The Smart Way to Tap Social Media
May 26th, 2009 | Posted by innovO.K. In our last column, we hope we persuaded you that you need to add social media—things such as Twitter, blogs, LinkedIn, and Facebook—to your innovation quiver.
But not only do you need to add social media but also commit to using them. Just experimenting with the idea is unlikely to produce any significant impact. A far better course to take is to concentrate on an objective—what do you want to have happen as a result of employing social media?—and then measure progress toward that goal. Without focusing on measurable objectives, it’s difficult to justify further investment. Or as the philosopher George Harrison put it: “If you don’t know where you are going, any road will take you there.”
Then again, just because you can measure something doesn’t mean it matters. Sure, you can discover that 436,315 young women have commented on your blog posting about the latest in skin care, but if that activity isn’t moving the sales needle, it isn’t helping you. The only metrics that matter are the ones that support your objectives. Typical goals include increased brand awareness, increased sales, accelerated new-product adoption, enhanced organic search ranking/visibility, customer retention, and real-time insight.
Now, these metrics don’t exist in a vacuum. Your competition will be using social media as well, so you want to be smart about which you use. If you want something important to measure, you should gauge where you stand compared with the competition in context. You need to see who has the advantage based on positive/negative brand perceptions, organic search-term content/ranking, visibility, and their observable overall social strategy.
We have two suggestions. First, you want to identify the key social media most used by your customers and then evaluate their choices by not only popularity but also how believable your customers think they are. A case study will show you what we mean.
We were hired by a cosmetics company that wanted to start employing social media in a big way. Because you want to fish where the fish are, we began by finding out what social media their customers—and potential customers—used on a regular basis. By surveying a representative sampling of people, we discovered there were a combined 17 places (which included Facebook and certain other Web sites and blogs) they visited most often.
Now, 17 places are far too many to target effectively. So we dug a little deeper and found that the cosmetic company’s customers did not view all 17 equally. Some Web sites were seen as places that were trying to sell them something. Some blogs were seen as entertaining but not reliable. Others were seen as purely social places, so any sort of commercial message there would come off as jarring. Armed with this information, we were able to prioritize our efforts accordingly and align the right outlets with our strategies and tactics. The results were an increase in reach and, more important, quality of reach.
Nicholas Kinports, our firm’s digital integration manager, has a wonderful way of thinking about implementing your social media strategy. “It isn’t about making content go viral—though that would be a wonderful byproduct, should it happen—or creating the next great Facebook application,” Kinports says. “It’s about structuring, and in some cases restructuring, how a business views and interacts with its customer base. The modern consumer is savvy, aware, and fully able to make informed decisions, thanks to a wealth of information freely available on the Internet. The consumer of the near future will make purchase decisions based on information gleaned from unbiased peers and influencers. Social media is the latest tool through which these interactions occur.”
If you think of social media as that—a social consultant—the results can be remarkable from both a bottom-line and competitive standpoint. But to be in the game, you first need the desire to be social and the strategy to do it authentically. Then you need strong team members to execute ongoing core competency and follow it through. As you can plainly see, there’s a big difference between a brand that behaves like a dabbler and one that behaves like a master when it comes to social media. Where does your brand fall?
Consumers’ Irrational Exuberance?
May 26th, 2009 | Posted by stockStocks rallied on May 26, and a surprising jump in consumer confidence is getting the credit.
The May consumer confidence reading hit 54.9, quite a jump from 40.8 in April. It’s another data point that suggests the economy is stabilizing a bit.
But, it’s troubling that the report’s optimism contradicts other economic indicators.
1. Slightly more people said jobs were plentiful (though still just 5.7% of those surveyed), and slightly fewer said jobs were hard to get. This despite the fact that more than 600,000 Americans continue to file initial jobless claims each week, and many economists expect the unemployment rate to rise from 8.9% in April to 9.2% in May.
Nick Kalivas of MF Global Research suggests both can’t be right:
It is either signaling that the labor market is stabilizing or Conference Board [consumer confidence] data will display weakness in the coming months.
