Redefining Risk-Free...

For the longest period of time the classic proxy for the theoretical risk-free rate has been the 3-Month U.S. Treasury Bill, this may have to be re-thought given the U.S. debt-crisis that just got "resolved" today. The crisis brought home the realization that the U.S. Ecoomy, far from being infallible, is actually vulnerable in it's present state.

The longer-term ramifications of both the crisis itself and the solution that was agreed upon today are going to be profound. The United States has re-discover its place in the global economy instead of relying on past laurels, and soon, while the other developed nations still look to it for economic leadership and haven't realized that this need is more psychological than anything else...

Employment Outlook: ADP vs BLS...

Earlier this week the Markets were buoyed up by some favorable economic reports coming out, but most significantly by yesterday's ADP Employment report that predicted a 157K increase in private jobs. Traders that were holding short positions given the low seasonal performance of markets in summer months, further drove markets up in a "short squeeze rally".

Come Friday morning, the BLS Employment report came out, and proved ADP wrong...yet again. According top BLS estimates, only 18K Non-Farm jobs were added in June, much lesser than the 105K economists were expecting and a miniscule fraction of the 157K ADP predicted. And this is a consistent pattern in the past year, ADP has been off vs BLS by 50% or more on at least 6 occasions. That is a coin toss. So I say either ADP proves why they have a better read on employment than BLS or they stop reporting this number in the public interest...as it is the markets are jittery and beyond the implications to investors, the markets have a direct bearing on consumer and corporate morale. We do not need another volatile factor added to an already chaotic mix of indicators.

"Mix Modeling on its death-bed" Starcom MediaVest Group CEO Laura Desmond

http://www.adweek.com/internet-week-blog/laura-desmond-wants-her-industry-deep-six-its-market-mix-132255

Starcom MediaVest Group CEO (and #57 on Forbes 100 most powerful Women in 2008) Laura Desmond believes that Marketing Mix Modeling, platform for measuring Advertising ROI is on it's death-bed, citing backward-looking focus and lack of ability to evaluate consumer attitudes as part of the reason it is becoming obsolete.

I think Marketing ROI as a concept won't go away (taking care to distinguish Mix Modeling as the device and Marketing ROI as the objective) for at last a couple of reasons:
-Elegance in evaluating Marketing Strategy was not the primary raison d'etre for the approach, it came about as a means for stakeholders outside the Marketing Department to understand how the dollars they were pumping into advertising was contributing to topline growth (and bottomline performance)- in other words the "business performance" focus she faulted. After all influencing consumer attitudes is not the end-goal of advertising, growing sales is (by influencing consumers positively), so successful advertising needs to demonstrate ability to drive both, not just any one of the two purposes.
-Today the approach does more than that and can simultaneously evaluate both business performance and consumer attitudes, depending upon how much effort you want to put in. I have already written in the past that consumer attitudes not only can but should be measured in marketing-mix models (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1411790)

Playboy Outsourcing Operations? Times must really be tough!!

Playboy Enterprises Inc. recentlly announced that they will be outsourcing most of their operations to American Media Inc. in a 5-year partnership deal.

Apparently it's not party time anymore at the company Hugh Hefner started (partly with money loaned by his mother). In fact they have seen their margins erode progressively over time. They netted out $2.3MM profits on revenues of $331MM in 2006 (0.7% margin), in 2007 they made $4.9MM in profits on $340MM in revenues (1.4% margin). To put their operating profitability in perspective, consider this- Playboy operating profits in '07 were $10MM, giving an operating margin of 2.9%. Bauer Consumer Media, publishers of FHM magazine had operating profits of £65.4MM during the 12 months to 31 March 2008 on revenues of £313.1MM- a 20.9% margin. So they do need a revamping of their operational strategy. Especially given the manual intensive nature of the publishing business, the economies of scale AMI can bring to the table may reeally unlock the profit potential at this controversial yet iconic brand. I guess they are hoping that AMI, which has a score of successful magazine titles in their portfolio can help them improve operational effectiveness.

2009 Retail Season Half-time: Black Friday '09

Black Friday '09 has come and gone and the experts are already making prognostications about the rest of the '09 Holiday Season and the health of the Retail Sector. Talk about opinions being divided- on Yahoo! Finance itself there were two articles posted a day apart taking opposing views- "Early indicators of Black Friday sales promising" and "Black Friday: D-Day for 'Deals' and a 'Dismal' Economy". I think both perspectives hold some water. The average American consumer has seen some benefit from economic pressures easing off over the last few months and have had some of their purchasing power replenished. They do not have enough to splurge across the board this Holiday season, so we will probably see them making a lot of trade-offs-  a family vacation or new clothes for the family or that big flat screen TV we've been thinking off. Seeing the mad rush at Wal-Mart and at BestBuy, I think Retailing analyst Kristin Bentz (The Talented Blonde blog) is right, the two themes top of mind for the American consumer this Holiday season will be Value and Technology- retailers across all sectors that will get the perfect balance of value vs. profitability will come on top, and technology retail in general seems to be poised to do better than the rest- if the average consumer is going to splurge he or she wants to do it on something longer lasting like a computer or a new TV.

Review of "The Shift Index 2009: Industry Metrics and Perspectives” (Deloitte.com Article)

I came across this report from Deloitte “The Shift Index 2009: Industry Metrics and Perspectives” (published November 4, 2009) that takes a deep dive look at Corporate performance across a broad group of industries including Aerospace& Defense, Financial Services Consumer Products and Retail, Technology, Media, Telecommunications, and Automotive. In spite of the vague and cryptic nature of the content, I think there is some real value in going through this (that is if you have the patience to digest a 208-page manuscript- someone should talk to the authors about the need to be succinct when producing content for web-publishing).


The key theme of this rather lengthy report is that Return on Assets across public companies is down 75 percent and corporate performance metrics currently utilized across businesses may not be appropriate.

