Thursday, May 26, 2011

Lean Leaders Are Everywhere – If You Make It So

By adopting five key skills, everyone in an organization can – and should – exhibit Lean Leadership qualities.

The first article of this series discussed how many Lean initiatives either fail outright or fail to deliver as planned. Furthermore, that article went on to attribute these shortcomings to four cultural factors. This article explores the second of these cultural factors: Lean Leadership. We will focus on why leadership is critical and highlight the qualities that distinguish Lean Leadership from leadership in general.

Recall, from last month's article, that the desired outcome of management is dramatically different from the desired outcome of leadership. Management's objective is to produce and perpetuate a system that will create predictable and orderly outcomes on issues that are important to the business. Such outcomes include: on-time delivery, good quality, as well as being on budget. Predictability is the key. Lean leaders do that by using such Lean tools as job breakdown sheets, process management, visual management and standard work. On the other hand, the role of leadership is to produce change, often large dramatic change. Let's explore how Lean Leaders do that at all levels in a Lean organization.

The Need for Leadership

Recall that:

  • To survive and prosper we must improve,
  • To improve we must change and
  • To change we need leaders to affect that change.

Because change occurs throughout a Lean organization, Lean Leadership is needed at all levels. But how does this work? How is leadership manifest throughout the organization, even at the floor level of a typical Lean manufacturing facility? How does the operator on the floor exhibit the three skills of leadership? (As a reminder, these skills are: 1) envisioning the future, 2) aligning people through communication and deeds and 3) motivating and inspiring others to action.

That's easy enough to explain. If change is happening, someone is leading – because leadership is what it takes to create successful change. If an organization is changing, it is changing to something. That, in itself, creates a focus, a vision of the future. For the sake of argument, say a worker starts with a kaizen report. He may discuss that effort with others in his work cell and solicit their ideas and support. He also may discuss at his shift turnover with his shift replacement to reality-check his concept. In so doing, he is aligning the resources that are needed to make his "vision" a reality. Then, as he completes the Kaizen, gets any approvals that may be needed and others follow suit, he has in fact motivated the team into action. The tool he uses may be a kaizen and A3 or a simple suggestion – it really doesn't matter. In a Lean facility, the floor worker has the tools, the authority and the empowerment to facilitate change in this manner, and in so doing, he is leading. A Lean organization cultivates this type of a culture so that changes can occur at all levels and consequently leadership can be manifest at all levels.

Lean Leadership Requires New Skills

I read a lot in the literature about what it takes to be a Lean Leader and, quite frankly, I believe that most of it really addresses the weaknesses in leadership in general. Most of the advice has little to do with anything specifically related to Lean. Yet there are some skills that seem to be far less important in many leadership roles, but are absolutely critical if you want to be a Lean Leader. There are five skills that I have found to be particularly helpful.

1) The Lean Leader must be technically competent. They need not be technical experts, but they must understand the basics of the Lean strategies, tactics and skills. Does that mean the plant manager or division general manager needs to understand SMED? Absolutely! They need not be experts in SMED, but they must be SMED literate and SMED competent. There is no substitute for this. Even at the division general manager level, it is not practical to make just-in-time decisions if you do not have the requisite technical knowledge.

2) The Lean Leader must be present on the job site on a regular basis – he or she must go to the gemba. The leader must be present when things are going well and must be present at the problem sites as well. They must often be in the middle of the action – not to micro-manage, but to know the pulse of the place, the pulse of the problems and the pulse of the people. Lean Leadership is neither a long-distance event nor is it a spectator sport.

3) Lean Leaders must not only be teachers, they must also preach and promote teaching at all levels. Lean Leaders make sure that all of their direct reports are good teachers. In classical leadership, the role of teaching is frequently delegated – not so with the Lean Leaders.

4) The Lean Leader is an excellent role model. He or she is a "do as I do" individual. For example, as a Lean Leader teaches 5S, you can count on his or her office space meeting standards. More than any Lean Leader trait, "walking the talk" is the one behavior that garners group support and respect from subordinates and peers alike. Conversely, it is the one trait that, if not practiced well and consistently, will quickly undermine a Lean implementation.

5) The Lean Leader must teach leadership. This is the real key to sustaining the gains. Teach them to keep a focus, teach them how to get their resources aligned and teach them how not to "de-motivate" their subordinates and peers and you will have gone a long way toward teaching leadership.

Everyone Can – And Should – Be a Lean Leader

In a Lean organization, Lean Leadership is practiced at all levels. It is not a "management thing" – it must be practiced by everyone. Lean organizations are built upon the concept of continuous improvement. Changes occur in all processes at all locations within a Lean organization. If an organization wishes to change, it needs the skill of leadership to properly execute the changes.

Furthermore, once Lean Leadership is taught and properly delegated, the "leadership footprint" in the company is enhanced: it is stronger, it is more obvious and it is also more pervasive. Consequently, when there are personnel changes anywhere, there is more leadership momentum within the organization. This action means an organization is less likely to lose all its gains simply because one charismatic leader just happens to leave. This expanded footprint concept is missed by many organizations, and hence their changes and improvements tend to have less staying power.

So how do practitioners know if their culture contains the element of Lean Leadership? They need to go to the gemba and see for themselves. Are the leaders technically competent? Are they found on the floor when business is routine as well as in times of upset? Do they "walk the talk"? Are they good teachers, and, most importantly, do they teach Lean Leadership? These are all measurable behavioral traits. The presence of Lean Leadership at all levels throughout the company is a powerful tool to change a business, and to change a culture.

About the Author: Lonnie Wilson is the author of How to Implement Lean Manufacturing (McGraw-Hill, 2009). He also is the founder of Quality Consultants, located in El Paso, Texas, which teaches and applies Lean techniques to Fortune 500 firms as well as small entrepreneurs, principally in the United States, Mexico and Canada.

Thanks to iSixSigma


How Virtual Assistants Can Be An Asset For Small Businesses

Virtual assistants are qualified individuals providing administrative, technical or creative assistance from a home office, and generally work on contract. They are not fully-fledged employees, and often have more than one assignment on hand.

Every so often we hear of Virtual Assistants being changed and new ones recruited. Many companies have a track record of VAs being replaced every few months. The nature of work being such, this is not a smart business move. While it is acceptable to use some VAs periodically for specific assignments, changing the set of regular VAs can spell doom. They must be treated as an indispensable part of the team and they too must be able to figure out the needs of a project and contribute accordingly to enhance the performance of the company. They also have their own set of grievances, and allegations which make them leave assignments and look for newer ones. It really seems to be a case of open distrust, but with communication channels open, and an exchange of ideas and expectations from each other, both VAs and companies can find an amicable solution and establish a long term working relationship.

Some factors to consider include:

  • Looking for the right Virtual Assistant- Businesses need to hire the right VA with the appropriate expertise needed for handling their business. It is not correct to hire the first one they find and then expect them to perform from day one. A solution is advertising for VAs and short listing three to five of the ones seeming most suitable. It is only after a candid interview will it be possible to pick the best one. Asking for references and tracking their past performance will also give valuable insights in to the potential and capability of the virtual assistant.
  • Specific targets and expectations- If you do not know yourself what exactly your end goal is, and only have an idea about what you want, there is no way that the VA will be able to deliver. It is important to have clear cut targets and goals and these can then be converted into expectations from the VA. It may mean starting on a small project and going through it in detail with the VA so that the next one can be handled in the same manner. Being able to communicate and giving the VA time to understand your personality, your code of ethics and your style of doing business, all help in getting the best out of them, and making sure that the one hired is the one that stays.
  • Showing appreciation- VAs are as human as full time employees, and a bit of appreciation goes a long way in helping them do better. Having a VA on tenterhooks whether he or she is doing things right, the fear of being fired, or being hauled up for mistakes, does not let them put in their best effort. On the other hand, letting them know when a job is well done, that you care and have a long term perspective for keeping them, will bring out the best and help them provide results that you would like to see.
Eventually VAs are like any other member of the team, needing time to settle in and understand the requirements of the task at hand. Giving them the right inputs and constant encouragement at every step will ensure that there is no need to look beyond the one you have, to hire another one.
The Author:     Neil Jones - Neil is currently plying his trade as head of marketing for eMobileScan, a technology company specializing in offering their customers a tool set that will help to increase the productivity of their workforce.


What Makes An After Action Review Successful

In the first part of my 2 part series looking at After Action Reviews, I explained what an After Action Review is, and outlined the different activities that take place during it. In part 2, I want to follow up with an overview of what needs to be done to ensure that an After Action Review is successful.

Let's get straight to it, with my 8 tips on how to ensure that the process is successful

Have a good independent facilitator

The facilitator role is key, as they will dictate the direction and pace of the After Action Review. If the AAR is to be a success it is vital that they remain impartial. For this reason it is good practice to have a facilitator who was not involved in the project. Where I work, we have a pool of trained facilitators who make themselves available for a certain number of After Action Reviews each year.

Everyone involved in the project needs to attend

There is no point in doing an After Action Review if everyone in the project can't be there. If anyone is missing you will almost certainly miss out on some aspect of what happened during the project. As a result you will be unable to identify all of the potential learning.