2. Inflation expectations fell in the report, from 5.9% in April to 5.6% in May. That’s a surprise given the rising price of gasoline. The price of fuel for Memorial Day travel was 30 cents per gallon higher than just a month ago.
Still, consumer attitudes actually are consistent with the talk lately from some economists, politicians and especially investors. The S&P 500 is up 21% from Mar. 9, reflecting hopes that the economy is stabilizing and may recover later this year.
Clearly, some consumers have gotten this hopeful message. Their retirement accounts are fatter than two months ago, but they also believe the current momentum will continue.
Expectations for more jobs in six months jumped from 14.2% in April to 20% in May. Expectations for increased income moved from 8.3% to 10.2%
Unfortunately, these raised expectations could be dashed.
Ryan Sweet of Moody’s Economy.com summarizes the problem:
The surge in expectations corresponds with a rebound in stock prices. […] However, a major concern is that if the economy does not improve as expected, consumers might react to the disappointment by cutting spending even more, which would delay the recovery.
Even if job losses slow, new hiring could take longer to materialize. Trends in the automotive sector — including worries about General Motors (GM) — could exacerbate the situation.
As Deutsche Bank (DB) chief U.S. economist Joseph LaVorgna noted last week:
While we are optimistic that the labor market’s rate of decline is poised to slow, any significant turnaround could be stymied by further pain in the auto sector.
Since the beginning of the recession, the economy has lost 5.7 million jobs, a number that could hit 7 million by the end of the year. That’s the most of any downturn since World War II, LaVorgna says.
Meanwhile, many Americans might not fully realize how much the dismal housing market is hurting their net worth. The latest S&P/Case-Shiller Home Price index, released May 26 and based on March 2009 data, shows prices continue to plunge.
And Felix Salmon notes:
The length and severity of the drop in house prices is still just a fraction of what we saw on the way up: we had a ten-year boom from 1997 to 2007, and there’s no particular reason why the bust should last just as long — especially given the natural stickiness of house prices on the way down.
Consumers may be feeling a bit better these days. That’s a good sign for retailers in the short term. But the fundamentals don’t yet support optimism about Americans’ buying power over the long term.
Saving money is a habit everyone needs to develop
May 21st, 2009 | Posted by taxDear Action Line: You have given advice on saving money on everything under the sun. How do we keep from spending it? How do we save this money we saved? D.H., Tulsa. Rain falls: “Phil’s Psychiatry” is one page over.
Bankrate.com says we should save every day even if it’s only a little. Saving is a habit
everyone needs to have. Everyone should build a “rainy day fund” to help get us past the unexpected emergencies such as job loss, health care bills, airplane tickets for a West Coast funeral, etc. Credit counselors say it should contain six months of bill payments, at least $10,000. Once collected, go back to buying things, eating out, etc. The economy needs money, too. Savings account: The fund should always be kept liquid: money in a bank or credit union savings account that can be accessed immediately money not used for bills or extravagancies. Use a clean pickle jar or coffee can and set aside the same amount each week. The trick is, “Don’t count it. Don’t spend it.” Pocket change: Some people put their pocket change in a coffee can and get free change wrappers from the bank to package up Saturday for deposit Monday. Or buy the four lower denominations of coin wrappers at your local dollar store. Make a deposit at least once a month so you won’t be tempted to spend it. Big debt: If you’re still paying off credit cards, put all of your “saving money” on that bill until you’ve paid it off. There’s no financial sense in plugging a savings account that pays 1 percent when you’re paying the credit card company 20 percent on borrowed money! Keep the card account open (for the sake of your credit score) but take all the money you’d been paying and put it in savings. Have you just paid off a large debt like a car payment or a college education? Keep making that payment to savings. Pay yourself! Saving a bill: Treat your “saving project” as a “bill.” You owe yourself X amount of money each day. Set it up with your bank or credit union to transfer funds automatically from your checking account to your savings account on a predictable date: the first and the 15th or just the 28th day of the month so you can know when to expect it. Too large: We all need to skip dessert or that afternoon candy bar. Take the money you would have spent on treats and put it in savings. Raise: Save that raise. Save your tax refund. Goal treat: Make saving a family project. When you’ve reached your goal amount, treat yourselves to a day at the movies or the Tulsa Zoo, Gilcrease Museum, Philbrook Museum of Art or the Oklahoma Aquarium. You deserve to celebrate! Recycle aluminum: Recycle aluminum beverage cans and hang onto them until Earth Day (April 22). A 24-can case of empties weighs 1 pound. In honor of Earth Day this year, four Tulsa recyclers paid 40 cents per pound and one paid 43 cents. If your family of four drinks two cans of pop per day, then rinses and smashes them for storage in plastic grocery bags (no bugs) that’s 2,920 cans per year, divided by 24 is 121.7 pounds, times 43 cents is $52.33. Not big money but at Reasor’s sale prices it’s 10 1/2 cases of Coke or Sprite! Submit Action Line questions by calling 699-8888 or e-mailing phil.mulkins@TulsaWorld.com or mailing them to Tulsa World Action Line, PO Box 1770, Tulsa OK 74102-1770.
