The “Wii” Mystery

No, not a “wee” mystery, this post is asking the (possibly naïve) question: Why is the Nintendo “Wii” system still almost impossible to obtain five weeks after Christmas? For those of you who have been living in a cave somewhere for the past six months, the “Wii” system is the latest video game console available from Nintendo. It makes use of a number of new types of controller to give the player the sensation of actually being “in” the game – such as a hand-held controller with a set of accelerometers that allow the player to actually “swing” at a baseball or “roll” a bowling ball. As with all Nintendo video games, it supports a huge range of software and tie-in products, and like most groundbreaking new home video game systems, it was the hottest possible Christmas gift for several key demographic groups (including children 3-12, teenagers, and males 18-36) during the last holiday season. You can visit the company’s Official “Wii” Site if you want to.

Now, as much as we don’t like it, the strategy of Artificial Scarcity is hardly a new concept. In fact, most people have had at least one run-in with a new product that was released to the public in limited numbers to avoid market saturation – and keep the price up. This is a fairly simple of using the laws of supply and demand to keep demand high and support the price point you have set for the product. Nintendo has used this strategy for most of its recent product releases, as has Sony with the “Playstation” lines and a number of other electronics companies with their newest releases. And so far it has certainly worked with the “Wii”, which still sells out the moment it hits the stores. In fact, a sales associate at Best Buy told me today that the “Wii” units are often sold out “even before they open” on the days new shipments arrive.

I don’t think he meant it literally, although there have been documented cases of retail workers purchasing scarce consumer products before the store opens (using their employee discounts) and then selling the products privately (or on eBay) later that day. A very alert store manager can prevent this, but more often the local management team is in on the scam (and is raking off a share of the profits) or just doesn’t care. The practice isn’t actually illegal, and in any case, given the way most of the retail industry (and the “Big Box” retailers in particular) treat their employees, it’s completely unrealistic to expect those workers to put the company’s interests ahead of making a few extra dollars on the side – or, in this case, on eBay. But even leaving issues like employee relations and private/cash sales over the Internet aside, why maintain the artificial shortage this far after the holidays are over?

By the end of January, all of the kids who were hoping for a Wii for Christmas either have one, or are resigned to not getting one. Kids with January birthdays may still be expecting one, but for the most part, the huge pressure to obtain the ultimate gift (and keep up with relatives, neighbors or other rivals who have also done so) is over for most consumers. Even more to the point, if none of Nintendo’s competitors has managed to bring a product to market that can take away (or recover) market share from the Wii by now, they probably won’t until next fall (the run up for the next Holiday season). Nintendo could increase the supply of Wii units available to the public, dramatically increasing both their profits from selling the basic hardware and their potential market for new software and new product releases without diluting the demand significantly – provided they maintain a very strong grip on their distribution channels, the way Apple did with the iPod and iPhone releases.

Of course, it’s just barely possible that Nintendo is actually having problems meeting production demand, given that the Wii was a runaway hit all over the world, not just in the U.S., Japan, and a few of the wealthier European countries. In which case, they really need to fire whoever they’ve got doing sales forecasts …

The Dark Side of the Farce

In my last post, I mentioned the touring exhibit known as “Star Trek: The Tour” which I went to see this past Monday in Long Beach. It’s an interesting business concept in its own right (as a means of generating money using a set of fixed assets), and as I mentioned in the last post, it represents an interesting test-bed for a Star Trek-based theme park, if anyone out there is considering launching one. I should also note that I firmly believe that if there wasn’t anyone considering such a project before, there probably is now – and by the time this enterprise completes its multi-city run across the U.S. there may be several groups of entrepreneurs considering such a venture.

Of course, there are still several unanswered questions in play here. One is why “Star Trek: The Tour” is being put on by CBS, rather than by Paramount (the nominal owners of the Franchise). Did Paramount pass on the idea as too risky, or did they outsource it to CBS in order to generate interest in the upcoming eleventh Star Trek movie without the bother of setting up and running the project themselves? Will enough people be willing to pay the price of admission to make the project a financial success? Will enough additional people be willing to pay the price of admission to convince someone to launch a Star Trek theme park? If so, where would you put the theme park? If you build where the land is cheap (e.g. some underdeveloped part of America) how do you get people to go there? If you build somewhere people already want to go (Orlando, Florida, or Anaheim, California, or even Las Vegas, Nevada) how will you afford to purchase that much land?

Only time will tell. But while we’re waiting, there is one aspect of “Star Trek: The Tour” that is so completely lame that it bears comment. I refer to the much-touted (it’s actually part of their marketing pitch online!) retail and food section of the operation. There isn’t much of one, folks; the average Borders has more Star Trek merchandise available on any given day. I noted a few books, a few action figures, some very expensive autographed artwork, and a few DVD copies of some of the series. There were almost no toys (apart from the Tribbles), no ship models, no costumes or props, no tie-in products worth the mention. There were actually more teddy bears (in vaguely Trek-like costumes) than any other type of merchandise, and most of what was there looked like knock-offs generated by people who have heard about Star Trek, but have never actually seen it.

