Big Red Horseshoe - Vanderbilt Owen MBA Students on Business Strategy

Starbucks Strategy Incites Many Articles, Many Clever Headlines

"Ooh, that smell" proclaims the Forbes.com article on Starbucks' plan to remove warm breakfast sandwiches from the menu. The strong smell was taking away from the aroma of coffee, the company's bread and butter (so to speak).

There were other instant classics after the coffee giant announced its restructuring plan: "Starbucks Stinks," "Starbucks Expansion is Losing Stream" (a coffee pun rather than a sandwich pun?), and "Overhaul, Make It A Venti."

The New York Times could only come up with, "Starbucks to Close Stores and End Sandwich Sales." I guess they leave the bad puns to the sports writers. More from the Times on Starbucks' store situation:

Mr. Schultz also announced that his company would close 100 underperforming locations in the United States while scaling back the rate of store openings domestically. At the same time, Starbucks will move more aggressively to open stores overseas, where business remains robust. He did not identify the locations that will be closed.

In all, Starbucks will open 1,175 restaurants in the United States this budget year, down from its previous goal of 1,600. The company will open 75 more stores abroad than originally predicted, for a total of 975.

Much has been made about McDonald's entry into premium coffee market and how that would impact Starbucks, but the company's same store sales had already slowed -- down 1% in the U.S. last year.

Regardless of the new competition, Starbucks was in need of a change. It is time for that step that former growth kings tend to take: Go back to their roots.

The company is testing $1 cups of coffee (including refills) in Seattle. Hmmm.

Interesting note: CEO Howard Schultz said the company will not report same store numbers during the turnaround ("at least temporarily," as the Times put it).

Qtrax: The Non-Launch

Qtrax, a legal P2P service, has been all over the news for a few days. First came news that the service, free to users and supported by advertising, would launch today. The company played up the launch at the MIDEM conference in France.

Then came word that none of the four major music groups -- EMI, Sony BMG, Universal Music Group and Warner Music Group -- have a licensing deal with Qtrax.

Oops.

The company admitted to its exaggerations. "We are not idiots," said CEO Alan Klepfisz."We wouldn’t have launched the service in front of the whole music industry unless we had secured its backing. We feel we have been unfairly crucified because a competitor tried to damage us." Oh really? There's a big difference between general backing of the business model and the iron-clad legal backing that comes with a contractual agreement.   

There could be a number of reasons for the problem, but labels aren't saying much other than Qtrax does not yet have the proper licensing deals to offer their music on the service. Perhaps the service had changed and the original deals are no longer valid. Maybe Qtrax used the pre-launch media blitz to speed up the negotiation process -- a risky way to force the labels' hands. Or maybe Qtrax isn't very good at paperwork and should have had this taken care of long ago. My money is on the latter.

Here's my best guess: There was no way Qtrax was going to let MIDEM -- the best launching pad it would have for the next 12 months -- to come and go without grabbing the spotlight. So, without licensing deals, it weighed getting no hype at MIDEM versus finalizing the product and launching at a future date. It chose MIDEM as its coming out party and went full steam ahead. Not a textbook way to launch a product. Qtrax has had to publicly admit its original claims (regarding licensed content) were not true, and the press and blogs have got in a few jabs. Those are negatives, though, that can be erased if users see a great product when it's eventually rolled out.

Here's the bad news: My early impression of the site is that it is an unattractive, clumsy service. The site does not yet offer a download of the application, but Qtrax sent me an email this morning with a download link. Installation was fast and easy. Everything after that was a mess. It doesn't help that Qtrax doesn't yet allow for downloading or even streaming. (How can I judge a P2P service without streaming or downloading? Easy. I can tell how good a site is without listening to the music. It's the searching, navigating, indexing and layout that differentiates music services. They all sound the same.)

Had Qtrax thoroughly tested the site, worked out the bugs, cleaned up the rough edges and finalized the proper deals with labels, the launch would be a success. No such luck. Qtrax has teased reporters, techies and some music fans with grandiose promises it may never fulfill. Overcoming that initial stumble will take a lot of time and elbow grease. Eventual users of the product probably aren't aware of what has just transpired, but their perceptions will be shaped by those who have just witnessed this huge misstep.

How Not To Run An Organization

Today I will mix business strategy and sports and organizational design. From the Atlanta Journal-Constitution (via TrueHoop) comes an example of ineffective management and a convoluted organization structure at Atlanta Spirit LLC, owner of the Atlanta Hawks NBA team and the Atlanta Thrashers NHL team.

On Tuesday, Atlanta Spirit LLC dumped a CEO and a CFO.

I know. First reaction: Don't care. They'll eat it up at the Wall Street Journal, and maybe Staples. In terms of tangible product impact, this isn't quite like the Hawks or Thrashers dumping a center, which is to assume either team has one of those, either.

The fact Bernie Mullin (the outgoing CEO, president and traffic cop for the nine-headed ownership group) and Bill Duffy (bean-counter) are out of work illustrates that this remains sports' most dysfunctional executive unit.

The owners basically eliminated a layer between themselves and the teams. But Michael Gearon confirmed they also have created a new seven-person committee of relative department heads that reports to the nine-membership group, which runs the two teams, which have a combined zero playoff wins.

So, once again, the Atlanta Spirit math: Nine over seven divided by two equals zero.

Classic.

Miscellaneous 'Shoe: Folgers On Its Own, Irrational Widget Exuberance

-- Procter & Gamble to spin off its Folgers coffee unit. Over the next few years, P&G is expected to unload companies that don't fit with its desired portfolio of high-growth beauty and health care products.

