Brand Disloyalty: Recession-Weary Consumers Take Discounts To The Extreme

The Wharton School - University of Pennsylvania
Published: October 26, 2011

Before Joanie Demer even sets foot in a grocery store, she thoroughly maps out her game plan. First, Demer, a married mother of two, gets her hands on several of the glossy circulars from her local Sunday newspaper and files away a few copies of each coupon inside. Next, she checks her favorite Internet coupon aggregators -- Smart source.com, Redplum.com, as well as her own site, TheKrazyCouponLady.com -- for printable coupons. She scours Facebook and company websites for other deals and uploads barcodes for vouchers to her smartphone.

When she shops, Demer eschews brand loyalty for the best bargains. She often goes to multiple grocery stores depending on weekly discounts and is known to come home with a dozen 16-ounce jars of peanut butter if she has a coupon and the math works out. She hits membership warehouse chains -- such as Costco or BJ's Wholesale Club -- for their fresh produce and dairy specials. For toiletries, she frequents chain pharmacies, such as Rite Aid and Walgreens, where her coupons entitle her to razors and bars of soap for free or for just pennies on the dollar.

Demer, who lives in a remote corner of Humboldt County, Calif., spends about $40 a week on groceries, which is less than half of what she used to before she started couponing. She says she is not a "survivalist consumer," but nor does she cringe at the description, either.

"I don't have a bunker full of a massive stockpile, and I'm not afraid of a government collapse or impending nuclear disaster," says Demer, who self-published a book titled, Pick Another Checkout Lane, Honey. "But in this economy ... it's smart to have a certain amount of food on hand. You never know when you might lose a job or have a medical emergency. It's good not to have to go to the grocery store for a few weeks and spend money you don't have."

While Demer's zeal for grocery deals may border on the radical, her shopping practices are not unusual in mainstream America. As the unemployment rate hovers at a stubborn 9% and the food category of the consumer price index continues to rise, Americans are making subtle but important changes to their grocery buying habits in an attempt to stretch their household budgets.

A weekly food stock-up used to mean a trip to the nearest supermarket and a cartload full of groceries chosen by brand preference, not price. Those days are gone. Customers today are chasing the best deals by shopping at multiple grocery stores depending on the sales, stocking up on products when they are being deeply discounted or bulk-buying at warehouse club chains. They are using the Internet to comparison shop or, like Demer, engaging in extreme couponing, a trend with its own reality TV series.

"The era of conspicuous consumption, with the mindset of, 'I work hard; I deserve to waste money,' is pretty much done. Budgets are tight, and people are in the bargain-hunting mood," notes Stephen Hoch, a Wharton marketing professor. "Because there is more information available on pricing and quality, it's easier to make smarter decisions than it used to be" about shopping at multiple bricks-and-mortar locations, or online if necessary. "Extreme couponing takes less effort than it used to," he adds. "Why leave money on the table when you don't have to? Brands are playing that card, and retailers are reinforcing it. They are sending a message [that they] understand consumers are smart and savvy."

Brands may be surviving this new era of household austerity by increasing the number of coupons they issue. But this is not a smart long-term strategy, note experts. Coupons and short-term promotions train customers to expect more for less, and do not cultivate brand loyalty -- in fact, they may make customers even more fickle.

Bulking Up on Discounts

Saving money on groceries is not easy these days. The Department of Labor reported on October 18 that food prices rose 0.4% in September, pushed up by increases in the cost of cereal, fruit and vegetables. Dairy prices have climbed 10.2% in the past year. As it is, grocery store chains have a lot of fixed expenses and thus operate with slimmer margins compared to the standard industrial company, according to Value Line, an investment research firm. Their operating margins, which tend to run in the mid-single digits, are even narrower today because of a flood of competition from other retailers.

"It used to be that location was the biggest factor in supermarket shopping choice. But now people are looking more at prices," and are willing to travel to find the best deals, according to Lars Perner, a professor of clinical marketing at the University of Southern California's Marshall School of Business. Many of the best deals are found in places other than the local grocery store. Chains today compete with drug stores, dollar stores and supercenters, in addition to websites and membership warehouse clubs.

The warehouse clubs -- Costco, the third largest retailer in the U.S., Sam's Club, a division of Wal-Mart, and BJ's, which has a strong foothold in the Northeast and Mid-Atlantic -- sell everything from bulk packages of paper towels and boxes of Cheerios to fine wines and diamond engagement rings. They always tend to do better in a poor economy, but this downturn has been especially profitable. Costco's net sales increased 15% to $8.6 billion in September, while U.S. same-store sales rose 7% during that period. In the last five years, Costco has grown its membership base by 25%. BJ's, which was recently taken private by an equity investment group and no longer reports monthly sales data, has experienced a similar trend: As of July, the chain saw a 6.7% increase in same-store sales year-to-date. In the second quarter of this year, Sam's Club reported that its sales rose 16.2%.

One reason for the current popularity of warehouse chains is that customers are stocking up on groceries now because they are not sure if they will have the means to buy them later. "It's hard for people to interpret the macroeconomic scene," Perner points out. "People are afraid of losing their jobs. But even if they get to keep their jobs, they probably won't be getting any overtime, a raise or a holiday bonus.... There is a desire for a safety net."

