The EC Opts for Creative Destruction
September 25th, 2007 | Posted by innovThe European Commission can look back on a truly remarkable week that is certain to write history in competition policy. First, Information Society Commissioner Viviane Reding announced she would tackle uncompetitive practices in the telecom sector by drawing up rules on how much mobile phone operators can charge for connecting calls to their networks. This, she said, was a response to the wide disparities in pricing that exist across the EU and which stymie efforts to create a level playing field and a common, competitive market.
Then, the European Court of First Instance rejected Microsoft’s (MSFT) appeal against a past ruling and upheld a $613 million fine levied for Microsoft’s alleged abuse of its dominant market position in Europe. Finally, Andris Piebalgs, the EU Energy Commissioner, introduced ambitious plans for increasing competition in Europe’s heavily protected and overpriced energy markets. His energy liberalization package includes measures on ownership unbundling, national regulators, network cooperation, and transparency.
Customer-competition link
In all three cases, it has been interesting to observe the way some companies in the affected sectors try to justify their business practices by claiming their market-dominating positions are actually beneficial to consumers, the economy, and society at large. In essence, they argue that monopolies or oligopolies should be upheld or innovation will suffer, investments will stall, and the industry will go belly-up.
Where is the evidence for such claims? Who can honestly assert that monopolies have ever delivered on innovation, or that oligopolies have been sensitive to the needs of the customers they serve? We invite anyone who doubts the positive power of competition policy or market liberalization to return to the times of airline and telecommunications monopolies. These sectors also cried foul when the European Commission forced open their markets—ultimately benefiting consumers and providing opportunities for new market entrants. Anyone who doubts today the merit of competition policy should be forbidden from taking a flight on Ryanair or placing a call on Skype.
In a recent paper we explain the intricate, and positive, link between consumers and competition policy. Drawing on the McKinsey country studies of the 1990s, we demonstrate that consumer-oriented policies, and the productivity-enhancing effects they have through stimulating competition and innovation, are among the most important indicators of a country’s economic wealth and long-term prosperity.
Slower pace of change
Indeed, research has shown that over time, a political and regulatory focus on consumers, rather than producers, appears to be the key determinant of a country’s economic success, and accounts for much of the difference in wealth and prosperity as measured by gross domestic product (GDP) per capita between developed parts of the world, such as Europe, Japan, and the United States.
In addition to benefiting consumers, strong competition policy also favors new market entrants, innovative young companies, and entrepreneurs by facilitating market openings and commercial opportunities for nonincumbent economic actors. The importance of this creative destruction—of movement in the markets—cannot be overestimated, particularly in Europe, which has a poor track record of creating new, fast-growing companies able to challenge the power of the vested industry.
Not surprisingly, Europe’s largest 25 companies all were founded before 1960, while in the United States eight of the 25 largest companies didn’t exist then. And in general, European companies grow at a snail’s pace compared with their peers across the Atlantic. Whereas on the Continent the average business employs five people, in the U.S. that number stands at 19.
Going back to the importance of consumers, it is their ability to vote with their feet and to make choices regarding their consumption that forces companies to stay on the ball, to pay attention to market trends, and to deliver top performance. That is why a focus on producers rather than consumers makes absolutely no sense—not politically because there are more consumers, i.e., voters, than producers, and not economically, because companies shielded from competition deliver consistently worse products and services. This applies across all industries.
Wake-up call
Economic evidence demonstrates that intense competition forces firms to increase productivity in order to generate profits and stay in business. The gains in productivity come both from increasing the value to the consumer of the goods and services produced and from decreasing the resources needed to produce the goods and services, thereby lowering their prices.
In an age of limited natural resources, and given Europe’s rapidly ageing and even declining population, productivity will be vital to meeting the challenges of the future. But there is little incentive to increase productivity and innovation in companies and sectors that are shielded from competition. That is why business as usual is not an option.
Europe in general, and its consumers in particular, can no longer afford to subsidize under-performing, overcharging companies, let alone entire sectors that are so critical to long-term economic performance. And it is quite an irony that so often those who are most critical of the market will be the first to protect and give an easy ride to so many companies. For sure, the old boys’ network is still alive and well in Europe, but reality has set in, thanks largely to the leadership from Brussels, which has delivered a much-needed wake-up call and shift in policy.
Europe doesn’t need more monopolies, economic patriotism, or protection of economic incumbents; it needs a healthy dose of competition, empowered consumers, and a level playing field for new market entrants, entrepreneurs, and innovators. That’s the only way to deliver on the growth and jobs agenda, and it’s the politically smart response to Europe’s consumers, who have too often been forced to pay excessive prices to protected providers.
