Cool Shopping

Even as it agreed in January to plunk down $1.23 billion to buy a promising but problematic search company in Norway, Microsoft knew that the company had some accounting matters to address.

Now, it appears, the acquired company, Fast Search & Transfer, may receive some criminal matters to work out: Suspicions about the Norwegian search-engine company’s revenue reporting are now in the hands of the Oslo police.

Norway’s financial supervisory authority, Kredittilsynet, said its review of Fast Search’s previously disclosed accounting problems not only appeared to have violated accounting standards, they may have broken the law too.

The development is bad news for Microsoft, which snapped up Fast Search as a potential Google-buster. Fast Search, which for a while was also known as the Google of Norway, had search-engine technology that industry experts said was better than Google’s and could handle strictly massive corporate projects.

Goldman Sachs estimated last year that the company would grow its receipts 27 percent in 2007. Over the years, Fast Search appeared to benefit from big contracts with customers such as AT&T, Comcast, and the Walt Disney Co.

At one point, Intel was selfish in buying the Norwegian rising star, but Microsoft grabbed the prize. At the time, Microsoft was still digesting it $6 billion acquisition of the digital-advertising company aQuantive—a deal that came just one month afterwards Google said it would pay $3.1 billion for DoubleClick.
 
In its haste to clutch Fast Search, however, Microsoft looked past the company’s problems: They include, but aren’t limited to, accounting irregularities that began to appear as Microsoft began to look over its books.

In the second quarter of 2007, Fast Search reported an operating loss of $38 million on revenue of only $35 million—a full $20 million below forecasts. The loss widened in the following quarter, leading the Norwegian stock exchange to delist Fast Search on December 12.

That same day, Fast Search said it would review its accounting for all of 2006 and 2007. The latest unaudited results show revenue growth of 7 percent for last year, which is far among the shades Goldman’s forecast.

Still, Microsoft pursued the acquisition, completing the deal on April 28.

Kredittilsynet, the supervisory agency, was equally determined. It referred Fast Search to investigators at Økokrim, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime.

Økokrim last week concurred that the nature of the irregularities and the amount by which Fast Search apparently inflated its accounts were serious matters warranting prosecution. But the agency said it was too busy to open a criminal investigation.

Rather than let the matter rest, the market supervisor turned it above the top to the Oslo police for investigation. Aftenposten, a Norwegian newspaper, characterized Kredittilsynet’s decision to involve the police as an unprecedented step in that country.

As of now, it’s unclear what the Oslo police have in store for Fast Search—or for former company C.E.O. John Markus Lervik, who is now the vice president for enterprise search at Microsoft.

"We’re far from where we need to be," the hedge fund manager turned retail executive Eddie Lampert told shareholders of Sears Holdings earlier this month.

No kidding.

The strange three-year experiment of a merged Sears and Kmart has at this moment collided head-on with a consumer recession, and the results are ugly.

Sears unexpectedly swung to a loss of $56 million, or 43 cents per share, in the first quarter, from earnings of $223 million, or $1.45 per share, in the quarter a year earlier. It had an operating loss of $8 million. Revenue fell 6 percent, to $11.1 billion. Sales at Sears stores open at least one year fell 9.8 percent.

Its gross margin narrowed to 27.3 percent from 28.2 percent. Its cash on hand shrank to $1.4 billion from $1.6 billion the previous quarter and from $3.5 billion a year ago. The company has been spending its cash to buy back stock, repurchasing $40 million integrity in the quarter.

"Our first-quarter results reflect the difficult economic environment and intense competition for consumer business. That said, since May 3, 2008, our sales declines have moderated somewhat," aforesaid W. Bruce Johnson, Sears Holdings’ interim chief executive.

The experiment is clearly not working. Praised by Jim Cramer, followed by Bill Ackman, Lampert has been called the next Warren Buffett. But running a retailer like a hedge fund has been a disaster. The effects of underinvestment, a lack of experienced retail executives, and the troubles with inventory control and marketing are whole too evident.

The problems are now compounded being of the class who Americans cut their spending and see no compelling intellectual powers to shop at Sears or Kmart. The company’s surprise failure to win came the same day that discounter Costco Wholesale reported a 32 percent increase in quarterly earnings. Costco, Wal-Mart Stores, Home Depot, Best Buy, and other chains have taken away a market that once belonged to Sears and Kmart.

