Leslie Pratch on Assessing and Developing Leaders

By Leslie Pratch

Our research into personality and leadership (among M.B.A. candidates at the University of Chicago and in the field) shows that assessing an individual’s coping style yields a more reliable predictor of leadership among already highly-qualified candidates than any other tool being used in American business.

This post spells out the assumptions at the base of our work. Subsequent posts will describe our methods and run through some case examples.

Our work rests on four assumptions about personality.

One, personality is fundamentally a theoretical construct. We use it to explain how we think, feel, and act. We characterize personality in shorthand terms. Sarah is self-confident and aggressive; Bill, empathic and intuitive. But such characterizations touch only on a few of the many parts that go into the make-up of the whole personality – a rich and complex entity that can be rigorously and scientifically assessed.

Two, the effects of personality on decision making can be predicted. With psychotherapy, certain aspects of personality can be changed.

Three, our personalities are a function of our individual histories, especially our childhoods. This limits the extent to which we can change. Who we will be in the future is a function of the person we are today and who we were in the past; however, changes can be made with the right effort.

Four, our personalities operate at different levels of conscious awareness. Each level affects how we think, feel, and act in ways that may not be obvious or easily measured.

We can think of personality as an iceberg. What’s above the surface is what’s conscious. What’s below the surface is what’s unconscious. In-between is what is preconscious – like the fantasies of Walter Mitty. Much of our behavior is driven by what’s below the surface, by the unconscious parts we don’t see or understand. What goes on at an unconscious level, where we aren’t aware of it, influences what goes on at a conscious level, where we believe we have control.

Yet sometimes we discover we don’t have complete control. This explains why we do surprising things for reasons we don’t understand which may be contrary to our best interests. We have deeper motives; we have hidden fears and wishes – and, because they are hidden, they can lead us to act in seemingly irrational ways.

The more aware we become of these unconscious dimensions of our personality, the more likely we can master them. This mastery is important if we are to behave with appropriate flexibility and strength – some of the hallmarks of active coping. The better we cope, the greater our chances of being successful.

“To cope” commonly means “to deal with or contend with difficulties.” That is how Webster defines it. I use the term to refer to an attitude or style, an overall approach to dealing with life. Active coping is the readiness to adapt resourcefully and effectively to complex and changing conditions. We display it the readiness to strive to achieve personal aims and overcome difficulties rather than passively retreat or be overwhelmed.

Active coping is a stable, albeit complex, psychological orientation across time and circumstance. It comes into play in a specific situation, in the now. It is always the best way to respond to a situation that was not, or could not be, anticipated.

Active copers feed on experience; they incorporate what they have learned into their psychological systems, making them increasingly more capable of tolerating uncertainty and devising new strategies for growth. This leads to greater effectiveness as an executive and from that to better organizational performance.

Whereas active coping seeks to confront and resolve, passive coping is reactive and avoidant. Passive coping is refusing to tolerate the full tension that a situation imposes, for instance, reacting before the facts are sufficiently understood. Passive coping is retreating from reality, tuning out information, and resisting change. It’s dealing with minor problems in order to avoid the anxiety of major problems.

Active coping is what we expect of leaders: the ability to learn; adapt; improvise; mobilize; and overcome conflicts. Executives who are passive copers are far less likely to be successful.

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help classmates preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to first- and second-year M.B.A. students at Chicago Booth (or elsewhere) who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

Supply Chain Management

Here are seven principles of excellent supply chain management (supply chain is from suppliers’ suppliers to customers’ customers):

Principle 1. Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.

Principle 2. Customize the logistics network to the service requirements and profitability of customer segments.

Principle 3. Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation.

Principle 4. Differentiate product closer to the customer and speed conversion across the supply chain. The hardware manufacturer who solved the problem by determining the point at which a standard bracket turned into multiple SKUs. This point came when the bracket had to be packaged 16 ways to meet particular customer requirements. The manufacturer further concluded that overall demand for these brackets is relatively stable and easy to forecast, while demand for the 16 SKUs is much more volatile. The solution: Make brackets in the factory but package them at the distribution center, within the customer order cycle.

The key to just-in-time product differentiation is to locate the leverage point in the manufacturing process where the product is unalterably configured to meet a single requirement and to assess options, such as postponement, modularized design, or modification of manufacturing processes, that can increase flexibility. In addition, manufacturers must challenge cycle times: Can the leverage point be pushed closer to actual demand to maximize flexibility in responding to emerging customer demand?