Ensure there is no blame

It must be clear going into the After Action Review that the purpose is to focus on learning, and not on finding a scapegoat. The climate, should be open and free from free, in order for there to be a successful outcome. The facilitator should make this clear at the start of the review.

What happens in the After Action Review, stays in the After Action Review

The only content that should be discussed outside of the review, is content that the participants agree to share. Normally this takes the form of Action Reports, which are created at the end of the review. This is important as participants will then feel free to be open when discussing the project. Again the facilitator should make this clear at the start of the review.

Meet as soon as possible after the project conclusion

It is key that the After Action Review takes place as quickly as possible after the project. Finding out how people felt about a project i.e. exploring their emotions is an important aspect of learning what to do the next time. After time passes most people forget how they felt, especially if they go on to work on other projects. The danger of leaving too long a period, is that the focus will only be on technical aspects of the project.

Create SMART Actions to be taken out of the Review

SMART actions (Specific, Measurable, Appropriate, Realistic, Timely) are essential if what is learned from the After Action Review is to be applied successfully in the future. If actions are too fuzzy, and not assigned an owner then what was learned during the review, may not make a difference next time.

Output should be linked training

To ensure that mistakes during a project are not repeated by others in future projects, it is important that what is learned during the After Action Review, is embedded into company training programs.

Leader Support

It is crucial that senior members of the team are fully supportive of the After Action Review. Any indication that management do not support the process can quickly spread to more junior members of the team, and as a result the review is not taken seriously.

As you can see there are a lot of factors that go into making this process successful. Based on my experience I would highly recommend the tool to anyone who is committed to learning not just at an individual level, but also at the organizational level.

Let me know what you think via the comments. Have you participated in an After Action Review in the past? If so, what factors contributed to its success? For those of you who haven't used this process, I'd be interested in hearing your thoughts.

The Author: frankbradley - I live in Kilkenny, Ireland, and I'm married with one daughter. I was born in Derry, and came to Kilkenny via Manchester, England, and Dublin. My passion is all things Social Media, and for the last 2 years I have been working as a Social Media Evangelist for Oracle, where I have worked for the last 8 years. This role entails, promoting the use of Social Media internally for improved communication and collaboration.


Where The CEO Is Just Another Guy With A Vote

At Namasté Solar, nothing is more important than the idea of workplace democracy.
Why democracy?
Blake Jones is a longtime student of inequity. While working as an engineer in Nepal, he was appalled at the unfairness of that country's caste system. In Egypt, he squirmed when colleagues chided him for wearing jeans "because it was unbefitting of my status." When he returned to the United States to work at a global engineering firm, Jones concluded that power and status in the workplace were largely a function of access to information. Those denied information grew disengaged and often quit. In 2004, Jones, with Wes Kennedy and Ray Tuomey, laid out the founding principles for their ideal company. Namasté Solar would be flat, employee owned, transparent, and democratically managed. "One person, one vote," says Jones. "It's the best way to make decisions and the right way."

The deal sounded sweet. In 2008, a number of large companies and private equity firms expressed interest in buying Namasté Solar and dramatically amping its growth. It was arguably the biggest decision ever faced by the business, which designs and installs solar-electricity systems. And Namasté would make it the same way it makes all decisions: painstakingly and communally.

And so began the meetings, weeks of them, including two daylong retreats. The company's co-owners (around 40 employees at the time) debated passionately, with some urging "Sell! Sell!" and others recommending caution. To ensure every voice was heard, large conclaves dispersed into small groups, in which more-reserved workers could comfortably speak their minds. Finally, the co-owners crowded into a conference room where, by a show of hands, they rejected the offer.

"We recognized our culture means everything to us," recalls Teri Lema, Namasté's business manager. "We decided we would rather make a go of it and stay small to preserve the way we do business."

Namasté Solar is an employee-owned cooperative in which more than 70 percent of workers hold stock and thus can vote. That stock is priced at $5,000 a share, and each employee can buy a single share. CEO Blake Jones would have liked the price to be higher, but on this as on many issues—whether to expand the company's service offerings, for example, or whether to open a Denver office—he found himself on the losing end of the democratic model that he and his co-founders put in place. "A 22-year-old recent college grad who is an apprentice installing solar panels on rooftops has the same vote as I have," says Jones. "I regularly don't get my way."

Namasté's evolving approach to democracy illustrates how a core cultural value scales with the size of a company's work force. In Namasté's first couple of years, decisions were made by consensus, and everyone voted on everything. At around 15 or 20 employees, Namasté switched to operating by consent. A single thumbs-down would table an issue, but employees could abstain from voting. At 35 employees, the company established a supermajority threshold of 60 percent, with questions attaining the magnitude of a possible sale requiring assent from two-thirds of the staff.

To prevent constant votes from dragging down productivity, the company created committees to decide narrower questions. Membership isn't restricted by role. An installer interested in marketing can sit on the marketing committee. A designer concerned about HR policies can sit on the human-resources committee. Decisions affecting everyone are made in one of the company's bimonthly Big Picture Meetings, usually so packed that people line up along the walls. There, an issue's "driver" (the person shepherding it to resolution) presents pros and cons for as long as 45 minutes, soliciting feedback throughout.

On rare occasions, decisions are made by the board, which is composed of five employees elected by their colleagues for one- or two-year terms. It was the board that voted to initiate the company's first-ever layoffs at the beginning of the year, when changes in Colorado's solar subsidy program suddenly altered the company's outlook. The board also considered options like cutting everyone's pay, "but then you take a hard look at the positions you have during times of feast that are unnecessary in times of famine and realize it's time to cut that job role, not just pay that person less," says Ryan Dulaney, a project manager who plans to run for a board seat in the next election. "I'm really proud of the way we handled it."

Jones says he fields frequent questions from outsiders about inefficiency—specifically, whether Namasté's elaborate decision-making apparatus cranks along too slowly. He argues that the company is, in fact, extremely efficient, because by the time a decision is made, employees are lined up behind it. "It takes our ship longer to change direction, but once we do pick a direction, everyone is rowing with full fervor, and we reach full speed more quickly," says Jones. "Even if people are in the dissent, they feel like their voice was heard."

As for the constant hits to his own authority, Jones doesn't care. "I'd rather people look at me as a peer or a fellow business owner than a boss," he says. "Something I've heard from other CEOs is that they feel very lonely at the top. I don't."

Thanks to Leigh Buchanan / Mansueto Ventures LLC. / Inc.


How To Leverage Sustainability Initiatives For Finance Transformation

Today, being a sustainable business – an organization that integrates environmental and social performance with financial results – is a growing imperative, and reporting should reflect this new reality. The finance function has a central, and expanding, role in supporting sustainability.

These new responsibilities can be catalysts for finance transformation initiatives intended to help the business grow, improve efficiency, and manage risk and compliance. In fact, such sustainability-related triggers can create opportunities to improve reporting, transparency, and business performance, as well as mitigate business risk.

Where Do They Intersect?

Sustainability's emergence as a core business issue adds a new dimension to finance, including setting finance strategy and vision, and designing and implementing changes across the finance organization. Sustainability initiatives can trigger finance transformation in six key areas:

Enterprise value. Sustainability initiatives can be evaluated as investment opportunities rather than just costs, so sustainability considerations can be incorporated into finance strategy, and the finance organization can provide input into sustainability investments decisions and maximizing potential returns.

Stakeholder relations. Scrutiny of corporate sustainability performance continues to grow among many stakeholders, so a sustainability communications strategy can help position the company as a sustainability leader and influence its investment opportunities, recruiting and retention, and product and brand loyalty.

Reporting. Many organizations seek sustainability information from companies today. It is critical to define and develop internal and external reporting strategies, processes, and controls to communicate sustainability information accurately and consistently.

Tax and regulatory drivers. Governments often influence private-sector sustainability initiatives through tax laws and regulatory requirements, so leading companies incorporate sustainability considerations into tax planning, risk management, and operational performance assessments.

Greenhouse gas and waste stream impacts. Greenhouse gas (GHG) regulations effectively introduce a cost of carbon and monetize an organization's GHG reduction efforts. Leading organizations factor carbon pricing and GHG and waste stream emissions into financial planning.

Enterprise risk management. Reduced energy, commodity, and resource consumption can lower business risks of dramatic price increases. Leading organizations are incorporating sustainability-related risks into their risk maps and accounting for the impact of fluctuating resource prices in their planning, forecasting, and treasury activities.

Key Triggers

All six of the sustainability-driven triggers warrant consideration. However, sustainability reporting and tax and regulatory drivers, in particular, have risen to the top of many CFO agendas.

Sustainability reporting has external and internal dimensions. External includes regulatory compliance reporting and reporting to investors, shareholders, business partners, non-governmental organizations, and other constituencies. Internal supports ongoing development, performance, and analysis of sustainability initiatives and processes across the enterprise for management decision making and other purposes.