In recent years, Costco and other warehouse chains have stolen market share from traditional grocery stores by enlarging their stock of fresh fruits, vegetables and meat. The economic downturn moved people to shop at warehouse clubs to save money, and many consumers had an epiphany, says David Reibstein, a Wharton marketing professor. "They realized, 'Wow, I'm able to get all of the products that I want but at a significantly lower price.' This recession has been a windfall for Costco [and places like it]." Wall Street has taken note. Warehouse club companies are considered some of the most "recession-resistant" equity bets. From January 2008 to today -- arguably some of the toughest years in stock market history -- shares of Costco are up 21%. By contrast, the Standard & Poor's index is down 15%. Over the past seven years, BJ's stock climbed 192% (the stock was recently de-listed) and Costco's rose more than 200%.

The Coupon Comeback

Another cost-saving strategy for grocery shoppers: clipping coupons. Coupon redemption in the U.S. peaked in 1992 (at the end of a recession) when 7.9 billion coupons were cashed in, according to Inmar, a North Carolina-based company that processes coupon transactions. By 2006, that number had declined to 2.6 billion and languished there for years.

But in the fourth quarter of 2008, as cracks in the subprime mortgage market erupted into the most severe global financial crisis and recession since the Great Depression, coupons made a comeback. In 2009, companies issued 367 billion coupons and shoppers redeemed 3.3 billion of them, a 27% increase. In September, Inmar reported that coupon redemption rose 1% for the first six months of this year, compared with the same period in 2010.

"At the low end of the economy, where people are struggling because they have lost their jobs or they fear they will lose their jobs, people are, out of necessity, clipping coupons," says Barbara Kahn, director of Wharton's Jay H. Baker Retailing Center. "It's a short-term response. [Consumers are thinking,] 'I only have X amount of money, and I have to make it work.'"

Coupons are not just for down-at-the-heels penny pinchers, however. A poll of more than 1,000 U.S. consumers conducted last year by Harris Interactive found that coupon use is highest among well-off, educated city dwellers. According to the survey, 61% of adults with annual household incomes of more than $100,000 said they had redeemed a coupon in the preceding six months. In addition, adults with college degrees were almost twice as likely to have used a coupon for a purchase in the previous half-year as those who did not graduate from high school. More than three quarters of those who redeemed a coupon of any kind during the previous six-month period lived in metropolitan areas.

"There has been a significant change in the cultural meaning of coupons," notes Frédéric Brunel, a marketing professor at Boston University's School of Management. "Even just a few years ago, coupons weren't hip.... Coupons did not symbolize success or achievement; they were only a few levels above food stamps. But now, clipping coupons is a celebrated, cool, middle-class thing to do."

Technology is accelerating the movement toward couponing. While paper coupons still make up the bulk of coupons redeemed, Internet coupons and mobile phone coupons -- usually in the form of a text message with an embedded discount code -- are also growing. NCH, a marketing research firm, reported a 37% increase in the number of digital coupon offers last year. In addition, coupon aggregators and online group buying sites, such as Groupon, have proliferated. "Technology is not only making it easier and more accessible to look for deals, but it is also amplifying and reinforcing the social reach of this phenomenon," says Brunel.

The couponing trend has even inspired a reality television show. "Extreme Couponing", a series on the TLC cable channel that debuted last year, features shoppers making extensive use of coupons to save money on their grocery bills. In many cases, shoppers walk away with carts full of food and other staples, but pay only pennies on the dollar through the use of multiple discount offers. "Although it makes for some entertaining TV, we don't know the boundary and actual reach of the more extreme forms of this phenomenon," notes Brunel, adding that one thing is clear: "There is glory to be had in saving as much money as you possibly can by using coupons."

Strategic Promotion

Have Americans made permanent shifts in the ways in which they stock their pantries, or have they merely made temporary adjustments in the face of a terrible economy?

Experts say warehouse club chains are likely to continue to eat away at the market share of traditional grocery stores even after economic conditions improve. By offering consistent value, warehouse clubs have impressed deal-seeking customers. But most experts predict that shoppers who are currently bulk buying their groceries out of concerns about not having the means later will likely stop. Similarly, shoppers in general are likely to become less aware of store sales and price reductions.

Manufacturers' coupons cut into the margins of the original issuer, not the retailer. Coupon clippers like Demer, the self-proclaimed "Krazy Coupon Lady," save money by shedding any modicum of brand loyalty in favor of purchasing whatever is on sale. Demer, for instance, has learned to live without expensive products. She says she never buys a bottle of shampoo unless she has a coupon for it.

"Brands need to think strategically about how they use promotions and how they incentivize customers," Brunel states. "When the consumer gets something at a deep discount, they might perceive the quality [of the product] to be lower, or attribute their choice to the price discount versus the inherent quality of the good or service. This is not a good recipe for long-term brand equity building." Moreover, customers become addicted to the discounted price, says Kahn, who is also a Wharton marketing professor. "When you start playing the price promotion game, people feel that they're being cheated if they then pay more than the discounted price in the future."

Still, it is hard to say whether the couponing movement will remain as fervent once the economic landscape looks brighter. "In previous recessions and economic downturns, we saw things like an upsurge in store-brand products. People changed their behavior to weather the economic storm," Reibstein notes. "But usually when it was over, people reverted to form and went back to their favorite brands."

