“Well written and an interesting perspective.” Clan Rossi --- “Your article is too good about Japanese business pushing nuclear power.” Consulting Group --- “Thank you for the article. It was quite useful for me to wrap up things quickly and effectively.” Taylor Johnson, Credit Union Lobby Management --- “Great information! I love your blog! You always post interesting things!” Jonathan N.

Saturday, February 1, 2014

Corporate Social Responsibility at Walmart

Is it not an outright oxymoron for a company such as Walmart to pinch pennies when it comes to its non-supervisory employees even as it is oriented to the social good of society through its "corporate social responsibility" (CSR) programs? Leslie Dach, a former executive at Walmart who had been behind several such initiatives liked to make the point that striving to make a dent in societal problems can dovetail with a company’s own financial interests. The two need not conflict. I submit that this is not good enough for a company's management authentically into "giving something back." Specifically, the social-good initiatives should be integrated with company operations. Walmart can indeed be criticized from this standpoint, particular since Sam Walton's sons cut non-supervisory employee sickness and vacation days. I suspect that the illusion foisted on the general public is likely to burst one day as the bones of the stores' operations are laid bare (i.e., the curtain is pulled back to reveal for the public the proverbial man behind the curtain). Let's hope that other companies can learn from, and thus improve on Walmart's dual strategies.

Strategic Leadership: Disentangling Strategy and Leadership

Strategic leadership relates an organization’s differentiated core competencies to its ideologies, identity, mission and view of the macro environment system. Relates implies that strategic elements are not identical with a vision containing values (Ireland et al, 1999, p.48). In fact, a tension can be involved, as interest applies one way to core competencies and another to the social reality that a leader promotes in line with an organizational mission (and identity). For one thing, the basis of a competitive advantage can be rather limited temporally, due to technological changes, for example, while values espoused are presumably long-lasting in their validity and thus not easily changed. 

To be sure, the tension between more immediate strategic objectives and a longer-term social reality formulated and “sold” by an organizational leader need not exist. Crafting strategy that is in line with what an organization “stands for” is possible and, indeed, can be quite profitable as well as societally legitimate (i.e., in line with the mission that is in line with societal values). Even so, at an abstract level, strategic interest does not dovetail with a holistic vision that is societally valued because the organization is central in one but not in the other.

Ethical leadership as a means of managing strategic leadership (Worden, 2003a and 2003b)        

In business terms, the hub-and-spokes structure of the stakeholder management framework differs from the web-like “network” that characterizes social reality at the societal level and contains the organization’s mission. An organizational leader constructs and depicts not only a vision of the organization’s mission, but of an encompassing social reality of the environment (i.e. society).  Both of these elements pertain to the legitimacy of the vision as well as the organization itself in society.  For a leader’s vision to be regarded as credible in society, integrity is necessary (or, sadly, at least the appearance thereof). The leader’s interpretation of social reality “must not be affected by success-oriented considerations in favor of the corporation” (Enderle, 1987, p. 661). The lack of any tension, which is admittedly possible, must not be a result of changing the vision whenever core competencies change. Integrity applied to a leader means resisting the temptation to turn the vision into a malleable chameleon as per strategic convenience. This is a relatively tight interpretation of integrity applied to leaders, for no extrinsic values are being attributed to leaders here. For example, I am not saying that a leader must be fair in order to have integrity as a leader. Integrity applied to a leader has to do with leadership itself, rather than opening a flood-gate of whatever ethical value the investigator or practitioner favors.

In short, strategic leadership is a mixture rather than compound. Relating strategy to leadership implicitly involves managing two paradigms—one that of leadership vision (tapping into a societal “web-like” framework) and the other that of strategic management (the organization as necessarily “front and center”). If these paradigms are not balanced, the leader risks either portraying a self-serving vision or shirking the organization’s survival. In difficult market conditions, a leader might lean toward strategic objectives—though without violating the vision’s values. In a favorable economy, the pruning of strategy to boost the credibility of the vision can effectively counter the strategic leaning at the expense of standing on principle.

