Stereotypes and bias can affect judgment in the subtlest of ways. New brain imaging research shows just where these biases are experienced deep within grey matter.

“My colleagues and I were interested in determining how the brain responds when people are ‘put on the spot’ by decisions that could make them appear racially biased,” says Malia Mason, assistant professor of management who studies decision-making and the neuroscience of social perception. She will be co-hosting a symposium on diversity and leadership later this month at Columbia Business School.

Mason and her co-authors, Michael Norton, Joe Vandello, Andrew Biga and Rebecca Dyer, looked at how the brain helps people manage decisions that others might interpret as discriminatory. The researchers measured their white participants’ brain activity while they decided which of two individuals was more likely to have certain traits (e.g., gentle, intelligent, Canadian). On some trials participants were asked to decide between two white candidates, on other trials the particpants had to make a judgment involving a white and an African-American candidate.

“The results revealed that the brain’s alarm — the anterior cingulate cortex (ACC), a cortical region that detects conflicts or uncertainties — is triggered when people have to choose between a black and a white candidate,” Mason says. “Importantly, this occurs regardless of the relevancy of the trait or characteristic in question. The sound of the ACC alarm was just as loud when people decided who was Canadian as when they decided who was intelligent.”

Having to choose between a black and white candidate was also associated with activity in brain regions that support concentration (the dorso-lateral prefrontal cortex or DLPFC) and flexible responding (the lateral orbital frontal cortex or LOFC). Like the brain’s alarm (the ACC), these regions were recruited even when participants’ decisions could not be taken as evidence that they harbored stereotypical beliefs. These findings suggest that the judgmental context itself — having to choose between a white and a black participant — sets off a cascade of events and signals the need to proceed with caution and care, to inhibit stereotypical beliefs, and to consider how a decisions will be interpreted by others, says Mason.

“The good news is that people appear to be sensitive to social injustices and highly motivated to seem egalitarian,” says Mason. “Unfortunately, these findings also suggest that egalitarian aspirations alone do not lead to social colorblindness. The challenge is to help people unlearn beliefs with a dubious basis. Our results suggest that brute inhibition of stereotypes is a lot of work for the brain.”

The Program on Social Intelligence and the Sanford C. Bernstein & Co. Center for Leadership and Ethics are hosting the research symposium “Inclusive Leadership, Stereotyping and the Brain” on September 18, 2009. Learn more about the symposium and register for the event here.

Images courtesy of Malia Mason

	From left to right: Prof. Yusheng Zheng, Wharton School and Cheung Kong Graduate School of Business, paper award winner Guoming Lai and Prof. Fangruo Chen.

Channel stuffing can lead to all kinds of distortions and ultimately hurts the long-term value of a company. So what are the incentives for a manager to engage in the practice? That was the winning topic for the Best Paper Award at this year’s Conference of the Overseas Chinese Scholars Association in Management Science and Engineering (OCSAMSE), which took place in Shanghai in July.

The conference was sponsored by Columbia Business School’s China Business Initiative, which is part of the Chazen Institute for International Business. OCSAMSE is the only organization representing overseas Chinese scholars in management science and engineering. The conference series was focused on integrating theory and practice and panelists discussed supplier relationship, supply chain and operations management.

Professor Fangruo Chen awarded the research prize to Guoming Lai and Lin Nan from David A. Tepper School of Business at Carnegie Mellon University and Laurens G. Debo from University of Chicago Booth School of Business for their paper “Manager Incentives for Channel Stuffing with Market-Based Compensation.”

The winning paper authors suggest that managers find real earnings management more attractive in the wake of the Sarbanes-Oxley Act. However, managers also now face more “real” constraints, such as bounds on physical inventory and often their interests are not aligned with long-term stakeholders. The results create three effects that drive the manager’s incentives for channel stuffing.

Other speakers at the conference included Dr. Weihua Ma of China Merchants Bank, Qinghou Zong of the Wahaha Group, Weimin Sun of Suning Appliance Co. Ltd., Steve Graves of M.I.T. and Mike Pinedo of New York University Stern School of Business.

Photo courtesy of Mei Xue

With at least 2,000 car dealerships from Chrysler and GM slated to close this year (and more than 1,000 dealerships overall that closed last year), the existing American dealership model is in crisis. The closings appear to underscore just how over-extended — and over-stocked — the U.S. dealership system has become. One of the fatal flaws for dealerships has been an inefficient distribution network.

My research, conducted with my colleague Gérard Cachon at The Wharton School at the University of Pennsylvania, shows that the current structure of the U.S. brands’ dealership network led to inefficiencies in the distribution system. These inefficiencies add to the total distribution cost, which accounts for 30% of the price of a new car.