The tax is greener on the other side
May 21st, 2009 | Posted by taxPORTLAND, Ore. Almost every state is experiencing hard-core, near-cataclysmic budget woes. States like Oregon that rely heavily on income tax. States like Washington that rely just as heavily on sales tax. States like California that rely on both.
So it is hard not to chuckle at the headline in Oregon’s leading newspaper: “Oregon’s state finances desperately need stability, and a sales tax would provide that.”
Hmmm. Sounds like the flip side of the battle cry in Washington: If only we had an income tax, Washington’s budget situation wouldn’t be so bad.
Except that it would be.
The money is always greener on the other side.
Oregon lawmakers struggling with a wretched budget deficit may gaze across the Columbia River and see dollar signs in Washington’s sales tax. Washingtonians, including Senate Majority Leader Lisa Brown, can look just as intently across the cool rushing river and imagine Oregon’s income tax saving the day for our state.
Somewhere over the rainbow lies the better tax system.
Don’t forget California, which has income and sales taxes. The Golden State is in bigger trouble than both Washington and Oregon, a situation that also flows from a citizen-initiative system hamstringing all three states. But I digress.
Let’s face it: When the economy bombs, the entire West Coast is in trouble.
Statistics from the National Conference of State Legislatures show all major revenue sources are affected by a strong downturn. Oregon’s budget deficit for fiscal year 2010 is projected to be 18 percent of the general fund budget; Washington’s projected deficit, 19.9 percent. Not all that different really.
Local economist Dick Conway believes the income tax is better for financing state and local governments because the personal income tax base grows faster than retail sales tax and is less volatile.
Two economists, three opinions. Mark Thoma, the University of Oregon economist who wrote the piece for The Oregonian, says income tax is less stable than sales tax.
As the economy plummeted, Oregon’s employment tanked and revenues dropped. The state’s 12 percent unemployment rate is second-highest in the nation. As the Washington economy cratered, people sat on their wallets and refused to spend. Sales tax revenues sailed southward.
Besides, voters in both states will never trust politicians to improve the tax system because the clamor for change usually arises when politicians seek more money.
It’s a matter of trust or lack of it. Both the call for an income tax in Washington and the cry for a sales tax for Oregon come dressed as ways to make the tax system more reliable.
But wise voters sense the outstretched hands. They don’t believe the underlying tax would really go away, at least not for long. So it’s an additional tax and they are not interested.
Both states might do better with a mixture of both taxes for stability.
During the latest budget session in Washington, Brown advocated an income tax and then dropped her plan. Gov. Chris Gregoire did not support the idea because all states are having trouble. No group of states is performing dramatically better than any other group, except those that extract and tax minerals from the ground.
Former King County Executive Ron Sims, the last politician to campaign on an income tax, challenged Gregoire in the Democratic primary for governor in 2004. He got walloped.
