2015-06-26 What makes big data big is not its volume but its impact on decision making!

Harikesh Nair

What makes big data big is not its volume but its impact on decision making!

This month, I feature an interview with Dr. Harikesh Nair, Professor of Marketing, Graduate School of Business, Stanford University. Specializing in marketing analytics, Dr. Nair blends applied economic theory and econometric tools with marketing data to better understand consumer behavior and to improve the strategic marketing decisions of firms.His research is a must read for anyone interested in big data and marketing through social media 

1.      Last year you delivered a short talk entitled “Building Better Employee Incentives with Big Data.” Can you summarize the highlights of that talk? How would you define Big Data?

I think the “bigness” of data should not be defined by the amount or the quantity of data or the speed at which it can be collected, but by its ability to make big impacts on decision-making and outcomes when utilized properly. For me, big data means the fact that information and analytics can be combined in new ways with domain knowledge that managers already had, to make large impacts on the organization. That is what I consider big data.

A lot of companies have made large investments in collecting data on how the companies interact with customers. We refer to that as CRM, or customer relationship management systems. We now can track a lot about customers—what the touch points are, what the customer did. That has generated a revolution in how consumer interactions with companies are analyzed. What I was discussing in the video was a similar revolution occurring within the firm. Specifically, in much the same was as customer interactions with the firm can now be modeled, we can think about how employees behave, how they interact with one another within the organization, and model employee behavior in a granular way. All of that can be tracked. We can conceive of the firm as an internal market. I think that is a huge change that will occur in the near future: the notion of big data will enter within a firm, an organization.

The fact of the matter is that right now, we really do not have a good understanding of what makes an employee good. We really do not have a systematic understanding of why some employees are good while others are not and what drives productivity. For instance, consider whether teams make employees more productive. Some employees may not perform well when working in isolation, but exceed expectations when grouped together into a team. Who should we group together? Similar or dissimilar people? What works better? We really don’t know. The advantage of the new scenario is we can now track who works with whom, how they interact with each other, and see whether productivity was higher or lower under different team configurations. Also interesting is the fact that all of that information can be combined with traditional HR data on who received a high salary, who was given a bonus, who received a commission. And you can match these data with actions employees took. Then you can ask questions like, “If you give this person so much commission, will you increase his productivity this much?” In other words, we can now quantitatively assess the value of a commission.

2.      In what other areas do you feel Big Data can be particularly useful in improving corporate performance? How can managers and staff systematically collect and analyze such data?

One analogy offered by a colleague is that big data is a natural resource like oil. Oil in its original form is not useful. It first has to be extracted and stored. Then, it has to be cleaned. Ultimately, it must be refined in a way making it useful for consumption in a vehicle or jet engine. Data are similar. The first step is data collection. But simply collecting and storing large quantities of data somewhere is not useful. The data need to be systematically cleaned and rendered in a form suitable for answering a business question. And finally - and I think this is the really big gap for an organization - data in and of itself does not “speak” or “tell a story”. It has no value until it is combined with some business and domain knowledge and interpreted correctly. The design of the right experiment or the right question to ask, and when to use a database to broach it, and when not to in order to avoid so called “analysis paralysis,” are all managerial questions.

So, I think the mere collection of data is not going to change much. It’s when the data are used by intelligent individuals who understand how to use analytics in combination with domain knowledge that it’s going to be powerful. I think the most important thing for companies is to try and find those kinds of individuals. This is not easy - the human-capital scarcity is very real. There are good statisticians who may not know the business context. There are people who are trained and credentialed in particular aspects of business but who don’t have the training to think quantitatively, or do not know how to think in a data-oriented manner. You need to find people who can do both. Just one of the two pieces is typically insufficient. Corporations need to focus their attention on this human-capital dimension.

Massive computing innovations are taking place in the collection, cleansing, and visualization of data. Great software is available for these tasks. But this data will not affect the business unless a line manager uses this information to make a decision. I think the collection, cleaning, and visualization aspects are easier to solve than this problem—that is, understanding how this data can be used to drive the business forward. For this, firms need to train existing managers, hire new people, and empower them to make decisions as well. Universities have a role to play in proactively providing more and better training, graduating more people with the requisite skills. The effort will have to be collective. Presently, there is an acute talent shortage.

3.      Not too long ago, you conducted a Big Data study of Facebook messages investigating the effect of social media content on customer engagement. Can you summarize that study for us, highlighting key findings? To what extent do you think they generalize to countries like Japan?

The purpose of the study was to learn about the role of advertising content in the context of social media. To understand the background on the study, lets ask: when a company spends a lot of money on advertising, what should consumers infer? If the product were of low quality, but many people purchased the item as a result of high advertising, the firm would be adversely affected. Thus, the fact that the company is advertising heavily signals to consumers the product is high quality. Punchline - the presence of heavy advertising by a company suggests to consumers that the product is high quality. Knowing this, only really good firms would advertise. Really bad firms would not, thereby validating consumer thinking. This is the so-called signaling model of advertising in a nutshell.

This model is unsatisfactory. It implies you do not necessarily have to advertise heavily in order to get the advertising’s benefits. You simply need to spend some money to signal that you are a good firm to consumers. Yet we see that many companies spend significant resources in hiring ad-agencies and creative directors and others to design compelling advertising messages; that ad-creative firms have a lot of clients and are making money. Some ads center on lifestyle features, others state prices. Some ads describe how good you will feel if you use the product. Yet others simply furnish objective information. All suggests that the ad-creative matters. Also, many people have tried out Pepsi and Coke and know how they taste – they don’t need to see ads to know whether Coke or Pepsi “work for them”. But we see that both companies continue to spend huge sums advertising. This is clearly not simply about signaling. A limitation of the canonical model therefore is its failure to assign a compelling role to the content of the ads. This paper asks how the content of the advertising matters.