Differences in the way a company reports sustainability information to distinct audiences can create significant exposure to regulatory sanctions, shareholder actions, and reputational risk. Sustainability disclosures are subject to monitoring by environmental and financial regulators, shareholders, and other key stakeholders. Sustainability results are put on public view through scorecards such as the Global Reporting Initiative, the Carbon Disclosure project, and Newsweek's Green Rankings.

As a result, reporting requirements can drive activities across the four dimensions of finance transformation:

Strategy and vision. Defining metrics and key performance indicators around sustainability initiatives to help communicate progress and status to key stakeholders.

Organization. Staffing the finance organization with practitioners, who can monitor sustainability activities, analyze relevant data, and report results with accuracy and clarity.

Processes. Developing leading external and management reporting processes for reporting specifically how sustainability efforts translate into shareholder value.

Systems. Implementing technologies to enhance management reporting capabilities and integrating systems and migrating to a "one report" design for issuing financial and nonfinancial results.

One approach to creating an effective sustainability reporting capability is to create a "center of excellence" for sustainability policies, procedures, and communications. Such a center can become the focal point of responsibility for coordinating internal and external sustainability reporting and aligning it with financial reporting, supported by the appropriate infrastructure. The finance organization is uniquely equipped to create and manage such a resource.

Tax and Regulatory Drivers

Many companies are aware of potential tax credits and incentives available for sustainability activities. However, these benefits often aren't fully captured because companies pursue them on a one-off basis and because "business units" or facilities may make sustainability decisions without seeking tax department input.

The finance organization, through its tax function, can drive a more strategic approach to sustainability-related tax opportunities, getting the tax department involved upfront in sustainability decision making. The tax department can conduct a range of business case and ROI analyses; implement internal controls and reporting mechanisms; stay abreast of federal, state, local, and international tax regimes to identify potential additional benefits; coordinate and leverage tax-related activities across jurisdictions and geographies; and maintain tax compliance over time to address the risk of losing tax benefits, with potential financial reporting implications.

As with sustainability reporting, tax activities may benefit from creation of a center of excellence for sustainability policies, procedures, and communications. Also, tax and regulatory requirements can drive activities across the four dimensions of finance transformation:

Strategy and vision. Incorporating sustainability ¬associated tax and regulatory perspectives into the development of finance strategy and the related operating model.

Organization. Staffing the finance organization with practitioners who understand tax and regulatory issues, and who can analyze relevant data and report results with accuracy and clarity.

Processes. Developing leading practices to leverage potential tax relief for sustainable capital investments; performing tax planning related to sustainability regulations; enhancing tax and other regulatory compliance processes to account for sustainability; and completing required calculations, disclosures, filings, and related reporting.

Systems. Assessing and deploying technology tools to track tax benefits and compliance requirements.

With sustainability growing as a priority for corporations, the finance function is uniquely equipped to take a lead role in this emerging area of corporate activity. Finance can bring increased focus, rigor, and consistency to sustainability efforts, while adding value to the organization as a whole by transforming itself to meet tomorrow's demands and opportunities.

Thanks to Chris Park, Samuel Silvers / Penton Media, Inc. / Business Finance Mag


The Value Of Letting Customers Have Their Say

I recently visited an online store and for some reason, I was hesitant about placing an order, unsure about the security on the site. Looking around for a "Testimonials" page, I was unable to find one. I wanted reassurance from other customers that they had achieved customer satisfaction from this site and I didn't see it so I left.

Many websites will have a Testimonials page which offers reassurance to customers. However, they tend to be limited in number and the recency of the testimonial is often not available to see. Can a review feedback service offer more than a "Testimonials" page? I think it can. Having recently installed Louder Voice on my site, I thought I would share with you for reasons for doing so and the advantages I have found so far.

Why use a review feedback service?

  • It offers feedback – negative and positive. In the case of negative feedback, you have the opportunity to communicate with the customer and redress the situation, as well as improving your customer service and/or products into the bargain.
  • Positive feedback will increase confidence in your brand and should increase sales. It has been shown to improve sales conversions by up to 40%
  • It will improve the SEO of the site. Reviewers often name the product in the review too which also helps your SEO.
  • It provides up to date fresh content (which of course Google likes) but also reassures customers when they see recent reviews.
  • They are written by genuine customers and as not all reviews will be perfect, I believe that as long as customers can see that any problems will be addressed, it comes across as genuine. (by the way, you do see every comment before you publish it)
  • If a customer is unhappy, it is better that they tell you about it and give you a chance to resolve the problem, rather than they telling many others without you knowing.
  • Do have a strategy in place to deal with any negative reviews so you are prepared should one happen. I once noticed an angry customer post a very disgruntled update on an online store's Facebook page. The company eventually reacted (they didn't notice it for 2 days) by writing some pretty obvious false 'positive' reviews which enraged the disgruntled customer even further and she wrote yet another inflamed review. Most reviews will be positive but be prepared to act to assuage the customer who isn't.

    I had long admired the way Puddleducks have their most recent reviews on their front page, very visible, thereby offering reassurance and confidence in its service and products.

    Reviews from the Puddleducks website

    At Garrendenny Lane, we have an excerpt of the review appearing in the right side bar of the front page and they alternate in turn. They are not the main focus of the page, being quite subtle but are still very visible. When the plus symbol is clicked, the customer can see a selection of reviews.

    Reviews are also posted on the product page. There is a score star system so if a score of 4 out of 5 is awarded, for example, 4 stars light up. The comments are also available to see. I have found this particularly useful in reiterating the quality of our products, particularly with items such as soft furnishings where shoppers often like to feel the quality as well as see the product.

    It is also possible to have the reviews posted to our Facebook Reviews page in the same click as it publishes the reviews on the website, thus spreading the good news. As you can see in the image below, it is a separate tab on the business page. Tthe reviews page provides links to the products, provides the score and review per product and gives the overall score of all the reviews too.

    Approximately 10% of customers asked to review, will do so.
    We email the customer about a week after despatching it with a polite request for their review. LinkedIn offers a wonderful opportunity for businesses and person to ask for and include reviews on their profiles and it has long since been seen as a valuable tool. No matter what you are selling, letting potential customers see what their peers thought about your products and services will provide potential new visitors to your site and confidence for users to go ahead and purchase. Please leave your comments below.

    The Author: lornasixsmith :- Lorna owns the online home, gift and lifestyle store Garrendenny Lane Interiors. Living in 'the sticks' she enjoys using social media (her blog, facebook, twitter) to engage with other businesses and with her customers.

  • Why Lean Manufacturing Fails

    A misunderstanding of the concepts of tools and their relationship to business processes – along with a name disadvantage – can lead to the downfall of a Lean implementation

    During both prosperous and difficult times, successful businesses naturally look for new ways to improve performance. However, in recent years, as the world economy suffered through one of the worst recessions in history, many companies turned in droves to Lean and other variations of continuous improvement programs to rescue their sagging businesses. But, did they really learn during this process?

    Despite the enormous popularity of Lean, the track record for successful implementation of the methodology is spotty at best. Some recent studies say that failure rates for Lean programs range between 50 percent and 95 percent. To analyze this level of performance from a Lean, problem-solving perspective, continuous improvement experts should be asking: Why do so many companies fail to achieve Lean success?

    While the causes are numerous and extensive, I will focus on one of the most significant reasons: failure to understand the theories and concepts of Lean and their relationship to the entire business.

    What's In a Name?

    First of all, there is the name itself. The commonly used term "Lean manufacturing" perhaps could be the worst-coined phrase for this type of continuous improvement methodology. It automatically emphasizes two things that conjure limited expectations of the functionality of this business methodology: "Lean" and "manufacturing."

    The dictionary definition of the word lean ("lacking in richness, fullness, quantity; poor") brings up unfortunate connotations. When mentioned in business circles, Lean is often associated with trimming down, reducing or (most notably during the Great Recession) lack of sales or work. Thus, when the word "lean" is spoken, most people immediately think of doing more work with fewer people. Because no one prefers unemployment to a stable job, figurative walls are automatically erected to defend against the inevitable layoff.

    Companies considering Lean also need to understand that "manufacturing" is a woefully inaccurate term to describe the full uses of Lean concepts. Lean is a business methodology, not simply a manufacturing tool. It requires complete and total commitment from the highest executive levels and must cascade down to all departments and throughout all levels of business.

    Lean does involve manufacturing, of course, but it also directly affects sales, customer service, human resources, research and design, finance, administration, purchasing, scheduling, and building maintenance. Failure to understand how improvements (or lack thereof) made in one area will affect another can result in transformation failure. If your manufacturing team improves processing time from five days to one day, but your "pre-production" team still requires 25 days to get the order to manufacturing, you haven't gained much on the competition.

    'Flavor of the Month' Resistance

    Given that so many companies have misused the Lean approach, resistance is to be expected. This push-back also creates barriers to the change that needs to take place for an effective Lean transformation. Meanwhile, the understandably skeptical staff considers the methodology to be just another "flavor of the month" that will eventually be abandoned.