-- The Wall Street Journal's Kelly Spors says 2008 will be the year bloggers start making money. How?

"Starting Feb. 1, San Diego-based V2P Communications is offering five-to-eight-second audio ads, called NetAudioAds, that will automatically play when a visitor lands on a blog or Web site. Publishers sign up for the free service and V2P then lines up advertisers, who bid on rates they will pay to have their ads played on a given blog. Bids generally start around $14 per 1,000 plays. Blog publishers get a 25% cut of the ad revenue."

No matter. My volume is usually off anyway. Now it's definitely off. By the way, taking 75% of revenue is attrocious. BlogAds takes about 30%. Spors mentioned a few other ad solutions by Revver and Google. The problem thus far is that many bloggers are part-timers and have an "I'll be happy with anything" attitude and take far too little money. By charging rates that are too low, they could be taking away money from those that charge correctly. Hopefully these new services will get them up to a fair and sensible rate.

-- Widget maker Slide gets two big investors -- Fidelity and T. Rowe Price -- and a valuation of $500 million. Is this irrational widget exuberance? Does that valuation assume Slide will have a monopoly on widgets? Business Week asks, "How could a widget company be worth half a billion dollars? What is the revenue model? How could it ever make a profit on slide shows running on other people's sites?" Then Business Week tries to rationalize the valuation. Lame. Look, I don't know much about widgets, but I do know that users will have little loyalty to one widget maker. There will always be something better to capture attention, and the barriers to entry are about as high as a gnat's eyelash.

-- Best business books of 2007, according to BusinessWeek.

General Motors' Crawl out of the Red

If you've followed the saga of General Motors in recent years, you probably know the struggling auto manufacturer unloaded a massive weight from its shoulders when it cut a deal with the auto workers' union. The Wall Street Journal had a worth-reading op-ed a few days ago about the "Two Heroes of Detroit," Robert S. Miller and Ron Gettelfinger. Miller is chairman of Delphi Corp, Gettelfinger is the president of the United Autio Workers.

In late 2005, Miller took over Delphi, an auto parts maker that was spun off from General Motors, and immediately took it into Chapter 11. He demanded steep wage cuts and declared that Delphi's losses brought "into sharp relief the different value the global market places on knowledge workers versus basic manufacturing workers." Many in Detroit, including Gettelfinger, lambasted Miller. The union eventually backed Miller's plan.

Two years later, Gettelfinger took a page out of Miller's playbook.

"On the heels of the Delphi agreement, Mr. Gettelfinger led the union into its quadrennial contract talks with the Detroit Three -- starting with GM. He hired a Wall Street bank, Lazard Ltd., to analyze GM's financial condition, and to assess objectively whether saving GM meant sacrificing such UAW shibboleths as full-freight health insurance, guaranteed medical benefits for retirees, full pay for laid-off workers and the like. The answer, of course, was yes.

Last fall the union reached historic deals that shifted retiree health benefits from the Detroit car companies to a union-run trust fund that the companies will fund at 60 cents on the dollar. The union also accepted two-tier wages, with lower pay for many new hires, and agreed to let the companies offer workers lump-sum buyout plans to shed unneeded positions. The short strikes that preceded the agreements with GM and Chrysler stemmed from Mr. Gettelfinger's need to sell the deal to the union's rank-and-file."

To cut is to cure.

More recently, reports say GM's plan to cut annual U.S. labor costs by $5 billion in the next three years will significantly improve earnings.

More recent GM news:

-- GM Daewoo developing low cost car for emerging markets

-- GM Wants Bigger Piece Of China Joint Venture

-- GM invests in cellulose ethanol

-- GM, Toyota battle turns electric

Nike Air Jordan Goes Green

From The Oregonian:

Nike says the Air Jordan XX3 is its first premium product designed according to the company's sustainable standards. The world's largest athletic-wear maker, based near Beaverton, says it changed how the shoe was designed and manufactured to reduce waste, use more environmentally friendly materials and eliminate solvent-based glues.

Industry insiders and designers lauded Nike for elevating sustainability goals to its most famous product. But they note that many of Nike's efforts to limit the shoe's impact on the environment are more baby steps than soaring, Jordanesque innovations.

Of all the stakeholders here -- which includes investors, manufacturers, activist groups and retailers -- I'd wager the ones that care the least about this announcement are those who buy Air Jordan basketball shoes.

But even a baby step is a step forward.

Catching Up With The 'Shoe

The Horseshoe took a much-needed rest during and after finals. Now that classes are back in swing, the posts will continue on a regular basis. Here are some of the items that caught my attention in recent weeks.

-- "Authenticity Over Exaggeration: The New Rule In Advertising" at HBS' Working Knowledge. "In this new reality, it's the consumer who runs the show for the most part, not the marketer—in fact, forget the 'consumer' label altogether. It's too limiting."

-- Nielsen will offer a service to help companies ensure that videos are being distributed and viewed online in legal, sanctioned ways.

-- Ford and GM (Saturn) working to overcome their hybrid gaps.

-- Sony BMG will join the other three major music groups by dropping DRM from its downloads. The first retailer to get Sony BMG's tracks will reportedly be Amazon.com, which will be the first online store to get DRM-free tracks from Warner Music Group. I thought it would take more time for all four majors to drop DRM, so hats off to them for ditching an anti-piracy policy that has limited growth in digital music sales.

-- Wal-Mart had its tax shelter case dismissed by a North Carolina court. In a nutshell, Wal-Mart used two real estate investment trust it owned to pay itself rent and deducted those rent payments when calculating state taxes.