We worked with a company to collect a lot of posts that firms are publishing on Facebook. Then, we used Amazon’s Mechanical Turk (a crowdsourced labor platform) in combination with a natural language-processing algorithm to create variables reflecting attributes of the content of the posts. Eg, does the content mention prices? A sale? The brand? Do the posts contain emotional content? Is this content emotionally positive or negative? Our key finding was that information about prices and availability, what we called search attributes, were not effective in generating engagement, which we defined as “Likes” and comments on facebook. Emotional content, in contrast, generate a lot of engagement. From this relatively large-scale study of over one-hundred thousand posts on Facebook, we concluded that emotional content is extremely important for generating engagement. In addition, though search attributes like prices alone do not seem to generate engagement, coupled with emotion, they have a positive effect on engagement. This main finding of the paper underscores the importance of emotional or social content for generating interaction. Information provision alone does not seem to work.

4.      How do you think social networks in specific and the internet in general have changed marketing? What three changes do you feel are most significant? How well have companies adapted overall? What can they do to better adapt?

Social networks have changed marketing in a huge way. Their primary influence has been to create a spillover effect that amplifies the importance of marketing messages. In the pre-social days, I could target a message to the user, exerting an effect on that person. The message might affect other users, but we had no way of knowing. Now, we can target a message at an influential user. Not only will he or she potentially be affected by that message, but that user might share the message with others because of the social nature of the message. Individuals connected to this targeted individual are also affected by the message, which they, in turn, will share with their friends. Thus, social networks increase the efficacy of the impact of messages. Further, much of this is measurable.

Social networks have also changed the power equation between consumers and firms. In the past, if you had a terrible experience at a restaurant or on a plane flight, you could write to the CEO, but then no one else will know of your experience. Or you can tell a few of your friends at home. Now, you can post your experience in Facebook for viewing by a vast circle of friends, some of whom will respond indicating they have had a similar experience. They may repost your experience and tweet it, too. Then, their friends will read about your experience. It may be included as part of a thread in a trending story in Twitter, in which case millions of people may eventually learn about your experience. In this way, social networks have increased the power of the consumers. They now have the ability to explain their viewpoint to a large number of people, a form of influence once enjoyed only by firms with the resources to advertise. That gives consumers more of a voice.

What can firms do to adapt? I think measurement is particularly important. Tracking technology has improved. Advertising channels and social-media options have proliferated. You can advertise on Twitter, post ads on Facebook. You can select from Facebook social ads to ad feeds. Paid content and social content are also options as well as Youtube. Measurement technology in the digital world is advanced compared to the offline world. A large number of firms now sell sophisticated measurement products. The problem, I believe, is on the people side. Human capital in marketing organizations is currently inadequate to effectively leverage all of these tools. People do not know how to use them. They are overwhelmed by the volume of data flowing in and by the proliferation of available options. The first step firms can take is to improve their in-house measurement capability and hire people who understand these tools. Firms can demand better measurement from agencies providing data to them as well.

5.      Google coined the neologism ZMOT—Zero Moment of Truth. In contrast to the classic First Moment of Truth, the five to seven seconds a consumer sees the product on the supermarket shelf, deciding whether or not to purchase it, Google believes consumers now decide before they go based on online research. To what extent do you agree with this Googly notion? To the extent that you agree, what do you think the implications of ZMOT are for company marketing departments? How will they have to alter their marketing strategies?

As an academic, I hesitate to give uni-causal explanations for multi-causal phenomena. Shopping behavior - where and how we choose to buy - is a complex process. It involves obvious considerations related to price, convenience, and mental associations to other brands as well as word of mouth and advertising. I am reluctant to buy into the First Moment of Truth or ZMOT notions for this reason. I do think both concepts apply, but I do not think either applies completely to the exclusion of other considerations.

Compared to the past, the sheer magnitude of information and the ability to access it on the go with a smart phone have changed behavior significantly. Many consumers are no longer influenced by conventional lifestyle advertising or simple branding. If you think about what a well-known brand is in the first place, it is a cue that the product is very good. It comes with the promise that the quality is good. It tells you that you will not be cheated. If I am time constrained or cannot find information related to a purchase, I will trust the well-known brand. Purchasing a well-known brand is lower risk in this case.

Because information is now easy to find and access, this impact is reduced. In some sense, information in lifestyle advertising and information in branding are substitutes. As information becomes easier to access, we will access information from our networks. In that sense, I agree with the Google folks. Lots of decisions are not driven by cues that you see in the stores, but by information about products that consumers have researched.

Two strategies will be important in adapting to this new reality. One is to think deeply about the marginal value of time for people. Time-constrained people may not find reading lots of information and checking prices an optimal course of action. The information-acquisition cost is too high for them. Other individuals may not be all that hungry for information in certain contexts. In other contexts, they might actively search it out. For this reason, it is important for companies to target the content and timing of their messages appropriately. The mass marketing approach has changed to one of a heterogeneity of approaches targeting to consumers for whom the brand matters.

Given that consumers are more active in seeking and using information, the second strategy is for companies to play a role in providing that information. Good companies now need to provide a page explaining what makes them a good company. Simply stating you are a good company is no longer effective. You now have to explain why. Companies can create their own web and product-information pages. Companies need to be in the channels where consumers acquire information. Many consumers type key words in the Google search engine. Companies need to be there. This is the second way companies can respond to the proliferation of information and the reduced transaction cost of acquiring it. 

2015-05-24 Pragmatic Professor Uri Gneezy takes behavioral economic principles from the laboratory to industry

Uri Gneezy Interview

October 6, 2014, 9:30 am (JST)

Epstein/Atkinson Endowed Chair in Behavioral Economics, Professor of Economics & Strategy

Rady School of Management, UC San Diego

Professor Gneezy applies behavioral economics principles to solve real-world problems. He has studied the effects of incentive-based interventions to encourage good habits and reduce bad ones, Pay-What-You-Want pricing, and the detrimental consequences of small and large incentives. In addition to traditional laboratory and field studies, Dr. Gneezy works with companies, conducting behavioral economics-based experiments to achieve traditional performance goals in non-traditional ways. Before joining the Rady School, Gneezy was a faculty member at the University of Chicago, Technion and Haifa. Gneezy received his Ph.D. from the Center for Economic Research in Tilburg. His recent book  The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life published by PublicAffairs in 2013 has received critical acclaim. 