Late-Summer Data for Housing, Consumers
September 25th, 2007 | Posted by innovWeak reports on U.S. existing-home sales in August and on July home prices—as well as a decline in a key consumer confidence gauge in September—provided negative jolts to the markets on Sept. 25. Yet the headline figure for the existing-home sales report—and the report’s median price component—were actually stronger than we had anticipated, given homebuilder sentiment deterioration in August and the sharp 12% drop in the pending home sales index.
The real negative surprise for the day was the decline in consumer confidence. This weakness will boost the significance of the various confidence measures followed by the market for October, as we gauge whether the Sept. 25 reading from this one survey was a one-off swing in just one measure that bucked the pattern in most surveys or a more significant indicator of underlying deterioration in consumer attitudes.
Here is Action Economics’ rundown of the Sept. 25 releases:
Existing-home sales fell 4.3% in August, to a 5.50 million unit annual pace from an unrevised 5.75 million pace in July. Single-family home sales fell 3.8%, the seventh consecutive decline. Sales of condos and co-ops fell 8%, continuing the monthly volatility seen this year.
Inventories continued to pile up. The supply of unsold homes rose to 10 months from 9.6 in July. The supply of single-family homes rose to 9.8 months from 9.2 months, the highest level since May, 1989. The median price fell to $224,500 from a revised $228,700 in July (from $228,900).
The existing-home sales drop in August was hefty, but smaller than we had expected given the big 12.2% drop in the pending-home sales index in July and the credit-market disruptions to August sales that we had assumed. The August report certainly contained a weak set of figures, but not as bad as might have been expected given the deterioration in homebuilder confidence and real estate conditions for the month.
And the median price figure of $224,500 was notably stronger than we had assumed and actually left a 0.2% gain on a year-over-year basis. The median price figures from this report have generally outpaced our assumptions through 2007.
The reported sales drop was roughly in line with declines in other August reports for the housing sector: The 2.6% housing-starts decline to a 1.331 million annual rate, the 5.9% decline in permits to a 1.307 million rate, and the decline in the National Association of Homebuilders’ index in August to a 22 reading from 24 in July (the index fell further in September, to a 20 reading). We will assume a hefty 11% drop in new-home sales in August, to a 770,000 annual rate, and a 0.5% drop in August construction spending.
We will continue to expect a 20% rate of decline in residential construction in the third and fourth quarters, following the 11.6% rate of decline in the second-quarter gross domestic product report, as credit crunch fears take the housing sector to fresh lows.
The S&P/Case-Schiller home price index fell 0.45%, to 198.4 in July from a revised 199.3 in June (199.2 previously), for the 20-city composite index. On a year-over-year basis, the index is down 3.9%, vs. a 3.4% decline in June, as price declines accelerate. Indeed, this is the steepest decline on record, though this index only began in 2001. Las Vegas, Miami, New York, Phoenix, and San Diego are some of the major cities pacing the weakness.
Of course, the July index does not reflect the effects of the late-summer credit crunch, and price declines could show some acceleration in the August and September reports.
U.S. consumer confidence, as gauged by the Conference Board’s monthly index, fell to 99.8 in September from 105.6 in August (revised from 105.0). That’s as low as it’s been since November, 2005. It appears that the negative news related to financial market turmoil and some disappointing economic reports continue to weigh on the mood of the consumer.
The present situations component plunged to 121.7 from a revised 130.1 (130.3 previously). The expectations index fell to 85.2 from 89.2 (revised from 88.2). The labor index (jobs plentiful minus jobs hard to get) fell to 3.6 from 7.8.
The confidence drop in September left the index sharply underperforming the other confidence measures on the month. We will continue to monitor the full mix of confidence measures, and if the rest show little change in October, we will see this reading—with its particularly large drop in the current conditions measure—as more of an aberration than an indicator of deteriorating underlying conditions for consumer spending.
September 24th, 2007 | Posted by innovThe recent run of tepid inflation reports is about to come to an end. The last major inflation indicator for August, the personal consumption expenditure (PCE) chain price index, to be released Sept. 28, will mark the end of the year-over-year “honeymoon” for various U.S. headline inflation measures since the jumbo commodity price free fall starting in August of last year.
The upshot: Every major U.S. headline inflation measure will soar over the next three months because of comparisons unskewed by the effect of Hurricane Katrina as well as due to recent big commodity price gains.