The report then proposes that there is a “Big Shift” in underlying economic and behavioral trends the convergence of which is the fundamental driver of this performance erosion. The report then goes on to dissect how this so-called Big Shift is playing out across these different industries.

The report further proposes a “Shift Index” to quantify this phenomenon along three dimensions (quantified by 3 other indices- I suppose they need to make it complicated to sound sophisticated!):

Foundation Index: As defined by the report “The Foundation Index reflects new possibilities and challenges for business as a result of new technology capability and public policy shifts.” Put simply this is the infrastructure that has redefined business processes including digital infrastructure, and asynchronous and integration of geographically disparate resources that optimizes productivity. This metric is apparently evaluated at economy-level and therefore not analyzed by industry. Not sure why this would not differ across industries in an economy?

Flow Index: Defined by the report as “the Flow Index, is characterized by the increasing flows of capital, talent, and knowledge across geographic and institutional boundaries.” Translation- this basically builds on the Foundation Index- which is a more static perspective of resources. The Flow Index emphasizes the fact that Knowledge, Technology and other resources are in a constant state of flux and emphasizes the ability to constantly tap into evolving reservoirs of these resources to replenish current resources (not surprisingly- in the spirit of complicating concepts in pursuit of sophistication the report looks at two additional metrics within the Flow Index- Inter-firm Knowledge Flows and Worker Passion metrics).

Impact Index: If the descriptions on the previous two metrics were a bit vague, this one borders the esoteric. “…the Impact Index reflects how well companies are exploiting foundational improvements in the digital infrastructure by creating and sharing knowledge— and what impacts those changes are having on markets, firms, and individuals.” From my humble view-point, I think this is basically a measure of how well companies leverage their abilities around the previous two indices to create competitive advantage- I can buy that.

All in all I think there is some very useful information in this report, as to the effort required to go through this article to get to that information- to tweak a quote from a well-known movie "the juice may be just about worth the squeeze". If you are looking for specific analysis for the industry vertical of your interest, I would recommend going through the corresponding section of the report- what I have summed up above should save you some time on the rest of the material.

Note: This is an independent and unsolicited review of publicly-available material and neither the writer of this commentary nor this website takes any credit or liability for the original material being reviewed in this commentary. Please use your judgment in considering this review.

Marketing Effectiveness Analytics Comes of Age

As Marketing Effectiveness Analytics comes of age, it seems to have been promoted from specialized firms to it's own practice area within Marketing Strategy dvisions of Crème de la Crème of the consulting world and from an esoteric existence within Market Research Departments to the Corporate Boardroom- almost a Cinderella story. Marketing Effectiveness Analytics today is the tool of choice while setting benchmarks and hurdle rates for assessing marketing campaign performance, setting new product marketing budgets and pricing strategy shifts.

Studies like Marketing ROI Analysis (a.k.a Marketing-Mix Modeling a.k.a Marketing Effectiveness Analysis), Marketing Spend and Advertising Optimization etc. were not mainstream services within the Marketing practice area of blue-chip firms like McKinsey, Accenture, Booz and Deloitte. Now these firms have dedicated sections to Marketing Effectiveness/Efficiency within their Marketing practice area. It's not as if they have created new and improved version of these analytics that have been practiced by niche firms for the last 20 years or so, they have just added their branding to them and this is causing C-level execs to take notice. So now that Marketing Effectiveness Analytics has established as a mainstay within the "must-haves" of Market Research tools, hopefully there will be more focus on standardizing this tool across industries so that the results can be normalized and used as benchmarks.

One potential outcome of marketing effectiveness becoming a standardized corporate practice is that GAAP could be amended to treat Marketing as a Capital expense (maybe a bit of a stretch but not impossible). This will have far-reaching effects on marketing budget management- for instance if marketing expenses could be capitalized and amortized over time instead of in the same revenue period, Corporate stakeholders would be less likely to slash marketing budgets every time costs need to be trimmed. Return hurdles set by Marketing Effectiveness analyses would ensure that marketing spending is efficient and productive thereby providing a check to a tendency to overspend and amortize over longer periods. Just a thought.

Torture the Data long enough and it will confess to anything...

The core motivation for this Blog was to promote some rigor in business and economic analysis and research. In our posts we had talked about how research is becoming less and less exploratory and more and more confirmatory.

I was just reading an article on Yahoo! Real Estate from CNNMoney.com titled "Americans Tame Their Wanderlust". The article is pretty cool as it focuses on domestic migration patterns, which obviously has a strong bearing on regional shifts in Real Estate demand and pricing. What was not so cool was the lack of connectivity between the data presented and the corresponding insights developed. For instance the article's title is based on the following statement "Only about 2.4% of Americans moved from state to state in 2008, down from 2.5% the previous year". The author relies on U.S. Census Bureau population data, which is publicly available at the Census Bureau website. Now this is a 0.1% change- 307,000 absolute decline assuming a total U.S. population of 307 Million. This seems like a large number if the numbers aren't estimates but actuals, but it is impossible to measure this data with 100% accuracy, so the Census Bureau like most other folks in Business and Social research settles for 90% confidence (with a 10% probability that the estimates are wrong). A key metric in gauging how much importance to put into this change is the "standard deviation" of how this percentage varies year over year. So if this percentage varies +/-0.05% every year, there is only a weak possibility that there was actually a decline and for all purposes the change would be statistically "insignificant".

I am not saying that the article is inaccurate, all I am saying is that in my opinion enough data may not have been presented to justify the title. It is especially risky to base real estate investment decisions using just two data points as typically the gestation period for these investments to bear fruit is significantly longer than 2 years (if more folks had been mindful of this we probably wouldn't have had a real estate bubble).
A little rigor around analysis of Census Bureau would have yielded the author a few interesting nuggets around domestic migration trends in place. For example the chart below shows net migration trends by 4 U.S. regions.
 

The chart indicates that with the exception of 2002-2003, the South seems to significantly lead all other regions in migration. The West seems to have some cyclical pattern going on but seems to generally mean-reverting around an equilibrium balance. Over the past 10 years the exodus out of the Midwest has progressively abated. The exodus out of the Northeast seems to have peaked out in 2004-2005 and is progressively becoming less negative in net domestic migration.

