Saturday, March 31, 2012

Voice Recognition Technology Disrupts Markets

Dragon Go as it appears on the iPhone
In the article "The Human Voice, as a Game-Changer," author Natasha Singer discusses the opportunities, concerns, and disruptions caused by Nuance Communications' developing voice recognition technology. Not only does Nuance provide the software known as Siri for the iPhone 4S, the company has an app on the market called Dragon Go, which is similar to Siri, but doesn't talk back to you and can handle more common vernacular.  Nuance is working to apply voice recognition technology to other appliances and technologies, hoping to solidify a brand new market.

Although voice recognition has been around for awhile, it hasn't been able to communicate back to us, or clearly interpret what we are saying in past examples of the technology. For this reason, there are numerous opportunities and concerns that arise regarding utilization of voice recognition.

Opportunities
Nuance Chief Executive Paul Ricci
  • Because voice recognition is now available through smart phones, tablets, and computers, Nuance has set its sights on disrupting the search engine market. Dragon Go will automatically connect your device to the internet link that is necessary to meet your instructions. The app has an advantage over other search engines because it skips the step that involves work - scrolling through search results. The only disadvantage of this feature is that it could potentially misunderstand you and bring up something you weren't looking for.
  • The potential of voice recognition when combined with cloud computing and appliances is huge. Imagine telling your alarm clock to wake you up at 9:00 AM, and syncing it with your coffee pot so it has a hot mug waiting for you when you go downstairs. And soon, we might be able to sync all of these appliances with our phones so we could have a seemingly automated kitchen similar to that in The Beauty and the Beast.   
Concerns
  • Privacy is a prime concern with new voice recognition technology. Because peoples' voices are stored by the software as algorithms, web-surfers may be more susceptible to data hackers. And if the future appliance market is voice controlled like Nuance hopes it will be, consumers' information could be obtained from anything connected to the internet. Nuance, however, states in its privacy policy that information will only be used to improve internal systems. 
  • The psychological impact of more human-sounding and responding technology could be a problem. As machines interact with humans more seamlessly, the imperfection found in human to human interactions may be emphasized. Professor Sherry Turkle, from MIT, discusses the implications of technological communication in the voice-controlled age in her book Alone Together.  
 
I believe Nuance is an extremely versatile company because it has both consumer and corporate based products, and because it has made several important acquisitions to become the pioneer in a blooming market. One of the more recent acquisitions is Vlingo, a smaller, voice-to-text company. Acquiring so many companies is a smart move by Nuance because it prohibits larger firms like Google or Microsoft from gaining a sturdy hold on the voice-command market. Additionally, producing Dragon Go, a consumer product, will increase Nuance's brand recognition. This is a necessary step in the company's development as it moves towards larger corporate contracts with companies like IBM.

Although the Nuance stock is down about six dollars since February, its future growth looks very promising.

Fast-food Restaurants Redefining Themselves...and Should They?

A couple of weeks ago, a case study about the McDonald's Co. allowed us to see the ups and downs within this fast-food industry giant under different leaders, and it showed us how a company perceives itself can influence its performance as a whole. When I compare the McDonald's case with this article I read on New York Times called "How Wendy's Finally Knocked Burger King Down a Notch", it leads me to think how a business can balance its pace to adapt the market change while maintaining its original mission of the business.
With the announcement from the food industry research firm Technomic that Wendy's had edged out Burger King as the country's No.2 hamburger chain last week, the article analyzed how Wendy's actions facing the changing market taste lead it to the current position and pointed out the trend for fast-food restaurants to grow in the future. Actually, with the fierce competition within and outside of the fast-food chain, similar actions are taken in most of the fast-food restaurants, like McDonald's, Taco Bells, and White Castles, to generate more sales. The most obvious one is to upgrade the menus and to be creative in product offerings. The sales for McDonald’s increased significantly after they shift their focus back to providing high quality and nutritious meals instead of focusing on expansion blindly. Wendy’s, in the same fashion, placing a sharp focus on ingredients to provide more higher-end and better quality meals. For example, they offer fresh strawberries and almonds on their salads, French fries with sea salt, Bacon Portabella Black Label Burger with mushroom sauce, etc. It gives the customers more options to choose from, especially as people having increasingly desire for healthy and nutrition balanced meals nowadays. A variety of options also increase people’s incentive to try things out, especially with attractive advertising and promotions.

Placing more investment on the food menu is a prevalent strategy for most fast-food restaurants today. It is a good practice to take, but one can still be backfired if the company sacrifices quality or specialty to pursue variety, or fail to implement efficient procedure to make it cost efficient at the same time. It is good for the customers to have a variety of options. Yet, the restaurant still needs to figure out what it is special at in order to make its offerings special to the customers. Similar as the way companies testing out their value of existing by asking themselves what would happen to the world if this company disappears, the restaurant should think about what people come to their place for. If people go to somewhere else, will they get the same value of product or experience? If they can or get even better experience, then maybe it is time to rethink the current offering. People go to a certain restaurant, expecting certain kinds of food. One may not go to Steakhouse for orange chicken, or go to Korean restaurants for hamburgers. With a fast-food restaurant, people expect to get quick service with easy-prepared meals. Within that realm, it is more effective to increase comparative advantage by having several five star products that people cannot find anywhere else instead of providing all kinds with an average or low quality.

The variety of product offering is not the single most important factor for people to choose one fast-food restaurant over another, but the quality is. An example for this would be the In-N-Out Burger that has great popularity in the west coast. Oppose to most fast-food restaurants’ practices that focus on increasing variety, In-N-Out only have limited offerings, but their product is quality assured. Every ingredient they use to produce their burgers is fresh- they don’t even have freezer system to keep the leftovers. People can see how they make French fries out of freshly cut potatoes, and they use fresh beef and buns to make the burgers. Their motto is to “keep it real simple, do one thing and do it the best you can.” Even during recession, they still took in an estimated of $420 million in revenues in 2008. People visit In-N-Out for healthy and quality burgers with fair price, that’s it. Their business model is simple, yet effective and profitable.

Right now, with the emergence of the so-called fast-casual restaurants setting big challenge for normal fast-food restaurants and raising the standard bar for fast-food chain in general, restaurant like Wendy’s is redefining its business model to face this competition. Those fast-casual restaurants offer higher quality food with higher price without providing table services. Generally, they are nicer place to hangout than fast-food restaurants without paying tips. In order to compete with these raising fast-casual restaurants like Five Guys and Panera Bread, Wendy’s is currently remodeling 50 of its stores and building 20 with new designs to make it more elegance and spacious, a Starbucks-style place for people to hangout. Seems like most of the traditional fast-food restaurants are moving toward a higher-end level, since they don’t want to get stuck in the middle between fast-casual restaurants and convenient stores like 7-11 that can provide cheap fast-food as well. While I don’t oppose to the idea of refining oneself and reaching for the best, I think one still need to recognize who they are and realize what they are really good at. Will Wendy’s face more competition if it goes after business model like those fast-casual restaurant directly? Or should it find another way around and make what they are special at really special? What do you think?

Reference:
  1. http://business.time.com/2012/03/30/how-wendys-finally-knocked-burger-king-down-a-notch/
  2. http://chowhound.chow.com/topics/410121
  3. http://www.dailyfinance.com/2009/05/24/in-n-out-burgers-six-secrets-for-out-and-out-success/

Should HBO Leave Cable Behind?

Tomorrow is a big day for millions of Americans. Game of Thrones Season Two will premier on HBO at 9 PM EST to millions of viewers and much fanfare. Season One boasted 13 Emmy nominations and 2 wins and has attracted a dedicated following, myself included.

However, the biggest story surrounding Game of Thrones isn’t who will be watching tomorrow — it’s who won’t be watching. Here is a blog post by MG Siegler (a Michigan grad) venting his frustration about HBO’s business model. Here’s a PandoDaily article by MG about the same thing. Here’s another blog post responding to the PandoDaily article.

HBO is only available by way of an additional fee on top of traditional cable packages. Cable television is expensive, and there are millions of people unwilling or unable to subscribe. In this current landscape, this means that the aforementioned people are automatically precluded from subscribing to HBO. No cable? No HBO.