For the domestic inflation measures, the first U.S. headline inflation pop will emerge in the producer price index (PPI) report Oct. 12, when the year-over-year rate will rise from a 2.2% low point in August to a 4.1% rate in September and 6.0% rate by October. The “Katrina peak” for this measure was 6.9%, when the hurricane-induced collapse of the oil industry infrastructure around the New Orleans and Houston areas—aggravated also by Hurricane Rita—prompted hefty gains in most energy and energy-sensitive prices. It may be a surprise to some when the year-over-year inflation pace for producer prices soars toward the Katrina peak without the help of a hurricane or other calamity.
The consumer price index (CPI) will show the same pattern, with the Oct. 17 report displaying a likely year-over-year rise from 2.0% in August to 2.8% in September. Further gains are likely to reach the 3.6% area in October, and the 3.9% area in November. The impending peak for this measure will fall short of the Katrina-based 4.7% unless we see a considerable further jump in energy prices.
Following the projected August drop in the year-over-year PCE chain price index mentioned above—to a 1.9% pace that would be associated with a likely downtick in the core rate (excluding food and energy prices) to 1.8%—this measure will also post a three-month upward climb, to a 3.2% rate, by November, vs. the Katrina apex of 3.9%. Again, the new peak assumes no particular supply disruptions like Katrina, just the accumulated weight of hefty U.S. price gains over the past eight to 10 months. Those gains have not appeared to be all that dramatic in the monthly reports because they were being compared against year-earlier figures that had been impacted by the Katrina effect.
To make matters worse, the outlook for commodity price gains is made particularly troublesome by the accelerated downtrend in the U.S. dollar over the past month that has been associated with the reversal in Federal Reserve policy.
The dollar drop of recent months will provide a solid boost to commodity prices through yearend, as will robust growth in world gross domestic product. Our global growth forecasts show that GDP growth in the developing world will more than fill the void of any U.S. slowdown over the near term, ensuring that 2007 will be the fourth straight year of extraordinary growth in global GDP.
The U.S. import and export price indexes are typically a source of inflation restraint in the U.S. economy, with a generally sideways path for these measures between the late-1980s and 2003. But with a dollar free fall alongside the hefty surge in world GDP growth over the past four years, the trade price indexes have been trending sharply upward.
The market may seek to treat the U.S. headline inflation surge through the fourth quarter as “aberrant” even though arguably it was the temporary lull over the last 12 months that marks the actual distortion.
In total, all the U.S. year-over-year headline inflation figures, and many nominal sales measures, will surge over the coming three months from troughs that we are now enjoying in the various August reports. This is occurring alongside robust growth in bank balance sheets and an associated boom in growth for loans, reserves, and the money supply. The Fed is focusing market attention on the potential for an economic slowdown and is easing monetary policy on the notion that downside economic risks exceed upside inflation risks. Is that what the central bank’s balance of risk will look like by yearend if we do not see the sharp pullback in business and consumer spending that the Fed is now focused on averting?
Indeed, consider this: Fed Governor Donald Kohn’s recent implication that the central bank is easing in response to falling asset values may haunt the Fed if economic weakness fails to materialize soon and especially if we see any unwelcome upticks in core inflation rates. How will Ben Bernanke & Co. justify its new lower trajectory for the Fed funds rate target if rate cuts are really aimed at stabilizing home prices—which could take years—rather than reacting to downside economic risks attributable to the credit crunch? If key U.S. economic measures fail to slow over the near-term beyond some short-term disruption effects, policymakers may have difficulty justifying even the current Fed funds rate target rate, let alone a potentially lower one by yearend.
The Upside of Change: Increased Sales
September 21st, 2007 | Posted by innovDo you hate change? It used to drive me crazy, too. My favorite saying about change was, “Change is good. You go first.” I was unhappy when my company changed my product and service offerings, the pricing structure, my sales manager, or my quota. I fussed when my competitors changed their approaches and my customers changed what they bought. One day I listened to a speaker talk about the upside of change and learned there is a whole business based on helping folks deal with it. She helped me realize I was looking at the glass half empty—and I decided to see it half full.
Here are seven strategies I’ve since adopted that you can use to lead your sales team or improve your own selling skills.
•Accept change as inevitable. When you think about it, aspects of your life change all the time. Fashions change. Your children grow older. Your hair will probably get grayer or thinner. Seen in this light, it would actually be odd if everything except your work changed. Expect changes and try not to be surprised by them.