What makes this even more puzzling is the huge amount of Star Trek-related merchandise available to the general public. A cursory check on Amazon shows over 23,000 book listings, nearly 800 toys, 120 software products, 190 music selections, 1,100 VHS tapes, 259 DVD selections, 130 video games, plus alarm clocks, decanters, Christmas tree ornaments, even food items. None of this was available for sale. And while there was a food service operation (called “Ten Forward” after a location on the Enterprise-D ™), you could only reach it by leaving the exhibit – with no re-entry allowed. Not a serious flaw in the middle of nowhere, I suppose, but in Long Beach, with dozens of resort-grade restaurants available in a three-mile radius, a major mistake.

One is left wondering how anybody attempting to make money off a pop-culture phenomenon like Star Trek could possibly fail to take advantage of the (quite literally) tens of thousands of merchandising possibilities. Other than prints of pictures taken of guests on the various sets (the ships’ bridges and so on) these people aren’t even trying to sell anything except tickets. It does make you wonder if the whole thing was set up by people unfamiliar with Trek culture (anyone who has ever seen the Dealer’s Room at a Star Trek Convention would have known better) who just don’t know any better, or if the people behind this venture just want to milk it for ticket money and can’t be bothered to explore any of the other possibilities. Or, I suppose, if the whole thing is an elaborate market test for a much larger project being developed somewhere else…

At least, I hope so. Because if this was the best they could do for a merchandising effort, I would not bet on “Star Trek: The Tour” lasting to the end of its run. Or even until it reaches a venue near you…

Star Trek on Tour

We had Monday off from work, and decided to go down to Long Beach and check out the touring exhibit called “Star Trek: The Tour.” If you’re not familiar with this enterprise you can check out the web page about it if you’d like. Basically, it’s a very large collection of props, costumes and other memorabilia related to the five television series and ten movies that collectively make up the “Star Trek” franchise, along with a number of interactive and multi-media displays. Throw in a couple of flight simulator rides (depicting rides on the “shuttlecraft” spacecraft) and some very good set designs (including the bridge sets from both the Original series and the Next Generation series, several other “locations” aboard the fictional ships, and so on) and you’ve got the general idea.

It’s somewhere between the displays and exhibits you would find at a large Star Trek convention and the attractions you might find at a theme park – part WorldCon and part Universal Studios, if you will. As a member of the movie-going public, and specifically one who had just shelled out $30 a ticket to see this extravaganza, I was left with somewhat mixed feelings. On the one hand, they did an excellent job with the material; I’ve been through a large number of museum-grade exhibits that were not as well designed or executed. The chance to sit on the bridge of the Enterprise ™ and the Enterprise-D ™ is a kick, and the mock-up of a corridor aboard the later ship was very well done; you could almost believe you were there. They also had a short “interactive” video clip (representing a few minutes aboard a ship in the Star Trek universe) that was worth waiting in line to experience.

On the downside, the Tour facility does very little beyond feeding the nostalgia of the hardcore Trek fans. Gene Roddenberry’s vision included a whole galaxy of worlds, races, and cultures, not to mention a whole fleet of ships of different types, space stations, cities, artifacts, and so on; this exhibit provides an up-close look at a lot of the props and costumes, but it doesn’t really include any information you could not have picked up watching the movies and television episodes. And I don’t mean pouring over them frame-by-frame on your DVD player; I’m a fairly casual fan (a “Trekkist” in fan-speak, as opposed to the dedicated “Trekkers” and the fanatical “Trekkies”) and there was nothing in the collection I couldn’t have identified (and probably explained the significance of) if called upon to do so.

Upon reflection, the whole experience made me realize just how much untapped potential this concept really has. There is very little doubt that you could produce an entire theme park around the Star Trek franchise, much like the Harry Potter theme park under construction at the Universal complex in Orlando. The potential for rides, walk-through attractions, shows, video screenings, concerts, and interactive activities is huge, and if you include the period piece features and alternate realities offered by the Holodeck ™ in the later series, there’s really no limit to what you could do. Of course, you’d have to find an audience willing to shell out the requisite dollars for the experience. I’m not saying that this is the point of the current Tour project; I’m just saying that if somebody somewhere ISN’T watching Star Trek: The Tour carefully, with an eye to developing a permanent theme operation somewhere, I’m going to be very, VERY disappointed…

The Disney Institute

Last summer my family and I took a trip to Disneyland, and I wrote about it in this space in a post I called “We’re Not Worthy!” As I noted at the time, going to Disneyland when you’re a management scientist is a lot like going to visit a cutting-edge NASA facility if you’re a physicist: you spend most of your time wandering around staring at things and muttering “These guys are GOOD!” under your breath. And, in fairness, they are; the heart of any Disney park is essentially one huge tie-in product to dozens of motion pictures and cartoons, some of them decades old, with some of the best marketing (best in terms of dollars made per dollar spent) and merchandising the world has ever seen. Until your business can convince your customers to pay you 500% markups on food, shell out 800% markups on souvenirs, and wait for up to 3 hours to go on a five-minute ride, don’t even think of embarrassing yourself by comparing your business to a Disney theme park.