HBO is the biggest name in premium cable television. It boasts the best shows with the best actors, and now with the advent of HBO Go, you can watch all of the network’s shows anywhere. There are a lot of people who want access to HBO’s content, but do not want to pay for (or have) a cable subscription. Further, HBO doesn’t make its content readily available for non-subscribers. For example, HBO could sell its shows on iTunes a day or a week after episodes air. While many consumers would be frustrated waiting a week to watch the Game of Thrones premier, a week is a reasonable amount of time to wait for great content. But HBO doesn’t do this, presumably due to restricting contracts with cable companies. To me, it seems impossible for HBO to satisfy cable companies and meet all of the consumer demand for its content.

I’m sure HBO would love to charge a monthly rate for its services a la Netflix so everyone who wants HBO subscribe. However, the company is unwilling to leave its lucrative contracts with cable companies behind. Time Warner, HBO’s parent company, described the rising revenues of its "Filmed Entertainment" business segment in their latest 10-K filing. Operating income for this business segment (of which HBO is a part of) increased by 14% to over $1.2 billion from 2010 to 2011. HBO is obviously very successful, and they’re growing. While I can’t say for certain, I’m sure the consensus between HBO’s management is — if our business model ain’t broke why fix it?

The short answer — digital cable market saturation.

As of 2011 there were 46 million digital cable subscribers (link). While this is an increase from 2010, digital cable subscriptions have been increasing by a rate of about 10% or greater since 1998, and the number of subscriptions only increased by 3% from 2010 to 2011. These numbers appear to say that the digital cable market is nearly saturated, thus HBO’s prospective pool of subscribers is also nearly saturated.

HBO is a pioneer in digital television content with HBO Go. HBO Go is a fantastic service that works well and is easy-to-use. However, HBO is in the same position as Kodak was with digital photography - yeah they both do digital television content and digital photography, respectively, but will they put forth the effort to make these products/services their main revenue generator?

This is the second time I’ve brought up a Kodak comparison in a blog post, but I feel that it is a great analogy for companies that struggle to adapt. HBO needs to adapt its business model somehow to capture the millions of potential subscribers who don’t want or need cable. This could be as easy as making HBO Go available to everyone for $20 a month and offering the service on multiple platforms (HBO Go is going to be available on Xbox 360 in the near future, and should expand to other products like Apple TV and the PS3). Or the business model could be as complicated as running a hybrid business model that maintains the cable money. With digital cable subscription growth waning, HBO needs to see the writing on the wall and prepare to adjust its business model accordingly.

Food Trucks: Deliciousness Gone Mobile

I've been around street food for my entire life. It was an essential part of my diet as a kid growing up in New York City.The after school hot-dog provided me with valuable nutrients such as protein, carbohydrates, and other calorific needs to spur my infantile hyperactive needs. But they have come a long way since my elementary school days.

Mobile food has evolved from boiled mystery meat to providing foodies with gourmet eats around the city. For instance, you can mosey on over to the Milk Truck for a rustic take on a crowd favorite: the good old grilled cheese sandwich. Or, if you're craving something from the sea, the Red Hook Lobster Truck is parked just around the corner. But not for long, because these mobile craving fixers move to the market, one of the food truck model's most distinct advantages. But more on that later.

Most successful food trucks share one major common trait: they have menus built on one or a couple of key quality ingredients. Take the Taim Falafel Truck, for example. They offer several unique takes on a middle eastern favorite, falafel, offering both traditional and original options, such as green olive infused falafel. I have eaten off of this truck numerous times, sampling various items from its menu, all of which have been consistently tasty.

Now let's analyze this business model in a little bit more depth. First, like several other food trucks, Taim originally started as a restaurant, which solves the storage problem. The truck itself, painted in the Taim livery, makes it a moving billboard for all pedestrians to see. It is equipped with a fully functioning mobile kitchen, capable of delivering the quality offered by its stationary location downtown. I know from first-hand experience, as I have been to the restaurant as well. The CVP: to provide the customer with a unique gourmet product available only on the other side of town. Add in three employees and a surprisingly low overhead, and you have a mobile food store that you can take anywhere you want. Think of it as a desktop application that has been ported to the iPhone, not to mention that thousands of apps you can use to locate your favorite food truck.

This mobility creates a huge advantage for two major reasons. The first is that you are able to bring your staple product to a market outside of your neighborhood, reaching customers who would otherwise not try your product. The other is that you can gravitate towards pedestrian hotspots at varying times of the day. So you can be on Wall Street during trading hours or on the lower east side on a Saturday night to reach those late night college snackers.

I love food trucks. To me they represent a whole new wave of culinary experience and talent that focuses on getting great food to the masses in all areas, which is comes back to the spirit of food in general. Great food should be experienced by all and shared with all, and food trucks are the first step in doing so. As a business, they're great because they can be very profitable. Although they are very difficult to start, given the initial costs.

Friday, March 30, 2012

A Budding New Industry?

Whether congress or scientists can come to agree on the merits of medical marijuana or not, the industry seems to be priming itself for a leap forward. One company in particular has begun to take advantage on a larger scale. WeGrow is a department store that sells products to assist people in the growing of Medical Marijuana. They do not sell any actual marijuana products only tools, soils and other items that can facilitate the process. The company is dedicated to growth and has started to use franchising as a method to open more stores. Currently they have stores operating in Sacramento (their original location), Phoenix and Washington D.C. and in the next few months they expect to have locations in New Jersey, Colorado and Oregon.

WeGrow has to fight an uphill battle in order to make sure that they can survive, with the legality of marijuana very much in limbo, the industry they are trying to create is at great risk. However, it seems to be no mistake that locations have opened up in political areas. Sacramento is the capitol of California and it goes without saying that they are feeding the political fire by opening up in D.C. If the stores are successful WeGrow will be sending a message to policy makers about the merits of medical marijuana, as a profitable industry.

Furthermore, weGrow is planning to have an IPO. This has the potential to really catapult the industry forward and could plant the seeds for a major new market where WeGrow would have the opportunity to be the ambassador or as they are described, truly become the “Walmart of Weed.” If the big financial players invest in WeGrow, they could put immense pressure on politicians to loosen their grip on Marijuana. Much like with the housing crisis, if everyone starts making money, it will be hard to stop the chain.

WeGrow is also taking a page from Whole Foods. They do not only sell the products needed to grow marijuana but they are also providing classes on how to grow marijuana as well as magazines and literature on marijuana. By doing this they are taking over a great portion of the value chain and supply chain for the marijuana industry. However, by not directly growing they are increasing their chances of selling on a large scale. Since marijuana has to be grown in a low key fashion, there may be more profits in supplying tools to the growers.

Personally, I believe it is inevitable that this industry will evolve and be recognized legally on a large scale. Since the price of growing marijuana is bound to have less costs then manufacturing other painkillers such as Morphine and Vicodin, (science pending) marijuana has the potential to be a much more affordable drug and could likely be distributed to patients very easily. Also since marijuana can be consumed as an edible and not only by smoking, it would not require that people change their behavior in order to take the drug. If the science ends up being behind it, and people continue to demand marijuana as they do now, WeGrow could be the pioneer of a budding industry.

Thursday, March 29, 2012

Enron, Lehman, UMICH

Last week, I had the privilege of attending Provost Philip Hanlon’s presentation on the university budget. He discussed various factors influencing tuition rates, the most prominent of which is the decreasing amount of capital appropriated by the state of Michigan to institutions of higher education. Unfortunately for students, and in order to support the growing functions of the University, this means tuition rates need to increase to make up for the loss of funding. One graph he presented demonstrated that over the past decade, tuition has been increasing at an annualized rate of 5.6%.

University of Michigan Provost Philip J. Hanlon

While this did not particularly surprise me, I did want some further clarification on that, so I posed Phil a question during the Q&A session following his presentation. It went something along the lines of,
"As an out of state student, my tuition rate is approaching nearly $50,000 a year, and if those projections (5.6%) are correct, then in the near future we may be seeing rates as high as $80, $90, or maybe even $100,000. I personally believe this cannot continue forever and many prominent economists have theorized that higher education is going to be the next bubble. So, does the University have a contingency plan for if and when such a bubble does occur, and what present actions should it take to prepare itself for such an event?"

Although he acknowledged that my question was good and valid, Phil did not have any concrete response to the prompt I gave him. Essentially, he dodged around the actual question and said that the University does not try to project tuition rates into the future. Now, let it be known that the University tries to be as transparent as possible with all of its budgets and funds, so this was in no way a refusal on Phil’s part to address the issue I raised. However, I believe this points to a deeper problem, and one with which all of us BA students are familiar: Collins’ stages of decline.

