Free Advice

Steve Jobs

2011-10-06T19:05:00.002-04:00

Lots of articles in the past several months address the question of what is the relationship between failure and innovation... should you expect to fail if you want to innovate. How frequently should you fail? How quickly do we declare failure and move on to the next hypothesis? Some venture capitalists extoll the concept of "efficient failure", the art of recognizing a failure early and moving on. How does this attribute mesh with traditional notions of persistence or "stick to itiveness?

And, what kinds of environments foster innovation? Environments with open, loose standards in which people tolerate mistakes and don't demand much? Or environments in which leaders impose rigorous standards and show little tolerance for mistakes? Like most questions worth thinking about, this one has no easy answer... What do you think Steve Jobs would say?

Encouraging Mistakes

2011-10-01T09:03:00.002-04:00

How can we innovate without making (costly) mistakes? Basically, we can't. So, should we tolerate mistakes, or encourage them? Merely tolerating mistakes is not sufficient to encourage innovation and intellectual chance taking. The challenge for both individuals and businesses is to foster environments in which experimentation is encouraged and there are no (or few) inhibitions to trying out new untested ideas. If taken to its logical extreme, though, this philosophy might result in continuously failing businesses. One happy mistake after another.

So, somehow, we must communicate that there are no penalties for offering new solutions and there are rewards for offering up creative solutions while at the same time building our culture, which values intellectual honesty, integrity and rigor. This culture will enable us to test our hypotheses against our starting assumptions and objectives, and then efficiently discard those hypothesis (the majority) that don't pass the test. We call this Efficient Failure.

Moving from brand analysis to entrepreneurship

2011-09-11T18:48:00.001-04:00

My interests are evolving.... I love teaching. Just accepted a very exciting assignment at Fashion Institute of Technology: to lead the effort to develop an undergraduate major in Entrepreneurship studies. I couldn't be more thrilled and frankly, somewhat intimidated, by this opportunity. At FIT, we have a very special mix of students, combining creative and business aspirations. First job is to define what is meant by entrepreneurship.... to help our students understand what is the mindset of the entrepreneur. I'm thinking of this as my own entrepreneurial undertaking and hoping I can make it a success.

The View from Savigny Partners

2010-08-03T10:00:00.000-04:00

Savigny Partners, is one of my favorite and most reliable sources of information about the luxury sector. Written from financial perspective, their review is concise and informative.

Sector Review

Issue 12, August 2010

S A V I G N Y P A R T N E R S L L P

SLI performance January 2010 to date – not quite out of the woods yet

A mood of cautious optimism in Q1…

The Savigny Luxury Index posted a solid overall gain of 22.4% since the beginning of the year, outperforming

the MSCI World index by 19 percentage points. The overall sentiment was that the sector is on the rebound,

with Bain forecasting a four percent rise in sales for the sector for 2010. Q1 results posted by our

universe of companies showed both strong sales and profit growth. Nevertheless the overriding message

was one of cautious optimism with some of the sales growth in Q1 being attributed to retailers restocking

depleted inventories. Some concerns were raised as to whether LVMH powerful Q1 growth, which sent its

share to a 10-year high, would be sustainable for the whole year.

… consolidated into very strong prospects for the sector

Signs of improved prospects for the sector continued to come out of company and sector announcements.

Swiss watch exports posted a healthy increase in June, and Hermès lifted its full year sales growth target

on the back of surprisingly strong Q2 figures released on 20 July (27% growth for the quarter or 20% at

constant exchange rates). The overall view is that more good news is to come, underpinned by strong demand

in emerging markets, especially China, and by the recovery of demand in the USA, which should continue

to prop up wholesale channels. LVMH recently released half year results confirmed the trend, beating

estimates with a 16% growth for the first semester.

Has the Aegean brew poisoned the equity well?

The Greek sovereign debt crisis which unfolded at the end of April sent global markets into turmoil. The

SLI was not immune and went into a tumble, losing eight percent of its value from end-April to mid-May.

The respite of the rescue package announced at the beginning of May was short-lived, with the fear of Aegean

contagion to other markets such as Spain and Portugal resulting in another dip in early June. Whilst

July saw both a strong recovery in the MSCI World index (+4.8%) and the SLI (+9.6%), there are lots of

frayed nerves as a result of this macro-economic uncertainty. The luxury sector is setting sail again but

the Aegean tidal wave continues to rock the fragile boat of recovery – the sails have been hoisted but will

the boat capsize?

Issue 12, August 2010

Instead of Advising, Let's Create a Brand

2010-08-01T17:09:00.000-04:00

It's been a very long time since I last posted to this blog; maybe I haven't gotten my thougts together, maybe I'm too deeply enmeshed in my current project. I'm not sure that I've had much original to say. So, what I thought might be interesting is instead of advising others about their brand related issues, let me see if I can create an authentic (if small) brand.

For the past fifteen months, I've been studying and playing with the work of pop artist, James Rizzi. I am lucky to have gotten to know James a bit, to talk and travel with him, to watch him work and to watch people react to his work. It's been inspirational. So much so, that I've convinced myself that at least part of his artistic legacy should be his connection with children. You can see some of my initial ideas at www.hwelt.com

Over the next weeks and months, I plan to use these posts to discuss the challenges I'm thinking about as we try to cobble together a coherent group of commercial products which authentically reflect James Rizzi's art and add something to peoples lives.

Please come along for the ride.

The Benefit of the Crisis: A German View

2009-01-15T08:23:00.004-05:00

From our colleagues at Schmid Preissler Strategy Consultants:

Due to current events, we are publishing this very special BriefLetter written by Dr. Thomas Schürrle. Dr. Schürrle is an attorney consulting globally operating businesses. It is due to this occupational activity that his point of view of the current situation is of particular value and interest.

Dr. Thomas Schürrle

The Benefit of the Crisis

A few years ago, the former president of the Federal Constitutional Court and Federal President Roman Herzog suggested suspending a percentage of all rules and regulations across-the-board with the reasonable expectation that the absence of numerous regulations would remain undetected. The criticism that this process has not been implemented quickly and noticeably enough has not yet faded away and the call for extended regulations and increasing legislative efforts already becomes loud again - to bring the financial market under control and to prevent systemic catastrophes within the global economic and fiscal system - which are currently dampening the future prospects.

Only at first glance there hides a paradox within the inconsistencies of both approaches. This is not a question of quality and quantity of regulation, but rather of market regulation as a whole.

Apparently, the freedom of competition and management is, from experience, a better guarantee of the supply with economic goods and services than the administered planning via a centralized government. That both exponents view each other as opposites of the integrated whole without ever representing competing alternatives we know since the heuristic discussions about the viability of the particular economic system. The position of the pendulum of regulatory measures between both exponents generally reflects ex-post-facto reaction according to the requirements of the control of markets. Within a regular framework, public administration can and should impact the markets through control to a very limited degree.

However, it would have to do so to a much more considerable degree in order to keep the markets from reaching their target functions.

If you examine the existing regulation of the financial markets under aforesaid premise, you will discover that the market for the supply with debt – with some regional distinctions – has been strictly regulated for the past few decades. Where as the market for the supply with equity is regulated only rudimentarily, either through private equity or hedge funds. Regulation of share derivatives and their trade, especially of those utilizing the leverage effect, is virtually non-existent.

Considering this background, it is fair to conclude that the markets and their instruments tend to develop into the area where they are subjected to the least limitations. Thus, the private equity / hedge fund business has grown considerably in the past two decades. The business with financial derivatives has exploded. Since the new development of products in unregulated segments was only profit-oriented and not controlled and it also was not subject to any self-regulating market conditions, fundamental principles were disregarded. One of these principles is that money cannot proliferate on its own. Appreciation of value which has a profit increasing affect on financial transactions based on derivatives must be generated by the underlying market economy. Furthermore, the extension of the derivative-chain does not simply increase the profit expectations but also the loss expectations and it simply defines the gradient of success or failure.

The increased dependence of the successful finance business on financial derivates does not square at all with the fact that banks, insurances and suppliers of proprietary capital have to primarily ensure the supply of external or proprietary capital. Trading with financial derivatives remains a secondary business, even if it speculates on the basis of short positions, unless strictly for hedging purposes only. If the financial leverage contingent on derivative trade typically leads to short term profits, it is at the same time inevitable that a market expanding in this direction will make out a draft on the future. Such drafts have been drawn in the past years and now it is time for payment: Since the market for financial derivatives inflated explosively, the bill is proportionately large.

This asks for more than drastic corrections. Trailing the runaway derivative market development with corrected touch-ups is doing too little. In view of the potency of this crisis and the magnitude of the dissipated finances, the main function of the money market to supply money has been jeopardized. In such a crisis, bans simply curtailing derivative trade or controlling managerial salaries do not work. In fact, approaches must be methodical and need to be all-encompassing.

This is exactly what the crisis provides space for: Legislature can and should, during a free-enterprise regulation, conceptually make the markets more expensive where limits need to be imposed, especially in secondary and tertiary derivative markets, which do not primarily serve the goal of supplying the population with economic assets, services and capital. In return, legislature will prevent economic main and primary functions – namely the supply of the population with economic assets, services and capital within the intergovernmental or domestic segment – from being curtailed. Internal and external barriers to trade need to be avoided at all costs. They were the main amplification factor in 1929. Any form of accelerators, which neither serve supply nor its basic principles, need to be strictly avoided. This includes not only derivatives from the financial sector but also other disruptive factors that could unduly amplify cyclical value fluctuations of products, services and businesses through leverage. Even a short term duty to supply information and reporting requirement should be taken out of the market to allow for long-term planning, where since such reporting requirements are verifiably not useful or used correctly. Long-term orientation has to be the basis for the entire market regulations to effect adequate self-regulation.

The awareness of what needs to be done is now forming in the crisis. Only the enormous pressure of a global economic crisis generates the necessity for clarity, thoroughness and strategy that is inherent to every great reform and creates the ability to get things done without endless debate. The industry has shown us the correct and successful path from a crisis jeopardizing ones existence in many cases, e.g. in the case of Siemens. Within a timeframe of just two years, the company was able to utilize a severe crisis in connection with dubious business practices and exchanged the entire top management and restructured nearly all internal control systems. Those familiar with Siemens before know that this equals the gutting of a building, and such a drastic restructuring would not have been possible without such a threat to the existence from the outside.

It is primarily the crisis that allows us to throw overboard pointless restrictions and enables the creation and installation of new and reasonable self-regulating market structures with a long term perspective. What proved to be imperative for the largest German industrial enterprise should also apply to the “site management” by political and administrative bodies, both on a Federal and a State level.

From: Schmid-Preissler Strategy Consultants

2008-11-23T15:20:00.002-05:00

Crisis, Recession or What?

Readers of BriefLetter or recipients of our Synesis have known our assessment for a long time already. What we mean is that what we are experiencing today is neither a crisis nor a recession. We characterize this situation as a break. A break with the past. We wrote about it in the essay “The last 50 years have passed”.

It is not about pondering how to cope with the crisis, about how to get out of a recession. It is now time to define in every business, in society and politics, the future primary values and along with them to necessarily develop new strategies for the future.

It is essential to take stock in all areas, to filter out the substantially valuable and to put it together to a new performance indicator. Less has to be more in the future. The “every year increasing turnover” can no longer be in the center of strategic thoughts. The goal has to be to achieve a substantial profit. Only with such a profit can new goals be reached.

It is imperative to procure certainty in regard to availableness of knowledge and expertise of employees, because with too few or even no employees with enough knowledge and lots of experience a future cannot be shaped.

It is essential to rigorously verify products and services in regard to their superiority as compared to the offer of the competition. In the best sense, distance has to be created and expanded.

It is it is necessary to be prepared for consumers keeping a close watch on the price/performance ratio during purchases for products meeting needs. For purchases taking place in the big field of satisfaction of wants, more attention is going to be paid that the intrinsic value of immaterial values emanating from Premium and Luxury brands is going to be expressed and as such dreams and wishes of the buyer are going to be fulfilled. The latter is very important, especially in times where money is spent cautiously and prudently. Surely, it is going to be easier for people to extricate themselves from bad times, if they can strike a balance between reality and beautiful experiences. Wise and sensitive marketing are in demand here.

We suggest to look less to the left or right, but to be self-concentrated and to concentrate on the relationship to the customer. The livelihood of a business and its success actually depend on ones performance ability and on ones attitude towards the customer.

Re: WSJ: Milan Woos the New Frugal Luxury Shopper

2008-09-25T10:41:00.004-04:00

Re: Today's Wall Street Journal.

Touting runway designer clothing as an "investment" is a bad idea. If branding teaches us anything, it is that your brand is your promise to your consumer, it's your contract, your bond. So, why make a promise that you know you will disavow a year or two from now? Does anyone really envision next year's ad pitch to be " you don't have to buy much this year because you bought well last year? Is this what we'll be saying next year? I don't think so.

Starbucks: Grinding The Numbers, Losing its Soul

2008-08-02T10:01:00.003-04:00

Re: Cold Coffee, NY Times, August 2, 2008

Bravo, The New York Times.

But Starbucks, What have you been drinking. lately?

When you're a 5000 store chain, boasting outlets all over the world, and a national newspaper begs you to keep open one, 1000 square foot location, one would think this might get the attention of the cost cutters.

Has everyone in charge of the Starbucks brand been fired, already?

"Maybe cutting these particular costs might be more expensive than we calculated" they might ask.

"Are there some "off-financial-statement costs here that we haven't accounted for?"

"Maybe our customers thought we stood for something more than just the opportunity to buy an expensive latte?"

"We used to talk about building our reputation, did that ever matter?"

"Has anyone checked what we told the community planning board when we were lobbying to open the store and the neighborhood was concerned that the shop, previously there for 25 years, might be forced to close?"

"Do you they will remember this closing when times turn and we are again wanting to expand into their neighborhood?"

"I know it's a longshot, but do you think any of the locals travel out of the neighborhood and might actually tell people what we're doing?"

Just some non-financial-analyst metrics that Starbucks might add to sharpen its grinder.

Cutting Its Costs, Starbucks Brand Begins to Bleed

2008-07-23T10:19:00.008-04:00

Re: To Starbucks, a Closing; To Newark, a Trauma, NYTimes, July 23, 2008

Starbucks explains the planned closing of its Broad Street, Newark store very candidly: ““We used several criteria to determine stores for closure, including identifying locations that were not profitable at a store level and not believed to provide acceptable returns in the foreseeable future.” Where's the assessment of the impact of a store closing on the company's reputation, on the Starbucks brand?

Clearly, financial criteria are important to the consideration. Surprisingly, for a business that is so brand driven and profits so much from its investment in its brand, there is no indication that a brand strategy is playing any role in planning the Starbucks retrenchment. To be sure, Mr. Schulz, clothed his comeback in the language of “brand values” and “return to the brand’s roots”. But, where's the meat? In fact, no brand planning has surfaced as of today. Instead, Starbucks is cannibalizing its brand and sacrificing it on the altar of satisfying the financial goals imposed by Wall Street.

Some very smart person once said, “it’s not whether you fail but how you deal with your failure that reveals who you are.” And that’s true of brands as well. These times will reveal much about Starbucks and will set the foundation for its future success or failure.

Starbucks sold itself as a “different” type of coffee company. It was the American adaptation of the European coffee house, the neighborhood coffee house. People friendly, the café’s were stocked with newspapers and periodicals and invited customers to linger while enjoying their quality coffee time. It was also a company that was good to its people: good salaries, advancement possibilities, good ingredients in its foods, good coffee purchased from the right parts of the world. Starbucks was a trend-setter which “proved” during its rise that you can be a good corporate citizen as well as a highly successfully company. These were some of its hard earned brand equities.

People felt good when they sipped their Starbucks; they were part of a good thing. Who can measure how much of the premium they knowingly paid for their Starbucks was for the better roast, or coffee bean and how much for the privilege of participating in this "good", "positive" feeling.

It’s now clear that in its giddy days, the Company embraced some ridiculous expansion policies. It played to its financial analyst audience and has paid the price in hits to its profits caused by foolishly chosen, duplicative locations and other wasteful expenditures.

But while claiming to be focused squarely on the protection of its base, its core, its brand, its current tactics reveal a serious misunderstanding of what the Starbucks brand is all about. Ignore the people on Newark’s Broad Street, if you like; what are the rest of Starbucks followers going to think when their “different” kind of company turns its back on the community development it once prided itself as being part of? What is the next local zoning board going to think when Starbucks needs a variance to successfully replace the old, local coffee shop with a brand new Starbucks café? How much of a premium will coffee drinkers pay for a cup of coffee from a regular corporate coffee shop?

How much is a company’s credibility worth? Well if you leave it exclusively to the numbers crunchers tasked with reducing costs by a target percentage within a specified time frame, “not much”. There may not be a line item in the company’s financial statement for “brand equity” but intelligent, forward looking leaders of brand driven companies surely understand its value.

How about you, Mr. Schulz?

The High Price of Opacity

2008-07-22T10:08:00.003-04:00

Re: Why No Outrage? Wall Street Journal, July 19, 2008

Great question, but that’s where it stops. James Grant’s answer: blame the victims, bad answer.