•Stay flexible. While it’s good to have systems and procedures in place, build them with some elasticity so that when things change, your business doesn’t come to a standstill. For example, if your manufacturers changed their product codes, could you change your ordering system quickly so your sales didn’t stop? How about if your customers wanted to change how they were billed or received delivery? While you can’t anticipate every change, having flexibility, both in systems and attitude, helps you respond more quickly.
•Sell yourself on the change before you talk to your customers. Your attitude is infectious, so before you call on your first customer, convince yourself of the benefits of your new situation. This will make you calm, confident, and even enthusiastic about the changes. If you act like the change is terrible, the customer will think it is. However, if you act like it’s terrific, he will trust you and see it as advantageous too.
•Look for the opportunity. As the old saying goes, when a door is closed, a window is opened. Look for what you can now offer your customers that you couldn’t sell them before. If you have a smaller product line to represent, that reduces your inventory costs, which can mean higher profits for you or lower costs for your customers. If you have new products to sell, you can go back to all the prospective customers who didn’t buy from you before and call on them again. If you have new pricing programs (BusinessWeek, Winter, 2006), you can call on those customers who couldn’t afford you before.
•See the cachet of change. Think about it—change sells newspapers, gets folks to watch TV and surf the Internet. Your customers want the latest and greatest, and it’s your job to bring it to them. No matter whether it’s new packaging, new flavors, or new styles, everyone wants to be current. If you’re not convinced, think of how few of your customers want buggy whips or any product that hasn’t been changed for the last 82 years. Customers want the excitement of new products and services—so sell them.
•Vent, get over it, and move on. Let’s face it, big, bad changes can be hard to absorb. If you’ve just lost your best customer for reasons out of your control, it’s O.K. to take a day or so and have a personal pity party. Just don’t do it at work or in front of your customers. Then let it go and move on. Get busy replacing that lost business.
•Sharpen your sales skills. If you’ve been selling the same product or service lines to roughly the same customers for a while, it’s possible that you may have slid into more of a customer service role than a salesperson role. So when things change, you should brush up your selling talents. Buy a best-selling book on sales, read a few of my previous Savvy Selling columns or listen to some of my Savvy Selling podcasts. There are plenty of resources to help you learn new sales strategies. Don’t try to sell up-to-date offerings with yesterday’s skills.
Change is a part of life. Whether it’s a long-term trend or short-term fad, everything is changing around you. Accept change, look for the opportunities to sell more, then sell the benefits of the changes to your customers. When you sell more after the change than you sold before, you’ll find it’s easier to accept the next change. Happy selling!
Seek the Magic with Service Prototypes
September 12th, 2007 | Posted by innovStudies show that people gravitate toward products and services that make them feel good, safe, calm, or happy. Yet the traditional foam core model, created in a design lab and proudly displayed on an executive’s desk, can neither capture nor demonstrate the sensory and emotional state of a customer experiencing a company’s service.
Think of GM’s (GM) On-Star in-vehicle security and communications system. A physical model of the blue OnStar call button doesn’t begin to convey the relief a lost or injured driver would feel on hearing the operator’s voice. Marketing departments get this, it’s why an OnStar ad focuses on the customer rather than the button, yet the distinction is too often overlooked in the development process.
With this in mind, it is strange to me that common practice in the service sector is to still test potential innovations with simple, written concept statements. Worse still are the companies that follow with an expensive pilot only to find that their promising concept missed the mark—because it had focused on the button rather than on what the button meant to the person pushing it.
These practices are a terrible waste of time, money, and other valuable resources—including the careers of those brave enough to try new things. Service prototyping is a way to transcend these issues while at the same time improving quality and decreasing risk.
Rather than defining a service by what it does, think of it as the reaction it elicits from the people using it. This is because a service is essentially an experience. Experiences draw on our senses and our emotions, making their creation much more complicated by comparison to the average product you can hold in your hand. As such, more issues must be carefully explored before you can hope for customer delight: What constitutes value? Does the service integrate easily into the customer’s lifestyle? What are the brand connotations?
Visualization and prototyping techniques that inspire concept development and iteration by development teams are important tools to aid in this process. When a sensory demonstration of the customer’s response to a service comes to life, everyone involved can share the vision. Here are a few guidelines to consider as you strive to understand how your customer’s emotions and value systems might interact with your new service.
At the front end of innovation, the “rough draft” must be rough. That means prototypes that are cheap, simple and quick. To be effective service prototypes, they should inspire your audience—from beta testers to C-suite decision-makers—to assess the service through the eyes of a customer. How does it make them feel? Is it engaging? What’s missing? These early concepts should be unfinished and malleable, inviting improvement. Most importantly, these visualizations should create white space so the user can imagine the concept evolving into a service offering with which he or she would love to engage.
