Archive for April, 2011
Friday, April 29th, 2011
“The federal government proposed sweeping new guidelines on Thursday that could push the food industry to overhaul how it advertises cereal, soda pop, snacks, restaurant meals and other foods to children,” The New York Times reports. “The guidelines are meant to be voluntary, but companies are likely to face heavy pressure to adopt them. Companies that choose to take part would have five to 10 years to bring their products and marketing into compliance.”
Way back in 2005, Smeal’s Marvin Goldberg wrote an article warning that the food industry would be wise to self regulate in order to avoid government intervention a la big tobacco. An excerpt:
Rather than encouraging children to reach for the same high-calorie snack every day, marketing messages should urge kids to make healthy eating decisions. These ads should also portray a balance between healthy consumption and exercise. As a whole, the industry should band together and agree to voluntarily dampen the level of advertising of high-sugar, high-fat products.
Anyone who has ever tried to improve their diet and avoid high-calorie foods knows that a key ingredient is not to leave those foods in full view in the kitchen. A full cookie jar on the counter is likely to be a recipe for failure. The exposure that children get to foods from television commercials, in-store displays, and, increasingly, messages in the new media are the equivalent of very powerful and persuasive cookie jars. This effect can be countered by replacing those cookie jars with healthy snacks.
With government agencies and Congress breathing down their neck, now would be a good time for food marketers to start using their powers for good. I’m not advocating that we rid the Earth of all candy bars and cheeseburgers. Rather, I’m reminding my fellow marketers that the food industry stands at a crossroads today, just as tobacco did in the 1990s and as McDonald’s did [in 2001].
Food manufacturers and restaurants have a choice: They can go the road of tobacco and be forced into behaving acceptably or they can build upon McDonald’s modest efforts [at offering healthy alternatives] and make money without exploiting our waistlines.
Thursday, April 28th, 2011
What a week for couch potatoes—thrilling NBA and NHL playoff games; the fairy-tale royal wedding; and yes, the grand-daddy of them all, Federal Reserve Chairman Ben Bernanke’s Wednesday press conference. The first ever in the history of the Federal Reserve, I might add.
While I have no illusions that Bernanke will win the Nielson ratings wars this week, there is no doubt that the press conference was a seminal event in the Federal Reserve’s evolution toward greater transparency and accountability in its policymaking. Did the Chairman make any breaking news? Absolutely not, but there was important market reaction to what Bernanke said and the way that he said it.
Here is what I heard, and my perception of how the markets continue to view Fed policy:
1) The Federal Reserve Mandate – It was very clear that the chairman attempted to draw boundaries around what the Fed can do and what the Fed can’t do with respect to economic recovery. For the past three years various pundits have criticized the Fed for doing either too much or too little during the recent crisis, perhaps even overstepping its powers. Bernanke must have stated at least 15 times that the Federal Reserve’s mandate is to maintain/promote a growth level consistent with full employment and low inflation. His latest projections for the end of 2011 are range-bound estimates of GDP growth of 2.1 percent, inflation of 2 percent and unemployment at 8.3 percent.
These numbers are not going to make anyone jump for joy. But what is important here is that Bernanke emphasized (given his mandate of balancing growth, employment and inflation) that, in weighing the costs and benefits of various policy tools, he is more concerned with anemic growth and employment than he is with the specter of runaway inflation—at least for the next year. Notice there is nothing in the mandate statement concerning the appropriate level of the dollar.
2) Inflation – Bernanke was very clear to emphasize that if the Fed begins to see stronger signs of prices heating up, then the Fed will take swift action on the inflation front. This is definitely not what inflation hawks wanted to hear. Bernanke clearly feels that the main concern of Fed policy is unemployment and sluggish growth (yet, there are signs in the public speeches that other Fed Board members are beginning to challenge the Chairman’s position). Critics point to skyrocketing oil and commodity prices, the rise in food prices and some evidence of rising input costs leaking into other consumer good prices (Procter & Gamble and Coca-Cola announced price increases on products yesterday). Critics point out that latest CPI data shows all-level prices rising at a 2.7 percent rate, while Bernanke’s emphasis on the “core” CPI of 1.2 percent is unrealistic (the core rate strips out price increases from food and energy, which tend to be more volatile).
So how did the markets react? Silver moved up nearly 7 percent, approaching an all-time high of $50 an ounce, gold was more muted, rising about half a percent (Gold Bugs are now Silver Bugs), and oil was basically flat.