Introverts: The Best Leaders For Proactive Employees

Harvard Business School - Harvard University
04 de Outubro, 2011

We often expect corporate executives to conform to certain extroverted CEO stereotypes: C for charismatic, E for effusive, and O for outgoing. To wit: Virgin Group chairman Richard Branson, who very publicly flew around the world in a hot air balloon; former General Electric CEO Jack Welch, a guest player on the sitcom 30 Rock; and Oracle CEO Larry Ellison, the swashbuckling yachtsman.

But then there are the introverted CEOs—calm, eremitic, and observant—who prefer flying below the radar. You've never heard of them because they don't like the spotlight. Take Peter Rouse, who last week was named interim White House chief of staff, replacing the extraverted Rahm Emanuel.  Barely known outside of Washington circles, Rouse is a quiet politician who seems to eschew the public eye, preferring instead to hunker down and deal with problems.  Within the walls of the West Wing, he is reportedly known as a "fixer."

Both types of leaders, the extraverts and the introverts, can be equally successful or ineffectual, but with different groups of employees.

"Often the leaders end up doing a lot of the talking and not listening to any of the ideas that the followers are trying to provide"

A new study finds that extraverted leaders actually can be a liability for a company's performance, especially if the followers are extraverts, too. In short, new ideas can't blossom into profitable projects if everyone in the room is contributing ideas, and the leader is too busy being outgoing to listen to or act upon them.

An introverted leader, on the other hand, is more likely to listen to and process the ideas of an eager team. But if an introverted leader is managing a bunch of passive followers, then a staff meeting may start to resemble a Quaker meeting: lots of contemplation, but hardly any talk. To that end, a team of passive followers benefits from an extraverted leader.

"Often the leaders end up doing a lot of the talking, and not listening to any of the ideas that the followers are trying to provide," says HBS associate professor Francesca Gino, who conducted the study with professors Adam M. Grant of the University of Pennsylvania's Wharton School and David A. Hofmann of UNC Kenan-Flagler Business School. Their article, "Reversing the Extraverted Leadership Advantage: The Role of Employee Proactivity," will appear in the Academy of Management Journal next year.

The three professors commenced their research with field data from a national pizza delivery chain, mailing out questionnaires and successfully surveying fifty-seven pizza store managers and 374 employees about their personality traits and their coworkers' behaviors. Using a five-point scale, the respondents rated themselves on adjectives such as "reserved," "introverted," "talkative," and "bold." The employees rated their teams' general work behaviors on items such as "Try to correct a faulty procedure or practice" and "Communicate opinions about work issues to others even if their opinions differ or others disagree."

The researchers then compared the survey results against each pizzeria's overall profitability over a seven-week period. Sure enough, they observed high profits in stores where the employees were relatively passive but the managers were extraverted. On the other hand, when employees were proactive, the stores led by introverted managers earned high profits. Meanwhile, profits were lower in stores where extraverted managers led proactive employees and introverted managers led passive employees.

"There are ways to influence the likelihood that leaders will act introverted or extraverted"

The research conducted by Grant, Gino and Hofmann shows that there's a definite need for introverted leaders. Here's the problem: research shows that introverts, not prone to self-promotion, typically have more trouble than their extraverted colleagues rising through the corporate ranks in order to take a leadership role. This is especially true if they are surrounded by extraverted coworkers, who are likelier to receive promotions because they actively draw attention to themselves—fitting the stereotypes of great leaders.

"Many people associate extraversion with action, assertiveness and dominance—characteristics that people believe to be necessary to be effective leaders," Gino says. "The features that define extraversion are commonly the features people associate with leadership."

Changing a leopard's spots

Unfortunately, companies that promote only extraverts are natural breeding grounds for the aforementioned ineffectual situations in which extraverts report to extraverts. Fortunately, the research also shows that it's possible not only to change prevailing attitudes about leadership, but to influence leadership behavior as well-that is, to encourage introverted and extraverted behavior in any given situation.

"We showed that there are ways to influence the likelihood that leaders will act introverted or extraverted," Gino says.

For the second study in their paper, the researchers devised a scenario in which 163 college students participated in a T-shirt folding contest. The students were divided into fifty-six groups, all tasked with folding as many T-shirts as possible in ten minutes. (They were encouraged to try their hardest-the most productive groups would win iPods.) Each group consisted of one assigned leader and three followers, plus two research assistants—"confederates"—who pretended to be followers. Some of the confederates were told to approach their team leader, after a minute and a half into the folding session, and say, "I have a friend from Japan who has a faster way. It might take a minute or two to teach it, but do we want to try it?" (The Japanese method is featured on YouTube.) The goal was to see how introverted and extraverted leaders would react to the proactive suggestion.

In an effort to control whether the student leaders would manage their teams in an introverted or extraverted manner, the researchers asked them to read a brief statement before the T-shirt folding commenced. Half of the leaders received this statement, along with a list of supporting academic studies:

"By creating a work environment where people feel free to speak up and be proactive, the organization is creating the right place for introverted leaders to be successful"

"Scientific research now shows that behaving in an extraverted manner is the key to success as a leader. Like John F. Kennedy, Martin Luther King, Jr., and Jack Welch, great leaders are extraverted: their behavior is bold, talkative, energetic, active, assertive, and adventurous. This enables them to communicate a strong, dominant vision that inspires followers to deliver results."

The other half received this antithetical statement, also followed by a list of academic studies that supported it:

"Scientific research now shows that behaving in an introverted manner is the key to success as a leader. Like Mahatma Gandhi, Abraham Lincoln, and Socrates, great leaders are introverted: their behavior is quiet, shy, reserved, and unadventurous. This enables them to empower their people to deliver results."