A major inefficiency is the pattern of holding inventory — an important part of the distribution cost. Most of the vehicles in the U.S. are purchased directly from dealer stock and holding inventory is expensive, especially when credit is scarce as it is now. The graph below illustrates important differences in the monthly days-of-supply for Chevrolet, Ford and Toyota.

The popular press suggests that 60-day supply is the ideal level of inventory for the auto industry. This is, in fact, the industry average, but the figures show that Toyota is consistently below that benchmark while Chevrolet and Ford are usually above it (other brands of Ford and GM also show a similar pattern). Overall from 2000 to 2004, Chevrolet held about 130,000 more vehicles in inventory relative to Toyota (300,000 compared to 170,000 units), even though the two brands sold about the same number of vehicles in the U.S.

The huge number of GM dealerships explains most of this difference in inventory performance. As of 2007, Chevrolet had around 4,000 dealerships compared to 1,200 Toyota dealerships. That means that an average Toyota dealership sells three times as many vehicles.

Source: Automotive News 2007 Yearbook

Due to economies of scale, managing inventory for a Chevrolet dealership is much more costly than for Toyota. In general, dealerships from domestic manufacturers carry substantially more days of supply. Consequently, they require more cash to operate, their inventory is less fresh and they tend to have more overstock at the end of the model year, which in turn leads to more rebates. All of this translates into higher distribution costs and lower profits for the dealer.

How could U.S. auto dealerships be improved? Reducing the number of dealerships can do several things.

First, it will reduce cannibalization between dealerships, increasing average sales per dealership. Dealers can take advantage of economies of scale in the distribution process and have more frequent deliveries and lower safety stocks, thereby reducing the amount of inventory held without hurting (and possibly improving) customer service. It also helps to keep a fresher stock to better match customer preferences and to lower markdowns at the end of the season.

All of this leads to a more profitable dealership and a more efficient distribution network. Higher dealership earnings can be used to invest in better showrooms and better training of the sales force, which can improve customer service and further boost revenues.

Photo credit: never a safe second

How can managers prepare for the less beneficial outcomes of practicing fairness?

According to the research of Professor Joel Brockner, both staff and management alike benefit when a firm makes a strong commitment to practice fairness. While there are some barriers to implementing fair process, Brockner says, it’s undeniable that firms that do so consistently see higher levels of employee commitment and productivity and that their employees report more job satisfaction and less stress — which makes overcoming those barriers a worthwhile investment. His research is featured in the most recent Ideas at Work.

But fairness can come at a cost.

“If people feel that the process was handled fairly regarding a decision that they will not be happy with, such as the loss of a job, or the failure to get a promotion, there is less resentment directed toward to the organization,” he says. “But the potential risk is there is more self-blaming and more low self-esteem.”

The tenure system illustrates the dilemma of process fairness. “When someone is turned down for tenure, the last thing they want to hear is what a fair process it was because then they feel like ‘OK, I got what I deserved.’ If they got what they deserved and the outcome is bad then they may feel badly about themselves.”

Brockner’s advice to managers? “The negative consequences of fair process don’t mean you should forego fairness. Practice fairness but also be aware that people may end up feeling badly about themselves and take additional action to counteract it.”

For example, Brockner and his co-authors recently found that people who engage in corporate-sponsored volunteer activity often feel more committed to the organization, precisely because the act of volunteering reaffirms their sense of self.

“There is a conundrum when you dole out unfavorable outcomes. If you are fair, people blame themselves, if you are unfair, then they blame you. So beware — you’ve got work to do as a manager either way.”

Learn more about Professor Brockner’s research in Columbia Ideas at Work, where he outlines the keys to process fairness and offers guidelines to help firms make hard decisions in a fair way. Read more about (download file) his research on the downside of process fairness.

Photo credit: Eric Lemoine

The fate of General Motors could mean tricky political business for Toyota, says Professor Hugh Patrick, faculty director of the Center on Japanese Economy and Business. Patrick is moderating a panel event tonight about the two automakers.

“The downsizing of GM opens economic opportunities for Toyota in the U.S. market, but it may also create serious political risks for Toyota’s market share, now a little under 20%, goes to 25% or 30%,” Patrick says. “Job creation is a major political as well as economic issue in the U.S., and there almost certainly will be various pressures on Toyota to assemble more vehicles in the U.S. and to purchase more parts and components in the U.S. — and to import fewer from Japan.”

William Holstein, author of Why GM Matters: Inside the Race to Transform an American Icon and panelist at tonight’s CJEB event, says the government’s recent actions have ignored the progress the company has made, such as absorbing lean manufacturing lessons from Toyota through the companies’ joint venture, NUMMI.

