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| Volume 8, Issue 9 |
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In This Issue:
 Starbucks' lessons for premium brands
 Winning in a downturn: Six actions to take now
 Lafley’s law: If you want to win become a game-changer
The anxiety advantage
 How Lloyd's CEO insured success
6 signs you don't care about workers
How bad will it get on Wall Street?
Welcome to the frozen economy
 Fannie Mae and Freddie Mac: End of illusions
 Coping with a bad boss
World's most expensive cups of coffee
Fourteen reasons you're not sleeping
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Starbucks' lessons for premium brands
Starbucks' announcement that it will close 600 stores in the United States is a long-overdue admission that there are limits to growth.
In February 2007, a leaked internal memo written by founder Howard Schultz showed that he recognized the problem that his own growth strategy had created: "Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a
neighborhood store." Starbucks tried to add value through innovation, offering wi-fi service and creating and selling its own music. More recently, Starbucks attempted to put the focus back on coffee, revitalizing the quality of its standard beverages. But
none of these moves addressed the fundamental problem: Starbucks is a mass brand attempting to command a premium price for an experience that is no longer special. Either you have to cut price (and that implies a commensurate cut in the cost
structure) or you have to cut distribution to restore the exclusivity of the brand. Expect the 600 store closings to be the first of a series of downsizing announcements. Sometimes, in the world of marketing, less is more...
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Winning in a downturn: Six actions to take now
According to many indicators, a recession is either looming or already here.
Yet because the business landscape has changed so much since the last recession, in 2001, the defensive and offensive tactics that worked then may not work as well this time around. For example, emerging low-cost competitors from China, India, and other
rapidly developing economies are now in a position to gain market share and acquire assets from cost-heavy incumbents. Moreover, many companies that were burned in the
last recession are savvier today, and their behavior may be tougher to predict in a new downturn. Now is the time to get ready...
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Lafley’s law: If you want to win become a game-changer
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The best way to drive growth and win competitively is to innovate.
Simple, but hard to do consistently. In June 2000, A.G. Lafley received a call from former Procter & Gamble CEO John Pepper asking him if he was prepared to accept the CEO position at the company. Stunned, Lafley had met with then CEO, Durk Jager, the day before and had no idea he had resigned. In the coming days and months, Lafley
undertook a hard assessment of the company’s predicament. P&G had already issued a profit warning in March. It would soon issue another that June. Too many products and organization initiatives were being pushed into the market before they were ready. While Lafley’s business in North America was delivering, his other responsibility,
global beauty care, was not going to make its numbers. Other businesses were in worse shape. Humbled, Lafley and his team had to go back to first principles and re-organize the company around innovation to drive sustained organic growth. Together with Ram Charan, a prolific author and consultant, Lafley set forth how he did it in the
recently published book, The Game-Changer. Free of management can’t and the usual platitudes that infuse most business tomes, the book is a lively and detailed account of what he learned "through many trials and too many errors" along the way. But it’s not just about P&G. Charan provides case studies of similar innovation shifts at
Nokia, GE, DuPont, HP and Dell, among others. Not everyone can do what P&G does. (Who can spend $200 million a year—$1 billion since the beginning of the decade—on consumer research?) But anyone can create an organizing structure that nurtures and supports innovation. Even companies with their own innovation centers can learn from the
multidisciplinary team approach of P&G’s Future Works, which creates new businesses, or its use of innovation hot zones like Clay Street. And here’s the kicker: Today, Lafley gets more revenue and profit from new products and businesses while spending less each year on R&D as a percent of revenue. "Innovation now drives virtually all of
P&G’s per annum organic sales growth," he argues. "We now only count on 1 percent of our 5 to 7 percent sales growth to come from acquisition activity. From fiscal 2001 through 2007, even against a background of rising energy and commodity costs, we have improved operating margins by more than four percentage points. Profits have more than
tripled to $10 billion-plus, while free cash flow has totaled $50 billion over the same period." Perhaps Lafley’s most disarming idea, which he discussed when CE’s J.P. Donlon caught up with him in New York, is the notion of “fearlessness when it comes to failure." Lafley, who was honored by this magazine as Chief Executive of the Year in
2006, even celebrates in his book 11 spectacular failures during his career—not something most CEOs feel comfortable talking about. [Find out how Lafley's 11 spectacular failures turned into successes]...
