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.
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.
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).
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).
KDnuggets: Analytic Outsourcing Review: Dude, Where's My Analysis?
[Published on KDNuggets on Dec 6, 2008: https://www.kdnuggets.com/news/2008/n23/21i.html]
Analytic outsourcing has come into prominence in recent years with the growing independence of the KPO (Knowledge Process Outsourcing) segment of the BPO (Business Process Outsourcing) market as an independent sector of its own right. The multi-billion dollar KPO market in India is dominated by both established names in consulting and outsourcing as well as some newer players. Firms like Evalueserve (www.evalueserve.com), Genpact (www.genpact.com), McKinsey & Co (mckinsey.com) and Accenture (accenture.com) are leading the pack in this sector, while traditional BPO companies like TCS, Wipro, Infosys, WNS and EXL are also making a push into this sector, driven by the higher margins in KPO projects. Other countries such as China, Russia, Poland, the Philippines and Hungary are also ambitiously pursuing KPO opportunities, but India still has the lion's share of the global KPO market.
With the prolific outsourcing of more and more analytic functions to external vendors, it becomes important to understand the ramifications of the decision to outsource analytics to onshore or offshore units (either captive or independent) for companies vs. conducting it in-house. Let's first of all understand why this decision is very different from other types of outsourcing.
Differentiating a Business Process vs. Knowledge Process from an Outsourcing Perspective
Business Process Outsourcing entails taking a routine business process that is consistently repeatable, follows standard industry procedures and doesn't require client-vendor interaction on a regular basis and outsourcing it to an external entity. Knowledge Process Outsourcing on the other hand entails processes that are not consistently repeatable, do not necessarily have standard industry norms of execution, require more frequent client-vendor interaction and require a high degree of custom expertise that doesn't necessarily form the curriculum of standard business education. An additional point of difference is that BPO projects contain modules that can be separated and assigned to different entities with much more ease than KPO projects, especially analytic projects where modules are exponentially more integrated. KPO projects also have higher visibility within C-level stakeholders at end-clients than BPO projects.
Is Analytic Outsourcing For You?
There are several factors to be considered in evaluating the decision to outsource analytics vs. retaining it in-house:
- Access to or ability to assimilate analytic talent in-house
- Ability to constantly update in-house talent with latest analytic developments and techniques
- Availability of necessary data in-house and capability to organize it
- Financial Cost vs. benefit of conducting analytic research in-house
- Risks from outsourcing research function
- Advantage of third-party unbiased opinion and access to industry best-practices available to external vendors
With all the opportunities for efficiency, there are a few strategic disadvantages being overlooked by several business organizations that have outsourced a significant amount of their analytics to offshore entities. For instance, analytic projects often have the tendency to yield corollary business insights that may not have been the original goal of the analysis. The persons and entities within the organization may be the most qualified to identify and leverage such opportunities, compared to external vendors. This is especially important to firms where innovation is a critical part of the business model.
Long-term Outlook
The proliferation of analytic outsourcing is inevitable in the long-term, as firms try to focus on their core competitive advantage and leverage comparable yet cheaper talent in offshore markets. At the same time active firms that do not outsource the entire analytic process but manage to retain insight generation at a strategic level should prove to have somewhat of an edge over passive firms that outsource the entire analytic insight generation process. This will especially be an advantage during turning-points in industry and shifts in economic cycles and trends, which will require a deep understanding of all facets of the business and a rapid development and execution of appropriate strategic changes. Also the best KPO firms to partner with will be the ones that do not follow a "black-box" approach to analytics, but are willing to allow some level of scrutiny to their process (of course within the limits of Intellectual Property protection constraints)
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....
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.
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