Workaholics Shouldn’t Try to Achieve Work-Life Balance

For workaholics, the concept of work-life balance isn’t helpful. There is always more work to do, and they’re more than willing to do it. The problem is that this type of drive and dedication often leads to burnout because workaholics aren’t the best at protecting themselves. So instead of trying to achieve balance — an impossibility, really — workaholics should set boundaries. Examples include setting aside time for family and friends (temporal boundaries), getting out of the office at regular intervals (physical boundaries), and forcing oneself to focus on something other than work (cognitive boundaries).

SOURCE: Happy Workaholics Need Boundaries, Not Balance

Build the Right Team Behaviors

Even though most management systems focus on individual performance, it’s critical to reward and recognize your team collectively. As a team manager, support the right group behaviors by:

• Encouraging collaboration. Talk about your people as a team, not as a set of individuals. Instead of talking about individuals’ contributions, praise the common behaviors that contribute to the team’s overall success.
• Evaluating team performance. 
Every six months or so, take a close look at the group’s progress. Don’t mention individuals in this appraisal but focus on what the team has done—and can do—together.
• Using rewards. If you are able, tie a portion of your organization’s discretionary compensation to team performance. If you don’t control the purse strings, try recognizing your team’s hard work in a public way—through a departmental email or even displaying their picture in a common space—or giving them exposure to senior leaders.

Adapted from “How to Reward Your Stellar Team,” by Amy Gallo.

You Can Win Without Differentiation

from: http://blogs.hbr.org/2013/10/you-can-win-without-differentiation

For decades, strategy gurus have been telling firms to differentiate. From Michael Porter to Costas Markides and through the Blue Oceans of Kim and Mauborgne, strategy scholars have been urging executives to distinguish their firm’s offerings and carve out a unique market position. Because if you just do the same thing as your competitors, they claim, there will be nothing left for you than to engage in fierce price competition, which brings everyone’s margins to zero – if not below.

Yet, at the same time, we see many industries in which firms do more or less the same thing. And among those firms offering more or less the same thing, we often see very different levels of success and profitability. How come? What explains the apparent discrepancy?

To understand this, you have to realise that the field of Strategy arose from Economics. The strategy thinkers who first entered the scene in the 1980s and 90s based their recommendations on economic theory, which would indeed suggest that, as a competitor, you have to somehow be different to make money. Over the last decade or two, however, we have been seeing more and more research in Strategy that builds on insights from Sociology, which complements the earlier economics-based theories, yet may be better equipped to understand this particular issue.

Consider, for example, the case of McKinsey. Clearly, McKinsey is a highly successful professional services firm, making rather healthy margins. But is their offering really so different from others, like BCG, or Bain? They all offer more or less the same thing: a bunch of clever, reasonably well-trained analytical people wearing pin-striped suits and using a problem-solving approach to make recommendations about general management problems. McKinsey’s competitive advantage apparently does not come from how it differentiates its offering.

The trick is that when there is uncertainty about the quality of a product or service, firms do not have to rely on differentiation in order to obtain a competitive advantage. Whether you’re a law firm or a hairdresser, people will find it difficult – at least beforehand – to assess how good you really are. But customers, nonetheless, have to pick one.  McKinsey, of course, offers the most uncertain product of all: Strategy advice. When you hire them – or any other consulting firm – you cannot foretell the quality of what they are going to do and deliver. In fact, even when you have the advice in your hands (in the form of a report or, more likely, a powerpoint “deck”), you can still not quite assess its quality. Worse, even years after you might have implemented it, you cannot really say if it was any good, because lots of factors influence firm performance, and whether the advice helped or hampered will forever remain opaque.

Research in Organizational Sociology shows that when there is such uncertainty, buyers rely on other signals to decide whether to purchase, such as the seller’s status, its social network ties, and prior relationships. And that is what McKinsey does so well. They carefully foster their status by claiming to always hire the brightest people and work for the best companies. They also actively nurture their immense network by making sure former employees become “alumni” who then not infrequently end up hiring McKinsey. And they make sure to carefully manage their existing client relationships, so that no less than 85 percent of their business now comes from existing customers.

Status, social networks, and prior relationships are the forgotten drivers of firm performance. Underestimate them at your peril. How you manage them should be as much part of your strategizing as analyses of differentiation, value propositions, and customer segments.