Looking at this from a State level may have generated too much noise as there are several factors to be considered like the fact that Washington D.C. is at the confluence of three states and has a significant number of people that at one point in time or another lived in both D.C. and one of the neighboring states. So either analysis and insights should be limited to the granularity permitted by raw data or an appropriate statistical model should be leveraged that controls the influence of potentially confounding factors.

Eye on The U.S. Economy: September 2009 Employment Report

The Employment Situation Report comes out on Friday September 4th, 2009 at 8:30 A.M. Based on other reports that came out earlier this week, it may go either way vs. expectations. Consensus estimates an average decline of 200,000 in Nonfarm Payrolls.


Although the ISM Manufacturing Index came out on September 1st at a very strong at 52.9 vs. a Consensus of 50.5, the Inventories Index was weak, suggesting Manufacturers are drawing down existing Inventories, which doesn't help Employment. but production was up.
From a historical perspective, last month ISM Manufacturing Index had an upside surprise, ADP came in at -371K, Consensus estimates on Nonfarm Payroll were -300K and Actual came in at -247K. So if we see a repeat trend this month, we could actually come better than -200K.

So far I see a couple of positive factors supporting better than expected Employment and one negative factor (ADP).

Here's the reason I am honing into Employment this month- Personal Income usually lags Employment and leads Consumption, therefore it is logical that Employment trends in September and October could be a major influence on Holiday sales. If you look at the last ten years Retail Sales estimates from the Census Bureau (excluding Auto), the monthly SAAR (Seasonally Adjusted Annual Rate) correlation vs. the Month-over-Month Employment percent change peaks out at a 3-month lag. The correlation with monthly change in Seasonally Adjusted Retail Sales (ex-Auto) peaked at a 2-month lag. Unless we have significant improvement in Employment and Personal Income over the next two months, we are looking at another year of bleak Holiday sales.

Media, A Wharton Professor and Marketing Research - II

And a little book called Moneyball
Following up from my last post, I gave my second blog a little time to think itself through. For some reason, I kept thinking about this book while I was listening to Professor Fader's ideas. That set me off on another line of thought. What is marketing research all about? The professor kept talking about the value of conventional wisdom and using information more effectively. Perhaps a few innovators in baseball have hit upon the answer. So, without much further ado, let me introduce the reader to the book using the omnipresent Wikipedia (http://en.wikipedia.org/wiki/index.html?curid=438445). Here you can find a pretty succinct summary of the book. The core of the book to me, however, is the essence of innovative marketing research.
Every industry has its own conventional wisdom. Take, for instance, the motion picture industry. Traditional wisdom says that movies should be released on Fridays so that they can benefit from the weekend crowd. While this might have held true in times when the average movie-goer went to work 5 days a week and looked for some Friday night entertainment, but will this theory change if we had flexible working hours? Is the pre-release on Wednesdays and Thursdays an attempt to get an early edge? Is it the reflection of an extended weekend? Do these rules apply equally in the summer? I don't have a definitive answer, but I just know that the new trend certainly isn't conventional wisdom.
Baseball, too, suffers from its multitude of opinions. What Billy Beane and his crew did was to challenge opinions using statistically-backed stats. For example, they found that a college player's chance of making it in the big leagues is way greater than a high school player's odds. This flies in the face of traditional baseball thinking - but is validated by research! This allowed a middle of the pack team like the A's (when it came to budget) to run with organizations like the cash-rich Yankees or the Red Sox who in the past have simply shelled out exorbitant cash for the best established players.
I am sure marketing researchers at this point are smiling to themselves. Haven't we all faced some brand manager who seems to believe that her brand is premium despite all evidence to the contrary? Or that TV advertising still generates 15% incremental sales for a mature CPG product?
To me, the professor's theories, the book and the current state of marketing research all point in the same direction. Research is useless if it is only used to validate conventional wisdom. True value in research is driven by finding previously undiscovered nuggets - and not by doing the tried and tested.

Wading Through A Deluge of Recession Pricing Advice

Over the past year or so a lot of advice has come out from business thought leaders about recessionary pricing strategies. Below are three articles from what are considered to be well-regarded sources:
INSEAD: When to push the panic button?
Harvard Business School: Marketing Your Way Through a Recession
McKinsey: Pricing in an inflationary downturn
Although there's a lot of valuable advice in these perspectives, it is surprising that some of these studies propose a one-size-fits-all approach to recessionary pricing.
Sorry to burst the bubble, but the consumer decision process is not that simple. For instance the INSEAD article proposes that consumers are not more price sensitive during a recession, the extra sensitiveness shown during recessionary times is attributed to income smoothing and advices firms to focus on share of customer wallet rather than share of market. Good advice, but while it is great to focus on share of wallet, share of market ultimately determines the financial performance corporate stakeholders will be evaluated on. Share of wallet as a metric is focused on retention(up-selling and cross-selling). While retention is critical, acquisition is important too in driving growth. Market-share is a more wholesome metric that takes into account performance of both retention and acquisition activities, especially if the firm is in a growing category, where acquisition could be a greater determinant of performance than retention. On the other hand for mature industries, retention would certainly be more important. This highlights the perils of subscribing to generic strategies.
Another frequent advice I have come across is to not take a perceived increase in price sensitiveness during economic downturns as a signal to aggressive pricing strategies that may lead to unprofitable price wars. That is all good, but game theory suggests that in multi-competitor industries, you will always have a player that will try to increase their payoff by defecting and using aggressive pricing strategies to garner market shares. In this case should you take the higher road and trust in your customer loyalty or protect your market-share?
The Harvard article scores on a few points, for instance Advice #6 is to "Adjust Pricing Tactics"- some good nuggets of wisdom here, but #3 "Maintain Marketing Spending" is no all that realistic. Margin pressures inevitably result in budget cuts.
The McKinsey article actually has some pretty good advice on how research steps that can help fine tune pricing strategy, without actually trying to generalize findings. I especially liked these:
Monitor customer-level profitability
Update price sensitivity research
Monitor your industry’s microeconomics
Consumers reaction to pricing in recessions is not generic across all of their purchases. For instance, if a Brand is in a category with relatively low product differentiation, price discounting could forever forfeit brand premium, while Brands in categories with higher product differentiation can actually leverage pricing without damaging longer term equity. Also for service-based industries, brands can drive longer-term market-share by lowering price and locking in customers over a longer-period. Ultimately the key thing to remember is that when it comes to pricing strategy- one size certainly doesn't fit all.