Clearly, Bernanke attempted to speak to “Main Street” in emphasizing that he understands the pain caused by food and energy price increases making up a significant portion of American budgets. However, inflation is defined as the general rise in the level of ALL prices, which is the reason for his focus on Core CPI. My feeling about the Fed’s position is that prices in two large sectors of the U.S. economy continue to be stagnant—housing and even more importantly wages. Until Bernanke sees inflationary pressure in the form of a wage and price spiral, I think he will continue to emphasize accommodative monetary policy. Bernanke was very clear on this point stating that the Fed could target a 0 percent CPI through monetary tightening, but in weighing the costs and benefits, the effect on economic growth and employment would be recessionary.
Wednesday, April 27th, 2011
Last week, the Supreme Court heard oral arguments in the case of Microsoft v. i4i. The Court’s eventual decision has the potential to substantially alter the patent property right by relaxing the presumption of validity and making it easier for defendants to mount challenges in court. Although the outcome of most future litigations may not be significantly impacted – the presumption only plays a role in close cases – the dispute is an interesting battle in a broader war. The rhetoric between those satisfied with the status quo in patent law and those who believe the system is fundamentally broken has been heating up for some time, and the i4i case is but one part of the debate. As patent rights play an ever more important role in fields like communications, health care and sustainability, it’s important to consider how patent reform efforts can impact the future value of this critical asset.
The i4i case involves a patent on a software editor for XML, which is a computer language. According to i4i, Microsoft’s Word program contained an XML editor that infringed i4i’s patent. In defense, Microsoft argued that i4i’s patent was invalid due to an early sale by i4i that placed the invention into the public domain. However, Microsoft’s evidence of the early sale depended on witness testimony that was not originally available to the patent office, and was rebutted by i4i’s witnesses. In the end, the jury found the patent not invalid and held Microsoft liable for $240 million in damages.
Despite the somewhat mundane facts of the case, the issue on appeal to the Supreme Court is central to patent law. It concerns the statutory presumption that an issued patent is valid. The courts have traditionally interpreted the presumption to require “clear and convincing” evidence to overturn a patent, which is an advantage for the patentee. Such an evidentiary burden is higher than the standard “preponderance of the evidence” that exists in most civil cases. Microsoft argues that this evidentiary burden is too high, giving too much credit to an overworked patent office and permitting the enforcement of invalid patents. It is particularly inappropriate when the Patent Office had not considered the evidence in question during the original examination. According to Microsoft, if the jury had been able to equally weigh the witness testimony on both sides, it might have found the patent invalid.
From i4i’s point of view, the expert examination rendered by the Patent Office — a process that can take years — is due substantial weight. The resulting patent deserves more than the toss-up evidentiary contest of a typical civil case. In addition, it can be argued that the greater certainty that comes with a higher evidentiary burden is an important aspect of the value of patents. Easier challenges may result in an increase in infringement and reluctance on the part of prospective users to license.
Rather than dividing politically, the battle lines in the i4i case are drawn roughly along industry boundaries. Many in the high-tech, consumer electronics sector, including companies like Apple, Google and Dell, have sided with Microsoft. Companies in the pharmaceutical and biotechnology sectors, like Bayer and Genentech, as well as intellectual property owner organizations, support i4i. To be sure, there are many crossovers and the industry delineation is not perfect (for example, IBM supports i4i’s position). But one has the sense of a technology bias in the various positions on the case.
Not surprisingly, one can see many of the same alliances in other patent reform contexts. In general, firms in crowded, fast-moving technology fields are more likely to see patents as a hindrance to innovation and support stronger limits. Firms that depend on patents for long-term profits and have a more silo-like innovation environments tend to prefer stronger rights, or at least favor the status quo. As it stands now, it seems that there is no obvious direction for comprehensive patent reform that is capable of garnering across-the-board support. For that reason, Congress has struggled to make changes in recent years. Current pending legislation (the America Invents Act) makes more modest revisions than some would prefer, yet it still faces opposition.
Change does happen, though. Lately, the courts have taken the lead, making piecemeal revision in individual cases that slowly reforms the law. Is this enough? Some have argued that a more comprehensive approach is necessary to provide America with a 21st century innovation environment. But because satisfying all of the interested parties will continue to pose a political challenge, cases like i4i play an important role.
