McKinsey analysis of sector timing in recession

McKinsey did an interesting analysis of which sectors either lead or lagged in both the decline and eventual recovery from a recession.

As you might imagine (especially with this current recession) the speed that companies declined going in was much faster than they experienced coming out during the recovery.

The report notes that history suggests some possible indicators of the beginning of a recovery. “In three of the four most recent recessions, higher consumer discretionary and IT spending led the way. When real EBITA growth resumes in these sectors, it may be a useful indication that the economy is turning around.” We will keep an eye on these sectors!

10 things to remember for social media success

How many Fortune 1000 companies have a Social Media Strategy? Better yet, how many of those will fail in the next year? These are questions worth asking as the future success of these campaigns depends on separating the buzz from what provides lasting value to brands.
Along these lines we wanted to share what we’ve been hearing lately from our clients. They have heard that their competition is using Social Media and are interested in the potential, but during these times they are coming back to the same question: “How does Social Media help me: grow my business/increase sales/cut costs?”
Of course this is eminently justifiable as the benefits have to be tangible and understandable to executives in order to get approval to move ahead in concert with other initiatives that are currently underway.
Here’s what we have learned (so far):

  1. Need buy in from the top. There will likely not be the same level of participation from the top but with the right set of guidelines, executives can see that participation from company staff can actually help build customer engagement with the brand.
  2. Need an internal culture to support it. Executives must understand that the conversation about their brand and products is taking place whether or not they participate. Lack of participation is not going to stop conversations from happening and may in fact lead to missed opportunities to shape the dialog.
  3. Understand that it’s not the tools but the topics. It should be the substance of the conversation which should be the focus. Tools change, but customers have issues that need to be heard and there is a great opportunity to get previously unmet customer needs out of the dialog if you co-ordinate this data with other channels.
  4. People don’t live and breath your products. Unless you are RIM or maybe APPLE you have to consider your products in the context of the customer’s lives; how they enable customers to meet (or exceed) their needs. The conversations should be real and not just marketing jargon. Customers can see beyond language that doesn’t relate to their experience.
  5. Need to go beyond click-thrus and impressions to measure overall brand engagement. Executives must be prepared that it might not increase transactions in immediate short term but will allow a new dialog with customers. What does this mean? If someone engages with a brand on a social media site then recommends your product to others on their blog should you say your website failed? Of course not. It must be one component of the overall mix.
  6. Measure measure measure. Based on your overall objectives and also the objectives of your other partners in the value chain you need to use metrics that have relevance to your business – metrics that executives understand.
  7. Need to dedicate resources to this as an ongoing initiative. Just doing it for a short term won’t produce desired results over long term. There’s a need to understand and implement compatible compensation structure to reward success to make sure that this doesn’t go the way of other “buzz-word” tactics.
  8. Consider it as part of current marketing mix. It should not be thought of as standing alone, or as a replacement to current initiatives (see excellent post by @tamera)
  9. Understand current customer viewpoints on products and services. In order to start finding ways to engage customers, review existing customer needs insight and if necessary look at re-examining ways to get deep customer needs back into the organization.
  10. Tweak and build feedback loop to continually improve the initiative.

And don’t fret if it doesn’t immediately take off. No matter what anyone says, nobody has this totally figured out yet…

Economic recession forces positive attitude to see opportunities

There is a great article from Geoff Ramsey-CEO, Co-Founder of eMarketer on how it’s important to stay balanced during these difficult times. In it he mentions five key ways to keep on track and avoid seeing every article or news report as additional evidence that we are heading towards an inescapable catastrophe.

  1. Understand Your Locus of Control
  2. Tighten the Spigot
  3. Focus on the Opportunities
  4. Leverage Data to Construct Opportunistic Experiments
  5. Invest in the Future

What is interesting is that these five ways pretty much mirror in sequence how people deal with other stressful situations in their lives. I believe we are still in the early part of this sequence as business owners and consumers try to make sense of all the statistics and negative news which bombards them every day.

But the critical element in this sequence is moving beyond the paralyzing fear which has gripped the markets and realizing that this will turn around and everyone out there has an opportunity to creatively reshape how we do business. I was at a great talk at the University of Toronto’s Rotman School of business last night and the speaker Geoffrey Helt reiterated that we are in a transformation right now and as painful as this is at the moment (especially with everything else going on in the economy) will result in new models and ways of conducting business.