"We had them think about their role as a leader and consider how the certain style would help them go about the task," Gino says.

Sure enough, the students' leadership style during the T-shirt folding exercise corresponded with the statement they had been asked to consider. Those who had read about the virtues of introverts were far more likely to signal that they were receptive to the novel Japanese folding method. And as with the pizzeria study, when the followers were proactive, the groups with introverted leaders were more productive than those with extraverted leaders.

"It worked," Gino says. (The research team believes that the results may have been more dramatic had the groups been given more time to fold; the sessions were only ten minutes long, and the whiz-bang Japanese folding method took some practice.)

Gino says her future research plans may involve the topic of authenticity, the degree to which introverts can genuinely adopt extraverted behavior before landing a leadership role. Ideally, though, she hopes to see more corporations adopt policies that reward good listeners as much as they reward good talkers.

"By fostering a work environment where people feel free to speak up and be proactive, the organization is creating the right place for introverted leaders to be successful."

The Art Of Selling

The Economist
22 de Outubro, 2011

WÜRTH, a German family firm, makes the most basic products imaginable: screws, nuts and bolts. No need for fancy salesmanship here, you might think. In fact, Würth has 30,000 sales reps. It calls them its “beating heart” and strokes them deftly: when one performs exceptionally, the firm writes to congratulate his wife.

These changes have prompted many firms to prune their peddlers. Drug firms cut their salesforces by a whopping 30% between 2006 and 2011, according to ZS Associates, a consultancy that specialises in sales. Many “field” or travelling salesmen have been replaced by cheaper telephone salespeople. American retailers have cut sales staff to the point where they are probably missing out on business.

Reports of the death of the salesman have circulated since the first dotcom boom. Consumers are doing their own research. Businesses are opting for automated purchasing and reverse auctions where all that matters is price. Online comparisons, ratings and other unbiased information have made the tough task of selling tougher still. Customers have become warier of being sold to. Drug firms used to hire ex-cheerleaders to sway doctors into prescribing their pills. But doctors (many of whom are female these days) have grown less swayable. About a third of them are now considered “hard to see” by the drugs industry.

Yet for all this, selling is as important as ever. The much-maligned car salesman is still shifting the vast majority of new cars, despite carmakers’ efforts to sell online. In Asia the personal touch is essential. Amway, a direct-selling firm, counts China as its biggest market. Avon and Mary Kay, two direct-selling rivals, are also growing rapidly there. Selling in Korea, according to a saying among Korean salespeople, means drinking a lot of soju, a fiery local spirit, and “getting naked” when appropriate.

Young industries are embracing old sales techniques. For a forthcoming book called “The Art of the Sale”, its author, Philip Delves Broughton, visited Salesforce.com, a firm that sells online sales support. He found a boiler room full of athletic-looking graduates pounding the phones. Google, too, may be built around algorithms, but it also has thousands of flesh-and-blood ad salespeople. Apple has sold millions of iMac computers online, but its shops are as sophisticated as they are old-fashioned. Its rivals sell computers via soulless big-box stores. Apple makes it personal, down to the last psychological detail: for example, staff are forbidden to correct customers if they mispronounce the names of its gadgets. Immac, iMac, what’s the difference?

The tragedy of the salesman in modern business is not that he is on the way out, but that he is disrespected. C-suites hardly ever contain a “chief sales officer”. Chief executives rarely come from sales. Recruiters must devise euphemisms such as “business consultant” for sales roles, or good graduates won’t touch them. Only a few companies, such as Würth, give salesfolk their due. Others agree with Scott Adams, a cartoonist, whose character “Kenny the Sales Weasel” asks an engineer to explain a product’s technical specifications. “Our product is beige. It uses electricity,” says the engineer. “Whoa! Brain overload!” wails the weasel.

Management theory mostly ignores selling. Peter Drucker, perhaps the most influential guru, wrote that “the aim of marketing is to make selling superfluous.” Most business schools do not teach sales as a separate subject in MBA programmes. Consultants have rethought strategy to the nth degree but seldom furrow their brows about sales.

It shows. According to a new book, “Sales Growth: Insights from Leading Sales Executives” by Thomas Baumgartner, Homayoun Hatami and Jon Vander Ark, three consultants at McKinsey, the performance of salespeople within a single company typically varies by a factor of three. And the difference between the best and worst companies when it comes to selling is far greater than the difference for functions such as supply-chain management, purchasing or finance.

He’s liked, but he’s not well liked

There are signs that companies are starting to pay attention to selling. Some are trying to turn it from an art into a science. At the very least, this means standardising practices taken from the most successful salespeople. Firms are starting to track reps much more closely, usually to their dismay. Salesforce.com sells tools which allow sales managers to track on a daily basis what their minions are up to. Companies are reorganising sales so that their most important customers are cosseted by huge, complex selling teams which include people from many departments.

Meanwhile, debates about selling rage on. The fiercest of all concerns pay. Should you pay reps a salary, or prod them daily with commissions? American firms used to pay a higher proportion of commissions, but are now opting for more salary, like European companies. Japanese salesmen are typically paid a salary only. Chinese and Indian reps often want to be paid commission only, because they see this as a way to make money quickly, says Nigel Piercy, a professor at the University of Warwick who has studied the way salespeople are paid.

