Sunday, November 25, 2012

Liquidating Twinkies: When Pension Benefits Fail to Go Quietly

After the first news struck the US media like a shock, the follow-up has been quiet and predictable. Hostess Brands, the maker of such classic snacks as Twinkies and Ho Hos (thanks to a European upbringing I have no idea what I am writing about), has been given permission to enter bankruptcy proceedings and liquidate its assets by the oddly appropriately named Judge Drain. That means job losses of 18,500 jobs and a search for buyers for its 30 or so brands and many production plants, distribution centers, and other assets.

The opportunistic hoarding and eBay selling of Hostess snack foods has subsided as people seem to be getting the idea that some other maker will likely take them over and continue making them. Yes, you can bid on eBay for a $200 box of Twinkies or a $50 box of Ho Hos (are Twinkies so much better?), but nobody is doing it. In fact, the bids are on boxes below $5. There is a support group for Twinkies on Facebook, but I am having difficulty determining whether it is a spoof.

Except for the true addict, the more interesting issue is how a maker of goods that seem to ignite so much passion could fail so quickly. The story is complicated and involves a botched Chapter 11 restructuring that left the firm with more debt than before (they are supposed to do the opposite), as well as two unions with opposite ideas of whether the firm could survive a strike. The Teamsters, who thought it could not, were right; the bakers' union, who called for a strike, were wrong. But the really interesting part is that a very contentious issue in the labor negotiations between the management and the unions was an increase in the employee-paid part of the healthcare cost and restrictions on pension payouts. Together, these reduced the benefits employees would get from Hostess.

Such changes are actually occurring in many Fortune 500 companies, according to research by Forrest Briscoe and Chad Murphy in Administrative Science Quarterly. Such cuts were originally made quite publicly after some firms discovered that their pension and benefit liabilities were large, and sought to reduce them as a cost-cutting measure. However, negative media coverage resulted, leading to reputational consequences, pressure from interest groups, and labor unrest like what Hostess experienced. As a result of these reactions, the diffusion of transparent cuts quickly slowed down. Instead of public and transparent cuts, firms started implementing more obscure spending caps that had the same effects on their costs, but were much harder for employees and media to understand and react to. These spread rapidly, in part as a result of a few consulting firms advising their clients how to implement these obscure benefit-cutting practices.

The result was diffusion by stealth. This is so clearly the opposite of regular diffusion processes, where more information leads to faster spread. The reason for the reversal is obvious. The managers in charge of these changes were fully aware that they were adopting unpopular, reviled practices, and would rather go under the radar than let it the consequences of their decisions become known. Which raises the question: do you know if your pension or benefits has been cut recently? If you work for a major corporation, the chances that it has happened are not so small that they can be overlooked.

Monday, November 19, 2012

The Bengal Army Mutiny, the Fall of the Berlin Wall, the Arab Spring, Occupy Wall Street

In 1857, 142 regiments of the East India Company's Bengal Native Army in India mutinied against their commanders, leading to one of the most serious military confrontations between Indians and the British colonial rule until its dissolution. In 1989, demonstrations occurred throughout East Germany, including weekly demonstration marches from the Nikolai Church to the Karl Marx Square in Leipzig. Starting at the end of 2010, the Arab Spring has in many nations revolved around a weekly cycle of protests that culminate after Friday prayer.

What do these events have in common? Hayagreeva Rao and Sunasir Dutta have published an article in Administrative Science Quarterly showing that religious festivals were the key trigger of the Bengal Army mutiny. This was because mutiny, which is a collective act of disobedience, involves enormous risk for every participant. It will only be attempted if each one is certain that the others also want to join. That creates a coordination problem. Under normal circumstances, army discipline will make a mutiny impossible, but the religious festivals allowed a "free space" for the soldiers to mix with each other and locals. They could also express opinions and hear others, and could understand that their own resentment was shared. For the Bengal Army, the resentment was around cultural and religious threats from British rule. In addition, there was a specific rumor that they would be supplied with a new rifle that used ammunition that was greased with fat from pigs and beef, a gross violation of religious norms. By itself, the rumor did not start the mutiny, but when combined with religious festivals it did.