But as impressive as all of that is, there’s a new Disney venture that leaves all of those achievements in the dust. It’s a consulting/professional and corporate training operation called The Disney Institute. The basic concept is simple: since Disney management techniques are obviously so superior, every other business should want to study how they do things and apply these Disney techniques to their own operations. For a very reasonable price, Disney will sent a team of their own management scientists to your company to teach you how they do things, and to consult with you about how to apply these Disney principles to your own operational issues. An article in this morning’s Los Angeles Times details just such a training program going on at the Miami International Airport, which could definitely use some help with customer satisfaction issues (it consistently rates as the least favorite U.S. airport)

“So, what is so impressive about all of this?” I hear some of you asking. Granted that Disney has some really good management techniques, isn’t it simply logical that they would form their own consulting division and offer to teach them to you – for a price? Well, I suppose that on the face of it this is a very simple idea – which fails to explain why there is no comparable operation being run by any other successful corporation. IBM will not offer to teach you how to duplicate their tech support, Nordstrom will not come to your headquarters and teach you about customer service, and Apple is not about to share their thoughts about product design or marketing with you. Although any of these companies probably could develop a consulting/training division if they really wanted to. Certainly, they all have the necessary reputation for excellence in their respective fields.

Which brings me to the whole point about the Disney Institute. The Disney people have, in effect, applied their reputation for management and marketing excellence to a new service – in other words, they have expanded their existing brand to cover an entirely new line of services. All of the information they are offering to share with you has been divulged to the general public numerous times over the years; in documentaries, in Harvard Business School case studies, in management textbooks, even in existing Disney products. Any half-baked MBA student could explain the bulk of the Disney management techniques to you, and any reasonably good management consultant could explain to you how to apply these ideas to your business. But because the Disney brand name is so strong, people are willing to pay a premium to have genuine Disney personnel come and fulfill these same functions. Once again, the ingenious part isn’t what they’re doing, any more than a cheap plastic trinket with a Disney character printed on it is a great value; the ingenious part is that they’ve successfully marketed it to their customers at that preposterously high markup…

Say it will me, everyone: “We’re not worthy! We’re not worthy!”

Another Tax Cut

I don’t know if you’ve been following the national news regarding the latest in tax cuts, but if not, there’s a new one and you can read about it here until CNN takes the story down. Now, I know this blog is supposed to be about business and not politics, but this particular bit of political nonsense is based on a faulty business premise, and that brings it into my area of expertise. I can’t really comment on whether or not this is an astute political move, or on whether or not it constitutes good governance on the part of the President and his advisors; I only know that our current President’s own father once referred to this type of tax cut as “voodoo economics” – and he was right…

The basic idea behind any tax cut – especially a “tax rebate” like the one being proposed this week – is that the people who receive the money will spend it on new houses, major appliances, new cars, and other major purchases, which will benefit large companies that produce consumer products. These companies will then pay their suppliers and hire more workers to handle the increased demand, and the suppliers will also need to purchase more materials and hire more people, thus creating even more jobs. In economics, this basic concept is called the Multiplier Effect, and the general idea is that by injecting money into the economy through the increased purchase of goods and services, the money gets spent many times over (as opposed to just giving the money to one person or organization, who may just keep it).

This is the basic idea behind the Supply-Side Economics so beloved of the Reagan Administration in the 1980s. Massive tax cuts were given to the very wealthy, who were expected to take the money and invest in new factories, purchase masses of consumer goods, and generally stimulate the economy. These economic benefits would therefore “trickle down” to the people who owned the factories, supplied the factories, and worked in the factories, thus indirectly benefiting everyone who worked for a living in the United States.

It’s a pleasant enough idea, but ultimately nonsense. If you suddenly discover that your tax bill for this year has dropped by $800 it’s always possible that you’ll apply that amount to a new stove or a new refrigerator – assuming that you can find one for that amount, or that you have the extra to cover the cost of something you’d actually want. It’s more likely, however, that you’ll just have to pull 800 fewer dollars from your savings to cover the cost of the tax hit. Or borrow 800 fewer dollars to keep your household afloat. But since almost none of these “tax rebate” dollars will be given to people making between $25,000 and $40,000 per year (which is to say, almost 40% of the country!), it’s unlikely that this tax break will mean very much to anyone who gets it.

The fact is, it really doesn’t do anyone earning $40,000 per year much good if people richer than them get to spend less on their taxes, and it does no one any good if the people in the top 1% in incomes get to buy large estates in the country – except for those 1% of the people, who can almost always be relied upon to donate money to the political campaigns of the party that enabled them to buy their large estates in the country. Which is really the point I’m driving at here. I realize that the richest people in the country also account for the majority of the income taxes paid, and I understand that any potential tax break will have to be made proportionally, which means those same richest people will be the ones who will benefit the most from the tax cuts. But anyone who has spent even a few minutes learning how economics actually works will already know that the idea that this sort of tax cut program will actually stimulate the economy is nonsense. Or, in the words of Harvard economist James Tobin, “The idea that tax cuts would actually increase revenues turned out to deserve the ridicule..."

Holiday Creep

We’ve all heard of feature creep – a form of runaway expectations in which additional features keep being added to a relatively straightforward project until no one could possibly complete it, let alone bring it in during the original time frame and for the original budget. Today I want to talk about Holiday Creep, or the way that distant holidays keep growing less and less distant as the years go by. There was a time, long ago, when the Christmas shopping season did not begin until after Thanksgiving, and people had a chance to recover from the Holidays before the onslaught of Valentine’s Day, St. Patrick’s Day, President’s Day and Easter began. Today, you’d be lucky to have enough time to pack away one set of holiday decorations before the next big day.