1.   Your research spans several topics including when and how incentives work, deception, gender differences in competitiveness, and behavioral pricing. Can you give us an overview of this research and its major findings?

The theme that connects the different research topics is what motivates people. If you consider incentives, for example, we take a look at when incentives have a negative effect on people’s behavior, when they have a positive effect, and when they have no effect. In a large percentage of cases, incentives have no effect. Companies offer all kinds of incentives to people, but they do not change their behavior. Offering such incentives, companies spend a lot of money for nothing!

Moving to the topic of deception, we can think of what makes people lie. Incentives do not have to be money. Power can be an incentive. I am interested in how incentives affect the decision to lie. Many of us experience what I call lie aversion. We would prefer not to lie if we could reach the same, desired outcome without lying. Yet we find that many people lie. For this reason, I think that understanding the incentives driving this behavior is important.

Similarly, my research on gender all centers on the impact of incentives. I look specifically at how men’s and women’s reactions to incentives differ. In our research on competitive incentives, we learned that women respond less than men. Thus, even the gender studies we are conducting center to a large degree on incentives.

Follow-up question:  How did you initially become interested in the issue of incentives?

From a very young age, I have always wondered why people do what they do. What are their hidden behavioral motives? Even before starting to study economics, I was interested in understanding what motivates people. I simply found this topic interesting. Sometimes this interest becomes annoying:  When I go to the doctor, I will wonder what is motivating him to tell me to do something. I have become obsessed with the question of incentives, but I also find them fun.

2.   Vernon Smith used experiments to explore the formation of bubbles, and Daniel Kahneman to develop Prospect Theory. How does your research relate to that of these scholars, who brought the application of behavioral economics into the mainstream by winning the Nobel Prize?

Vernon Smith and Kahneman and Tversky are the fathers of the field. They started their research in the field when it was not popular. They were the pioneers. Vernon Smith concentrated primarily on auctions. He called experiments the wind tunnel. If you want to know how people will behave, you run these experiments. I do not typically run market or auction experiments of this type. But Vernon Smith set the rules that we are using in the field today. For example, he indicated that we cannot deceive people in our research even though deception is regularly used in psychology. We pay people for performing tasks. In other words, we are looking at the real choices made by people.

Kahneman and Tversky were both psychologists. As such, they brought a different perspective to economic problems. They did not come with a theory, then use a wind-tunnel type experiment to determine when or how it works. Their work was more about the psychology of decision making. Many of their findings are about the psychology of behavior. Some of the findings related to mistakes people make. They were trying to find a more descriptive theory of decision making under conditions of risk.

My work is different in the sense that it is based on the work of these three pioneers, among many others. In addition, I am looking at phenomena of importance in the real world. Most of my research these days is with companies. If a charity wants to raise more money, what are the behavioral or psychological elements that can be incorporated into the way the charity requests contributions to raise effectiveness? If a company wants more people to follow it on its website, what kind of incentives could be used? As mentioned, not all incentives are created equal. For this reason, if you understand the psychology of incentives, you can actually use them more effectively.

One major difference between what Smith, Kahneman, and Tversky did and what I do is that I work with the companies to understand the way they or their customers are behaving. Being closer to the real-world phenomenon in this way is not necessarily better, but this is the stage in which I believe we presently are in behavioral economics. Kahneman and Tversky devised the concept of framing and showed how it is important. In a lab experiment, we can easily show that framing a problem in one was as opposed to another causes people to think about it differently. In my research, I am trying to take this concept to companies, determining whether they can benefit by framing choices differently.

3.   How has the field of behavioral economics evolved since 2002, when Kahneman and Smith were awarded the Nobel Prize? Where do you think the field is heading in the next ten to twenty years? Who are the young scholars you feel will lead the field’s development?

To a great extent, we have left the lab. We have gone out into the field, where we are trying to test our hypotheses in a more natural environment. That is not to say that I do not use lab experiments. I am still doing them, but I use them as one tool. Going out into the real world is something important that we are doing. For example, one application we are looking at is in the area of development in Africa. I believe the area will be interesting.

In twenty years, I hope that behavioral economics will no longer be distinguished from “mainstream economics.” Behavioral economics is about people. If you talk to people other than economists, these people do not even seem to understand the need for behavioral economics as a distinct field. How could economics be non behavioral? Our being behavioral economists means that others are non-behavioral economists. Confusing, isn’t it?

In the future, I hope that textbooks will not have a separate chapter about behavioral economics. Rather, I hope that every chapter will feature the basic model rooted in the simplifying assumptions of economics, followed by (behavioral-based) explanations of what happens when these assumptions are not valid: “Here is what you expect when A,B, or C occurs because people’s behavior is more complex than suggested by the simplifying models economics uses.”

We do not currently have enough young people with creative ideas. We need more people in the behavioral economics field. There are a few good people in the field, but no superstars come to mind.

4.  Can you give us an overview of your recent best seller The Why Axis, summarizing the highlights?

I am happy my book is popular in Japan, too. The book looks at how people actually behave, trying to bring insight from models, theories, and experiments. We take these insights to the real world to test how they actually work. Behavioral economics is one topic, field experiments, the other. We are testing the theory, not simply making assumptions. The advantage of field experiments is that they permit understanding of the causality.

If you have a company change the price of a product they sell over the internet, you will observe the effect. You can really isolate the effect, noting that one group of people viewed a particular item at one price and another group at the other price. Using such data, you can construct the demand function. You can really test what happens when you make changes based on your behavioral theories. To be clear, the book is about behavior economics and field experiences: trying to both understand people’s behavior and test it rather than making assumptions about it.

We wrote the book because we wanted to take the message to companies about the importance of testing ideas rather than trusting their intuition about those ideas. When companies create incentives, the frequently rely on their intuition. These companies could benefit from field experiments. They could both become more efficient and save money, too.