Jim Collins’ Stages of Collapse, and where Michigan stands.

That’s right folks, I am claiming that the University of Michigan - a business, at the end of the day - is going to fall on financial hard times much like its public counterparts in California. It is currently in Stage 3: denial of risk and peril; "Internal warning signs begin to mount, yet external results remain strong enough to ’explain away’ disturbing data or suggest that difficulties are ’temporary’ or ’cyclic’ or ’not that bad...’" Taking a holistic approach to collegiate funding, it becomes clear that attending any institution of higher education is becoming harder and harder.

Phil talked about how the University is attempting to provide more and more financial aid and scholarship opportunities to make attending easier, but I believe that if the funding for these programs comes from further tuition increases, then these initiatives are fundamentally unsustainable. He mentioned how, on average, a $200,000 investment in the education of one individual at UM generates returns of $900,000 some 40-or-so years down the line. I.E., seemingly strong external results used to justify internal problems unrelated to the results. As an aside, that $900,000 is not inflation-adjusted, so the real value would be quite a bit lower. These examples all fit Stage 3 perfectly, but the clincher is, as far as Phil is willing to disclose, the University does not have a contingency plan for (what I believe is) the inevitable black swan.

The University needs to plan for failure in order to mitigate potential losses.

However, before everyone jumps on me for decrying the health of our sacred Havard of the West, be aware that this is, by far, not an isolated instance. If anything, my interest lies in protecting the University by raising awareness of these issues in order to generate discussion, and hopefully, change the way administrators perceive our current situation; we are not immune but we can be stronger. Analyzing the collapse of Lehman and Enron leads to several conclusions about bubbles in general. First came tech, then housing, and soon, education. Several factors common among both firm and market collapses include:

  • Inflated asset prices - Enron’s energy securities were vastly inflated in the years during which the company was profitable. However, they chose the unethical path instead of going down gracefully. In the tech and housing bubbles, both the values of tech companies and houses got inflated far higher than their fundamental values; the same is currently the case with university tuition across the country.
  • Excessive borrowing and lending - The excessive borrowing and lending of credit during the housing boom ultimately injured the global financial system because most major financial institutions were too interconnected through the creation of security bundles tied to massive amounts of loans that were discovered to be unpayable. One of the root issues here is the fact that originators decided to give out loans like candy and home buyers were none the wiser to realize they were infused with arsenic. Students in today’s society are taking out more and more loans from the government, while tuition prices continue to soar across the board, and discovering they cannot repay what they borrowed in the foreseeable future. See the similarity here? And let’s not forget how much Enron took out from its partnering banks in order to sustain its staggeringly high-risk trading operations.
  • Underestimation of risk - In our already depressed economy, a few good weeks that indicate growth in factors such as national employment might alleviate fears for some, but treating a disease is very different from eliminating the factors that caused it in the first place. Yes, the DJIA is over 13,000, but at what cost? With events like the election rapidly approaching, volatility is high. To maintain express optimism, or even mild nonchalance, for the future without having any sort of contingency plan is irresponsible for any institution be it the government, a corporation, or a university.

In short, the University is going to be negatively affected by the forthcoming education bubble due to the factors listed above and a few others. However, with proper planning, it is possible to mitigate a solid percentage of the damage and eventually recover with minimized repercussions. Although my analysis is based on medium-term speculation, there is absolutely no reason to underestimate the risk of default in today’s economic climate. Fundamental asset values must be determined and priorities must be set. Any business must constantly reassess itself and its outlook on the future; the battle must be won before it has begun. Sans planning, only doom awaits.

Note - Phil’s presentation was recorded, but I was unable to find the video after searching extensively through the UM web network. Sorry guys; you won’t be able to see me in action!

Best Buy Rethinks Its Business Model


In this morning's Wall Street Journal, it was reported that Best Buy lost $1.7 billion dollars in the third quarter of this fiscal year, which ended for them on March 3. This massive loss triggered a 9% slide in their stock price, down to $24.16 in Thursday midday trading. This loss comes as Best Buy has difficulty adjusting to the changing landscape of the retail industry, losing key sales to companies like Amazon and Apple. The main reason they have been losing sales to Amazon is because customer often come into their stores, look at products, and using their mobile phones, find cheaper prices for the same product on Amazon, from whom they end up making the purchase. Amazon can compete on price because they do not have the costs associated with the massive retail stores that Best Buy does. Apple has been biting into their sales as they continue to open up their own retail locations to sell their popular consumer electronics. As gloomy as these numbers seem, Best Buy does have some positive numbers, including a small increase in market share, growth in online sales, growth in overall revenue by 2% for the fiscal year, and the fact that this loss was affected by a one-time $2.6 billion dollar cost associated with exiting their UK business. However, same-store sales decreasing by 1.7% is not a good sign.

All is not lost for Best Buy, however. CEO Brian Dunn (pictured) has a plan to revive the retail giant. The first aspect of this plan is to reduce the amount of the big-box stores. He wants to eliminate 50 of the large stores across the company in the next year, this is expected to save the company $800 million in costs in the next few years. This decrease in total square footage is a key strategic move as the company looks to shift its retail strategy.

The company's shift in retail strategy will begin with the test launching of so-called "connected stores" in San Antonio and the Twin Cities. These stores will focus on giving customers tech support and setting up wireless connections, while also offering large hubs in the middle of the store where shoppers can go for help. Also, these stores will emphasize faster checkout and the ability to pick up items ordered online. These stores also represent the "customer transfer" strategy Best Buy is trying to roll out. These stores will be 20% smaller than old ones in terms of space, which analysts think is a change long overdue and has the potential to further the change in the company's business model. These changes relate directly to Krishnan and Prahalad's N=1 model. Best Buy's new format will allow them to give each customer a better individual experience, mainly through the assistance hubs and the faster checkout. These create a much simpler customer interface and can be scaled to happen in stores across the country.

The next portion of the shift in retail strategy will be to improve the staff. The company will achieve this in a few ways. They will be increasing training for workers by 40% as well as offering financial incentives to employees. The financial incentives program has been proven to work at Best Buy, as it is already incorporated into the sales of mobile phones. These changes also relate to the N=1 model. Better trained employees will provide better service to each customer, which will allow them to have better individual experiences.

The last part of their shift is to focus more on developing their Best Buy Mobile locations, which are stand alone stores that sell mostly smart phones and tablets. These smaller locations will create a more intimate setting for customers to shop, furthering their shopping experience.

Overall, Best Buy is heading in the right direction with its plans to cut down the size and number of locations it has across the country. The decrease in size will be a cost cutting measure as well as allow customers to have a better, more individualized, shopping experience. The addition of the assistance hubs and emphasis on tech support will also be important, as it gives customers a reason to come to the store instead of buying something online. Adding more mobile stores will also aid in enhancing the customer experience. Best Buy has begun to change the value it offers to customers, going from a store that offers every consumer electronic to a retailer that offers many products as well as an enjoyable shopping experience.

Wednesday, March 28, 2012

Harry Potter and the Chamber of E-Books

Yesterday the digital e-book version of all seven books of the Harry Potter series finally became available for sale, as discussed by Jeffrey A. Trachtenberg in a recent Wall Street Journal article. Harry Potter fans can purchase these e-books directly from the bookstore feature of J.K. Rowling’s Pottermore website, a website that was launched last summer to give fans a virtual, interactive reading experience. These digital books can be accessed on e-readers, tablets, mobile phones and computing devices, and are offered through Sony, Amazon, and Barnes & Noble’s online bookstores (which all direct you straight to Pottermore’s bookstore). However, the Harry Potter e-books are not available on Apple’s iBookstore, and Apple owners can access them through other retailer applications. She is selling the first three books of the series for only $7.99 each and the last four books, which are longer, for $9.99 each. By launching these e-books, J.K. Rowling is trying to target children from ages eight to eleven who haven’t yet read the books, as well as teens and older readers.