When innovators at the Mayo Clinic wanted to create a self-service check-in experience as part of its world-renowned health-care service, they worked with paper and patients’ imaginations to understand how users would expect it to work. Learning as they went, they then deployed simple screen menus on a PC mocked up like a touch screen with someone beside it typing the system’s response. During this process the team constantly watched and interviewed patients for the types of interactions, both human and machine, that would improve their overall experience, noting their pain-points and emotional wants and needs along the way.
Good service prototypes appeal to the emotions and avoid drawing attention to features, costs, and applications that can clutter the conversation and derail the excitement factor. Storytelling, vignettes, cartoons, amateur videos—all are low-budget tools that bypass the intellectual “gristmill” and go straight to the heart.
Scott Stropkay and Bill Hartman of Essential Design in Boston use a technique that involves old magazines, scissors, and glue. In a throwback to kindergarten days, target customers are asked to cut and paste pictures, articles, personal thoughts, and feelings about a topic that relates to a new service idea.
Using this type of technique, if you are exploring the viability of a new cell phone service, and your target market is teenagers, a group of 13- to 19-year-olds might be individually asked to create collages about how they feel about their phones. The key at this stage is to encourage free association by providing a minimal amount of instruction.
Next, one of the teenagers talks about his or her cut-and-paste self-portrait. Can’t you just hear that conversation? As the teenager describes her artwork, personal feelings about her cell phone become almost palpable.
“I want to keep my phone on, but then I have to answer when my mother calls. She calls a lot and it’s embarrassing.”
“I left my phone at home once. Wow, was I ever lost that day!”
“I got 52 text messages one day. That was a good day.”
The power of the collage simulates her feelings and the environment she wants when using the service. Not only does this provide a healthy check-in on current offerings, but, more importantly, it creates the opportunity to explore new services that will excite, satisfy, or relieve anxiety.
“The idea here is to encourage the customer to co-create and help design the service,” says Stropkay. At this point in the exercise, colorful cards with a variety of service ideas can prompt the teens to talk about how a service would make them appreciate their cell phone experience even more. As the research continues, the cards can be ranked or modified and new ideas that emerge added to the pile.
The unchecked emotions that surface during this hands-on experience help validate—and build a business case for—new ideas. Imagine trying to gain these insights through a survey, or around a company conference table. The collages have the added benefit of allowing you to see patterns emerge, and serving as visual talking points that designers can use to generate breakthrough ideas.
Service innovators and management teams alike must accept that a fair amount of time and budget has to be devoted to early-stage development in order to get an offering right. This is especially true when creating “new to the world” services. Veterans of this sort of exploratory work will tell you it is nearly impossible to get a big idea working quickly. There are simply too many moving parts to optimize.
In an iterative development process, design thinking-methods and tools come in quite handy. User feedback delivered in real time, for instance, and a comprehensive approach to refining multiple touchpoints increase your chances of rapid problem solving. The other key element is a multidisciplinary team led by an experienced professional (a cognitive psychologist, human factors specialist, or marketer, typically) that can keep the development process focused and moving toward the desired result.
Google does this all the time. That’s why we see so many of its new offerings in beta. The company expects to be in iteration mode until an offering is ready for prime time, presumably while usage patterns and business model become refined to the extent that a success can be claimed. This practice is part of the operating model—with expectations, schedules and budgets appropriately tuned. If you are interested in driving your company to become a systemic innovator, continuous iteration should become part of your operating model for innovation as well.
So does this mean service prototyping is easy? Nope. While an intuitive, thoughtful facilitator can extract meaning from early-stage prototyping with coarse materials, knowing when to move a project forward and when to keep preparing is a challenge. Is there a magic moment in the process when everyone knows—and agrees—that you’ve got a good one? How do the initial findings translate into a service offering that truly reflects the desires expressed by the customer? And how does the employees’ experience of providing the new service become part of the prototyping process?
The answers to these questions are moving targets, but making a corporate commitment to more creative service prototyping efforts is the first step to pinning them down. Measuring human emotion, and customer experience, is a quirky mix of science and art. With practice, companies become adept at extracting useful data from a discipline that lacks clear delineation.
To help drive this point home, have a look at this video of a new health-care monitoring solution envisioned by my Georgetown MBA students last spring. It doesn’t answer every question you would have at the fuzzy front end of innovation, but the information it provides in six short minutes would surely be ample inspiration for stakeholders at all levels to see what the future could bring.
