The status quo was bad for Apple who didn’t want to compete head on with Amazon in the book category. But ironically, Apple — the supposed protector of the everyday consumer — holds a dominant share of paid music downloads.  Why isn’t Apple’s near monopoly position on iTunes considered equivalently malevolent to Amazon’s strong position in the book industry?
• The publishers are essentially asking us to believe that the threat that Amazon mighteventually raise prices on ebooks was worse than the publishers conspiring with Apple toimmediately raise consumer prices over Amazon’s $9.99 pricing by 30%-40%.  Is it credible that this collusive negotiated deal was in consumers’ best interests?
• Newspaper stories are now surfacing that Amazon has been raising prices on some slow-selling, scholarly and small-press books books over the past few months. Anecdotal and fragmentary data has fueled speculation on impending monopolist abuse.  But these press reports fail to compare Amazon’s revised pricing to competing retail channels.  My speculation is if the books that Apple has recently re-priced are carried at all in bookstores, they are sold at or close to full list price, whereas Amazon’s re-priced titles are still selling at 10% to 15% below list.  Why is Amazon to be faulted here?
• Across dozens of categories, Amazon has established a consistent track record of low consumer pricing.  Is there a compelling reason we should suddenly fear that Amazon will become an abusive monopolist in the book category?

In the end, this anti-trust trial proved to be a slam-dunk case.  The DOJ’s claims were backed up by damaging e-mails and phone logs establishing Apple’s and the publishers’ anti-competitive intent and by data that showed the incontrovertibly harmful consumer impact of their collusive behavior.  The issue for Apple and publishers of course was never an overriding concern with what was best for consumers, but only what was best for them. This isn’t unusually callous behavior… it’s just business. Apple did not want to compete head on with Amazon in the retail market, and conspired with publishers who feared that Amazon would eventually demand lower wholesale prices, starting with e-books and eventually expanding to all books.  To publishers, Amazon posed an existential threat.

But the notion that publishers need to be exempted from broadly applicable antitrust constraints on collusive behavior to protect the status quo from the inevitable consequences of digital disruption, is an intellectually tenuous argument at best.

The sad fact is that many aspiring authors would argue that the publishing industry has been retreating from its historically laudable role of promoting great literature and important non-fiction work long before the recent explosive growth in e-books.  In this view,  major publishing houses have generally made life harder for new and mid-list authors by collectively skewing their advances and marketing budgets towards blockbuster titles, often of dubious literary distinction.  The logical corollary to this view is that the possibility of self-publishing e-books has opened more opportunities for more authors to get to market, giving more choice to consumers at lower prices.

Some hard working, earnest (and often poorly paid) managers in the book publishing industry will undoubtedly take strong exception to this view of their noble profession and deeply believe that antitrust action -- if any — should have been brought against the monopolist evil empire in Seattle. But in the end, it is the marketplace and not the courts that will dictate the outcome of “the new normal” in the book publishing industry.
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If you have any doubt that even seemingly indomitable monopolists are not exempt from the need for continuous innovation and adaptive change with or without judicial restraint, consider the following. Each of the companies depicted below were accused at the height of their market power of monopolistic, antitrust behavior. Yet none of these companies were able to continue to dominate the industries in which they once held market shares of ~50% – 90+%. In the decades following government charges of antitrust abuses (some won, most lost), Kodak and GM went bankrupt, what was left of AT&T was sold off at a fire-sale price and IBM and Microsoft are no longer considered monopolist threats.

​More recently, Apple’s iTunes, which once looked invincible in the music download music business is now facing stiff competition from a number of streaming music providers, including Pandora, Spotify, Songza, Google and yes, even Amazon!
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So in the book industry, as in every other industry, every player — including Amazon — will have to continue to adapt their business models to deliver value in an industry subject to relentless change. Transient competitive advantages  will come and go, but business outcomes will be ultimately be determined in the marketplace, not in the courts.

​By now, you have undoubtedly seen press coverage on “the crisis” in higher education, signified by disturbing trends in a number of performance indicators depicted below.

What adds urgency to the purported crisis (which in fact has been brewing for decades) is  a gnawing concern that the US is losing its historical higher education leadership — particularly in STEM disciplines — to China, India and other emerging powers.