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The anxiety advantage
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For any chief executive, anxiety is a fact of life.
To thrive in today’s world, CEOs must achieve top-line growth, push innovation and creativity, align strategy with performance, and manage for value. They must build their leadership bench strength. They must think globally and plan for the long term while responding to unexpected problems and opportunities in the short term. Today’s
top leaders must continually reinvent themselves and their organizations if they are to build and sustain a company. One capability makes it possible for leaders to succeed at these crucial tasks—the capability to live with and create just enough anxiety within themselves and for others. More than any other leadership quality, this
ability propels great leaders to the top. It enables them to optimize performance in an unpredictable, often volatile business environment. It empowers them to build great teams while inspiring and challenging their organizations to meet stretch goals. Just enough anxiety is the hidden lever of business success. How do I know this? As an
entrepreneur, psychologist and CEO adviser for the most recent 30 years of my five-decade life, I’ve been face-to-face, thought-to-thought and insight-to- insight with 250 CEOs. The capability to achieve desired results by managing anxiety at the most effective level—just enough anxiety— is the overarching commonality of the best
CEOs. Daniel Vasella, chairman and CEO of Swiss pharmaceutical giant Novartis, says it best: “Between my ideal of where we should be and the reality of where we are, there’s always tension—and I’m somewhere in between. But I can’t stay where everyone is; I have to lead. The best leaders are adept at using anxiety to move their companies from
where they are to where they’re going—the gap between their current reality and their desired future. [Here's how they do it...
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How Lloyd's CEO insured success
Richard Ward will never forget his first day as CEO of Lloyd's of London, the venerable specialty insurance market that brings
together underwriters and brokers to insure everything from investment banks to the World Trade Center to the teeth used by actress America Ferrera in the TV show Ugly Betty.
After getting in the elevator, or lift, as the 51-year-old Brit calls it, a woman entered toting a rolling suitcase. "Have you had a nice trip?" he asked. "No," she replied. "This is a claims file." The experience underscored an issue Ward knew he would have to confront as CEO of Lloyd's. The centuries-old organization had a great
reputation and track record for insuring and paying out for some of the world's most extraordinary risks. But its claims processing was still stuck, in a sense, in the 17th century. "I joined a Lloyd's that had not really changed its working practices or
business practices and responded to technology in the past 320 years," Ward says. [To get started, Ward sought out those members who were dissatisfied with the status quo....]
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6 signs you don't care about workers
It has become a sad cliché: "Our People are our Greatest Asset."
That hackneyed phrase doesn't mean anything in particular, so it's an easy bit of boilerplate to stamp on hallway posters and marketing brochures. When certain employers do elevate their talent-retention and team-welfare initiatives to the level of strategic priority, it's obvious. Google (BusinessWeek.com, 10/25/07) (GOOG) is a
hot stock, but it's even hotter as a desirable workplace because of the attention paid to hiring and keeping the best folks on board. When companies talk about valuing talent but don't put that talk into action, it shows. As a business leader, there are
easy ways to gauge whether the happy talk about employees has a basis in reality. Here are our Top Six not-walking-the-walk red flags...
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How bad will it get on Wall Street?
It has been a year since the global credit markets first seized up, and four months since the dismantling of Bear Stearns.