One might ask whether viewing strategic leadership as something to be managed renders a leader a phony in terms of believing in the principles being advanced in the leader’s wider vision as well as what the organization stands for. In other words, would a leader who is passionate about certain values be willing to compromise them in bad times because any loss in societal credibility can be made up on the flip side? Moreover, if a leader really does believe in the values being evoked, wouldn’t every strategy employed necessarily dovetail with them? The underlying question may be whether the organization functions primarily to accrue profit or to advance the values or ideology expressed in the leader’s vision. The priority on profit is a default. In public corporations, stockholders can or should be able to determine the default on account of owners’ property rights. Indeed, I submit that these rights should eclipse even the business judgment rule that gives priority to managerial expertise (which assumes profit as the default objective).

Generally speaking, where strategic objectives are in tension with leadership vision, the question of whether the two underlying paradigms should be managed has to do with the relationship between the default and the espoused principles or values. It could be that the tension only arises when profit-making is the default. In any case, understanding the two basic paradigms underpinning strategic leadership can add to our understanding of strategic leadership itself as not simply “leadership that is strategic.”  

G. Enderle, “Some Perspectives of Managerial Ethical Leadership,” Journal of Business Ethics 6 (1987), no. 8:657-663.

R. D. Ireland and M. A. Hitt, “Achieving and Maintaining Strategic Competitiveness in the 21st Century: The Role of Strategic Leadership,” Academy of Management Executive 13(1999), no. 1: 43-57.

S. Worden, "The Role of Integrity as a Mediator in Strategic Leadership: A Recipe for Reputational Capital," Journal of Business Ethics, August 2003(b) (Vol. 46, No. 1), pp. 31-44.
S. Worden, Strategic Leadership as a Source of Competitive Advantage: A Qualified Dualistic Model,”  Proceedings of the Midwestern Academy of Management (St. Louis, 2003(a)). 

Sun Tzu's Art of War: A Recipe for Leadership in Business

According to Master Sun in The Art of War, “Leadership is a matter of intelligence, trustworthiness, humaneness, courage, and sternness.”[1] Although Sun Tzu is referring mainly to military (and related political) leadership, lessons can be learned for exercising business leadership.

The complete essay is at "Sun Tzu's Art of War:  A Recipe for Leadership in Business"

1. Sun Tzu, The Art of War: Complete Texts and Commentaries (Boston: Shambhala, 2003), p. 44.

Friday, January 31, 2014

Google Jettisons Motorola: A Jack of All Trades Is a Master of None

Managers tasked with the overall management of a company may thirst for additional lines of business, particularly those that are related to any of the company’s existing lines. Lest it be concluded that an expansive tendency flows straight out of a business calculus, the infamous “empire-building” urge, which is premised on the assumption of being capable of managing or doing anything, is often also in play. Interestingly, this instinct can operate even at the expense of profit satisficing or maximizing. In this essay, I assess Google’s sale of its Motorola (cellular phone manufacturing) unit.

Having acquired Motorola for $12 million, Google’s selling price of $3 million may seem to reflect negatively on the management at Google. However, Google arranged to keep some of the valuable patents, and license a few of those to Motorola. “Google got what they wanted and needed from Motorola—they got patents, engineering talent and mobile market insight,” Jack Gold, principal analyst at J. Gold Associates, explains.[1] His mention of insight is particularly noteworthy, as it pertains to the importance of innovation at Google.

Larry Page, Google’s CEO, provides us with the official rationale. “The smartphone market is super-competitive, and to thrive, it helps to be all-in when it comes to making mobile devices.”[2] Not being “all-in” implies that Google’s management would be too distracted by its main preoccupation (i.e., coming up with new software and related hardware) to concentrate on making phones better than those proffered by competitors in that manufacturing sector. Interestingly, Page omits at least two alternative rationales.
First, the quote says nothing about the institutional conflict-of-interest that is inherent in Google competing in the phone market against smartphone makers such as Samsung and HTC, which use Google’s Android operating system. Jack Gold points out that selling Motorola eases this tension.[3] 

That a conflict-of-interest is more serious than mere tension seems to have alluded the financial analyst; competitors are in tension, but this is generally accepted because the benefits to society dwarf the rather limited costs (e.g., by means of government regulation). An institutional conflict-of-interest, on the other hand, brings with it only a private benefit while the costs can be widespread. From a societal standpoint at least, we do not assess conflicts-of-interest based on a cost-benefit analysis. In fact, we tend to treat the sheer existence of the exploitable arrangement to be unethical. We need only look at the societal reaction in the U.S. to CPA firms pronouncing unqualified opinions so the clients would renew the firms for the next year, and the rating agencies rating tranches of sub-prime mortgage-based bonds as AAA because the agencies earn more if the bond issue does well. Yet, strangely, Larry Page made no mention of having expunged this problem.