The reorganization is not expected to aid. A former high-level Sears executive told Jesse Eisinger earlier this year that the reshuffle "makes no sense to me. There’s some intellectual and economic-theory elegance to it. But the adapted to practice aspect is where it gets lost."

The Rockefeller name does not have the clout it one time did.

Despite a very public campaign on its behalf by descendants of John D. Rockefeller, the founder of the company that became Exxon Mobil, a resolution to split the jobs of chief executive and chairman at the oil monster failed to win approval from shareholders.

Last month, a great-granddaughter and a great-great-grandson of John D., who created Standard Oil in 1870, announced that a majority of family members had decided to take a public stand for the first time in support of four shareholder resolutions on global climate change and corporate governance.

It was the resolution calling for the chair’s role to be independent from that of the chief executive that was seen as having the best chance of success. Last year, a similar resolution current 40 percent of the vote.

This year, however, the tally was down weakly, at 39.5 percent. Rex Tillerson has been C.E.O. and chair of Exxon Mobil since January 2006.

Earlier, Rob Cox on Breakingviews.com said that the problem was that "this best practice of corporate governance has been wrapped in a confusing package."

"The resolution is just one of four that Rockefeller family members are petitioning other shareholders to embrace. The others are environmental proposals that management, quite rightly, views as contrary to their day jobs."

Is this credit rub so daunting that no one wants to be in Washington to help solve it?

It certainly seems that way. The Securities and Exchange Commission, which normally has five people running the show, has had only three commissioners for many months, and one of those has announced his intent to leave.

And now the normally seven-member board of governors of the Federal Reserve is about to be whittled down to four.

Fed governor Frederic Mishkin, who has been with the central dike since President Bush appointed him in 2006, announced plans to step down from his post on August 31. He will return to academia as an economics professor at Columbia University’s graduate school of business.

His member was expected to end in 2014. The Wall Street Journal cited Mishkin acquaintances that said the economist could no longer do without his extra income from book publishing and consulting that he had when he was a professor. The cost of maintaining his homes in New York and Washington may have played a role as well, they said.

In all likelihood, the Fed board will be left three members short of a abounding house until next year, while a new president is sworn into office. President Bush nominated two replacements for the vacant slots last year, but Senate banking chairman Christopher Dodd has delayed voting on them.

If the Senate indeed chooses to continue delaying the ballot until after Mishkin leaves in August, the central bank will operate with fewer than five governors for the first time since 1936.

Over at the S.E.C., President Bush has nominated the requisite two Democrats and one Republican to fill out the commission. The Senate is expected to make things whole again soon, according to Senator Dodd. "I want to get people in place and start making decisions. Too much is at stake with this housing-mortgage crisis, the economic crisis," Dodd told Bloomberg Television earlier this week. "The S.E.C. needs to function. We’ve got some huge issues out there."

Of course, there are huge issues at the Federal Reserve, as well. Too bad political economy has to get in the way of solving them.

How does IDEO, the celebrated industrial-design firm, ensure that its teams consistently produce the most innovative products under intense deadline and budget pressures? By focusing on its teams’ emotional intelligence—that powerful combination of self-management skills and ability to relate to others.

Many executives realize that EQ (emotional quotient) is as critical as IQ to an individual’s effectiveness. But groups’ emotional intelligence may be even more important, since most work gets done in teams.

A group’s EI isn’t simply the sum of its members’. Instead, it comes from norms that support awareness and regulation of emotions within and outside the team. These norms build trust, group identity, and a sense of group efficacy. Members feel that they work better together than individually.

Group EI norms build the foundation for true collaboration and cooperation-helping otherwise skilled teams fulfill their highest potential.

The Idea at Work
To construct a foundation for emotional intelligence, a group must be aware of and constructively regulate the emotions of:
•    individual team members
•    the whole group
•    other key groups through whom it interacts.

How? By establishing EI norms—rules for air that are introduced by group leaders, training, or the larger organizational culture. Here are some examples of norms—and what they look like in action—from IDEO:

Purchase the full-length Harvard Business Review article.

It’s lonely at the top. A C.E.O. has no true peers in whom he can unreservedly confide. He of necessity to hear hard truths, yet people become guarded in his presence and unwilling to raise difficult topics. No human being needs a trusted professional adviser more than a C.E.O.