Whether they are called “rainmakers” (an investment banking term) or “peddlers”, whether their feet are on the street or in the door, whether they are pushing metal (cars) or slamming boxes (photocopiers), salespeople are the unsung heroes of business. They battle daily and bravely against rival firms and consumers who foolishly prefer to save their hard-earned cash. They gather vital intelligence about customers’ preferences and competitors’ moves. Forget the marketing mavens, the strategy wizards, the bean counters and the designers. Spare a thought for the world’s Willy Lomans, riding on a smile and a shoeshine.

Pointless Regulations - It's A Jungle Out There

The Economist
22 de Outubro, 2011

TYPICAL company in Congo with a gross profit margin of 20% faces a tax bill equivalent to 340% of profits. Some survive by slipping the tax collector a few Congolese francs to look the other way. This is nice for tax collectors, but not so good for Congo. Its spirit of enterprise is throttled at birth by ridiculous rules.

Every year since 2003 the International Finance Corporation (part of the World Bank) has compiled a report on red tape around the world. “Doing Business 2012”, which was published on October 20th, reports progress on several fronts.

“Doing Business” does not delve into complicated areas full of tricky trade-offs, such as regulating banks or environmental pollution. Rather, it looks at rules that ought to be simple but often aren’t. How long, for example, does it take to register a company? In New Zealand it takes one day and costs 0.4% of the local annual income per head. In Congo it takes 65 days, involves ten steps and costs 551% of income per head.

In Kenya, by no means the most bureaucratic state in Africa, firms that register incur an annual secretarial fee of $220, plus more for lawyers’ bills. This discourages small firms from becoming formal, which means they can’t borrow money from a bank. Those that register find the paperwork labyrinthine and confusing. “We found it was very hard to see what was ahead of us,” says Alix Grubel, a director of Kenya Buzz, a digital publisher.

Other procedures the IFC measures include registering a property (which takes one day in Portugal, 513 in Kiribati); obtaining a construction permit (five steps in Denmark, 51 in Russia); enforcing a simple contract through the courts (150 days in Singapore, 1,420 in India); and winding up an insolvent firm (creditors in Japan recover 92.7 cents on the dollar, those in Chad get nothing at all).

Although the IFC has not been publishing red-tape league tables for long, it has already shamed most of the world’s governments into cutting a few pointless rules (see chart). In the past six years, 94% of the 174 economies surveyed have streamlined at least some processes. In the past year alone, 125 countries implemented reforms. Globally, the average time it takes to register a business has fallen from 50 days to 31 since 2003, and the average cost from 89% of per capita income to 36%. Until recently in Paraguay, companies were obliged to have every page of their accounts stamped with a judge’s seal. No longer.

Cutting red tape makes countries richer, if the 873 peer-reviewed articles and 2,332 working papers that use the “Doing Business” data are anything to go by. A study in Mexico found that simplified municipal licensing led to a 5% increase in the number of registered companies and a 2.2% increase in jobs. It also lowered prices for consumers. Bankruptcy reform in Brazil caused the cost of credit to fall by 22%. Countries with flexible labour rules saw real output rise by 17.8% more than those with rigid ones.

And you do not have to be a tea-party fan to agree that some corporate tax rates are too high. To compare apples with apples, the IFC looked at how each country would tax a domestically owned ceramics firm with 60 employees, two plots of land and a pre-tax profit margin of 20%. Five countries (Sri Lanka, Argentina, the Comoros Islands, the Gambia and Congo) would hit such a firm with taxes exceeding 100% of its profits. This is of course self-defeating. When taxes are too high, no one pays them. Bolivia, for example, tries to grab 80% of a firm’s profits but ends up raising far less, as a proportion of GDP, than low-tax Chile, which accordingly has much better roads, schools and public health care.

This year’s report adds two new measures. One is electricity. A young entrepreneur in Liberia who builds a new warehouse must wait on average 586 days to connect it to the power grid. In Ukraine it takes 274 days; in Germany only 17. Guess which of these countries has a thriving manufacturing sector?

The other new measure is transparency. How easy is it to find out what the rules are, how to comply with them and what it will cost? In most countries in Africa and the Middle East, a businessperson must meet an official face-to-face to discover such things. In more business-friendly places, it is all published online. This not only reduces hassles; it also reduces costs. Where fees are transparent, they tend to be lower. In countries where it is easy to find the documents required to import goods, it takes 21 days on average to import them; in countries where such forms are hidden in a bureaucrat’s desk, it takes twice as long.

The IFC singles out several countries for plaudits. Morocco, Moldova and Macedonia improved the most in the past year. South Korea has “sunsetted” more than 600 regulations and 3,500 administrative rules since 2008. Song Yae-ri, the founder of Seoulist, a website that publishes reviews of the hottest food and coolest bars in Seoul, says it was easy to register her firm. “All it took was a trip to the tax office, where I filled out an A4 sheet of paper. It took five minutes,” she says.

In Kenya, by contrast, many businesses feel they have no choice but to employ a “consultant” to wait in queues and, ahem, deal with awkward officials. Others keep a low profile to avoid the predatory state. Honey Care, a Kenyan firm that sells bee hives to farmers and buys back the honey, finds it can avoid red tape by operating out in the countryside, far from the nearest bureaucrat. The downside is that there are hardly any roads.