For example, when I was working in retail in the 1990s, Valentine’s Day would officially begin about two weeks after Christmas – just long enough for the store to milk any remaining sales out of the After Christmas Clearance sale. Then we’d pack any remaining Christmas merchandise into the attic (including some of the candy – there are popular sweets with a three-year shelf life!) and bring down the Valentine’s decorations. By about this time of year we’d have the Seasonal aisle loaded up with cards, candy, and a wide array of red and pink heart-shaped knick-knacks of every possible description. Shortly thereafter, the sort of people who get their Christmas shopping done by September would come in to get their Valentine’s needs covered, having already finished with their income tax returns.

A few weeks later, a normal clientele (mostly female) would come in, gearing up for the holiday with high hopes. By early February, the customer demographic would be shading into a mixture of men (well-organized ones) and women (procrastinators), and by the week before Valentine’s Day, most of the people in the seasonal aisle would be male. During the week leading up to the big day it’s almost unheard of to find a female shopping in the Valentine’s Day section, and the men are beginning to look very pleased with themselves. One can clearly imagine that in prior years they forgot the day, or waited until the last second, and are now feeling very good because they’ve obtained their gifts with two days to go. By the 14th the customers would be frantic, knowing that if they came home empty handed they’d never hear the end of it, and by dinnertime that night the men bolting in through the door would literally buy anything even vaguely heart-shaped.

And then, after a day or two to clear out leftover Valentine’s candy (some of that will last until next year, too, but it’s better to clear it out and start fresh) my crew and I would be pulling green decorations and party favors for St. Patrick’s Day out of the attic, and moving on to Easter a few weeks after that.

Now, I don’t intend to blame the current economic issues facing this country on holiday buying. Certainly, retail stores need holiday-based sales in order to stay in business, and our economy needs both those retail channels and the jobs they create in order to stay afloat. But I do have to question if this cycle has gotten out of control. In a world where people are defaulting on their sub-prime mortgages and abandoning cars with remaining payments that exceed twice the value of the vehicle, is it really a good idea to be trying to sell people Easter candy while they are still hung over from New Year’s Eve? If we have become a nation of debtors, should we really be encouraging people to start blowing money they don’t have on Christmas presents before Halloween? I don’t have the answers; I only hope that someone out there does. Because at this rate, it’s only a matter of time before next year’s Holiday shopping season begins before this year’s Holidays are over…

A Hypothetical Question in Ethics

For this week’s ethics post, I would like to invite everyone out there to join me in a hypothetical question:

Imagine that you are the owner of a highly visible business. A report is published in the newspapers, and immediately picked up by every media channel in the world, in which a witness with extremely marginal credibility implicates one of your most productive employees as the long-term user of an illegal substance. Further, let us imagine that the witness offers no proof, no hard evidence of any kind, and there is no way for anyone to corroborate his accusation of your employee, who in turn categorically denies all of the charges. There is no way this evidence would ever be presented in a court of law; no prosecutor in the world would touch such a case for fear of being laughed out of court. But because both your business and the employee being impugned have relatively high profiles, the media scrutiny of both you and your employee is intense, and uninformed people all over the world are convinced of his guilt and your complicity.

Including at least some of your customers.

What are you going to do? Before you answer that question, you may want to review your reaction to the Mitchell Report, released one month ago today. Because, as near as I can tell, almost every one of the Major League Baseball franchise owners is dealing with that exact question right now – or will be soon…

Now, as a long-term baseball fan, I must tell you that I have no love for the owners. Even the most balanced accounts of the sport during the mid 20th Century make it painfully clear that the owners brought the Player’s Union and all of the attendant problems of the players as represented workers down on themselves, through dirty dealings that would make a Teamster blush. And I have no great sympathy for most of the players; it is difficult to feel sorry for a bunch of grown men who are being paid tens of millions of dollars to do something that half of the people in America would gladly do for just a living wage – if we were capable of doing so in the first place. Both groups should have realized decades ago that if they didn’t work out some means of policing the industry themselves that the public would demand action be taken, and that the government would eventually attempt to do so.

For the players themselves, the best course of action seems clear: they don’t have to prove their innocence, the government has to prove their guilt, so the best thing for them to do is get clean, stay clean, and say as little as possible. Documenting every medical treatment they’ve ever had would be sensible, and I’m sure they’re already working on doing just that. None of the “evidence” presented so far is any real threat to anyone, and if a real case does pop up somewhere, they all have the money to hire top legal representation and defend themselves. But what if you were one of the owners; how would you approach this storm? For the purposes of this question, we will assume that you do not have certain evidence of your employee’s guilt or innocence (in which case your legal obligations would be clear). Do you have an obligation to support your employee and maintain his innocence? Even though he probably can’t do as much for you without risking public and/or legal exposure? Or do you just remain aloof, refuse to discuss the matter, and let the pieces fall where they will?

It’s worth thinking about…

One Viewer’s Opinion

There has been a lot of discussion lately as to why many of the recent motion picture releases coming out of Hollywood have been underperforming. Now, I’m sure you’ve already heard all of the commentary on the dumbing-down of America, the competition from other forms of entertainment, the threat of illegal file sharing and DVD piracy, and the difficulty in marketing successfully to an increasingly saturated consuming public. You’ll be relieved to know that I don’t really have much to add to any of those points; I’m going to come at this from a much more basic level. A business level, in fact: I would like all of you to consider for a moment that the problem facing the movie business these days is simply one of Price Point.