5.  In addition to conducting academic research, you consult with companies to help them apply              behavioral economic principles in their businesses. Can you tell us about your consulting                    practices, citing some concrete examples of projects and the results they have produced?

We worked with a large insurance company that wanted employees to receive flu vaccinations and take other tests. As an incentive, the company gave employees $10 for each test, spending $100 million dollars on the program. We conducted a field experiment to assess this incentive. In one condition, we paid employees $10 per vaccination or other activity up to 5 activities. In another condition, we told them they had to complete five activities to receive a payment. Looking at the data, we realized that some of the money the company was spending was what we call “money for nothing.” Many of the employees would have received the vaccinations even if they had not been paid for doing so. Of course, these employees are happy to accept the money, but it is not the reason they are receiving the shots. In this case, we helped the company to achieve the same goals for only $50 million dollars, saving them half of what they had been spending.

6.  Earning your bachelors in Israel, then your Ph.D. at Tilburg University in the Netherlands, you 

     were educated entirely outside the United States. How does the training you received at the latter 

     differ from that offered by U.S institutions? What are the similarities?

Like many other life events, my studying for a Ph.D. in the Netherlands was a coincidence to answer your first question. I did my bachelors degree in Tel Aviv because I had grown up there. After graduating, I moved to the Netherlands with my wife, who had accepted a job there. We were not following some grand master plan we had carefully designed.

To answer your second question, studying in the Netherlands had a significant effect on my life. At American universities, there is one way and one voice about how to do research. Outside the U.S, in Europe, Asia, and other places, thought about economic problems is more pluralistic. I think the average quality of training in the United States is higher than in other places. European universities have fewer highly skilled researchers but the variance in perspective is good. Different ways of thinking are good. Scholars who have not been trained in traditional economic thinking can more easily be creative. I am fortunate not to have attended an American in university in this respect. If I had, I would have received more rigorous training, but would also have left a bit brainwashed. I would have more difficulty trying to do a different type of research.

After I completed my Ph.D., I returned to Israel, where I was a university faculty member for four years. I decided to develop my career in the United States for two reasons. First, in the area of economics, America is still the center of gravity. A scholar can more easily launch a career there than elsewhere though developing a career in Europe has also become easier. Hong Kong, Japan, Singapore and China, are developing, too, but the United States is still at the center. I came to America because I wanted to enter the Big League. The second motivation was purely economic. The salary in Israel was not adequate to enjoy the lifestyle I desired.

2015-04-24 Blue Bottle Coffee arrives in Japan!

James Freeman , Founder & CEO

Blue Bottle Coffee

Interview Conducted Wed, January 14, 2015 8 – 9 am (JST)

1.       In various sources, including a Japanese blog that introduces outstanding San Francisco restaurants, Blue Bottle Coffee is referred to as the Apple of coffee. What are the origin and meaning of this connection to Apple, Inc.? How is Blue Bottle Coffee similar to Apple? How is your organization different?

I’m flattered that Blue Bottle Coffee has been compared to Apple because it is the largest company in the world in terms of revenue. I will begin by explaining how we are different. First, we are tiny. We do not scale in the way that Apple can scale their operations. I think we are more different than similar.

But I think people respond to us in the sense that we are Apple like because we are unencumbered by a lot of distractions the way Apple is. We are very focused on our people and our coffee the way Apple focuses on their people and technology. They also make everything deceptively simple. Tables in Apple stores look like a beautiful piece of maple furniture, but they are filled with infrastructure including security devices, a power supply, and internet connections, all elegantly tethered together in a single cord underneath every table. I am inspired by this simplicity. Perhaps that is why Blue Bottle has been compared to Apple.

2.       How did you conceive of the product name? What is its significance?

The Blue Bottle, located in Vienna, was the name of Central Europe’s first coffee house. We have a story about it on our website. It’s an apocryphal anecdote about war hero Franz George Kolshitsky. When the Turkish army laid siege to Vienna in 1683, he penetrated Turkish lines to successfully notify Polish troops of the need for their assistance. Driven from the city, the Turks fled, leaving everything behind. Though local residents mistook Turkish coffee beans for camel feed, Koshitsky recognized them as coffee beans from having lived in Arabia. According to legend, Koshitsky purchased the bean with reward money from the Vienna mayor, using them to open The Blue Bottle.

The croissant, also introduced following the siege, is an interesting side note to this tale. Creating the croissant, Viennese bakers celebrated their victory over the Turks by devouring the crescent on their national flag.

3.       You sold your first coffee beans at a farmers market in Oakland around 2002. Since then, Blue Bottle Coffee has grown considerably, expanding into several cities. How have the dynamics and operation of your organization changed during that time? How can you maintain your perfectionist standards now that you are a CEO rather than the owner?

In addition to serving as CEO, I am also one of the owners. Of course, the challenges are no different whether I am 100% owner or 0%. Referring to your question about standards, “maintain” is not an option. The concept of maintaining is a fiction. You are either getting better through ongoing improvements in your sourcing and processing of coffee beans, or you are getting worse. For this reason, I think about improving rather than maintaining. One of the luxuries of this round of investment, the supplemental funds have allowed us to invest in quality. We have added staff in the quality control function, at the green coffee level, and at the training level. People were able to taste this investment before they saw it.

I am concerned about making our coffee better next year than it is this year. I want the company to be focused on continual refinement and improvement. In the past year alone, we have already doubled our quality-control staff, and we are cupping three to four times the coffee. We have also doubled our green coffee-purchasing staff, and we are now flying three to four times as many miles to different countries of origin. Adding trainers and revising the curriculum, we have completely revamped our training department. We are working with our head trainer to roll out that curriculum shortly.

In a way, I feel like I have more control than I ever had because we have the luxury of making these investments. Michael Phillips, previously of Handsome Coffee, which we have acquired, now heads all of our training programs, for example. We acquired the company because they have an amazing team we intend to use to seed improvements in our own coffee. For me and the other investors, improving Blue Bottle Coffee as we grow the company is a priority.