While it was inevitable that Harry Potter would be in the digital book market sooner or later, I think that this was a smart move for J.K. Rowling to not only keep her strong fan base, but to gain more fans for this series. Rowling, especially after introducing her series into the digital book market, is the perfect example of successfully changing her strategy over time to adapt to the changing demands of her customers, as Harry Potter started as a simple paperback book and has grown to so much more than that. After the first book became so popular, in order to satisfy her customers’ demands, she wrote six more books and turned it into a series. In addition to completing the series, movies were made, which not only enticed people to read the books for the first time, but also gave current fans a reason to keep coming back for more. Now, with the increased use of technology, especially for reading, Rowling had to find a way to incorporate it into her strategy. I think that by launching Pottermore, and offering her e-books through this site, she can successfully keep up with the rapid pace of technology as well with as with the changing preferences of her customers. In addition, these e-books are extremely inexpensive, which will be attractive to both new readers and those who already own hard copies.

J.K. Rowling, over the past thirteen years since the launch of Harry Potter and the Sorcerer’s Stone, has really proven to keep her focus on her fans, and always continued to change her strategy based on the changing preferences of her customers, which has helped her to be so successful. While I’m not sure that these e-books will get me to read the series, I am excited to see what will come next.

The Dodgers Dodged a Bullet

A recent Forbes article by Mike Ozanian goes through the sale and purchase of the Los Angeles Dodgers baseball team of Major League Baseball (MLB).  Magic Johnson, a former Los Angeles Lakers basketball star in the NBA most known for his revelation that he is HIV positive, is the figurehead of the group that has completed its purchase of the LA Dodgers.  Johnson's group won the Dodgers' bidding war with a record more than $2 billion dollar offer.  While Johnson is not the main monetary contributor, a group called the Guggenheim partners along with Johnson and a few others put forth (obviously) large sums of money to get this MLB franchise.  To put this in perspective, the previous record price for an American sports franchise was a $1.1 billion bid that won Stephen M. Ross the Miami Dolphins (at this point everyone should know, but yes the Ross from the Ross School of Business).  Johnson's group may have overpaid for the Dodgers as far as actual assets, but the auction drove up the price to unseen heights.  Johnson and his partners have to hope that they can turn around a franchise recently in bankruptcy.

So how does something that a group would pay over $2 billion go up for sale in the first place? The answer lies in the poor management of previous owner Frank McCourt, but we will soon see he still made out pretty well from his investment in the Dodgers.  So, McCourt paid $330 million for the Dodgers team in 2004 and $100 million for the stadium and surrounding property.  Seven years later, McCourt had the team $600 million in debt, and the employees were bouncing checks at the bank (a whole dilemma that the Dodgers had to take care of with their off-field reputation taking a pretty big hit).  The Dodgers were really run into the ground due to some poor management on McCourt's part, but he was almost able to salvage his team's misfortune with a new TV deal.  This deal, however, was blocked by the MLB's commissioner Bud Selig and it pretty much spelled the end for McCourt as the owner of the Dodgers.  McCourt decided to file for bankruptcy in December of 2011, and had to sell the team in order to take care of the debt he created as well as pay a settlement to his now ex-wife.  The Dodgers, however, greatly increased in value over the years McCourt was in charge due to their location as a sports franchise in LA.  After making over $2 billion on the sale, less the $430 million it cost to buy the team, $573 he owed in debt, and $131 million he had to pay his ex, McCourt left the Dodgers, a team he basically screwed up and managed into the ground, with over $867 million gain.  Huh?  However, as I said earlier, the purchasing groups that entered a bidding war for the Dodgers really saw the potential for great profits in the LA market, and they also set the standard for price of the team with their $2 billion price.

During McCourt's tenure as the owner, the Angels organization changed its name from the Anaheim Angels to the Los Angeles Angels of Anaheim in attempts to get more of the fan base from the Los Angeles area.  The Angels also seemed to be more suited for the Los Angeles because they spent more money and seemed more flashy in their player signings.  (The Angels recently signed free agent Albert Pujols to one of the largest contract in the history of baseball.)  In a comparison of team salaries from 2011, the Angels ranked fourth in the MLB compared to the Dodgers number twelve ranking.  In addition to this, the Dodgers last appearance in the playoffs was three years ago.  There is a lot of room for this LA franchise to grow because of its market, it just needed to have to right group running the show.

 Who better to help run the show than the star of the Lakers' Showtime of the 80's.  Magic Johnson will bring back the LA, Hollywood feel that the team was lacking under its previous management.  This change in management will potentially lead to greater profitability for the Dodgers' franchise.  The Dodgers already have great resources on their baseball team in Matt Kemp, last year's runner-up MVP, and Clayton Kershaw, last years National League Cy Young Award winner (best pitcher in the NL).  The operations workers are also looking for new ownership so that they won't have anymore issues with bouncing checks, so they will likely embrace this new ownership more than a typical team's operations crew.  The players are also embracing the new ownership.  Matt Kemp was excited to the point that ESPN.com quotes him as saying, "I started looking at the texts, and everyone was saying that Magic was our owner.  I thought people were just messing with me.... This is a pretty good day for the Dodgers."  The people within the Dodgers organization are excited about the new ownership bringing in proven winners to run the team operations, and they feel as though the culture is shifting to being a winning one.  The players and workers both feel as though they will finally be paid what they deserve for the work they provide; something they feel this new leadership will accomplish.

The values of the team will also be restored.  The Angels, while the second team to be labeled as a LA team, seemed to be the better of the two teams in Los Angeles as far as values of the area.  The Dodgers can spend another $34 million and still not surpass the Angels payroll spending, so they have some more room to make flashy pickups and increase the buzz of the team around town.  In order to improve the value chain, the new ownership hired Stan Kasten to run day-to-day operations.  Kasten was in charge of the Atlanta Braves during their impressive streak of making the playoffs from 1991 - 2005, and he has proven that he knows how to run a team.  Magic also said he would be around the team, helping them every day in more of a figurehead role.

The Dodgers don't have to necessarily start winning a lot of games right away, but if they start creating more of a buzz for the team and it leads to success, the over $2 billion investment may be worth it.

FEI Company: Investing in Electron Microscopes

At the Georgetown Stock Competition this weekend, David Paolella and I pitched a specialized transmission electron microscope company, FEI Co. We unfortunately did not make it out of the first round. We were knocked off by the winning group from UC Berkley (pitched long DMND). In this post I write about the Natural Resource segment of FEI Co. which is a a huge catalyst. Specifically I will address how the company is trying to analyze where they add VALUE to natural resource exploration.

FEI Company is the leading electron microscope manufacturer in the world. It has four major business segments. Academic Research, Electronics (Semiconductors, chips), Life Sciences, and Natural Resources. The company's stock (Nasdaq: FEIC) is nearing 52-week highs and is garnering new attention from life science analysts at JPMorgan and Bank of America. The company expects revenue for the first quarter of 2012 to come in line with analysts expectations of $0.6-0.68 EPS .

In class we've spoken about where a company adds value with their products or services. Currently, FEI is in the process of such a process. Their new natural resource products, QEMSCAN WellSite, will better help natural gas and oil explorers. It implements new Core-to-Pore nanoscale analysis of earth materials gathered from drill sites to advise natural resource drillers the best way to drill, frack, or split the earth.

Last Monday, I spoke with the Treasurer and Investor Relations Executive, Mr. Fletcher Chamberlin, about the infancy of their product and further numbers. The three QEMSCAN WellSite test sites in the Persian Gulf, Papau New Guinea, and Italy all concluded with very positive results. They partnered with GEOLOG, Haliburton, and Maersk Oil for these sites and are trying to tweak and price the product so that it yields larger gross margins. While the Treasurer could not publicly release specific numbers or margins of the Natural Resource segment yet, he said that the margins are greater than their Electronics Segments (52.8%). The executive was really excited about the 2012 commercialization of the QEMSCAN WellSite, and the opportunity to continue to grow their Natural Resource segment at a larger multiple than lasts years growth (>200%).

The exploration of oil and natural gas is a $359 Billion dollar industry. New partnerships with GEOLOG, Haliburton, and Maersk Oil will allow FEI to contact the majority of natural resource customers. This will help FEI sell their rugged Microscope and software in shorter time span.

FEI's inventory historically mirrored revenue, but now we are seeing that FEI has greatly increased their raw materials relative to their other inventory of Finished Goods and Work In Progress. My team's investment thesis was that these new raw materials were purchased in order to build their new Natural Resource Electron Microscopes. It seems to be that management has seized the opportunity to add value to Natural Resource explorers by reducing the amount of time and capital expenditure it takes to pump, mine, or drill resources out of the earth.

FEI's new Natural Resource segment is something to keep a major eye on as the company sees it's share of Revenue to grow from 3% to 26% of company revenue by 2014.