    But how does a Lean transformation become another flavor of the month? Businesses in all sectors are jumping on Lean. Some truly do the research and understand what they are getting into – usually realizing it is far more than they had foreseen. However, far too many believe that simply applying the tools (5S, kaizen, value stream mapping and so on) will get them on the road to quick success. They don't take the time to learn of the theories and concepts needed to sustain the transformation. They don't review those theories and concepts thoroughly and align the business to the methodology.

    Here lies an additional level of cause. As flavor-of-the-month management is so readily displayed in business today, the faith required for a Lean transformation often does not exist. Too many businesses initiate change, only to fall away when they cannot overcome this barrier.

    Arguably, there are several solutions to this lack of faith in Lean. For instance, businesses committing to Lean transformation should not use the time benefits gained from Lean as an excuse to pile more work onto their employees. Simply adding more work to the pile only lowers productivity, morale, and both the physical and mental health of the staff. Taking the time to work with the employee, learning to identify necessary tasks, removing unnecessary work and discovering more available time to do more valuable work (without increasing the overall workload) will result in better understanding between employee and manager, more trust, communication, and overall employee performance.

    Nor can a business use Lean as a tool for headcount reduction. Certainly, layoffs made headlines across the globe during the Great Recession, including some companies touting Lean. Many companies used the downturn in business as the excuse for layoffs, claiming they weren't Lean-related, but that's like claiming it's not your fault the house burned down while holding the empty gas can and the matches.

    Total Commitment

    The single most significant key to a Lean implementation is that all parts of the business must make the transformation through total commitment to Lean theories, concepts and tools. For example, if your finance team is still using standard cost accounting, you will not see the financial gain of implementing Lean. If finance has no desire to change, the executive level must step in and drive change.

    When Lean is implemented to reduce staff sizes or add work without eliminating waste, or is focused too heavily on manufacturing, the transformation is bound to fail. Some improvements will be made, but they will be neither sustainable nor, more importantly, continuously improved upon.

    Newtonian laws state that every action has an equal and opposite reaction – it is a simple theory. The difficulty lies in understanding the reaction, preparing for the reaction and working with the reaction. Failure to understand the relationship that a Lean transformation has with the entire business will cause an unexpected, and unwanted, result.

    About the Author: Mike Thelen is the continuous improvement leader at Wells Enterprises, the makers of Blue Bunny ice cream, based in Le Mars, Iowa, USA. He has led continuous improvement/Lean initiatives in positions ranging from front-line supervisor to system facilitator in various corporations since 1998 and is a certified Green Belt. Thelen also offers educational and conference speaking services, and is founder the free Aberdeen Lean Forum.

    Thanks to iSixSigma


    How Sustainable Is Groupon's Business Model?

    What customer wouldn't want to score a deep discount on dinner, beauty treatments and other services, especially during a downturn? Barely three years old as an industry, online group buying sites are witnessing rapid growth, as more subscribers sign up, more partner businesses sign on, revenues climb and venture capitalists swarm to invest, further driving up business valuations as a result.

    The most prominent group buying site, Chicago-based Groupon, has 2011 revenues estimated at between $3 billion and $4 billion. Google last December offered to buy the firm for $6.4 billion. After the acquisition was unsuccessful, the search giant launched its own venture, Google Offers. Facebook, too, is entering the space, joining the roughly 500 group buying sites that have emerged worldwide.

    But much of that "wild exuberance" is miscalculated and could bring ruin to investors, warns Wharton marketing professor David Reibstein in an interview with Knowledge@Wharton. Taking Groupon as a case in point, he says the industry's current growth rates are unsustainable. Also, he faults the site's business model, arguing that it will leave customers, suppliers and investors disenchanted.

    An edited transcript of the conversation appears below:

    Knowledge@Wharton: Online group buying sites are a growing industry. Competition is fierce. More than 500 group buying sites have sprung up even though the industry is in its infancy. What is driving all this action?

    David Reibstein: Part of it is because the Internet has provided a lot of power to the customer. Group buying has provided the ability to pool customers together to give them much more collective bargaining power. There's been a long history of customers trying to pool resources so they can buy more. Often there would be resellers who pool together and form cooperatives or even franchises that would collect individuals, but now consumers are pooling their buying interests together. And so, it is turning a lot of power over to the customer. That's great.

    Knowledge@Wharton: What are the strengths of this industry?

    Reibstein: It continues to offer some value to customers in terms of pooling them together and providing them some strength. It has often been the case that businesses have been able to buy from suppliers and get quantity discounts. This is now allowing consumers to buy in groups and afford ... quantity discounts. That is fantastic. There's no reason why this notion of customers pooling interests to be able to do group buying should go away.

    There is an advantage to the merchants as well. The advantage is, rather than sell one by one and customer to customer and doing the marketing effort one by one, it is really allowing businesses to be able to sell a significant amount of volume with more of it being channeled through one customer.

    Knowledge@Wharton: What exactly do venture capital investors find attractive about this space?

    Reibstein: Unlike the customer, the investors are attracted by the huge growth and the valuations that are going on in this industry. I firmly believe there's going to be a lot of money lost in some of these investments. What is it investors invest in? They invest in growth. They say, "Wow, this industry went from close to nothing [to] 500 suppliers." If you look at the total dollar volumes that are being passed through here, it looks like a tremendous amount -- and it is. But the question is will it continue to grow and particularly, will it continue to grow at the rate at which the number of suppliers is growing? The growth rate for [each] supplier will be negated by the number of suppliers. But investors are clearly attracted by the growth rate and the valuations.

    Knowledge@Wharton: The biggest of these companies, Groupon, is estimated to post revenues exceeding $3 billion in 2011. What is it about Groupon's business model that is driving such growth?

    Reibstein: The way this works is they go to merchants [and] say, "I am willing to sell some of your inventory and I am going to take a cut out of [the profit]. But you're going to have to give me a deep discount. If you don't give me a deep discount, we're not going to make it available to people." To some degree, they are operating just like a retailer. I am going to buy volume, I'm going to break that down and sell it to individual customers. And I'm going to sell it to those individual customers for more than what it cost me. That's exactly how every retailer operates. The difference is they are not buying any of the inventories. They are just a reseller.

    Knowledge@Wharton: Why do you believe that business model will not support the current growth rates?

    Reibstein: Let me talk about some of the fundamental weaknesses. Obviously, one is, however brilliant of an idea it is, there is also now a huge increase in competition. When Groupon had few competitors, it was more viable than it is now with 499 competitors.

    But that is not the big weakness. The Groupon business model works better during a recession than it does during a vibrant economy. I will explain why, and this is where it gets intriguing. The reason some retailers might be willing to provide supply to Groupon is because they have excess inventory. That is particularly the case for services. One of the services I notice frequently [offered on group buying sites] is that of beauty salons. They have so many seats and so many beauticians. If I don't sell that 3 p.m. to 4 p.m. time slot on Thursday afternoon, I cannot carry that time slot in the inventory tomorrow. It perishes. It perishes in the same sense as an [unsold] airplane seat [once] a plane takes off down the runway. Because of the recession, there has been an abundance of people who are forgoing beauty salons and other sorts of luxury, discretionary services. Rather than let that airplane seat go [unfilled] and the beautician hour go with no revenue, [companies] would [rather] sell it for a little above whatever the incremental costs are. So there is a willingness to do deep discounting.

    As the economy picks up and there is less excess inventory, the availability of supply will go down. The willingness of the merchant to offer deep discounts will go down. The business proposition to the customer will be less attractive if [the item or service being offered] doesn't have the same deep discount.

    Knowledge@Wharton: A big chunk of Groupon's subscriber base is said to be made up of educated young women, and that is one reason why Groupon features many beauty and wellness offerings. How crucial is the makeup of the subscriber base for the success of the business model?

    Reibstein: If you look at the nature of the customers who are buying from Groupon, they tend to be younger, more white-collar, they may be better educated and may be a similar profile to those who shop at [warehouse club chain] Costco. And so, they tend to be relatively savvy shoppers. Many of the merchants offer these deep discounts, not with the hope of perpetually offering them, but given that they have excess inventory right now, it would be nice to let people sample their product or service with the hope that they are going to like it and subsequently will come me back and buy it when it is not being offered on Groupon [and] is at its full retail price.

    Unfortunately, the people Groupon is attracting are those who are referred to as "deal prone customers" -- who are, to put it differently, price-sensitive customers. These customers tend not to be the most loyal of customers. And because you have attracted them with a low price, you are more likely to lose them because somebody else offers a lower price. The merchant might say, "Well I am not making money on these customers, but hopefully I am building some future business." But there is the challenge of whether they are really building future business, because what they really getting is a fickle customer. Merchants are going to discover that the Groupon customer is not where you build your future business. Therefore, the savvy merchants are going to learn that this is not a good way for them to do business.

    Knowledge@Wharton: How could this industry change customer expectations? What would that mean for retailers?

    Reibstein: There is a real concern that [the model] takes regular customers and makes them more deal sensitive. Imagine the risk for a spa that has a set of customers who are willing to pay $120 each [for services]. Those customers either see or learn of a Groupon offering. It's one thing when [a Groupon deal attracts] an incremental customer who is paying $60 for what normally would have been $120, and [the business is] getting $60 it was not going to get [otherwise]. But it is disastrous when you take customers who were going to pay $120 and now you only get $60 from them.