Follow-Up Question:  What was the motivation for the acquisition of Handsome Coffee?

We were looking to expand in Los Angeles, but building a roastery in the city is quite difficult due to regulatory restrictions. The acquisition was motivated by the desire to obtain infrastructure like this, and needed real estate, as well as a great team. The appealing location was also a factor. Many interlinked reasons, including Handsome Coffee’s receptiveness, account for the merger. They were ready for a change. In light of all of these considerations, the acquisition seemed like a natural idea.

4.       What were some of the challenges you faced in founding Blue Bottle Coffee? How did you overcome them?

I still feel like I am facing challenges. I began my career as a classical musician, so I did not know much about business or very much about coffee, for that matter. I knew the type of coffee that I personally liked to drink, and that is what I wanted to produce because I thought other people would enjoy it as well. Challenges related to growing and scaling the vision for our company and for the shops continue.

Most challenges in my career have been more about learning a lot of things I did not know, including learning things about people and how to interact with them; learning about their interests and what they might want; learning about real estate. Every year, I feel like my job is different from the year before. I feel like I make a new start every year. The feeling is sometimes exhausting, but also exciting. However, it’s the life I have chosen because it’s the one I prefer.

5.       Your current wife Caitlin was intimately involved in helping you market your coffee at the Oakland Farmers Market. What is her involvement like now that you are the CEO of a funded company?

She is still our head pastry chef, our culinary director. As such, she develops recipes for Blue Bottle Coffee and teaches our bakery managers how to make the pastries. Caitlin also collaborates with the managers to introduce new products. She works with designers to create suitable packaging and is intimately involved in creating products we serve in our shops. We have pastry kitchens in all of our roasteries in all the regions where we have cafes because I like for everything to be made in our shops. Traditionally, cafes have used commercial bakeries, but I think this model is flawed. Bakery pastries tend not to be very delicious. Because I like delicious pastry, we make our own.

Caitlin is also gifted with a keen sense of spaces. She has a beautiful eye for colors. I like white paints for our shops, and I rely on her eye to select the right types. I depend on her insights just about every day. In this sense, I’ve married well.

6.       Some strategists would conclude that Blue Bottle Coffee is positioned as a snobbish “niche” brand while Starbucks is more “casual.” Starbucks is seen as a middle-market, commodity-driving coffee company; how would you describe your current positioning?

I do not think that our positioning is “snobbish.” The strategists who use these descriptors make me think of people who went to a good college, but have never worked in the industry. I really do not spend a lot of time thinking about Starbucks or other coffee companies. I spend a lot of time thinking about what I want to produce and how we can both surprise and delight our guests with a great experience around beautiful coffee made by someone who is skilled, hospitable, and friendly in an interesting physical space.

I think your description of Starbucks as a middle-market, commodity-driven coffee company is accurate. That’s their cross to bear, so I am not going to talk about them. I am interested in peak experiences. I am interested in providing the most delicious coffee in the most hospitable way in the most beautiful spaces to a wide variety of people.

I believe guests do not usually know what they really want until after they see it or experience it. Had I done market research when I started Blue Bottle Coffee, asking questions like, Do you want coffee that is more lightly roasted than you say you like? Do you want to wait longer than you usually do for it? Do you want to pay a little more for it? No one would have responded yes. That is why I think about execution based on our own standards. We obviously want to listen to guests. But we are more interested in surprising and delighting them with something they did not know that they would love.

7.       In another interview, you noted that you are constantly striving to improve quality, believing that if it is not improving, it is declining. Please describe the process you employ to continuously improve the quality of your product.

We begin at the country of origin. Our coffee buyers fly to different companies, where we maintain long-term relationships with growers. The buyers are cupping coffee, observing the conditions on the ground. These observations include working conditions, healthcare, and access to schools and fresh water, not just the condition of the plants and the coffee cherries. Because the quality of the coffee begins where it is grown, we thoroughly check areas where we grow.

After we contract to purchase coffee, the supplier will send a sample, which we cup. Cupping, by the way, is the industry term for sampling coffee in a regimented way. We score the cupping and log the score. Then, when the shipment arrives by ship a while later, we will cup a sample of that, score and log it, comparing the shipment to the original sample. That gives us a baseline for the coffee. Then, every day, we cup every batch of the coffee scoring on a scale from one to one hundred. This is the cupping score.

We also employ a TTI (True to Intent) score ranging from one to five to describe the extent to which the coffee is behaving the way we want it in the context that we are using it. If we held the Brazil coffee we are roasting for espresso to the same standards as the Kenya we are roasting for Kenes, that would not be an apples-to-apples comparison. But if we juxtapose this TTI score with the logging score, we can assess how the coffee is behaving relative to how we want it to. If we see a decline in the TTI score to below 3.75, we do not serve the coffee. After pulling it, we re-roast it. If the score ranges between 3.75 to 4.25, we will cup it twice to confirm that it is behaving the way we want it. We aim for a TTI score greater than 4.25. We subject every batch we roast in every market to this evaluation process.

At the end of each month, I look at the scores with the QC (quality control) head. Referring to the TTI scores, I determine whether we pulled any coffees, if we are on the borderline with fewer coffees than the month before or more. I also determine if a particular coffee seems to be causing problems or is not lasting as long as we would like in the warehouse. Maybe the coffee is not maintaining the essential qualities it must have to be delicious when we serve it.

Everyone knows how to go back and check previous scores, so at the shop level, staff can confirm quality as well. If the customers receive an espresso that does not delight them, and the baristas are struggling, I can go back and look at the data for that roast date any time. The barista can then go back and flag a coffee.

We currently collect a lot of data. We need to figure out how to streamline it. The process is arduous, but it allows us to continually evaluate our success in roasting and refining. If we are able to catch a bad batch before serving it to customers, I become excited. When I see the scores improve, I become excited.

8.       You have also noted that other business plans you have seen often map out marketing and branding strategies, but do not seem to adequately describe the product. You emphasize the importance of focusing on the product. What specific suggestions can you give for doing so? Do you follow a system for product prototyping or design at Blue Bottle Coffee?