In this illuminating chronicle of financial misdeeds, Grant presents a long list of reasons why the American public should be outraged at the state of the economy, at the condition of the vast majority of Americans, and at the seemingly near unanimous willingness of those in power to do nothing to correct the situation. He asks, given that this is an election year and these problems are well publicized why don’t we see any signs of public outrage. He answers: Americans don’t care.

This article is only one of a growing number of inquiries into why, at a time when we Americans are awash in information, various groups within our society consistently behave against their self-interests. In your spare time, read What's the Matter with Kansas by Thomas Frank.

“Things have become too complicated.” “It’s harder to connect the dots.” “The US and global economies have become so inter connected that it’s difficult to discern cause and effect relationships.” We are regularly showered with lists of reasons why not to understand a situation. Add to this our penchant for the sound-bite and 100 word news analysis and it’s clear why many will tell you that any concept which can’t be explained within these parameters is probably not a concept worth understanding.

But there’s more. This is not an entirely benign situation. It didn’t just happen.

We have developed an unsettling pattern in our national culture: We provide government assistance to the poor and middle sectors of society through direct assistance programs and we provide government assistance to the affluent and corporate sectors indirectly through opaque systems of credits, tax incentives and indirect benefits. There may be nothing sinister here, it may just have developed this way for historical reasons, but the costs of this opacity have become enormous.

By way of illustration, we have school lunch programs through which the federal and local governments provide direct assistance to schools to provide healthful lunches to our students. If someone were interested, one could compute the amount of money that the government provides through this program. If one day, it were discovered that some local officials were misappropriating the food intended for the students and instead selling it, in addition to the deserved outrage, we could take remedial action. We understand the flow of the money through the program, how much money is involved, who should handle it etc. We could fix this problem.

Now take the example of how hedge fund managers are compensated. Generally, they receive most of their compensation through a construct called a carried interest. The reason for this is that their tax advisors have advised that a carried interest qualifies them for capital gains treatment for the money they are paid for their work and it is therefore subject to a maximum tax rate of 15%. One day, someone writes an article in the Wall Street Journal noting that while hedge fund managers typically make in the tens of millions of dollars per year, unlike the rest of the American public, they are taxed at a maximum rate of only 15%. There is the expected outrage and the public says: “fix this”. But the fix is no longer direct, it’s no longer easy. Why, because the fix involves changing the tax provisions which in this case were used to incentivize people to take investment risks. The argument from their lobbyists: if you tax these poor hedge fund managers on the same basis as we do the rest of us, they will not take the risks (what risks) and they might even move to the Cayman Islands where they have set up their funds. The argument essentially is: we can’t afford to lose these guys.

Imagine if we had paid some ordinary person $50,000,000 and his contribution was to burden our business with billions of dollars of worthless debt that we now have to reckon with. Would anyone be screaming, “don’t cancel his bonus, he might leave?”

T. Boone Pickens is now publicizing his alternative energy plan to end the US dependency on foreign oil. The plan will entail tens of billions of dollars of government assistance. Mr. Pickens is lobbying for government assistance. It might very well be a good plan; he might deserve the government assistance. But if I were going to help, I would want to know how much I’m giving, how it’s being spent and what can I expect in return.

But under our current system, the assistance will come through very indirect and hard to measure programs like energy credits, research and development tax credits, the use of government eminent domain powers and numerous other incentives. In the end noone will know how much public money was spent. Noone will know how much was given to Mr. Pickens. No one will be able to calculate what we, the public, have gotten in return.

There is no accountability for public money given to the affluent and to corporate America. Many don’t even acknowledge the subsidies exist; many don’t assume any responsibility for providing the public with a return on its investment.

There is no appreciable public debate on the subject because the welfare and other assistance programs for the affluent have been kept out of the public’s view. The price for keeping them out of public view is that they are not measurable, it is difficult to tell if they are accomplishing the goals for which they were created, and there is no accountability. Our leaders preach the benefits of free market capitalism, of transparency and of accountability. It's time that we insist that these principles be applied to all of the members of our society.

Brand Repair: Fresh Views Breathe New Life Into Inbred Brands

2008-07-14T09:49:00.006-04:00

Re: Nelson Peltz, Activist Marketer, Fortune Magazine, July 10,2008

Brand strategy is shrouded in secrecy by most brand driven companies. And the more successful the brand is, the more likely it is that the group responsible for its creation remains around for a long time, each successful year growing more confident, and frequently less open to opinions from outsiders. We see this phenomenon in our politics and we see it in our businesses. Insularity and smugness kill brands.

When businesses falter, how frequently do they go back to the business's founder or early leaders seeking to be rescued by those who had the "original formula" down right? Sometimes, I think the reason why this strategy works at times is because the founder has been disassociated with the business long enough to have seen it from the outside, not because he possess the deep, hidden secrets on which he built his original success. Steve Jobs is certainly credited with turning Apple around and Howard Schultz was brought back to Starbucks with great fanfare. The jury is still out to determine what Schultz learned while away from his creation.

So, this little article about activist investor, Nelson Pelz, has an important message. But it's not that Mr. Pelz is or is not a wonderful marketer. The message is how valuable it can be to bring some fresh air into the insular brand strategy and marketing thinking of established brand driven companies . In Pelz's case, he has bought his own ticket to the party by owning more than 5% of the company's with whom he shares his advice. Management could hardly afford to ignore his views.

But one would hope that enlightened brand managers would seek the views of those who are sometimes outside of their inner circle. Someone has to tell us when the emperor is wearing no clothes!

Buying For Less May Be Trading Up

2008-07-11T09:26:00.002-04:00

Re: The Wall Street Journal, July 11, 2008, “US Consumers Trade Down As Economic Angst Grows”

Focus on consumers buying less expensive things is missing the point. Price alone is not the issue. The questions for the brand marketer are: 1. Is the consumer redefining the “value proposition” he desires, 2. How can we deliver that “value”; and, 3. Is the consumer willing to trade up to acquire that “value”.

In our desire to identify indicators to predict consumer behavior in the economic downturn, we instinctively revert to pulling out the tired lists of full priced retailers, discounters, club (warehouse) discounters and comparing sales figures over like periods. But what these gross figures don’t reveal is why the consumer is making the choices reflected in the comparisons.

From the point of view of the product manager or the marketing strategist, it is very different whether the consumer is merely seeking the refuge of “lowest price” or whether traditional notions of value factor into the buying equation. Is the consumer asking “will this item last longer?, “will it cost less to maintain” “is the style likely to survive the shifts in fads or trends and be wearable longer?” Clearly if the consumer is taking value propositions, other than pure price, into account, this is information that is highly useful to the brand driven business, particularly in times of economic duress.

When utilizing this information, though, the company should be very careful not to treat this entirely, or even principally, as a marketing challenge. Value starts with the product and the value proposition being offered to the consumer must be product or service driven if it is to be real. Inventing a great story, launching a great marketing message for inferior products, or products that don’t meet the consumers’ expectations, are flawed strategies and will not work.

This a moment for brand driven companies to reassess their product lines, to edit those items that may have crept in during the sloppy, frothy, high rolling times, and to ask themselves, "What do we stand for? and "What do we want to stand for?" To the extent there is a difference, a realignment is in order.

American Universities: Let Me Count the Ways in Which You Overcharge Us

2008-07-10T16:28:00.003-04:00

Anytime I write about education policy, I get myself into trouble. But when I finished reading today’s Wall Street Journal article on “custom” textbooks and thought, “this is unbelievable”, I knew it was only a matter of minutes before I reached for my computer to write this post.

It seems that a “custom textbook” is one of the more recently developed techniques through which our institutions of higher learning are short-changing our students. A custom textbook is apparently a widely produced text book, which is "customized" for a university by including freely available information, perhaps a different, customized binding, and often stamped, “This book may not be bought or sold used”. In other respects, many of these text books are identical to the ones that are distributed as non-customized. No matter that the prohibition on resale is acknowledged to be legally unenforceable, our schools think this is sufficient to deter most of the students from re-selling their custom books. So, from the point of view of selling more books, this is mission accomplished.

Adding insult to this injury, the books are priced higher than the non-customized versions (which have the same substantive text) and the educational institutions for which the books have been customized have contracted to share in the proceeds from the sale of these books! That’s right, our colleges have conspired with privately owned, for profit, publishers to charge their students an artificially high price for textbooks, which the schools require their students to buy, and then block the students ability to sell his or her book, once used, or to buy a used copy.

To be sure, many universities who originally found this fund raising gimmick attractive, have rethought their original position, and decided that cheating their students was not the right thing to do. I hope the rest of our educational establishment will quickly follow suit.

Starbucks: Why Was it the Real Estate, Stupid?

2008-07-04T10:02:00.003-04:00

“Lax Real Estate Decisions Hurt Starbucks” reports today’s The New York Times. Not hard to figure out four days after the company announced the closing of 600 stores! But the store closings are the symptom, not the cause, of Starbucks’ problems.

In my previous post, I alluded to some of the company’s research, which supported its aggressive and patently foolish march to place a Starbucks on every available inch of available real estate. It’s worth repeating: 1. long lines at existing stores led to the conclusion that to ease the wait, the company should add another location within a stone’s throw of the successful store; and 2. research that showed that customers would not cross the street to buy Starbucks’ premium coffee, the same coffee for which they would pay $4 per cup and for which they would forgo the fee cup of coffee often awaiting them in their work place or home.

Isn’t it amazing that no-one looked at these conclusions and screamed, “the emperor has no clothes” ?

Well maybe not, if we give some serious thought to what drives endless (and too often, mindless) corporate expansion. It’s probably no coincidence that the pace of store openings increased dramatically in the weeks and months before the close of each fiscal period.

Why might this happen? Is it possible that the corporate expansion strategy is targeted as much to satisfying the expectations of the financial analysts as it is to keeping the company competitive and healthy? You know, it’s funny, if you place the typical successful CEO in a room with a bunch of average people who offer suggestions as to how to run his/her company, he might politely listen but few would expect him to return to his corporate suite and implement each suggestion. But when Wall street analysts lay out expansion targets, articulate strategies for global expansion, to offerings on the new menu or the music that might be played as a backdrop to the sipping of Starbucks black gold, somehow management took copious notes and couldn’t move fast enough to implement these untested (and unsolicited) suggestions.

I was hoping that a fellow like Schultz, who has much more than a financial stake in seeing his company flourish again might have the backbone to tell the financial community that maybe there are limits to the number of Starbucks stores that the world will support, that Starbucks might attract more business by looking deep into the company’s core to find additional offerings. I was hoping that Schultz would do more than the tired Wall Street two –step of cutting employees and shuttering stores. The company has a stellar reputation for how it treats its people and its customers. Now, it's time to live up to its own values, not those imposed by others.

I am still hopeful, Mr. Schultz. At one time you built a truly world class brand. Let’s see what you can do if you put your mind to it!

eBay and Trademarked Goods: A Better Solution

2008-07-03T07:33:00.002-04:00

From our archives: Originally published in November of 2007

On November 14, 2007, the Wall Street Journal ran an article describing the beginning of a long-anticipated trial, being litigated in the Southern District Federal court, in which Tiffany & Co. is claiming very substantial damages from eBay. Tiffany alleges that eBay bears responsibility to regulate the sale of counterfeit Tiffany branded products on its site. Other prominent trademark holders have filed similar actions against eBay. It seems that while these two goliaths wage their war, the public interest in maintaining a fair and informed market place on the Internet might be neglected.

A much simpler solution than the broken system now in place between eBay and trademark holders would be to simply require those who wish to sell trademarked goods on eBay to register with eBay, as sellers of trademarked goods, and to provide a verifiable identity and (terrestrial) address. While it's virtually impossible to authenticate goods in a virtual marketplace, it is feasible to identify and regulate those who gain access to that market.

Generally, our legal system works when there is in place a system of meaningful checks and balances. To maintain this equilibrium, the trademark holder is given a legal monopoly over the use of its rights and the person who might be affected by the assertion of those rights has the right to protect himself from abusive enforcement behavior. He has the rights to review any assertion of illegality, is provided with the opportunity to answer claims and is given the right to seek compensation if the rights holder acts abusively. When the legal system grants a legal monopoly, like a trademark, to a party, it does so cautiously, and generally imposes responsibilities on the monopoly holder designed to safeguard the public interest. In the area of trademarks, these responsibilities include a duty to protect one’s trademark, to maintain its distinctiveness and to enforce the trademark against those who infringe it. But there is no right given to the trademark holder to interfere with the lawful sale or resale of products bearing its mark.

In the terrestrial world, trademark holders police the use of their marks. When confronted with suspicious activity, the trademark holder traditionally begins enforcement by sending a notice to the infringer, a demand that the activity be stopped. He may sue for infringement and damages, and in certain circumstance he may resort to extraordinary measures like injunctive relief, to prevent a sale, or to the seizure of the counterfeit or gray market goods. When the law provides for extraordinary measures, it attempts to level the playing field by requiring that a bond be posted. This is designed to protect the targeted party and to induce the trademark holder to act responsibly. In all instances, the trademark holder acts at his peril; if he mistakenly seizes legitimate goods, or erroneously closes a selling establishment, he bears responsibility for the financial consequences of his actions.

On the Internet, this equilibrium is threatened by the broken system now in place with online auction sites like eBay and the trademark holders. EBay’s existing policy is to remove specific listings when it is notified by a trademark holder that the listing violates trademark law. There is no requirement that the holder establish that his claim is valid or even that it is likely to be upheld by a court.

Tiffany and other trademark holders, engaged in similar lawsuits, are seeking to deputize Ebay to become their trademark rights enforcer. They would like eBay to act even more aggressively to independently remove trademarked items that are offered for sale, whether or not the trademark holder calls these listings to eBay’s attention. In effect, the trademark holders would like to eliminate all of the usual checks and balances, which protect the public, and assume the position of judge and enforcer by deputizing eBay to do their enforcement work.

Where is the public interest in this scheme? Is it reasonable to assume that an individual eBay seller will pursue his remedies against abusive trademark enforcement through the legal system? Given the global nature of the Internet, an eBay seller in New York might be faced with challenging the actions of a trademark holder in Europe or Asia in order to re-list his items or sell similar items on eBay in the future. This is not very likely to occur. And, the trademark holder may unwittingly alienate its loyal customers, some of whom may have purchased the trademarked goods, relying on the owners promises that they are worth more, eventually become collectibles, and ultimately hold or increase their value. EBay looses potential revenues by reducing the volume of legitimate sales. So, no one really benefits from this regime.

It would be simpler and more in keeping with existing trademark law and practices if eBay would institute a registration procedure through which a seller who desires to offer trademarked goods for sale on the site, would be required to register with eBay. The seller would provide a verifiable address and identification. With this simple procedure, the trademark holder would be left to police potential sales over the Internet in the same manner it now does in the terrestrial world: it would be charged with implementing a monitoring and enforcement program to detect suspicious activity and to enforce its rights against those violating the law.

If the suspicious activity occurred on the Internet, the rights holder could either obtain the identity from eBay or eBay could contact the seller on behalf of the rights holder and make the normal demands. All parties would be left with their traditional legal remedies in tact. And, equally important, the public, in this case the eBay seller, would have the opportunity to meaningfully defend itself against inaccurate claims by the rights holder. Each party, eBay, the trademark holder and the public seller would have protections and remedies that are consistent with the economic consequences of their activity and therefor likely to be pursued.

Ebay, Poor Advocate For Public Interest, Loses Our Case

2008-07-02T22:18:00.002-04:00

Just some initial thoughts; more to come.

Today’s Wall Street Journal story reads: “EBay Fined Over Selling Counterfeits”; and stories in yesterday’s editions of The New York Times and Women’s Wear Daily were headlined, “EBay Ordered to Pay $61 Million in Sale of Counterfeit Goods” and “Battle of the Titans: LVMH Awarded $61.3M In EBay Counterfeit Case” respectively. EBay has been prominently associated with “counterfeits”.

Can you think of anything that could be more damaging to the reputation of an Internet marketplace? EBay should have gone to extraordinary lengths to explain to the public that its interest in this dispute is the public’s interest as well.

There should be no question that foisting counterfeit trademarked goods on the public is a bad thing and should be punished. The trademark laws generally impose upon the trademark owner the responsibility to police the market and bring infractions to the attention of the governing authority. These laws generally recognize that governments usually have very limited capacity to recognize a fake, to regulate it and to determine who is selling it. That’s one reason why the owner, who is awarded the premium on the sale of its branded goods, is expected to underwrite the cost of enforcement as a cost of doing business.

But these cases involved far more than the sale of fake goods and it is in these areas, in particular, that the impact of this French decision, if extended to other courts and jurisdictions, would be devastating to the Internet market place.

EBay might have educated the public to know that the so-called “counterfeit goods” that were the subject of this lawsuit include genuine branded goods (like the LVMH fragrances) which are being sold by vendors outside the authorized LVMH distribution system. There is nothing fake or counterfeit about these goods. The consumer is not being defrauded in these sales. The trademark on the goods is a proper indication that the goods originate from a source common with goods purchased in the LVMH distribution.