U.S. Economic Outlook: Bottom In Sight or Double-Dip Recession?

A quick survey of key economic indicators for the U.S. Economy may indicate that some of the downward drivers may be paring back more than expected, which could either indicate a reversal may be in the offing or we are on the brink of a double dip recession.

Durable Goods Orders: Durable Goods orders are to be released on June 24th and the consensus average is a -0.5% change. Durable Goods orders for April released on 5/28 was an upside surprise (new Orders expected 0.0% change vs. Actual 1.9%), and in April released for March were an upside surprise too (declined less than expected). If the underlying trend in Durable Goods is less negative than what economists are expecting, it may suggest that industrial production and capital spending situation may be a little bit better than expected coming up into the close of the second quarter of 2009.

Consumer Confidence & Consumer Sentiment: Both Consumer Confidence (Conference Board) and Consumer Sentiment (University of Michigan) where upside surprises (upside surprise in April too). Consumer spending is the heart of the U.S. Economy, representing 2/3rd of the economy.

Retail Sales: Although overall Retail sales were slightly below consensus, Retail Sales ex-Auto was slightly better than expected.

Inflation: May Headline Inflation rate was lower than expected, while Core Inflation came in right on the mark.

Employment: May Non Farm Employment was less negative than expected, while the Unemployment rate was slightly higher than expected. Numbers released in May for April also showed a better than expected Non-Farm Payroll situation.

Given the fact that First Quarter GDP was a little worse than Consensus expectation, the overall economic scenario painted by these indicators may suggest that a bottom could be in sight. It is too early to call a turnaround since GDP still has a negative trend, although the trend seems to be decelerating. At the very least we can expect overall 2Q to perform better than 1Q. This seems to align with Prof. Nouriel Roubini’s January prediction (first quarter 2009: -5%; second quarter 2009: -4%; third quarter 2009: -2.5%; fourth quarter 2009: -1%--adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009). Although now "Dr. Doom" Roubini is raising the prospect of a Double-Dip recession, as he thinks that not everything is in alignment for a significant reversal of the recovery trend. Hopefully he is underestimating the impact of all that stimulus money or overestimating the fallout of the public debt burden, because if we are indeed looking at a Double-Dip recession, it will get a lot worse before it gets better.

Global Warming, U.S. Economy and the GM Bailout

Why do I have these three themes in one sentence? That is because I think these could shape each other’s future with a little foresight.

Transportation is the second largest source of greenhouse gas emissions and accounts for a third of all carbon dioxide emission in the U.S. and Canada. Governments the world over are awakening to the fact that irreversible damage is being done to the environment on a global scale, with fossil fuels one of the key culprits. If there is one line item that you are going to find in the budgets of most rational governments the world over, it is investments in clean energy including reducing auto emissions.

President Obama has already made his stance on this clear by saying he hopes to see 1 million plug-in hybrid and electric vehicles on the road by 2015. Many have called this optimistic, but I don’t think so, only that I think President Obama is being myopic in his definition of “road”. I think the U.S. can take a leadership position in the global Hybrid car industry, not just the U.S., by bringing together likeminded Governments that would like to see a reduced consumption of fossil fuels. He said “"The nation that invented the automobile cannot walk away from it." And I agree, but I think “$4 billion in guaranteed loans and tax credits to help U.S. automakers retool for more fuel-efficient cars and to develop batteries for plug-in hybrids that get up to 150 mpg”, is taking a passive stance on the subject. If one American revolutionized the Global Auto Industry with the Model T, no reason why another cannot shape it’s future with making Hybrid technology affordable.

The combination of increased global concern on climate change, public opinion focused on a faltering economy and the current turmoil in the U.S. auto industry provides an alignment that the President should leverage. Especially opportune is the U.S. Government’s investment resulting in controlling interest in General Motors. I have not been fond of bailouts in general, as I favor natural evolution and survival of the fittest, but in this case it could be a good thing. GM is a company that has already made significant investments in hybrid technology (although cars like the 2010 Chevrolet Camaro SS with a V-8 engine bring into question the GM's product development strategy and Bob Lutz's commitment to the longer term). With the might of U.S. Tax payer dollars behind it and a more active rather than a passive Taxpayer role in the Board, this company can take a global leadership role in making U.S. hybrid technology the prevailing currency across the world over the next 5-10 years. This will require the U.S. Government to evolve GM into a largely hybrid car manufacturer. From a macro perspective, this could provide a significant boost to exports in the longer term, balancing the worsening Trade Gap (sales recorded by the global hybrid vehicles market are expected to surge at a CAGR of around 12% during 2008-2015 and focusing on this growth should only enhance Taxpayers’ Return on Investment on GM).

I know from an economic perspective, to make this a profitable venture will require a lot of work. Currently hybrid technology is far from affordable- the GM Volt, which plugs into a household electric socket to charge, is slated to retail for $40,000, nearly the same price as a conventionally fueled Mercedes C Class. As technology improves, this dynamic should change significantly- just look at the Notebook computer industry. And then again this is not just about profits- developing a potentially successful U.S. Hybrid Car Industry has ramifications that will reverberate for more than a hundred years to come, in a global climate that will finally begin the healing process from generations of big-cylinder, gas-guzzling monster cars spewing CO2 into the air.