“Rick Wagoner was leading an ambitious restructuring plan at GM and there was very real chance that he was going to be successful in doing this by 2010,” Holstein says. “The Obama administration completely ignored the very substantial progress Wagoner had made with changing the cost structures of the company, changing its manufacturing process, revitalizing its car design and investing in the future of the lithium-ion battery.” (See Holstein’s related op-ed in the New York Times.)

As the government reportedly considers a Good GM/Bad GM plan, could Toyota itself be a contender to purchase a piece of the auto manufacturer?

“My guess is that Toyota will not be interested in purchasing GM or any significant part of it,” says Patrick. “Toyota’s cars already compete very well with GM’s in the U.S. market, and there might well be considerable political exposure for Toyota emanating from such purchases.”

The Center on Japanese Economy and Business presents “Two Behemoths in a Troubled Industry: Toyota and GM” tonight from 6:00 to 7:30 p.m.

Photo credit: Ahren D.

This post contains an update.

Retailers have been stunned by how abrupt the change in the economy has been and that it has happened across all strata of consumers. It is most pronounced in the luxury sector. As recently as seven or eight months ago, luxury thought that it was invulnerable, but that is not true.

Many luxury customers are aspirational and are vulnerable to downturns in the economy. The core customer with essentially unlimited disposable funds may no longer find it fashionable to behave as they had in the past. Irrational exuberance may not return and people may not seek to live beyond their means, choosing a more conservative lifestyle. Now, the customer is saving for the first time in many years, and this recession will leave a lasting mark on consumer behavior.

Jobs, confidence are lacking
Retailers are one of the largest sectors of the economy. They are very large employers. When business declines, retailers stop hiring. Layoffs soon follow. We’re seeing this across the country. Laying off large numbers of people creates a cascade of breakage. This impacts consumer confidence; everyone knows someone who was laid off. Stores begin to close. That is very visible. At the end of the day, if people don’t have jobs, there is no recovery and that’s the end of it. The consumer has to be viable, which means jobs and a rise in confidence. Many people with viable jobs become increasingly fearful of losing their employment. We’ve gone from irrational exuberance to irrational fear.

It’s good to be different
This downturn creates powerful opportunities for organizations to emerge if they can successfully differentiate themselves. Retailers with notable products and services can create enormous energy and value. Two examples are Apple and Amazon. Apple has a highly differentiated product and a selling environment at retail that is incomparable. Their market share will continue to climb as long as they continue to satisfy their customers’ needs and wants. Amazon aggregates assortments of merchandise in an on line setting that is the best in the world and continues to acquire more and more market share. They invested in an esoteric device, the Kindle, and surprise! It looks like a $1.4 billion business next year.

On the other hand, retailers with little or no forward strategy like the department stores, who have been playing out a “Last Man Standing” end game have little likelihood of future success and vitality. Layoffs in this sector are a tragic and ineffective expression of survival. You can’t use reductions in force as a strategic blueprint. It creates enormous disruption and leads to more crises downstream.

Good news for the shopper
Currently there is an enormous excess of inventory in many retailers supply chains because of recent extreme and unanticipated shortfalls in sales. These excesses will have to be liquidated. Retailers are dumping inventory, canceling what they can and avoiding buying forward product. In the next year we’re going to see fewer stores, less inventory overall in stores and less discounting because of less inventory. Prices will come down because consumers will expect more value and will be less willing to play the high-low game as they have in the past.

This economic downturn, recession if you will, is likely to continue for at least 12 to 18 months and maybe longer. I believe that when it is over the retail landscape will be very different than it is today.

UPDATE (2/25/09): Follow up from the Retail & Luxury Goods Conference. Keynote speaker Robert Burke said, “I don't think the department stores are completely dead and I don’t believe luxury is over. … It became overused and ambiguous terminology.” View the complete video (part 1, part 2) of his speech. -CN

Photo credit: Christopher Chan

Models pose a paradox. They hold the key to extraordinary profits but can inflict destructive losses on a bank. Because a model entails a complex perspective on issues that are typically fuzzy and ambiguous, they can lock traders into a mistaken view of the world, leading to billionaire losses. Can banks reap the benefits of models while avoiding their accompanying dangers?

Our research suggests they do, and shows how. We conducted a sociological study of a derivatives trading room at a large bank on Wall Street. The bank, which remained anonymous in our study, reaped extraordinary profits from its models — but emerged from the credit crisis unscathed. For three years, we were the proverbial fly on the wall, observing the traders with the same ethnographic techniques that anthropologists used to understand tribesmen in the South Pacific. We identified a set of managerial procedures, which we call “reflexive modeling,” that lead to superior model development. (View the complete study)

The key to outstanding trades, we found, lies outside the models. It is a matter of culture, organizational design and leadership. The bank that we observed introduced reflexivity in every aspect of its organization. From the junior traders to the supervisors, everyone at the bank was ready to question their own assumptions, listen for dissonant cues and respect diverse opinions.