Washington and Oregon can trade a sales tax for an income tax or vice versa. But either way, both states will get sick in a down economy. There is no immunization from these tax systems for economic flu.
Joni Balter’s column appears regularly on editorial pages of The Times. Her e-mail address is jbalter@seattletimes.com
Pandora: Unleashing Mobile Phone Ads
May 21st, 2009 | Posted by innovForever, it seems, we’ve been told that it’s just a matter of time—next year, for sure—that mobile marketing will take off in the U.S. Yet advertising on cell phones remains tiny.
That may be about to change for two reasons: Web-surfing smartphones are selling briskly even in a downturn, and applications for those gadgets—especially Apple’s (AAPL) iPhone and the BlackBerry—are proliferating. That means people are spending a lot more time playing games, watching TV, and shopping on their phones. All that activity translates into what marketers call engagement, a fancy way of saying people are paying attention. Companies, of course, prize that, so they’re looking for mobile applications that are a good fit for their brands.
Which brings us to Pandora, a nine-year-old, free online service that lets users design “radio stations” based on their musical preferences. Since Pandora launched a mobile edition two years ago, it has signed up 6 million people (total users for mobile and Web versions is 27 million). That has prompted the likes of Best Buy (BBY), Dockers, Target (TGT), and Nike (NKE) to buy ads on Pandora and experiment with what remains a cheap advertising medium—one most companies have yet to figure out. “We’ve reached a tipping point,” says Domino’s (DPZ) Pizza advertising executive Rob Weisberg. “Marketers, especially consumer brands, have to take mobile seriously now. You have to be where your customer works, lives, and plays.”
Pandora has become a test bed because people who use the service tend to spend a lot of time playing around with it. They are constantly creating stations, rating songs, and scrolling through playlists to find artists they don’t know. Pandora founder Tim Westergren says on average subscribers use the mobile service about 90 minutes a day (though there are no independent numbers).
Advertisers are trying out Pandora in myriad ways. Sometimes it’s as a direct marketing tool. Domino’s, for example, puts up ads that urge people to call in for a pizza directly from their phones. Other companies are using coupons. Docker’s offered a 20% discount if visitors went to the brand’s site and entered the promotional code “Pandora.” Some companies prompt users to watch movie clips where their products are featured prominently. Puma, which developed a shoe with Ducati motorcycles, ran ads on Pandora that included a trailer from the Vin Diesel movie Fast & Furious 4. The ads allowed people to buy shoes that were featured in the film from their phones. Kraft (KFT) and Nike, looking to have people come directly to them, took out ads encouraging Pandora users to put links on their phones that take them to special mobile sites providing advice as well as promote products. Kraft’s is the iFood Assistant, with recipe tips, and Nike’s is the Nike Training Club, with workout suggestions.
If one thing has surprised advertisers, it’s how avidly consumers are responding. Target says 27% more people clicked on its ad for the release of Christina Aguilera’s greatest hits CD last fall than on any other mobile Web campaign. The ad urged users to visit a site where they could get a free Aguilera ringtone and buy the album. Target recently launched a Pandora campaign for the retailer’s C9 by Champion clothing line.
Sonos, which sells home music systems, just wrapped up a campaign on Pandora. DeAnna Wassom, Sonos’ senior marketing director, says she has never seen better customer response in her 20 years in the business. The ads asked people to click through to a promotional video. Typically, only 1% to 2% of people click on ads overall. But nearly 5% clicked in this case, says Wassom, and almost 40% of those clicking watched the entire video. During the campaign, nearly twice as many people asked to be put on Sonos’ e-mail list as those signing up on the company’s regular site.
Derek Handley, whose firm, Hyperfactory, has persuaded several companies to advertise on Pandora, says most brands have no clue how to market on mobile devices. Many try to do too much, including making sites so technologically flashy that they crash phones. The key is to keep it simple, he says. Handley also advises companies to build special mobile sites, because regular ones don’t translate well to supersmall screens. With mobile marketing poised to take off, the companies experimenting now will have a head start.