Coffee is our product. You really cannot “prototype” a cappuccino. You can only extract the espresso and steam the milk. For that process, we have a system that aims to continually improve and refine the product and to test our adjustments to our blends. One of our core blends is called Hayes Valley Espresso. We want to make a couple changes in it, so we are going to test it at one of our locations for a week. We want to see how the blend we have made behaves under real-world conditions in a café. We will do limited-run tests in some of our smaller shops in the Bay Area so we can assess how the coffee behaves.

In a broader way, we are prototyping more of the nuts and bolts of our café. It sounds mundane, but we are testing a prototype for a condiment bar. Where should the napkins be? Should they be the first item in the row on the condiment bar, or should they be at the end? We have twelve-ounce lids and eight-ounce ones. Two thirds of our guests order twelve-ounce drinks. For this reason, if these drink lids were closer to the customer in the bar than the eight-ounce lids, would fewer customers accidently take the wrong-sized lid, making them happier in addition to expediting the process? Even with something as seemingly mundane as a condiment bar, there are dozens of details we can discuss, refine, and test. We tend to conduct this sort of experimentation in smaller shops in the Bay Area so that people from our head quarters and I can go there and really see how the changes are working.

9.       You raised $19.7 million in a 2012 funding round and $25.8 million in a 2014 round from diverse investors including Matt Mullenweg, Founder of WordPress; an author; co-founders of several tech-start ups; and skateboarding legend Tony Hawk. Clearly, they believe your business is a worthy investment. Why? What do you think has attracted such a diverse following of investors?

Our investors are all smart, interesting gentlemen. They are looking to make wise investments in interesting and meaningful businesses involving scalable concepts. Having all of your money invested exclusively in tech stocks is probably not a good idea. I think everyone wants to have a diversified investment portfolio. These investors are familiar with Blue Bottle. They are aware of the opportunities in a scalable idea, and they believe Blue Bottle is scalable.

10.   In addition to low-cost, self-service providers like Doutors and Saint Marc Cafes, convenience stores have entered the already-saturated, Japanese coffee market offering ultra-low-cost 100-yen beverages. What makes you confident your planned first store in the Kiyosumi area of Tokyo will succeed? What is your current strategy for expanding in Tokyo and Japan nationally? What is your competitive advantage vis-à-vis other coffee chains? Which companies do you view as competitors?

Actually, I am not confident we will succeed, but I am hopeful! I had a 100-yen Lawson coffee the last time I visited Japan. For basically a dollar, the beverage was surprisingly better than I had expected. To make coffee at that price point that is not totally awful is something of an art. I have respect for such Japanese companies, producing interesting products under stringent economic constraints.

As in the United States, Starbucks paved the way. They created and continue to drive the market that companies like mine are enjoying. In Japan, Starbucks was one of the first non-smoking cafes. People are greeted by friendly hospitality in a luxuriant-looking environment, but Starbucks is not that expensive. What Starbucks has done in Japan and certainly in the United States, is proved a concept, confirmed a latent demand. They’ve trained a lot of customers to be curious about coffee, to have expectations regarding coffee. I believe this curiosity is driving our success in the United States. One in a thousand people who go to Starbucks thinks, “Oh, this is good. I wonder what else is out there?” That’s our opportunity to out-execute them in terms of coffee preparation and quality, hospitality. I think similar opportunities exist in Tokyo.

Our company in Tokyo is different because it is not a joint venture or a licensee. Blue Bottle Japan is 100% funded by the Blue Bottle Coffee in the United States. For this reason, it’s going to have a much more personal stamp on it. It is going to seem like Blue Bottle Coffee in the United States because that is what it is going to be. When I was in Tokyo, I myself interviewed a Japanese man who had lived in the United States to determine if he were the right person to make decorative cupped flowers for the store in Kiyosumi. This is an example of how we are taking a granular interest in the look and feel of our products for our roastery, pastry kitchen, and coffee bar. We aim to provide an authentic, Blue Bottle experience, and we are hoping that guests will take an interest.

We have recently opened our new, beautiful site in Aoyama. I’m excited about this project, which I think will be a lot of fun. I love the building. Our first coffee bar in Kiyosumi, which opened in February, will also serve as the headquarters. Then, in March, we opened Aoyama. During the following months, we will assess whether we were right, whether people are interested. If so, we will continue looking for further opportunities, other locations in Tokyo.

Our Tokyo team consists of three, amazingly competent women: Namiko, Asami and Saki are basically running Blue Bottle Coffee Japan. They have all spent significant time with us here in Oakland, and we have spent a lot of time with them in Tokyo. In a way, they are the three legs holding up the stool. Beneath them, we have hired some store managers from Tokyo, and we have some Americans who speak fluent Japanese. One will be in quality control, another a store manager, and the third, the lead barista. I think Japanese guests served by a young, American barista, possibly with long hair and maybe a few tattoos, speaking refined Japanese, will be surprised and delighted. Our Japanese guests will realize that we are doing our best to meet them where they are.

11.   In previous interviews, you have alluded to traditional Japanese cafés (kissa-ten). What have you learned from them? To what extent does Blue Bottle Coffee reflect the “artisan” mindset characteristics of Japanese kissa-ten?

I love the dedication to perfection I have experienced in the kissaten. They are absolutely certain that the way they are doing things—the way they always have done them and will always do them— is correct. I love the peacefulness, the hushed, tranquil quality of my favorite kissaten. The sensation is quaintly outdated, like going to grandmom’s house. But I just love the feeling that every possible detail that could matter has been carefully taken into account.

At Hatto, one of the kissaten I like, the gentleman warms the saucer the way he warms the cup before placing the cup on it. I admire this perfectionism. I do not want to open a chain of kissaten because I prefer a more modern approach. But I think that you are correct in pointing out the artisanship of the Japanese, their dedication to craft. We are from Silicon Valley, so we will measure. We will use scales and thermometers to make our coffee. They are part of our culture. At the same time, we intend to bring the same dedication to craft to the process.