Two kinds of failure

Think of it this way: There are two kinds of failure. The first comes from never trying out your ideas because you are afraid, or because you are waiting for the perfect time. This kind of failure you can never learn from, and such timidity will destroy you. The second kind comes from a bold and venturesome spirit. If you fail in this way, the hit that you take to your reputation is greatly outweighed by what you learn. Repeated failure will toughen your spirit and show you with absolute clarity how things must be done. In fact, it is a curse to have everything go right on your first attempt. You will fail to question the element of luck, making you think that you have the golden touch. When you do inevitably fail, it will confuse and demoralize you past the point of learning. In any case, to apprentice as an entrepreneur you must act on your ideas as early as possible, exposing them to the public, a part of you even hoping that you’ll fail. You have everything to gain.

- Via Mastery

When to Give Up on an Innovative Idea

You have a new innovation under way, but things aren’t going well. You find yourself at a crossroads: carry on, or jump ship? It’s always a tough call. But if you haven’t experienced any pleasant surprises in a long time — say, something took far less time than anticipated, or you came across a new but unexpected design enhancement, among other scenarios — take pause. And if you’re not gaining any new insights, it’s time to reassess. Finally, if you also notice a lack of enthusiasm from team members, customers, and/or clients, kill the idea. Bad things, remember, come in threes.

SOURCE: Three Signs That You Should Kill an Innovative Idea by Michael Schrage

Control Is the Key to a Workaholic’s Happiness

According to a recent study, more than 60% of executives, managers, and professionals work 72 hours a week. Blame it on smartphones. These folks are always connected, in other words — 67 hours during the week, 5 hours on weekends. But most of them don’t sweat it. As long as they have control of their workload, and when they can get it done, they don’t mind working long hours. But when their bosses are to blame for the overload — late meetings, demands for overtime — they aren’t too happy about it. It just goes to show: control is king.

SOURCE: Welcome to the 72-Hour Work Week by Jennifer J. Deal

The Best Leaders Are Both Tough and Nice

Leaders often ask themselves whether it's best to be tough or nice. If you're tough — a "driver" — you can push people to go beyond the limits of their abilities. If you're nice — an "enhancer" — you can better understand the needs, problems, and concerns of your charges. It's a hard choice. So which style results in the more highly-engaged employees? According study of 160,576 employees under the command 30,661 bosses, the tough-versus-nice battle is tight. Eight percent of tough-led employees are highly engaged. Nice? Six percent. So tough-minded leaders are the winner, right? Not so fast. The most effective leaders, it turns out, use both styles, and 68% percent — that's right, 68% — of their employees are highly engaged. That's impressive.

A Good Story Can Help You Raise Prices

What makes one object — a toaster, a shoe, a painting — more valuable than another object? Why is one painting, for example, worth $10 million more than another painting? Back in 2006, Rob Walker, a columnist for The New York Times Magazine, put this question to the test. He bought all sorts cheap items for under $4 — a wooden mallet, for example — asked a bunch of writers to insert the objects into short stories, and then put the items, along with the stories, up for sale on eBay. On average, the value of the objects increases by 2,700%. Crazy. The project should serve as an important reminder to all companies: a meaningful story, above all else, can go a long way in increasing the value, i.e., the prices, of your products.

SOURCE: If You Want to Raise Prices, Tell a Better Story by Ty Montague

Management Tip of the Day: Evaluate Your Potential Customers

Before you launch a new product, you need to have an idea of how many people will buy it. There are two ways to do this. If you’re already selling products, it’s often easiest to start by looking at your existing customers. Who among them might find this new product useful? Then build up your forecast from there. Think about other people who are similar to your current customers, including those in adjacent market segments. This is called a bottom-up approach. To do a top-down calculation, start with a large, diverse population (say the entire population of the U.S.) and then use a series of qualifying attributes, such as income level or age, to narrow your potential market. To get the best of both of these methods, have two people on your team use each one and then compare the results. 

Adapted from HBR's Go to Market Tools: Market Sizing.