Rich countries score better than poor ones on the IFC’s measures, with Singapore pipping Hong Kong to the top slot (see chart), but there is no room for complacency. America comes fourth, yet in the past year it enacted no reforms at all in the areas “Doing Business” measures. Its tax code is as simple to understand as a thesis on post-structuralism translated into Klingon. And some American states insist on costly licences for florists, interior designers and barbers. Now there’s a rule that needs trimming.

Giant's Awakening - Johnny Walker

Why Nice Guys Don't Always Make It To The Top

Stanford Graduate School of Business

Published: October, 2011

Nice guys may not finish first, according to research coauthored by Nir Halevy of the Stanford Graduate School of Business. In fact, taking care of others in your group and even taking care of outsiders may reduce a nice guy's chance of becoming a leader.

Typically regarded as a common virtue, generosity can also be a sign of weakness for leaders, according to a new study.

The research finds that contributing to the public good influences a person's status on two critical dimensions: prestige and dominance.

"People with high prestige are often regarded as saints, possessing a self-sacrificial quality and strong moral standards," said Robert Livingston, assistant professor of management and organizations at the Kellogg School of Management, Northwestern University. "However, while these individuals are willing to give their resources to the group, they are not perceived as tough leaders."

The researchers define dominance as an imposed alpha status whereas prestige is freely conferred admiration from others. Al Capone, for example, characterizes a high-dominance individual, whereas Mother Theresa represents a high-prestige individual.

The study argues that people with high prestige are perceived as desirable leaders in noncompetitive contexts; they are seen as submissive compared to individuals who strive to maximize their personal gains. In times of competition, individuals who are less altruistic are seen as dominant and more appealing as leaders.

"Our findings show that people want respectable and admired group members to lead them at times of peace, but when 'the going gets tough' they want a dominant, power-seeking individual to lead the group," said Nir Halevy, lead author and acting assistant professor of organizational behavior at the Stanford Graduate School of Business.

Livingston and Halevy coauthored the research with Taya Cohen of Carnegie Mellon University's Tepper School of Business and PhD student Eileen Chou of Northwestern University's Kellogg School of Management. Their study highlights the need to distinguish between different types of status in groups, as well as how intergroup conflict shapes followers' leadership preferences.

"There are numerous academic findings on status but we sought to investigate the antecedents and consequences of two distinct forms of status, depending on the context," said Livingston.

To test their theory, the researchers conducted three experiments where participants were given the option to keep an initial endowment for themselves or contribute it to a group pool. Contributions either only benefited the contributor's fellow group members, or simultaneously benefited the contributor's group members and harmed the members of another group.

The first two experiments found that selfishness and displays of 'out-group hate' — unnecessarily depriving the members of another group — boosted dominance but decreased respect and admiration from others. In contrast, showing in-group love — generously sharing resources with fellow group members — increased respect and admiration but decreased dominance.

The third experiment found that "universalism" — that is, sharing one's resources with both in-group members and outsiders — had the most dire net outcomes on a person's status. The researchers discovered that universal generosity decreased perceptions of both prestige and dominance compared with those who shared resources only with members of their group.

In short, being generous can boost prestige if an individual is selectively generous to his or her own group; this increases respect and admiration from others. However, being selfish or belligerent (unnecessarily harming members of another group) decreases respect and admiration from others but it increases perceptions of personal dominance.

The intriguing consequence is that dominant individuals were more likely than prestigious individuals to be elected as a representative for the group in a mock competition with another group. Thus, being too nice can have negative consequences for leadership.

"Being too generous often comes at a personal cost to one's position of strength or power," Livingston explained.

"This research begins to explore when 'nice guys' finish first and when they finish last, depending on the group context," Halevy said. "Nice guys don't make it to the top when their group needs a dominant leader to lead them at a time of conflict."

The study, "Status Conferral in Intergroup Social Dilemmas: Behavioral Antecedents and Consequences of Prestige and Dominance," will appear in a forthcoming issue of the Journal of Personality and Social Psychology.

Don't Confuse A Scorecard With A Scoreboard

Harvard Business Review
Published: September 13, 2011

I've always been a big believer in using results as the differentiator between success and failure. You either achieve your goals or you don't. Energy, creativity, and activity are all good things — but they don't create value unless results are achieved.

Most organizations take the same stance. They put a great deal of emphasis on reporting and celebrating quarterly and yearly results — with the assumption that there is a huge upside to being perceived as a winning company. After all, positive results attract investors, raise stock prices, reinforce customers, draw talent, and more.

But only athletic events produce clear winners and losers in the short-term — and most organizations are not actively engaged in those. In fact, in many cases, the immediate "results" are in reality unknown, ambiguous, or disconnected from current performance. Here are some common examples:

• When pharmaceutical companies announce that a new drug has been "approved," they are actually saying that their researchers made some breakthrough discoveries as far back as fifteen years ago. By the same token, when these same companies talk about the "quality of their current research pipeline," they have no way of knowing what will actually make it to market since over 95% of drug projects fail.
• Financial firms that report quarterly earnings are probably jumping the gun with their results. Many of the transactions included in their announcements cannot really be judged successful for several years, or until the loans mature. Similarly, when these firms share "lead tables" that compare the numbers of transactions between institutions, the results don't reflect the quality of the deals.
• Manufacturing firms that gauge their success and failure on short-term sales numbers are actually reporting on their capacity to leverage research, technology, manufacturing, marketing, sales, and other functions over time — in the context of the current economy. In other words, changes in sales results may not be a sufficient measure of current performance.