How? As many have already suggested, individuals certainly matter. The bank hired people with a healthy dose of humility and an appreciation for the limits of their smarts. This often meant opting for older traders rather than younger hotshots.

But the key to the bank’s reflexiveness did not just lie in individuals. By reflexiveness we don’t mean super-intelligent traders engaged in some heroic mental feat, splitting and twisting their minds back on themselves like some intellectual variant of a contortionist. Reflexivity is a property of organizations.

The architecture of the bank, for instance, was crucial. The open-plan trading room grouped different trading strategies in the same shared space. Each desk focused on a single model, developing a specialized expertise in certain aspect of the stocks.

To see why this was useful, think of a stock as a round pie. Investors on Main Street often eat the pie whole, with predictably dire consequences. The professionals that we saw, by contrast, sliced stocks into different properties. Each desk was in charge of a different property, and the different desks then shared their insights with each other. This could happen in a one-minute chat between senior traders across desks or in an overheard conversation from the desk nearby. This communication allowed traders to understand those aspects of the stock that lay outside their own models — the unexpected “black swans” that can derail a trade.

Sharing, of course, is easier said than done. The bank made it possible with a culture that prized collaboration. For instance, it used objective bonuses rather than subjective ones to ensure that envy did not poison teamwork. It moved teams around the room to build the automatic trust that physical proximity engenders. It promoted from within, avoiding sharp layoffs during downturns.

Most importantly, the leadership of the trading room had the courage to punish uncooperative behavior. Bill, the manger of the room, made it abundantly clear that he would not tolerate the view, prominent among some, that if you’re great at Excel, “it’s OK to be an asshole.” And he conveyed the message with decisive clarity by firing anti-social traders on the spot — including some top producers.

In other words, the culture at the bank was nothing like the consecration of greed that outsiders attribute to Wall Street. We refer to it as “organized dissonance.”

Our study suggests that a lack of reflexivity — that is, the lack of doubt on the part of banks — may be behind the current credit crisis. We are reminded of infantry officers who instructed their drummers to disrupt cadence while crossing bridges. The disruption prevents the uniformity of marching feet from producing resonance that might bring down the bridge. As we see it, the troubles of contemporary banks may well be a consequence of resonant structures that banished doubt, thereby engendering disaster.

This blog post was coauthored with Professor David Stark, chair of the Department of Sociology at Columbia University and author of The Sense of Dissonance (Princeton University Press, 2009). Please visit Professor Daniel Beunza’s blog Socializing Finance to learn more about his research on the social studies of finance.

Photo credit: Daniel Beunza

In 2009, change is not just a buzzword — it’s a top priority for many organizations and individuals. And according to Professor Eric Johnson, major change need not be difficult or expensive. Often, Johnson says, change can start by simply looking at how an organization — or a consumer — utilizes default settings.

“There are many defaults that affect you, and you don’t even realize it,” says Johnson. “An unchecked box is a default.”

Research by Johnson and Daniel Goldstein of the London School of Economics has shown that default settings have the power to affect change on a wide range of issues, from consumer purchases to organ donations. Take the example of buying a new car. A customer completes an online car configurator and is shown features that match her preferences, such as the option for a sporty three-spoke steering wheel with a high-horsepower engine. These adaptive defaults serve to align product and consumer as closely as possible. In a different study, a default for organ donation can account for a 16-50% increase in transplantations performed in a country, they found.

However, in addition to changing a desired outcome by checking or un-checking a box, a default also promotes change in user behavior.

“Defaults change the way you look at choices. It is as if you owned the default, and you have to decide what are the advantages and alternatives,” says Johnson.

In a recent article in Harvard Business Review, Johnson, with co-authors Goldstein, Andreas Herrmann and Mark Heitmann, discuss how to best design defaults. The first thing to consider is who is designing them.

“[Default settings] are a decision that is strategic and goes to the bottom line,” says Johnson. “But the decision is too often made by the IT person or the person doing the page design. It is an essential characteristic of a Web site. It’s part of a larger view that site architecture has a large influence over consumer behavior and that’s not something most firms and consumers anticipate.”

And that decision making need not require any overhead, says Johnson. “The beauty of defaults is that they can be changed by simply editing a couple of lines of HTML.”

To learn more about Professor Johnson’s research on defaults, see “Defaults make a difference” in Ideas at Work.

Dateline: London

I think to really understand the ramifications of what happened, you just had to be there. At London’s Heathrow Airport that is.

On Thursday March 27, I took British Airways’ (BA) day flight from JFK to Heathrow. On Saturday I was due to talk about customer value to a group of high-level strategic account directors at a global software company. I planned to tell them that success in value delivery would guarantee customer satisfaction and enable them to retain and grow their customers, increase profits, and lead to greater shareholder value. I relaxed in my Club World backward-facing seat and concentrated on the task ahead.