EBay might have educated the public to know that often times these goods are being sold on eBay by independent sellers, people like you and me, who may be selling a legitimate branded item which we have bought or have been given and which we cannot return, and who believe we can do better selling these items through an auction rather than by giving them away.

EBay might have educated the public to know that many of the sales are sales of used branded items, which are also now prohibited by this ruling.

Most importantly, eBay should have educated the public that the virtual world of the Internet, the world in which eBay operates, is in many respects different from the terrestrial world in which most luxury goods have grown and perfected their marketing. Consequently, before imposing trademark, distribution and competition rules for this new world, we have a responsibility to examine their likely impact.

Trademark laws generally impose upon the owner of the mark, the brand owner, the responsibility to police the proper use of its mark. The legal rational is that the monopoly, which the law grants to the trademark owner is justified by the benefit to which the consumer gains from knowing and relying on the fact that all products bearing the same mark emanate from a common source. Unlike copyright laws, which are about property, intellectual property, trademark laws are about business, consumer protection and orderly marketplaces.

One of eBay’s raison d’etres is that it empowers ordinary people to become buyers and sellers in a reliable market place. Turning this marketplace over to the interests of the large and financially powerful brand owners runs in many ways counter to the justification for establishing market places like eBay in the first place.

While I am often not an ardent fan of eBay, in this instance they walk on the side of the angels. Its interests in these lawsuits are very much aligned with the public interest, with the interests of ordinary, honest buyers and sellers who patronize eBay. But those people handling eBay’s public relations, those who are entrusted with its brand, permitted the brand owners to publicly marry eBay to the devil. And this association may ultimately prove more damaging to eBay than the setback of the underlying lawsuits.

Disappointing Starbucks Redux: Fix the Brand? No, Just Sell the Real Estate

2008-07-02T09:15:00.005-04:00

This morning’s Wall Street Journal article reporting the closure of 500 additional Starbucks stores got me thinking about how naïve I was when I actually believed what I read in the original Starbucks story.

When the news about Starbucks’ financial problems began to surface last year, accompanied by the leaking of the now infamous memo from its founder, Howard Schultz, detailing how the brand had lost its way and needed to return to its core, I actually believed that he had identified some of the causes of the company’s reversal of fortune. In fact, I copied and distributed to my class on branding, copies of the initial articles and of his memo.

While Mr. Schultz’s admonitions to respect the company’s roots and return to the principles, which supported its success, provided great jumping off points for academic discussion, they apparently did not identify what really ailed the company. While his statements supported his purist and maverick public status, made for good press, and might have even eased his return to the helm of his weakened enterprise, they now appear to have been little more than window dressing for a fairly standard cost cutting Wall Street approach to fixing a business.

Even at the time, I was puzzled by his assertion that rapid growth was the company’s biggest enemy. Why, I asked, was having a large number of locations an impediment to delivering an authentic European coffee house experience at each location? It may be that growth was unhealthy but it was not the growth, I thought, that caused the company to lose its focus on its special coffee house experience.

But now, as we witness the company’s actions, not their public relations inspired pronouncements, we begin to glimpse what really went wrong with the Starbucks experiment. Now, it makes more sense that its real estate expansion is a principal culprit.

According to the Wall Street Journal article two real estate principles supported its march to ever increasing numbers of locations: long lines at existing stores and research that showed that customers, presumably thirsting for the taste of Starbucks premium priced coffee and eager to pay twice or three times the cost for one cup, somehow would not cross the street to find their treasure. Crossing the street, the research concluded, was enough of a deterrent to send the customer sipping an inferior alternative. Both these principles supported the strategy that Starbucks needed more stores, sometimes down the block, sometimes across the street from its existing locations.

While the absurdity of these strategic conclusions should raise serious questions about the competence of the experts who came up with this stuff, and those who executed the strategies which were developed to respond to these perceived threats, it seems an unfortunate, but safe bet that Starbucks will not be one of those businesses which re-examines its core brand values and returns to health by understanding the sources of its strength.

Consumers of Branded Goods Beware: Goods May Not Be Resalable!

2008-06-30T11:16:00.003-04:00

Women’s Wear Daily and The New York Times just reported that LVMH, the parent of Louis Vuitton, Christian Dior, Parfums Christian Dior, Parfums Kenzo, Guerlain and Parfums Givenchy, and other French luxury brands has just won a significant case against eBay in the French courts. According to the article, the French court has held eBay liable for the sale of counterfeit LVMH items and the sale of legitimate LVMH items by non-authorized sellers.

It is the barring of sales by the so-called non-authorized sellers that is troublesome to me because these non-authorized sellers could easily be folks like you and me.

Many owners of high-end trademarks and branded goods companies have policies, which define a “seller” as anyone who offers three or more branded items for sale. Once one is included within the definition of “seller”, it only requires a check on the trademark owners’ “Sellers” list to determine whether or not one is “authorized”.

Casual sellers and independent dealers who buy these goods and resell them as used, don’t appear on these lists. Ebay, on the other hand, lacks the capacity to check whether the goods being offered are legitimate or not and consequently merely takes off its site any goods reported to it by the trademark owners and being sold by “unauthorized sellers”.

The result: all this high end stuff that is trumpeted as holding its value or even increasing in value over time, is unsalable on eBay.

Obviously, these policies were established for legitimate reasons to maintain an orderly distribution system for the manufacturer and owner of the marks. But on the Internet, where everyone can be a seller, and where people often go to buy and sell trademarked goods not wanted by the original owner, this is a problem.

In fact, the Internet exacerbates this problem because it is the market in which branded goods experience much more success than unbranded goods and at the same time the Internet was a market touted to be friendly to the independent, often smaller and less powerful, merchant.

To the extent that this decision, already being heralded by many of the major brand owners as a significant victory, signals that the Internet is now on track to become the domain of the powerful, large brand owners, this is a setback for independent and smaller merchants and ultimately for all consumers who will inevitably pay more for branded goods. The next time you are told that a high priced luxury branded product is intended to be passed from generation to generation, take it seriously: You may never be able to re-sell it.

High Energy Costs & The Consumer: From SchmidPreissler International Strategy Consultants

2008-06-28T11:02:00.003-04:00

 Energy Costs Naturally Change Consumer Behavior. Globally.

The majority of people, no matter in which part of the world they are living, are not going to earn more than the rising energy costs. This does not inevitably have to lead to a decrease in consumption. In our opinion, consumers are going to change their behavior.   The process of purchasing decisions is subject to changed criteria. We are assuming that impulse buying in regard to satisfaction of needs is going to decrease for most people in the broadest sense and every purchase is going to be pondered with greater thoroughness and the actual necessity of the purchase.  

The satisfaction of wants is going to increase considerably. The small and big wants are going to increase, especially in tougher times. The majority of people are going to ask the question of value more often and more intensively when it comes to the satisfaction of wants. Material values are playing the decisive role here. Premium and Luxury products have their high times especially in times when the disposable money is worth more, because there is less of it. Purchases are made purposeful and selective. True Premium and Luxury products are bought, maybe even more than ever, but only if they are “true” Premium and Luxury products.

  Growing awareness during purchasing and consumer behavior is surely one of the consequences that arise from the development of energy costs. What does this mean for industry and retail? Advertising, sales conversation and service agreements for customers have to be of a better quality. Naïve advertising, half truths, deceiving appearances all of this is not going to be enough for promotion. The sales conversation has to have a content directly related to the product and its qualities. A profound knowledge of the product would be such content. For the longest time the maintenance of such sales conversations has been grossly neglected. Self service in retail, order charges and online ordering systems in wholesale and in B2B business have disregarded the vocation of sales personnel. It is imperative to do a lot of persuading here.

  Quality is above quantity. This principle applies especially to those products meant for satisfaction of wants. Less is going to be more in the future. Bulk goods are going to be hard to sell even at reduced prices. People are going to live more consciously. A lot of things that might have been viewed as old-fashioned are going to be held in esteem again. What’s natural is going to be rediscovered again. Life is going to become more humane again and as such get back a new “old” quality. In a certain way the development of the energy costs is helping us to get a new relation to consumption, as paradox as this may sound.   The fear that high energy costs endanger the consumer’s wealth or keep the people in the Second and Third World in poverty is only one of many positions one could take and one we do not really believe in. When it comes to the people of the Second and Third World one could see one ray of hope in this development that consists of the ability to achieve higher prices for the natural resources, oil, gas, food, and other materials that they produce and thus have one immediate advantage to the higher energy costs. Let’s think of Africa. We have pointed out the future of Africa years ago and have touched exactly on what we experience today. A new Africa that is slowly finding its feet on solid ground again thanks to its natural resources.   

High energy costs slow down uninhibited globalization. In turn, this is going to ease the fear of the future in many people.   

Restrained and conscious consumption, quality above quantity are decision criteria that allow for a positive outlook into the future. And there is one other thing we should consider, it is energy in the form we know it today that has enriched our lives. Often we have not even noticed it anymore, at least in the First World, because energy was relatively cheap until recently.

  For the development of new strategies it is important that the above mentioned other side of energy cost development attracts interest, because it contains a great deal of possibilities which have been overlooked in the recent past.

Change and Rupture, Published by SchmidPreissler Strategy Consultants

2008-04-30T09:50:00.002-04:00

Life is change. That is not new. From the beginning of creation, the world has changed with every passing day, every hour. In the past, the change of which we speak occurred at a more or less moderate pace. Within limitations, it was calculable.

Globalisation, new information technologies, the New Economy, increasingly sharply differentiated ideologies, suggestions of economic recession, catastrophes, and other events have increased the tempo of traditional, familiar change to such an extent that it has spun out of control. A fracture has resulted that is so deep and permeates all aspects of life to such an extent that the question becomes ever more urgent: how is this to continue? For many, the future seems to be in danger.

Until now, at least in the First World, people lived by and large at peace and under circumstances of ever increasing prosperity. In Europe, the population discovered that peace means much more than just the absence of war and the dangers lurking in the darkness were soon forgotten. The 11th September 2001 represented the outbreak of a new dimension and type of war. The supposed secure world of the strongest power on earth was deeply wounded.

The events are driving people to their utmost, above all the knowledge that their abilities have become inabilities and that instead of being the ones in control they are being controlled and hustled. Money and work are becoming scarce. Virtual possessions are dissolving into nothing. Hunger and poverty are spreading even more quickly. The neo-socialists and neo-communists are rehearsing a comeback.

Due to bewilderment, weakness and fear in the upper echelons of politics, business and society, but less frequently among the “common man”, change, as we experience it today, is commonly reinterpreted as an apocalypse scenario.

At the moment, more and more top managers, unprepared for the challenges that confront them, are leaving the business world, some by choice, some under duress. Even quite serious, solid and well-known economists are falling victim to mental traps. Graspers are doing foul work. Ethics and moral are being thrown by the wayside all too quickly if advantage can be gained somewhere. One might almost think that with the loss of a hold on the values of yesterday we are all being catapulted into uncontrollable chaos.

Today, just managing is no longer sufficient to deal with the situation. This is true of both the economy and politics. An orientation that will lead to a new order is necessary if we are to feel the ground steady under our feet again and regain trust in ourselves and in others.

We need more entrepreneurs.

Entrepreneurship is essential. This is very likely the reason that family companies are experiencing an unexpected renaissance.

What we are experiencing is not a game.

What we are experiencing in the economy is not easy to solve with home-made drastic cures. Above all caution is advisable when using quick solutions. Successes achieved quickly are often bogus successes and of short duration.

Personnel reduction, cost reduction plans, Lean management structures, new management-by... programmes, benchmarking, restructuring programmes off the peg - none of these, not even the 100 US management concepts recently offered in book form by one consulting firm, convey as a rule solid solutions.

We have to be capable of more.

Our time, characterised by change which generates rupture, also has its chances and it is necessary to accept and use these without any ifs and buts. Ultimately, it is the chances that can lead us out of the valley of worries and problems.

In order to do so, we must again pay close attention to the rules of Creation.

We must serve truthfulness, that is, we must stand up for and guarantee what we say and do. And we must undertake nothing that we cannot affirm.

We must again practice discipline, be open, fair and determined.

We must be responsible.

One’s word must again be worth something.

And we must recognise and respect the limits of freedom.

Unrealistic? Illusory? By no means!

We know many entrepreneurs and companies that either never relinquished their stability, or regained it, and are in terrific shape. And, therefore, they brilliantly survive the storms unleashed by change.

Our own clientele is proof that traditional and conservative values combine in an excellent symbiosis with an elite, polyglot, modern context.

This symbiosis has a future: it is the path to tomorrow’s success. And the current change signalises a new beginning for it. It has always been the basis of our strategic consulting.

We understand the current chaos as a process of clarification and renewal. The four seasons are a beautiful example provided by Creation for natural events, though they recur with regularity, are also always new.

What are the essential aspects in terms of the structuring of a corporate future?

· Uniqueness: this is among the most important goals for any company. Only a company that strives for and achieves uniqueness can enjoy a leadership role.

· Leadership role: no company should follow trends; rather, it should formulate them. The most important prerequisite for that is independence.

· Independence: the degree of independence in all its manifestations decides the value of a company. Its value is then expressed in its culture and style.

· Culture and style: a company must be able to afford culture and style in order to ach¬ieve profitability.

These essentials constitute the armour that allows a company to thrive.

Knowledge is power.

The First World has largely completed the change from an information society to a knowledge society.

With his knowledge, each individual, each achiever represents an unknown challenge for each company, but likewise offers great and multifarious opportunities.

The current change is creating new perspectives for companies of every size, it creates for those who understand it, who perceive the rupture, chances for a “place in the sun”.

The storm that is sweeping over us speeds up a long overdue process of elimination, separating the wheat from the chaff. The survivor of this process then faces equally stiff competition. In the long run, this results in better achievements for everyone, a better economy and better economic management.

New horizons emerge through this process, particularly in the context of consumption.

In the First World, the importance of immaterial goods increases as that of material goods declines. They have lost their significance.

In the Second and Third Worlds, private consumption is just becoming a factor in the political economy.

One further aspect of this change is of great importance to us. It will make possible the future transition from a knowledge society to a culture society. Knowledge allows us to prevent the destruction of our world through the misuse of power. And, knowledge can also enable us to find ways to set strict boundaries for stupidity.

After what we’re going through now, nothing will be the same as it once was. Let’s understand change and rupture as a chance for a new beginning.

Action/Abstraction: Pollock, de Kooning and American Art, 1940-1976

2008-04-29T15:55:00.003-04:00

I just attended a preview of the exhibition at the Jewish Museum, NYC, Action/Abstraction: Pollock, de Kooning and American Art, 1940-1976. My advice: Drop whatever you're doing and go see it!

Not only is the selection of works from the American Abstract movement beautiful and well presented, but more impressive to me, is the organization and mounting of the show. The art works are punctuated with intelligent and highly informative curatorial narrative as well as with a good amount of original, period documentation. All of the paintings are exhibited in the context of continuous references to the historically significant critical writings of the period's two pre-eminent art critics: Clement Greenberg and Harold Rosenberg. This exhibition is as much about the important role which art criticism and artistic dialogue play in the creation of an art movement and the shaping of the art that defines it, as it is about the specific American Abstract artists included in the show.

Even though I frequent museum exhibitions and have always been attracted to the art of this period, I was relatively unaware of the role which these two individuals played in shaping and defining their contemporary art scene. My fascination with their writings was made even more intense when I realized that there is no comparable critical dialogue evident in our contemporary art community. Today, we are asked to judge artists and their works, by the continuous loops of spiraling auction prices and gallery price increases.

When covering contemporary trends, the art press generally seeks out the opinions of auctioneers, art dealers and affluent collectors. Hardly any attention is paid to the more academic and critical segments of the art community. And with good reason: they have disappeared from the scene.

While we can't instantly create knowledgeable art critics or writers or reporters who can invest the time to learn about something before they report on it, it is a step in the right direction to realize that our dialogue is incomplete, that an important element is missing. From the perspective of a collector, or from that of a contemporary art curator, this realization should, at a minimum, encourage us to go slow when acquiring contemporary art at contemporary prices.

Use Caution in Regards to Growth of Consumer Goods Turnover in 2008

2008-04-12T17:08:00.006-04:00

From Brief Letter, published by Schmid-Preissler Strategy Consultants, Germany

Wants and needs are going to get even more distinct outlines than has been the case in the past. Everything that can’t be clearly assigned is going to continue to disappear.

Meaning, people are going to purchase more prudently. They are going to use their considerable knowledge during selection and purchase of products and services.

Surely, there are needs that can be met, in regards to quality, with simple and modest products and services, especially through automated facilities. Price can be adequately low there. The consumer has long gotten used to buying packaged products from a carton or simple shelves. When it comes to satisfying needs, the advantageous price is an important sales tool. This is why discounters are going to be of even more significance in the near future.

However, when this is about fulfilling wants, satisfying wishes, then people are always willing to spend more money. In economically tough times this may be even more so than in good times. But even for products and services which do not serve fulfillment of demand it is imperative that the relation of the value of the product to the price has to be evident. Far more critical than in the past, people are going to watch out for a comprehensible immaterial value of Premium and Luxury goods and services when fulfilling wants and satisfying wishes. Most of all this means brands dominating the premium and luxury business have to offer value.