On a brighter note, many observers point to the emergence of Massive Open Online Courses (MOOCs) as the savior that will disrupt and dramatically improve higher education. Some suggest MOOCs will supplant expensive, ineffective classroom education with a cornucopia of web-based offerings taught by the world’s best professors from the best schools on their best day — all for free!

Yet, while few would argue with the need for colleges and universities to bend their cost curve, improve accessibility and achieve better education outcomes, the notion that MOOCs will largely replace classroom education in meeting these objectives is naive folly.  There is a role for online and on-campus education, and the challenge and opportunity for higher education institutions is to find the optimal mix for their targeted student market.

So what can we expect to see in the higher education landscape over the coming decade?

For starters, let’s stipulate that the status quo in higher education is unsustainable.  No sector of the economy can continue to absorb an ever-higher proportion of household disposable income, particularly with mounting evidence that the quality of higher education outcomes is static at best, and by some measures, actually declining.

Defenders of the status quo may point to the fact that despite tuition inflation, a college education remains a good investment relative to non-college attendance.  But as Clay Shirky bitingly points out, this argument casts students as hostages in an extortion scheme: “pay us or you’ll be even worse off!”

The question of course shouldn’t be whether a college degree provides an adequate (albeit recently declining) return on tuition investment relative to an obviously inadequate alternative, but rather, how can we improve the ROI and accessibility of higher education?

There are already signs that market forces are correcting what has traditionally been a hidebound sector of the economy.

• Many state governments have been cutting funding while mandating lower cost alternatives for course offerings
• A growing array of lower cost, more flexible higher ed solutions are emerging, from publicly funded schools (e.g. Western Governors University), private institutions (e.g. Georgia Tech’s recently announced $6,600 online MS in computer science), and VC-backed startups (e.g. Coursera)

And in fact, recent data suggests that despite continued escalation of published tuition rates,net tuition revenue (i.e. net of financial aid) and enrollments have actually begun falling in many second-tier colleges and universities and in graduate degree programs in law and business.

But before accepting the dogma that these are early signs of a disruptive tsunami crashing on the shores of college campuses, it is wise to take some cautionary note of impediments to the speed and breadth of disruptive change in higher ed:

• Cynics are right to point out that “we’ve been to this dance before.”  For example, after inventing motion picture technology, Thomas Edison boldly asserted in 1913  that “Books will soon be obsolete in schools …. Our school system will be completely changed in the next ten years.”
• Similar pronouncements of a revolution in higher ed were made with the advent of radio, television and the internet.  For example, Columbia University, where I teach, was a pioneer in online education, investing $25 million to launch Fathom in 2000 during the height of the internet bubble.  This venture was disbanded in 2003 after failing to achieve ambitious enrollment and profitability targets.
• There is a large and fiercely resilient constituency committed to supporting the status quo that will strenuously resist calls for reconceptualizing higher education.  It is easy to imagine that many senior faculty and administrators fall into this camp.  But this group, whose entire careers have been guided by the current rules of the game, also have powerful allies amongst current students and alumni, who fear that the value of their impending or past degree may be diminished by disruptive changes.  For example, when University of Arizona’s Thunderbird School of Management recently announced a partnership with for-profit education company Laureate to create online offerings and new global campuses, nearly 2,000 alumni signed a petition to block the proposed union. As one alumnus noted, “when I tell people I got my M.B.A. from Thunderbird, I would like that to have meaning and not drawing comparisons to University of Phoenix.”

To appreciate the depth of incumbent stakeholder commitment to the status quo, consider the following dialog from one of my recent MBA courses at Columbia Business School, which focuses on disruptive change across a number of industries.  During one class, the topic turned to whether and how MBA education might be disrupted by new technologies and business models.

To get the discussion rolling, I started by sharing some recent data from widely watched MBA school rankings (Business Week and The Economist) indicating declining student satisfaction with the quality of the MBA education at Columbia and other schools.  The intent was to serve as a backdrop to soliciting student suggestions for improvement in business school education.  One of the students seemed visibly uncomfortable with where this discussion seemed to be going, and shared a point of view that the CBS community has an obligation to support the school and protect its reputation.
In fact, some students amplified this sentiment by noting that any student who gave less than top ratings on published surveys of student satisfaction were hurting themselves and classmates.