On Thursday evening I landed at Terminal 4; little did I know what was unfolding at Terminal 5.

Terminal 5 was BA’s long-planned new $8.6 billion state-of-the-art facility at Heathrow. CEO Willie Walsh was on hand at 4 a.m. when the first flight arrived early from Hong Kong.

After that, everything went downhill. In a word, BA’s baggage-handling operation failed. Apparently, the system had functioned well in a 2,000-passenger test, but could not handle the 40,000 who that day crowded into the terminal.

By the following mid-week, BA had cancelled over 300 flights, 40,000 pieces of baggage had been separated from their owners (many sent overland to Italy for resorting), and thousands of passengers did not reach their destinations. To make matters worse, Britain’s aviation regulator reacted swiftly to stranded passengers’ complaints that BA failed to provide hotel rooms, in possible breach of European Union requirements.

In a stroke of genius, the Terminal 5 debacle occurred just three days before an open-skies agreement between the U.S. and Britain came into force. In addition to increased competition from European airlines flying from the U.S. to continental destinations, BA would now have new U.S.-based competitors at Heathrow. Continental, Delta and Northwest Airlines each offered flights on day one. Some analysts’ estimates of BA’s losses from canceled flights, additional costs, and reduced future bookings approached $100 million; Goldman Sachs downgraded BA shares to sell.

So what lessons can we learn from BA’s experience?

First, service businesses are tough to manage. Operations occur with the customer in close proximity and problems are quickly highly visible — very different from a factory making products.

Second, sophisticated systems are great when they work, but when they fail, disaster is close behind.

Third, when you put in sophisticated systems, test, test and then test again; it may take time and it may cost money, but consider the alternative!

Fourth, customer satisfaction depends on the difference between expectations and performance. BA had so hyped its new terminal that any failure hurt even more.

As for me, when I arrived back at terminal 4 on Saturday afternoon, British Airways could not get me on their JFK flight. The agent sent me to Virgin Atlantic where I gratefully accepted one of the few remaining Premium Economy seats to Newark. The counter clerk cheerfully phoned New York so I could change my car service pick up and I headed for the gate. As I was boarding, the gate clerk told me there was a change — an upgrade to Upper Class. Thank you Sir Richard!

Footnote: The following Wednesday, British supermodel Naomi Campbell was reportedly taken off a Los Angeles-bound BA flight and arrested. Apparently Campbell became agitated when told one of her two bags had been misplaced.

You can find Noel Capon’s new marketing planning workbook, The Virgin Marketer, and his textbook, Managing Marketing in the 21st Century, at www.mm21c.com.

This the final stop on the “Pre-MBA World Tour,” organized by John Shoaf '10 and members of the class of 2010.

At 5:30 a.m., we arrived on the market floor in time for the opening bell, which, to be precise, is an old-fashioned hand bell, rung by an auctioneer standing on a small stool.

We were at Tokyo’s famous Tsukiji Fish Market, perhaps one of the few places in a developed country where business is transacted quickly and efficiently without the aid of technology.

Every day before dawn, frozen tuna of all sizes arrive at the market and are spread across the floor of a warehouse. Buyers called “middlemen,” who wear special numbered hats, inspect each fish and take notes on quality, internally calculating value.

The auction commences as the auctioneer calls out the number painted in red ink on each fish and announces the opening bid. The middlemen use a gesture called “Teyari” to inform the auctioneer of their respective bids. The final price of each fish takes merely seconds to determine.

After each lot of fish is auctioned, assistants arrive with hand-pulled wooden carts. The fish are loaded onto the carts and moved to a nearby stall in the market for processing. The fish are then cut, packed and shipped to retail establishments around Japan.

Japan’s Central Wholesale Market Law of 1923 laid the groundwork for the country’s wholesale market system. Unique in the world, the law requires that prices be fixed on the basis of an auction regardless of the quantity of goods involved in the transaction. The law restricts transactions in the markets in order to maintain impartiality. According to the Tokyo Metropolitan Government, the role of the Central Warehouse Market is to stand between producers and consumers, promote the smooth distribution of perishables and contribute to a stabilized diet through fair and speedy transactions between wholesalers and jobbers in clean and functional facilities.

It was refreshing to see that there still exists a public market built solely on human-to-human interaction. While technology has certainly changed business for the better, we on the Pre-MBA World Tour were reminded that business is fundamentally about people and, very often, speed to market. When participants in a transaction meet face-to-face, a personal bond forms and a sense of trust emerges. People, unlike machines, can exhibit raw emotion, feelings and perspectives, allowing us to adapt to our surroundings and strategically intuit things that machines are incapable of comprehending.