Tuesday, March 27, 2012

The End of Time for "Pink Slime"?

Hundreds of thousands have recently joined forces by signing an online petition, in an effort to remove ammonia treated meat fillers from schools. This isn't the first time "pink slime," dubbed so by a federal microbiologist for its unappetizing appearance, was the center of media attention. The lean meat trimmings first popped up on the news radar last year when fast food chains like McDonald's vowed to stop using it in its products. To further exacerbate issues for the the company that produces the so-called "pink slime," Beef Products Inc., major retail chains have yanked the meats containing the cheap filler off their shelves, and very publicly announced their discontinuation of carrying such products in the future. The financial impact of the media frenzy has forced the company to respond drastically, starting by suspending operations in three of their four production plants- as reported by this Associated Press article.

So what exactly is this "pink slime," and how does BPI make it? According to its website, BPI acquires their beef trimmings directly from USDA approved processing plants. From that point, the leftover fatty pieces are heated and spun to remove most of the fat. After that, the mixture is compressed into blocks, and treated with ammonium hydroxide to kill of bacteria. The product is then incorporated into ground beef, which consumers can get from their local grocery store or lunch cafeteria. It is estimated that 70% of all ground beef in the United States contains pink slime, and the pink slime to beef ratio is up to 1:3.

In response, BPI is currently doing damage control by attempting to dispel the misconceptions people currently have of their product- hoping to gain back most of their business by educatiing people about the purpose of ammonia treatment and the quality of their meet. Last week, BPI took out a 1 pg. ad in WSJ to promote their product, in addition to launching a new informational website on their product. But the strategy to rebuild the company's reputation is not enough to save it from its recent financial losses. Although BPI is unwilling to disclose specific numbers, it has responded to this crisis by stopping operations at its Texas, Kansas, and Iowa plants (the Texas plant currently produces 200,000 lbs per day, while the Kansas and Iowa plants come out with 350,000 lbs per day). Currently, the plant headquartered in South Dakota is the only one still resuming normal operations. The approximately 600 employees at the shut down plants will be fully compensated for the 60-day suspension.

Recent class discussions centered on business stress really relate to this current topic affecting BPI. As the company faces this big unexpected change, the actions that it chooses to take now and in the next couple of months will most likely determine its fate. By halting the majority of its production, BPI reduces its variable costs while it figures out what the next steps should be. Similar to the Kodak case that we studied, BPI cannot just leave the lean meat trim business and pick up something else instead (given their holdings of the production plants). Currently, BPI takes trimmings from processing plants, and mainly adds value to them by treating them with ammonia. The problem with that is that consumers misperceive their vale adding process as the root of the problem, and BPI needs to find a way to fix this issue. Informing consumers about the purpose of the treatment is challenging with more negative media light shone on pink slime than positive. Off the top of my head, BPI can consider altering their treatment processes to omit ammonia, and incorporate new treatments more accepted by consumers. The online petition and loss of business from major superstore chains are not the end of BPI's problems. Far from it, I think things are going to get worse for the company as they should expect to lose even more business in the times to come. As of now, it is important for the company to make preparations for when things do get worse, and set up a plan of implementation for the absolute worst case scenario. From the takeaways of our class discussions, how do you guys think BPI should approach this problem? Do you think there are any specific courses of action the company can take to combat the media uproar, or do you think the end of time for pink slime (and BPI) is near?

Stop Tracking Me!

In this day and age, the media often portrays Internet advertising in a very negative light. One of the leading online advertisers is Google with their Adwords and Adense programs. I recently had the opportunity to ask a Google employee how they felt about concerns with online privacy loudly voiced by media. More specifically, I brought up an article in the Wall Street Journal I had recently read that described the “No Tracking Button”.

Here’s the article at a glance:

  • Online companies agreeing to adopt the button.
  • Some companies who’ve had past privacy slip ups, including Facebook.
  • A few web browsers have already installed a No Tracking Button on their browser. Mozilla Firefox was the first adopter of the button.
  • Currently, some advertisers and tracking companies have not yet agreed to honor the system
  • The rest of the article pretty much details an alliance that universalizes the tracking button, so it will be affective.

I pretty much asked the employee if he believes the No Tracking Button will change Google’s online advertising, which accounts for 99% of their profits. First, he suggested that the media, like it often does, blows the whole Internet privacy thing out of the water. In fact, he stated that very few people would actually use the button. He compared it to people in Switzerland and how they reacted to a questionnaire asking them if they’d want to stop phonebooks from being sent to them. And even though they are one of the most ecofriendly countries in the world, the response rate was less than 7%. He believes that the No Tracking Button will have a similar story. However, the article included a poll asking whether you would use a No Tracking Button or not. Overwhelmingly, the votes were about 90% in favor of using the button.

Additionally, he compared it to taxes. Virtually all of Google’s products are free; they make their money via online advertising. Likewise, many of the government’s “free” services, such as education and roads need to be paid for by taxes. If people did adapt the No Track Button, then Google may be forced to start charging for their products. I believe this will completely change Google. And as we’ve recently seen in our case studies, when companies totally change, they can fall apart.

What do you guys think? Do you think most people will use the No Tracking Button? I personally don’t get freaked out when I see advertisements that are obviously targeted towards me. However, I know a lot of people who do, including my younger brother.

So if people do begin to use the No Track Button, how do you think this will affect Google? Do you think they’ll continue to innovate and be the leader in their field? If they do change, will they pivot completely and fall apart such as Snapple did in our recent case study?

Monday, March 26, 2012

Desperate Times Call For Desperate Measures: Six Flags

The hotel industry is constantly evolving. If anything, the 2008 crisis has accelerated this evolution to the point where a clean room and good food is no longer enough for the guest, as consumers in all markets reevaluated their utility per dollar spent. Now, more than ever, tourists are looking to be engulfed in a unique and memorable experience catered to a specific taste. This is the blunder of the boutique hotel: to combine the highest standards of quality and service with an eclectic taste and personality to deliver a once-in-a-lifetime experience to the guest that will make him want to return. Conversely, the guest has its own taste, with its own desires, looking for a reason to go back and visit the same hotel. Why not apply this philosophy to theme parks, and Six Flags especially?

Before I get into specifics, I want to establish a few caveats. First, the most important measure for a place like Six Flags is the size of its returning guests pool. In order for a theme park to stay on the map, it must give a reason for its customers to return. This leads me to my next point: the type of people who would consistently return to theme parks are theme-park goers, which come in many forms including teenagers, young families and, if you're as lucky as I am, the Annual AP Physics field trip to Six Flags (thank you, progressive education). In order to insure that you capture returning guests, like in the boutique hotel philosophy, you need to give your guests a memorable experience that extends beyond a looping roller coaster or a picture with Bugs Bunny (as awesome as that sounds).

Enter Six Flags. I've been to Great Adventure twice, and I have to say that the second time was for my class field trip, so I don't think that counts as me wanting to go. The reason for this is because while the rides are fun, is it really worth the 90 minute drive and the hour wait to ride Nitro for the fourth time? Obviously not, and frankly, this is really all that Six flags has going for it. Disney World, on the other hand, actually used all of its brands to create not just one, but three different theme parks (Magic Kingdom, Animal Kingdom, and Epcot) in one resort, connected by a surprisingly practical monorail system and a collection of hotels in varying degrees of size and luxury.

Granted, Six Flags has neither the brands nor the real estate to create such a world. But that is because it has instead opened a number of smaller mediocre one-day parks in random locations around the country. So what should it do? Close the bottom performing parks, salvage as much as it can (old roller-coaster components and the like), and sell the rest along with the land. This will raise a lot of cash. Then, it should acquire a collection of licenses so that it can create a theme park with an actual theme. I, for one, think it would be awesome to be able to go to a live-action Quahog or Springfield, but I digress.

Step 2: invest in a massive plot of land that is in or near a tourist and/or theme-park hotspot, like Orlando or Southern California. The third step would be to take the Disney World model, which has already been applied successfully by Universal Orlando, and build a world, not a park, that its guests will want to go back to. The way I see it, the only other option for Six Flags is to put itself up for sale and hope it gets bought out by a company that will do something with the company, because the last thing it needs is to open up another park in the middle of nowhere.

Why Did Zynga Purchase Omgpop?