This is not to say that we should abandon any of these ways of viewing organizational performance. Rather, we need to better understand how these numbers were achieved and what they are actually saying about a company's long-term health. In other words, metrics are starting points for dialogue rather than conclusions. If we don't treat the announced results this way, we run the risk of being fooled. That's why we have analysts whose job it is to probe the numbers and interpret what they really mean if we don't have the time or access.

As individual managers we do not have the luxury of personal analysts, so we have to interpret the true meaning of results ourselves. But all too many managers avoid or ignore this part of their job — either because it takes too much time, is too difficult, or will lead to uncomfortable discussions. So instead they treat scorecards like scoreboards, with black and white numbers that they think tell the whole story.

Unfortunately without dialogue, interpretation, and reflection, numbers on a scorecard often lead to a distorted picture of performance — with too much, too little, or misplaced credit given for achievement. For example, in a financial services firm that was trying to introduce new products, the numbers alone made it look as though the sales team was floundering. But by probing deeper, the senior business leader realized that some of the products were poorly designed, that systems did not adequately support the new offerings, and that the sales team was unclear about priorities and preferred targets. She also found that some sales teams were able to hit their numbers despite these factors. Without trying to understand the nuances behind the results, the senior leader might have put all the responsibility for improvement on the sales function, which would have reinforced the lack of collaboration and perhaps made the situation worse.

Obviously, not every result requires deep analysis and interpretation. But without at least some amount of dialogue, we run the risk of misunderstanding what is really going on.

Game Theory In Practice

The Economist
Published: September 3, 2011

FOR a man who claims to lack expertise in the field, Bruce Bueno de Mesquita, an academic at New York University, has made some impressively accurate political forecasts. In May 2010 he predicted that Egypt’s president, Hosni Mubarak, would fall from power within a year. Nine months later Mr Mubarak fled Cairo amid massive street protests. In February 2008 Mr Bueno de Mesquita predicted that Pakistan’s president, Pervez Musharraf, would leave office by the end of summer. He was gone before September. Five years before the death of Iran’s Ayatollah Khomeini in 1989, Mr Bueno de Mesquita correctly named his successor, and, since then, has made hundreds of prescient forecasts as a consultant both to foreign governments and to America’s State Department, Pentagon and intelligence agencies. What is the secret of his success? “I don’t have insights—the game does,” he says.

Mesquita & Roundell, Mr Bueno de Mesquita’s company, is just one of several consulting outfits that run such computer simulations for law firms, companies and governments. Most decision-making advice is political, in the broadest sense of the word—how best to outfox a trial prosecutor, sway a jury, win support from shareholders or woo alienated voters by shuffling a political coalition and making legislative concessions.

Mr Bueno de Mesquita’s “game” is a computer model he developed that uses a branch of mathematics called game theory, which is often used by economists, to work out how events will unfold as people and organisations act in what they perceive to be their best interests. Numerical values are placed on the goals, motivations and influence of “players”—negotiators, business leaders, political parties and organisations of all stripes, and, in some cases, their officials and supporters. The computer model then considers the options open to the various players, determines their likely course of action, evaluates their ability to influence others and hence predicts the course of events. Mr Mubarak’s influence, for example, waned as cuts in American aid threatened his ability to keep cronies in the army and security forces happy. Underemployed citizens then realised that disgruntled officials would be less willing to use violence to put down street protests against the ailing dictator.

But feeding software with good data on all the players involved is especially tricky for political matters. Reinier van Oosten of Decide, a Dutch firm that models political negotiations and vote-trading in European Union institutions, notes that forecasts go astray when people unexpectedly give in to “non-rational emotions”, such as hatred, rather than pursuing what is apparently in their best interests. Sorting out people’s motivations is much easier, however, when making money is the main object. Accordingly, modelling behaviour using game theory is proving especially useful when applied to economics.

Follow the money

Modelling auctions has proved especially successful, says Robert Aumann, an academic at the Hebrew University of Jerusalem who received a Nobel prize in 2005 for his work in game-theory economics. Bids, being quantified, facilitate analysis, and predicting the right answer can be very lucrative. Consulting firms are popping up to help clients design profitable auctions or win them less expensively. In the run-up to an online auction in 2006 of radio-spectrum licences by America’s Federal Communications Commission, Paul Milgrom, a consultant and Stanford University professor, customised his game-theory software to assist a consortium of bidders. The result was a triumph.

When the auction began, Dr Milgrom’s software tracked competitors’ bids to estimate their budgets for the 1,132 licences on offer. Crucially, the software estimated the secret values bidders placed on specific licences and determined that certain big licences were being overvalued. It directed Dr Milgrom’s clients to obtain a patchwork of smaller, less expensive licences instead. Two of his clients, Time Warner and Comcast, paid about a third less than their competitors for equivalent spectrum, saving almost $1.2 billion.

Advances in game theory have “picked up dramatically” in recent years as it has become apparent that failing to do a proper analysis can be costly, says Sergiu Hart, a colleague of Dr Aumann’s at Hebrew University. For example, a few years ago Israel’s government added a novel twist to an auction of oil-refinery facilities. To encourage more and higher bids, the government offered a $12m prize to the second-highest bidder. It was an expensive mistake. Without the incentive, the highest bid would have been about $12m higher, an analysis showed—participants bid low because the loser would strike it rich. Combine that sum with the prize payout, and the government’s loss amounted to roughly $24m. The conclusion, then, is “don’t presume you know what the solution is” without help from modelling software, says Brad Miller, senior modeller at Charles River Associates, a consultancy in Boston. It designs game-theory software to model industrial auctions and the plotting of corporate mergers and acquisitions.