    You want [to attract] those customers who were not at all part of your existing customer base.... What would be really bad is if you make your Groupon offering frequently enough that the customer just sits around and waits, [thinking,] "Rather than getting my normal salon service, I am going to wait until they offer that 50% to 80% discount." [In that case,] the entire normal margin that the salon owner was going to make is totally gone.

    Knowledge@Wharton: There have been cases where retailers have been swamped by customers with Groupon coupons and unable to cope. Also, there may be offers where Groupon does not attract the minimum required number of customers to "unlock" an offering. What are the downsides there?

    Reibstein: Indeed, there have been some merchants that have been overwhelmed with the volume, and the correct solution is for retailers to be able to put a cap or a ceiling [on the discount]. That may create a little bit of frustration among customers, but that doesn't really hurt Groupon [because] it gets people to respond even quicker and buy it now before the deal closes. I think it works to Groupon's advantage to have a ceiling.

    As for the floor, if you don't get a minimum number of people buying an offer, that makes sense, too. This is, again, in the same spirit of retailers buying from manufacturers; generally there is a minimum order that is required, and [group buying] is very similar to that.

    Knowledge@Wharton: Wouldn't a supplier or retailer's existing client base feel shortchanged when others with coupons pay less?

    Reibstein: The very loyal customer who is paying full retail price will start to resent [those who are using the Groupon discount], particularly if you go to a restaurant [and you are] willing to pay the full retail price. If everybody else who is walking in with a Groupon coupon is paying less, you will feel like an idiot. So retailers start developing some of that resentment in their best customers.

    Knowledge@Wharton: How would customers paying full price respond?

    Reibstein: This piggybacks on what I mentioned earlier. You could anticipate consumers will start saying, "I see you offering it to [Groupon users] at $50 off, and I expect you to give it to me. If you don't, then I am going to be more irritated." That has not happened as yet that we know of.

    But I am sure there have been customers who were normally going to pay full retail price who now aren't because they were able to get a Groupon deal. A savvy customer could say, "I am not going to buy anything at Groupon that I wasn't normally going to buy. I'll just go online and look to see what is on there. If I see something that was already on my shopping list and now I can buy it at a cheaper price, then it's great."

    Knowledge@Wharton: You said this model works best in a recession economy. We've heard the same thing being said about Walmart. Shouldn't group buying work just as well, or better, when the economy is stronger and people have more disposable income?

    Reibstein: It is the case that Walmart's market share grew during the recession. Walmart still works well, but it works better in a recession. There's no question that during the recession, consumers were looking for bargains. Previously, they were not as inclined to look for bargains.... If the economy were to recover, then just looking for the bargain becomes not as much of a selling point. Everybody's fear is when the recession ends, that they have trained customers to be looking for bargains.

    Knowledge@Wharton: The group buying market globally is largely underserved. These firms could enter huge untapped markets. Wouldn't that help them continue to grow at the current rate or even better?

    Reibstein: The answer is yes. They still have opportunities to grow by going into untapped markets. But then the question is going to be, how long will their growth continue, and what's going to happen in those markets as more and more competitors enter?

    Knowledge@Wharton: Groupon's valuation was last put at $6 billion. Do you see any parallels between what is happening in this industry and the dot-com boom and bust of 10 years ago?

    Reibstein: That $6 billion is what Google offered them [in December 2010]. I think Google was foolish to make that offer, and the only thing worse was for Groupon to turn it down. [Groupon later raised $950 million in fresh financing, giving it a valuation of $6.4 billion.] Groupon's value will not persist if it stays in its current model. There is this wild exuberance, because of the growth, that has gotten everybody euphoric. But the question is, will it persist? Obviously, I don't believe that it will.

    I see a lot of parallels with the dot-com boom, and that includes the enthusiasm of growth and everybody running to the same spot. It's like a school of kids on a soccer field ... where they are all going to where the ball is. There are too many people in one spot, but that's where the energy is....

    Knowledge@Wharton: What can Groupon and the other group buying sites do to fix the flaws in their business model?

    Reibstein: There are lots of things that can be done to make the model even better. Groupon just announced one, which I think is big. There is Groupon Mobile, which is really cool. Groupon Mobile knows if you are near a merchant that is on Groupon, and it will message you that the pizza shop you are walking in front of is offering a 50% coupon....

    The next enhancement that would make sense is to get down to individual information and be able to know that John likes pizzas and we're going to offer that to John. Or that John bought a new sweater and maybe a blue shirt would go with that sweater. If they start customizing offerings individually, it will be all the more powerful.

    Knowledge@Wharton: Could the explosive growth of group buying become too big to handle for Groupon?

    Reibstein: I am not at all worried about that. When you have growth, it is hard to manage it. But when you get the kind of valuations that you have seen [for Groupon], they can afford to find people to handle that growth volume. Everybody wishes they had that problem.

    Thanks to Knowledge@Wharton


    Power To The People Or Just A Fad? Forecasting The Future Of Group Buying Sites

    It took a lot for Rob Solomon to leave sunny Silicon Valley for wintry Chicago, but it's a change he was happy to make. The e-commerce veteran moved to the Midwest to become president of group buying site Groupon, spotting the company's potential to be the next eBay. Named by Forbes magazine as the fastest growing company in web history, Groupon leverages consumers' penchant for online bargain hunting with the power of social networking to build a business with skyrocketing sales. "The Internet has never been really very good at bridging the gap between traditional commerce and the web," Solomon, ex-CEO of travel search site SideStep, says. "Then we came along."

    Groupon -- from the words "group" and "coupon" -- negotiates deeply discounted deals with mainly small businesses and alerts its legion of e-mail subscribers to the offer, such as half off on a Swedish massage. The deal is triggered when a minimum number of users buys the voucher, and consumers are rewarded if their friends purchase as well. The discounts run from around 50% to more than 90%, but the deal must be purchased within a limited time, usually 24 hours. To entice buyers, Groupon's writers craft a zany ad in keeping with the Internet zeitgeist. "Creating a masterwork of art can be like wandering through a maze: After a lengthy period of reflection and contemplation, you'll still probably starve," reads the 50% off ad for the Absolute Abstract art gallery in Philadelphia. "Appreciate an artist's risks and transcendent joys with today's Groupon."

    The deals and the drama have propelled Groupon into the e-commerce stratosphere. Founded in 2008, Groupon now reaches 25 million subscribers in 29 countries. The Chicago-based company serves more bargain-hunters than its biggest rival, LivingSocial, which has more than 10 million subscribers in the U.S., Canada, U.K. and Ireland. Dozens of similar sites have sprung up to tap the group-buying trend as well, including BuyWithMe, Dealster, SocialBuy, HomeRun, Tippr, DealOn, TownHog, MyDailyThread, CrowdSavings, Bloomspot, Scoop St., Twongo, EverSave, YouSwoop, You've Gotta Get It, TwoBuckDuck, DealPerk, FlyCoupon and many more. Other websites, such as restaurant reservation site OpenTable and companies like AOL and Cox Media Group are getting in on the act by launching their own Groupon-like services. (OpenTable focuses specifically on eating establishments.) In a fragmented market with low barriers to entry, Groupon is by far the largest -- for now.

    But are group buying sites just a passing fancy that will end as quickly as today's 70% off deal? "I don't think it's just a fad," says Kartik Hosanagar, a professor of operations and information management at Wharton, noting that social commerce sites tap into the needs of both small businesses and budget-conscious consumers. The deep discounts and social nature of the deals appeal to the Internet-savvy, while local shops get mass exposure without the upfront marketing costs of newspaper ads or TV and radio spots. Groupon markets the deal and shares the sales with the business. "Customer acquisition costs for small businesses are very high," Hosanagar adds. "Groupon allows small businesses to acquire customers in a fairly efficient manner." Moreover, the business model "leverages the power of social networking and collective buying in very natural ways -- that's here to stay as well."

    Back to the Future?

    Group buying sites are not new, but previous incarnations failed to gain much traction with consumers. A high-profile flameout was Mercata, backed by Microsoft co-founder Paul Allen. The Bellevue, Wash.-based company opened its online doors in 1999 to people who wanted to band together for discounts on products such as kitchen appliances. The items would start out at one price and as more users clicked to buy, the price dropped. But two years later, the company closed shop. Mercata founder Tom Van Horn said at the time that poor market conditions contributed to the firm's demise. It didn't help that social networking had yet to take off. Consumers weren't familiar with the idea of online group buying, and Mercata also had to compete with discounted prices on the same goods from other e-retailers.