Tokyo coffee is traditionally quite dark, and the shops emphasize a lot of blends. The brewing ratios are very thick. Our preparations techniques will be familiar to customers, but the taste might be a bit lighter, our brewing ratio more limpid. We are going to apply our way of thinking to certain traditional tools, techniques, and ingredients used in Japan.

12.   Japanese people would probably prefer to be seated while enjoying coffee rather than standing.  What are your plans to localize store management in the Japanese market to accommodate such cultural differences?

We have a few tiny stores, kiosks, really. I do not want to rub your face in it, but the temperature was 66 F (18.9C) today here in San Francisco. I had to bring a sweater to work! In this climate, a walk-up kiosk makes perfect sense. In New York, we have a few small venues and a few larger ones with seating.

In our Aoyama shop, a big café, we have about seventy seats. We will also have a richer variety of food offerings. Even at our roastery in Kiyosumi, we will have about twenty seats, as well as some seating outside. The culture has shaped expectations, but not as much as the climate. You would not want to stand outside the roastery drinking a coffee in Japan during August. Nor would you want to stand outside in January. We will adjust the seating to these preferences, but not the drinks. We will apply the same methods and standards as in the United States.

13.   Alluding to the convenient monorail from Haneda Airport to downtown, you have described Tokyo as the way modern, futuristic cities are supposed to be. What else do you like about Tokyo and Japan more generally? What aspects of the country or culture do you not enjoy?

I love the orderliness and regimentation. I always know the side of the escalator for standing and the side for walking. If you are in a hurry on the New York subway, you are in trouble: everyone is standing on both sides of the escalator blocking your path. I love the universal awareness of customs and virtually universal adherence to them. Tokyo is also breathtakingly safe and clean. I do not necessarily feel unsafe in New York or San Francisco, but the environment in Tokyo is definitely remarkably different.

I love Kappabashi with all of the little booths. “There’s the one where you get your stools,” and “There’s the one that sells plastic models of food.” I love the intimate texture, the “smallness” of different districts in vast Tokyo. Even going to Hanto in Shibuya is amazing. It’s one of the busiest train intersections in the world, but if you walk just five minutes, you find yourself in a small, peaceful alley way. You feel like you are a million miles away from the city. I love this “smallness” so characteristic of Tokyo.

I wish I could speak Japanese. Nihongo sukoshi benkyoushiteimasu.

Follow-Up Question:  How do you select staff? How did you instill your values in those you recruit?

I participated in two job interviews just today. I have to sign off whenever a manager is hired. I call or interview candidates in person before signing off. I want to get a feel for the manager. I rarely veto the hiring manager’s decision, but I know I can if I need to. Because I interview each of them, the managers feel as if they are on the inside of things from the very beginning. This sense of belonging has been helpful in cultivating shared values.

Teaching about the product coffee is not difficult. A few months of study, and you are good at it. Unless the role is specialized, like a head roaster position, we de-emphasize the coffee part during our interviews. The difficult task is teaching people to be polite, on time, and considerate. We are looking for people who already embrace these sorts of “eternal” values. We have people coming from fine dining to work with us, and we recently had a manager from a winery join the team.

14.   You did not major in business or economics as an undergraduate, and you do not have an MBA. Do you feel your lack of formal training in business has put you at a disadvantage in any way? If so, how? How do you compensate? Conversely, how have your training and experience as a professional musician contributed to the development of your business?

I feel that not having an MBA has been an advantage. I had twenty thousand dollars and a couple credit cards when I started out. I thought that was plenty of money, so I opened Blue Bottle. Had I known about business, I would have thought, “You can’t start a business with so little capital.” Not knowing what the usual constraints and limitations are has been an advantage in this respect. Additionally, I can hire MBAs. If fact, I have an MBA on the team. Not having been trained in business does not seem to be a constraint, allowing me to have a fresh perspective.

You know that repeating something 1000 times is no big deal when studying classical music. It’s simply part of a daily practice session. But for people who are not accustomed to this type of discipline, the repetition would be a big deal. Becoming a classical musician requires formidable discipline. In comparison to that discipline, nothing I now do seems all that difficult. My training as a classical musician has definitely benefited me in developing the business.

15.   Based on your experience, what is your advice how to successfully start and grow a business?

Concentrate on your product. If you are working on your product to improve it and are aware of both its strengths and deficiencies, you are meeting a necessary condition to make your business work. This focus alone may not be sufficient, but it is necessary. The other details can wait till later. I think that embedding yourself in your product is the most important factor, though I believe it is often overlooked.

16.   Have you ever read the book Do What you Love, The Money Will Follow published by Marsha Sinetar in 1989? You have attempted to follow her advice twice. The first time, when you pursued your passion for the clarinet, you appear to have been unsuccessful, but attempt two, pursuing your passion for coffee, has been wildly successful. How would you evaluate Sinetar’s advice in light of your own, personal experience? What did you learn from your first failed experience that helped you succeed the second time?

I think that in the context of my first career, the title of the book should read, Do What You Love, and You Will Slowly Be Driven Insane. Such a title describes what was happening with my career as a clarinetist.

The book title implies a privilege. Some people in this world, in this country and city, do what they do not like because they must. They may work as janitors not because that is their desired job but because it pays the bills and feeds their family. I do not want to impute any magic to my current success in this job that I love. I was lucky. Things worked out. I enjoy what I do. I feel very lucky. But I do not think Sinetar’s advice is universally generalizable.

2015-03-27 Power and status significantly impact judgment and decision making.

 

 

 Dr. Nathanael Fast

nathanaelfast.com

 

Assistant Professor of Management and Organization, Marshall School of Business,

University of Southern California

 

 

 Power and status impact judgment and decision making.

 

A graduate of the Stanford University Program in Organizational Behavior, Professor Fast studies the effects of power and status on behavior, judgment and decision making, and the psychological foundations of culture. An experienced social entrepreneur, he has co-founded three nonprofit organizations addressing community and economic challenges in California’s Central Valley. His research has been referenced in a variety of business media including Business Week, Economist, Financial Times, and CNN.