FOMC: Looking for Clues in ‘Fedspeak’
September 11th, 2007 | Posted by innovJust how onerous has the current credit crunch been? We at Action Economics have published a report on our Web site reviewing a number of broad credit measures since the unpleasantness began in July. To summarize, there are no signs of widespread ill effects thus far:
1. Yields for broad fixed-income categories have actually declined through the credit crunch period, with hikes only in specific rates that were unusually abrupt, but which still leave rates low on an historic basis;
2. Wider credit spreads—i.e., the interest-rate differential between various categories of debt and U.S. Treasuries—are more than accounted for by lower Treasury yields, and spreads are now arguably in line with historic levels;
3. Declines in commercial paper outstanding are concentrated in the asset-backed category and among paper issued by foreign financial firms, and rapid bank credit growth may be absorbing most of the effects of these declines on the broader U.S. economy;
4. Bank asset growth remains solid;
5. Various consumer and business confidence measures are showing only modest adjustments owing to the credit crunch; and
6. Consumer spending has performed well through August, at least via available sales measures in advance of retail sales.
These observations fit comfortably with the view frequently expressed by Federal Reserve officials that much of the disruptive effect of recent market instability will be temporary, while the effect of any monetary policy adjustments undertaken by the central bank will take longer to play out. This perspective encourages a sober approach to policy, a view echoed in recent comments from Fed officials.
Indeed, a review of recent “Fedspeak” shows that most Fed officials have not indicated any strong desire to cut rates, let alone push rates down to the extent the markets are pricing in. It was not surprising, of course, that August comments from Bill Poole, president of the St. Louis Fed; remarks from Jeffrey Lacker of the Richmond (Va.) Fed; and a press interview from Richard Fisher of the Dallas Fed all reinforced the view that the central bank would be loath to ease policy as the markets repriced mortgage instruments—unless there were signs of heightened downside economic risks beyond short-run disruption effects and adjustments in the housing market.
But, this same tone has extended through most Fedspeak thus far in September, with a perspective that is likely shared by Chairman Ben Bernanke. We received no clues on policy from the Fed chief’s Sept. 11 speech in Germany, as he stuck to the topic of global financial imbalances. Bernanke was more forthcoming in his late August speech in Jackson Hole, Wyo. (BusinessWeek.com, 8/31/07), as to the Fed’s willingness to respond to market and economic disruptions, and at that venue his position was notably balanced with little clear indication that he was committed to a rate cut.
Comments made in the wake of the Sept. 7 release of the August employment report by Charles Plosser of the Philadelphia Fed were particularly hawkish, with a focus on the need for policy to be set with regard to longer-term growth prospects and not short-run effects. On Sept. 10, further comments from the Dallas Fed’s Fisher highlighted the relatively limited credit crunch pass-through observed thus far, as did comments from the Kansas City (Mo.) Fed’s Thomas Hoenig on Sept. 7. Fisher warned that the path of financial turmoil and the policy course has yet to be determined, which further dampened speculation of a rate cut beyond 25 basis points.
On Sept. 10, the Atlanta Fed’s Dennis Lockhart sought in his comments to evaluate the August jobs report in the context of recent positive reports on retail sales, hence downplaying the jobs data and leaving a hawkish spin to his talk. Interestingly, only Poole’s comments seemed more dovish than in August, though this likely reflected a preference for a less high-profile rhetorical role following political heat for an earlier comment that only a “calamity” would justify a rate cut.
From the dovish side of the aisle, San Francisco Fed President Janet Yellen provided a fairly balanced review of the central bank’s circumstance in remarks on Sept. 7. Though we certainly think that this nonvoting Fed president will be happy with a quarter point easing at the next meeting, her presentation repeated the above caveats and did not support an easing decision as aggressively as might have been expected, perhaps via greater focus on downside risks via wealth and credit effects on consumer and business investment.
This more aggressive approach to assessing the policy backdrop was taken, however, by Governor Frederic Mishkin in a Sept. 10 speech. His comments took a notably more dire tone than Yellen’s: “economic activity could be affected more severely in other sectors (than housing) should heightened uncertainty lead to a broader pullback in household and business spending. That scenario cannot, in my view, be ruled out, and I believe it poses an important downside risk to economic activity.”
The bulk of his comments focused on downside economic risks, combined with inflation concerns that were downgraded as well. His comments suggest that we can certainly identify at least one vote on the Federal Open Market Committee that would be willing to entertain more aggressive action.