Secondly, Page’s statement makes the point that the company’s main pursuits would be too distracting. Alternatively, he could have pointed out that manufacturing phones would likely become a distraction from Google’s main work. This rationale makes more sense, as distractions from an adjunct operation are less costly than those impinging on what the people at a company do best.

I submit that the assumption that a heavily ideational, future-oriented company can also be good at manufacturing is more costly than any prohibitive short-term financials. The search-engine-based internet giant strikes me as being oceans of time away from the banal world of manufacturing, even concerning those products such as cell phones and internet glasses that are related to the software advances.

Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, trying out a pair of Google "glasses" during a meeting at Google's headquarters. How might the innovation change war? If only it could be relegated to virtual reality .

Similar to leadership being forward-oriented whereas management encompasses implementation of existing strategies derived from innovations already part of history, Google’s forté in looking out on a horizon pregnant with practical possibilities not just to ride, but also to create the next wave in computer technology does not necessarily transfer into being good at managing a manufacturing process. Furthermore, any resources, whether financial or managerial, poured into the latter must come with an opportunity cost at the expense of the former. That is to say, opportunities would be lost in what the supervisory and non-supervisory employees at Google do best. Even hiring additional managers and labor with expertise in manufacturing would require time and money that could otherwise be devoted to inventing and mining practical ideas on the open horizon. At the very least, the “room addition” of operations could distract Google’s futurists from delivering yet another leap in technology that transforms the world in which we live.

Generally speaking, intensification can bring with it more fecundity than can expansion. The diseconomies of scale that come as costs rise disproportionately as a company’s administration and operations expand only worsen the plight of the Jack of all trades who is master of none by virtue of having a finger in many pies. What might a business calculus look like that is based on intensification? Amassing more and more charge in a well-fitting battery is doubtless very different than being oriented to spreading out across new lands while trying to conquer and hold them while protecting the home front and seeing that it continues to be productive. I suspect that the intensification instinct is more in line with profitability over all than is the power-aggrandizing urge of empire-building.

1.Alistair Barr, “Google Sells Off Motorola,” USA Today, January 30, 2014.
2. Ibid.

Wednesday, January 29, 2014

The State of the Union Address: The Presidency as Visionary or Bureaucratic Leadership?

Just after President Obama’s 2014 State of the Union Address, CNN found that among the Americans who had watched the speech, 76 percent had a “ total positive” reaction, 44 percent of which being “very positive,” and 22 percent had a negative reaction.[1] What is left unsaid can be even more useful than what is reported. In this case, the poll does not reveal the criteria used by the respondents to assess the speech. The devil lies in the details here, in not only the actual criteria used, but also the very content of the speech. In this essay, I investigate the suitability of the criterion that can be labeled “extent of detail in the speech,” given the purpose of the speech as laid out in the U.S. Constitution and, moreover, the presidential office.

In his 2014 address, Barak Obama stayed largely away from “the vision thing.” This point is significant to the extent that “presiding over the whole” is an important feature of his office. Even realistic bipartisan legislative items, such as immigration and trade reform, received only cursory mention. This is understandable, given the gridlock that had made 2013 one of the least productive Congresses in U.S. history. Under the circumstances, the president could have done worse than lean on his constitutional obligation “to give to the Congress information of the state of the Union.” Pursuing this tract may have given the president (and the office) more reputational capital (e.g., standing above the fray; not being partisan). Sadly, he truncated that duty to sell his executive actions to a weary citizenry and Congress. In other words, like presidents before him, Barak Obama chose to make the speech fit almost exclusively within the second part of the constitutional obligation—to “recommend to [Congress’s] consideration such measures as he shall judge necessary and expedient.”[2] To be sure, he did push a few “incrementalist” legislative proposals, such as increasing the minimum wage a few dollars and extending unemployment compensation three months. Unfortunately, the public seemed to recognize the partisan nature of these “agenda items.”