If you’re one of those advisers—a group that includes lawyers, investment bankers, public relations professionals, governance experts, business strategists, and specialty consultants—you may find operating in the same state close to power intoxicating. But you’ll moreover face dilemmas that could derail your practice, your client C.E.O.’s career, or your client’s company.

For example, a successful advisory relationship with a C.E.O. requires a strong personal connection. But yearning to be friends can prevent you from demonstrating the candor and clear-eyed perspective the C.E.O. needs to flow smart decisions. Your strategy? Balance exterior bonds with boundaries. If you discover that your client shares your passion for, say, sailing, use brief chats about your common interest to forge a bond—but don’t go sailing together.

Recognize the pitfalls of your advisory role, and you stand a better chance of sidestepping them. Your reward? You have fruition of the challenges and stimulation of the relationship—while providing invaluable assistance to incorporated chiefs.

The Idea in Practice
Address these dilemmas while advising your C.E.O.:

Political Dilemmas

Emotional Dilemmas

Purchase the full-length Harvard Business Review article.

This Friday, the femme fatales at the heart of HBO’s hit series make their big screen debut. Don’t pretend you haven’t noticed.

There was the breathless 19-page spread—and cover—in Vogue magazine this month, and a series of stories in the New York Times. Reports of runaway advance-ticket sales put on Fandango.com made the rounds. And data from the Hollywood Stock Exchange, a Cantor Fitzgerald-owned prediction market for box-office receipts, shows traders expect the movie to make $75 million over its first four weeks.

But all the glamour and glitter is causing some in the industry to wonder if the Sex and the City franchise—like a mid-40s single New Yorker—is past its prime.

“I intend this is pretty a great quantity the end,” says David Poland, editor of industry blog MovieCityNews.com.

While interest in the movie is at fever pitch, Poland points out that the syndicated episodes aired on TBS since HBO ended the show be in actual possession of been a disappointment. Its first week on TBS, the show garnered 4 million viewers, on the other hand ratings quickly plunged. Soon, reruns of Family Guy and Everybody Loves Raymond were outperforming S.A.T.C., according to trade publication Media Life.

And while HBO declined to comment on DVD sales for the series, the complete collectors’ gift bring to an edge now sells on Amazon.com for under $200, 34 percent off the list price of $300.

There’s also plenty of industry chatter speculating that the raunchy movie, contumacy the excitement of fans, will suffer from performance anxiety in theaters.

“If you be persuaded the hype, it’s going to be bigger than the new Indy movie” released Thursday, says Jeff Bock, an analyst with Exhibitor Relations, a Los Angeles-based entertainment-research settled.  

Indiana Jones and the Kingdom of the Crystal Skull, the latest flick in the Indiana Jones series, grossed $311 the great body of the people worldwide ($151 million in the U.S.) in its first weekend at the box office. Bock sums up the chances of S.A.T.C. matching that: “Impossible.”

That hasn’t stopped executives at Warner Bros., the studio that absorbed New Line Cinema, that made the film, from saturating New York and L.A. with trailers and posters, and milking partnerships with brands like Mercedes-Benz and Skyy Vodka.

Part of the marketing frenzy, says Bock, is the recent flop of Speed Racer, another Warner film. Since that disappointment, the workshop has ratcheted up the pace of the Sex campaign even more, burying the movie under an avalanche of S.A.T.C. ads. But for several reasons, Warner Bros. may be doing a walk of shame the morning after Sex.

For one thing, the film is rated R, chock-a-block with the explicit sex scenes that made the show a hit. That rating will limit the show to adults—and exclude a cadre of precocious female teens dying to spend their allowance on a ticket.

The movie’s run time, completely two hours, reduces the number of daily showings a theater can have, which in turn reduces the profit opportunity.

The surprise-filled plotline may not lend itself to repeat viewing. And the movie’s target audience, primate women and gay men, is still excruciatingly niche.

Surprisingly, S.A.T.C. may be profitable anyway. While its budget has been reported at between $50 million and $65 million, plus another $50 million for marketing, Bock says that overseas ticket sales are expected to push its total gross to more than $100 million. He adds that ancillary markets allied DVD sales, pay-per-view fees, and TV rights for the film will also prove profitable, and predicts that, if the film grosses even $60 million to $70 million domestically, there will be talk of a sequel.