In total, the mix of Fed commentary thus far, in the context of the available data on the evolution of the credit crunch, almost uniformly suggests that the Fed is less prone to entertain a more aggressive policy trajectory than some market participants assume.
Still, there is a spirited debate in the markets over what the FOMC will deliver on Sept. 18, with many observers now speculating that the Fed will disappoint hopes for aggressive rate cuts at its Sept. 18 meeting. Yet, some market players continue to argue for bigger steps from the Fed. Implied rates on Fed funds futures point to a 4.49% rate for December and 4.10% for April, 2008. If these rates were to be sustained once the flight to quality premium from credit crunch fears subside, they would be consistent with significant easing from the current Fed funds target rate of 5.25%.
We suspect the Fed is reluctant to lower the target rate currently. Though the surprising 4,000 drop in August nonfarm payrolls certainly gives the FOMC the cover for rate cuts, there have been few signs elsewhere that there’s been significant impact on Main Street from the financial debacle on Wall Street. With the Fed’s ongoing reserve injections, the effective Fed funds rate is already trading well below the central bank’s official target, and most broad measures of interest rates have declined through the period to leave a net reduction in borrowing costs for most businesses. It is not clear that an actual easing in the funds target would necessarily help solve the market’s credit woes.
Nevertheless, the FOMC will be pilloried if it doesn’t act. We expect a quarter point easing at the Sept. 18 meeting, followed by a similar move in October.
September 7th, 2007 | Posted by innovWhen you mention the company you represent or the products you sell to prospective customers, do they ever look at you funny and say they don’t know what you’re talking about? Take heart. This is a common challenge for many sales pros.
Selling to customers who are unfamiliar with your company or product isn’t a new problem. In 1958, McGraw-Hill (MHP) (the parent company of BusinessWeek) first ran its famous “Man in the Chair” ad. It had a crabby-looking man sitting in a chair, saying, “I don’t know who you are. I don’t know your company. I don’t know your company’s product. I don’t know what your company stands for. I don’t know your company’s customers. I don’t know your company’s record. I don’t know your company’s reputation. Now—what was it you wanted to sell me?”
By the way, this ad still runs. The photo has been updated several times in the past 39 years, and the copy has been translated into French, German, Italian, Russian, and Chinese. However, the words have stayed the same because the selling challenge hasn’t changed. Its message is universal and timeless.
So what’s a salesperson to do if prospective customers don’t understand what he’s selling? Here are some tips:
1. Analogies work. If your company is not well known, you can say it is like company X but with quality Y with corresponding benefit Z. The idea is to springboard off the well-known supplier while carving out your niche and identifying your unique benefits.
Let’s pretend the dominant vendor in your industry is a company we’ll call Piston Products. Let’s imagine Piston is known for being tough to do business with. So you can say your company is like Piston Products but with a heart for customers, so everyone feels good throughout the sales process. Or if Piston’s headquarters is on the other side of the country, you can say your company is like a local version of Piston Products, with quicker service.
If your offering is new or unique, you can say it is like product Z but with attribute A and corresponding benefit B. For example, if you sold Squiggle services, you might say a Squiggle is like a high-tech assisted-living center where the residents receive 24/7 Web-cam support so they can keep in touch with loved ones who live far away.
2. Clarity matters. Make sure your analogies are clear; don’t be cute or clever. Your customers won’t take the time or energy to figure out what you’re selling. For example, I recently got all excited about writing a speech I called “Sell Like a Superhero.” I could just see myself on stage, wearing a red cape, talking about identifying the sales problem with X-ray vision, and leaping over objections in a single bound. However, when I tested the draft speech on others, they told me superheroes don’t sell, which is a polite way of saying they didn’t know what I was talking about. It was back to the drawing board for me.
3. Having to start your pitch from scratch can work in your favor. There are several advantages to selling to a prospect who has never heard of your company or product. I remember my first selling job out of college for a 100-year-old Fortune 500 company. When I was making cold calls, prospective customers would sometimes tell me that they’d had a sales rep from my company who did them wrong many years ago, so they didn’t want to hear my pitch. When representing a new company, you start fresh—few bridges have been burned before you got there.
Another advantage is the cachet factor. With almost every group of customers, there are going to be a few who want to buy something simply because it’s new or unique. They want to be the first on their block to own what you sell. Look for customers who like to display their new watch, vehicle, or computer gadget. If they like cutting-edge products in one area, they probably like them in another.
Selling products that few have heard of, or representing companies that are not well known, makes the sales job tough—but that’s what separates sales professionals from mere order-takers. Use what your customers already know to clearly explain exactly what you sell, and you’ll close more deals. Happy selling!