Recognizing the sensitivity of this topic to those still in the anxious hunt for a post-MBA job, I suggested that for the remainder of the class discussion, students should imagine that a decade has passed, everyone has a great job and we are now merely reflecting back on what might improve MBA education for the next generation of aspiring business leaders, including the possibility of disruptive new formats.

To my surprise, one of the students opined that he would still be reluctant to publicly acknowledge concerns with his alma mater for fear that it might weaken his executive stature.  In his words, “as long as I have Columbia Business School on my resumé, I’d like it be considered a top-notch B-School.  And I hope to play a valued role in recruiting the next generation MBAs from Columbia.”

To take this discussion thread one final step, I asked the class at what point their allegiance might shift from supporting their alma mater to supporting the best business interests of their employer, if in fact, a potential conflict emerged.
“Suppose,” I hypothesized, “an HR director came to you in your capacity of business unit general manager to report that your company was experiencing excellent results by hiring applicants who had supplemented their undergraduate degree with directly relevant skills via targeted MOOC courses.  Starting salaries for this new breed of employee was roughly half the rate of a freshly minted MBA.  As a result, she suggested that your company should reduce its historical emphasis on MBA hiring.  Would you be receptive to such a suggestion?”
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One student continued to express discomfort with such a suggestion, thereby providing an unexpected teachable moment regarding just how resistant current stakeholders can be to disruptive threats to the status quo — in educational institutions or corporate entities.

With that caution in mind, what changes in higher education can we expect to see in the years ahead?
First of all, let’s return to what I stipulated earlier: despite earlier flame-outs, this time isdifferent and higher education will be disrupted as new technologies enable viable alternatives to the unsustainably high costs and declining value of traditional higher education formats.

In the long term, resistance from incumbent stakeholders will eventually be overcome by two large and powerful constituencies poorly served by today’s status quo: the 70% of US adults who do not have a college degree and the large number of employers challenged by a skills gap in the recruiting marketplace.  The economic potential that can be unlocked by better serving these large constituencies will continue to attract investment in alternative education delivery models from both the private and public sector.

And make no mistake about it: if employers begin to experience positive results in hiring employees who have acquired superior job skills at lower cost than by attending conventional colleges (and therefore may accept lower initial compensation), interest in conventional forms of higher education will decline from both students and employers alike.
But these are still early days in the disruption of an extremely large and complex segment of the economy and anyone who tells you they know how it will all sort out — or even worse, cling to simplistic notions such as “MOOCs will largely replace college classrooms” — is either misinformed or naive. 

There are appropriate roles for both online and on-campus education delivery models, and the challenge is ultimately to find the right balance to improve effectiveness at lower cost. Institutions like Columbia University, who currently has the dubious distinction of charging the highest gross college tuition in the US can in fact continue to provide a superior higher education experience (and justify its inherently higher costs), but only by addressing two questions I believe every university president should currently be asking themselves:

1. How can our institution demonstrably improve the quality and cost-effectiveness of our university education in ways that are uniquely well suited to students who choose an on-campus experience?
2. How can and should we participate in emerging opportunities to deliver learning in an online environment – to enhance our in-class learning, to extend our global reach or both?
   
   

The answer to the first question lies in exploiting inherent advantages of on-campus education that demonstrably deliver superior value.  The starting point — and often the most under-exploited key differentiator — is more personalized interaction and feedback between students and leading academics and teaching practitioners.

Obviously a high level of personalization is not possible in MOOCs with tens of thousands of students.  So if universities want to remain leaders in delivering the best quality higher education, they have to ensure they provide more student access to the best teachers backed by research and relevant experience, who are incentivized and motivated to spend time interacting meaningfully and individually with their students.    

Unfortunately, this key differentiator for on-campus education is often not a faculty priority, given the incentives typically in place at research-centric higher ed institutions.
In fact, at universities like Columbia or my alma mater MIT, the incentives in place for tenure track faculty are skewed so that the marginal utility of spending an extra hour on research greatly exceeds the marginal utility of an incremental hour devoted to curriculum enhancements, teaching and student interaction. Relatedly, it is already far too common for student TA’s to grade their peers’ homework assignments because professors are unwilling to put in the effort required to provide personalized feedback, or classes have become too large to make such personalization feasible, or both.

On the other hand, professors who volunteer to create MOOC courses are likely to be predominantly  motivated by teaching excellence and extending their intellectual reach.  The best online teachers will attract the most enrollments and the highest student satisfaction ratings.