All this begs the question, what might technology-reliant markets learn from the human-to-human model? Some insight can be gleaned from specialist-style auction markets, such as the floor of the New York Stock Exchange. These markets allow for the personal interaction and expert judgment that is often cited by proponents as helping to maintain orderly markets, especially under extraordinary conditions. Most importantly, technology-reliant markets should learn that technology exists in order to aid people, not the other way around.

As we increasingly rely on technology to put business practices into effect, how can we retain the best elements of human-based systems in order to sustain optimal efficiency? In our zeal for acquiring newer and faster technologies, are we also losing something?

CBS Professors Nelson Fraiman and Medini Singh recently offered their views on the pace of economic development in Uruguay to the newspaper El Observador (download pdf of article here), addressing how the country could increase its levels of productivity and innovation in order to rival global competitors.

Calling Uruguay “stuck in time,” Fraiman and Singh asserted that the mindset of Uruguayan entrepreneurs has to change in order for the country to catch up to the rapid pace of development in other emerging nations, particularly India and China.

“Unlike India or China, here I don’t see hunger in the people,” Fraiman said. “Uruguayans are content, and that can be a problem.”

Both Fraiman and Singh said that Uruguay’s small geographic size should not hold it back, and proposed that if local entrepreneurs could optimistically embrace change and let go of a compulsion towards conformity, the country would be able to take advantage of limitless possibilities.

The only challenge now is to identify which business activity to focus on in order to distinguish Uruguay from other emerging nations and add unique value to the global market.

Fraiman proposed that Uruguay could exceed competitors in offering knowledge-based services, and Singh said he believes that it’s necessary for the country to focus on technical education in management and technology, “because this is what the world needs today.”

This discussion came out of a workshop to Uruguayan entrepreneurs last month on “Strategy and Operational Excellence for Global Competitiveness.”

Taking organizational service to the next level is not just about executing key strategic goals. According to Professor Awi Federgruen, companies need to focus more on considering the relationship between strategic options and operating cost.

“It is challenging but relatively easy to come up with planning approaches that will take out the organizational fat to reduce operational costs for given strategic goals,” Federgruen told the FT in a BearingPoint podcast. “But what is much more challenging and ultimately much more important for most organizations is to understand how the required operating costs interact with the strategic goals of the company.”

Within a corporate landscape that’s becoming more and more competitive in terms of the quality, accuracy and timeliness of services provided, organizations need to take a step back and weigh the implications of certain initiatives to the bottom line.

“Those tradeoffs between operating costs and strategic goals are not easy to figure out . . . and yet [they’re] something that organizations should indeed stay awake about, because without having a good understanding about what indeed the revenue implications are of strategic choices . . . one may be missing the big picture,” Federgruen said.

What challenges does your organization face in thinking about strategy choices in terms of operating cost — and do you agree that the task deserves greater attention?

This post is part of a series following the “Pre-MBA World Tour,” organized by Shoaf and members of the class of 2010.

When most people think about the growing economy in India, their first thought probably relates to BPO (business process outsourcing). The BPO phenomenon in India was due to, among other things, a combination of low wages, a highly skilled labor force and the economic-liberalization policy of 1991. This scenario created a large flow of foreign direct investment into India’s IT and communications infrastructure during the tech boom of the late 1990s.

Although BPO has been a driver of India’s recent economic development (by putting India on the radar of investors around the world), the future of India’s emerging economy will likely be elsewhere. If you’re looking for the next wave of growth and opportunity in India, consider the new rising middle class of nearly 300 million people.

Because of the prevalent family-business model in India, much of this middle-market growth will likely come from privately held enterprises (rather than public companies) — so if you’re simply pumping cash into an ETF, you might just end up in a few, highly speculative investments. The best way to really capitalize on this opportunity will be to actively participate in the emerging economic system. Of course, this is always easier said than done.

So how do you become a competitive player in a new market with a total population of 1.2 billion people? The first step is to realize that India is an extremely diverse country with hundreds of languages, religions and ethnicities. Each of the 28 states (and seven union territories) in India has its own unique culture (and subcultures) that must be considered when developing marketing and distribution strategies.

It will be critical to understand not only the Indian psyche but also what physical and political constraints exist to get your products to market.

For example, in certain regions the postal system is not effective, because many residences don’t have accurate mailing addresses. So to reach their customers, many companies deliver mail, advertisements and warranty information through SMS text messaging. Even in Mumbai, I had a rickshaw driver explain how he checks his Facebook account and asks for driving directions through his mobile phone.

The other important consideration is learning how to deal with the political bureaucracy. Last week our tour stopped in Dubai, where it typically takes about six months to get a project through the planning stage. In Mumbai, a certain infamous flyover project has been in the planning phase for more than five years.