Perhaps the main thrust of the address fell on announcements of, and justifications for executive actions, including tightening industrial carbon-emission limits, increasing the minimum wage that federal contractors would have to pay their workers as a condition of accepting contracts in the future, and providing a new retirement-savings device for any employees without an employer-based plan. The White House readily admitted the diminished returns afforded by executive orders relative to legislation. “I wouldn’t tell you that executive action is a substitute for major bipartisan legislation; it’s not,” Dan Pfeiffer, a senior advisor to the president, admitted.[3]

The implication that the state of the Union hinged on such “micro” measures somehow escaped the notice of viewers, the media, and the political elite. By the time the president got to his “achievement” in having secured the voluntary agreement of several CEOs not to discriminate against the long-term unemployed, he was past even the encroachments of the recommendations part. The showcasing of hand-picked people in the gallery entirely bypasses the constitutional purpose of the report and recommendations.

To be sure, Barak Obama was hardly alone among U.S. presidents in steering the address toward partisan recommendations. In fact, by the time of the 2014 address, most Americans probably expected a partisan list of proposals. His contribution may have been in moving the de facto standard for what counts as a State of the Union Address even further along in terms future expectations of presidents using the address to sell their respective agendas. In the context of legislative gridlock and perhaps even a media-fomented general sense that the stuff of visionary leadership must finally bow down to American pragmatism in the era of managerialism, the president’s addition of executive actions took the address even further from the “big picture” inherent in the condition of the Union itself—that is to say, further away from transformational and visionary leadership and closer to bureaucratic and politicized management. This is bad news for the presidency if the presiding role of the office (e.g., looking out for the good of the whole systemically) is as much a part of the job as are commanding the military and acting as chief executive.

Burns’ distinction between transactional and transformational leadership may shed some light here. Burns classifies both types under moral leadership in his definitive work, Leadership.[4] The transactional leader takes the followers’ needs as given and attends, via particular (i.e., incrementalist) transactions with the followers, to the extant lower needs already preoccupying the followers as well as the leader (e.g., raising the minimum wage). In contrast, the transformational leader raises, or transforms, the needs that the followers consider the most important to higher, distinctively moral, needs that would transform both the followers and the leader, even if merely in looking at a problem in a new light (i.e., through the lenses of a novel paradigm). It should come as no surprise that “the vision thing” and charisma have great value in transformational leadership and none at all in the transactional sort. For example, the president could have inserted his recommendation for a raise in the minimum wage within a vision of sustenance as a fundamental, and thus unconditional, human right. The transformation would involve raising the perceived need at issue from that of negotiating a new conditional set of terms for domestic food aid (“food stamps”) and a maximum in unemployment compensation to replacing that mindset among leaders and followers alike with one that is rooted and justified in basic (i.e., unconditional) human rights.

In conclusion, the gradual shift in emphasis that has gone virtually unnoticed at the societal level as Americans have critiqued State of the Union addresses is “the canary in the coal mine” already letting us know that both the presiding and related non-partisan leadership roles of the U.S. presidency are well on their way to extinction. Unfortunately, many Americans seem to have been pegging their assessment criteria to what the address itself has become—even if this means validating successive presidential lapses. Lest shirking the presiding and “big picture” leadership roles of the office in favor of getting as much of a partisan agenda put into law as possible is not sufficiently narcissistic, the presumptuousness involved in feeling free to “tweak” the office in a more convenient direction surely suffices. Yet such gradual moves effectively evade notice as if by stealth.