For anyone not familiar with the idea, the price point is the price level at which the highest profit can be made on a given product. As the price of a product rises, the seller’s profit per unit rises, but the number of units sold drops. A product that sells 100 units when the price is $1 might only sell 80 units when sold for $2, and might only sell 10 units when the price reaches $5. If the product costs $.50 to make, then we make $50 selling it for $1 ($.50 per unit profit x 100 units = $50) and $120 selling it for $2 ($1.50 per unit profit x 80 units = $120), but only $45 selling it for $5 ($4.50 x 10 units = $45). That’s right; we can actually make more money selling this product at $1 each than we can selling it for $5 each; and we can make a lot more selling it for $2. If you plot the sales and profits of ANY product or service against bottom-line profit on a graph, you will eventually find the point where the profits are the highest – the price point.

Of course, in real life, there are a lot of factors that go into how many copies of a given product will sell at any given price level. The existence of competitors will be a factor; value will be a factor; prestige associated with the product and status conferred by ownership will be a factor. If your customers are not aware of your product they won’t think if buying it, and if they can’t obtain it easily they may not make the effort to do so. Setting the price point is a complex science, and many large companies employ teams of researchers full-time to work on this one topic. Which makes the movie studios’ apparent disregard for this issue seem a bit naïve…

Clearly, there is a limit to how much anyone is going to pay for two hours of entertainment, especially when there are many other options available. Paying $5 to see a movie might seem reasonable; paying $11 seems considerably less so, especially when you can rent a DVD for $4. Paying $44 for four movie tickets, plus another $5 or $10 for parking, to take a family of four to see a movie does not compare well to $4 for a DVD rental, and it does even worse when we factor in weather, inconvenience (driving and parking), uncomfortable viewing environments, crowds, and really bad movies.

And that brings me to the point. When the only entertainment choices available were live theater (expensive and hard to obtain), radio (not very visually interesting) and the movies, the studios could charge a lot and not really concern themselves with product quality. In a world with home video games, DVD movies (especially with big-screen home theater systems), hundreds of channels of cable and satellite television, elaborate pay-per-view services, and the endless entertainment possibilities of the Internet, it’s just not reasonable to expect people to pay as much for a night at the movies. And that doesn’t even take the quality issue into account. The bottom line is that the folks in Hollywood can blame video piracy all they want to, but this will not change the fact that they are pricing themselves out of their market. They must make some effort to either lower prices or find some way of adding value to their products…

The Business of Burgers

A while back I wrote a post about different companies in the same field really being in different businesses – actually, having different business models within the same industry. A problem I encountered quite often during my time as a management consultant (and still see from time to time today) is that even people who should know better often fail to grasp that the business model they are using is not the optimal one for their particular part of the field. It does us no good to operate like a high-volume Starbucks when what our customers want is a quiet place to hang out, conduct business, and purchase/consume meals; nor can we prosper selling tiny plates of exquisite (and very expensive) food when what our customers want is a burger and a beer. With that in mind, let’s take a look at another very common type of business: the burger stand.

If you’ve spent any time in any American city, you’ve probably eaten in one or more of these fast-food institutions. Within a half-mile radius of my house there are two chain burger restaurants (a Burger King and a Carl’s Jr.), two local burger restaurants, and a Denny’s (which most certainly sells burgers). If we expand that radius to a mile or so the number of vendors increases exponentially, including 3 Jack in the Box locations, a Fatburger, a Red Robin, a Sizzler, at least a dozen local burger stands, and no fewer than 4 (yes, FOUR) McDonald’s locations. That’s not even counting the various sit-down restaurants in the area that include a burger or two on their menus. And I live in a residential neighborhood!

At first glance, one could easily get the idea that Americans (or the ones who live in North Redondo Beach, anyway) never eat anything else. But when you look a little closer, it becomes obvious that these businesses are not really selling the same thing. The chain operations, for example, are mostly selling convenience. As cheap as some of these restaurants are, you could still produce hamburgers for less at home, especially if you are willing to buy large boxes of frozen meat patties and keep them in your freezer. But a handy McDonald’s, Burger King, Jack in the Box or Carl’s Jr. will sell you a burger, hot and ready to go, exactly when you want one. You don’t even have to get out of your car; just yell your order into the clown’s head and they’ll hand it out the window.

It’s important to note that a local burger stand probably doesn’t have this same emphasis on moving product – and moving you in and out of the store – as quickly as possible. Like any other local service business these operations rely on repeat business, and on having their customers feel as though they belong. A local burger stand may or may not be clean, comfortable, and staffed by people who know your name and make you feel welcome – but if it isn’t, it can’t really compete with the McDonald’s down the street. In addition to food, these businesses are selling community, exclusivity, and comfort.