CERN’s Collaborative Management Model
May 20th, 2009 | Posted by innovAs a business leader, imagine trying to manage more than 7,000 scientists from 85 countries around the world—with their own languages, cultures, and expertise—on a 20-year collaboration to create the most complex system ever built.
Now imagine the goal is to recreate the conditions a billionth of a second after the Big Bang. And none of the experts on your team will get personal credit for changing our fundamental understanding of the universe. And oh, by the way, you don’t have control of anyone’s paycheck.
It might seem like an impossible management situation. But that is exactly what is going on at the Large Hadron Collider (LHC) at the European Organization for Nuclear Research (CERN) in Geneva, Switzerland.
The LHC has garnered some attention to date: An explosion last September delayed the experiments for a year, myths of black holes still plague the program, and the just released movie Angels and Demons features a fictitious “antimatter bomb” from CERN. But these issues distract us from the real story.
Beyond the atom-smashing, business leaders have special reason to examine what is going on in Geneva. CERN’s remarkable leadership and culture are what make their extraordinary advancements possible. And most important, we can apply these principles to stimulate innovation in our own organizations, no matter how big or small.
I visited CERN twice last year, and it is a wonder to behold: a 27-km-long circular tunnel and four enormous detectors, buried 100 meters underground. One of the four experiments, called ATLAS, weighs as much as the Eiffel Tower, has about 20 million components, uses 3000 km of cables and 1000 km of piping, and requires some 5 million lines of computing code to run.
You might assume a project this massive requires top-down, authoritative leadership. But there are no directors. No CEOs or presidents. No corner offices. In fact, the main building is cylindrical, with every office the same size. The leader of each experiment is called the “spokesperson,” and a “resource coordinator” tracks the allocation of money and people.
LHC leaders create the framework for people to share and contribute. Gathering spaces throughout CERN serve as giant “water coolers” where ideas can be shared. Different perspectives are valued, and decisions are made with input from everyone. How? With weeklong summits, held three or four times a year; thousands of less formal meetings that are open to all collaborators, and an online system that allows participants to browse agenda and watch presentations remotely.
To a fast-paced corporate executive, this may sound like overkill, but the investment up front eliminates costly issues that can surface later. Everyone feels ownership and commitment.
The entire community at CERN operates with a profound sense of trust that comes from a mutual code of ethics. Everyone is expected to work hard and share.
Because their community is close-knit and their most valuable currency is reputation, experimental physicists around the world know who contributes. Conversely, the few who have been too proprietary with their ideas have been ostracized. It’s like a crowd-sourced performance review.
Notably, CERN promotes the open-access movement in scientific publishing; anyone can access results, which are posted to the CERN library site.
People don’t fail, experiments do. At CERN, failure is a valuable learning opportunity, not a cause to point fingers. Remarkably, after the explosion last September delayed experiments for a year, no one was fired.
It may seem that on a project of such great scale, there is no room for taking risks. But in truth, the project evolves through a natural process of experimentation and peer review.
For example, those running the ATLAS experiment and its counterpart, the Compact Muon Solenoid (CMS), needed to make a very fundamental design choice in the early 1990s: what technology to use for the magnets. They did not commit to a decision and hope for the best. Failure at that level would definitely be disastrous. Instead, each experiment provided the budget for two or three teams to prototype different technologies in parallel. After numerous iterations, CMS and ATLAS made their final and very different bets based on years of designing, building, testing—and, yes, sometimes failing.
Although corporate executives do not always have the luxury to undertake multiple major developments in parallel, they can encourage a culture of small experiments and risk-taking early in the development process. Ultimately, this up-front investment begets a better end product and much less risk of a bigger failure later.
The scientists at CERN are unrelentingly dedicated to a singular goal.
But surprisingly, because so many have contributed, it would be very difficult for anyone on the team to win the Nobel Prize. Regardless, thousands of experts manage to keep their egos in check and collaborate. They do so because they share a common yardstick for all decisions: What is the best choice for physics?
In business, this means having an ambitious yet attainable vision for the organization that is embraced by the grass roots and embodied by the leadership.