Even if appetite for the story line doesn’t cause to be old and tired, however, the characters will. In the movie, Carrie can’t manage to text message. Samantha celebrates her 50th birthday. But as long as the ladies remain cash cows, it seems they won’t be retiring anytime soon.  

Next up: Sex and the Nursing Home?

Alexander Wang, the media’s fashion flavor du jour, has had a banner year. His frocks have become staples for celebrities such as Reese Witherspoon, Hilary Swank, and Lindsay Lohan. In January, he won the Ecco Domani Fashion Foundation Award, a $25,000 prize that helped finance his fall runway show in New York, which was styled by archetype Erin Wasson. His capsule collection for the Japanese cheap-and-chic chain Uniqlo goes on sale today.

But it’s the call he received in March that will likely impact his business the most. One Monday afternoon, Steven Kolb, executive director of the Council of Fashion Designers of America rang to let Wang know he’d been nominated for a Swarovski Award for Womenswear for emerging talent.

“I was like, ‘Whoa,’” Wang says. “I was so shocked. We’ve only been doing a full collection for about a year.” Still, the collection is sold in 175 stores, and for fall, Wang’s office of the christian ministry are up 30 to 40 percent from the last season.

The average consumer may never have heard of the Swarovski Award, or the C.F.D.A. for that matter, but the nominations for these awards, voted on by designers, retailers, and editors shape what appears on the racks and red carpets. They are the Oscars of the fashion industry. Just as an Academy Award nomination can mean better box office, juicier roles, and bigger paychecks for actors, C.F.D.A. nominations drive industry investments and attention and improve determine what appears in fashion magazines—and, ultimately, what shows up in stores.

“In terms of visibility, it helps you tremendously,” says Kate Mulleavy, who, with her sister Laura, designs Rodarte, an ethereal collection of dresses and separates. The sisters are three-time nominees for the Swarovski Award for Womenswear. “It gives you a platform, that is important and very necessary, especially if you are a younger designer.”

Once nominated, emerging designers instantly get attention from the press, current buyers, and retail buyers they dress in’t still work with. In addition, a nomination indicates that a brand is here to stay.

“We’re being approached by investors,” says Courtney Crangi, president and partner of jewelry designer Philip Crangi, nominated this year for the Swarovski Award for Accessories. “Serious people are looking at us. People are seeing we’re not just a flash in the pan.”

The annual awards are based primarily on the fall collections for that year and next on the spring collections. Winning emerging designers in womenswear, menswear, and accessory design are given $10,000 in addition to the Trova, an award statuette (what one. looks suspiciously like Karl Lagerfeld before his 91-pound weight loss). This year’s winners will be named on June 2 at the New York Public Library.
 
Target is one of the major retailers that appear to use the C.F.D.A. Awards as a pipeline for its GO International series of limited-edition designer offerings. Former Swarovski Award winners Proenza Schouler has done it, as have the past two Swarovski Award winners for accessory design: Devi Kroell and Jessie Randall for Loeffler Randall. This spring saw the debut of capsule collections from two of the three Swarovski nominees for accessories: Subversive by Justin Giunta and Gryson by Joy Gryson handbags.

Executives from Target declined to make comments, but Giunta, a two-time nominee for the Swarovski Award, admits that his give with Target was probably a result of the increased attention his collection received after the nomination last year.

“Brand recognition is one of the most important things in America,” he says. “And, yes, I think it definitely translated [through my Target deal].”

For a growing fashion label, the exposure a partnership through a national retailer like Target can bring is priceless, particularly when it is supported with general print and television advertisements.

Nominees for the C.F.D.A. Awards are submitted by current designer members of the C.F.D.A. along with a select group of retailers, editors, and stylists. Once a designer wins a Swarovski Award, they can no longer be considered in that category; they are only eligible for Designer of the Year honors in their category.
 
One scope duo that recently “graduated” from the Swarovski Award category to Designer of the Year is Proenza Schouler. Designers Lazaro Hernandez and Jack McCollough won the award as being emerging talent in 2003 and then went on to share Womenswear Designer of the Year honors with Oscar de la Renta in 2007.