By contrast, a Sizzler doesn’t have a drive through; they will make an effort at providing you with an actual dining room to eat in, and a server to bring you your food and refill your beverage whenever you like. They’ll even sell you things other than burgers, if you want them, offer you salad bars, a choice of side dishes and desserts to go with your meal, even sell you a really over-priced beer. It’s still not a real restaurant, but it’s not as likely to result in your having to sleep on the couch if you take your wife there, either. It’s hard to consider a Denny’s or a Coco’s “real restaurants” either, but at least they will actually come to the table and take your order, and cook your food to order instead of just taking it out from under the heat lamp. In all of these cases, the restaurant is selling you an experience, not just a meal – specifically, a dining-out experience. It should be relaxing and enjoyable (to whatever extent is possible), or else you could just have caught a burger from the drive-through window and eaten it at home on the couch.

By the time we get all the way up the scale to a Red Robin, a TGI Friday’s or a Chili’s the restaurant is trying to offer us an entire lifestyle, with elaborate drink menus for singles or parties, kid’s menus and crayons/coloring books, “atmosphere” and anything else that can help you get into the spirit of the thing. It’s supposed to be fun; food as entertainment. Certainly, it’s supposed to offer you something you couldn’t get by taking a frozen meat patty out of the fridge and frying it up on your stovetop. Probably the ultimate example of this is Dave and Buster’s, as referenced in a previous post. I’ve been known to drive 40 miles to go to the nearest Dave and Buster’s in Orange County, passing untold hundreds (or thousands!) of burger stands to get there.

So is there room for another place selling hamburgers to open in my neighborhood? Sure! As long as they’re selling something that the people here want to buy – assuming that they know what that is…

The Ethics of Drug Testing

I know; most of you have been reading essays, rants, screeds, and in some cases legal briefs on this subject for years now, and you’re sick of hearing about it. Well, I’m not a lawyer, so I can’t comment on the legality of drug testing in the workplace; and I’m not an ethicist, so I can’t really comment on whether the entire process is really ethical or not; I’m a management scientist and a strategy scholar, and that does qualify me to comment on the management implications and strategic value of these testing programs. And just on those bases, there’s still a lot worth commenting on…

Now, I understand all of the points about invasion of privacy and unreasonable searches and so on, but the fact still remains that I really want the pilot of an airliner I’m flying on, the bus I’m riding on, or even the gasoline truck I’m driving behind to be clean and sober. Unfortunately, if the person operating a vehicle of this type has a bad drug trip and winds up killing dozens (or hundreds) of people, the fact that the operator can be sent to jail for long periods of time and sued for the wrongful deaths of their victims (assuming the pilot/driver survives in the first place!) isn’t going to matter to those who are killed, and it won’t matter much to their families, either. The stakes are so high, and the consequences of failure are so completely irreparable, that there is no way to “fix” the situation afterwards.

The problem is, drug testing is no real guarantee of safety, either. Any test method devised by humans can be beaten (if only by having somebody else provide the test samples), and even if someone does test clean, there’s nothing to prevent them from going out the NEXT day and getting hammered just before getting behind the wheel. A good manager, who works closely with his/her pilots or drivers and knows who is reliable and weeds out anyone likely to do something suicidally/homicidally stupid will help, but even the straightest people do slip off that straight and narrow way sometimes. I can tell you from personal experience that there’s no judging a book by its cover on this issue – and that sometimes the last person you would ever expect will turn out to be the one with the secret drug problem.

Then there’s the issue of false positives. Everybody knows these happen; there was even a segment on Mythbusters a few years back where they determined that you can get a false positive for at least 12 hours (possibly 18) after eating a poppy seed cake or roll. So you might find yourself watching an innocent hippie (who just happens to love poppy seed cakes) like a hawk, while a straight-arrow prig who irons and starches his underwear does a big pile of blow the day after a drug test and then crashes a tour bus into a corner market. It happens, folks. Drug and alcohol users have to be lucky every time; failure causes under critical conditions only have to get "lucky" once...

From a management standpoint, a drug test will never replace the need to know your people, keep a close watch over them, and help the ones who are making bad choices make better ones. This will always be part of the manager’s role, and if you don’t want to do those things, you may want to consider another line of work. From a strategic standpoint, random drug testing may or may not help your company avoid fines, legal exposure, and other problems (check with your corporate counsel), but it won’t replace the need for good line managers, and it can’t make you completely safe from drug-related problems. If you feel that the potential savings to be realized by preventing possible drug-related incidents (or just being able to demonstrate in court that you’ve made every effort to prevent them) exceeds the costs of lowering morale, generating employee resentment, losing valuable personnel, and being sued for invasion of privacy, then go ahead, but rest assured, no matter which way you choose to go, someone somewhere will tell you that you should have done the opposite.

Sometimes there really aren’t any good answers. It’s worth thinking about…

Subtracting Value

All right; so how do you subtract value from something as simple as a hotel room? A given location or design may be sub-optimal in many respects (e.g. size, location, convenience), but once you’ve built the building, how do you actually make the facility LESS profitable than it was to begin with?