Over time, I fully expect that MOOC platforms will evolve towards revenue-generating business models, precipitating a shift in the balance of power from universities to individual academics and practitioners who develop a global reputation for teaching excellence.  If the best teaching professionals increasingly find their best opportunities for global impact and remuneration lie outside traditional higher ed institutions, it may further hollow out the educational excellence of Tier 1 universities.

The point here is it that every academic leader should reexamine what it will take to sustain leadership in delivering the highest quality on-campus higher education in the future — not just with respect to traditional delivery models and current protocols, but also against evolving highly disruptive new technologies.  The context and priorities will vary from one institution to another.  For example, community colleges may choose to focus on online enhancements to classroom education aimed at lowering cost, expanding student coaching (to combat high dropout rates) and enhance flexibility.  On the other hand, Tier 1 universities may push the envelope on hybrid teaching models which free up faculty time for more intensive and personalized student interaction.

In any event, the question isn’t whether but how higher education institutions catch the wave of disruptive change.
With respect to the second key question facing university presidents – whether and how to participate in emerging online learning opportunities – no one can claim to know the precise pace and form that disruptive learning technologies will take over the next decade.  But I would argue that it is precisely because of this inherent uncertainty that the appropriate response to early stage disruptive threats (and opportunities) should be extensive low-cost iterative experimentation.
Universities need to discover for themselves how to best incorporate new technologies into their on-campus and extended learning environments.  I would like to see more higher education institutions aggressively undertaking and sharing experiences from multiple digital learning experiments, including video lectures to “flip”  classrooms, MOOC courses to extend  learning reach and to gain familiarity with online pedagogical techniques, greater use of video technologies to beam global thought leaders into our classrooms, and experiments with different forms of automated grading for larger online and classroom audiences.

What’s holding universities back?  The obvious culprits are common to corporate environments as well: budget constraints, misaligned incentives and the ever present FUD.  But another barrier is the significant faculty skills gap that constrains many colleges and universities from gaining widespread buy-in to exploit emerging technologies.
As a case in point, consider how leading graduate schools have adapted their curricula to train aspiring journalists.  Ten years ago, J-School curricula focused predominantly on the tools and techniques for becoming an effective print media reporter.  Today, J-School courses emphasize multi-media technologies, social networking and digital photography/editing skills which reflect the radical shifts in reporter roles and news delivery formats.
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In contrast, graduate students pursuing a career in academia typically get limited formal guidance on general  teaching skills, let alone tutorials on emerging technologies to digitally enhance their classrooms.  On most campuses, there is simply too little opportunity and incentive for junior or senior faculty to lead the charge on pedagogical experimentation.
So for now at least, as is often the case in the corporate sector — Kodak and Blockbuster are exemplars that come to mind — the leading edge of disruptive change is primarily being driven by newcomers rather than incumbent leaders.
While it is difficult to predict exactly how new technologies, pedagogies and business models will play out over the coming decade, it is a safe bet that those institutions who stubbornly cling to the status quo are likely to find (painfully) that this time it is real: higher education is in the midst of disruptive, transformative change.

A former chief technology officer of Hewlett-Packard recently shared the profound observation with me that “the difference between a good idea and a great one is timing.”

So true.
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While (too) much attention is often given to the dangers of being late to market — as HP assuredly was with its ill-fated and short-lived tablet computer — it can be just as deadly to prematurely enter a market before the technology, cost, or operational requirements are ready to deliver a viable consumer value proposition.
To put the issue of launch timing in context, recall that every new product launch must overcome three inherent risks to become a market success:

1. Technology risk
   Successful new technologies have to work reliably and as intended.  Technology viability is by far the most common risk associated with new product development and applies to the countless ideas that appear promising in theory, but never make their way out of R&D.  Last I checked, eternal youth and teleportation remain examples of this type.  Tens of thousands of promising but ultimately ineffective drug compounds are more prosaic examples that chronically bedevil pharmaceutical companies.
2. Operational risk
   Even if an underlying idea is technically sound, companies must be able to successfullyoperationalize the business around the new technology.  Webvan — one of the pioneers of online grocery services —  is an example of the failure to build a financially viable business around a proven technology: automated pick-and-pack grocery warehouses.  What brought Webvan down was overly ambitious expansion, which distracted the company from ironing out the basic operational requirements for on-time, cost-effective home delivery.  By the time Webvan crashed and burned, it had squandered about $1.4 billion of VC investment and IPO proceeds. On a smaller scale, NYC’s bike-sharing program is currently experiencing teething pains in establishing reliable operations.  Time will tell if New York can match the success of comparable bike-sharing programs throughout Europe.
3. Market acceptance risk
   Even if the first two hurdles, can be overcome, the final risk factor to be managed for a successful new product launch is consumer acceptance.  There have been some legendary (and expensive) technology flops of this type that make for delicious schadenfreude.
   