So is the Government bailout of GM a smart move? Yes- only if President Obama was serious when he was talking about “Change”. If he really is as imaginative a leader as I think he is, he will take this opportunity and score a big touchdown on all three fronts: Global Warming, U.S. Economy and the General Motors.

Riding out the Recession with Lean Business Strategies

Businesses in the present economy are under pressure as the pace of revenue growth slows down to a crawl, compressing profit margins as revenues barely exceed fixed costs. Of course you can still drive growth through share gains and lower costs by targeting jobs for elimination, but when industry growth is nonexistent, your competitors will protect market-share fighting tooth and nail. Also there’s only so many jobs that can be eliminated without cutting into the core of the organization. Here are some measures that can be taken to tighten the organizational belt and drive austerity within the organization- some old ideas and some new.

Internal Impact: Reinforce your core and increase operational agility

Drive Operational Efficiency:
Leverage matrix relationships and pool resources across functional groups. Also evaluate the opportunity of creating smaller multifunctional “SWAT” teams that can rapidly deployed to tackle complex one-time assignments across the organization. Protect cash reserves to compensate for credit paucity during recessions- don’t over-leverage. Acquisitions may seem very attractive during recessions as valuations are low, but acquisitions add a lot of burden on the company in the integration process during a time when corporate energy needs to be conserved- bite only as much as you can chew!

Focus on competitive advantage:
Every firm at some point started with some competitive advantage that enabled them to enter a market effectively and when times get tough, it becomes critical to leverage this inherent expertise. This also offers the surest opportunity for growth- by simply taking your competitive advantage to newer markets, rather than trying to get into markets where you have peripheral or no expertise. Bring the game to where you have an advantage.

Streamline your Product Portfolio:
Innovation is critical to growth, but depending upon the industry, only about 30% of all innovations have the ability to drive incremental growth (without cannibalizing core business). New product trials to identify successful innovations consume precious resources that are critical to corporate health during tough economic times. Plants are masters at evolving through tough environmental conditions and provide us a valuable lesson in growth- you can only grow if you survive. In bad weather, plants conserve resources and do not produce flowers, fruits or seeds. These are critical for it’s proliferation, but consume precious energy in producing, which is better used in staying alive. Take a realistic look at your innovation portfolio, rank them by short-term probability of success and take the top 25% or fewer to trial.

Enhance existing product features:
Leverage customer data and market research to understand what product features are the most valuable to customers and enhance core portfolio. Remember when resources are scarce then innovation needs to be efficient.

External Impact
Maximize Customer Value Proposition
Understand what customer need your product serves and try to maximize the product’s ability to serve that need. This goal determines the focus of internal impacts 2, 3 and 4 above. For instance if functional benefits are the primary need your product serves then minimize packaging and other peripheral costs and increase the functional offering. If quality not quantity is the key benefit your customer derives out of your product, then quantity not quality is what needs to be adjusted to protect margins.

Retention rather than acquisition focus
In most industries, acquisition costs are very high and there is a net negative cash flow of replacing an existing customer with a new customer when factoring these acquisition costs. If there is a moderate to high degree of customer turnover, your marketing dollars are better spent on retention rather than acquisition.

Protect core market
Your core market segment and is what drives your main cash flow and your core customers are the most loyal. It is easy to take this for granted as corporate leaders focus on making their mark on newer areas of growth, but when faced with economically challenging times, the castle needs to be protected from competitive incursions. This is also your most familiar grounds from which to weather out economic storms.

Satisfy broader range of existing customer needs
This is probably the lowest hanging fruit and also the most important in all of your external opportunities available. During economic hardships every single of your customers are trying to stretch their dollars and if there are innovation opportunities available to fulfill multiple customer needs with fewer products, these should be capitalized.

"Wal-Mart-esq" Marketing Strategy at Hyundai Motors?

I just saw the Hyundai ad that offers to buy back your new Hyundai if within a year of purchase you lose your job- talk about making best out of the situation! They were already pushing the best value for your money line- but this is quite a bold move that for the time-being stands head and shoulders above the rest of the "economic downturn? we are here to rescue" pitches. If it doesn't burn a hole in their pockets, this should bode well for their brand equity. On the flip-side, Hyundai taking back my new car will ease the pressure of making payments, but now I will not only be jobless but also car-less.

Honda, Toyota: this is your opportunity to outdo those smarty-pants at Hyundai Marketing- make a counter-offer of also throwing in a free loaner for those job interviews (you can thank me in cash for this free tip).

McKinsey on Economic Regulation: Calling a Spade a Spade...

...or stating the Obvious?


Mckinsey Quarterly just put out an article highlighting the need in the current economic scenario for an increased cooperation between business leaders and regulators. The article states that "As concern over global problems mounts, executives and regulators have everything to gain from building relationships based on trust, and developing solutions that benefit a wide range of stakeholders". First of all I think this is a key area to address as the average Joe asks how come their elected leaders stood by while the business machinery took the free markets doctrine to illogical extremes. If people were rational and self-regulating we wouldn't have the need for the police and the judicial system, and if businesses were rational we wouldn't need the FTC and the SEC. At the same time 2008 was not just about the failure of the free markets system and the article doesn't address some regulatory limitations on dealing with the special circumstances surrounding 2008. In spite of the breadth of the current economic problems, truth of the matter is that trouble began with capital markets and the blatant securitization of all kinds of assets, the true economic risks of which regulators weren't really equipped to assess. Secondly, to some extent the economy validated at least one aspect of the free markets philosophy- survival of the fittest. Take the US domestic automotive sector for instance- these guys were in trouble long before the housing bubble and sub-prime crisis began. The credit crisis and their stocks tanking is forcing them into extinction as their ratings get slashed and they struggle to meet their debt obligations, but the it all boils down to their inability to compete with foreign automakers- evolution principles in action.