It is going to be problematic for those suppliers of products and services which are still present in the traditional and disused “center” of the market and without adequate substance and yet are offered as premium and luxury goods and brands.

The consumer goods markets are going to shrink. But not the exterior outlines on the upper and lower edges of the individual markets or industries, but from the center.

If your planning includes growth for 2008 and the coming years you should rely less on the past but rather align your plans for growth with the possibilities, your products and services offer in regards to a clear profile.

Money available for consumption is becoming more valuable globally and the offer has to be designed correspondingly. If you are aware of this and look around accordingly, you are going to realize quickly that considerably more has to be done then just economizing and lowering costs. In order to keep the offer valuable and if necessary create a more valuable offer one has to be willing to invest into the market.

Has the Fed Become a Sub-Prime Lender?

2008-04-09T13:21:00.000-04:00

With the Fed's extension of $39 billion of credit, collateralized by the same assets that caused private banks to refuse to lend to Bear Stearns, hasn't the Fed become the largest sub prime lender in the world? And by facilitating the J.P. Morgan Chase buyout of Bear Stearns, the Fed has signaled it has the appetite to purchase additional piles of sub prime debt.

The difference between the Fed's strategy and that of the banks and other financial institutions who hold large portfolios of sub standard assets is that the private financial institutions got into this mess unknowingly; the Fed knows exactly what its lending against and that's the tragedy.

Given the huge amount of sub prime debt still in the banking system and the Fed's declared policy of being a ready buyer of any asset unwanted by the private banking system, isn't it time to ask "What is the net worth of the Fed?" "How good are its guaranties?" and "What is the result of the Fed's insolvency?"

From Bloomberg.com: Volcker Says Fed's Bear Loan Stretches Legal Power by John Brinsley & Anthony Massucci

2008-04-09T12:23:00.000-04:00

April 8 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker questioned the central bank's decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at ``the very edge'' of its legal authority.

``The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,'' Volcker said in a speech to the Economic Club of New York.

Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent ``severe'' damage to financial markets.

Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed ``excesses of subprime mortgages'' to spread into ``the mother of all crises.'' The Fed's Bear Stearns loan was unusual, he said.

``What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,'' he said.

Wall Street Subsidy

Lawmakers, while praising the Fed and Treasury for averting a financial collapse, have also questioned the plan to subsidize Wall Street while the Bush administration resists using government funds to assist homeowners cope with the worst housing crisis in 25 years.

Volcker said the Fed's loan may send investors the wrong message.

``The extension of lending directly to non-banking financial institutions -- while under the authority of nominally `temporary' emergency powers -- will surely be interpreted as an implied promise of similar action in times of future turmoil,'' he said.

Volcker said the modern financial system has ``failed the test'' of the marketplace. When asked whether he predicts a ``dollar crisis,'' he said, ``you don't have to predict it, you're in it.''

The dollar has dropped 15 percent against the euro and 14 percent versus the yen in the past year.

$945 Billion in Losses

``What Chairman Volcker said in his remarks is that we need to make sure we are taking a look at the implications of the Fed decision,'' Glenn Hubbard, former chairman of President George W. Bush's Council of Economic Advisers, said in an interview. ``The question is: How do we then redesign regulation around a decision that bold?''

Volcker's critique comes as policy markers struggle to prevent the world's largest economy from contracting, a prospect Bernanke himself raised last week. The International Monetary Fund today said the global losses from securities tied to commercial real estate and loans to consumers and companies may reach $945 billion.

``The bright new financial system, with all its talented participants, with all its rich rewards, has failed the test of the marketplace,'' Volcker said.

As credit markets seized up, the Fed gave the 20 primary dealers in U.S. government bonds the same access to discount- window loans that had previously been reserved for banks. The central bank now auctions as much as $100 billion to lenders a month, and has cut the cost on direct loans to just a quarter- point above the overnight rate on loans between banks.

``The implications of these decisions, and the lessons from the unfolding crisis itself, surely deserve full debate and legislative review in the period ahead,'' Volcker said.

Fed's Response

The Fed has also lowered its benchmark rate six times since September to 2.25 percent from 5.25 percent, and traders anticipate it will cut by at least another quarter point this month to cushion the economy's downturn.

Volcker, 80, said the problems stemmed in part from trading of increasing complicated securities including derivatives that ``have taking on a trading life of their own,'' and said the turmoil ``adds up to a clarion call for an effective response.''

`There was no pressure for change, not in Washington which was spending money and keeping taxes low, not on Wall Street which was wallowing in money, not on Main Street with individuals enjoying easy credit and rising house prices,'' Volcker said.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net

Ungrateful, Apple Inc. Bites the Tree it Fell From

2008-04-07T08:58:00.000-04:00

As a life long resident of the Big Apple, I always wondered why we permitted this little, spunky computer maker, Apple Computer, to borrow our brand and benefit from the decades of folk lore and tradition associated with the Big Apple's history. Maybe it was New York's natural affinity with the underdog, I thought.

After all, here was a tiny David of a company, created by two computer geeks who actually thought that product design might enhance our experience with computers. Possessed with odd ideas that computers might make people's lives easier, more fun, more creative, they actually wanted to make these machines more intuitive to use, more "user friendly" in the industry jargon. They were contrarians from the inside out.

What the heck, I thought, these guys could use any help we, New Yorkers, could provide and letting them trade off our scruffy, anything-is-possible history is easy! It doesn't cost us and helps them. So no New Yorker objected when they showed a momentary lapse of creativity and adapted our logo, the Big Apple, as their logo. We even calmed down our friends at the Big Apple Circus and intervened with representatives of hundreds of Big Apple businesses, asking them to chill out, to give these west coast nerds a break and let them benefit from our luster.

But as my Mom used to say no good deed goes unpunished. On April 5th, Apple Inc. apparently renewed its objection to a proposed NYC logo for our Green campaign because it too closely resembled the logo they had appropriated from us. Go figure. I'm sure Jobs will dismiss the gaff, blame it on "the lawyers" as he continues to showcase his flagship Fifth Avenue store, using images backdropped by New York's iconic General Motors building, a view of the Plaza Hotel, Central Park, or shot from an angle showcasing the Fifth Avenue, Tiffany's intersection.

A bigger question is "why does Apple care?" The company claims that having its logo share the market place with the New York City Green logo would dilute Apple's mark. Apple thinks that having the two marks co-exist would confuse the public. People would no longer know that Apple products come from Apple and that ads and related products bearing the Green NYC logo are promoting a NYC environmental "green" public policy. The legal experts refer to this as a "confusion as to source". Doesn't seem logical to me!

And what if the public is confused as to the source of these products and services? Is that bad for Apple. As a maker of computers, ipods and monitors and as a reseller of vast arrays of computer and entertainment related products, Apple surely doesn't have a very respectable environmental footprint. Would it harm them if a few New Yorkers actually thought they were good environmental citizens?

Sotheby's, the Art Market’s Enron, Acts to Destroy Public Confidence in Chinese Contemporary Art Market

2008-04-04T12:52:00.001-04:00

The Art Newspaper's April 2008 issue contains a first page article on the upcoming Sotheby's Hong Kong sale of Chinese art. If the events leading up to this auction aren’t a clear sign of the manipulation of the Chinese contemporary art market, I don't know what is. Like Enron, Sotheby's created its auction marketplace, oversees it, and trades in it, as a principal, thereby influencing supply and pushing prices up.

Basically, the article tells how a collection of Chinese contemporary art, assembled by private collectors, was exhibited at the Louisiana Museum (Denmark) then traveled to the Israel Museum, Jerusalem. Both museums did what museums do for important exhibitions; they published catalogues, promoted the exhibition and most important, gave the “museum imprimatur of legitimacy and importance” to the displayed works and artists. The exhibition was packaged as works from a single, important private collection.

While the art was still being exhibited, a private art dealer "bought" the collection, allegedly telling the original collectors that the purchaser intended to keep the collection intact. As it turned out, Sotheby's acquired a significant ownership in the collection. And two days after the close of the Israel Museum exhibit, Sotheby's announced that the entire collection would be sold off at its Hong Kong and New York auctions, in April and the fall of this year.

When I sat on the Board of The Brooklyn Museum, in the 80’s and 90’s, museums were scrupulous to distance themselves from the commercial side of the art world. No dealers sat on boards or even advisory committees. Curators were appropriately circumspect when seeking and getting advice from dealers.

This is not because dealers are bad; it simply recognizes the conflict of interest that a dealer might have when advising a public museum on art or artists in which he trades commercially. To preserve their impartial authority, the museum world wisely kept its distance. Museums generally respected the public trust, which they hold, and did not want to risk being seen as participants in the commercial promotion of art.

Gradually, over the past twenty years or, the Museum world has lost much of its independence from the commercial side of the art market. Dealers are now active participants, providing funding and “scholarship” on block-buster exhibitions. They contribute significantly to the museums and guide important clients to museum boards. High profile, well-funded dealers now exert considerable influence on the policies of world-class museums.

Add to this mix the emerging market in Chinese contemporary art and you have the perfect storm: a vast art market both in terms of its number of artists and the works being produced, a market and culture largely unfamiliar to western audiences, a market sufficiently secluded and opaque to enable a speculator to buy and sell very privately. The Chinese art market of the 90's provided an opportune environment for a financial speculator to accumulate large inventories of art out of the public eye.

And so they did. As recently as ten years ago, savvy art speculators trolled China and purchased large quantities, container loads in some cases , of art. So called investment partnerships were formed to purchase artworks in quantity and hold them for 3-5 years until they would be sold at projected multiples of 3 to 5 times their cost. At times these investor speculators even succeeded in locking up the supply of certain artists, by entering into exclusive supply agreements for years to come.

The only challenge remaining was where and how to sell such large quantities of art at such prodigious projected gains. Large inventories of art typically require the investment of time and money, marketing and strategic placement of the art into important museums and private collections, and the assumption of risk before an owner might realize a significant financial return on his investment. But this is not what these investors bargained for.

Enter the auction houses, eager to expand their global reach and smelling the potential for huge, quick profits embedded in backwater, undeveloped art markets.

Significantly, during this same ten-year period, the auction houses evolved their often-criticized businesses of financing the purchases of art to guarantying auction results to actually owning and selling art. These auction houses, entrusted with maintaining fair, honest and transparent marketplaces, see nothing wrong with investing in art and selling it through the very same channels they are supposed to keep fair and honest. Perhaps more important and more tragic, the art community hasn't found this development to be troubling either. After all, auction house interest in owning and selling art just means more money would chase less product and prices would go up.

Like Enron, the auction houses will likely continue these practices and relentlessly push the profit envelope further until this situation implodes.

With no pushback from the Museum community, no significant collector voice challenging the claim that the auctioneer can be an honest broker of art belonging to others simultaneous with promoting the sale and appreciation of his own inventory, no outcry from the academic and art critic community that money has now usurped their roles as guides in public endeavor to understand and appreciate what is being created… in short, with the breakdown of the checks and balances that we have evolved to ensure a viable and working art market, the contemporary art market is poised to become another in a troubling list of financial bubbles.

Fashion Industry Discovers the Waisted Rectangle©, Our View of the Consumer Goods Market

2008-03-18T09:42:00.001-04:00

FROM OUR PARTNERS AT SCHMIDPREISLER INTERNATIONAL STRATEGY CONSULTANTS:

It has long been controversial, if the questions “What do I need to satisfy my needs?” and “What are my wants?” are basically the critical purchasing criteria or whether the purchasing power of the people is decisive when it comes to purchasing decisions. Just as controversial was our thesis that independent from purchasing power orientation on the price plays the decisive role when it comes to satisfaction of needs, while satisfaction of wants is oriented on immaterial values; for instance the prestige value of a brand.

Deduced from Maslow’s pyramid of needs the market was divided in a top, center and a wide base. The center of the market was viewed as especially attractive, because the common attitude was one could assert oneself with an average product quality at slightly higher prices and margins than in the rough climate of the mass market and it would take less time and effort then it would take in the noble luxury segment.

The “Center of the Market” was a hot topic of discussion for many years. There were vehement advocates of the center and there were those who left it carefully and without much ado. The center of the market went through emotional roller coaster rides. First it was “out” then it was “in” again. For us it was always a phantom.

In the 80’s of the past century, after the change of values became a widespread movement and the consumption society prepared for the pursuit of new targets which were not supposed to be shaped by a never ending more on consumption anymore, we realized that the market needs a new view. This new view should take into account the changing habits the life of people. This was the basis for our Waisted Rectangle©. A view of the market, divided in four segments grasping everything that serves the satisfaction of needs and wants. And we said that when it comes to the satisfaction of needs, the price plays a decisive role. For the satisfaction of needs, the immaterial value assigned to these products is crucial.

We named these four segments: Luxury, Premium, PremiumEconomy and Economy. The center ceased to exist for us. Since the first public introduction till today, almost 20 years have passed. For the implementation of a new view of the market this is a relatively short period of time. We are proud to say that our view of the market serves more and more often as basis for businesses for their positioning on the market. Whole industries have adopted the Waisted Rectangle©. The automotive industry which for instance has practically given up the whole middle class and now instead offers Luxury limousines, Premium cars often also called business class aside from its bread and butter models develops and sells upgraded PremiumEconomy models.

2007 was also the year where airlines started to exchange their three-class-structure through a four-segment-structure based on our Waisted Rectangle©. And we just recently read that the fashion industry realized that the fashion market also functions according to the view of the Waisted Rectangle©.

Fashion that is supposed to satisfy needs and fashion that is supposed to fulfill wants. There is Economy and PremiumEconomy on one side and Luxury and Premium on the other side. The success business enterprises such as H&M, Zara and C&A have achieved in the past few years has certainly contributed to the fashion industry giving up the long propagandized three-class-theory, where the center of the market was the comfortable segment for people who were not able to really decide what they actually wanted to be.

Bear Stearns Bailout? Would Its Shareholders Agree?

2008-03-17T18:33:00.000-04:00

Question: Did the fed orchestrate a bailout of Bear Stearns or provide a huge subsidy to J. P. Morgan, Chase?

Once again, the current administration, the world's cheerleader for private enterprise has provided a huge taxpayer subsidy to a giant, private bank. There's enough public information out there to raise some serious questions.

Two days before the announcement of the proposed deal, the Fed offered to extend enough credit to Bear Steans to give it one month to stabilize its situation.

Two days before the deal was announced Bear Stearns stock was trading in the vicinity of $30 per share. This was the last publicly traded price, arguably the best indicator of value.

The proposed deal includes massive Fed guaranties to protect the purchaser against unforeseen liabilities.

To the extent that the value of the enterprise is in excess of the $2 per share price, the Fed has orchestrated a transfer of wealth from the Bear Stearns shareholders to the shareholders of JP Morgan, Chase.

By offering to swap treasury securities for the lower rated debt that undermined Bear and is threatening other Wall Street banks, is the Fed guaranteeing an indeterminate amount of liabilities? How much is the Fed worth? What is the extent of this exposure in the financial markets?

What is the public benefit from the Fed's actions? Phrases like "insuring the stability and orderly functioning of the financial markets" need to be explained.

Has our government considered guaranteeing the mortgage exposure of homeowners with sub-prime loans? Why not? Are homeowners more culpable for their excess borrowing than the financial wizards who constructed the sub-prime securities and derivatives, or than those who traded in these instruments?

Please send me your views.

You’ve Invested Heavily in Building Your Brand: In Bad Times, Your Brand Can Protect You

2008-03-17T14:59:00.001-04:00

Reading daily about the economic downturn? Sales and profits figures slashed? Government bailouts, cutbacks, layoffs and facilities closings? Well, the best strategy may not be to cut and run.

Following the herd can be dangerous to your brand, and to your business.

While you were growing your business, you invested heavily in building your brand. Beginning by defining your business’ core values and devising your strategy for communicating these values to your customers through every aspect of your business, you offered your consumer a clear promise of the products, services, experience that would bear your label. If you were successful in delivering on your promise, the consumer rewarded you with purchases and loyalty.

In bad economic times, your brand, your most precious, off-balance sheet asset, might very well be your best protection. So, before you rush in and indiscriminately cut costs, first carefully examine the health of what you’ve created. In those instances where the euphoria of seemingly endless good times induce you to spend opportunistically, diverging from or ignoring your original branding strategy, you might indeed find costs worth cutting, or business lines that might best be divested. But, where your investments yielded a strong brand foundation, you should certainly move to protect your brand and if you have the means to invest, enhance it. Consider that there may be no more advantageous moment to build your brand than the moment that your competitors are weakening theirs.

Reacting to the news reported in the general media, may also mean that your timing is off. Often, by the time the economic data is disseminated and reported by the press, the economic problems may be well under way and the moment to take aggressive preventative measures may have passed. Limited access to timely financial data and reliance on the pundits means that many mid market companies are always relegated to playing catch up ball.

Across the board cut backs in business spending and investment may in fact exacerbate the severity of the decline. Contractions in business activity are opportune moments to re-examine the basic principles on which the business was built, to critically evaluate the business’ relationship with its core customer, and to take action to strengthen those relationships.