Management Tip of the Day: Strengthen Your Confidence

Confidence isn’t something you either have or you don’t. It’s a dynamic emotion that, like a physical muscle, needs exercise to grow stronger. Here are two ways to build and maintain it: 

• Take inventory of your past. It’s easy to doubt yourself and your abilities. But if you look at your track record, chances are that your successes outweigh your failures. And, more importantly, you likely survived your missteps and gleaned lessons along the way.
• Focus on strengths. Most leaders are very strong in a few competencies, average in the majority, and weak in a few. Concentrate on leveraging what you’re best at. Then, manage your average and weak areas so they don’t detract from your effectiveness.

Adapted from “To Strengthen Your Confidence, Look to Your Past” by Amy Jen Su and Muriel Maignan Wilkins.

Management Tip of the Day: The Right Questions to Ask Your Data Analysts

In today’s business world, you’ve got to be data literate to succeed. If you aren’t trained in analytics, don’t fret. As a non-expert, you can play a critical role by asking your “quants” the tough questions. Here are a few that almost always lead to more rigorous, defensible analyses: Where did the data come from? How well does the sample represent the population? Does the data distribution include outliers? How did they affect the results? What assumptions are behind your analysis? Might certain conditions render your assumptions and your model invalid? Why did you decide on that particular analytical approach? What alternatives did you consider? If you don’t understand a reply to any of these, ask for one that uses simpler language. 

Adapted from “Keep Up with Your Quants” by Thomas H. Davenport.

Management Tip of the Day: Take a Long Lunc

There’s a simple, old-fashioned practice that can make work more effective, engaging, and fun — long lunches. The idea of a leisurely lunch chatting with colleagues or clients might seem like something out of another era, but it has a place in modern office life too. Eating slowly has documented health benefits and having unplanned time with colleagues can help you forge deeper connections. Instead of scarfing down a sandwich at your desk or grabbing something on the go, make time for a longer lunch break. Even if you do it just once or twice a week, it can create stronger relationships with co-workers, and make you healthier and more productive. 

Adapted from “Old-School Business Practices Worth Bringing Back” by John Coleman.

How Money Actually Buys Happiness

http://blogs.hbr.org/cs/2013/06/how_money_actually_buys_happiness.html

Warren Buffett's advice about money has been scrutinized — and implemented — by savvy investors all over the world. But while most people know they can benefit from expert help to make money, they think they already know how to spend money to reap the most happiness. As a result, they follow their intuitions, using their money to buy things they think will make them happy, from televisions to cars to houses to second houses and beyond.

The problem with this approach is that a decade of research — conducted by us and our colleagues — demonstrates that our intuitions about how to turn money into happiness are misguided at best and dead-wrong at worst. Those televisions, cars, and houses? They have almost no impact on our happiness. The good news is that we now know what kind of spending does enhance our happiness — insight that's valuable to consumers and companies alike.

Buffet recently penned an op-ed titled "My Philanthropic Pledge" — but rather than offer financial advice about giving, he suggested we give as a way to enhance our emotional wellbeing. Of his decision to donate 99% of his wealth to charity, Buffett said that he "couldn't be happier."

But do we need to give away billions like Buffet in order to experience that warm glow? Luckily for us ordinary folks, even more modest forms of generosity can make us happy. In a series of experiments, we've found that asking people to spend money on others — from giving to charity to buying gifts for friends and family — reliably makes them happier than spending that same money on themselves.

And our research shows that even in very poor countries like India and Uganda — where many people are struggling to meet their basic needs — individuals who reflected on giving to others were happier than those who reflected on spending on themselves. What's more, spending even a few dollars on someone else can trigger a boost in happiness. In one study, we found that asking people to spend as little as $5 on someone else over the course of a day made them happier at the end of that day than people who spent the $5 on themselves.

Smart managers are using the power of investing in others to increase the happiness of their employees. Google, for example, offers a compelling "bonus" plan for employees. The company maintains a fund whereby any employee can nominate another employee to receive a $150 bonus. Given the average salaries at Google, a $150 bonus is small change. But the nature of the bonus — one employee giving a bonus to another rather than demanding that bonus for himself — can have a large emotional payoff.

Investing in others can also influence customers. Managers at an amusement park were unable to convince patrons to buy pictures of themselves on one of the park's many rides. Less than one percent purchased the photo at the usual $12.95 price. But researchers tried a clever variation. Other customers were allowed to pay whatever they wanted (including $0) for a photo, but were told that half of what they paid would be sent to charity. Now, buying the picture allows the customer not only to take home a souvenir, but also invest in others. Given this option, nearly 4.5% of customers purchased the photo, and paid an average of more than $5. As a result, the firm's profit-per-rider increased fourfold.