   ​Consider for example the the Iridium satellite phone system that promised to deliver mobile communications capability anywhere on the planet, from the middle of the ocean to the depths of the Amazon jungle.  The audacity of this technology when first announced by Motorola in the early 1990’s was awe-inspiring.  But by the time Iridium launched in in 1998, consumers quickly recognized devastating flaws in Iridium’s value proposition:

• Iridium did indeed work well on a ship’s deck in the middle of the ocean, but not at all in enclosed structures, — like buildings and automobiles
• The handheld unit was a three pound brick that required an ungainly large external antenna and large battery pack for prolonged use
• The handset cost around $3,000 and airtime charges ran as much as  ~$5 per minute.

After $5 billion of investment, Iridium declared bankruptcy within nine months of launch.

Another example of a great idea in theory, that failed to deliver an attractive value proposition, is the Segway.  Hailed as a revolutionary product that would change the world when first introduced by inventor Dean Kaman in 2001, consumers never could figure out why a $3,000 motorized scooter (banned from operating on most big-city sidewalks) made any sense.  The world may have changed over the past decade, but largely without the ubiquitous presence of Segways.

Overcoming risks
On a brighter note, it is possible to overcome initially negative market reactions to new product concepts, as some of the most successful current products (or those intriguingly on the horizon) demonstrate.  Consider the following:

• Apple iPad
  Apple recently announced shipping it’s 100 millionth iPad, but the company was certainly not the first to market a tablet computer when it launched in 2010.  In fact, Microsoft and others had tried to develop this market ten years earlier, with no success.  And, one might even argue that the Newton — a cross between a PDA and tablet, introduced in by Apple in 1993 — represents an even earlier failure to gain market acceptance for tablet 

The reasons underlying Apple's success with the iPad have been well documented, including thoughtful design and UI, technical refinement (e.g. battery life, screen resolution), the availability of hundreds of thousands of apps and a huge installed base of step-up iPhone users.  All of this boils down to great execution and timing. Steve Jobs had an uncanny sense of not only what, but when to introduce new technology.

• E-books
  A similar story played out in the digital book market.  The first renderings of e-book readers were launched by Rocket, Sony and others as early as 1998.  But it wasn’t until Amazon delivered Kindle’s one-click access to hundreds of thousands of ebooks available on Amazon.com, appealing to its installed base of millions of book buyers, that e-book sales took off.  Amazon had been working on the Kindle for five years prior to its 2007 launch to iron out the technology, business model, operations and contracts ensuring widespread access to digital books.  Their patience was rewarded; the original Kindle sold out within hours launch and remained oversold for months to come.  Again, timing dictated when Amazon could successfully manage the risks associated with this new product technology, leaving first movers in the dust.
  
  
•  Apple Watch
  One of the more intriguing products on the horizon today are “iWatches” — wristwatches that synch via Bluetooth to mobile devices (phones and tablets) to display timely information like text messages, weather — and yes, even the time — in a convenient format.  The Pebble watch earned notoriety to become the highest funded project on Kickstarter, garnering over $10 million from ~69,000 investors within 5 weeks of initiating crowdfunding.  In addition, many technophiles are currently agog at the prospect of an iWatch from Apple as their next new thing.  But neither Pebbles nor Apple are pioneers in this category, as iWatches first appeared from Tissot, Swatch and others in 2003, powered by Microsoft’s network, carried over FM radio broadcast signals in selected metropolitan areas.  The original iWatches cost as much as $800 and required a network subscription of $59 per year.  Within a few years, iWatches were discontinued, having never generated much market interest. The Pebble and rumored iWatch may find their impending launch timing more favorable, as ubiquitous wifi/4G network availability and the support of a large apps developer community will enhance functionality and coverage.
• SodaStream
  The record for persistence in finding the right time to trigger broad-based market acceptance for an unconventional product may go to SodaStream — a 110 year old company that sells beverage-making systems for home carbonated soft drink consumption.  Founded in England in 1903, the company made little market headway under seven different corporate owners during its first listless century, and was on the verge of bankruptcy in 2006 when the company was purchased by an Israeli private equity company for $6 million.The strategic breakthrough came when the new CEO, Daniel Birnbaum recognized the potential for SodaStream to sell soda makers as a lifestyle product that tapped into several global market trends, i.e., consumers’ desire for products that deliver convenience, sustainability, health & wellness, personalization and value for money.  Birnbaum aggressively repositioned SodaStream’s product line with upscale designs and features, added new flavors and packaging conveniences and aggressively advertised the broader value proposition in global markets.
  