Principle 5. Manage sources of supply strategically to reduce the total cost of owning materials and services.

Although manufacturers should place high demands on suppliers, they should also realize that partners must share the goal of reducing costs across the supply chain in order to lower prices in the marketplace and enhance margins. The logical extension of this thinking is gain-sharing arrangements to reward everyone who contributes to the greater profitability.

Principle 6. Develop a supply chain wide technology strategy that supports multiple levels of decision-making and gives a clear view of the flow of products, services, and information.

For the short term, the system must be able to handle the day to day transactions and electronic commerce across the supply chain and thus help align supply and demand by sharing information on orders and daily scheduling.

From a mid-term perspective, the system must facilitate planning and decision-making, supporting the demand and shipment planning and master production scheduling needed to allocate resources efficiently.

To add long-term value, the system must enable strategic analysis by providing tools, such as an integrated network model, that synthesize data for use in high-level what-if scenario planning to help managers evaluate plants, distribution centers, suppliers, and third-party service alternatives.

Principle 7. Adopt a channel-spanning performance measures to gauge collective success in reaching the end user effectively and efficiently.

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help my classmates preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to first- and second-year M.B.A. students at Chicago Booth (and elsewhere) who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

Analytical Marketing Methods

(1) Conjoint Analysis:  Assess the importance to consumers of a wide variety of product attributes by having consumers evaluate a few products that represent various mixtures of those attributes.

(2) Factor Analysis:  Summarize many product variables with a few key factors (e.g., “moist,” “smooth,” “goes down easy,” and other factors may move together when customers evaluate food products, so instead of having three attributes, we combine them into one factor, say, “Easy to eat.” We can then compare products on this one factor).

(3) Cluster analysis:  Used to group products or consumers by like characteristics, such as factors identified via factor analysis.

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help my classmates preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to first- and second-year M.B.A. students at Chicago Booth (and elsewhere) who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

(1) When there are few sellers, monopoly-like pricing can be maintained if the short-term discount rate is low –Folk Theorem

(2) Firm 1 raises price; Firm 2 can follow one period later. Will it? If it doesn’t, Firm 1 will drop price and both firms will be worse off. For Firm 2, the question is how valuable is an extra period of extraordinary profits relative to perpetuity of better but not extraordinary profits? If discount rates are low, it will follow price increase; but if discount rates are high?

In other words, Firm 2 can go for profits: High, Low, Low, Low . . . or profits; Medium, Medium, Medium, Medium if it matches. Which set of cash flow is greater depends on the discount rate. The higher the discount, the more attractive is the former.

(2) Whether an oligopoly can maintain a monopoly-like price depends on communication and coordination and understanding between the players. These depend on:

(a) Market concentration

(b) Speed with which price changes are detected, which depends on a number of factors.

(c) Prices should be set based upon the value created for the purchaser of the product. Value can be created by revenue increases or cost decreases that result from using the product. For pricing technological innovations, look not only at the direct purchaser’s situation, but also at how the innovation increases revenue or decreases cost in other downstream parts of the value chain.

(d) Prices, however, are constrained by the value / price offered by competitors and substitutes and also by their behavior (i.e., competitors and substitutes may bid away any economic profits). In a competitive case, competition ensures that the product seller does not capture all the value created by the product.

(d) In the absence of competitors a producer is a monopolist and maximizes profits by raising prices / restricting output.

(e) Producers can have some monopoly pricing power if their product is differentiated. Commodity producers have no pricing power.

(f) Producers should try to price discriminate by segmenting the market and raising the price for segments with inelastic demand (e.g., business travelers) and lowering prices for segments with elastic demand (e.g., vacationers).

(g) Prices should be varied to react to fluctuations in demand.

(h) A long-term view should be considered when pricing a new product or changing prices in reaction to demand fluctuations

(i) For new products consider network synergies (sell the handle cheap in order to sell the blades) and other loss leader approaches.

(j) For price changes in reaction to demand fluctuations, consumer good will may be important.

(k) Pricing policy should be consistent with desired image and brand.

(l) If you don’t price discriminate, you have to make a choice between appealing to all or many segments at a moderate price or to one or a few segments at a higher price. Multiple the size of the segments by the (price less the variable costs) for each scenario and see which is larger.

(3) Pricing Rivalry

(a) Market concentration.

(b) Lumpiness of orders.

(c) Availability of sales transaction information.

(d) NUMBER AND SIZE OF BUYERS.

(e) Volatility of demand and cost conditions.

(f) Asymmetries among firms (different costs or quality levels).