I submit for your wise consideration, therefore, the following question: Is democracy unknowingly susceptible to death by increments? If so, republics may be destined by the fates, or, more likely, inherent design to unwittingly suffer a prolonged decline without any awareness that the anchors are being gradually moved down the hill. The lack of recognition that the markers have been moved means that the new positions are taken to be the old default. Accordingly, no serial decline is discerned; no “big picture” vision that is historically as well as idealistically informed breaks through the ice, as the marker on what counts as leadership has shifted too over time. It is difficult to follow the bread crumbs if they are being eaten by birds. By yet another analogy, the state of the Union might include the point that we are skiing downhill in “white-out” conditions, utterly clueless as to where we, the self-governing people (ideally), are going until it is too late.

1. Ariel Edwards-Levy and Mark Blumenthal, “State of the Union Poll Gives Obama Positive Marks,” The Huffington Post, January 29, 2014.
2. The U.S. Constitution, Article 2, Section 3.
3.Susan Page, “Speech-wise: What a Difference [a] Year Makes,” USA Today, January 29, 2014.
4. James M. Burns, Leadership (New York: HarperCollins, 1978). 

Tuesday, January 28, 2014

The State of the Union Address: The Presidency as Presiding or Partisan?

On The O’Reilly Factor on the evening of Obama’s health-care “summit” at the White House in 2009, Bill O’Reilly told Laura Ingrahams that the president had done an adequate job in moderating the discussion.  Laura replied, “He is not a moderator; he is the President of the United States.”  O'Reilly provided his own perspective, in admitting that “moderating is not enough in the long-run because the country wants leadership.” The host was only partially correct.

I submit that any country profits by having a presider; from this role, he or she can lead with credibility rather than being perceived as a partisan. For example, President Obama evinced leadership in the interest of the United States as a whole in taking Osama bin Laden out on May 1, 2011. The president could stand for the union as a whole in going after terrorist number 1 without being sidelined by being partisan.  On a more daily basis, this role translates into moderating meetings of partisans rather than being partisan himself. The stature of the president achieved in having stood for the whole, such as in having Osama bin Laden killed, could—if not diluted by partisan positions—give the president sufficient credibility to moderate important meetings of congressional leaders who would otherwise refuse to meet.

For an American president to want the credibility required to effectively moderate meetings involving partisans while at the same time being partisan is to want his cake and to eat it too.  A desire for both is suggestive of a sort of character that might not be sufficiently respect-worthy to preside.  If the American Presidency stands for the union as a whole, the office is inherently oriented to staying above the fray while keeping an eye on the overall interest of the whole.  Perhaps President Obama would have been able to forge a compromise at his health-care summit had he been neutral concerning Democratic and Republican proposals rather than taking on the Republican lawmakers as a partisan.  That is to say, Obama might have been able to have enough sway with the Republicans to effectively preside over the meeting to keep it from going off track. This could involve pushing one side or the other to give a little more when the process would otherwise cease without a resolution.  To be able to nudge either side, the chair must be viewed as credible (i.e., unbiased) by both sides. As it was, any such suggestions of the president were dismissed by the Republicans as motivated by an ulterior motive in line with the Democratic position.

The degeneration of the presidency is evinced by what the State of the Union address has become.  The speech is supposed to be primarily a report on the condition of the union, with prudent recommendations.  The speech is not supposed to be partisan. For one thing, the statesmanship implied in the event itself is undercut if the recommendations become the main event and they are those of the party that the president heads. In other words, the credibility, even in the president's report of the condition of the union, is undercut if a president uses the speech to push his ideological agenda. The emphasis on such an occasion as The State of the Union is fittingly on the general welfare of the United States as a whole. If half the room is clapping on a consistent basis through the speech, something is wrong.

One of President Obama's State of the Union Addresses. Imagine the change in content were the media to base evaluations on how low the ratio of half-chamber to full-chamber standing ovations is. 