“The use of modelling makes business clients more inclined to adopt longer-term strategies.”

Software is not always needed. A student at Hebrew University, for example, demonstrated the Israeli government’s $24m loss using pen and paper. It took him about two days, however, according to a professor there. Software, naturally, is far faster. But gathering and handling the necessary data can require expensive expertise or training. Decide, the Dutch consultancy, usually charges €20,000-70,000 ($28,000-100,000) to solve a problem using its software, called DCSim, because it must first conduct lengthy interviews with experts. Its clients include government bodies in the Netherlands and abroad, and big companies including IBM, a computer giant, and ABN AMRO, a Dutch bank.

PA Consulting, a British firm, designs bespoke models to help its clients solve specific problems in areas as diverse as pharmaceuticals, fossil-fuel energy and the production of television shows. British government agencies have asked PA Consulting to build models to test regulatory schemes and zoning rules. To give a simple example: if two shrewd, competing ice-cream sellers share a long beach, they will set up stalls back-to-back in the middle and stay put, explains Stephen Black, a modeller in the firm’s London headquarters. Unfortunately for potential customers at the far ends of the beach, each seller prevents the other from relocating—no other spot would be closer to more people. Introduce a third seller, however, and the stifling equilibrium is broken as a series of market-energising relocations and pricing changes kick in. The use of modelling makes business clients more inclined to adopt longer-term strategies, Dr Black says.

But game-theory software can also work well outside the sphere of economics. In 2007 America’s military provided Mr Bueno de Mesquita with classified information to enable him to model the political impact of moving an aircraft carrier close to North Korea (he will not reveal the findings). Game-theory software can even help locate a terrorist’s hideout. To run simulations, Guillermo Owen of the Naval Postgraduate School in Monterey, California, uses intelligence data from the US Air Force to estimate on a 100-point scale the importance a wanted man attaches to his likes (fishing, say) and priorities (remaining hidden or, at greater risk of discovery, recruiting suicide-bombers). Such factors determine where and how terrorists decide to live. Game-theory software played an important role in finding Osama bin Laden’s hideout in Abbottabad, Pakistan, says Mr Owen.

Where is all this heading? Alongside the arms race of increasingly elaborate modelling software, there are also efforts to develop software that can assist in negotiation and mediation. Two decades ago Clara Ponsatí, a Spanish academic, came up with a clever idea while pondering the arduous Israeli-Palestinian peace process. As negotiators everywhere know, the first side to disclose all that it is willing to sacrifice (or pay) loses considerable bargaining power. Bereft of leverage, it can be pushed back to its bottom line by a clever opponent. But if neither side reveals the concessions it is prepared to make, negotiations can stall or collapse. In a paper published in 1992, Dr Ponsatí described how software could be designed to break the impasse.

Difficult negotiations can often be nudged along by neutral mediators, especially if they are entrusted with the secret bottom lines of all parties. Dr Ponsatí’s idea was that if a human mediator was not trusted, affordable or available, a computer could do the job instead. Negotiating parties would give the software confidential information on their bargaining positions after each round of talks. Once positions on both sides were no longer mutually exclusive, the software would split the difference and propose an agreement. Dr Ponsatí, now head of the Institute of Economic Analysis at the Autonomous University of Barcelona, says such “mediation machines” could lubricate negotiations by unlocking information that would otherwise be withheld from an opponent or human mediator.

Such software is now emerging. Barry O’Neill, a game theorist at the University of California, Los Angeles, describes how it can facilitate divorce settlements. A husband and wife are each given a number of points which they secretly allocate to household assets they desire. The wife may inform the software that her valuation of the family car is, say, 15 points. If the husband puts the car’s value at 10 points, he cannot later claim that he deserves more compensation for not getting the car than she would be entitled to.

Predicting an end to conflict

Participants need to be sure that such mediation technology is fully neutral. For large deals, audit firms closely monitor the development and use of such software to ensure that no party secretly obtains information about another’s bargaining positions, says Benny Moldovanu, a game theorist at the University of Bonn. He advises firms that design negotiation software for privatisation schemes and wholesale-electricity markets. This approach will spread to other utility markets, such as water, he believes.

Could software-based mediation spread from divorce settlements and utility pricing to resolving political and military disputes? Game theorists, who consider all these to be variations of the same kind of problem, have developed an intriguing conceptual model of war. The “principle of convergence”, as it is known, holds that armed conflict is, in essence, an information-gathering exercise. Belligerents fight to determine the military strength and political resolve of their opponents; when all sides have “converged” on accurate and identical assessments, a surrender or peace deal can be hammered out. Each belligerent has a strong motivation to hit the enemy hard to show that it values victory very highly. Such a model might be said to reflect poorly on human nature. But some game theorists believe that the model could be harnessed to make diplomatic negotiations a more viable substitute for armed conflict.

Today’s game-theory software is not yet sufficiently advanced to mediate between warring countries. But one day opponents on the brink of war might be tempted to use it to exchange information without having to kill and die for it. They could learn how a war would turn out, skip the fighting and strike a deal, Mr Bueno de Mesquita suggests. Over-optimistic, perhaps—but he does have rather an impressive track record when it comes to predicting the future.