Of course, egos at CERN do clash. And there is spirited competition between ATLAS and CMS to be the first to discover the “Higgs particle.” But the leaders avoid wasting energy on trying to control everything. Instead they focus on nurturing the right environment for innovation.
As I toured CERN, I was struck by the scale and complexity of the undertaking. But I was also struck by how simple, yet revolutionary, the approach to innovation seems. It’s simple enough that we could all try it.
Thank you to Markus Nordberg, Robert Cousins, and George Brandenburg, who contributed to this column.
‘An Explosion’ in Women-Owned Companies?
May 19th, 2009 | Posted by innovSeven years ago, Nicole Loftus was entrenched in an $19 billion-a-year industry she felt was following an outmoded model. As a distributor of branded products, she served as an intermediary between companies that wanted products imprinted with their logos and the manufacturers that made them. Remarkably, neither side ever interacted. Loftus struck out on her own—against the advice of her family and then-husband—and began building what is now a multimillion-dollar company, Zorch International. The Chicago company offered an innovation to the branded-products industry’s supply chain and changed how many corporations procure such products.
As a successful businesswoman, Loftus is defying statistics. According to Catalyst, a global nonprofit organization that tracks women in the workplace, only 28 of the 1,000 largest U.S. corporations have female CEOs. And women still earn 77¢ for each dollar made by a man, the Census Bureau reports. To that point, the first legislation President Barack Obama signed into law was the Lilly Ledbetter Fair Pay Act, a salvo against wage discrimination against working women that was meant to counter a 2007 Supreme Court ruling.
It can be especially challenging for women to establish companies seeking a broad reach, such as those that provide services for corporations—and securing financial backing can be nearly impossible. In 2008 only 6.8% of venture capital went to companies founded by women, according to Dow Jones VentureSource (NWS), a database that covers the venture-capital industry. Just one of five U.S. compamies with annual revenue of $1 million or more is owned by a woman, according to the Center for Women’s Business Research. Just 3% of women-owned companies ever reach the $1 million mark, compared with 6% owned by men, the center says. “It was an absolute, 100% shock to me that there was still disparity between men and women in the business world,” Loftus says.
That’s not to say there’s been no progress. Amy Millman, president and founder of Springboard Enterprises, has been connecting entrepreneurial women and investors since the early 1980s. Millman predicts that in the next four to five years there will be “an explosion” of women founding companies in science-based sectors such as pharmaceuticals, medical devices, software, and clean energy. “Things that are cutting-edge—there are a lot more women in these fields now,” she says.
Loftus finds it unnerving that so many people still think in terms of companies being “women-owned.” Often, she says, corporations focus too much on who owns Zorch. They assume it’s a tiny outfit, unable to provide a high volume of services, even though Zorch expects sales to leap to $36 million this year and top $100 million by 2011.
Loftus started the company herself with the aid of angel investors, bank loans, and the Chicagoland Entrepreneurial Center. In 2008, Crain’s Chicago Business ranked Zorch the fastest-growing company in Chicago, and Inc. magazine ranked it the eighth-fastest-growing in America. Inc. also ranked Zorch the country’s No.1 company owned by a woman for its astounding 10,822% growth rate from 2005-2007. Loftus says the best advice she can give to aspiring women entrepreneurs is, don’t take money from investors until you really need to. “Don’t be afraid to not have money,” she says. “You don’t need money to serve a customer.”
Before Zorch, if a company wanted, say, Bic ballpoint pens with its logo printed on them for advertising or promotional purposes, it would do business with a distributor such as Corporate Express or Adco Marketing. The distributor would contact Bic, negotiate the deal, assist in the design details, charge a fee—and the two parties doing business would never speak. Loftus erased the middle man. Essentially, Zorch brought manufacturers to the table to speak directly with the corporations seeking their products. Zorch is essentially a portal that handles all sales and resulting transactions. Loftus says distributors weren’t eliminated earlier because “when they got wind that one manufacturer was selling directly, they’d get together and blackball it—there are a lot of distributors, but it’s a small world.”