And that brings us to the Berlin Wall and the Arab Spring. Just as the soldiers of the Bengal army lived in an army that was organized to maintain discipline and prevent mutinies – it even employed informants and spies – so did East German and Arab activists live inside states organized to prevent uprisings. East Germans had reason to protest for a long time, but organized repression made it difficult. In order to protest, it was necessary to solve the coordination problem of learning whether others also shared the same resentments and were also willing to risk protesting. The marches in Leipzig were astutely organized as peace prayers, which were then allowed to morph into nonviolent protests. Similarly, in many nations, Arab Spring protests took advantage of the Mosques as a natural assembly points and the Friday prayer as the most important prayer of the week.

In other nations with stronger secular anti-government movements, the "free space" was created differently. Instead of using a specific day and time, the protesters captured a specific place, like the Tahrir Square in Cairo, Egypt. This is the same strategy used by the "Occupy Wall Street" movement. An interesting feature of this strategy is that constant occupation of a specific location fits the staffing patterns of the government much better because it pits the usual full-time security force against full-time (and presumably scarce) activists. The protest peaks generated by religious free spaces overwhelm security forces by a mass of full- and part-time activists in a short time window. The difference in the unemployment rates of Cairo and Manhattan gives a clue to why the Egyptian movement had more staying power than Occupy Wall Street: there were more full-time activists available in Cairo.

Rao and Dutta's key point is that insurgencies are ultimately about the ability to organize and coordinate, just like normal organizations are. The special feature of movements like the ones mentioned here is that they are "Organizational Weapons of the Weak," used against those who are usually better organized and with greater control of resources. That makes them rare and interesting examples of creating organized behavior out of nearly nothing. 

Saturday, November 10, 2012

Sony Mobile: Dialing for Innovation?

Earlier this year Sony took full control over its troubled mobile phone joint venture Sony Ericsson, renaming it Sony Mobile. Taking control is the first step of a turnaround strategy, and the initial moves have already been made. There have been cuts in the workforce, and the old non-smartphones have been cut from the product lineup. Closer integration with the handset business music and gaming assets services has been put into place. Of course, all this just puts Sony on the starting line with any other modern handset maker, and does not create a recipe for winning. If you look at recent breakdowns of worldwide handset markets shares, you will find Sony in the category of - - “Others.” Clearly they have some way to go.

Sony has a long tradition of using design and innovation to fight competitive battles, and their new line of Xperia smartphones shows that the design part is working already. They are neat. But that, too, is so very common these days in mobile phones. How about innovation? Sony has a tradition for that. And, it would be typical of firms that have fallen behind their management’s aspirations for performance to increase the pace of innovation in order to turn the tables on the competition. Much research, including my own, has shown that firms that fall behind prefer to take the risky path of launching many products, and often innovative ones, in order to catch up.

But for Sony Mobile there is the complication that it is the subsidiary of Sony Corp., a conglomerate that has its hands full trying to catch up with competitors across a range of businesses. Will this make it more or less aggressive in its responses? Recent research by Vibha Gaba and John Joseph suggests that it will become less aggressive: While a firm or subsidiary that has low performance will compete more aggressively, being the subsidiary of a conglomerate with low performance leads to more caution. A likely reason is that the corporate owner is less focused on competition in the market place through product launches, and instead starts conserving resources. But that focus on resource conservation undercuts the subsidiaries’ wish to start a comeback from their weak competitive position. So here we have another reason why the multi-business corporation may be a less agile competitor than the single-business corporation: its business-level and corporate-level reactions to low performance are opposite! It is out of synch with itself.

The problem must be especially interesting for Sony Mobile, for two reasons. The first is that Gaba and Joseph did their research on the mobile handset industry, so Sony Ericsson is in the data they analyzed. The second is that one of the newer products in the Xperia smartphone is an agent 007 smartphone. I have not seen the movie, so I am not sure what that phone does. I am slightly scared by the prospect of people around me carrying it. But surely, if Sony Mobile can make the phone for somebody who so regularly flouts M’s rules, Sony Mobile can also find a way to flout Sony Corp’s limitations on how they spend their money.