Last week, one of the leaders in the social gaming industry, Zynga Inc., made a move which they hope will help solidify their position as the forerunner of social gaming. Zynga purchased Omgpop, a company who just over a month ago was struggling to survive, for a staggering $180 million. Before their release of the smash hit Draw Something, Omgpop was at best a mediocre social gaming startup with approximately 20 million registered users over its six years of existence. Just five weeks after the release of Draw Something, the app already had over 35 million downloads and has dominated the App Store charts consistently for the past weeks.

Omgpop's Draw Something
Since its recent initial public offering, Zynga has been looking for ways to distinguish itself from other social gaming companies as well as become independent of the social media giant, Facebook. Facebook currently takes 30% of the revenue that Zynga games make through Facebook users. With over 90% of its revenue coming from Facebook, Zynga has undertaken several projects in an attempt to make itself independent from Facebook.

There are always two sides of any purchase as we have seen through the Marvel and Snapple cases. In this case, there is one key question for each of the companies: For Omgpop, why sell now? More importantly, for Zynga, why Omgpop?

From Omgpop's point of view, selling seemed like a very debatable choice. Looking at their history, Omgpop had resembled an extraordinary company. After failing miserably as an online match making site (iminlikewithyou), they made the radical switch to online gaming. With this stroke of luck, why would they not sell? It is very likely for Draw Something to just be a one hit wonder and Omgpop should definitely just take their spoils and go home. Additionally, Zynga has the resources and manpower to further develop Omgpop's games and platform in order to make it even better.

On the other hand, Omgpop was on top of the world. Not only were they making heaps of money for the first time ever, but their game was blowing the competition out of the water. The game topped the chart within two weeks of its released and has been number one ever since. Was it really the right choice for them to sell at this point? In class we argued about whether Marvel should or should not have been sold to Disney just as it was finally retaking the limelight. This is a similar case in a different industry. Sure, the heap of $180 million in cash is surely something that is enticing, but was sacrificing control of the company had worth it?

The more intriguing side to examine is that of Zynga. From the surface of this acquisition, it seems that Zynga can not stand not having one of their games top the App Store charts. After mobile hits such as Words with Friends, Scramble with Friends, and Cityville, having another company's game topping the charts would be troublesome. Buying up Omgpop and other smaller social gaming companies could get expensive very quickly for Zynga especially if they target companies who are on top of the industry. If the purchase was made of these reasons, then it would have been a terrible investment as history has shown, Omgpop is not a very successful company. Most likely in a few weeks Draw Something will fall off the charts just as Zynga's other games have since their release.

However, when looking at Zynga's strategy and long term goals, the acquisition of Omgpop may just be what Zynga needs to take the company to its next level. In an effort to make themselves independent from Facebook, Zynga may be able to find an answer in Omgpop's system as Omgpop has supported social gaming for their approximately 20 million users on their own platform for years. Incorporating their platform with Zynga games and the mobile gaming industry, Zynga could be able to finally connect users without the burden of going through Facebook.

Although the hefty $180 million price tag seems like it may be a hit or miss investment for Zynga, it is a chance that they are willing to take. This could allow them to build their own platform and achieve their goals of escaping from the grips of the Facebook social media monopoly but also has the possibility of being a waste of money and the only thing that Zynga get from this is a few months of income from Draw Something and forty new staff members to pay. We will have to see what the future holds for Zynga.

Sources: NYTimes Article, Forbes

The Golden Arches

As we have discussed in class, McDonald’s Corporation has gone through its fair share of management changes during the last decade. In 2002, with the stock price down 60% from its peak in 1999, then CEO Alan Greenberg resigned after only four years in office. Next emerged Jim Cantalupo, who announced the company’s “Plan to Win”, and began to emphasize adding customers to restaurants instead of vice versa. After Cantalupo suffered an unexpected expected heart attack in 2004, McDonalds was forced to promote Charlie Bell to the position, who in turn passed away from cancer a year later. Since then, current CEO Jim Skinner has provided the firm with much-needed stability and increasing profitability, but he too is schedule to retire in July (Moore).

Enter Don Thompson. A 48 year-old and McDonald’s COO since 2010, he has maintained a sound reputation throughout his tenure in the organization, which is bolstered by his training as an engineer and his ‘affable’ personality. However, he faces an arguably tougher task than Cantalupo did ten years ago. Instead of having to revive the company, as Cantalupo did, Thompson is charged with meeting the lofty expectations shareholders now have. McDonald’s stock has been trading in the mid to high $90s and topped out at $102 back in December. Thus, many investing experts worry that the fast food chain will be unable to grow at the rate it has been. To complicate Thompson’s job further, McDonald’s best chance to increase the value of its shares lies in international markets, a field where he has limited experience (Jargon).

In my opinion, the upcoming CEO and his companies predicament corresponds well to Jim Collin’s Good to Great, in which he discusses ‘How the mighty fall’. Collins discusses five stages that great corporations progress through, only to come out destroyed on the other side. So what does Don Thompson need to do, or not do, to keep McDonald’s trending upward, or to avoid trending downward?

Understand what got him here
Continue to build on the efforts of past leaders, which have obviously worked. This means upholding the “Plan-to-Win”, which emphasizes well-trained workers selling the right, affordable products at clean, contemporary restaurants while also creating marketing activities that resonate with key customer groups (Moore).
Avoid hubris
Any overestimation of McDonald’s abilities or of his own will immediately cause management to begin to make poor decisions (Collins).
Know his limits
While expanding to more countries is key, Thompson must not do so to the point where cost rise significantly higher than revenues.
Accept the possibility of limited regression
McDonald’s has been doing so well for so long that it will be almost impossible to maintain that rising level of success for an extended period of time. Thompson must not ignore profits and stock prices if they drop slightly, but also must stay the course if they do.
Continue to improve
Thompson, and his team, have to still innovate and search for new ways to improve business. For McDonald’s to grow as it has been, they cannot be satisfied with what has been done in the past.

There is no doubt Don Thompson will face several challenges as the next CEO of McDonald’s, but all of them can be overcome. If he can expand but not over-extend, innovate but not deviate, and credit others before himself, Thompson will be successful.

Sunday, March 25, 2012

Temporary Restaurants?

As discussed in this Wall Street Journal article, there are many costs involved in attempting to open a new restaurant or store, especially in San Francisco, and the Wise Brothers have undertaken a clever process to avoid these costs: the pop-up restuarant.

We have all seen pop-up - or temporary - stores in malls where they inhabit the paths on which people walk, taking advantage of their location to test new products or to avoid the costs of purchasing a store. This same idea applies to the pop-up restaurants, which have existed in London since the mid-2000's. These restaurants have many different goals: they can be used by start-ups such as the Wise Brothers who want to cut down on costs or they can be used by existing restaurants who aim to test their new products but do not want to risk trying them in the actual restaurant, where a product flop could negatively affect their business.

Start-up companies who employ the pop-up have used this to their advantage by building a clientele and getting their name out to the community. They can then build up revenue and eventually open a store when they have the necessary money and customers to succeed.

The article goes on to discuss the procedure used to purchase and run a pop-up restaurant, but I would like to take the discussion in an alternate direction. While I believe that it is ideal for a new restaurant to employ the pop-up technique early on, I am curious as to whether or not this should be considered a simple "stepping stone" to becoming a real restaurant.

Part of the allure of pop-up restaurants is the simplicity and unique aura that they present. It is very easy for customers to be walking or driving past and get their food. They see a small boutique set up and it appeals to the customers who are in a rush or just don't want the hassle of sitting down and dealing with waiters, etc. This customer in a rush is a very specific type of consumer that these pop-ups would bring in. They would not appeal to families who want a nice environment, sitting down and enjoying a meal.

This is where the difficult transition would take place. If the pop-up restaurant succeeds and makes profits high enough for management to consider opening a full-time restaurant, they will have to dramatically change their clientele. They have built brand loyalty and have built a name for themselves, but they have done it with the consumer who does not have time to sit down for a meal. It will be tough for a restaurant to switch its target customers so quickly. This could be a Snapple-esque disaster, where the change in distribution process helped doom the product.

The only way for this alteration to be successful in my opinion would be to keep the pop-up store while also opening their full-time restaurant. This will allow the transition to be smooth and they will still be able to capitilize on the unique quality of their pop-up restaurant while also getting revenues from a full restaurant.

Do you think this transition will be easy, or do you think we will see more pop-up restaurants start to make a name for themselves?