September 7th, 2007 | Posted by innovThe stunning weakness in the U.S. nonfarm payroll figure for August revealed in the month’s employment report, released Sept. 7—and the downward revisions to job growth in July and June—is a likely game-changer for the Federal Reserve’s strategy in managing the credit crisis and its potential impact on U.S. growth. The central bank’s internal desire to avoid reductions in the Fed funds rate target will likely need to be shelved for now.
The Fed would probably appear too aloof if it passed through the Sept. 18 Federal Open Market Committee meeting without a cut in the target. We still suspect that Ben Bernanke & Co. is loath to cut the Fed funds rate target, but they can clearly raise their perceived assessment of economic risks sufficiently to justify a rate reduction, and they would face severe criticism if they ignored the August jobs report.
And the report was surprisingly weak, clearly demonstrating that economists and investors had misjudged the risks in the report. Nonfarm payrolls fell 4,000 in August from revised gains of 68,000 in July and 69,000 in June (previously they were 92,000 and 126,000, respectively), for a net revision of –81,000. The unemployment rate was steady at 4.6%, from 4.6% in July. Average hourly earnings were up 0.3%, which was the same as in July. The average workweek was stable at 33.8 hours.
In the guts of the report, private payrolls rose 24,000 with manufacturing payrolls down 46,000 and construction down 22,000. Employment in the services sector was up 60,000, with financial services flat. Government payrolls fell sharply, falling another 28,000 after a surprising 52,000 drop in July (from –28,000 previously).
The jobs report revealed widespread weakness that will filter through the other monthly indicators, though strength in other source data cap the downside August risk. Indeed, with strength in all the other available August data for the economy outside of housing, the weakness in this report adds risk largely by throwing a monkey wrench in the analysis of the other August figures, and hence boosting risk with each remaining August report.
We now assume a 0.4% personal income gain in August that will leave disposable income bouncing in the third quarter to the 5.6% area. And we now project a 0.2% August industrial production gain that will leave this measure poised for a 3.3% third-quarter rate. This follows growth rates of 3.3% in the second quarter and 1.1% in the first.
The flat August hours-worked index leaves this aggregate on track for 1% growth in the third quarter, following 2.3% growth in the second and a 1.1% rate in the first. The 22,000 drop in construction employment in August, and 0.6% drop in construction hours worked, is consistent with our –0.5% August construction spending forecast, following the 0.4% July drop.
And, for GDP, we have modestly reduced our growth assumptions for the third and fourth quarters, to 2.6% each, following an assumed downward revision in second-quarter growth to 3.7% from 4.0%. Here, the jobs data are less significant than they might appear, as we expect the odd hit to government jobs over the last three months to be fully reversed over the coming months, leaving a much more modest undershoot for hours worked in today’s data over time than might be suggested from the headline surprises.
Yet, worse-than-expected wholesale trade figures for June and July were also released Sept. 7—wholesale sales rose 0.1%, while inventories increased 0.2%. This reinforces a likely downward second-quarter GDP growth revision, and we expect inventory managers to adopt a more cautious strategy over the coming months in response to heightened fears of recession.
For the Fed, the August employment figures add a new twist to the outlook, as they show a deterioration in job growth over the last three months that occurred alongside a sharp bounce in GDP growth to the 3%-to-4% area over this same three-month period, which is an unusual mix for employment data without the jobs data being at least partly aberrant.
Indeed, hours-worked growth is more volatile than GDP, and we will need to assume at least a partial correction in upcoming months that closes the gap between payroll gains and sales and output growth to some degree. The odd-jobs pattern is even more unusual, given the lack of evidence in the other jobs measures of the pattern in the labor market, and given a flat path for the unemployment rate, initial jobless claims, and most employment indexes in the sentiment surveys. The fact that government jobs fell a remarkable 80,000 combined over the last two months without an obvious reason adds to the likelihood that the jobs figures are at least partly aberrant.
Yet, for the Fed, with downside risk to the economy from credit market turmoil, and widespread expectations for a rate cut, it will be hard for the central bank not to deliver a quarter-point rate cut at the Sept. 18 FOMC meeting, and we now expect an additional 25-basis-point cut in October as well. Of course, the 50 basis points in rate reduction could be seen in one jumbo September rate cut, or with an intermeeting cut if we see new developments at some point that heat up the credit crunch.
The Fed is likely reluctant to fully believe today’s figures as a reflection of growth and is still likely loath to cut rates to address credit market turmoil—but today’s data leave little choice.
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