Warren Buffett, happiness guru. Just as we have taken his advice on making money, research suggests we should now take his advice on making happiness. By rethinking how we spend our money — even as little as $5 — we can reap more happiness for every dollar we spend. And Buffett's happiness advice comes with a financial payoff as well. By maximizing the happiness that employees and customers get from every dollar they receive in bonuses or spend on products, companies can increase employee and customer satisfaction — and benefit the bottom line.

Q&A: The Price of Paying Attention

http://www.ritholtz.com/blog/2012/11/information-sources/

Kent Thune recently asked me a few questions about The price of paying attention. He used a portions of my answers in his column, but much of what I wrote was off topic.

Never wanting to waste anything once written, here are those thoughts on Research, Media, Information Sourceset. al. :

1. How much time do you spend each day searching for and consuming information?

Less and less – I probably spend more time looking at curated material and less outright searching than I used to.

Twitter has become the new tape. I am constantly discovering new voices there. I do find myself looking for new sources, but that is not the focus of my process.

Rather, I seem to be hunting for excuses to eliminate bad, unreliable or biased sources. Investors have this cognitive bias that “more information” helps they make better informed decisions. It turns out not to be true; more information helps them be more emotionally comfortable with their decision making – over confident in fact. Paradoxically, more info leads to overconfidence and WORSE decision making.

2. How do you choose your information sources? Is this process similar to building a portfolio of investments?

Process is important. I want to know that there is a method to the madness of the person I am reading. Sure, track record matters, but I need to see a justifiable rational process that is not based on luck or randomness.
These days, I seem to be reading people rather than organizations. For example, Dan Gross is at Daily Beast – I will read him anywhere, even at a site (like the Daily Beast) filled with biased and corrupt writers I detest. I’ve read Jesse Eisinger at TSCM, WSJ, Portfolio and now Pro Publica – where ever he goes, I am a reader. And James Montier used to be at Dresdner Kleinwort, now he’s at GMO. So it’s the person, not the organization that matters most to me.

I try to eliminate people with bias or a terrible track record or who have to crank out content – give me any excuse to remove one more source of bad or mis-information and I am happy to do so. The perma-bulls and perma-bears are easy targets; the harder ones are the bad judgment or poor process.

For example, Kevin Hasset is one of the authors of Dow 36,000. That’s a fatal money losing horror show of awful judgment AND terrible timing. He is henceforth quarantined as a source for anything ever again. I cannot afford to let anything he writes influence. Ben Stein is another guy who simply murdered his readers financially. There are tons of other examples – people who denied the 2007-09 recession as late as October 2008, rewriters of history. They are too expensive, too costly, to allow them to influence my thoughts.

Every now and again, I have to sequester a writer I like. Perfect example: Look at Andrew Sullivan, who is a compelling and interesting author. I used to read him all the time. Even worse, he is a powerful and persuasive writer, making him all the more believable, and therefor dangerous. But his judgment was so god-awful about the Iraq war, that I simply quarantined him as a deadly infection, never to be trusted again. Guys like him are a curse to anyone who run money.

3. Have you noticed a proliferation of amateurism and incompetence in financial media in recent years? If so, which media type (i.e. web, print, cable, etc) has deteriorated the most?

Television News is just awful, cable especially. We switched off the TVs in the office about 5 years ago and never looked back. CNN is mostly idiotic, Fox News actually makes you uninformed + filled with wrong info, and CNBC has turned into this money-losing shout fest.

“Lose the News” was a column I wrote in 2005, and its more apt than ever (here)

The WSJ, once the greatest paper in the world, has lost a good chunk of credibility in my eyes since Murdoch took it over. The reason is his blatant bias – anything with a remotely political relevance is now 100% untrustworthy. Its still an excellent news source for me, but so long as he owns it, there is an asterisk attached to every article. MAY BE EDITED FOR POLITICAL REASONS. Forget the phone hacking scandal, that old bastard should go to jail for what he did to the paper. I hope NWS Corp spins it out so it can go back to being the best paper in America.