Zorch found a niche serving extremely large corporations that smaller distributors don’t like dealing with. Loftus is fine with smaller profit margins if the volume’s high. The company has worked with heavyweights such as AT&T (T), BP (BP), and Citigroup (C) in 120 different countries. Loftus says Zorch is thriving despite the recession, because it saves companies money.
The biggest challenge for women in starting succesful companies, Millman says, is they need to become more aggressive and less risk-averse. This would include women more confidently marketing their expertise and forging ahead with potentially valuable business ideas despite market conditions. “The resources are actually more plentiful and it’s much cheaper to start a business now than a decade ago,” she says.
No Innovation Without Ambition
May 18th, 2009 | Posted by innovIn the year 2035 a techno-phobic cop investigates a crime that may have been perpetrated by a robot, which leads to a larger threat to humanity. That was the tag line for the 2004 thriller I, Robot. If the business of risk management had the same cinematic appeal as the business of robotics, we might also have watched Attack of the Killer Derivatives! Tag line: Mad mathematicians working in secret laboratories unleash a plague of arcane but lethal financial contracts on an unsuspecting marketplace.
Innovation gone awry is normally the basis for a sci-fi plot. But this tale was anything but a popcorn frivolity. A decade of aggressive innovation is usually celebrated. But this time, it nearly blew up the global economy. The risks of innovation are meant to be borne by innovators. In this case, we all suffered.
In the aftermath of this startling chapter, innovation continues to suffer. It is a tough time to think big. How do you make innovation happen? The details can be difficult, but the starting point is simple. Innovation is inspired by ambition—not any ambition, but one that just might be impossible. In other words, innovation begins with optimism.
Innovation only sometimes ends on an upbeat. Failure is inevitably a part of the innovation game. Post-failure, some companies tear themselves apart looking for someone to blame. Others dig for the right lessons learned and move on to fight another day.
We face the same choice now: not as a company, but as an entire economy. We can be weak in defeat, or we can be strengthened by it.
Which path will we take? There are reasons to be hopeful. Fears of a complete economic collapse have abated. The worst of the acrimonious finger-pointing has passed. The environment may now be favorable for all of us to be able to take a collective deep breath, figure out what went wrong, and set about fixing it. And if we believe we can fix it, then optimism will stage a comeback.
The business of risk management is indeed worth fixing. We may have created a runaway monster, but that does not mean that we should throw away a decade of advance. Risk management is a centuries-old industry, and the benefits of innovation in risk management are enormous. It has helped farmers stabilize their income in the face of volatile commodity prices. It has aided exporters by giving them the means to protect against currency fluctuations. It has enabled mutual funds to reduce risks for individual investors. Done right, it can even lower the cost of mortgages and help more people buy homes.
Furthermore, innovation in risk management supports innovation in all other industries. The activities of every company can be divided into two simple categories: ongoing operations and innovation. There is only so much uncertainty that a business can tolerate in total. When uncertainty in ongoing operations is high, innovation is diminished. But when a company can transfer day-to-day risks elsewhere, it can invest more in innovation, and we all stand to win. For example, when an airline can off-load the risk of rising fuel prices, it can invest more in experimental new services.
Can the risk-management industry be fixed? Of course it can. The three central lessons from the crisis are anything but mysterious. First, all risk management must be regulated. This has long been understood in mainstream insurance businesses. Without regulation, the temptation to insure risks that you cannot cover is too great. Nobody was watching at AIG. Second, to manage risk well, you need good information. All of the mathematical sophistication in the world is useless in the face of bad data. When mortgage originators stopped verifying information presented by prospective borrowers, risk management failed. Third, good risk management spreads risk; bad risk management concentrates it. Allowing just a few financial firms to carry so much of the risk of a broad decline in the national real estate market was foolish.
Derivatives contracts are complex. These lessons learned, however, are clear, and the problems are imminently fixable. Risk management will come back fitter, stronger, and better than ever.
As soon as we recognize this episode for what it is —a bizarre story of innovation on steroids gone mad —we will have the courage to move on. We will acknowledge that the trajectory of progress is never a straight line, and we will stand up again.