Media, A Wharton Professor and Marketing Research - I

A couple of weeks ago I had the opportunity to actually attend a lecture by a Wharton professor - Peter Fader - at the Marketing Modelers meeting down at the ARF in NYC. The topic of conversation was "The Paradoxes of Interactive Media". Peter Fader is a professor at the Wharton school of business and is actually on the board of A-list journals such as Marketing Science and Journal of Marketing Research. He has built his reputation on his research on trial and repeat in the CPG industry, while also doing some mean research in the field of electronic commerce. Most notable was his testimony during the Napster trial. Based on that testimony it was clear that the man is a rebel and revels in lateral thinking. The talk just confirmed it.

Even though I - or most other people in the room - didn't agree with everything he said, but his approach prompted me and everyone in the room to question our beliefs and conventional thinking. In today's blog I am presenting one of the points made in the session.

Professor Fader iterated that cross-group differences across different demographics like ethnicity are often meaningless. Now this may be true from a total category point of view (he used the example of DVD purchaes by hispanic vs. non-hispanic consumers). But if you get down to the brand or attribute level, this actually leads to way different consumer behavior - and since marketing is brand-driven rather than category driven, I would have to say that distinct differences do exist and can be leveraged by marketers to drive sales differently among different demographic groups. However, his essential theory that people are the same (or distributed similarly/ normally, if you want to be statistical) everywhere is pretty solid. However, as soon as you start breaking down a category by its attributes (brand, size, flavor, feel etc.) ethnic differences come into play. I would love to hear other points of view on this. I will deal with a couple of other interesting points made by professor Fader in my next posting....

So the Recession is finally official- Now What?

On Friday, November 28, 2008 the Business Cycle Dating Committee of the National Bureau of Economic Research announced a peak in economic activity in December 2007. Since it is the NBER's sacred and ordained task to announce recession beginings and end, finally everyone including the government can admit that we are in an official recession until the NBER announces a 'trough', signalling the end of the recession. Interestingly, neither the GDP or the GDI (Gross Domestic Income) showed an extremely clear pattern in the two consecutive quarters of decline rule to identify a peak, only the payroll employment seems to have declined every month since December '07 and the NBER seems to have weighed heavily on this metric to dtermine that we reached a peak in economic activity in December '07. Interestingly, I had posted previously in Is GDP a Consistent Measure? No, GDP is actually a Deceptive Measure... that relying purely on the GDP to determine the state of the economy is not a good idea since this measure may no longer be as reliable as it used to be in the past. Even if the financial markets and the economic production begins to stabilize, employment may continue to decline (economists are expecting Friday's employment report to be abysmal at a 325,000 decline- ADP has reported a 250,000 decline in the private sector). What probably is also driving private sector declines is the fact that stock prices are down in the dumps and management will continue to leverage every opportunity to be efficient by cutting costs to appease shareholders, until revenue growth returns to a point where it offsets the need to improve profit margins through cost-cutting. After the 2001 recession, jobs took 4 years to return to peak levels according to the Economic Policy Institute and if that is any indicator, we are looking at late 2011 early 2012 for a full recovery. With the dramatic decline in House Prices and the bleak performance of retirement accounts, households are increasing their savings rate in "safer" securities (typically bonds), as they can no longer rely on their real estate equity as a retirement cushion. In any case we are a long way from getting out of the woods.

Ghilarducci's Guaranteed Retirement Account Plan & The Macroeconomy

The last couple of weeks there's this rumor that's been floating around that the Government plans to do away with 401K and replace them with what is being called Guaranteed Retirement Account. The idea apparently originates from an economist, Teresa Ghilarducci, who put forward a paper "Guaranteed Retirement Accounts Toward retirement income security" in November 2007. A year after the paper was published, in the wake of one of the worst financial crises in the history of the US, the author was apparently called to testify before Congress as the paper caught the government's eye. The paper proposes that workers "not enrolled in an equivalent or better defined-benefit pension" be enrolled in a "GRA" plan that combines the best features of defined-benefit and defined-contribution plans, offering workers guaranteed (?) retirement benefits- contributions will earn a rate of return guaranteed by the federal government. Upon retirement these funds will convert into annuities. Ghilarducci claims that combined with Social Security, these annuities will replace 70% of pre-retirement earnings (I thought most of the folks who entered the workforce within the past decade had given up ever seeing their Social Security benefits?). Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent (but remember you are foregoing the opportunity to generate market returns on your investment- not amounting much today, which is why we are even entertaining this discussion I guess). Assuming this thing works and the Feds will be able to deliver on their promise, what will be the fallout from pulling that kind of capital out of the investment markets? Of the total $17.1 Trillion in U.S. retirement assets, mutual funds managed $2.2 Trillion, while IRAs accounted for $4.5 Trillion (data as of March 31, 2008 from Investment Company Institute). If a $0.75 Trillion bailout was going to pull us out of the financial crisis, what will be the outcome of withdrawing $6.9 Trillion out of capital markets? Or am I missing the math completely?

P&G Giving Up on Facebook Marketing?

I was just reading an article by Jack Neff of AdAge covering P&G "Digital Guru" Ted McConnell. Ted believes that Social Networks like Facebook may never be able to show the ROI on Ad dollars marketers spend on their websites. The article quotes Ted as saying about consumer-generated Media "Who said this is media? Media is something you can buy and sell. Media contains inventory. Media contains blank spaces. Consumers weren't trying to generate media. They were trying to talk to somebody. So it just seems a bit arrogant. ... We hijack their own conversations, their own thoughts and feelings, and try to monetize it." I am not sure if someone rewrote the English language dictionary but last time I checked Media is defined as "means of mass communication" and with a Reach of 12% of global internet users according to Alexa, Facebook certainly fits that bill. Now is it a good medium for advertising, that's a whole another thing. Ted also raises concerns about the type of targeting afforded by Facebook, but that's a fallout of the Information Age. There was a lot of hue and cry about using Credit Bureau data for marketing, a few regulations later that is still an industry. Ted makes a good point about reach fragmentation though- there's just way too much people do online to effectively reach them with any decent amount of banner ads. On the other hand as technology advances the ability of online advertisers to track a target through their internet trail and persevering until a conversion is obtained isn't that difficult. Already re-targeters are identifying unique users and repeatedly hitting them with ads- check this article.