Brand driven businesses have unique relationships with their customers; the customer relationship is a deal between the brand and the customer, in which the brand makes certain promises and the customer remains loyal so long as those commitments are met. The core of the brand-customer relationship is trust.

While exercising caution in anticipation of a downturn in business is surely warranted, one of the reasons why this strategy may not be best for smaller or medium size businesses is that by the time we acknowledge the problem, it is well under way. Limited access to timely financial data and reliance on the pundits means that many mid market companies are always relegated to playing catch up ball.

Particularly after long periods of economic growth and business expansion, a business would do well to ask: Have we remained true to our core principles? Have we clearly articulated to our customers what we stand for, and, have we consistently delivered on our promise?

A variety of tactics are available to businesses of all sizes to develop the data necessary to answer these questions. Larger and flusher businesses may commission professional, quantitative and qualitative market studies to ask their customers “how are we doing”. Through questionnaires and focus groups, the marketing professionals can develop a fairly accurate answer to this question.

But as New York’s Mayor, Ed Koch who was famous for walking down the streets of his city and asking his constituents, “How am I doing” taught us, asking customers directly often yields excellent results. Businesses too can develop fairly reliable information using anecdotal techniques. Conversations with customers both before and after a sale is made, with suppliers and others integral to the success of the business can yield significant and reliable information. In fact, a personal interaction with your customer not only gets you access to information, but also demonstrates to your customer that you care, and that’s always good.

Once this information is collected, management should implement a program of discussions, with appropriate executives, to digest the information and determine where the business may have strayed from its core message in ways that might have been hidden or overlooked during the expansive years.

With the business leadership properly focused on the brand message, the ways in which it was successfully delivered and the areas in which it might have been obscured or worse, overlooked in favor of a more opportunistic tactic, management is equipped to develop corrective measures.

Quality control, merchandising, design, selling strategies and marketing all need to be critically examined. And where improvements can be made, they should be implemented. But the common theme in all of this is a laser like focus on the customer: What have we promised, what may he expect, how can we better deliver, how can we make him aware of our commitment and earn or re-earn his trust. Truly, in bad times as well as good, the customer is key.

If new products or service lines were added that are not in keeping with the brand promise, these should be cut or scaled back. Even when the short-term effect of these cutbacks might reduce near term revenues, the moderate to long-term benefits or enhancing focus, investing in the further development of core businesses will outweigh the short term pain. In some instances, where these diversions from the business’ core message have been well enough developed to be of interest to industry partners, a sale or divesture of these ancillary businesses might make some sense.

It is very tempting to cut prices, staff, and facilities to protect the business. But more often than not, these cuts will reduce the business’ flexibility to respond to market demands. Ironically, this loss of flexibility to innovate to meet new market conditions will often handcuff the business and commit it to stay with the very strategies that led to its problems. And while price cutting alone might reduce inventory and increase or maintain cash flow, it will also reduce margins and drag an up market business into the domain of its lower priced competitors, frequently increasing the downward business spiral. One need only look at the pernicious effects of end-of-year sales in the department and mass retailer sector to appreciate this phenomenon.

In an ideal world, a brand driven business would keep to its message, secure its market niche and continuously enhance its bond with its customers. But this is not usually the case. Periods of rapid growth and expansion often present tempting “opportunities” to quickly enter new markets, increase product categories and expand the business. When the economy or business shows signs of faltering, the smarter brand driven business is one which appreciates the value of its brand, understands how it is a strong, yet fragile, engine for stability and profitability, and takes measures to protect it.

U.S. Universities Rush to Set Up Outposts Abroad: Are We Leaving Our Students Behind?

2008-03-08T12:01:00.000-05:00

In February of this year, The New York Times ran the first of a series of articles, which will explore the expansion of US Universities abroad. In describing the global expansion plans of New York University and other prestigious U.S. institutions of higher learning, the article observes, “The American system of higher education, long the envy of the world, is becoming and important export as more universities take their programs overseas.” Is this good US trade policy?

When reading this long and detailed article, I was surprised that in all the discussion of the pros and cons supporting and detracting this emerging education initiative, there is not one mention of the interests of current or future generations of US students. Equally sad, none of the educators quoted in the article seems to consider the impact that this policy of educational globalization will have on American citizens workers.

Instead, the discussion among the education establishment seems more narrowly focused on the prestige and reach of American universities, on becoming better known, better funded, gaining more powerful alumni, and providing more opportunities for faculty to teach abroad. It’s as though the institutions, many of which receive vast amounts of public funding and support, exist only to enhance themselves. Have our students been lost in the equation?

One has only to tune in to any of the political debates this year to hear or read about the outflow of US jobs to foreign outposts. Traditionally, the enlightened response to many of these concerns has been that we need to do a better job of educating our workforce, to prepare our people for more highly skilled, and typically better paying, careers. The trade policy notion has been that the loss of low paying jobs is not in and of itself a bad thing, if it is offset by the creation of better paying jobs and the creation of a work force which can meet these needs.

But now our educators, in the rush to join the Globalization juggernaut, would like to export our educational know-how, and disperse, world-wide, the knowledge, skills and training that have long been seen as the foundation upon which to build a better American workplace and to elevate the American standard of living.

While enriching the educational institutions with large contributions, new campuses and global centers, do we risk cheapening the learning and degrees that up until now have helped generations of American students compete in the world economy? Moreover, are we transferring valuable educational know-how without recognizing its economic worth?

Perhaps it’s time to take a closer look at our nation’s education policy, to understand its relationship to our nation’s ability to afford good lives to our people and continue to compete in the global market place. We need to give this national resource the respect it deserves and treat it as a precious resource.

What do you think?

Starbucks: Howard Schultz Wants A Little Private Time

2008-02-03T16:13:00.000-05:00

Bravo, Mr. Schultz.

Instead of delivering a detailed and long list of his planned turn-around initiatives, Howard Schultz , the returning CEO and Chariman of Startbucks surprised most financial analysts by announcing that the company would provide less, not more, information about its initiatives and short term results during what he acknowledged would be “a difficult” turnaround period. Mr. Schultz also announced that Starbucks would discontinue providing same store sales figures to the street and would no longer offer earnings guidance.

In adopting this strategy towards the financial community, an approach that is widely considered to be risky to his longevity as CEO, Mr. Schultz acknowledges the competing imperatives between running a business with a long term brand-building point of view and those suggested when attempting to satisfy Wall Street’s acknowledged short term appetite. The financial community thrives on minute-to-minute predictions, quarter to quarter results and it is not uncommon for an analyst who may never have sipped a cup of coffee in a European café to offer quick solutions for Starbucks’ problems.

Recognizing the difficulties of having the financial community hovering over his shoulders during the turnaround, Schultz seems to have opted to pull a curtain around his company, focus his attention on what needs fixing in the business and address those difficulties. He wants a little privacy and the opportunity that this would give him to implement his plans. This is smart. He wants and needs the flexibility to intelligently experiment with new approaches, to examine the company’s core strategies,to right the company’s course to achieve those strategies, and possibly to make a few mistakes along the way.

Schultz also seems prepared to take advantage of the company’s movement into the international markets. While reducing Starbucks’ exposure to the domestic, US, market and closing underperforming assets, Schultz wisely looks toward the international markets to maintain his growth momentum. If successful, Starbucks will be stronger in both the US and abroad.

While it is by no means certain that Schultz will succeed, shareholders who remain patient will at least have the opportunity to experience whether Schultz' vision, executed without detours to accommodate short term financial community exigencies, is as correct as it was when he originally built the company. And whether or not he is able to turn the company around, Starbucks will have been given the opportunity to understand whether its core brand strategy, its central theme that there is a market for a unique and luxury coffee experience, has can provide the foundation for a successful business.

It’s Not Your Brother’s New Car That Threatens Your Family Business

2008-01-21T17:58:00.000-05:00

Economic slowdowns stress the family business in unique ways. These challenging times test the family’s ability to distinguish between family and business issues. Failing this test may not only elevate tensions in the family, but may also hurt the business.

The family business is a unique vehicle for conducting business. It combines business and family models of organization. While successful businesses are based on some form of meritocracy, where the best rise to the top, successful family models all emphasize the value of nurturing and protecting the weakest family members. While successful businesses separate between the business and private lives and promote the concept of not bringing one’s personal problems into the workplace, the family business often has a kind of transparency, which blurs the line between these two worlds.

But recognizing that these two worlds, the family and the business environments, are and should remain separate is critical to the proper functioning of the family business. Just because you know the intimate details of your partner’s lifestyle doesn’t mean that these items should be placed on the corporate agenda.

How the business’ shareholders and managers spend their money have no impact on the performance of the business. And the financial needs or desires of its executives should not impact compensation and other remuneration decisions. If family members focus on the business needs and on the contributions of its managers and owners, they will enhance their abilities to guide the business through tough times.

Deal Fees Under Fire Amid Mortgage Crisis: WSJ

2008-01-17T11:49:00.000-05:00

Letter to The Wall Street Journal:

I found your article in The Wall Street Journal to be very interesting. However, while you touch upon many of the factors that fueled the lending excesses, I question your emphasis on the role that the fee structures in the lending and mortgage industries played. To be fair, you discuss both the fee structure in these industries and the subject of executive compensation, which I believe to be two distinct problems. I am only addressing the first.

The core of my disagreement with your emphasis is that I believe the problems are systemic and you favor an approach which searches for the culprit and assigns blame. Unfortunately, most of the blame under your analysis will fall on the "little guy", the mortgage broker who "pushes" his product on the under informed borrower and walks away with a commission for a loan that is likely to be in default within months or years, at best.

The problem in the industry is that there are inadequate controls over the sales people selling the product, in this case money for mortgages, or securities that bundle mortgage obligations. This is aggravated by the fact that the credit decisions are either not properly made or the lending criteria are relaxed or ignored. Except in the case of fraud, the "culprits" are really the lending institution executives who make lending policy and credit committees, not the sales people. Every business man knows that if he doesn't enforce limits on his sales people, either by way of minimum prices below which a product can't be sold, or explicit authorization which must be sought, it will only be a matter of time before his sales people put him into insolvency. Credit checks and controls conducted by typical businesses are never conducted by the sales force. In fact, the better and proactive your sales team, the more likely it is that management will have to be vigilant and on occasion reign them in. This is a healthy dynamic of a system with adequate checks and balances.

We have moved to a financial system that requires an endless supply of money, and a high level of liquidity to survive. You correctly note that mortgages used to be held primarily by the originating entity. With the birth of techniques for continuously re-cycling capital, greatly promoted by the Resolution Trust Company in the wake of the Savings and Loan crisis in the late 80's and early 90's, a lending institution which securitizes and sells off its loan portfolio, creates a virtually never ending supply of capital to make additional new loans. This liquidity means that money chases product and inevitably leads to a lowering of credit criteria until we find ourselves in a crisis.

Two years ago, I had an employee in Virginia Beach who was a foreign national, employed on a temporary work visa. One day he proudly announced that he purchased a home and was able to walk away from the closing with $2,500 because he had obtained a mortgage that was $2,500 in excess of the cost of his home, including the mortgage costs and fees. I congratulated him and told him that he was witnessing the end of the local housing boom. He is now in back in Israel, his house recently sold in a foreclosure sale for considerably less than his purchase price. His mortgage broker was a genius; his banker was the idiot. Unfortunately, you and I will bear the tab.

Who's Sub Prime Crisis is it, Anyway?

2008-01-16T16:27:00.000-05:00

As the recent coverage of the impact of the sub prime crisis on the financial community makes clear, there are two distinct sub-prime crisis surfacing in this country: one in the real estate, home ownership, market; the second in the financial community. One is affecting average American households, the second is affecting larger financial institutions which often placed huge speculative bets using shareholder money. It is important not to confuse the two, particularly in the public debate that will inevitably frame the basis for government policies aimed at ameliorating this situation.

The homeowner sub-prime crisis is reflected in the acceleration of residential mortgage defaults, and, if not addressed, will most likely become evident in the rise of personal bankruptcies and other indicia of personal hardship. Government policy in this area should be targeted to determine if, and to which constituency, interim relief measures, like freezes on adjustable mortgage interest rates, will help fix the problem. If it is determined that a class of homeowners is likely to be able to support their mortgages if existing, pre-adjustment, rates remain intact, then either voluntary action by the lenders, or government legislation to accomplish a temporary freeze in these rates would be desirable.

The other sub-prime mortgage crisis is the mounting pile of losses being experienced by the financial community which results from ill conceived, highly speculative or little understood bets that these institutions placed on the performance of the residential mortgage sector. When considering whether remedial actions are warranted to bail out these institutions, we should not forget that on the road to placing these bets, these institutions racked up huge profits from the fees and other charges they received for arranging these bets. At a minimum these fees should be approximated and taken into account before anyone determines that these institutions deserve a publicly funded bailout.

We would also do well to remember the financial community's pleas for public assistance the next time we, as a society, are asked to consider, welfare reform, assistance to public education, help for the indigent and other public assistance projects.

Consumer Goods: SchmidPriessler 2008 Forecast

2008-01-14T18:52:00.000-05:00

Use caution in regards to growth of consumer goods turnover in 2008

Cost of energy, development at foreign exchange markets, exploding costs for health care, pension provisions, research and education, costs for fighting poverty, epidemics as well as terrorism, war and the consequences of war, rising costs for public service, securing and expanding infrastructures, fighting ecological destruction, development of new energies, protecting what is still whole in nature, fighting and lowering national debt – all of these problems are prevailing equally in countries of the First, Second and Third World and thus burden financial powers. People have to dedicate considerable financial resources to these problems and this is going to significantly affect consumption in the next year. Everywhere in the world even if there is a positive development of the global economy taking place. It’s not that consumption is going to collapse under these general burdens, but it is still going to change and we assume that it is going to change more and more sustained than many think during this time of a positive general mood.

Wants and needs are going to get even more distinct outlines than has been the case in the past. Everything that can’t be clearly assigned is going to continue to disappear.

Meaning, people are going to purchase more prudently. They are going to use their considerable knowledge during selection and purchase of products and services.

Surely, there are needs that can be met, in regards to quality, with simple and modest products and services, especially through automated facilities. Price can be adequately low there. The consumer has long gotten used to buying packaged products from a carton or simple shelves. When it comes to satisfying needs, the advantageous price is an important sales tool. This is why discounters are going to be of even more significance in the near future.

However, when this is about fulfilling wants, satisfying wishes, then people are always willing to spend more money. In economically tough times this may be even more so than in good times. But even for products and services which do not serve fulfillment of demand it is imperative that the relation of the value of the product to the price has to be evident. Far more critical than in the past, people are going to watch out for a comprehensible immaterial value of Premium and Luxury goods and services when fulfilling wants and satisfying wishes. Most of all this means brands dominating the premium and luxury business have to offer value.

It is going to be problematic for those suppliers of products and services which are still present in the traditional and disused “center” of the market and without adequate substance and yet are offered as premium and luxury goods and brands.

The consumer goods markets are going to shrink. But not the exterior outlines on the upper and lower edges of the individual markets or industries, but from the center.

If your planning includes growth for 2008 and the coming years you should rely less on the past but rather align your plans for growth with the possibilities, your products and services offer in regards to a clear profile.

Money available for consumption is becoming more valuable globally and the offer has to be designed correspondingly. If you are aware of this and look around accordingly, you are going to realize quickly that considerably more has to be done then just economizing and lowering costs. In order to keep the offer valuable and if necessary create a more valuable offer one has to be willing to invest into the market.

What we should wish for in 2008

What we should especially wish for in 2008: Regaining professionalism.

In general, there is plenty of knowledge. Dwindling professionalism of economic players costs the economy billions of Euros or dollars every year. The crisis in the money economy, unsatisfactory results in the automotive industry, the failure of many politicians, countless professional ‘blunders’ which can also happen to executive consultants, just to name a few ‘hot spots’, are attributable to dwindling professionalism. The deterioration of professionalism stems from a destruction of time gone wild. One gets increasingly the impression that he who has no time is good, important and in demand. One could almost think that people are trying to not have time, because they expect their prestige to increase and they would like to give the impression that without them nothing is happening. Recently, a German manager tried to justify his income amounting to millions by saying that, in general, he is working eighty (80) hours per week. Nobody called for his dismissal even though there is no more convincing evidence for inaptitude than a manager who is supposed to lead, working eighty hours per week. How sick is a society that does not feel that this is wrong, that does not feel it is running the risk of being lead by overstrained managers?

Professionalism has got something to do with maximum performance. In order to render a first class performance one has to have the ability to concentrate and bundle one’s energy to utilize one’s time at full capacity.

Those of us, who ask ahead of a conference why it is taking place and what the expected result is going to be, do have spare time. Only those of us who can express what is essential in only a few words, have time. He, who can live without an appointment book filled to the brim, has time. Only those of us, who can distinguish ability from inability and meaning from nonsense, do have spare time.

To have spare time means to keep calm and to keep the distance.

If we want to regain professionalism we need time to calmness and distance. And we have to fight a reckless fight against everything that robs us of time and calmness and against everything that curtails the distance and makes us feel cornered. If we want to regain professionalism, we need to eliminate the racket around us in order to get in touch with our inside, to listen to ourselves and to connect with our soul.