When we do, we will see that there is nothing fundamentally wrong with ourselves, our culture, our economy, or capitalism. We had something akin to a technical failure in the central computer system, and it brought us all down. But we built that central computer system, and we can certainly repair it.
Despite substantial collateral damage beyond the financial centers, we have plenty to build upon. We have the same factories we had before the crisis. We have the same workforce. We have the same talented scientists, engineers, and creatives, ready to chase dreams, ready to innovate
All we need is the full passion and unbridled optimism of our business leaders. Today, however, too many are hunkered down, waiting for the outlook to brighten.
Wake up. If you are a business leader, then your mood is the outlook. We await your call, your fighting spirit, and your belief in progress and possibility. Innovation begins with optimism.
No Virginia There Are No Safe Dividends
May 18th, 2009 | Posted by stockPosted by: Howard Silverblatt on May 18, 2009
I received a letter that said I am 78 years old. My financial advisers say dividends are safe. Please tell me the truth, are dividends safe? Signed Virginia
Virginia, your financial advisers are wrong. They have been affected by a blindness that prevents them from seeing, much less accepting or understanding, risk. They do not believe except [what] they have seen. They think that nothing can be which has not been and that dividends are an inalienable right of stock ownership. That once they are started they can never be taken away. No, Virginia, there is no such thing as a safe dividend. Whether they be regular, special or capital gains, they are not totally safe. Dividends exist as certainly as cash flow and profits permit, but must be forfeited to both when the imperiled entity is in danger. Alas! how dreary would be the market be if dividends were all safe. There would be no risk therefore all investments would pay the same, no comparative trade off, no need for so much of the fixed income world, and never a flight to safety.
But good dividends do exist Virginia, and while none may be totally safe, many offer such a rich history and are so deeply engulfed in their corporate culture that they are among the last of corporate expenditures to be sacrificed. The true secret, in both good times, which seem so far gone and so far in yet in come, and bad times, is to discover those companies that can and will most likely continue to pay their dividend, and therefore be not a guarantee, but a rightful trade-off between the higher yields and those that will permit us to sleep well at night. Is this relailst? Ah, Virginia, in this entire world there is nothing else as real and abiding as a regular cash payment that permits us to take it for granted and not even think of it, but realistic, NO. You must always remain studious and realize that there is nothing for nothing, and that at best you can get what you pay for; there are no bargains without risk. Dividend investing lives, and will live. A dozen years from now, Virginia, nay, a dozen time a dozen years from now, dividends will continue to pay, perhaps not all, but most.
So Virginia, I point you to a starting place, on our web site http://www2.standardandpoors.com/spf/xls/index/SP500_DIVIDEND_STARTING_FILE_20090515.xls, for you and your financial advisers. A list of companies that are rich in payments, but not high in yield, having earnings that have paid for those dividends, and, as best as can be currently estimated, are expected to continue to earn enough to pay their dividend. But Virginia there are no guarantees and risk exists everywhere, which you must accept and then manage.
May 15th, 2009 | Posted by stockBillions of new shares have flooded the market this month. Data from Thomson Reuters today shows almost as much equity has been issued in the last two weeks as in the first four months of the year.
In May, companies have raised $35.3 billion by issuing new shares, compared to $36.7 billion from January to April.
Some of the equity raises were required by the results of the federal government stress tests of top banks. Wells Fargo’s (WFC) $8.6 billion raise fits in this category. It’s the largest deal of the past two weeks, Thomson Reuters says.
But, as I noted a few days ago, not all the equity-raising is government-prompted or even related to the financial sector. Many corporations seem to be seizing the opportunity provided by the recent stock market rally, even if such equity raises dilute the stakes of current shareholders.
This flurry of activity may be short-lived. But, for now, it’s keeping Wall Street’s investment bankers busy and providing needed revenue to their troubled employers. So far this month, Thomson Reuters estimates banks have collected $1 billion in fees from U.S. equity capital markets activity.
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