Yet bad things keep happening, from the failure of IndyMac and the stock routs of Lehman Brothers and others to the market's collective yawn at the Treasury Dept.'s plan to bolster mortgage giants Fannie Mae and Freddie Mac. Once again, the optimists
who thought the crisis was over have been proven wrong. "People underestimated how bad things were last summer," says Frank Partnoy, a former Wall Street derivatives trader turned professor at the University of San Diego Law School. Did they ever. July's
rat-a-tat-tat of dismal news suggests that the scope of the credit crunch is much broader than most people thought. Traders, investors, bankers, and economists are waking up to the possibility that Wall Street's recovery from the worst financial
disaster since the Great Depression could grind on for years. And they're realizing that while the debacle was of Wall Street's making, its aftermath will weigh on banks, other companies, and consumers alike. One thing is for sure: The new normal won't be
as fun as the recent past. Banks will be smaller and fewer. Capital will be harder to get for some consumers and companies. And more of that capital will be parceled out by lightly regulated hedge funds and private equity firms, for better or worse, as the
balance of power on Wall Street shifts. Why hasn't the healing begun? The answer lies in the mechanics of leverage, or borrowed money, which banks not only provide to customers but also use themselves. [The next few years promise to be especially rough,
judging from the numbers so far. Banks cut back on credit in the three months through mid-June at a 9% annualized rate, the worst contraction in 35 years of data, according to Leigh Skene of Lombard Street Research. Issuance of mortgage-backed securities and
corporate junk bonds this year is down 87% and 63%, respectively, according to research firm Dealogic. A recent study projected that losses resulting just from mortgage-related lending would sap $1 trillion of credit from the U.S. economy. Banks
"have to shrink," says the University of Chicago's Anil K. Kashyap, one of the authors...]
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Welcome to the frozen economy
Not since the Depression have financial difficulties so immobilized spending and credit. Listen to the talk at a diner in Maine.
The polar ice cap may be melting, but the U.S. economy is frozen, starting right here in my small town. Gradually rising levels of dismay at the gas pump and in the supermarket gave way to paralytic shock last week when "lock-in" notices from the
local fuel company arrived. This year's advance price for home heating oil is nearly twice what people paid last year. A collective gasp of disbelief from my tough, resourceful Maine neighbors echoed across the meadows and up the rocky coast. Many
claimed they would never sign the contract. "What's your alternative?" I asked a friend. "I don't have one," he muttered. In the days that followed, a new quality of dread settled over the place like soot, as people weighed their options. Heat or food?
Gas or electricity? Medicine or mortgage payments? What to give up? What to cut back? The conversations were everywhere. In the supermarket, I heard one man tell another: "When I was a kid, you woke up, went into the bathroom, and broke up the ice in the
toilet. Now my kids will have to do the same. America is moving backward." My neighbors are like deer caught in the headlights: frozen in fear as something sinister, implacable, and wholly unanticipated lurches toward them. A reckoning has
begun to unfurl like a dark flower, slowly at first, then gathering urgency and force. This is not a short detour after all, but an untraveled road to an unknown place from which there is no return, no escape…and we are not prepared. The economic crisis has
been triggered by what economists call "structural shifts" in the global supply and demand for commodities, coupled with the meltdown in the mortgage markets and the ensuing credit squeeze. But this crisis is now moving into a whole new gear, creating
a new set of economic conditions that have yet to be named. Call it "the frozen economy." As pain reaches deep into the daily lives of ordinary Americans—irrespective
of their creditworthiness—it will trigger unforeseen consequences for every corner of the marketplace. Nearly two-thirds of Americans already say they are cutting back on...
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Fannie Mae and Freddie Mac: End of illusions
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THERE is a story about a science professor giving a public lecture on the solar system.