4. What is “chart porn” and why do you believe it is an apt term?

The website Chartporn.com credits me with coining the term some years ago, but I have no idea what I was thinking – other than gratuitous, hot sweaty charts of steamy market action and beautiful economic data are so wonderfully informative.

If a picture if worth a 1000 words, a well-crafted chart is worth 10 times that.

5. What cautions and advice can you offer traders with regard to their information consumption? Is there a diminishing return of information (i.e. more is less)?

Why are you consuming content? Are you looking to confirm a previously held belief? (Confirmation bias). Are you looking for additional information to make you feel good about your decisions? (Overconfidence bias)
Have a methodology that is not dependent upon finding some tiny piece of hidden info. That is not a repeatable process.

6. At The Big Picture, you don’t use SEO strategies or button-pressing headlines, such as “3 Reasons to Buy Gold Now.” Has this honest and often irreverent approach to financial news attributed to your success as a blogger?

Daniel Boorstin, the former librarian of Congress, once said “I write to discover what I think.” There is a lot of wisdom in that.

My writing is a way I manage to take all of the related but disparate thoughts across a variety of disciplines and organize them.

Here is a little secret: I write for me, not the reader. If that sounds odd, or anti-social, or even selfish, well, its all 3 of those things. But that’s why its very honest and perhaps why some people find it helpful. I am always seeking the Truth, trying to discern what is reality. There is enough bullshit in the world, who needs another SEO driven, hyped up headline content farm?

7. How important is intuition for the trader and how might information consumption affect it?

I don’t know, but I suspect intuition is wildly over-rated. Is it consistent reliable repeatable? If intuition was all that important than newbie traders with good intuition would be able to sit down at a desk and making a killing.

That does not seem to ever happen.

I suspect the best traders learn to internalize lots of what they have learned over time, and what appears to be intuition is really the result of 1000s of hours of hard work, research, practice, experience.

Thanks again, Barry.

Network for Quality, Not Quantity

from: Harvard Business Review

If you were to take the advice of some self-help books on networking, you would amass as many Facebook friends and LinkedIn connections as possible. But research shows that bigger networks are not necessarily better. In fact, large networks can hurt your performance by putting too many collaborative demands on you. The people who network successfully tend to have more ties to people who are not very connected themselves. People with connections to the less-connected are more likely to hear about ideas that haven't gotten exposure elsewhere, and are able to piece together unique opportunities. Don't treat networking like a popularity contest. Find ways to connect with more than the usual suspects by reaching out to those who aren't surrounded by others.

Why expensive consultancy firms are giving away more research

from economist: original article here

IN THE run-up to the climate-change conference in Copenhagen last year, a curvy graph was passed around by policymakers and NGOs. It showed various options for cutting carbon-dioxide emissions. At one end of the chart were simple efficiency improvements which would both cut CO2 and save money; at the other end were costly technologies like nuclear power and carbon capture. Climate-watchers found the graph useful for demonstrating how many money-saving or cheap technologies there were. As one veteran put it, “We all speak McKinsey’s language now.” The graph was indeed put together not by a tree-hugging NGO, but by the for-profit consultancy.

All consulting firms seek to provide what they annoyingly call “thought leadership”. McKinsey’s rival, the Boston Consulting Group (BCG), became well known in part by distributing its ideas freely. Consultancies now put out short opinionated papers as well as data-laden reports such as BCG’s recent one on wind power in China or PricewaterhouseCooper’s on electronic health records. Fiona Czerniawska of Sourceforconsulting.com says the number of such reports from the top 25 firms has quintupled since 2004. Free reports are expensive to produce: Tom Rodenhauser of Kennedy Information, a firm that monitors consultancies, reckons they cost up to 5% of gross revenues. Are they worth it?

Ironically, given how much grief they would give a client who failed to answer such a question precisely, the consultancies cannot prove they are. Clients rarely say they hire a firm on the strength of its free publications. But the firms nonetheless defend the growing practice as a form of marketing. Costly consultancies like BCG and McKinsey are hired by chief executives or those near that rank. Their reports (and, increasingly, their webinars and podcasts) are an excuse to contact potential clients and a way of boasting about the brainpower they can apply to problems.