    What makes group buying sites click today? For one thing, consumers are more comfortable with socializing and sharing information online, as the popularity of Facebook, LinkedIn and Twitter attest. The new sites also offer deals that usually cannot be found elsewhere on the Internet, such as 45% off cupcakes at the corner bakery. Another difference: Groupon and similar sites reveal the amount of the discount upfront (although it's only triggered if enough people sign on to buy the item.) Mercata's customers, however, weren't told the final discount until a certain number of people agreed to buy the product. Such tweaks to the business model make the latest iteration of group buying sites more likely to last, experts say. (In February, venture capitalist Martin Tobias bought several group purchasing patents from Allen's Vulcan Capital and launched

    That doesn't mean there won't be an industry shakeout. It's already claimed SwoopOff, which merged with HomeRun. "There are a lot of copycat Groupon models and it's not clear all of them will survive," Hosanagar notes. Consumers probably will pick a few good sites to follow instead of signing up for dozens of them. To rise above its rivals, a group buying site needs to have a good brand name and reputation, he says. Small businesses will naturally want to partner with the site that has the biggest following; in turn, the greater diversity of deals will attract even more consumers. Meanwhile, the remaining sites will have to fight harder to get market share. "The question is, which [site] will brand itself well?" Hosanagar says. "Groupon has a significant head start there. The others are going to struggle with the issue of very few differentiators."

    LivingSocial CEO Tim O'Shaughnessy isn't quite ready to crown Groupon the leader yet. "The space is very crowded but it's all about scalability, and those that can scale their business will succeed in the end," he said in a statement. "LivingSocial intends to stay in the game, even as smaller players drop off." But the dynamics of the market could change, and observers expect small businesses to begin crafting more profitable deals for themselves -- possibly at the peril of profits for partnering social commerce sites.

    For example, Groupon negotiates with a small business to offer steep discounts, usually half off or more, and then takes 50% of the resulting sales. That leaves the business with at most 25% of sales to cover overhead and product or service costs. For many shops, that means the business will barely earn a profit or even lose money. If a spa offers 50% off a $100 massage, for example, sales would be $50 per customer and Groupon takes $25. That leaves the spa with $25. Let's say after paying the massage therapist and covering overhead and other costs, the spa loses $20 per customer. If 200 people bought the voucher and 70% redeem it, the spa's loss would be $1,300.

    Blinded by Big Discounts?

    The next time Tom Block, owner of the Naked Chocolate Cafe in Philadelphia, works with a social commerce site, he plans to design a more profitable deal. Block recently partnered with Groupon to offer a $10 voucher good for buying $20 worth of goods at his dessert and chocolate shop. Groupon took half of the sales, leaving Block with $5 in sales per customer for selling sweets worth four times more. His shop sold 2,500 vouchers and expects about 80% of them to be redeemed. While "I'm sure it's not a money-maker," Block notes, "it certainly keeps the awareness going, and that's why we wanted to do it."

    He is willing to offer another coupon, but "I might offer something more specific, like hot chocolate, instead of blanket gift certificates." Still, Block is not sure that he will ever make money off the steep discounts required to put out an offer attractive to users of Groupon and its competitors. Two-thirds of businesses surveyed nationally said their Groupon deal was profitable, says Utpal Dholakia, a marketing professor at Rice University. However, fewer than 15% of consumers who used their vouchers came back.

    According to Solomon, Groupon encourages small businesses to slash prices steeply to make the deal compelling enough that consumers will be willing to try something new. "The traditional methods [of acquiring customers through newspaper ads or The Yellow Pages] have failed pretty miserably over the last 10 years."

    But what happens once masses of consumers are trained to expect big discounts? If they don't find a compelling deal at one site, they will hop to the next one. The result is erosion in profitability for businesses in an area as bargain-hunters shift from shop to shop or deal to deal. "You train customers to do things that are not ultimately that attractive," David Bell, a Wharton marketing professor, points out. "I think it's important for these businesses not to give away the farm" for the sake of a short-term surge in business.

    If deals are crafted to bring in new customers, Bell says, the one-time loss on the promotion could be worth it in the long run. For example, if a clothing store that mainly attracts female shoppers wants to boost its male patronage, the business could launch a 60% off sale on men's shirts. "This is almost a necessary condition for it to work -- pulling in people who might not otherwise have thought of using your product or service. If you only get the regulars, it won't work."

    Offering a deep discount also could pay off if a business employs the markdown to introduce a new product, suggested Eric Clemons, a Wharton professor of operations and information management. For example, when Procter & Gamble's Gillette unit wanted to introduce consumers to Trac II, the first two-bladed razor in the market back in the 1970s, the company offered the product at a discount. According to Clemons, consumers at the time didn't realize the advantages of a razor with two parallel blades, and the discount motivated them to try it. Once people get to know a particular product, businesses should end the promotion, Clemons adds, noting that similar discounts don't make sense for existing products because the same customer pool will buy them, just at a lower price.

    For a small business to justify a deep discount on existing products or services, Clemons says, the management has to believe that the product or service offered is better than what the market currently believes. For instance, a nearby Italian restaurant suddenly offers a tasty group discount deal: $15 for $30 worth of food. The business has not been doing well and believes the promotion will improve sales. Management is willing to take a loss on that deal, thinking the influx of new customers will be worth the expense in the long run. But if the eatery doesn't have a good reputation in the city, the restaurant will get a rash of bargain-hunters coming in for that cheap meal and most won't be back until the restaurant offers another good deal. "The question is: Why would the market not know how good you are on an existing product? Why will it fall in love with you after the promotion?" Clemons asks. "For you to win, your product has to be better than what the market thinks it is right now." The deal could work, he suggests, if the restaurant in question has hired a new chef or wants to introduce a revamped menu.

    Personalization and Scale

    As the online group buying market gets more crowded, look for sites to try new things, experts say. For one, deals are likely to become smarter and more focused, Hosanagar notes. Instead of blasting everyone with the same deal of the day, for instance, a discount for dentures would only hit senior citizens, while a 60% off voucher for children's clothes would be targeted to married couples in their early 30s. Group buying sites could also send users some deals based on past purchases. If a consumer bought photography lessons, for example, he or she might be offered a deal on cameras.

    Groupon is already trying to tailor its offers more closely to particular users. Deals are now customized according to a consumer's age, gender, location and interests, Solomon says. Instead of sending out one deal per day to all users in a particular city, the company now crafts 10 to 20 offers. Subscribers continue to receive one discount offer per day, but the deal they are sent is based on the information they provide the site. Groupon also has partnered with eBay and newspaper publisher McClatchy to offer its vouchers on those companies' websites. Solomon declines to comment on sales, but The Wall Street Journal reported that revenue is on track to hit $400 million this year -- no small feat for a two-year-old company. According to a Bloomberg report, Groupon is seeking venture funding that may value the company at about $3 billion. Asked if any buyers have come calling for Groupon itself, Solomon would only say that "people are very interested in our model."

    With an increasing number of competitors banking on that same model, Hosanagar suggests that the key to long-term viability for Groupon will be improved personalization and leveraging its scale. "If customers are flooded with e-mails from group-buying sites and private sales sites, the key question is which ones they will bother to read," he says. "Groupon needs to become as good as Netflix in terms of understanding customer preferences, segmenting them and personalizing their experience."

    Thanks to Knowledge@Wharton


    Be There Or Be Square: The Rise Of Location-Based Social Networking

    Be There or Be Square: The Rise of Location-based Social NetworkingTo find the hottest restaurant, bar or concert venue in town, many young adults are no longer checking in with their friends. They're "checking in" virtually via Foursquare, a location-based social networking site. Participants log onto the site and "check in" via smartphone to let contacts who are fellow users know where they are. At the same time, they learn what those users are doing -- whether a co-worker is eating at the restaurant next door, or if friends are gathering at a nightclub across town. As "check in" alerts are traded between phones, the people attached to them instantly become aware of the spots that are popular in their social circles.

    Foursquare, which was founded by Dennis Crowley and Naveen Selvadurai, was introduced at the March 2009 South by Southwest music and interactive media festival in Austin, Texas. In recent weeks, the New York-based company has made headlines by gaining about 100,000 users in 10 days during this year's South by Southwest event. Web traffic to Foursquare has increased by 400% since October 2009, according to the research firm Hitwise -- and that doesn't even count users who access the service via third party mobile applications.

    The site currently has more than 800,000 members "checking in" at locations around the globe. In addition to sharing their location with contacts, check-ins earn users points and digital merit badges through Foursquare's built-in game. For example, a "Bands on the Run" badge was offered to South by Southwest visitors who checked in at seven concerts in one day. The most coveted title is that of "mayor" -- rewarded to the most frequent visitor to any given location.

    While social networking sites -- including Facebook, Yelp and Twitter -- are taking notice of Foursquare's rising popularity and adding "check in" and location features to their sites, experts caution that function is more important than form. "Positioning a product as the new cool, hip thing is great for getting people to flood in, but it's also going to make people flood out quickly as people move onto the next hot thing," Wharton marketing professor Jonah Berger says. "For a product to persist, at some point it has to transition from a hip new thing to something that has functional value."

    Although Foursquare and competitors like Gowalla are the subject of most of the current headlines, experts say the true potential lies in companies knowing exactly where customers are and pitching offers or offering services based on the spots these customers frequent. As smartphones become more common and social networking gains a broader audience, consumers are consciously sharing more information than ever about their daily routines. That information makes it easier for businesses to advertise, or offer special discounts, that fit what someone is doing at a given moment. The challenge for Foursquare and other companies, observers suggest, is transitioning beyond buzz and finding uses for geo-targeting that are both profitable and practical.