An elderly lady interrupts to claim that, contrary to his assertions about gravity, the world travels through the universe on the back of a giant turtle. “But what supports the turtle?” retorts the professor. “You can’t trick me,” says the woman. “It’s turtles all the way down.” The American financial system has started to look as
logical as “turtles all the way down” this week. Only six months ago, politicians were counting on Fannie Mae and Freddie Mac, the country’s mortgage giants, to bolster the housing market by buying more mortgages. Now the rescuers themselves have needed rescuing. After a headlong plunge in the two firms’ share prices (see chart 1), Hank
Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege
previously available only to banks. The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most
prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press. Absurd or not, the rescue package notched up one immediate success. Freddie Mac was able to raise $3 billion in
short-term finance on July 14th. But the deal did little to help the share price of either company or indeed of banks, where sentiment was dented by the collapse of IndyMac, a mortgage lender (see article). The next day Moody’s, a rating agency, downgraded both the financial strength and
the preferred stock of Fannie and Freddie, making a capital-raising exercise look even more difficult. As a sign of its concern, the Securities and Exchange Commission, America’s leading financial regulator, weighed in with rules restricting the short-selling of shares in Fannie and Freddie. [In the end, the turtle at the bottom
of the pile is the American taxpayer. But that suggests that, if Americans are losing money on their houses, pensions or bank accounts, the right answer is to tax them to pay for it. Perhaps it is no surprise that traders in the credit-default swaps market have recently made bets on the unthinkable: that America may default on its debt...]
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Coping with a bad boss
Is your boss a yeller, a micromanager or clueless?
Does he put insulting notes on memos that co-workers can see? Does he throw things? Amy Cunningham's first boss at a Minneapolis public relations firm was a yeller and a micromanager, a tough challenge for a new employee just out of college. After a series of unpleasant incidents, the boss finally exploded when he found out Cunningham had
put together a media kit without showing him the separate pieces before assembling it--a routine task she'd done many times before. The boss stormed into her office, got in her face, yelled and cursed. "He tried to throw out any personal insult he could come up with," Cunningham says. "I've never been in another situation, business or
social, that was that scary." It all worked out. Cunningham approached another executive at the company and got reassigned. The boss left a few years later, and Cunningham stayed on--15 years, and counting. Having a bad boss is more than an annoyance. It's the main reason people leave their jobs. [So if your boss is a jerk
and you feel you have no choice but to stay, how do you cope? Here are some basic tips: The best way to deal with a micromanager is to...]
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World's most expensive cups of coffee
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Vladimir Ilyich Lenin must be rolling over in his grave.
Just 17 years after the collapse of the Soviet Union, the one-time capital of communism is now home to the world's most expensive cup of coffee. The average cup of joe in Moscow is $10.19, including service, according to a new survey by the London office of U.S. consulting firm Mercer. The rest of Europe isn't much kinder--coffee is
$6.77 in Paris and $6.62 in Athens. International travelers looking to satisfy their caffeine cravings should look to South America and Africa for relief: At $2.03 per cup in Buenos Aires and $2.36 in Johannesburg, both continents offer relief to cash-strapped java seekers. New York is far from the most expensive, weighing in at a
mere $3.75. "The cost of living survey is conducted in stores of international standard, frequented by expatriates," says Nathalie Constantin Métral, a research manager at Mercer's office in Geneva, Switzerland. "We collected the price for a cup of coffee in bars and cafés of international standard frequented by expatriates in
Moscow, and those places are very expensive." The figures are a part of Mercer's annual cost of living survey, which covers 143 cities across six continents and measures the relative cost of more than 200 items in each location, including housing, transportation, food, clothing, household goods and entertainment. The results are
used to help government agencies and multinational companies determine compensation allowances when sending employees abroad. [The results may surprise you...]
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Fourteen reasons you're not sleeping
Maria Hetem, the 47-year-old owner of a dog grooming salon based in Lebanon, N.J., noticed changes in the way she was sleeping over a decade ago but never thought to talk to a doctor about it.
Instead, she sought out medical advice pertaining to her frequent headaches but doctors were never able to determine the cause. Hetem attributed the fact that she never felt well rested and was frequently waking up at night to the growth of her business and her age. Eventually, thanks to the suggestion of a friend, Hetem got a
sleep test and found she had sleep apnea, a sleep disorder that disrupts breathing and can cause headaches. She guesses she's had the condition, which causes sleep deprivation, most of her adult life. "You just start to think, 'This is normal,' until somebody points out that it isn't," she says. Hetem's situation is an all-too common
one for millions worldwide. In the U.S. alone, it's estimated that one in 10 adults struggle with chronic insomnia, not to mention the one in three who occasionally deal with the condition and those who suffer from other sleep disorders...
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