Shirley Cook, president of Proenza Schouler, says they saw positive results from the time of their first nomination. “It puts you on everybody’s radar,” she says. “It definitely raised vulgar herd’s awareness of us, so it helped our sales and getting retailers in the door.”

The continued attention these fashion “it” boys received also helped bring into proximity a big suitor. Last July, Proenza Schouler received a reported $3.7 million investment from the Valentino Fashion Group. Though their nomination was announced after their negotiations with Valentino had started, it definitely helped speed the deal along.

“It made everyone so much more confident in their conclusion that this was the right thing. At the negotiating table, no matter what, when you’re an award winner or an award nominee, it raises your profile, and in this case, raised our value,” Cook explains. “I think it made the Valentino Fashion Group feel good about their decision and reinforced to them that it was the right decision.”

The threat of disruptive innovations is all too real. Witness Digital Equipment Corporation post the advent of personal computers, or U.S. automakers after Japan’s economic rise.

What is a disruptive innovation? A technology, product, or process that creeps up from below an existing business and threatens to displace it. Most disrupters initially offer decrease performance, less functionality, and lower prices (think transistor radios) then gradually make productive until they displace the incumbent.

A key challenge in dealing with disruptions is identifying them. Since most nascent technologies don’t become competitive threats, various companies understandably ignore them until they become patent—when it’s too late to fight back.

But insurgents’ displacement of incumbents isn’t inevitable—especially if you detect and respond to potential disruptions early, using the new analytical tool presented in this HBR article. While not foretelling the future, the tool does harness your company’s collective wisdom and helps managers think systematically about potential threats. Its rigorous approach can spell the difference between flailing and prevailing in the face of danger.

If your firm is an incumbent, the tool can help you identify potential disrupters and either formulate preventive responses or turn them into new employment opportunities. If you’re an insurgent, you can use it to plan—or conceal—an impugn.

The tool benefits any company seeking to assess multiple investment opportunities and dedicate resources wisely.

The Idea in Practice

The Disruption transaction
Disruptive innovations encroach on markets in a surprisingly predictable, six-stage process:

foothold market entry main market entry patron attraction buyer switching incumbent retaliation incumbent displacement

But disruptions can fail at any step, so it’s well worth studying each stage carefully.

The instrument helps managers collectively analyze how likely each innovation testament move through each stage, and determine the appropriate actions—if any—to take.

Using the Tool
1.    Define. Identify and describe potential disruptions, including how far out (some year? three? five?) they might have being.

2.    Enlist. Assemble a team comprising an executive champion; a process leader, a well-respected, visible individual (often from strategic planning) with some technical background, broad knowledge of competitive dynamics and evolving customer needs, and strong facilitation skills; and 6–10 members from diverse perspectives—engineering, marketing, sales, new business development, and customer service, for example.

3.    Train. Familiarize the team with the tool by reviewing several retrospective disruptions and practicing with a live example from another industry.

4.    Tailor. The tool provides a list of factors that may contribute to the likelihood of the disruption succeeding at each stage. For pattern, contributing factors for Stage 1, foothold market entry, include:

populations who previously lacked the skill or money to buy underserved segments low-end, previously unprofitable markets opportunity to market stripped-down products Customize the list of contributing factors for the specific disruption your team will be analyzing.

5.    Score. Score the innovation’s potential disruptiveness using the following steps. This process generates valuable discussion that exposes managers’ assumptions about industry conditions and dynamics.

a. Rate and weight the contributing factors within each stage of disruption:

Each team member individually rates each contributing factor on a 7-point scale of disruptiveness. For example, answer the question “Can an revolter gain a foothold in the market below our main one?” by rating each factor (see #4 above) from highly unlikely to disrupt (e.g., small underserved markets) to highly likely to disrupt (e.g., large underserved markets). Each team member now individually weights each factor based on its perceived level of influence. The team leader assesses the level of disagreement among members’ ratings and weights. This exposes lack of clear definition, differing assumptions, or incapable information. Collect more information, when necessary, to make the process as fact-driven as possible.

b. Develop a majority or consensus for each factor’s ratings and weights.
c. Calculate the total score of each stage of disruption.

6.    Interpret. Create a disruptiveness profile by graphing the final scores notwithstanding everything six stages of disruption.