True professionalism requires harmony of body and soul. The New Year is still young and fresh enough to wish for something from the beginning. Surely, not just ‘something’, but the most important thing that is going to make us successful: Professionalism. Today there is hardly anybody in the position to say he owns his own living space and that he is always able to keep the healthy necessary distance so his environment. In this respect we are all invited to decidedly advocate reclaiming professionalism. He who has the time and the calmness, who is able to keep the distance, does not have to search for new management techniques and rules because he is going to be able to put lots on the right track. For us executive consultants this means that we are going to be able to be more of a partner in dialogue for our clients, instead of gathering broken pieces.

Artist Owned Art Galleries: Good For The Public, Bad For The Artist

2008-01-14T10:28:00.000-05:00

This morning NPR ran a story on the proliferation of artist-owned galleries in New York. Unfortunately, this phenomenon has frequently coincided with the end of a booming economic cycle. As a collector and long-time observer of the art community, I am delighted to have more venues in which to get a glimpse of contemporary artists are creating. But as a person who also cares about the artists, I am worried that more artists may be hurt than helped by this phenomenon. Generally, it’s a bad idea for the artists.

Running an art gallery is not an extension of creating art. And although artists do, and should, take an active role in promoting their careers, running a gallery is a business, and a risky one at that. With art fetching well documented record prices and rents in cities like New York soaring, the risks of opening a small art business today far outweigh the potential benefits.

Successful galleries do far more than display and sell art. When not on the selling floor, the successful gallerist is busy visiting artists’ studios, networking with collectors, with Museums, critics, scholars and with other gallerists. He is seeking exposure for “his” artists as well as to place their work in important exhibitions and collections. And some successful gallerists contribute to the scholarship that is a necessary ingredient of a healthy art market. They produce catalogues, curate shows and lend works to other exhibitions.

The successful gallerist is an arbiter of taste, an expert whose expertise is sought out by those who want to build top tier collections, by those who wish to purchase their first work, by curators and by critics. If the gallerist is successful at building his brand, he has the power and authority to influence trends in scholarship, not only in collecting.

Not to be overlooked, the successful gallerist is an accomplished businessman. He understands the need for adequately capitalizing the gallery business, for developing a suitable inventory, and for merchandizing his business. He maintains a consistent level of taste, interest and variety on the gallery walls and makes his gallery a destination, which will always be interesting for the public to visit. Lastly, he controls expenses, watches the payroll and pays the rent on time.

Surely there is room for a small number of artist galleries. AIR Gallery and other collective efforts have a long and distinguished history and have contributed to the art community and to the participating artists. But it makes me very nervous to think that young artists will increase the already significant investment they make by committing to a career in art but assuming the additional risks associated with running a small business in New York.

Danger: Tightening Your Belt in Lean Times Might Lead to Fatal Undernourishment.

2008-01-13T20:45:00.000-05:00

The concept of “belt tightening” is integral to the vocabulary of economic bad times. Whether we call it a recession, a slow down or simply a hic cup, the press is rife with examples of belt tightening: consumers are tightening their belts and spending less, business are tightening their belts and reducing capital expenditures, cutting back on expansion plans or laying off employees. On the surface, it makes good sense. If you have less, spend less.

But for a brand driven business the impulse to tighten its belt to protect against economic adversity may be bad medicine. It very well might make the business more susceptible to the anticipated reduced economic activity; it might even cause the business to decline more precipitously than had it spent some money intelligently.

Roaring economic times disguise many strategic mistakes. We get sloppy when sales grow quarter after quarter, and we get cocky when virtually everything we do seems to result in increased sales. Frequently, we lose sight of the market that we originally targeted and inadvertently venture into new, less profitable, and more competitive markets. It’s a no brainer. Everything we do bears successful results.

But in less frothy times, consumers become more discerning. As less cash is available, consumers must make choices and whether they choose your brand depends on what they think of it.

It is precisely when these symptoms begin to surface that a brand driven business would do well to audit its brand strategy: to conduct market research to confirm its understanding of what associations its consumers make with the brand. What values do consumers associate with the brand: luxury, value, reliability, performance, comfort, rarity, exclusivity, and creativity? And how successful is the business in delivering on its promise to its consumers? Has the brand earned the consumer’s trust?

While these kinds of studies cost money, the information they provide is invaluable. It is critical to a brand-driven business’ ability to successfully navigate a difficult economic environment. While the competition’s knee jerk reaction to slash costs might appear to reduce the business’ vulnerability to reduced business activity, this strategy has the perverse effect of locking the business’ into what might be a failed strategy, a strategy conceived in flush times with little or no attention to detail. Drastic cost reductions reduce flexibility. When coupled with a lack of information about the brand’s current relationship with its consumers, these reductions raise the ante, and in effect commit the business to an all or nothing bet that its failed strategy will help it succeed in tough times.

I’m not recommending overspending or spending indiscriminately as bad times approach. Nero fiddling as Rome burned is a strong enough image to indicate the foolishness of this approach. But, I do advocate adapting to changing economic facts on the basis of current market data and re-examining where the business actually stands in relation to its brand equities. In weakened economic times, spending a little money can save a lot more

Starbucks Redux? Not If You Get a Wall Street Fix

2008-01-12T22:16:00.000-05:00

Joe Nocera’s New York Times article, written in the form of a memo to Starbucks Chairman, now CEO, and Founder, Howard Schultz is rich with skepticism as to whether Starbucks can be quickly turned around, coupled with advice on how to do it. Unfortunately, while advocating that Shultz revamp many of his strategic assumptions, Nocera incorrectly adopts many of the very same strategic assumptions that led to Starbucks’ demise.

Mr. Nocera makes the fundamental error of assuming that going back to the brand’s core equities means doing things the same way they were previously done. This is a wrong assumption. The smartest and best brands have always adapted their tactics precisely so they could maintain consistency and adhere to their core values! Recognizing shifts in consumer tastes, likes and dislikes is key to growing a business and in a brand driven business this means constantly adapting and sharpening the business’ tactics to maintain a consistent and proven set of core values. Changes in tactics can support maintaining a consistent message.

Chiding Mr. Shultz to “com [e] to terms with the new competition”, Mr. Nocera assumes that a fight between Starbucks and McDonald’s is inevitable and should be joined. I’m not sure that this is accurate or wise. The fact that the competition between Starbucks and McDonald’s is now being written about is already a measure of the deterioration of the Starbucks premium brand. Engaging in this battle elevates McDonald’s and will do little for Starbucks. Why would Starbucks or any premium player choose to compete against one of the very best and most successful mass marketers? Rationally, a competitor would avoid that competition. I haven’t read about any battles looming between Ralph Lauren and Old Navy.

Mr. Nocera applauds Schultz’ determination to focus “laser-like, on the consumer”. The applause should be reserved, however, until we see what Starbucks learns from this focus. Focus, by itself will not lead to a fix.

The real task is to ask the right questions and look to the consumer (and the market) for the answers that imply a strategy. The core mission is to deliver a premium coffee in a premium café environment. The questions are: What does today’s premium coffee drinker really want? What ambience should the stores have to attract and retain today’s consumer, who is likely to be better traveled and exposed to a wider variety of premium coffees than the Seattle consumer who initially supported the business? What does intimacy mean in this age of wi-fi, where the backdrop sounds of keyboards clicking has replaced the woosh of paging through newspapers and magazines?

Ultimately, the answers will come from market analysis, which poses thoughtful questions about the consumer and the market. I don’t know what this consumer would prefer, but the way to find out is through careful market analysis, not shooting from the hip.

Lastly, Mr. Nocera also rushes to conclude that Starbucks “insane growth” is a principal cause of its problems, that it needs to “drastically improve the food” and that the “stores should be clean and bright again”. Who says? If Shultz is to focus on the consumer, the focus should be on today’s consumer, not the consumer targeted when the business was started in Seattle.

And is Starbucks’ insane growth truly the enemy of intimacy in particular stores. Again, I’m not sure. Why should this be true? If you create an intimate “coffee café” environment in two, 3,000 square foot, stores, why can’t you replicate that environment in 1,000 stores? You can, so long as you don’t grow the individual stores.

Although the financial markets are looking for a quick fix for Starbucks, I suspect this is not in the cards. It took many years of neglect to bring the brand down to its present level. Maybe we should give it a couple of years to regain its stature.

Is "Hillary" the Clinton Brand in 08 or Is It "Hillary & Bill"

2008-01-11T17:44:00.000-05:00

Ambiguity has its place in life but it can be the kiss of death for a brand. This morning the Hillary camp sent Bill to speak on Al Sharpton’s radio show. His mission: to explain what he meant when he characterized Barrack Obama’s claim that he has had a consistent anti-Iraq-war position as a “fairytale”. Bill’s explanation: I stand by what I said and I said what I said.

Once again, Hillary seems to call on her husband to patch up the “nasty” problems generated by her campaign. For a person who is making huge efforts to illustrate that she is her own person, who is asking the electorate to try to get to know her, she is making the task of discovering the true Hillary very difficult.

The Hillary political strategists could learn a lesson from prevailing theories of brand strategy. The most important tenet of brand building is consistency of message. If you want people to buy your product, you must tell them clearly what it is your selling.

It’s for the Hillary strategists to decide whether the message is “elect Hillary and you get Hillary” or whether they prefer the two for one approach. But once this determination is made, they should rigorously stick to this message, not only in the campaign’s rhetoric but also in its actions.

If Bill is continuously called upon when the going gets tough, why should we believe that it would be Hillary who deals with the country’s problems, if elected

Retailers Limit Purchasers...Give Me a Break!

2008-01-10T13:28:00.000-05:00

Today’s New York Times ran a story that luxury retailers are limiting purchases of designer handbags to three per customer in an effort to reduce gray market traffic in these bags. Simply put, gray market activity is the buying and selling of authentic trademarked goods through illegitimate channels of commerce or in markets other than those into which the goods were initially sold. In this case, the resale of these legitimate bags in Europe and Asia by sellers who purchased them in the US.

Appearing on the same day as the financial press reports weaker than expected December retail sales, and the consensus is building that we are in a recession, this selling tactic reveals a lame attempt by certain luxury brands, and their retailers, to create “exclusivity” and “scarceness” in the market, where these goods are plentiful. Have they concluded that it's cheaper to build brand equity with marketing ploys rather than to follow through on their core promise to the consumer that these luxury branded goods are truly in limited supply? Perhaps in the short run this might work, but long term this will be costly to the brand.

Not that this artificial limitation of sales is likely to be effective. Does anyone really think that the Saks or Neiman Marcus in NYC is likely to coordinate with their sister store in White Plains or Bal Harbor to prevent a willing customer from buying more than the permitted number of bags? And, has no one ever asked a friend to purchase something for her if she is really desperate to have it?

Manufacturers have always been ambivalent towards gray market activity. While distributors complain that goods flooding their market from neighboring markets is damaging to their business, in the case of gray market activity, all goods are authentic and come from the same source (branded manufacturer). All of these sales, legitimate and gray market contribute equally to the brand’s bottom line. Only very few, long term and serious brands (think Hermes, Ferrari), have ever genuinely tried to combat gray market activity.

My guess is that this tactic of articulating policies to limit purchases, was conceived by the marketing gurus and are a desperate attempt by the marketers to create the illusion of exclusivity for products which are mass produced and widely available. It’s like the art dealer who tries to create a buzz by hiring five limos to park outside his opening but the clientele are no where to be found inside. In the long run, it’s far better to limit production or to deliver to a market only those quantities of products that are projected to meet the demand in that market. Building a brand is long term and and intensive and the rewards are likely to be enduring as well.

O Starbucks: Where Art Thou?

2008-01-10T10:27:00.000-05:00

I stopped into a McDonald's this morning and couldn't help thinking about their announced coffee assault on Starbucks and the Starbucks' senior management shakeup that this has brought about. It's truly amazing to think that Starbucks now plays in the McDonald's arena. My colleagues at SchmidPreissler noticed this phenomenon in the Spring of 2007; regrettably, for Starbucks, they were right (Please read link at right of page: "A Part of Starbucks Luster Disappeared...."). Starbucks diluted its brand equity and its coffee is tasting rather weak.

More than any financial statistics, or quarter to quarter comparisons, the fact that Starbucks openly admits to any reaction to the McDonald's initiative is a powerful indicator of how much damage the brand has sustained. There is hardly any similarity between these two giants of retail food distribution: the decor evokes a radically different ambiance, the service (if you can call McDonald's treatment, "service"), the product range and presentation. It is obvious that when the initial strategies were created, all of these were targeted to different audiences. Yet they are now poised for a head to head battle to capture the coffee drinking public. The setting is akin to Bentley reshuffling its management to get ready for a fight with Kia's launch of an economy hatch back!

I'm not suggesting that Starbucks shouldn't re-examine its tactics and try to regain its niche. Surely it should. But how did we get here?

When a company enters the public company arena, it takes on an additional set of challenges, not present in the private company sector. Surely, there are many financial benefits. But in the global economy of today, public companies are expected to continuously grow, to expand and to increase sales and profits; they are expected to protect their share price, not only their market share.

Not infrequently, the tension between doing what's good for business and pleasing the investment community, limits the company's flexibility to respond to market conditions. How does a company stay true to its original vision. to its brand equities, when it is pressured to endlessly open store after store, increase its product assortment, emphasize uniformity and consistency, and do away with some of its less economic attributes to illustrate that it is vigilant in protecting its bottom line. For Starbucks, for example, this meant losing the aroma of freshly ground beans and moving towards pre-ground coffee delivered in pristine vacuum packed containers. How do you explain to Wall Street that "smell sells"? How do you explain to Wall Street that Brand Equity drives real value?

It will be interesting to watch Mr. Schultz as he tries to recapture the Starbucks of his dreams and resuscitate it in the multi-national, commoditized, body that it has become.

The Brand is the Message: What Hillary and Starbucks Have in Common

2008-01-09T16:23:00.000-05:00

Today’s Wall Street Journal ran a story (reproduced in prior post) chronicling the story of legendary Starbucks founder and Chairman who is re-assuming the office of CEO of Starbucks to return the company to its origins; and Hillary Clinton confessed to her supporters that New Hampshire voters have taught her to listen again and “find her voice”. Asking “what went wrong”, the Wall Street Journal concludes: “The details vary but, in each case, companies with longstanding records of success are acting as though their trusty playbooks suddenly have vanished.” Both Hillary and Starbucks have panicked and have resorted to shotgun tactics of “try anything and everything” to reach their market.

The real problem is not their playbook or tactics; the problem is that they have ignored, or forgotten, their brand equity: their core message. They have abandoned the message which enabled them to differentiate themselves from their competition and encouraged their audience to trust their message.

At its inception, Starbucks dedicated itself to emulating the European coffee house experience and to bring that experience, service, ambience, smells and coffee to its American consumer. Coffee should not only be of luxury quality but the experience of drinking it should be relaxed, reflective and indulgent.

But the pressures of being a public company and the quarter over quarter growth objectives, which this implied, led Starbucks to embark upon a program of international expansion and diversification of product and services, that took the company further and further away from its core. You can’t deliver the European coffeehouse experience to Europeans; you must Americanize it. Starbucks was no longer able to fulfill its promise of a recognizable coffeehouse experience to its loyal consumers and its consumers reacted in the same way anyone would react to a broken promise: they lost confidence and their loyalty diminished.

Similarly, Hillary has not consistently kept to her promise of being a bright, liberal, independent and accomplished woman in politics; instead, she has adopted the “vote for one of us and you get two Clintons” message, and increasingly turned to her husband, Bill, to bail her out when the going gets tough. We vote for a political candidate because they stand for something we admire, or to which we aspire. If we are not sure what they stand for, we are less inclined to support them. If as a loyal supporter, you were invigorated by the opportunity to vote for a talented and independent woman for public office, you became confused, if not disillusioned, by the prospect of also (re)-electing Bill hiding under his wife’s skirt.

While it might seem a bit crass to introduce brand strategy lessons into the world of politics, I think the message is clear: in both arenas, the goal is to develop a relationship of trust with your audience; it’s to develop a clear, consistent message which reflects what you stand for and differentiates you from the field of competitors. Everything you do, your statements or speeches, your campaign tactics or the manner in which you sell your goods, your political team or your executive team must be consistent with your message. When you relinquish this clarity of message and behave inconsistently, you lose your audience and become one of a large group of competitors.

As Economy Slows, Reputation Takes On Added Meaning

2008-01-09T10:34:00.001-05:00

From The Wall Street Journal, January 9, 2008

By: George Anders

This article provided the stimulus for my post of even date.

As the nation's economy cools, some well-known companies are stumbling in painful ways. Starbucks is switching chief executives and struggling to reconnect with customers. Circuit City Stores is trying to right itself amid skidding sales and a more than 70% drop in its stock price last year. And the pharmaceutical industry seems to have lost its ability to develop meaningful new drugs.

What's gone wrong? The details vary but, in each case, companies with longstanding records of success are acting as though their trusty playbooks suddenly have vanished.