1.  Your most prominent research to date focuses on how power in organizations affects judgment and decision-making. Can you give us an overview of this research? What initially attracted you to this area of inquiry?

A lot of my work is focused on trying to understand how having or lacking power changes individuals’ perceptions, attitudes, and decision-making. People often like to point to the common saying “power corrupts,” especially when observing a leader who makes a bad decision, but I wanted to understand the relationship between power and behavior more systematically. So my colleagues and I have been using scientific methods to unpack the various psychological consequences of power on those who have it. We’re finding that the effects have the potential to be adaptive in some cases and maladaptive in others. For example, one set of studies with Deb Gruenfeld, Niro Sivanathan, and Adam Galinsky reveal that power increases the tendency to experience illusory control. That’s adaptive in the sense that it gives people the gumption to act boldly and keep going when times get tough. However, it can also lead to an overestimation of one’s abilities when accuracy is important, leading to undesirable outcomes. More recently, I’ve been studying how power, in the form of control over resources and outcomes, interacts with things like self-perceived competence and social status to influence behavior.

I’ve been interested in power for as long as I can remember. One of my first memories of this interest was when I was a kid in Zaire (now the Congo), where my dad was a volunteer doctor. We lived there during the dictatorship of Mobutu Sese Seko and the notion that a leader would abuse and even kill those who disagreed with his policies was alarming to me. Ever since, I’ve been fascinated by the factors that predict whether leaders will abuse power or use it to benefit others.

 

 

2.   Bullying has historically been a problem in the Japanese public school system, one that has been linked to the suicides of some victims. Based on your research, what would you suggest to principals and policy makers for eradicating bullying in Japan? What, if anything, can the victims do to defend themselves? What can bullied employees do to improve their plight?

Bullying is a really big and complicated issue. One thing that has helped – and organizations like the Workplace Bullying Institute have led the way in this regard – is to name it. By giving bullying an official name, it becomes something that both victims and policy makers can point to as a problem that needs to be fixed. Another thing that individuals who are experiencing bullying can do is take some time away from the situation to collect their thoughts and come up with a strategy for how to deal with the situation. Resources like the Workplace Bullying Institute are helpful for those wanting to figure out their options. It’s then helpful to take the issue to the right people and frame it in terms of the organization’s self-interest rather than as an individual problem. It’s also very helpful to take that step as a group of people, rather than as an individual. It’s quite easy and tempting for higher-ups to simply blame the victim and label them as overly sensitive, but this is impossible to do when the message about bullying comes from a whole group of employees who care about the well being of the organization. As far as what policy makers can do, the first steps are to give it a name and raise public awareness of the problem.

 

3.   I was intrigued by your research described in the March 10, 2009, Time article on the illusion of personal control that power creates. Quoting you and your co-author Deborah Gruenfeld, the article notes, “Power may cause people to lose touch with reality in ways that lead to overconfident decision-making.” Can you tell us the circumstances under which this outcome is likely? What can companies do reduce the likelihood that those in positions of power will render over-confident decisions? What can those in power themselves do?

A few factors can make the illusory control stronger, like repeated successes and being surrounded by people who are unwilling to challenge the leader. When we never experience failure or opposition, we stop feeling the need to deliberate the pros and cons of a particular decision. So companies need to foster deliberative thinking among those in power. Those at the top can help themselves by becoming conscious of the tendency to experience illusory control as well as reminding themselves of their inadequacies and surrounding themselves with people who will be honest with them.

 

4.   When I first read about your research suggesting that the reason people may remain popular long after their has talent faded—if ever they had any to begin with—stems from the human desire to find common ground in conversations, a shared topic of interest, I was incredulous. Can you tell us about this research? Do you think the results would also be valid in a country like Japan, where the culture is vastly different from the West? What are the implications of these research findings for businesses?

We wanted to test a simple hypothesis—that the psychological tendency for people to form bonds by talking about things they have in common underlies the sociological finding that prominent ideas and people persist in popular culture longer than they “should” based purely on merit. We found that baseball players received more All-Star votes and accolades when their names had been mentioned in the media in prior years, controlling for performance. The tendency for people to talk about these players in online chat rooms was the mechanism that drove this effect. Interestingly, the one group of people that showed a different pattern was baseball “experts” (i.e., fans that know a lot about baseball). They tended to talk about the more interesting, higher-performing players, but only when they knew they were talking with another expert. In short, a lot of prominent ideas and celebrities might exist simply because they give us a way to connect with other people. It would be interesting to look at potential differences for this effect among individualistic and collectivistic cultures. That’s not something we’ve done yet.

 

5.   Research you published in The Journal of Experimental Social Psychology, suggested that blaming is contagious in organizations. To control this contagion, you suggest rewarding employees for their mistakes in a 2010 HBR blog article. Could you give us examples of some companies that have introduced such reward systems? What have been the benefits of the systems? How has their business impact been measured?

Of course it’s important to encourage the right kind of mistakes—those that foster learning that improves future performance. There are a number of companies that take a novel approach to failures. India's Tata group gives an annual prize for the best failed idea. Intuit, Eli Lilly, and P&G all view failures as an integral part of their businesses. The benefit of this approach is that it fosters a climate of psychological safety and, as Amy Edmondson shows through extensive research, this leads to better overall performance.

 

6.   I understand that you lived in North America, Europe, and Africa as you grew up. How were you able to live on three different continents as a child? Can you tell us about your experiences in Europe and Africa? How have they shaped your perspective of America? How have your life experiences influenced your research?

My dad was a doctor who loved to travel as well as help others, so he signed up to volunteer with an organization similar to Doctors Without Borders. In Belgium I went to an all French-speaking school and in the Congo, my siblings and I were the only Caucasian kids in the village. Those experiences forced me to become an avid student of individuals and groups to try to understand the underlying norms and principles that guide people’s behaviors. That led to a life-long interest in doing research that helps uncover the underpinnings of human behavior. Living abroad was a neat experience and I’m still thankful for that opportunity.