Thought-provoking reports also help recruit the talented. Many graduates join consultancies and put up with being merely affluent—instead of joining investment banks and becoming obscenely rich—for the intellectual stimulation that consulting seems to offer. BCG, for example, recently invited all its staff with doctorates (a few dozen) to a conference to swap Big Ideas. Many of the ideas, from biology to musicology, influenced the subsequent year’s research programme.

Producing free research especially helps young consultants prove their worth, both to clients and to others within the firm. Christopher McKenna, a historian of consulting at Oxford University, says clients may balk at paying handsomely for a “young punk” of a consultant. A young punk who has written an impressive paper is a different matter. Spots for year-long stays at the consultancies’ in-house think-tanks such as the McKinsey Global Institute, BCG’s Strategy Institute and the IBM Institute for Business Value are fought over fiercely.

Is the research they produce any good? Some thought leadership is “academic masturbation”, says Mr Rodenhauser, but some of it is excellent: McKinsey’s analysis of China’s economic data, for example, or IBM’s specialist writing on technology. The effect of putting out free reports may be hard to measure, but Lenny Mendonca, McKinsey’s head of knowledge development, is not about to stop. “We only worry if we’re spending enough,” he says.

The new Japanese consumer

from: http://www.mckinseyquarterly.com/The_new_Japanese_consumer_2548

The attitudes and behavior of Japanese consumers are shifting dramatically, presenting opportunities and challenges for companies in the world's second-largest retail market.

MARCH 2010 • Brian Salsberg

After decades of behaving differently, Japanese consumers suddenly look a lot like their counterparts in Europe and the United States. Celebrated for their willingness to pay for quality and convenience and usually uninterested in cheaper products, Japanese consumers are now flocking to discount and online retailers. Sales of relatively affordable private-label foods have increased dramatically, and many consumers, despite small living spaces, are buying in bulk. Instead of eating out, people are entertaining at home. Workers are even packing their own lunches, sparking the nickname bento-danshi, or "box-lunch man."

This fundamental shift in the attitudes and behavior of Japanese consumers seems likely to persist, irrespective of any economic recovery. That's because the change stems not just from the recent downturn but also from deep-seated factors ranging from the digital revolution to the emergence of a less materialistic younger generation. An examination of the strategies of leading Japanese and multinational companies, along with interviews with more than two dozen executives of the most significant retail and consumer industry players, shows how consumers are changing and why (view our video interview with three of these executives, below). It also suggests the kinds of moves—such as rethinking relationships with customers and becoming more flexible about sales channels—that businesses must take to seize the opportunities created by Japan's new normal.

How Japanese consumers are changing

Japanese consumers have long been both distinctive and reassuringly predictable. Unlike their counterparts in Europe and the United States, they eschewed low-priced goods, preferring high-end department stores and pricier regional supermarkets. They were willing to pay high prices for quality products, and their love of brands sparked the emergence of a mass-luxury market where owning expensive, exclusive products seemed essential rather than aspirational. This combination helped boost the country's retail sales to an estimated ¥135 trillion ($1.48 trillion) in 2008, second only to the United States. Yet Japan's consumers are rapidly changing, in four primary ways.

Hunting for value

Japanese consumers are reducing costs and questioning their famous inclination to pay for convenience: a September 2009 MyVoice Internet survey found that 37 percent had cut overall spending, while 53 percent declared themselves more likely to "spend time to save money" rather than "spend money to save time." In apparel, high-end department stores concerned about the vanishing shopper have started leasing space within their stores to value-focused competitors such as casual-clothing chains Uniqlo and Forever 21, hoping that this will revive customer traffic. Japan's leading skin care companies are more aggressively introducing lower-priced products. Luxury-goods companies are watching a decade of growth disappear, with year-on-year sales declines of 10 to 30 percent.

What's more, sales of private-label products are booming. Experience in many North American and Western European markets suggests that once people switch to private brands, they rarely change back. Japan is in the early stages of this transition: until recently, the private-label penetration rate was just 4 percent, compared with the global average of 20 percent.¹ Japan's largest retailer, Seven & I, which operates 7-Eleven convenience stores and Ito-Yokado general-merchandising stores, expects private-label sales to grow by about 60 percent, to ¥320 billion, this fiscal year.