Barak Obama went to items familiar to his party in his 2013 State of the Union address, presssing for an increase in the minimum wage, for example. Was the president wading too far into the details in order to influence even more policy that that of the "big picture"?  If so, was this at the expense of the statesmanship that properly goes with the event?  Flying above the clouds to get a distant view of how we are doing at the time would have precluded such minor policy recommendations that incidently are very partisan in nature. So too on how to avert automatic budget cuts, the president stuck to the Democratic plan. Alternatively, he could have taken the high road and spoke on the condition of the Union in having almost $17 trillion in federal debt. This would have meant leaving it to the Congress to fiddle with the specifics on how to reduce the deficits.
Similarly, the president “offered Americans a populist economic vision” in his 2012 State of the Union address, “seeking to draw a contrast with his eventual Republican rival and demonstrating the widening policy gulf between the two political parties.” While offering a vision is good on the campaign trail, talking about an ideal for the future is not to describe or even analyze the present state of the Union. The ensuing string of policy proposals was “aimed at buttressing a re-election message that posits him as defender of Americans beset by inequality in the tax code and broader economy.” If there was any doubt that he intended a campaign speech, the Wall Street Journal continues, “he made a point of including policies that appeal to many possible constituencies.” Two hours before the speech, he sent an email to his campaign supporters, writing “Tonight, we set the tone for the year ahead.” This indicates that Obama did not intend to report the condition of the Union at the time. After the speech, Republicans justifiably criticized the speech as “an election-year blueprint.” In short, the encroaching partisanship over the figurehead nature of the office can be seen in how far “State of the Union” speeches have strayed from the constitutional task to report to Congress on the condition of the Union. 

Were the president to resist the urge to over-reach for short-term partisan gain, he would stand to gain so much more credibility in having faith in the power of presiding. As a model to get back to, we might look back to George Washington, whose prior achievements in standing for the alliance gave him sufficient stature to preside.  Hamilton and Jefferson and their allies were able to take up the mantel of partisan leadership in the cabinet, with the President thus freed up to preside over the new system of government and look to the public interest in the whole. Because partisan leadership contaminates presiding leadership, the presiding officer should take care to avoid the former in order to preserve the latter. 

In fact, the delegates at the federal constitutional convention in 1787 intended the Electoral College to keep the popular demand for partisan leadership from infecting the Presidency, and thus the credibility of the office. Crucially, the electors, being selected by state legislatures, were to be once-removed from the passions of the people.  In being tied to the direct popular elections in selecting electors, the state legislatures have unwittingly undone the check safeguarding the presiding role.  Hence it is can be expected that presidents will act on a proclivity to be partisan as per their election campaign. 

The presidency was designed to be occupied with accomplished and notable persons who could be expected to stand for the good of the whole. By virtue of his accomplished stature and self-discipline when it came to partisanship, George Washington was able to effectively preside over the Constitutional Convention of 1786.  There being a presider with stature who resisted the temptation to take sides on every issue, the convention could withstand the infighting and conclude with a finished document at the end of the summer.  In fact, Washington was such an effective presider that he could luxuriate on the final day with a request of his own…that the electorate of a US House seat be 20,000 rather than 30,ooo so the body would be that much more democratic (i.e., the representative being that much closer to the people…that much more knowable on an in-person basis).  The problem is that weighing in on virtually every debate has become the modus operendi of every American President. 

In short, the job description of the presidency was designed for one thing and yet the default has become something quite to the contrary.  This can explain why we witness so many presidents fail. I was not really very surprised in watching two hours of the health-care “summit” that it was basically political theatre.  I was not surprised that Barak Obama had trouble in moderating the discussion without being accused of partisan by Republican participants.  So I was not surprised that the Republicans instinctively distrusted the president’s attempts to moderate the summit meeting.  In such a climate, Barak’s presiding was doomed to failure for lack of credibility.  It really is not his fault; his office had long before been transformed into something that is ill-suited to in design. To ignore something’s design and expect it to do that which undercuts it is a recipe for ineffectiveness.


Carol Lee and Laura Meckler, “Obama Makes Populist Pitch,” The Wall Street Journal, January 25, 2012. 

Monday, January 27, 2014

The Mammoth Indoor Mall: A Dinosaur or a Reusable Shell?

One of the pitfalls in maintaining a general gaze at the long-term trend toward e-commerce at the expense of "brick-and-mortar" stores lies in missing or overlooking other changes in the business environment. The weight of such changes can fall largely within the "brick-and-mortar" world, impacting some of its neighborhoods more than others. Not all change impacting commerce in 2013 stemmed from the internet. The fate of the indoor mall is a case in point. Taking into account the obvious impact of online purchases does not explain why stand-alone stores and outlets were doing so much better than the noisy, sterile malls. 