Saturday, March 24, 2012

Is Tesla Creating A Kodak Moment for the Auto Industry?

In a Fast Company article on March 19th, Jon Gertner profiled Tesla Motors and their upcoming vehicle, the Model S. Gertner talks with Elon Musk, CEO of Tesla, about the Model S and Telsa’s future. The entire article is an interesting read but a specific segment of the article really caught my attention:

"Musk and others at Tesla contend that the Model S may be the first mass-produced car ever designed, from the ground up, with the specific purpose of being an EV; therefore any design conventions of gas-burning technology have been avoided."

The Model S is not merely a car that happens to be have a battery pack rather than a fuel tank - rather the entire vehicle has been designed from scratch, keeping in mind that the vehicle is an EV and not gas-powered. There are other electric vehicles on the market, but all of them have been designed as an extension their of gas-powered vehicle brethren (see the Nissan Leaf - a modified version of the gas-powered Nissan Versa). This is important because electric vehicles have much less, and much smaller, machinery under the hood, thus the existing norms of sedan industrial design can be revisited. The chassis can be completely retooled. Electric vehicles don’t have an engine, so the extra space vacated by the absence of an engine can be used for additional trunk space, more leg room, or whatever Tesla envisions. Tesla is the first company with the opportunity to exploit this space, and it has the chance to redefine what a sedan is — how it looks, how it works, and its feature set. The Model S is a 21st century vehicle.

The guts of the Tesla Model S. PHOTO BY JOAO CANZIANI.

Toyota, GM, Ford, Kia, and every other automaker needs to take notice of what Tesla is doing. The rules of the game are changing in the automobile industry seems to have its head stuck in the sand, despite most automakers offering some kind of electric vehicle or hybrid. To illustrate my point Bob Lutz, former vice chairman of GM and the head of the Volt initiative, was quoted in the article saying:

"The media might have you believe, Gosh, in 10 years it’s all going to be EVs. But it’s just not happening. The average American consumer is delighted with gasoline vehicles and is in no rush to change."

While I am no seer, I would hardly make the claim that the average American consumer is delighted with gasoline vehicles, especially with volatile (and rising) gasoline costs, or that EVs won’t explode within the next 10 years. The limiting factor with electric vehicles are batteries - smaller, more efficient batteries mean electric vehicles with greater range. Tesla is positioning itself to be the chief benefactor of such advancements, as its cars are already being built with batteries and electric motors in mind as opposed to engines and fuel tanks. Today, EVs are not ready for mainstream adoption. But they are the future, and the future is quickly approaching.

This situation strikes me as extremely similar to Kodak’s plight from Profile of Kodak: From Film to Digital Photography that we discussed in class last week. Kodak was a pioneer of digital photography, but found itself incapable of converting that head start into a profitable business because it was too preoccupied with its existing products and services that were centered on an aging technology: film. The auto industry is testing the water with electric vehicles and hybrids, but it is not committing to them. They see electric vehicles as a novelty and a luxury. Tesla sees electric vehicles as the future for all drivers and they are working hard at delivering that product now. Film didn’t begin to die for nearly fifteen years after Kodak began working on digital photography. While gasoline powered vehicles may not begin to fade for decades, advancements in battery technology and changes in consumer tastes may shorten that time table dramatically. In my opinion, Tesla is the only player who is ready to take advantage of the EV movement. Their patents, production processes, and expertise building the Tesla Roadster give them a leg up over an industry "delighted with gasoline vehicles."

What do you think? Is the auto industry priming itself for a Kodak collapse or is Tesla going to burn out before EVs are adopted en mass?

No Conversation Without Apple

I'm sure many of you are probably sick of hearing about Apple by now - the company seems to come up in just about every conversation concerning business trends and technology - but I wanted to look at the company through a different perspective. In class we've discussed much about what Apple has done right and have consistently set the company as a high standard for the competition (whether that be Google in the smartphone arena or Dell in computing). Yet we've also observed how numerous companies that were once at the top of their game crash and burn, and have discussed the need for constant innovation that sometimes pushes beyond the boundaries of what a company deems "safe". So with that said comes the question, how much should Apple be worrying about competition, and what markets should they expand into?

To put it bluntly, right now Apple is on top of the world; Apple is the most valuable publicly traded company, and it sets the trends for technology and design in a variety of product areas (computers, music players, smartphones, etc.). Through the company's success, it has managed to amass a staggering $100 billion in cash - an amount that many think the company should use towards continuing its domination in all things technology. The article, Should Apple Buy Twitter? by Matthew Ingram, discusses some of the potential benefits and disadvantages of Apple dipping into some of its cash buildup to buy the social giant Twitter.

As powerful as Apple is in the area of personal electronics and creative design, it does not really have much going for it in the social software area. As websites like Twitter and Facebook practically determine the way we interact with each other and share information in this digital age, I think that Apple really needs to make some moves and build up its presence in the social field. The article makes some great points concerning Apple - its main competitors in the future are likely to be Google and Facebook, not the standard computer companies of today. Furthermore, Apple's current offerings could benefit greatly from increased social connectivity - the iOS's expansive selection of apps, the iTunes huge amount of music offerings - if Apple invests in networks that foster discussion about its products and attaches an even greater sense of social identity to partaking in an "Apple experience", it could be virtually untouchable.

The article does bring up a few issues to this proposed buyout though. For one, it could hurt Apple's attempts to strike a deal with Facebook. It also begs the question, considering Apple's generally restrictive ("overly-protective parent") attitude towards its software, does an open network like Twitter really fit into the company's approach? Personally, I believe that it may be in Apple's best interests to go head on against Facebook rather than trying to appease them. Apple has sought out numerous deals with Facebook that have fallen through, like an integration with Facebook and Apple's not-so-successful Ping. It seems that Facebook aims to keep on growing, and it has already made strides into the social music with Spotify integration. I can see Facebook continuing to oppose Apple and to branch out into areas that directly compete with Apple's offerings. On this note, Apple will just have to step its game up and make sure that its offerings are top-of-the-line in all areas, including social integration.

Yet, as we've discussed in class, it's not often too easy to see if anything needs to be done when your company is performing so well. Apple has been incredibly successful doing things its own way for the last decade, and it seems to be on quite a good path for the near-future. Would it really make sense for Apple to go against its established culture (in terms of software offerings and purchasing decisions) to buyout Twitter? I believe that it would be in the company's best interest to thrust itself into the social software arena (although with the direct aid of key players - Google+ is a great example of an amazing company struggling to gain a foothold in an already crowded market), to really become involved in the means through which people have conversations and share information. What do you think?

Friday, March 23, 2012

The End of Red Solo Cups? Not quite

On March 21, Dart Container Corporation signed a Definite Agreement to acquire Solo Cup Company for $1 billion; the story was released in a Businesswire article late Wednesday night. Management at both companies appear to be extremely pleased with the acquisition and believe that the companies combined resources will allow for plenty of growth in the future. The CEO and founder's son, Robert Dart, explains:

"Dart Container’s acquisition of Solo will accelerate the progress Solo has made to improve its levels of service and customer support. We will use our expertise in running a successful, efficient, reliable and service-oriented company to create an organization that blends the best of both Dart and Solo for the benefit of our customers.”

Solo Cup executives were equally as pleased. Robert Hulseman, chairman of Solo Cup Company, stated:

"I am very proud of this company’s contributions to the foodservice packaging industry and extremely pleased that many of Solo’s dedicated employees will have the opportunity to continue making a difference for our customers. This is a positive outcome for everyone involved."

This is Dart's second such takeover this month. On March 6, Dart bought Brazilian manufacturer of foam foodservice products--Brasbar Disposable Packaging. The moves make sense for Dart as the company continues to grow its balance sheet as well as the number of products in can offer customers. Dart details how exactly the merger will effect their current customer value proposition,

"It will enable customers to purchase a wider range of products, made from a greater variety of materials with varying functional and environmental attributes — all from a single vendor. Both companies have an extensive history in the industry and will bring together valuable experience, traditions and complementary, high-quality products."

This is exactly the attitude larger established companies need to maintain their dominant positions. Since its inception in 1960, Dart--as a family owned and operated corporation--has quickly become the leader in the foodservice products manufacturing industry; they have built twenty manufacturing plants worldwide that produce over 600 products and employ a workforce of 7,600 employees. Meanwhile, Solo, established in 1936, has a global presence in the US, Canada, Latin America, and Europe and strong brand recognition, mostly stemming from the iconic red Solo cup.  Executives assure consumers that the new corporation will continue to manufacture and market Solo products under the Solo brand, much to the relief of college students every where.