    "Location is a broad variable that's going to be built into lots of different kinds of apps and services," says Kevin Werbach, a Wharton professor of legal studies and business ethics. "Social networking has obviously been a huge business phenomenon over the last few years. People have a virtual relationship with their friends but they also have a physical relationship in terms of where they are at any given time. Location is a valuable piece of information that can potentially enhance the richness of any kind of social interaction."

    iPhone's Inflection Point

    Location features were incorporated into mobile phones as early as 2000, but earlier social networking sites built around the technology, such as Dodgeball, failed to gain a foothold. Dodgeball, which had relied on text message blasts to update users on their friends' activities, had been founded by Crowley and then sold in 2005 to Google, which eventually shut it down. 

    "The inflection point for this was the iPhone," says Kevin Nakao, vice president of mobile and business search for web and mobile publisher WhitePages. "The iPhone was the first big device that got into the hands of a lot of consumers and added really easy-to-use location elements. They integrated mapping software into the device. Not only that, they made it easy for developers and publishers to integrate our applications." The iPhone has spawned such location-centric apps as a ski and snow report by outdoor gear retailer REI and a program called Flixster that allows users to search for movie times and reviews. Nakao notes that downloads of the WhitePages iPhone app increase significantly any time the program is featured on iTunes. In addition, he says, 80% of the campaigns offered via the application by major brands are geo-targeted, or displayed to consumers in specific markets that are chosen by the ad buyer.

    The usage of phones that allow Internet access, and participation in social networking sites, grew significantly in recent years. In a 2009 survey by the Pew Research Center's Internet & American Life Project, 32% of adults reported using their mobile devices to surf the web, up from 24% in 2007. Only 8% of adults told Pew in 2005 that they had a profile on a social networking site; that number was 47% for all adults in 2009 and 72% for men and women ages 18-29. According to Hitwise, U.S. web traffic to location-based social networking sites has increased by 350% in the past year. Profiles of Foursquare users reflect the statistics; co-founder Selvadurai, 28, says most of those checking in on the site are college students or young professionals in their 20s and 30s who live in urban areas. The site initially launched only in large U.S. cities but since December has been available anywhere in the world. Tokyo, for example, is close to becoming second only to New York for having the largest number of user check-ins.

    "Location has always been interesting, but now the technology has caught up," says Selvadurai. "We're finally in a position where you no longer have to go through carriers. There's no longer a lengthy process to get an app approved. Anyone can build [an application with a location feature]."

    He and Crowley, 33, were interested in developing a networking site based on location because they thought the concept better lent itself to spontaneous meet-ups -- the trading of tips and suggestions and other "serendipitous connections" that can be difficult when people live thousands of miles apart. They incorporated the game of points, badges and mayorships into Foursquare, thinking it would ignite users' competitive spirits and encourage them to explore their communities. "The idea of sharing is an honest one and one that is attractive no matter what kind of demographic you fit into. It's just a matter of teasing out the right rewards [for different age groups]," Selvadurai says. "We've actually heard stories of people using [Foursquare] to check into a playground with the intention of announcing to other parents that, 'Hey my kids are here. You should come and have a play date.'"

    Although Wharton operations and information management professor Kartik Hosanagar isn't surprised that young, urban-dwelling men and women are the early adopters, he believes location-based social networking has the potential to gain broader appeal because the services tap into a person's natural desire to belong to a community, and to gain social status by becoming a recognized "expert" in knowing the hotspots in his or her home turf. "Those are the types of things that go across generations. They're more fundamental," he says.

    Marketing professor Eric Bradlow agrees, noting that "every product that penetrates the market starts with a segment. You don't mass market to start; you target a market and then expand to other segments." Location-based social networking sites, however, are already beginning to attract brands that appeal to a broader audience. A partnership between Foursquare and the Bravo television channel allows users to get tips and recommendations from the channel's personalities, and earn badges based on the channel's programs such as "Top Chef" or "Real Housewives of New York City." Austin, Texas-based Gowalla, which recently announced a similar partnership with the Travel Channel, worked with Chevrolet to offer a free ride promotion for visitors to South by Southwest.

    Laura Wilson, a talent buyer for Philadelphia restaurant and concert venue World Café Live, was first exposed to Foursquare at South by Southwest. Anyone can add a location to Foursquare, and when Wilson signed on to add her business to the site, she found that hundreds of users had already been "checking in" there for months. Now World Café is planning to offer free food to each week's reigning "mayor." "It's something we need to pursue ... because for us it's driving people in," she notes. "It has the potential to be really important. We have to try to keep up with it, even if it doesn't become the next big thing, because we don't want to miss out on any opportunity to get the word out. If it is the next big thing, we want to be an early adopter."

    Transit hubs are among the spots where users of location-based sites are checking in most often. Gowalla, which has 175,000 users in more than 165 countries, reports that its number-one check-in location in Philadelphia is the airport. Foursquare recently partnered with San Francisco's BART train service to offer discounts on monthly passes to users who frequently traveled via public transportation, as evidenced by repeated check-ins on the social networking site.  Foursquare has implemented a "cheater code" that employs phone GPS signals to verify that users are where they say they are -- i.e., that someone isn't "checking in" at a local gym while lounging on his or her couch at home. Foursquare users can opt to keep their check-ins "off the grid" -- meaning that his or her locations are kept private, but he or she still earns points toward merit badges and discount offers from third party businesses.

    Annoyance vs. Gain

    Widespread efforts by businesses to tap into location-based social networking are what will cause many consumers to tire of the trend, warns Wharton marketing professor Peter Fader. "There's a really good analogy here to e-mail marketing. Fifteen years ago, you got your first e-mail from a company saying, 'Here are this week's specials chosen just for you,' and you said, 'This is cool' and 'How do they know what I wanted?' You read it, you maybe even bought something," he notes. "Maybe the second or third time it was still kind of cool, but then you got totally burned out with it and annoyed."

    Fader expects that, just as companies were eager to establish a presence on Facebook and Twitter, the same will be true for location-based social networking. "You've got a zillion companies jumping onto Facebook, posting ads, getting nothing for it and saying, 'Well, this is bad' and then they never do it again. My point is they jumped in too quickly and they gave up too early." He suggests that many businesses expect too much out of social media efforts and that those who use Foursquare -- or Twitter or Facebook -- as part of an integrated marketing strategy and in a way that makes sense for the brand, will gain the most bang for their buck.

    In the midst of rumors last week that Yahoo may buy Foursquare for $100 million, the site's creators are still figuring out what type of revenue model would be most profitable. Co-founder Selvadurai notes that the most natural fit would be charging venues for advertising blasts or offers of special discounts to frequent visitors. "A lot of the specials that you see -- the venue specials and the 'mayor' specials -- were actually suggested by the venues themselves. Venues found out that customers were using Foursquare. They wanted to tap into that and reward them."

    But Bradlow cautions that charging businesses to bring ads to users has the potential to overload location-based social networking sites to the point that many customers will stop paying attention. He suggests a model in which Foursquare or another location-based site would earn a portion of revenue for purchases made in connection with promotional partnerships with other companies. "I think firms gravitate toward [social networking] because of -- I won't say fear -- but the feeling that, 'We've got to be everywhere.' That doesn't mean they should do it," he says. "Firms need a valid return on investment for their marketing spending. They should test the impact of location-based marketing, see the click-through rates, and partner with a company to see if people actually purchased anything."

    Hosanagar believes that Foursquare and other location-based sites work best when partnered with businesses that naturally lend themselves to social interaction and community, such as coffee shops, theaters and hair salons. "Some consumer experiences are natural and social -- the small local businesses are the kinds that embrace this and really do so successfully."

    Thanks to Knowledge@Wharton


    MySpace, Facebook And Other Social Networking Sites: Hot Today, Gone Tomorrow?

    Popular social networking sites, including MySpace and Facebook, are changing the human fabric of the Internet and have the potential to pay off big for investors, but -- given their youthful user base -- they are unusually vulnerable to the next 'new new' thing. As quickly as users flock to one trendy Internet site, they can just as quickly move on to another, with no advance warning, according to Wharton faculty and Internet analysts.

    MySpace, with 70 million visitors, has become the digital equivalent of hanging out at the mall for today's teens, who load the site with photos, news about music groups and detailed profiles of their likes and dislikes. Other social network sites include Facebook, geared to college students, LinkedIn, aimed at professionals, and Xanga, a blog-based community site. In all, an estimated 300 sites, including smaller ones such as StudyBreakers for high schoolers and Photobucket, a site for posting images, make up the social network universe.

    Wharton marketing professor David Bell says the long-term success of these sites will depend on their ability to retain the interest of their members. "There is a fad or a fashion component to all these networks. Some will come and go," says Bell. The classic example, he suggests, is Friendster, which burst onto the Internet in 2003 and soon had 20 million visitors. Late last year, it slipped below a million after MySpace and other sites with better music and video capability lured Friendster users away. "A lot of the [success] is serendipitous. These things can have exponential growth. Then, if another community shows up that has better functionality in some way, there can be a mass migration."