Return on Product Innovation: Measuring your Innovation Pipeline

Innovation is a critical growth driver for most industries, but more so for industries that are mature. Growth industries are less reliant on an ongoing pipeline of innovations because the full potential of the existing portfolio hasn’t been maximized yet, penetration can be further increased and new markets can be expanded into, where success with existing products can be replicated. Products and brands in mature industries on the other hand are characterized by a lack of differentiation outside of price- barriers to entry are low, which increases the number of market players, pushing marginal profits down. In such an environment, innovation provides a strong differentiating factor, allowing a brand to lower dependency on price as a competitive lever.
So if you are responsible for the strategic planning for your firm and not in an early stage industry, you need to be thinking about your innovation pipeline and it’s not enough to say you have a department for innovation- in most industries only 1 in 10 innovations succeed. So you not only need to have a team in place that has a network reach both inside and outside the organization that allows ideas to funnel up, but you need to also have the right metrics in place to evaluate the performance of your innovation strategy vis-à-vis your industry. A study by McKinsey (McKinsey Global Survey Results: Assessing innovation metrics, October 2008) suggests that a large percentage of executives even at companies that actively pursue innovation don’t formally assess innovations at all.
One way to evaluate innovations is using Return on Product Innovation (ROPI) measured through in-market tests (in-market tests are also risky because your competitors can copy it and bring to market faster than you, stealing your thunder). For ‘breakthrough’ innovations that you are planning to take straight to the market without first testing, ROPI can be estimated as ‘one-year out ROPI’, ‘two-year out ROPI’ and so on. At the end of year 1, forecasts can be used to estimate breakeven time for ROPI to turn positive and marketing ROI can be used to evaluate opportunity to optimize marketing strategy to improve ROPI.

ROPI={[Dollar Sales-Cannibalized Sales]/ [Fixed Cost + (Variable Cost*Units Sold)]-1}*100

Fixed costs can include development or other one-time costs related to production, variable costs are usually ongoing production, marketing and distribution costs. You need to deduct cannibalized sales, because these are sales you would have gotten even without the innovation. This equation can be modified for any custom inputs particular to your industry or the nature of innovation. For instance, if estimating ROPI for an in-market test then using the full fixed cost for development is not fair and should be factored down based on the ratio of size of market tested vs. the total market-size.

October Retail Sales

Macy's reported a disappointing sales for the third quarter losing $44 million. Other retailers are expected to report quarterly results later this week including JC Penney, Kohl's and Nordstrom. Few retailers are already reporting poor sales number for the month of October, which is going to put added pressure on the market and the economy. This is going to be a roller coaster fourth quarter.

Enjoy....

The U.S. GDP & The Non-farm Payroll

On the heels of one of the worst ISM Manufacturing Index numbers in over two decades, the Employment numbers that come out on Friday were expected to be bleak- and it exceeded this expectation as the decline was 40K worse than the consensus average of -200K. The report released by the Bureau of Labor Statistics is based on two different surveys with different sample sizes and the bigger focus is on the Non Farm Payroll number that comes out of the establishment survey because this survey is more comprehensive with a much larger sample size than the household survey (375,000 businesses vs. 60,000 Households). The number of total employed persons in the U.S. population has been falling for 10 consecutive months and in October '08 there are 1,138,000 fewer employed persons in the U.S. compared to the November '07 peak of 138,037,000. And all this time economists have been debating whether it's really a recession or not- fact of the matter is the relationship between Employment and GDP may not be what it was in the past- correlating Quarterly change trends in GDP vs Employment (15-year moving window) indicates that this relationship may be only half of what it was 4 decades back.

The Economy has become much more complex than what it was back then and we may need to be redefining how we look at these economic indicators.

Evaluating Market Expansion Strategies: Vertical or Horizontal?

With the recent turmoil in the Economy, deals and opportunities are soon to follow as astute business persons hunt for opporunities for consolidating their position by moving into spaces vacated by fallen players. Easiest venues for expansion are horizontal, as they encompass your core area of expertise and help topline growth. Cost efficiency benefits are critical components in evaluating a horizontal expansion opportunity. Horizontal expansion strategies can be further broken out into geo-demographic expansion versus channel expansion strategies, but all these still entail doing what you are good at in new venues. Efficient marketing and distribution networks are important to the success of horizontal strategies.

Vertical expansion on the other hand is a trickier proposition as it entails venturing into an area you are only familiar with but lies outside your core competitive advantage, but done correctly will significantly impact your bottomline. Synergy benefits are very important for vertical expansion opportunities. Operational excellence too can go a long way in making a vertical expansion strategy very successful.

Industry lifecycle is also a big determinant of the feasibility of one versus the other. Growth industries make horizontal expansion very attractive and important for market leadership, whereas for mature phase industries horizontal expansion may not offer as much ROI as margin improvement through vertical expansion.

Predictive Targeting In Digital Media Marketing

I was just reading an article on MarketingProfs.com that was talking of leveraging a technique called "CARVER" (reminds me of Thanksgiving!) used by the military to "identify and prioritize" targets ("How to Target Your Prospects With Military Precision" http://www.marketingprofs.com/8/target-prospects-with-military-precision-meachum.asp?sp=1). This won't be the first time ideas from the military have been leveraged in business 'warfare'. In fact Precitive Trageting is exactly the area where another concept from military surveillance has been used- Receiver Operating Characteristic Curves or 'ROC' Curves. ROC Curves are used to evaluate how well predictive models are able to identify targets that are most likely to respond to specific media tactics. The concept is based on the effectiveness of Radars to identify targets by sifting signal from noise. ROC curves are used to evaluate econometric models that identify prospects that are most likely to respond to media tactics. Wikipedia has a good explanation of this approach: http://en.wikipedia.org/wiki/Receiver_operating_characteristic_curve. Although the CARVER concept is interesting, the optimization of the weights for each factor seems a bit subjective inc comparison to the scientific precision provided by an econometric model. This link provides a fairly decent expanation of the method: http://www.ni2cie.org/targetanalysis.php.htm
Compared to the subjective approach utilized here, an econometric model not only helps identify most opportunistic targets, but also quantifies specific relationship between probability of response to marketing and amount invested in each media tactic available. Of course to do this successfully you do need a training sample based on historical programs, so if the CARVER approach doesn't need any historical data, there may be something there.