  The company IPO’d in 2010 and has been its growing top and bottom line by 40+% per year ever since. SodaStream’s transformation from a money-losing, nearly bankrupt company in 2006, to a highly profitable global category leader with sales of nearly $600 million and a market cap over $1.5 billion in 2013 is yet another example that timing can play a key role in turning good ideas into great ones.
  

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. 
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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.
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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.
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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!

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• 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.

On June 11, 2012, Tim Cook graced the cover of Fortune Magazine, in a hagiography
about the man with perhaps the hardest job in America: to succeed the legendary
Steve Jobs who Fortune had already lionized as “the best CEO of the decade” and
“the best entrepreneur of our time”

As the Fortune piece noted: “Considering the widespread handwringing over how rudderless
Apple would be without Jobs, it is remarkable how steadily the company has sailed along without him.”  Time Magazine also weighed in with similar praise: “Highly ethical and always thoughtful, he projects calmness but can be tough as nails when necessary. Like the great conductor George Szell, Cook knows that his commitment to excellence is inseparable from the incredible ensemble he leads at Apple.”

Such plaudits certainly seemed warranted at the time. When Fortune’s story appeared, Apple was trading at $571 per share, 52% higher than when Steve Jobs stepped down 10 months earlier.  Apple’s stock and was well on its way to cresting at over $700/share in the coming months, prompting Forbes and the New York Times to speculate that Apple — already the most valuable

company in the world — was well on its way to becoming the first trillion dollar market capcompany.
These were heady times indeed, and Apple and Tim Cook apparently could do no wrong.
Or could they?

Apple’s fall from grace
Less than four months after the Times wondered how soon Apple’s market cap would break the trillion dollar mark, the Wall Street Journal ran a story under the headline “Has Apple Lost Its Cool to Samsung?” CNN had already scooped the Journal, with its own version of: “Is Apple Losing Its Cool Factor?”

And what about Tim Cook, the Szell-like conductor of Apple’s innovation band? In mid-January,The Motley Fool asked “Is Tim Cook The Next Steve Ballmer?” which was not meant as a compliment. And two weeks later, Forbes Magazine weighed in with “The Problem with Tim Cook“, raising serious questions about whether Tim Cook was up to the job!
What’s going on here?!  Sure, there were a couple of missteps with Apple Maps, perceived missing features in the iPhone 5 and the still-unfulfilled promise of Apple iTV.  But these events hardly seemed damning enough to signal a cataclysmic reversal of fortune.

Can Tim Cook and the company he leads really go from a heavy dose of smarts to serious ineptitude in just four months?  Has Apple really lost its mojo and its cool to Samsung, who for so long toiled in the obscurity of Apple’s giant shadow?

The Halo Effect
Earl Weaver, the Hall-of-Fame manager of the Baltimore Orioles twenty-five years ago opined an answer to these questions, which is as true in business as it is in baseball:
“You’re never as bad as you look when you’re losing, nor as good as you seem when you’re winning”

There is actually considerable academic research validating Weaver’s sage advice, that falls under the rubric of “The Halo Effect”. In IMD Professor Phil Rosenzweig’s excellent book of the same name, the Halo Effect is defined as the consistent tendency for people to ascribe positive ratings (particularly on subjective assessments like “executive vision” or “leadership”) when the overall measurable performance of a company is good, while tending to be overly critical of management when business outcomes display signs of weakness.