The first thing that comes to my mind is our old friend, The Second Law of Business: Do Not Annoy the Customer. Admittedly, different things will annoy different people, but there are some that are relatively easy to predict. Not being able to use something I’m paying for, for example. If the hotel’s gym is only open during hours I’m at work, for example, or if the Business Center is not available when I need it, or if the pool is the size of a postage stamp and full of small children swimming in diapers, or if the complimentary breakfast contains nothing I can eat (I’ve seen all of these things on the road), it’s going to annoy the crap out of me. If the restaurant is closed (by the Board of Health or just for repairs) and you can’t hold a meeting in the lounge because there’s karaoke from 1:30 PM to Midnight everyday, that’s going to annoy me. If the reservations people have lost my reservation and want me to pay extra for a higher-priced room because that’s all they’ve got left, that’s going to annoy me. More to the point, any of those things will annoy ANY business traveler, and if even a few of them happen on the same trip, we won’t ever be back…

In the rooms themselves, charging for amenities that the customer thinks should be included in the room rate – or even charging more than the customer thinks is reasonable – can remove all potential value from the items in question. For example, local phone calls don’t have to be free, but when the price for them becomes absurd (I’ve seen $2 plus $.25/minute – for local calls!) not only won’t people use the phone, but you’re also breaking the Second Law again. Mini-bar items are another example; if something you can get for $1 at the market on the corner is $2 in the mini-bar, you might sell some of them. But if it’s $5 dollars you won’t, and if it’s $8 dollars you’re just wasting space. Even worse, though, were bottles of water left in the room that were free on the first day, and $3 each the next day. Not that anyone mentioned that the next one wasn’t on the house, of course. I had to wait and find it on my bill when I checked out.

By the same token, an in-room whirlpool bath, in-room safe, steam bath or sauna that does not work is of no value; one with an extra charge to use it is a negative value; and one where you do not tell the customer there’s going to be an extra charge until they find it on their bill at checkout is illegal in many states. And if a customer has selected your establishment because they wanted one or more of these amenities, only to find they can’t have them (or can’t afford them), you might as well not have bothered in the first place. In fact, one of the only hard and fast rules with all “value added” features is this: “If it costs you money and it does not add value for the customer, it’s actually value subtracted.”

Not quite important enough to be the Third Rule of Business – but it’s definitely worth remembering…

Adding More Value

So, outside of the room itself, what other factors add value for a hotel guest? Well, I can’t speak for everyone, but for me it all begins with our old favorite, location. A hotel located miles from wherever my business takes me (or, on vacation, hours from anywhere I want to go) is not worth much to me, even if the room rate is fantastic. Location also impacts secondary issues like noise (is there a rail line or an Interstate just outside?), safety (are we in a bad neighborhood?) and habitability (is there a market, a convenience store, an office supply store, a coffee house, or a bar nearby? Or do I have to drive for an hour to get anything I might need in the field?), particularly on a long stay.

Then there’s food. I don’t need a good restaurant in the hotel if there’s one in walking distance – at least, not on a business trip. On vacation, room service is occasionally nice, and sometimes (e.g. in the morning before an early flight) it can be critical. But as you might guess from the title of this post, I’m the type who insists on value. I don’t mind paying a high price for good food and good service, but paying exorbitant rates for mediocre food and a 200% markup to have someone deliver it to my room, half an hour late and cold, will make me hit the ceiling. And if the food or service are bad enough, I’ll take all of my meals somewhere else – and probably my business, eventually.

On the other side of the coin, those complimentary breakfast rooms you sometimes see are a great value, especially for a business traveler. The ones that really stand out in my memory are the ones that add some form of protein to the usual toast, fruit and cereal. For a small increase in cost (for hard-boiled eggs, or even scrambled ones) the hotel has dramatically increased both how good the meal is for you and how much value it has for me (as I can’t eat a lot of fruit or sugary cereal). At one of the Hawthorn Suites we stayed at, in Texas, the complimentary breakfast included eggs, sausages, waffles, toast, cereal, fruit, various juices, milk and coffee. Of course, everyone knows that they take their breakfasts seriously in Texas, but for a service included in the price of the room, I felt this was really impressive. Their facility in Atlanta had a great breakfast bar, too.

Why does he tell us this? I hear some of you asking. Because none of the things I’ve been detailing in my last two posts are all that difficult, or all that expensive. These are value added measures in their purest form, and there is no real reason short of complete stupidity for any business to ignore measures this simple that can make this big a difference to their bottom line. You don’t even need a degree in hotel management to see how these issues could be the difference between success and failure. The odds are fairly good that if your business has any customer service or consumer service functions, that you have a similar opportunity to increase your profits by adding value – and the same basic chance to fail by ignoring that opportunity. In my next post we’ll take a look at the other side of the issue: measures intended to add value that don’t – or worse yet, remove it…

Adding Value

It seems like I’ve been on the road a lot over the past few years, which is odd when you consider that none of the jobs I’ve held recently involved travel – at least, not officially. But between teaching, consulting, personal travel, family obligations, and the cross-country odyssey my wife and I experienced in sending our daughter off to college, I’ve driven and flown well over 20,000 miles in the last six years, and stayed in enough hotels that I’m starting to have trouble keeping them straight, and in the process I’ve seen a huge range of efforts to add value to what would otherwise be a nicely-decorated prison cell (e.g. four walls, a roof, a bed and a toilet). Some of them work, some of them don’t, and some are so lame that they bear repeating…

First off, let’s start with the in-room amenities. Other than a bed, a desk, at least one lamp, a telephone, and a chair, what can you add to a hotel room that won’t defeat the purpose (e.g. require raising the room rate)? Well, most hotels offer a television set and cable TV these days. Some offer free premium channels (HBO or whatever), and some offer pay-per-view movies (adult and otherwise), but it seems that basic cable has become almost the baseline standard; if you check into a hotel that does not offer at least CNN, The Weather Channel and ESPN, you’d probably be disappointed. In-room video games might be a bonus if you are traveling with children of the right ages; Internet access using the TV as the monitor (which I’ve also seen) can be great for people who don’t like to lug their laptop with them on vacation.