Anticipating further detrimental impact on in-person transactions from increasing online purchases, Michael burden, a principal with Excess Space Retail Services, predicted after the Christmas season of 2013 that the retail sector would likely see an average decrease in overall retail square footage of between one-third and one-half within the next five to ten years. He cited fewer mall visits and less inventory needing to be stocked in the stores.[1] Less retail space not only includes smaller stores, but fewer as well. As regards store closings, the question of whether the indoor mall is to stand only as an artifact of an earlier society or a structure that can adapt to ever-changing societal mores begs for a definitive answer. 

One big shift in store closings underway already by 2014 stemmed from retailers shying away from indoor malls, favoring instead outlet centers, outdoor malls, and stand-alone stores. "There's no question that mall stores are closing quicker than the open air [variety],” David Birnbrey of The Shopping Center Group said.[2] Although new retail construction completions were at the time at an all-time low, the supply of new outlet centers had picked up in recent quarters according to Richard Ellis of CD.[3] Meanwhile, no new indoor malls were being constructed. Rick Caruso, founder and CEO of Caruso Affiliated, was unaware of any indoor mall being built in the U.S. since 2006. "Any time you stop building a product, that's usually the best indication that the customer doesn't want it anymore," he said.[4] Sometimes what is not done (or said) is more important than what the attention-getters are doing (or saying).

What exactly lies behind the impending demise of the shopping mall? E-commerce cannot be the whole story, for otherwise the outlets, outdoor malls, and stand-alone stores would face an equally dismal prospect. Rick Caruso declared at the 2014 National Retail Federation convention that at one point, the indoor mall “may have met the developer's needs—and even for [a while], the consumer's needs—but it has outlived its usefulness."[5] Without a major reinvention, traditional malls would soon go extinct as though a species unwilling or unable to adapt to rapidly accelerating climate change. 

Unlike the sort of experience that coffee shops off, the amusements here at Mall of America in 2005 are only indirectly linked to the products. (Image Source: Jeremy Noble)

Specifically, mall retailers must figure out how to get back in sync with people’s daily-life rhythms by creating a satisfying atmosphere for customers to experience. Many coffee shops had already achieved as much by offering wifi, good smells, particular styles of music (or none), and comfort (e.g., nice chairs, no fear of getting kicked out for hanging out too long, etc).[6] The comfort factor is subtle though significant nonetheless. Just weeks into 2014, news broke of yet another “mall shooting.” Malls and schools were already becoming associated with guns and death in the psyche of the general public. The managers of malls themselves and the particular stores therein faced the daunting task of finding and implementing novel experiences in line with a “modern-modern” society while facing a stiff headwind manifesting as an increasingly bad reputation in the broader society.

1. Krystina Gustafson, “A ‘Tsunami’ of Store Closings Expected to Hit Retail,” CNBC.com, 22 January 2014.
2. Ibid.
3. Ibid.
4.  Ibid.
5. Krystina Gustafson, “Without Rebirth, Malls Face Extinction: Developer,” CNBC.com, 13 January 2014.
6. Interestingly, a Starbucks store manager approached me on one occasion as I was setting up my laptop just after sitting down to demand that I buy something or I’d have to leave. I pointed out that I had just arrived and was waiting for the line to shorten, and that Starbucks’ policy permits people in the stores without making a purchase, but he dismissed both points and continued to bark his order as though I were an alien insect. I left rather than made the purchase I had intended, and called Starbucks’ customer service to complain of the manager who could not be wrong. After a bit of fake sympathy and affirmation of the policy as I had understood it, the “customer service” employee impotently said, “Unfortunately I cannot call that store manager to correct him on the policy.” I mention this because I have not since felt as comfortable surfing the net while enjoying a coffee in a Starbucks store. In fact, I stopped going to Starbucks stores and not soon thereafter gave up coffee as a regular drink because of its negative effects on the body (such as hard stools, headaches, and a general sense of nervousness while on the drug). 