    Wharton marketing professor Peter Fader agrees that social network sites are powerful, but mercurial, particularly since most are aimed at teenagers and young adults. "It's a complete crap shoot. Look how many of these have come along and how many were touted as the next big thing. How many have disappeared completely or find themselves in some strange little unexplainable niche?"

    He points to Orkut, an invitation-only service introduced by Google in 2004 that is little known in the United States, but wildly popular in Brazil, where more than 70% of its users are based. Indeed, Orkut has made Portugese a second language in its interface. "In Brazil it's gold, but in the U.S., where the service is domiciled, nobody's even heard of Orkut. And there's no good reason why."

    While MySpace and Facebook currently rule the popular crowd on the Internet social scene, Fader says the forces that make a hot site are difficult to quantify; any site could become the next outcast. "There is no reason to believe that these, or future ones that are emerging on the radar screen, will be any different. I don't think anyone can come up with a genuine reason why they have become so popular, outside of 20-20 hindsight." Echoing that point, an article in the April 30 New York Times reports that AOL plans to launch a social networking site to be called AIM Pages as a competitor to MySpace, Yahoo360 and other such services.

    One way for investors to benefit from the rise of social networks would be develop a highly diverse portfolio, Fader adds. "I have no problem with betting on a crapshoot, but you want to hedge your bets carefully and accept the downside in exchange for what could be an incredible upside. You can't control your destiny with these nearly as much as any other web site or portal."

    MySpace, Facebook and Other Social Networking Sites: Hot Today, Gone Tomorrow?Next Target: Cell Phones

    For the moment, MySpace and Facebook are hot. News Corp. paid $580 million last year for MySpace as part of a $1.3 billion Internet acquisition spree. Facebook just received an additional $25 million in venture capital.

    Both companies are planning to extend their reach beyond the computer screen to cell phones. Cingular Wireless, Sprint Nextel and Verizon Wireless are starting a service that will allow users to post messages on Facebook's home pages or search for other users' phone numbers and email addresses from a cell phone. MySpace has a pact with Helio, a wireless joint venture between SK Telecom and Earthlink, that will allow users to send photos and update their blogs or profiles by cell phone.

    According to ComScore Media Metrix, MySpace, with its 70 million users, ranks second behind Yahoo in pages viewed and time spent on the site. Facebook, founded by a 21-year-old student on leave from Harvard and backed by Silicon Valley venture capitalists, has 7.3 million registered users.

    Chris Hughes, a spokesperson for Facebook, says the company thinks of itself more as a directory grounded in real life rather than a social network creating connections between strangers. "We model people's real lives at their individual schools in a virtual space that enables them to exchange information about themselves. We are not focused on meeting new people, dating or anything like that. Instead, we want to manage information efficiently so that we can provide our users the information that matters most to them."

    Social networking sites in general rely mainly on a simple advertising model -- selling banner and text ads (although they ban uncool pop up ads). Facebook also permits sponsored groups in which a marketer can build communities within the site. BusinessWeek recently reported that Facebook had rejected a $750 million buyout offer and was holding out for $2 billion. "That number is nothing but rumor," Hughes says.

    When it comes to placing a valuation on the social network sites, Wharton marketing professor Leonard Lodish says traditional tools, such as the discounted present value of the profit stream, apply to these new Internet networks as much as they do to any other business. He recalls an argument he had with marketing students during the Internet boom of 2000 about Internet music seller CDNow. Lodish said the firm would never be able to justify costs of $70 to attain each customer. The following year the firm declared bankruptcy.

    In the case of MySpace and Facebook, Lodish points out, the cost of gaining new customers is practically nothing because users join voluntarily and provide their own content through their profiles. In addition, the cost of running the sites' web servers is relatively low. If a classic advertising or subscription revenue model is used, he says, low-cost social network sites could be highly profitable.

    Yahoo must buy or develop content for its site to attract advertisers and Google has to invest in its search capabilities, Lodish notes. "Yahoo makes a lot of money selling ads on its sites. Why can't Facebook and MySpace do the same thing?"

    Nitin Gupta, an analyst with The Yankee Group in Boston, says MySpace is rooted in linking emerging bands to new fans, which makes it a logical partner for a media company, such as News Corp. The company can use the site to test or build buzz around its products. "These have become almost living systems, as the social network has begun to expand beyond a place for people with certain musical tastes and become popular for dating and all sorts of things."

    While the MySpace population has grown, the site's roots remain in media, Gupta adds. "Today, it continues to be used to identify individuals interested in, not just music, but television and radio as well." Before News Corp. bought MySpace, NBC used it to show clips of "The Office" before the show was aired on the network. While media companies may be a more logical fit with a social networking site, other businesses might mesh too, according to Gupta. "It's a little more difficult to build a community around a Norelco razor, but it's possible."

    Meanwhile, Gupta says, social networks have power beyond ad revenue to act as a customer relationship management (CRM) tool for companies selling products or services. "There's a lot of focus on advertising and banner ads and the amount of traffic. But it's important to look beyond traditional forms of web adverting to see the real potential -- which is leveraging the connectivity of the sites and using them to form communities around products, media or services to really be in contact with your users."

    Still, he acknowledges, it will not be easy to convert those relationships to new revenue sources. "The future is in finding ways to monetize the online community beyond just traditional web advertising, although it's going to be difficult for online communities, even those behemoths like MySpace."

    According to Wharton professor of operations and information management Eric K. Clemons, connectivity is nice, but the Internet bust of 2000 showed that revenue is what matters. "As we learned from the first dot-com silliness, value is not in click-through or eyeballs. Value comes from revenues .... Can you sell subscriptions to your data or your service? Can you charge for referrals or for purchases that result from referrals? Can you sell stuff? If not, your revenue is zero and your market value is zero."

    Safety and Privacy Concerns

    As MySpace and other social networking sites have grown, so, too, have concerns about Internet safety and privacy. The Center for Missing and Exploited Children reported more than 2,600 incidents of adults using the web to target children online in order to engage in sexual activity. In March, federal prosecutors in Connecticut charged two men with using MySpace to contact youths with whom they later had sexual contact. Following Congressional hearings about online sexual predators, MySpace hired a safety czar to improve the site's protections for young users.

    The popularity of social networking sites may also have unexpected consequences for users. A gay student attending a Christian college was expelled after administration officials viewed photos of the student in drag on Facebook. Twenty middle school students in California were suspended after participating in a MySpace group where one student allegedly threatened to kill another and made anti-Semitic remarks. In Kansas, authorities arrested five teenagers after one of the suspects used MySpace to outline plans for a Columbine-like attack on the boys' school.

    Gary Arlen, president of Arlen Communications, a Bethesda, Md., research and consulting firm, says MySpace users may also begin to shy away as they grasp the long-term consequences of putting up photos of wild parties or tales of sexual bravado. "This stuff may come back to haunt you 20 years from now. MySpace runs the risk of a social reaction, but that is part of being the pioneer."

    Despite those obstacles, he is enthusiastic about social networks' promise, although he says the sites' ultimate value is less clear-cut than other Internet successes, such as eBay and Amazon. "It may be that this is a very slow play because the existing sites, Friendster and now MySpace and Facebook, are building a habit among young users. It will become a part of how they operate in their 20s and 30s. This service will be part of the landscape."

    According to Bell, there are strategies that social network sites can use to avoid becoming tomorrow's abandoned property. One way to retain a site's aura is to limit membership. For example, Bell notes that when Diesel jeans faced the problem of losing marketing cachet by becoming too popular, the brand cut back on the number of outlets it would sell to. Facebook tries to limit itself to college students. Social networks seem to operate best when they strike a balance between heterogeneity, which provides large numbers of members, and selectivity, which keeps the hordes focused and engaged in the site, he says, adding that social networking sites also must keep pace with technology and provide new features -- for example, fast downloads. "To create stickiness you must have functional value and also community value. If either of those becomes diluted, you give people a reason to start looking elsewhere."

    As a web-based business, social networks do have some advantages over traditional companies in tracking user behavior in order to detect problems early. "If you are sophisticated, you can measure and monitor the rate at which users join and you can detect early warning signs, such as a drop off in the number of people interacting," says Bell. "There would be metrics to monitor if you are headed in the wrong direction."

    Bell also cautions that sites will need to remain subtle in their approach to marketing if they are to build on their current success. While they provide banner and text ads, even more valuable word-of-mouth promotion lurks in the buzz within user profile pages. "Part of the popularity of these things is that they are more credible and not explicitly commercial," he says. "If somebody on the Mac fanatic site tells me about iPod, it's more credible than Mac advertising. If people feel the networks are too corporate, that's a turnoff."

    Still, no matter how their future takes shape, Bell says these types of networks are ingrained in Internet society. "They're here to stay. Like eBay, they are embedded now. The idea of joining online communities and being able to participate in them is not going to disappear."