ISM Manufacturing Index says the worst is not over yet in the U.S. Economy

So we were just talking about how the GDP is not a very consistent measure of the economy.
The Institute for Supply Managements Manufacturing index (formerly known as the NAPM Survey) just came out today and this little guy's been historically good at measuring contractions. The Index is constructed such that levels at 50 or above signal growth in the manufacturing sector, which is a good measure of actual demand. Levels between 43 and 50 indicate the economy is still growing but the manufacturing sector is slowing down it's activities in anticipation of lowering demand. Levels below 43 indicate that the manufacturing sector is taking drastic measures to counter a significant and extended slowdown in demand- basically the manufacturing sector considers the economy in deep recession. Guess what the Index number that came out today read? 38.9- a 26 year low, just 1 basis point above the September 1982 low of 38.8! This underscores the importance of credit in today's economy in a way, the bank's tightening of the credit faucet, and the events in the Financial markets and broader economy, consumer spending has taken a beating. Another point no one is factoring is the impact of people becoming austere in their spending to shore up their battered retirement accounts. With over a Trillion dollars lost in the country's retirement funds, people who were planning to retire within the next 1 to 2 decades are going to need to increase their savings rate to offset the loss of this year. Guess what that means for spending?

The Employment Situation report is coming out later this week, with such a drastic drop in manufacturing, I am expecting a pretty gloomy picture with the Non Farm Payroll number.

Is GDP a Consistent Measure? No, GDP is actually a Deceptive Measure...

In economics, expert and layman alike keep looking at the GDP quarter over quarter for some direction as to the true health of the economy. Talk about the blind leading the lame! If bubbles are reflective of an inflation of values of goods and assets, be it stocks, real estate or currencies, then an inconsistent metric is one that lacks robustness not to be influenced by bubbles. Look at the GDP- it is easily swayed by pretty much any bubble there is out there. The GDP may have been a good measure when the world was simpler, and production and consumption were driven by real growth in wealth, not by credit cards and home equity loans. According to Federal reserve statistics, Revolving Home Equity $100 Billion to $200 Billion from 1997 to 2002, but from 2002 to 2006 reached $500 Billion. It is difficult to believe that people's equity in their homes more than doubled in 4 years, so basically they were riding the wave of the real estate bubble and an artificial inflation in the value of their homes (old news now since even your neighborhood grocer by now knows about the sub-prime crisis). What's bad for the GDP (even Real GDP) as a metric is how much it is influenced by consumption (more than 2/3rd). With such a spike in Home Equity withdrawal, consumption is bound to spike as well, but this growth in consumtpion can hardly be said to be driven by a real increase in wealth and well-being- it is all driven by money advanced through Home Equity withdrawal, on the assumption of sustained growth in Home prices and not as much due to a genuine increase in actual Home Equity. When that market corrected it was payback time for all the uncontrolled spending driven by Home Equity- and GDP as a metric, was not able to see through that scam.

Credit Card Payment Systems: To Interchange or Not To Interchange!

Not too many people are aware of how the money they charge on their card at the Credit Card Machine in their favorite store makes its way to their monthly statement and who the intermediaries that are involved in this transaction trail are. In simple words, there are basically open networks like MasterCard and VISA that have different parties, like issuing banks (card issuers), merchant banks (that pay the merchant) and associations that process the transactions. Then there are closed networks like Discover and America Express that do the full-cycle from issuing cards to processing payments to paying merchants (although Amex may now be considered ‘open-loop’ since other banks like MBNA and Citibank have started issuing Amex cards). An important part of this entire transaction is the ‘interchange fee’, which is a percentage of the purchase amount that is charged by the Association (VISA/MasterCard) to push the transaction through. There is some justification in the interchange being charged; they are the costs of processing the transactions and absorbing the risk until the consumer pays for their transaction. This is why Associations like MasterCard and VISA retain part of the interchange (processing costs) and the issuing bank gets a large share of the interchange fee (risk-based costs). But nobody has really done a proper valuation on whether the fees are truly reflective of the transaction costs and risk premium involved. So in the interests of the consumers, some regulation in this area might be a welcome change. A substantial portion of the interchange goes back to the issuing bank. Issuing banks factor these into their cash-flows while evaluating credit risk from extending or increasing credit for cardholders. In the absence of this compensation, issuing banks will most probably get more restricted in extending or increasing credit since now they will have to bear the entire credit risk of the transaction until the payment comes through from the cardholder.
On the other hand, banks could pass these costs on to the cardholder in the form of increased rates and fees or lesser rewards. To quote James M. Lyon, First Vice President, Minneapolis Federal Reserve Bank, "In some of these countries, card associations have responded to declining interchange fees by generating revenue through other means that regulators may not have foreseen or desired. In Australia and Spain, for instance, where interchange fees have declined due to regulatory pressure, annual cardholder fees have increased; in Australia, interest-free periods have shortened and rewards programs have become less generous. On the other hand, in the United Kingdom, while interchange fees have fallen, both annual fees and introductory rates remain relatively low."
If issuers pass these costs on to cardholders, consumers will probably be less motivated to spend, since credit card transactions represent a very significant portion of consumer spending, which may have an adverse effect on the economy, which is very much dependent on consumer spending.

Bringing Metriscience to business...

Research and data are at the core of all management aspects of business. Production creates value and managements function is to improve this value creation process, while constantly researching both the value creation process and the improvement process. Data grounds research in reality vs. conjecture. This blog is all about data driven metrics and evaluation of metrics to gauge the temperament of contemporary business and economic activity.