Adding a data port to the telephone in the room does not take much effort, and is great for everyone who still has a dial-up modem in their laptop. A high-speed connection takes a bit more effort – but not that much more, especially since the hotel probably has one already; it’s just a matter of running cable to the rooms. Business travelers will prize a desk large enough to actually work at, and a good desk chair; families might also find it useful. An in-room coffee maker is useful for business travelers and anyone else who can’t function until they’ve had their first cup in the morning, but I’d rather have a fridge, myself. Even on vacation, I’m more likely to keep soft drinks in the fridge and make use of a microwave (if there is one) than any other features. Frankly, a mini-bar just isn’t the same; I’ve always had to move everything around to make room for my stuff. And I’m not sure the profits you can make from selling drinks and snacks at mini-bar prices are actually worth the cost of stocking one, the hassle of making sure your customers actually pay for what they use, and the problems that occur when the kids get into one…

Oddly enough, a second telephone in the bathroom is one of the most useful additions I’ve ever had – not that it comes up that often, but when you’re working (or traveling alone, for whatever reason) it’s nice to be able to get the phone easily. When you’re traveling with a companion, one of the more useful things is a second sink – one in the bathroom proper, and one outside it in the dressing area, so that both of you can get ready at the same time. Bathrobes don’t do much for me, and neither do complimentary beauty aids, but in both cases, I appreciate the effort.

Of course, all of this assumes that the room itself is clean, well maintained, and free of any other problems; if the window is stuck, the sheets are stained, or the room comes with free pets (of the multi-legged variety) it’s not going to matter what kinds of goodies you’ve got available…

Happy New Year!

I actually started this off as another rant about stupid things people do, and how this phenomenon is responsible for most of the problems in our world that are not caused by random chance, but then I reconsidered. I mean, that would be a depressing topic for the day on which a new year starts, with all of the potential and possibilities for a better future that a new year implies. The past year was a tough one for everyone who actually believes in democracy, free will, common sense, the human potential, a free market economy, peace on Earth, the United States of America (as something other than a way for rich people to screw over the rest of the world), literacy, higher or lower education, the environment, artistic freedom, freedom of speech, freedom of the press, freedom of religion, the pursuit of happiness, or sugar-free chocolate that actually tastes like the real thing, not just for me and my family in particular. And yet, even an old cynic like me can appreciate the promise of a new year, another chance, and the hope for a better world. Or, to quote Adam Duritz and the boys from Counting Crows, “It’s been a long December, but there’s reason to believe, maybe this year will be better than the last…”

In that spirit, I want to bring up a practice that came up in the news this part week that I think should serve as a warning for all of us who haven’t quite lost all of our common sense yet – or at least might remember where our marbles are. A story in the Los Angeles Times this past week mentioned a new loan crisis forming – this time in the field of auto loans, not mortgages. With the introduction of the new 7-year car loans, a lot of people are reaching the point where they want to buy a new car, but they still owe more on their car loan than they can get for selling the vehicle (or trading it in). This would prevent them from buying a new car, and thus delay the sale for a long period, thus lowering the sales rates for new cars. To avoid this, some car dealerships (and their financing partners) are adding the remaining balance from the old car loan to a NEW car loan, and raising the monthly payments to cover the difference.

Sounds like a bad idea, doesn’t it? In effect, you’re keeping your old car loan and taking out a new one at the same time, but you only get one car out of the deal. Even worse, some people replace their cars every three years (or even sooner), but are still paying on the loan for seven. There were a few cases in the paper of people who had replaced several vehicles in a short span (for whatever reason) and now had car payments that are higher than their mortgage payments! It’s destroying their credit, sucking up all of their available income, threatening their home equity, and potentially destroying any chance they have for retirement (or of supporting themselves when they can’t work anymore) simply because they don’t understand how loans actually work – or because they are stupid enough to believe that they can somehow beat the system.

Folks, trust me on this one: the House always wins. What the finance companies in this story are failing to realize is that they aren’t really the House – they can’t beat the laws of economics any more than the foolish and/or greedy consumers they’re fleecing can. If enough cars are repossessed for lack of payments, the finance companies are going to lose money no matter how usurious the terms they’re changing are, and if the economy crashes because too many people have destroyed their financial health with preposterous loans, it’s going to take the finance companies with them. And, as I noted in my post last year about Predatory Lending, we can’t expect the Federal Government to do anything about it; even if they weren’t already owned by the people who make money on this sort of nonsense (and as long as lobbying is legal, they will be), none of the other economic models have ever worked. The laws of Economics are not as precise as the laws of Physics, for example, but they’re just as hard to legislate away.

The only possible answer is in our hands, yours and mine. We have to be the ones to stop thinking we can beat the system; stop spending money we don’t have; stop acting like idiots. We have to declare the revolution of common sense, restore personal responsibility to our vocabulary, and start living like people who can actually find our butts without a lengthy search. Or at least remember where they were…

Because if we don’t, there’s reason to believe that this year will be even worse than the last…