One can see this for example in the glowing praise of successful business leaders (such as Reed Hastings of Netflix, Fortune’s 2010 CEO of the year) as “visionary, dynamic and customer-focused”, only to have the very same CEO widely vilified as “complacent, arrogant and unwilling to respond to customer preferences” one year later when the company’s financial performance stumbled. The Halo Effect probably hit bottom for Hastings when SNL parodied him in a bitingly funny skit in 2011.  ABB’s Percy Barnevik, GE’s Jack Welch and Groupon’s Andrew Mason are other examples of executives who have felt the sting of hyperbolic punditocracy.

It’s fair to say that Tim Cook is the latest victim of the Halo Effect – neither worthy of his early sanctification, nor deserving of his asserted fall from grace. As usual, the business press has been too quick to praise and condemn a man who, in reality has not changed the very essence of his being in just four months!

Let’s get real
So what can we expect from Apple in the months and years ahead? In my view, there are two parts to answering this question:

1. Apple has done nothing yet under Tim Cook’s watch to fundamentally call into question his leadership of the company or the potential for attractive growth
2. Having said that, the gut-check question for Cook remains the same as it would be were Jobs still leading the company: can Apple continue to profoundly redefine the value
   proposition in large new sectors of the economy?

It is no secret that Apple’s extraordinary growth over the past decade was propelled by the sequential breakthrough success of the iPod, iPhone and iPad.  Each of these products succeeded in realigning the value chains of multiple large industries, creating enormous profits for Apple.

But as good as any of these products are, the simple fact remains that over time, continued improvements yield marginally decreasing utility to consumers.

Take Apple’s biggest success to date for example, the iPhone.   When the first generation iPhone went on sale in the summer of 2007, it was received with unprecedented global enthusiasm, teasingly dubbed by The Economist as “The Jesus Phone”.  And no wonder…it’s design, user interface, functionality and apps support were so radically different and better than any other smartphone on the market that it appeared to many to be miraculously conceived!
By the time early adopters’ initial two-year contracts were up, Apple had unveiled its next generation iPhone, the 3GS with faster digital download speeds, an improved camera and considerably more apps.

And in every year thereafter, Apple continued to enhance the iPhone.  The iPhone 4/4S/5 got progressively, thinner, lighter, brighter (displays), faster, better (cameras), and eventually marginally bigger. While each new version was better than the last, none had the breakthrough market impact of the initial iPhone.
​
Economists have long recognized the marginal decreasing utility – more prosaically, the “wow” factor — associated with virtually every product in the market over time.

​For example, except for the most extreme technophiles, most consumers hardly notice the latest generation PC, home printer, digital camera or even automobile these days – a far cry from when the first primitive versions of these revolutionary products first hit the market.

Seen in this light, the fact that Apple’s latest iPhone lacks NFC capability or the best-in-class
screen size or the highest megapixel camera does not necessarily signal the end of their
innovative spirit.  Even if an iPhone 6 were released tomorrow with all of these features, it would fail to create the buzz of the first “Jesus Phone”.

Relatedly, it’s entirely to be expected that Samsung and others have largely caught up to Apple on most of the features and functions that define state-of-the-art smartphones.  If you have any doubt whether this is a unique failing of Apple, just ask BMW how they would compare their vehicles to the best Hyundai has to offer today vs. ten years ago. Competition happens, and no one is suggesting that BMW has lost its edge.

Where now?
So what will it take for Apple to continue to be, well, Apple?  Its unique challenge is not just to stay abreast of the relentless demands for continuous improvement in its current core products — daunting enough against competitors like Samsung, Google and Microsoft. It is to find thenext breakthrough product category that will once again disrupt a large business value chain to Apple’s profound benefit. A rumored rendition of an Apple “iTV” home entertainment ecosystem is probably the most likely possibility.

Critics of Apple should realize that epic business disruptions do NOT operate on a predictable product release timetable, and it is clearly premature to condemn Tim Cook for not pulling another blockbuster rabbit from under his hat during his eighteen months as CEO.

Expecting Tim Cook to continue Apple’s growth to unprecedented levels on an arbitrarily imposed timetable is simply not a reasonable standard by which to judge CEO performance.
​
While it is still too early to pronounce judgment on whether Apple’s astonishing string of revolutionary product launches has run its course, the clock is definitely ticking.