Spending more time at home

The Japanese used to spend little time at home, as a result of factors such as long work hours and small living quarters. Yet almost 50 percent of a representative sample of consumers across a range of age groups and geographies are now spending somewhat or significantly more time there (Exhibit 1). The suddenness of this behavioral change has prompted a term for it: sugomori, or "chicks in the nest." In fact, a September 2009 MyVoice Internet survey found that the top four ways people chose to spend their days off were surfing the Internet, watching television or reading the newspaper, sitting around the house, or listening to music. "I've seen people staying in more," said Ernest Higa, CEO of Higa Industries, which operates Domino's Pizza in Japan. "They're not going out, because of the economic crisis." (Hear more from Higa in our video interview, "Learning from the Japanese consumer—Three executive perspectives.")

Buying products differently

Japanese consumers are changing not only what they buy but also how they buy it. Long given to shopping near their homes, they are now more willing to travel. They are also deserting department stores in unprecedented numbers, preferring to spend their time in malls and stand-alone specialty shops. Asked by a March 2009 MyVoice Internet survey to explain their defection from department stores, they cited expensive products, "annoying staff," and an "inability to shop at my own pace." Consumers are favoring venues that satisfy needs beyond shopping, such as eating and entertainment.

Online shopping is central to both the economizing and the nesting trends. While Japan has one of the world's highest broadband penetration rates, it has lagged behind developed markets such as United Kingdom and the United States in the willingness of its consumers to shop online. Many explanations have been advanced for this peculiarity: Japanese consumers love the physical shopping experience; mobile-phone screens are too small; the density of retail establishments means that online shopping has less of a convenience advantage; credit card penetration is low.

Whatever the root causes, Japan has shrugged off its reluctance: according to an April 2009 MyVoice Internet survey, more than 50 percent of consumers are buying more online than they were just 12 months ago. "Mobile technologies are empowering consumers to make smarter decisions about what they buy," said Duncan Orrell-Jones, senior vice president and general manager of Disney Interactive Media (Asia-Pacific). (Hear more from Orrell-Jones in our video interview, "Learning from the Japanese consumer—Three executive perspectives.") The total online market for physical goods (excluding ticket sales and electronic downloads of media such as music, movies, and software) is estimated to be nearly $30 billion (Exhibit 2), compared with only $1.3 billion in 1999.² When Domino's, for example, launched an Internet-based home delivery service, in 2004, the company's first long-term internal target was to have 5 percent of home-delivery orders placed through it. To Higa's surprise, "over 35 percent of our sales today are through the Internet."

It's worth underscoring the tight relationship between online shopping and broader shifts in consumer behavior. In a consensus-driven society where individual choice and expression have historically been frowned upon, the ability to browse products, compare prices, and make purchases relatively anonymously is creating new attitudes and empowering consumers. An interesting example is health care, where the Japanese have traditionally been deferential to authority figures such as physicians. Yet according to a nationwide January 2009 Nomura Research Institute survey, 89 percent of Japan's people are somewhat or very interested in managing their own health care decisions.

Being health- and environment-conscious

Japan has always been perceived as one of the world's healthiest societies, thanks to a combination of lifestyle, diet, and genetics, and Japanese consumers are increasingly conscious of their health. A September 2009 MyVoice Internet survey suggests that spending on health, sports, and recreation, for example, has held up better than virtually any other retail category. One effect of the greater interest of the Japanese in directing their own health care has been the growing popularity of drugstores, which have been Japan's fastest-growing retail channel since 2000: store numbers have increased by 4 percent and sales by 8 percent.

Environmental consciousness has been emerging for some time. A survey conducted last year by the global advertising agency J. Walter Thompson found that 51 percent of Japanese consumers are somewhat or much more focused on the environment than they were a year ago; only 7 percent were less focused. A November 2009 McKinsey survey found that 84 percent of the respondents preferred to buy environmentally friendly everyday consumer products, and that preference is translating directly into business success. Consider, for example, Coca-Cola's I LOHAS (Lifestyles of Health and Sustainability) water, whose selling points include a reduced carbon footprint: bottles are made from 12 grams of recyclable PET³ plastic (rather than the standard 26 grams) that can be twisted and compressed when recycled. I LOHAS is also bottled locally, reducing transportation costs. Less than 12 months after launch, it has become Japan's top-selling brand of single-serve bottled water.