Tuesday, April 12th, 2011
In an interview with the Financial Times, convicted Ponzi schemer Bernie Madoff said several business schools have approached him about collaborating on ethics courses. A blog post on Bloomberg Businessweek points out that Madoff wouldn’t be the first white collar convict to speak at business schools and mentions that Smeal has hosted such speakers in the past. Smeal’s Linda Treviño, Distinguished Professor of Organizational Behavior and Ethics and director of the college’s Shoemaker Program in Business Ethics, responds:
It would be ludicrous for Bernie Madoff to lecture MBAs on “ethics,” although he might have a thing or two to say about greed and/or about his current life in prison.
Smeal has indeed invited ex-cons to talk with our students, undergraduates and MBAs. These have been uniformly well received by students as an unforgettable educational experience. The ex-cons are carefully selected. First, they are out of prison, meaning that they have already paid a debt to society (although they are often continuing to pay restitution). Second, they must have a clear and unequivocal educational message that explains how and why they took a wrong turn and how students can and should avoid doing so. They also generally explain the huge costs to their lives (bringing shame to their families, losing marriages, difficult relationships with children, the difficulties of prison life, etc.), and convey their sincere remorse.
Faculty judgment is crucial in deciding whether a particular ex-con will serve a useful educational purpose. And, of course, any guest speaker should be considered only in light of the broader ethics educational experience. At Smeal, that includes required courses in business ethics as well as the Smeal Honor Code experience.
Monday, April 11th, 2011
A recent article in Bloomberg Businessweek takes a closer look at Acosta, a sales and marketing firm that works for such clients as Kellogg and Proctor and Gamble. These companies pay Acosta to negotiate with retailers on issues like display and promotion. With 1,000 clients, Acosta’s revenue totaled $1 billion last year. Smeal’s Jennifer Chang Coupland, clinical associate professor of marketing and Paiste Fellow in Teaching and Learning, weighs in on the use of third-party marketing firms from a consumer standpoint.
It makes sense that food companies strategically invest in third party marketing firms to persuade stores to stock shelves with their products. A lot of research has shown that shelf space matters. Having more facings (e.g., a 4×4 block of Eggo packaging rather than 2×1) gives consumers more chance of seeing your product. Basic information processing theory shows that repetition also helps grab attention and enhance long-term memory of products.
Consumers also rely functionally and psychologically on location in making purchase decisions. The most profitable shelf space is just below eye-level, which for the average American grocery shopper (usually a woman) is somewhere below the 5’5” range. Why? Shoppers tend to look slightly downward. This is partly due to everyday social convention. We don’t stare straight at people, unless we have a reason to, so we tend to gaze slightly down. We also tend to go on “auto-pilot” in the store, thinking in our own bubble about the task at hand while negotiating other people, carts, displays, etc. almost on reflex. We also look down for functional reasons—to check the shopping list, put items into the cart or talk with a child seated in the cart.
Food companies want their brands in the vantage point of the consumer. If a shopper doesn’t see the Eggo waffles in the first place, they certainly won’t be bought on impulse, if at all. Thus, competition for the right shelf space is hotly contested and therefore worth the extra investment.
Tuesday, April 5th, 2011
The nuclear disaster unfolding in Japan is raising concerns about the safety of nuclear reactors and their role in meeting the world’s energy needs in the future. Germany shut down eight of its oldest reactors. Italy has put its nuclear plans on hold for a year. Safety reviews will delay the opening of new reactors in the UK and China. But at least one country is still barreling ahead with its nuclear ambitions: Iran.
“Though the Iranian government’s nuclear program, dubiously marked by poor safety practices and earthquake-prone topography, creates the potential risk for a natural-cum-radioactive disaster like that at Fukushima, Japan, up until now there has been little of the way of a public debate in Iran,” writes Fariborz Ghadar, director of Smeal’s Center for Global Business Studies, and his coauthors in an article on The Atlantic‘s website. “A combination of misguided nationalism and government misinformation has compelled many non-official Iranian elites—including staunch regime critics—to support the Islamic republic’s self-professed ‘inalienable’ nuclear pursuits.”
However, since the Fukushima disaster, a growing number of Iranian opinion leaders are speaking out against the country’s nuclear ambitions, according to Ghadar and his coauthors, Karim Sadjadpour of the Carnegie Endowment for International Peace and Ali Vaez of the Johns Hopkins School for Advanced International Studies.
In The Atlantic, they argue that Iran’s nuclear pursuits are not worth the humanitarian risk, economic costs and little power they might actually produce:
The Bushehr reactor today resembles a virtual petri dish of amalgamated, antiquated, and illicit technology—from 1970s Germany, Russia, and rogue Pakistani scientist A.Q Khan—ominously situated at the juncture of three tectonic plates.