Rushing to the scene are lots of experts with advice about sustaining or repairing a corporate reputation in tough times. Their tips may seem obvious, or even preachy in boom times. But when the economy stalls, nervous bosses are more eager for help. Besides, this is too alluring an area for management consultants and public-relations specialists to ignore. Reputation consulting offers plenty of face time with CEOs, as opposed to less glamorous work counseling operating units.

Among the advisers now in demand is Reputation Institute, founded by Charles Fombrun, a former management professor at New York University. The firm's active client list has doubled in the past year to 100 companies. It has offices on four continents and 60 employees, up from 37 a year earlier.

"Mending reputations can't be done overnight," says Kasper Nielsen, Reputation Institute's managing partner. He takes companies through a seven-step analysis of what's causing their reputation to suffer, followed by a close look at which constituencies -- employees, customers or investors -- are affected and what they are seeking.

Then it's time for the hard work of figuring out what aspects of company conduct are helpful and what needs to be fixed. In many cases, Mr. Nielsen advises turning to outsiders -- such as environmental groups or corporate-governance scholars -- to validate progress if a company's own assessments have lost credibility.

In extreme cases, Mr. Nielsen says, a company's hopes of recovery may depend on ousting the top executives who brought on the problems, so that new leaders can make a fresh start.

"A lot of companies care about reputation only after a crisis hits," Mr. Nielsen says. "Then they want to know, can you fix things? They don't integrate reputation into their everyday processes. That's dangerous. You have to do a lot of things right to build up a reputation platform."

At Tyco International, Edward Breen inherited a corporate reputation in tatters when he became CEO in mid-2002. The company's previous chief, Dennis Kozlowski, had been ousted amid fraud allegations. Investors were nervous about Tyco's heavy debt load. Employees told Mr. Breen that the company's standing had sunk so low that they were too ashamed to wear Tyco logo shirts to their children's soccer games on the weekend.

It took about a year for a true recovery to take hold, Mr. Breen recalls. "Employee morale was my single biggest concern, aside from our liquidity issues," he recalls. "I was especially worried about our 30,000 front-line salespeople. That's a very tough job if you're embarrassed about your company. If they seized up, we'd be in deep trouble."

To address morale, Mr. Breen says, he visited dozens of Tyco facilities around the world and briefed employees about the company's new management, new governance structures, new code of ethics and its progress in debt refinancing. He made sure question time was at least as long as his prepared remarks, so that employees could feel personally engaged with the new boss.

Mr. Breen also said he avoided the temptation to promise a rapid rebound. "People saw how fast our reputation went down, and they hoped we could rise back as quickly," he said. "But you can't. It's a slower process, and in some ways, it's never-ending. This is a marathon, not a sprint."

An intriguing test of reputation maintenance is playing out these days at American Airlines, which is negotiating a new contract with its pilots. The carrier, a unit of AMR Corp., won major concessions from its pilots in 2003, when the airline industry was in bad shape. The pilots now are pressing for catch-up pay increases of as much as 60%, contending that management is getting rich as the industry revives, and that employees also should prosper.

American's pilots last year elected a hard-line new president, Lloyd Hill, who says his membership is "frustrated with management." Both sides say contract talks could drag on for more than a year.

Whether bargaining-table friction will hurt American's appeal to customers is anyone's guess. Pilots say they fear the airline's reputation could suffer if management snubs them. American spokeswoman Tami McLallen says she hopes such snarls don't arise. For her optimistic view to come true, American will need to persuade its pilots that burnishing the carrier's reputation is their best choice, too.

"Reputation is invisible, but it's an enormously powerful force," says Alan Towers, a New York adviser to companies concerned about reputation issues. He encourages CEOs themselves to assume the role of chief reputation officer.

A different approach comes from Richard Edelman, CEO of the Edelman public-relations firm in New York. In a recent public survey, his firm found that companies fared best when CEOs blended traditional high-level communications with peer-to-peer efforts, in which passionate customers and employees helped to tend to the company's image.

The Man with 800 Warhols: Is This a Club Worth Joining?

2008-01-03T21:54:00.000-05:00

Kelly Crow’s very well reported article in the January 4^th edition of The Wall Street Journal should be a wake up call for those racing to acquire their Warhol at any price and to those who take delight in the few they own. Why enter a market which is dominated by one goliath of a player who is on record as having virtually unlimited buying power and has stated his desire to own the best works without regard to price? The simple answer is it makes no sense at all.

The Mugrabi family has been collecting the artist’s work for more than 20 years. And they avowedly bring to the art market an attitude of unabashed commercialism, not one of connoisseurship. Often quoted in art market and Warhol-related articles, the family and its representatives speak about Warhol’s works in the language of commodity traders, not traditional art collectors.

So, what does the Mugrabi domination of the Warhol market mean to the average collector. I think it means, you better love what you buy, and buy it only because you love it. In the business world, one can’t make reasoned economic judgments when competing with a dominant and aggressive monopoly, and the art market is no different. There is little reason to believe that, over the long term, you will sell your dearly bought works at a significant profit.

One might reasonably assume that the Mugrabi’s already own a very significant percentage of the best quality Warhol works and that they will aggressively pursue those that come to market. This is likely to mean that better works will only be available at premium prices, prices which may be justified only when the buyer can amortize the excess of cost over value, over a large inventory of works by the same artist.

It takes a lot of chutzpah, or considerable naiveté, to knowingly compete in a rigged market. When Mr. Mugrabi sits front and center at an auction and challenges other bidders to bid against him for works he wants, he is clearly sending a message. And those not physically present in the auction room can now benefit by reading the Mugrabi message in Ms. Crow’s article.

My best advice to those who think they need a Warhol in their collection? Buy the one you like and then spend a bit of time studying the work of other artists and find someone whose works move you. The trophy for Warhol Collector of the Decade has been awarded and there’s no fun in coming in a distant second. The second half of the 20th century produced at least a couple of other artists arguably of Warhol’s talent and stature. Find them and enjoy your collecting!

Buoyant Art Market Draws International Buyers: From the Wall Street Journal YEAR-END REVIEW OF MARKETS & FINANCE

2008-01-02T10:45:00.000-05:00

From The Wall Street Journal,

January 2, 2008

Buoyant Art Market Draws International Buyers

Asian Works Grab

Most of the Buzz;

A Big Russian Gift

By KELLY CROW

January 2, 2008; Page R19

The art market had another bumper year in 2007, as buyers from Asia, Europe and the U.S. chased the world's priciest works and mostly ignored the turmoil in the financial and housing markets.

Sotheby's said it sold about $5 billion of fine and decorative art last year, up 39% from 2006. The 2007 total included $1.3 billion in contemporary art, more than double the year before; $1.1 billion of Impressionist and modern art, up 24%; and $281.8 million in jewelry, up 44%.

Christie's International PLC sold about $6 billion in fine and decorative art last year, up 30% from $4.6 billion in 2006. Closely held Christie's said it will release full sales figures later this month.

In November, Sotheby's set an auction record for a contemporary artwork when it sold Mark Rothko's "White Center (Yellow, Pink, and Lavender on Rose)" for $72.8 million to an anonymous buyer. The top sale at Christie's was Andy Warhol's "Green Car Crash," which went for $71.7 million in May.

Among private art deals, a group of investors reportedly paid artist Damien Hirst $100 million for his diamond-encrusted skull, "For the Love of God."

Collectors got skittish only once, when a Vincent van Gogh landscape guaranteed to sell for $35 million went unsold at the Sotheby's Nov. 7 Impressionist sale in New York

Sotheby's shares fell by nearly one-third to $35.84 the next day. By Dec. 31, the shares had risen 6.3% from that point to $38.10 in 4 p.m. New York Stock Exchange composite trading.

Asian art and its buyers captured the most buzz. The wealth boom in Asia solidified Hong Kong's role as a major sales hub for art, not only traditional jades and Ming vases but also Asian contemporary art. Asian and Western collectors -- along with speculative investors -- traveled to Hong Kong, or bid remotely, for works by Yue Minjun and others. Christie's sold $466 million of art in Hong Kong last year, up 28% from the year before.

Interest peaked in October, when Mr. Yue's painting called "Execution," inspired by the 1989 crackdown on protesters in Tiananmen Square, sold for £2.9 million, or $5.8 million, at Sotheby's in London -- another city where art sales are on the rise.

Henry Welt, a fine-arts business strategist in New York, expects the auction market to continue drifting east from New York to London and Hong Kong. "Asian buying is real and strong, and it will last because it's a reflection of their enormous wealth creation and demographics," Mr. Welt said. London is a "more convenient" hub than New York for buyers living in Europe, Russia and the Middle East, he said.

Currency fluctuations had an effect. European collectors took advantage of the weak dollar by flocking to art fairs in Miami and auctions in New York. In May, Europeans took home about half the art offered at Christie's New York evening sale of Impressionist and modern art, nearly twice as much as they typically buy. In November, the New York contemporary sales were dotted with London collectors such as jeweler Laurence Graff, who bid on works by Andy Warhol. U.S. enthusiasts tried to offset the weak dollar by reselling their art in once-overlooked auction spots like Paris.

Collectors from Russia, the Middle East and oil-rich states in the U.S. West -- all flush from the same global commodities boom -- invested heavily in art last year, especially works that reflected their regional cultures. Russians were "less affected by the credit crunch, fiercely proud of their mother country, competitive and cash rich," said Charles Dupplin, an art expert at specialty insurer Hiscox Ltd.

In September, energy-and-steel magnate Alisher Usmanov paid Sotheby's more than $40 million to buy an entire collection of Russian paintings, porcelain and glassware days before the collection was to be auctioned; Mr. Usmanov said he plans to donate the collection to the Russian government.

Christie's continued to expand its efforts to reach Middle Eastern art lovers by holding two modern and contemporary art sales in Dubai, which collectively brought in $24.6 million, up from a single, $8.4 million contemporary sale the year before.

Christie's said sales also were unexpectedly brisk for an under-the-radar collection of Western art featuring Frederic Remington bronze sculptures of cowboys on horseback, thanks to collectors in Texas and Colorado. Overall, Christie's brought in $240 million in sales of American art.

Some art experts worry that the auction houses have become too reliant on risky tools to attract business.

For the major fall auctions of Impressionist and contemporary art in November, Sotheby's and Christie's used guarantees -- effectively assuming the risk involved in selling artwork at auction by promising the seller a specific but undisclosed price -- to buy outright a combined $1 billion of art before the sales. Their total tally for those fall sales was $1.7 billion.

Sotheby's Chief Executive Bill Ruprecht said guarantees are profitable and will continue to be used -- especially since there are no signs that art buying is slowing.

In December, a British buyer surprised the art world by paying Sotheby's $57 million for a three-inch-tall ancient limestone figure of a lioness estimated to sell for as much as $18 million.

"Fears about the market's health and liquidity do have an effect on us somewhere down the line," Mr. Ruprecht said, "but 2007 was an awfully

SUB-PRIME QUICK FIX: Fed Again Overlooks Simple Solution In Favor of More Regulations and Increased Costs

2007-12-20T16:55:00.000-05:00

In its first regulatory response to the sub-prime lending crisis, the Federal Reserve has recently passed rules that would prohibit lenders from making non-income verification loans. But these rules ignore the fact that the issuance of bogus mortgage loans, in which other people’s money was used to fund loans to unqualified borrowers were often facilitated by inflated property appraisals which made it appear that the home to be mortgaged was worth more than the loan. All this is being done in the name of protecting unsophisticated borrowers who are now facing foreclosure and personal financial ruin.

Does this remedy really attack the underlying problem? I think not. What it does do, is to impose another regulatory layer on the already over regulated, and therefore expensive, process of obtaining a mortgage. Each layer requires another professional to be involved in the home buying process and makes the process more costly.

Wouldn’t it be simpler, and far more effective if the Federal Reserve required all non-income verification loans to be non-recourse loans? By requiring these loans to be non-recourse, the lender would bear the financial responsibility (and risk) that the appraisal which supports the loan is accurate, and if it's not accurate, it's the lender who bears the risk. This would surely encourage lenders act more responsibly when engaging the property appraiser and would permit the market to regulate the supply and demand of this type of financing. A lender, which understood that its only recourse in the event that its borrower fell behind in his payments would be to repossess the property, would look more closely at the purported value of that property. And although no home mortgage borrower welcomes the possibility that he would be dispossessed, in the event of foreclosure, the borrower would have no personal liability for any difference between the amount due on the loan and the value of the property on the date of foreclosure. Borrowers would be shielded from the negative consequences of incurring additional debt, which they are unable to repay.

In addition, if the lender could only look to the value of the property to recoup its loan, the foreclosure sale process might become more equitable. Presently, the lender has every incentive to “dump” the foreclosed property and look to the borrower for the difference. If the loan were non-recourse, the lender might act more prudently to realize the maximum value from the foreclosed property, perhaps re-marketing it instead of placing it at auction. The inventory of foreclosed properties might then also be better managed to mitigate the collateral downward pressures imposed upon the housing market under the current scheme.

2008 Forecast: Subprime Woes Hit the Art Market

2007-12-13T19:05:00.000-05:00

So, you thought that the subprime crisis was restricted to the real estate market? This past year, the leading auction houses greatly ramped up the rate at which they extended guarantees to consignors, assuring those consignors that if the consigned artwork did not sell at a minimum target price, the auction house would purchase the artwork from the consignor. By some estimates the total amount guaranteed this year was three times the amount guaranteed only one year ago. This is a very disturbing trend.

If you assume that the auction house estimate of the price range at which the artwork would sell is a reasonable indicator of the house’s view of the value of the artwork, then you conclude that its guarantee is a commitment to buy the artwork at less than its own estimate of fair market value. Hardly a very smart deal!

At the core of the subprime conundrum is a loan extended to a borrower who does not have sufficient credit or assets to justify the loan. If a credit deficient borrower borrows 110% of the value of his new home from the lender, the loan is subprime. Well, if the auction houses buy art from their consignors at prices above their own estimate of fair market value (say, 110% of the value of the artwork), that’s a subprime art transaction. The auction house is left holding an asset worth less than what it paid for it. In addition, the auction houses are not likely to hold art acquired in this manner for long durations; financial good sense mandates that these works will be sold quickly to minimize losses and close out the transaction.

To further aggravate the situation, the increased supply of artworks for sale will push prices further downward and increase the number of artworks that the auction houses will be forced to buy to honor their guarantees. Does this sound like an hysterical downward scenario? Well, it’s about as crazy as thinking that Merrill Lynch could lose $10,000,000,000 in one quarter attributable to its subprime loan portfolio.

A Smelly Warhol?

2007-11-28T07:35:00.000-05:00

BOND No. 9, a high-class maker of New York City-centric luxury fragrances, just announced the introduction of “Andy Warhol Silver Factory”, the newest addition to its line of fragrances. Significantly, the Andy Warhol Foundation licenses Andy Warhol Silver Factory.

For those of you old enough to have been in the same room with Andy, the association with a fragrance might seem a bit odd. But licensing provides cash, and the Foundation has surely become associated with cash. As the owner of a very significant inventory of Warhol works, and holder of the authentication “key”, the Foundation played a very significant, at times controversial, role in the contemporary market for Warhol works. But now, with the foundation’s inventory very significantly diminished by the rapid rate at which it has been selling works in the past several years, fragrance may prove to be the new “pop” for the foundation.

From the point of view of Bond No.9 and its brilliant creator, Laurice Rahme, the marriage is very clever. Warhol is hot, it’s the party season, and most people associate the Pittsburgh born artist with New York City. People seem to be willing to pay big bucks for anything bearing Warhol’s name, so why not a luxury, high priced fragrance?

The more interesting question is “what does this marriage presage for the Warhol art market? The foundation played a very active role in the market for Warhol works: it sold works, mostly to dealers and top tier collectors, authenticated works, and influenced the channels of distribution, by decreeing who could buy directly from the foundation and in some cases who could buy from those who bought from the foundation. For a time, hardly any Warhol work of significance could change hands without some Foundation involvement.

Any reduction of the Foundation’s role will likely benefit the art market, the dealer community and collectors because the market will behave more freely and competitively. The Warhol market might even acknowledge the importance of scholarship and curatorial insight. Even collectors like Jose Mugrabi, who claims to own in excess of 800 original Warhols, don’t combine their ownership with the power to authenticate works. Consequently, these two sources of power will be diffused among more players.

Many art world denizens have long regarded the Warhol Foundation to be far more concerned with the commerce in art than with Warhol’s place in art history. Now that the Foundation has partnered in the launch of a Warhol fragrance, one can say that they have indeed learned something from Andy and have taken his commercialism to heart. Hopefully, the void created by the Foundation’s now open commercial focus will be filled by serious art scholars, critics, and collectors so that we can all get a more balanced appraisal of Warhol, the artist.

Letter from a Very Good and Wise Friend

2007-11-19T18:08:00.000-05:00

Just received this letter from my friend, Anne McBride, and want to share it with you:

November 19, 2007

Dear Clients and Friends,

Headlines from a recent single day (November 9, 2007) in The Wall Street Journal demonstrate the extraordinary turmoil and critical issues the world financial markets face:

"Two Weeks that Shook the Titans of Wall Street"

"Why Fed Expects Growth to Slow"

"Why Europe Isn't Lifting Rates"

"Lifelines for the Drowning Dollar"

A quick glance at these headlines indicates that much of the bad news emanate from the United States. Problems in the subprime market have rocked the U.S. financial markets. Significant, and in some cases, massive subprime mortgage related write-downs and losses have taken a toll on many of the well-known U.S. banks.