Stay tuned for our second blog post from India, as we plan to learn more about economic development and how to facilitate ethical business practices in a market where political corruption is an everyday fact of life.

Next stop: New Delhi

In part, it’s bad luck and bad timing. Airlines operated with an overburdened infrastructure to begin with, and then FAA inspections surfaced precisely as oil prices soared to record highs and the economy teetered into a housing-led recession. A perfect storm.

In 2001 there were similar shakeouts as the industry came down from a boom cycle fueled by the dot-com era, when airlines had to fire people, go into bankruptcy and jettison aircraft. Airlines are very sensitive to economic downturns. Many consumers and businesses eliminate air travel when times are hard, yet airlines cannot shed costs as quickly to keep pace because they have large commitments of capital and fixed costs such as airplanes, labor contracts, gate space and landing slots.

In hard times, airlines do what they can to survive. Some file for bankruptcy protection; others restructure and merge. Mergers, like Delta and Northwest’s, can help airlines offer more routes to customers, feed traffic into their hubs and spread overhead costs. But it’s a gamble. Continental’s recent rejection of a merger deal with United shows that industry consensus on whether or not consolidation will ultimately help reduce costs and increase profits is far from clear. Continental, for one, is betting that its international diversification will allow it to endure a weakening U.S. economy and dollar-denominated oil.

Perversely perhaps, these woes can also be viewed as a good thing. Low prices, crowded planes and gates, airlines scrambling over each other to offer new routes and services — all of these are signs of a starkly competitive industry.

In a certain way travelers have gotten what they’ve asked for too. Bob Crandall, former CEO at American Airlines, once said that every time American experimented with giving people more room on the plane and charging $5 more, they would lose out to competitors over price. Cheap, basic service is what most air travelers seem to want, judging by how they vote with their wallets.

Another byproduct of a competitive industry is that there is a lot of innovation and change. Bad business models fail and are replaced by new ones. There is no shortage of entrepreneurs trying to reinvent the industry. Eos Airlines thought there was a market for an all-business class service to Europe with fully flat bed seats, champagne and gourmet meals. An interesting idea, seemingly, but their recent bankruptcy proved it wasn’t viable.

One interesting trend happening on the high end right now is on-demand air taxi service provided by small regional jets that are relatively cheap to operate, fly out of less-congested regional airports and have sufficient range to compete with mainline carriers. They are targeted at business people who want to avoid the hassles of commercial airline travel. Good idea? Bob Crandall thinks so; he is leading a new venture called POGO to provide exactly this kind of service. Time will tell if he’s right.

As the industry continues to absorb shocks and innovate, it’s obviously disrupting the lives of employees and travelers alike. Sure, air travel was more glamorous in years past, but it was also extremely expensive and only available to a limited number of cities. Now people can fly anywhere for relatively little. Yet air travel can be miserable and crowded; airlines have cut back on services. Cost cutting produces hardships, and rapid change can feel a lot like chaos.

The question is: how much will you tolerate before you stop flying? If it reaches the point where we all opt to stay home or drive rather than fly, then the airline industry will really have something to worry about.

Dear Friends,

Thank you for your shipment of medical supplies. The boxes arrived Friday and I will take them to the clinic on Monday afternoon.

Visiting this clinic has been the highlight of my experience in Iraq. While I was there last week, I spoke with a veterinarian named Yousef. He runs a business tending to flocks of sheep and other livestock in the area. He also works at the clinic as a linguist.

On busy days, Yousef assists the doctors in treating patients. He told me that conditions [in west Baghdad] have improved in the last six months. Things were pretty gruesome in 2006 and early 2007, but they seem to be getting better. He also noted that recent violence has been a disruption to life and business in Baghdad.

Yousef and his wife (another veterinarian) are hoping to open a veterinary clinic in a building soon. USAID will be providing the equipment needed to make their vision for the clinic a reality. Coincidentally, USAID has partnered with Columbia’s Center for International Conflict Resolution in planning provincial reconstruction teams (PRTs). PRTs are civil/military teams that go about the business of smoothing “resource based conflicts.” So your contribution is working in tandem with a Columbia University initiative over here!

Your donations will help an Iraqi medical staff give their fellow citizens free medical treatment three days a week. The staff is now comprised of a pediatrician, two doctors, a dentist, a pharmacist and Yousef. The clinic is small, and often operates without electricity. Donated materials are the only supplies they have. Since supplies are limited, your contributions are a wonderful addition.

As [fellow EMBA student] Ann Marie noted, I will be heading home in another three weeks. If you have any desire to send further supplies this way, you can forward them care of the Army Major who oversees the clinic. [Diapers, formula and other basic medical supplies are all in need.]