Sunday, January 26, 2014

Online Sales: Breaking the Egg

Was the 2013 holiday season really a turning point in terms of online purchases? Can a business environment change so drastically from one Christmas to the next? If not, what can we say about a commercial system that buckles, at least at its weakest link, under the pressure of a moderate change in buying habits? Put another way, does such buckling necessarily indicate or point to the existence of a threshold point that has suddenly and unexpectedly been crossed? Alternatively, the system itself may be weak.

During the November-December holiday season of 2004, online sales revenue in the U.S. increased 25 percent from the year before.[1] CNN Money reported the increase as 29.5 percent—almost a third of total holiday sales.[2] This healthy numbers can be deceiving, however, if the base is low relative to the total. That is, if the online holiday sales figure as a percentage of total holiday sales is around 2 percent, an increase of 25 percent from the prior year’s online sales is immaterial in terms of the change in the percent of online sales to total from the prior to the current year. As shown below, fourth quarter percentages-of-total (rather than of increase) increased from roughly 1.7 in 2003 to 2 percent in 2004. This change is hardly earth-shattering.

Estimated Quarterly U.S. Retail E-commerce Sales as a Percent of Total Quarterly Retail Sales
4th Quarter 1999 to 4th Quarter 2004[3]

So let’s look at percentage-of-total figures specifically for the combined (November and December) season of Thanksgiving and Christmas, two of the major national holidays in the United States. In 2012, the season’s online sales revenue accounted for 19.3 percent of the total retail sales.[4] Keeping in mind the magnitude of the changes shown in the graph above (0.6% to 2.2% over five years), the change from roughly 20 to 25 percent in 2013—from just one Christmas to the next—seems relatively dramatic. Yet a shift from 20 to 25 does not in itself seem very significant. Even so, it was enough for journalists to label it a “sea-change,” “threshold,” “turning point, “and “major re-alignment, capable of unleashing a virtual tsunami.

One business practitioner interviewed on CNBC in mid-January, 2014 made the startling claim that the turning point had come quite unexpectedly in just one year. I contend that conclusion is overly dramatic, though I readily concede that the five-point difference was oddly too much for a part of the system. Specifically, “an unpredictably large number of packages overwhelmed UPS,” with thousands of Christmas presents left undelivered by Christmas Eve.[5] Natalie Godwin, a spokesperson at UPS, explained. “The volume of air packages in our system exceeded the capacity of our network, as demand was much greater than the forecast.”[6] The network’s capacity itself became transparent as a constraint, as a result of demand having been much greater than anticipated. The words “capacity” and “much” point to, or intimate, a systems-level problem not just for the package-delivery company, but also for the U.S. (and perhaps global) system of commerce.

Crucially, that a percentage change of just 5 percent of total sales revenue represented as increased demand can pierce the capacity of a major link in the commercial chain from manufacturers to customers suggests not a pivotal year, but, rather, a system too (i.e., artificially) inflexible or hard. Rather than being able to adapt to changes in the environment, as any fit species does through the evolutionary process of natural selection, the American system of commerce lacks the built-in ability to stretch (and contract). By implication, reaching a threshold point, such as in demand for products sold online, is in terms of the system and behaves as a wall rather than a semi-permeable membrane. It is worth pointing out that a threshold point concerning the system of commerce also no doubt exists in terms of society (i.e., changes in daily life) and even in terms of products (i.e., transformative products as mainstays as a result of ecommerce). Just as the loud kids tend to get disproportionate attention, a rigid and complacent system gets noticed (i.e., becomes transparent as a system) more than its share. Relying on such a system warrants the warning: Watch out for the “big one”—a major earthquake of sorts capable of a truly dramatic land-shift.
1. Jennifer LeClaire, “Online Holiday Shopping Soars 25 Percent to $23 Billion,” E-Commerce Times, 4 January 2014.
2. CNN Money, “Holiday Online Sales Surge,” 5 January 2004.
3. US Census Bureau, The Department of Commerce, “Quarterly Retail E-Commerce Sales 4th Quarter 2004.”
5. Donna Leger, “UPS System Overload Delays Holiday Packages,” USA Today, 24 December 2013.
6. Ibid.