(g) Multi-market contact.

(4) Time Based Competition

(a) Capability to minimize time in innovation, marketing, production, and logistics is an increasingly important driver of competitive advantage.

(5) Framework for Competitive Advantage

(a) Relative Differentiation.

→ Relative value created

(b) Relative Cost Structure.

→ Firm’s profitability

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help classmates who were preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to first- and second-year M.B.A. students at Chicago Booth or elsewhere who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

New Product Development Process

(1) Deductive process:

(a) Opportunity identification—identify growing / profitable / vulnerable markets that we have capabilities to serve

(b) Design

(c) Engineering / Advertising / Marketing

(d) Testing

(e) Introduction

(f) Production / Marketing / Distribution

(g) Life-cycle management

(2) Production

(a) Remember the 4 P’s (see post of May 31, 2010)

(b) Inductive culture / environment / incentives / organizational vehicles (e.g., ParcPlace spin-offs, multiple “idea” buyers at 3M) feeds deductive process.

(3) Forecasting Market Penetration

(a) Sales in each period = (some probability) * (number of people who haven’t bought yet) = (Pt)* (Total market size – people who have already bought) = (Pt) * (m-Yt-1)

(b) Penetration gets greater as more and more people adopt the product, that is = (initial probability of adoption) + some dispersion factor) * (% of people already buyers) = (Po) + [q[(Yt – 1)/m]

(c) Initial probability of adoption depends on the number of innovator-customers in the product category (HIGH: COMPUTERS; LOW: EXPERIMENTAL prescription drugs)

(d) Dispersion factor is going to be high for some products (e.g., internet in mid-90’s and other products that demand a “network” of users), and low for other products (e.g., Glide dental floss and other products that are individual, private, and non-image oriented).

The magnitude of these two factors will effect your initial and ongoing pricing decisions.

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help my classmates preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to first- and second-year M.B.A. students at Chicago Booth (and elsewhere) who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

When considering new product opportunities, consider four categories of new products:

(1) Existing market; existing product (i.e., enhanced product)

(2) Existing market; new product

(3) New market; existing product

(4) New market; new product

When marketing a new or existing product, remember the four P’s-the four things you can tweak when marketing a product:

(1) Product:

(a) Design/packaging

(b) Bundling of product with other products

(c) Services and warranty

(d) Price/Quantity ratio—how large of a segment is willing to pay for your level of quality

(2) Price

(a) Discounts

(b) Price discrimination (e.g., coupons)

(c) Economic incentives to distribution channels (e.g., commissions)

(3) Promotion

(a) Advertising

(b) Branding/Image

(c) Consumer education (about how to use your product)

(d) Public relations/reputation

(e) Grow the market as a whole

(4) Place (i.e., distribution)

(a) Experiment with channels

(b) Strengthen channels

(c) Focus channels

(d) Decrease costs

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help my classmates who were preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to new M.B.A. students as well as to those in their second year at Chicago Booth who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

Market Structure

(1) The number and size distribution of the firms in a market

(a) Key determinant:  Magnitude of demand/minimum efficient scale = “natural” number of competitors in the market.

(b) Capital-intensive industries should have fewer firms because economies of scale exist, giving advantages to large firms (George Stigler’s “survivor principle”).

Fixed Costs/Variable Costs

(1) Fixed costs cannot be adjusted in the short term

(2) Variable costs are those that vary directly with the level of production

(3) If fixed costs are high, capacity utilization is the key to success

(4) Fixed costs may jump if capacity can only be added in large chunks

(5) If anticipated volume is low, AC may be minimized by investing in lower fixed costs (e.g., capital) and accepting higher variable costs per unit (e.g., labor)

(i) Examples of Fixed Costs:

(a) R&D Costs

(b) Rent

(c) Administrative salaries

(d) Interest on debt

(e) PP&E depreciation

(ii) Examples of Variable Costs:

(a) Raw materials

(b) Labor

BCG Growth/Share Matrix

Firm plays the role of a banker with cash cows funding Stars and Problem Children early in their product life cycles in order to promote learning economies rapidly.

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help my classmates who were preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to new M.B.A. students as well as to those in their second year at Chicago Booth who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

Economies of Scope occur when the total cost of producing two goods is less within one company than within separate companies.

Why do economies of scope exist?