What makes this transaction different from many large Wall Street takeovers is that Dart is a private company and is not responsible to investors for quick profits in order to maintain its stock price. Dart's board sees this as a plus because they believe in Solo as a long term investment that must be well-thought out over a long period of time in order to maximize its returns. As an outsider, knowing whether or not these acquisitions make sense financially is impossible. Without knowing Dart's current debt and equity structures, it is impossible to know whether the company is over-extending itself, a concern when one sees a company make a string of acquisitions like Dart has. Time will tell if that is the case in this situation. However, from a strategy standpoint, I love the moves. Dart is refusing to become complacent. Many once great companies have fallen from the top by accepting the status quo and no longer looking for areas of growth. Instead creating a new department within the company or spinning off a new company altogether, Dart realizes the brand recognition of Solo combined with their quality management and supply chain is a formula for success.

Thursday, March 22, 2012

HP Merging Divisions

HP announced that it will be combing its printing and personal computing divisions in order to create an identity and ultimately increase profits as reported by the Associated Press. This is in response to the fact that profits have been dragging. The complex supply chain and competition has resulted in revenues decreasing and costs increasing. In the PC division, HP has faced increased competition with the rapidly growing tablet and Smartphone business. In the printing division, revenues have decreased as more are going paperless.

The goal in merging the printing division with the personal computer division is to save money by streamlining and consolidating. The money that is saved will be invested in innovation and growing areas. As they consolidate divisions and create new innovative products they hope to increase their brand name.

This innovation is important as it will be used to combat and compete against they mighty Apple. HP is currently working on products which hope to acheive this. For example, they have been investing in lighter and thinner “ultrabooks”. These are “devices that are easy to hold like tablets yet more powerful in sporting regular keyboards and the ability to run programs side by side on the same screen.” In addition they are exploring and greater advancement in the printing industry. HP hopes to be able to have an identity that people can attach to it. Through these changes, they hope to create “One HP” that is streamlined and customer oriented.

I believe that HP is correct to combine the two decisions as it will decrease costs for the company. The printing industry is ever decreasing, therefore, I believe that HP’s goal of making PC and printer product designs working together is a good idea. This idea will create some synergy between the two and I believe will help printers sell more. I also believe that they are correct in investing the money in new innovative products. This is smart as it will help combat the ever-increasing competition. However, I am concerned about their attitude towards increasing brand-name.

When asked about “What is HP?”, HP CEO commented: “ HP is the world’s largest provider of …..It’s simple, it’s clear, and it doesn’t need a lot of explanation.” This is concerning since he only boasts about the greatness of HP. His answer does not precisely state the brand of HP. Finally, I believe that this statement is ignoring the fact that HP has some big decisions ahead if it would like to continue being the world’s largest producer. This is an example of stage three of “How the Mighty Fall”. Internal warning signs are appearing while external data remains stronger. In his comments he does not mention any adversity that is to come and only amplifies the positive data. I do not believe that the CEO understands the magnanimity of what the future holds based off of their decisions.

What do you think?

FedEx and its Outlook in the Transportation Industry

FedEx Corp. released its Q3 earnings this morning and despite it showing more than double profits, its stock, which is close to a year high, tumbled 4.5% today. Bob Sechler explains in WSJ article that strong online holiday sales between December and February helped drive the profit that nearly doubled since last year. Despite these positive results, FedEx has forecasted a “below trend” growth in the upcoming months. With rising energy costs and fuel surcharges, the recent news for UPS to acquire TNT to expand its European operations, and new economic data forecasting global GDP growth of 2.3%, from a previous 2.9%, the attention has been turned to FedEx and its plans to acquire a solid strategy. FedEx chairman Fred Smith declined to comment on the UPS/TNT deal and explained that FedEx has no strategic need for big acquisitions in Europe confident with plans “to continue expansion primarily through organic growth.” To confront the strengthened rival in the constantly changing transportation industry, FedEx will need to continue sustaining innovation through major investments to protect its strategy. In order to understand the position of FedEx and its outlook in the industry, we will step back and examine the major players and changes in the industry in the past few years.

Past Major Players and Industry Changes


FedEx


FedEx successfully established itself as a leader in the US domestic parcel delivery by creating the overnight shipping business. Their initial advertising campaigns included “when it absolutely, positively has to be there overnight” and “our most important package is yours.” These messages were important in understanding the FedEx strategy; its business model revolved around the idea that you could rely on any package to be delivered the next day by 9:30 AM as long as it was dropped off at a FedEx box by 7 p.m. the night before. This model was innovative as it pioneered the overnight shipping industry and their value chain standardized and guaranteed overnight delivery.

UPS


While FedEx dominated the air, UPS controlled the ground with its big brown trucks recognized worldwide. Since the early 1900’s UPS was the first to meet the needs for private messenger and delivery services that has allowed it to grow to be the largest package delivery company by revenue today. The UPS theme, “What can brown do for you?” highlights the UPS brown trucks and the driver uniforms.

DHL


As FedEx and UPS mainly focused on the domestic market, DHL became the worldwide leader in the international transportation business. Their value proposition was “DHL ships overseas and the others don’t.” By the 1980’s DHL had a network of customers throughout the Middle East, Europe, Latin America, Africa, and was the first express company to expand and enter China. At the time, DHL had no interest in expanding to the US domestic market.

Market Share by Region

While each of these firms originally captured a different market niche, they wanted to expand to provide each other’s services. DHL acquired the trailing domestic competitor Airborne Express in 2003 to expand its North American operations and provide domestic US delivery. This strategy wasn’t too successful as it underestimated domestic competition from the big two domestic competitors and never captured greater than 10% of the domestic US overnight market. In 2008, DHL dropped its domestic services to focus on its international business. As FedEx innovated the overnight market, UPS slightly lagged behind at its own game as it underestimated the size of FedEx’s market, and quickly began to offer the overnight services and comparable technological developments to maintain efficiency and provide data communications networks. Soon both FedEx and UPS expanded to international markets, each acquired a few small international express mail companies, and FedEx added its ground and home delivery services to compete with UPS on the ground. FedEx initially had difficultly implementing its international operations and reported large losses in the first few years. In entering the China market, for example, FedEx implemented its US strategy abroad, and was not successful in adapting to regional cultures. UPS was more successful as it slowly expanded in China, relying on other carriers. Today, each carrier has notable presence in worldwide services, and can better assimilate with international expansion to new markets.

Looking Forward


In reaction to the decreased growth forecast, FedEx has reduced capacity in the US domestic express business. It has begun to trim its work force and put some aircrafts into storage until economic conditions improve. As consumers now are more attracted to the slightly cheaper rates offered by UPS, in order to re-establish itself as a more attractive domestic carrier, FedEx must sustain innovation through technology. FedEx always had technological superiority that continued to differentiate it from UPS. It was the first company to introduce electronic shipping solutions to businesses, and it should continue to find new ways to improve its efficiency and services. Providing a service feature that UPS lacks will allow FedEx to keep and expand its customers as it had done in the past. New innovative aircrafts and wireless technology to speed up data exchanges will continue to change airfreight services.

FedEx had more positive outlook with its international express business, and volumes have been improving. With regards to the UPS/TNT deal, UPS will now capture the largest portion of the European market, with DHL second, and FedEx third. FedEx should stay in the European market and expand through organic growth, by continuing to acquire smaller players in the market. FedEx was successful in acquiring Kinko’s in the US, which greatly increased the presence of FedEx offices; it will slowly continue to expand in Europe by following a similar strategy. The French express carrier, Geopost could be an attractive buy to establish FedEx stronger service in Europe. FedEx has also greatly invested in China as it currently captures 21% of the Asian Market, behind DHL at 36%. Concentrating on expanding in emerging markets with less competition will give FedEx a competitive advantage over UPS. International companies with manufacturing products in Asia would prefer a single carrier for their logistics, so FedEx must remain a strong player in Europe. In addition, FedEx may want to consider expanding in the Middle East or Africa through small acquisitions. The Jordanian express carrier Aramex has also been expanding in China and FedEx could potentially use their resources to expand in emerging markets.

What else could FedEx do to better improve its services and fuel its growth now that UPS could be a threat?