A project that begin in 1974 by the Shah of Iran has turned into multi-billion dollar money pit—beset by revolution, war, mismanagement, and sanctions—that has produced nary a watt of nuclear energy. Heightened international pressure and persistent technical difficulties have prompted warnings even from normally incautious Russian nuclear officials about the possibility of a Chernobyl-style disaster in Bushehr.
… While Japan’s nuclear crisis isn’t likely to compel Tehran’s current leadership to reconsider its nuclear course, it has seemingly spurred a more serious debate amongst Iran’s scientific, intellectual, business, and religious elites about the merits of such a project, and their heretofore understanding of nationalism and modernity.
Throughout the course of the last three decades, the rulers of the Islamic Republic have bestowed the title of “martyr” on hundreds of thousands of Iranian citizens whose lives were unnecessarily cut short—in traffic accidents, natural disasters, or the prolonged eight-year war with Iraq—often attributable to governmental mismanagement.
In a 21st century Iran, in which dignity, not martyrdom, is aspirational, Japan’s devastation has seemingly enabled a growing number of Iranians to see their own nuclear ambitions in a different light. Nationalism does not have to mean gratuitous defiance, modernity cannot be reconciled with a culture that celebrates deaths that were wholly unavoidable, and an inalienable right to enrich uranium should not come at the expense of an inalienable right to liberty, security, and happiness.
Monday, April 4th, 2011
Due to the recent events in Japan, many companies, like Boeing, are concerned. The practice of keeping inventories lean in order to boost profits is proving to be problematic and Japanese suppliers are unable to keep up with demand. An article in Bloomberg Businessweek discusses the risks associated with just-in-time inventory. Smeal’s Susan Xu, professor of management science and supply chain management, shares her thoughts on what supply chains need to do to avoid these risks.
Today’s supply chains are operating under lean manufacturing principles which embrace low inventory and just-in-time (JIT) delivery. However, a tightly coupled supply chain removes inventory redundancy and makes the network as a whole more vulnerable in the face of disruption, as illustrated by the significant impact of Japan’s earthquake on part deliveries of Boeing’s 787 Dreamliner, which is already more than three years behind schedule due to perpetual production delays. To avoid the downside of JIT, companies need to increase safety stock to certain extend to isolate the impact of disruption. However, stockpiling inventory in anticipation of low probability, high impact disruptive events is also not a cost-effective strategy. Companies need to create reliable and cost efficient supply chains by using other risk mitigation strategies.
First, a move toward modularization and mass customization in recent years has allowed many companies to offer customers with a wide variety of products. These products tend to have flexible configurations and it is often the case that a part in shortage can be replaced by another part with supply. Flexibility in product design and product variety can be an effective strategy for supply chain risk management. In times of crisis, a company can dynamically influence consumer choices by offering reconfigured products or alternative products via dynamic pricing, incentives and promotions. Dell used this tactic effectively to manage its part shortage problem during the Taiwan earthquake in 1999. In contrast, Boeing was unable to alter the configuration of 787 Dreamliner due to its unique product design.
Second, relying on a single source for a critical part of a product can leave a company in a highly vulnerable position when the supply chain is interrupted. Boeing single-sourced most parts of 787 Dreamliner, as few suppliers were capable of producing these sophisticated parts. It has been shown in academic research and practice that risk diversification via multi-sourcing can help companies maintain a steady supply of critical parts. However, risk diversification may not be achieved by simply lining up multiple suppliers. There have been many real world examples, including ones illustrated in this article, where a single catastrophic event simultaneously degraded the capabilities of suppliers located in the same region. In a recent project, partly supported by my NSF grant “Risk Management of Supply Chain Networks with Dependent Disruptions,” we show that companies not only need to multi-source, but also need to select the suppliers who are not subject to common-cause disruptions (e.g., the suppliers located in different geographical locations).
Third, in the assembly phase of supply chain operations, the deliveries of subassemblies must be highly balanced and coordinated, to prevent the delay of the final assembly due to shortages of certain subassemblies. Boeing suffered from repeated delays because it outsourced subassembly operations to a large number of suppliers worldwide, many of them faced with their own interruptions such as natural disasters, labor unrest, and economic downturns. The results from our recent NSF project show that, while risk diversification is desirable at the component level, risk concentration is preferable at the assembly stage (e.g., selecting suppliers located in the same geographical region). In retrospect, if Boeing had decided to use its in-house capacity for the subassemblies of 787 Dreamliner, it might have been able to avoid some significant delays.