Major Peter Buotte
411 Civil Affairs Iraq
HHC, 3BCT, 101 ABN
APO AE 09344

By the way, if anyone has an old microscope, Yousef told me he hopes to get back to his roots as a medical and veterinary researcher. While the promised USAID veterinary kit should include a microscope, there is no timetable for the kit’s arrival.

Ann Marie, thank you for coordinating this effort. Classmates, I am humbled by your generosity.

Best Regards,
Todd Morris

After spending a few months over here, I wanted to offer some perspective on the situation.

The surge and its underlying counterinsurgency (COIN) strategy seem to be making gains. I see the impact each day during intelligence briefings on local area operations. The shift in media attention away from Baghdad, and toward Afghanistan and Waziristan, serves as further evidence of the muted successes of COIN.

Recent improvements aside, I stand quietly skeptical as the postsurge drawdown looms in the near term. A key tenet of the COIN strategy has been battle-space denial through troop presence. Simply stated: peaceful gains have been made by increasing our presence in the neighborhoods of Baghdad. America’s forthcoming surge drawdown will increasingly foist the burden of peacekeeping upon local Iraqi leadership.

Unfortunately, lasting strategic success relies largely on the Iraqi people’s ability to assume control of security. Reviewing Iraq’s formation, and the eight decades of sectarian rivalry that ensued, would force most objective observers to wonder about the likelihood of peace in the wake of troop drawdowns. Furthermore, our military is incapable of sustaining current troop levels.

On a personal level, this has been an eye-opening experience. Life in Baghdad is surreal. My unit has not been tasked with off-base operations, so the largest threats remain rocket and small-arms fire that insurgents shoot into the base.

I live in a trailer park named Dodge City North near the base’s eastern edge. Typical mornings include the sound of explosions and automatic-weapons fire in the neighborhood to my east. Low-flying helicopters zoom overhead around the clock, the thumping of their rotors vibrating the walls of my trailer as they pass.

Peppered about the base are trailer parks similar to my own with other choice names like Freedom Village and Liberty East. Among the maze of trailers sits “The Oasis” chow hall. Though the menu varies each day, corn dogs are readily available year-round, and the facility’s Sunday morning telecast laughably features Ultimate Fighting Championship bouts aimed at keeping the warrior spirit freshly invigorated.

I recently made a trip to visit our few remaining British allies near the Iranian border in Basra. Basra is different from Baghdad, as the Iraqi Army has already assumed control of the southern portion of Iraq. The Brits are paring down their forces. At present they have just 5,000 service members remaining, and those souls are getting shelled regularly by Shiite militia in the area. The threat of rocket fire requires sleeping in steel and cinder-block coffins. These truly unique confines allow one to rest knowing that only a direct hit will bring harm.

It is amazing to think that you are now just a few short months shy of graduating from EMBA. I wish I was there with you all. Hopefully I will be home in time to crash a Friday evening social event in May.

With that I leave you with this quote:

“The deepest fear of my war years, one still with me, is that these happenings had no real purpose.”

J. Glenn Gray, The Warriors: Reflections on Men in Battle

(J. Glenn Gray was a WWII veteran who received a PhD in philosophy from Columbia before the war.)

Best regards,
Todd Morris

“Whenever journalists write about emergency room delays, they tend to oversimplify the problem, and they usually connect the increase in emergency room wait times to the increased percentage of uninsured patients. It’s true that the percentage of the uninsured is increasing, but all the research I’ve seen shows that the percentage growth in visits to emergency rooms is greater for insured patients than uninsured patients.

“So it’s not about uninsured people, it’s about people in general. And the reason more people are going to the emergency room is that the wait time to get an appointment with a primary care physician has gone up to an average of three and a half weeks. There are just are not enough primary care physicians, and there’s no financial incentive to become a primary care physician when other specialties are much more high-paying.

“And while the growing difficulty in access to primary care is certainly a factor in the growth of emergency department visits, it’s likely not the only cause. We are also experiencing increased numbers of people with diabetes, heart disease and other serious chronic diseases, and these also contribute to the increase in visits.

“There is also a growing number of patients being ‘boarded’ in emergency departments while waiting for an inpatient bed. These require the attention of the emergency department physicians, which results in the physicians having less time available for the new arrivals into the department.

“Hospitals do try to adjust the number of physicians that are on call to accommodate patient flow — for example, they realize more patients show up at noon than at two in the morning. They just don’t do it very well because they don’t know how to do it very well. Most hospitals are not run by MBAs. They are run by physicians, and physicians aren’t familiar with management techniques that are used in other industries. Banks, supermarkets, airlines and call centers all use mathematical models. Hospitals don’t use these mathematical models so it’s not surprising that they don’t operate efficiently.

“It does take up a lot of time and energy from the hospital managers to keep the hospital afloat. Most hospitals are in financial straits — one third of them operate in the red, and they don’t focus on emergency rooms because it’s not where they make money.”