On October 24th, Merrill Lynch announced that third quarter losses on investments connected to subprime mortgages would be $8.4 billion, up from a previous estimate of $5 billion. 6 days later, Merrill Lynch CEO Stanley O'Neal resigned. ("Two Weeks that Shook the Titans of Wall Street" Wall Street Journal, November 9, 2007) Citigroup warned of perhaps $11 billion of additional write-downs on subprime mortgages and related securities on November 4th. ($6 billion-plus of charges had already been reported for the third quarter). Charles Prince, Citigroup's CEO, resigned. ("Citigroup's Prince Steps Down, Rubin Named Chairman, Bloomberg November 4, 2007)

The banks affected are not only U.S. headquartered banks. Sanford Bernstein & Company analysts wrote that Barclays and Royal Bank of Scotland might write down $4.4 billion in the second half due to the breakdown in the market for credit-related securities. ("U.S. Three-Month Bill Yields Tumble as Subprime Concern Rises" Bloomberg November 9, 2007).

"The financial markets are worried about further possible large writeoffs related to subprime defaults and the fear that excessive losses could lead to a very dramatic seizing up in credit, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. ("U.S. Three-Month Bill Yields Tumble as Subprime Concern Rises" Bloomberg November 9, 2007).

The U.S. dollar has been extremely weak recently. On Friday the 9th, Reuters reported that the dollar fell to a "26-year low against sterling and a record low against the euro as expectations grew for more interest rate cuts from the U.S. Federal Reserve." The weakness of the dollar is a partial reason for the recent jump in oil prices. On November 7, oil touched an intraday high slightly above $98. It has since pulled back but remains above $90.

In mid-October, the International Monetary Fund forecast a slowing in 2008 world economic growth "with recent turbulence in financial markets triggered by the fallout from the U.S. subprime mortgage market clouding prospects." The European Central Bank is putting off taking any interest rate actions in the face of "surging" currencies, high oil prices and market turmoil. Euro-area firms are complaining about the euro's strength making their exports more expensive. ("Why Europe Isn't Lifting Rates" Wall Street Journal November 9, 2007) A weakening U.S. economy hurts the growth prospects of countries like Mexico which exports a high percentage of their goods to the United States.

Certainly investors have to guard against possible further deterioration in world financial markets and economies. It is possible that investors may increasingly gravitate to what they perceive as extremely safe investments and asset allocations. Yet, the broad-based turbulence in financial markets could represent an opportunity for publicly traded non-U.S. companies, especially in emerging markets.

The IMF notes that the major emerging markets have become the primary drivers of global growth. "For the first time, China and India are making the largest country-level contributions to global growth." The Financial Times notes that many emerging economies are in "far better shape than ever before to weather broader financial turmoil." Many emerging market economies benefit from the strength in commodities while a number of emerging market governments have strengthened their resistance to global financial turmoil. "The improvements in their economies have attracted a more diverse group of investors - including pension funds, central banks and local investors which analysts say are increasingly investing for the long term."

Additionally, David Malpass of Bear Stearns notes that a weakening dollar has an upside for international equities and emerging market economies. "The weaker the dollar in recent years, the more quickly capital has flowed out -to emerging markets, commodities and foreign real estate." ("Lifelines for the Drowning Dollar" Wall Street Journal, November 9, 2007).

Emerging market companies are benefiting from strong earnings growth. Earnings at Chinese companies traded in Hong Kong are expected to increase about 34% this year, according to Morgan Stanley. Morgan Stanley also believes that Brazilian companies will increase profits approximately 31 percent, Indian companies should grow about 29% and Russian companies about 17%. William Fries of Thornburg Investment Management points out "there seems to be plenty of capital in the world for companies that are growing." ("BRIC's big potential; Brazil, Russia, India, China indexes post exponential gains" Bloomberg News November 7, 2007).

Christian Deseglise, head of emerging markets at HSBC Investments, states, "What has changed is investor perception of emerging markets. The fact that emerging markets may be less of a source of risk than the developed markets is increasingly being recognized by investors." ("In for the long haul? Why a boom is under way in emerging markets, Financial Times, October 18, 2007)

To be sure, the picture in our economic/financial market crystal ball is cloudy. For example, it's not clear what will happen if the United States economy weakens even more than current forecasts. A severe global liquidity crunch would create few safe havens. Also, some investors worry about a stock market bubble in China and India.

Nevertheless, non-U.S. public companies should consider taking a more global approach to their investment outreach. Developed Asian financial markets such as Singapore and Hong Kong or markets benefiting from the commodity boom such as Dubai should be considered for outreach.

Further, U.S. investors are interested and may become even more interested in international equities. Last year, the Wall Street Journal noted that a number of domestically focused U.S. mutual funds are holding a surprising percentage of foreign stocks. ADR volume has been extremely strong. The Bank of New York Mellon reported on October 23rd that depositary receipt DR trading value (for American and global depositary receipts) exceeded $2 trillion for the first time ever. DR trading value increased 53 percent versus the same period in 2006. "A record 53.1 billion U.S.-listed DRs, valued at $1.872 trillion traded on U.S. exchanges during the first nine months of 2007."

Slow U.S economic growth and a weak dollar very well could encourage additional U.S. investment in international equities. Non-U.S. companies should look for opportunities in less obvious places in the U.S. such as certain domestically oriented fund managers or sophisticated retail investors.

Best regards,

Anne McBride

Vice Chairman, Global Investor Relations & Financial Communications

theglobalconsultingroup

STRATEGIC FINANCIAL AND CORPORATE COMMUNICATIONS

22 Cortlandt Street

New York, New York 10007

T: 646-284-9431 | F: 646-284-9485 | E: amcbride@hfgcg.com

www.hfgcg.com

Family Business: Outsiders Bringing Insiders In

2007-11-19T14:41:00.000-05:00

Rarely, if ever, does one find a successful family business that is managed exclusively by family members. Non-family, professional managers have either contributed to building the business or are required to maintain or grow the business that the family has founded. Why should a talented manager elect to join a family business? And if he does, how should he prepare himself to navigate the dual –family and business- systems, which drive the business.

There are two common scenarios in which a professional manager will confront the family system while managing his business. He may join a business and work for the founders and contribute to its success, or he may join the family business in which the founder would like to bring his family.

In either situation, the professional manager will be challenged to understand how and business operates when it is oriented both towards profitability and the implementation of a family succession plan. To do so, the professional manager should develop a transparent relationship with the founder. He should elicit from the founder the details of his family and business plan, and he should disclose his career objectives.

To be effective, the manager needs to understand whether the founder envisions bringing his son or daughter up through the ranks or has he already made place in the executive suite, whether he has decided that his son will succeed him in all events or is he committed to testing the son’s skills, drive and desire to succeed? And, then he should develop an understanding of what career path the founder envisions for him. Through all of this, the manager must maintain his strategy of developing a trusting relationship with the founder, and to articulate to the founder that he understands and is committed to assisting him realize his business and family goals.

Concurrent with solidifying his relationship with the founder, the professional manager should have a strategy to further his own interests. Why is he taking on this job? What are his goals? The least desirable objective is to chase equity. Minority ownership in a family business is difficult to obtain and probably worthless when obtained.

Instead, the professional manager is better served by focusing on current compensation, phantom equity, bonus and other incentive arrangements and an exit package. He should take the lead to identify benchmarks to measure his success in assisting the founder and his son. For example, if the son requires mentoring, the professional manager might negotiate an arrangement in which he is awarded bonuses based upon the son’s achieving certain predetermined benchmarks. Each time a pre-determined benchmark is achieved by the son, the professional manager might earn phantom equity, or a cash bonus.

The professional manager should also partner with the son assist him to advance. He is the one who has worked with the father; he knows his work temperament, his style of management, and can be of great assistance to the incoming son. The key to enabling this partnering is that the professional make clear to the son that he is fully aware of the family objectives and that he considers it his job to contribute to a successful succession. He should not permit himself to be positioned as an obstacle to the succession; he is an enabler.

The independent board, committee and advisory board are very useful to the manager. He will be continuously judged (and rewarded) for his ability to reach very subjective benchmarks and he should require that these judgments be made by neutral, independent, arbiters. The manager should play a proactive role in determining the composition of these bodies; he should discourage the use of family retainers and push for selecting professionals and business people who are financially independent of the family

The professional manager’s alliances with the founder and the son, and the family’s and professional manager’s abilities to cooperatively map mutually dependent career paths are critical to the professional manager's success. Transparency in the business environment, in disclosing the family plan, in articulating the professional's career objectives, and in the principals’ ability to navigate sometimes “touchy” subjects are critical to everyone's success.

eBay and Trademarked Goods

2007-11-15T11:22:00.001-05:00

On November 14, 2007, the Wall Street Journal ran an article describing the beginning of a long-anticipated trial, being litigated in the Southern District Federal court, in which Tiffany & Co. is claiming very substantial damages from eBay. Tiffany alleges that eBay bears responsibility to regulate the sale of counterfeit Tiffany branded products on it site. Other prominent trademark holders have filed similar actions against eBay. It seems that while these two goliaths wage their war, the public interest in maintaining a fair and informed market place on the Internet might be neglected.

Family Business: The View Outside, In

2007-11-12T17:57:00.002-05:00

You don’t have to be a New York Yankees fan to conclude that passing the torch to the younger generation in the family business can be treacherous. But receiving the baton in this inter-generational relay race is no easy matter, either. Who bears the responsibility to make this work?

The incoming family member bears the primary responsibility to devise and implement the strategy to succeed in ascending to the leadership of his family business. He or she should not rely upon the assumption that his family, the senior management, has learned all there is to know and is capable of insuring a successful transition.

Generally, there are three key players in the typical family business succession scenario: the incumbent parent generation; the non-family member key employee, and the incoming, younger family member. The incumbent member wants to transition management and, possibly, ownership of the enterprise; the younger member has been racing to be ready and is eager to receive the handoff; and the non-family member is work horse, reliable member of the team, often unnoticed, who is critical to the success in this transaction.

The younger family member should be clear that while being a family member may be a necessary condition to her reaching the executive suite, it is not a sufficient condition. He must clearly understand that he is entering a business, not an extension of the family. He will be expected to perform to higher standards than, and often different from, those by which the non-family management team has been tested. He will need to establish his own credentials.

Scorched earth strategies, thinking that the transition of management to the younger generation is an opportunity for wholesale replacement of key personnel and the implementation of radically different strategies, are not productive. Drastic upheavals in a successful business should be very carefully considered and generally, avoided. Unlike a non-family business where the appointment of a new executive team is often an opportunity to clean house and lay the blame for the businesses problems on prior management, this approach may have deep and very negative consequences for the family business. The phrase, “it’s not personal, just business”, does not apply to the dynamics of family businesses.

The younger family member should learn the business, learn to recognize the valuable roles played by the non-family members, and learn to demonstrate his leadership skills. His ingoing assumption should be since the business is successful, those in leadership roles are valuable team members; he should work with them, not against them.

Before joining the business, the younger family member might do well to spend some working time for another business. Family businesses, particularly successful ones, can be very insular and, learning how things are done elsewhere will significantly contribute to the potential leaders’ knowledge base, materially improve their network of useful contacts, and provide opportunities to make mistakes and elevate their credentials. Having achieved a degree of success and recognition in a non-family business is a valuable asset when navigating the family business environment.

Both before joining the family business and regularly thereafter, the younger member should also have extended, candid and extensive explorative conversations concerning the job, the career, the expectations and time line with their parent. The traditional executive interview process, through which as much is learned by the executive about the business as is learned by the business about the candidate is conspicuously absent from the process through which family members are enticed to join the business.

Lastly, like any executive being recruited to a new high-level position, these potential leaders should conduct their own due diligence on the business, its key players and business strategy. These are not contractual discussions; they do not have to result in agreements. They are exploratory discussions, aimed at gathering information, sharing views and helping to determine which values are shared by the generations and which will have to be reconciled in the future. They might include a discussion to air the senior member’s mid to long-term plans for his continued relationship with the business.

The younger, incoming executive should also develop a realistic understanding of how his entry will impact key employees: who will be welcoming, who will they feel threatened, who will they likely be supportive and who will they be inclined to undercut his initial integration. Equally important, the younger member should begin to develop strategies to identify indispensable players and how to gain their support and build alliances

The senior family member needs also to recognize that his business is not a family unit, that he has succeeded by recognizing talent and contribution and by promoting the most accomplished of his employees, not by nurturing those who couldn’t cut it. As the person of authority and last resort in the family business, he or she has an important responsibility to create an transparent atmosphere in the business, one in which his trusted and valuable employees understand his business and family plans and the roles which they will play in implementing these strategies. Usually, if key non-family employees are informed and properly motivated to implement the family strategy within the business, they will understand that cooperation is in their best interests and will be rewarded.

By doing his homework, by planning his entry into “his” business, the younger family member is doing his part to partner with his senior family members; he is fulfilling his responsibility to make the transition successful. It is not a guaranty of immediate success in integrating him into the business. But it certainly increases the likelihood that the incoming family member will be better prepared for the challenges he will encounter, will be smarter in choosing battles worth waging, and ultimately will be more likely to navigate a successful transition.

Although there has been considerable scholarship addressing the challenges facing the incumbent family members when bringing the younger generation into the leadership of the family business, very little attention has been focused on the younger generation. Little help has been offered to these future family business leaders. Many of them enter this race unprepared, too often not understanding the challenges they will face, the alliances they will need, or how to devise the strategies that will help them to succeed as they work to earn their place in the family enterprise. Consequently, they often participate passively in shaping their careers and rely on their parents to create successful career paths for them.

Musings on the Art Business

2007-10-31T23:01:00.000-04:00

On October 27th, the Wall Street Journal ran a story suggesting that art dealers have painted themselves into a corner in their competition and dependency on the auction houses. Have they really?

Clearly dealers are worried about the intrusion of the (powerful and monied) auction houses into their territory. But one would have to ask whether the strategy adopted by this gallery, to cut off clients who neglect to check with them first, before selling works at auction, makes any sense as a way to address the problem. As defined in the article the problem is that the gallery client doesn't ask the gallery before he/she decides where to sell the work of art. Can this really be the problem for the galleries? Hard to believe. And why would a savvy collector not mention to the gallery that he is considering selling some work previously purchased from the gallery? Isn't the collector better off having the gallery compete with the auction house and possibly offer an even better price (or terms) for the object?

I suspect the real problem for the galleries is that most contemporary art galleries are expected to protect their artists’ prices, ie., not permit them to go lower than the gallery price, and to the extent that the gallery has the economic strength to do so, to control the market in the artists’ work. In a rising market, the gallery doesn't have to worry about the protecting the artist's price; but it becomes very expensive for the gallery to support prices in a declining market, particularly, if it is forced to bid (buy) works above its own retail price.

Of all the players in this equation, the galleries have a big stake in supporting the artists prices: with large inventories of works, they have the most to lose. If the artists work is brought to auction and does not do well... the dealer has far more pieces that have been negatively affected by the well publicized weak sale, than does the collector. So, the gallery is under pressure to support the price range, determined by the auction house and collector, when they, not the gallery,set the low and high estimates for the auction sale.

Moreover, an effort to influence sellers not to sell to their best advantage is doomed to failure, particularly when the best the gallery can do is to say "I won't sell other works to you". If the past 50 years has demonstrated any principle in the contemporary art market, it is surely that money talks.

Where the galleries might fruitfully turn their attention is to the buy side of the process. The galleries should make their case for why it is increasingly stupid for a retail client, yes, even a savvy collector is, in the vast majority of cases, a retail client, to buy at auction. In an orderly and rational market, the auction house would function primarily as a clearinghouse for the trade, wholesale, venues; The people in the trade, the professionals, are best suited to cope with the deficits, inherent in this market: the inability to meaningfully inspect the work, the lack of time to research the accuracy of the details included in the published description of the work, the inability to view the work in surroundings approximating those that the prospective purchaser might have, the inability to view more than one of the artist's work at any time, to compare etc. etc.

No well regarded collection has ever been assembled through a majority of auction purchases. Collectors have historically taken their time, gained knowledge and become informed, used representatives to shield their identity when pursuing highly desirable objects, bartered with the dealer, collaborated with museum curators and other advisors. None, or very little, of this is possible when dealing with the auction houses.

If the collecting public resorted to buying at auction more selectively, thereby reducing the demand for the art works available through the auction process, prices should ultimately recede. The dealers could once again look to the auction houses as venues at which to replenish inventory. The collectors would benefit by being able to purchase their art works in a calmer setting, more discretely, and with better assurances that they understand what they are buying. Of course, with the auction process a public process, it is surely tempting for the collector to venture in and buy an occasional piece at a “dealer price”, but as a trend, this phenomenon has only increased prices to all participants in the art trade, with the auction house reaping superior profits from the increased buying activity.