Despite such success stories, Japanese consumers, like their counterparts in many other markets, have hard-nosed attitudes about paying for green goods and services. Just 16 percent of Japanese respondents to a recent McKinsey survey expressed a willingness to pay more for them.

Why behavior is changing

Three factors are contributing to these trends—first and most obviously, the current economic downturn. Just as European and US consumers have become more frugal, so have the Japanese. There's also a longer-term trend at work: Japan's economy has been relatively weak for nearly two decades. The changes that has wrought—such as the disappearance of life-long jobs and the increase in part-time and temporary labor—is fuelling consumer anxiety. The most recent (October 2009) J. Walter Thompson AnxietyIndex suggests that 90 percent of Japanese consumers feel anxious or nervous, the highest rate of any country in the world. While some money-saving behavioral changes (spending less, buying through different channels, going out less) stem from the downturn, it has in all likelihood primarily accelerated changes under way for some time.

Related to this anxiety is a second factor: the emergence of a new generation with radically different attitudes. This generation—people in their 20s—has grown up through Japan's difficult economic climate, never knowing the boom times the two previous ones experienced. Its lifestyle has prompted the nickname the hodo-hodo zoku, or "so-so folks" (or, even worse, "slackers" or "herbivore men"). Many shun corporate life and material possessions and are more pessimistic and more likely to be unemployed than their elders.

These young men and women present a challenge to marketers. As the CEO of a leading sports-apparel company in Japan recently said, "For the first time, we have a generation of consumers that aren't at all persuaded by what the professional athletes are wearing. We need a fundamental rethink of how to approach this next generation." In addition, these consumers tend to be more willing to spend money on services than products and on technology than other goods. In December 2008, when a goo Research Internet survey asked Japanese women aged 20 to 26 which products (of any kind) exhibited superior design, for instance, four of the top five were made by Apple, and just a handful of luxury goods made the list.

A final factor driving the change in attitudes and behavior is a series of small, largely unrelated regulatory actions. In March 2009, for example, Japan's government reduced the maximum freeway toll on weekends to ¥1,000 regardless of the distance traveled—a huge discount that encouraged trips outside Tokyo to big-box discounters and large-format retailers such as Costco and Ikea. Other examples include regulations allowing the wider sale of over-the-counter drugs; a mandate that all employees over the age of 40 (about 50 million people) take a test to determine whether they are at risk for conditions such as diabetes and high blood pressure and, if they are, requiring them to exercise and diet; and recent changes to reduce underage smoking. The Japanese government has also pushed to increase awareness of and access to health remedies, in part to address the challenge of paying to treat these conditions.

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All these changes add up to a new playing field for domestic and international companies. Because Japanese consumer behavior is shifting closer to that of shoppers in Europe and the United States, retailers and manufacturers can look to those markets for guidance. For starters, they should place greater emphasis on generating and maintaining customer loyalty and be willing to experiment with new store formats

that better match the way consumers now shop. Companies also should embrace online shoppers for any product, from the high to the low end, given their increasing numbers. "Marketers must begin to think about digital marketing as an extension of the product itself and not just an extra piece of media," said one Japan-based chief marketing officer of a major consumer products multinational.

The shift to value has already generated some unlikely winners—McDonald's has become Japan's biggest-selling restaurant chain—and helped companies that have traditionally struggled to gain traction. Ikea has become Japan's second-biggest furniture retailer. Costco membership is at an all-time high. Wal-Mart Stores' Japanese operation, Seiyu, reported its best financial results since entering the market. Amazon.com is doing remarkably well. Non-Japanese players are enjoying unprecedented success, and local manufacturers and retailers must respond proactively. Some are thriving—furniture group Nitori has excelled in a down market, as has online retailer Rakuten—but others may need to seek mergers to reduce operational costs and remain competitive, or partner with major retailers to bypass wholesalers and middlemen.

One thing is certain: the world's second-largest consumer market is changing as Japanese consumers increasingly resemble their Western peers. For Western companies that have long regarded selling in Japan as not only different but also difficult, this may be welcome news indeed.

About the Author

Brian Salsberg is a principal in McKinsey's Tokyo office.

The author would like to acknowledge the contributions of Tomoko Hibino-Niitani and Todd Guild to this article.