(1) Indivisibility:  Manufacturing multiple products allows firm more fully to utilize plant capacity

(2) Shared inputs can be applied to products produced at different plants

(a) Specific examples of economies of scope:  R&D spillovers

(b) Hub and spoke network economies of scope:

(i) An airline that serves a route such as Indy-Chicago as part of a hub and spoke network in which Chicago is the hub will have a lower average cost than an airline that only serves the Indy-Chicago route point-to-point—more people will travel the Indy-Chicago route because they can get to other destinations in the network.

(3) What Cost Drivers Exist, Independent of Scale, Scope, and Cumulative Experience?

(a) Location

(b) Infrastructure

(c) Coordination

(d) Economies of Density

(i) Focus of production activities (many products versus few products)

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I outlined what I considered most useful to digest the curriculum and to help my classmates who were preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to new M.B.A. students as well as to those in their second year at Chicago Booth who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

Two ways to evaluate efficiency of vertical relationships

(1) Technical efficiency: Is the relationship such that the least-cost means of production is being employed?

(a) Is the supplier at MES?

(2) Agency efficiency:  Is relationship such that coordination, agency, and transaction costs are minimized?

(a) Coordination: Do activities that protect private information cause inefficiencies?

(b) Do the supplier and producer know each others’ needs (i.e., are not carrying unnecessary inventories on either end)?

(c) Transactions—are we spending time haggling over contracts?

(c) Agency: Is the supplier acting in best interest of producer?

(3) Technical efficiency often increases with outsourcing; 1^st two types of agency efficiency increase with vertical integration; last type with outsourcing.

Market-based evaluations of Vertical Integration

In addition to achieving the optimal balance between technical and agency efficiency, a firm may vertically integrate in order to:

(a) Undo the effects of imperfect competition

(b) Double marginalization:  Each firm sets MC = MR without taking into account the effect of its pricing and production decisions have on the other firm’s profits. Occurs when one party has market power. Profits would be higher if they combined and set MC = MR as a whole.

(c) Price discriminate

(d) Foreclose entry or avoid foreclosure (e.g., integrate backward to lock up scarce input)

(e) Acquire information in incomplete information markets

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I recorded  what I considered most useful as a means to digest the curriculum that was new to me and as a way to help my classmates who were preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to first- and second-year M.B.A. candidates, especially those at Chicago Booth who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

(1) Firm Specific Investments

Example of rent and quasi-rent. Supplier considering firm (buyer)-specific investment:

Capital investment = $40M

Required return = 5% = $2M/year

Variable production costs = $3M/year

What is ex ante revenue requested for supplier to take investment? = 2+3 = $5M

If ex post next best alternative use of investment yields $3.5M, then quasi rent, the amount buyer can bargain out of seller before seller exits is $5M – $3.5M = $1.5M

(2) Non-Specific Investments

There are no quasi rents because the opportunity cost is $5M (supplier can just sell product on market).

Hold-up problem—redistribution of quasi rents that benefits one party at expense of other; may discourage investment in the first place or result in ex post transaction costs (lawyers to haggle out re-negotiation of contract)

When the self-interested behavior of independent firms jeopardizes the value of these investments, integration is a solution.

Grossman-Hart—ownership of specific assets should be given to entity that has the greatest effect on the overall profitability of the venture. Using its residual rights of ownership, it will use the asset in order to optimize its larger part of the profit pool.

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.

By Leslie Pratch

When I was getting my M.B.A., I recorded what I considered most useful to digest the curriculum and to help my classmates who were preparing to interview for consulting firms. Nearly a decade later, I realize these notes may be helpful to new M.B.A. students as well as to those in their second year at Chicago Booth who are boning up for interviews with consulting firms. I offer them freely and if they are helpful, encourage your use of them, especially if you are pursuing a leadership position in a consulting firm.

Diseconomies of scale can occur because:

(1) Rising labor costs resulting in large firms paying higher labor costs (apply Five Forces to see why—firms are large portion of unions’ revenues) although worker turnover is lower at large firms.

(a) Incentive and bureaucracy effects imply that:

(i) It is difficult for large firms to motivate workers

(ii) It is difficult to monitor performance (agency problem)

(iii) It is difficult to communicate with workers

(2) A higher number of managers is required per worker as hierarchy grows.

(a) Spreading of specialized resources:  Chicago’s Michael Foley

(b) Cost of avoiding Department of Justice monopoly hearings.

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Leslie Pratch, Ph.D. is a clinical psychologist with an M.B.A. in Strategy and Finance and a B.A. in Religion from Williams College. She works with boards of directors and private equity investors to select and develop executives. She can be reached at (312) 464-7919 or email her at leslie@pratchco.com or visit www.pratchco.com.