We can help to get past this by decreasing the flow of negative news (#2) and promoting the opportunities (#3) inherent in this shift. Turning down the volume allows you to refocus that energy and hear emergent trends in the marketplace.

Finally leveraging data and investing in the future gives you a starting point for investigating how to move ahead. Just remember to balance what is coming in with a grounded sense that standing still won’t work for long; the agile competitors are already looking at opportunities and trying things to carve out a path to new revenue sources and better customer experiences.

Thriving in tough times

In these times there are opportunities to grow your business. The advantage is that you have to be able to see them without falling prey to the negative attitude which seems to dominate the media right now.

Andrew Long of Critical Pathfinders is introducing a workshop to do just that: its called “Leveraging the Power of Crisis” and will be led by noted author Gina Mollicone-Long. Gina notes,”

“People are constantly telling me that they are worried about 2009.  I’m here to tell them that more millionaires are created in times of recession than during high times.  The companies and leaders that stand out this year will be those who step up and change their mindset,” she adds.

This is crucial to keep in mind. As I have said before in numerous posts, there is a shift going on in the economy and those companies that can see beyond the current turmoil to identify trends and opportunities will be those that succeed!

You can get more information about the sessions here.

Economic stimulus packages might not work out as planned

With the rush to pass the stimulus packages in various countries, politicians are repeatedly stressing the seriousness of the recession to spur various levels of government into action.
The problem with this is that the more politicians use adjectives like grim and unprecedented and draw comparisons to the great depression the less consumers spend and the worse consumer sentiment gets. This affects how business thinks about investing how consumers shop for goods and ripples up through the economy to prolong and perhaps accelerate the situation.
So in order to push through stimulus packages to fix the economy they may actually be hurting it in the long-run. This is most evident in the consumer sentiment index, which, although marginally higher in January still reflects consumers ongoing fear about the direction of the economy. Consumers now,

” anticipate the deepest and longest recession in the post-World War II era, but consumers do not expect the economy to sink into a 1930s-style depression…”

But in the face of unsettling jobs numbers, consumers are still unsure of the direction of the economy and are looking for direction that there is hope on the horizon. That hope may come in the form of a stimulus package, but we must still keep in mind that comparisons of these current conditions with the Great Depression will not help to spur confidence that government spending will help the situation.

In an analysis of Friday’s jobs report Globe reporter Barrie McKenna cites a University of Michigan professor that notes even though the job losses are large, they more accurately compare with the early 90s recession, not even the recession of the 80s. The reason says Mark Perry is that even though the raw numbers appear unprecedented, in the 1980s there were only about 93 million Americans working in the labor force versus approximately 154 million today. So on a percentage basis there is a distinct difference and a real danger of using raw numbers out of context for other purposes.

What all this comes down to is that as Professor Perry states:

“We’re talking ourselves into a more severe recession than this really is,” he said. “A lot of this is psychological, and that plays into consumer spending.”

But with the pace of job cuts accelerating, market watchers expect that next month’s jobs report will be even worse. One final thing to keep in mind is that these stats tend to be trailing indicators of how the economy was doing. That being said, any commentary on these upcoming numbers has to be framed judiciously so as not to choke off consumers and businesses willingness to spend.

Strategic innovation counters short-term thinking

Many executives find themselves facing difficult decisions these days in light of the challenging economic conditions. Short-term results are often scrutinized closely by the market as a way of determining a company’s financial health and direction. Although this can be a viable way of judging whether corporate strategy is translating into market success, what often happens is that short-term thinking permeates the organization leading to a starvation of resources for longer-term initiatives like new products and services.

One can see this happening at large companies in different sectors as they announce cutbacks in spending on innovation to meet customer needs. As the former CTO of Cisco notes, America is facing an “Innovation Crisis,” and needs to find “new ways of funding fundamental research.”

She cites the fact that Bell Labs announced late last year that it was discontinuing basic science research to “align the research work in the Lab closer to areas that the parent company is focusing on.”

The problem is that with these expense reductions, there is a tendency to pull back customer facing programs in order to conserve cash and “reduce” risk. As in an earlier post, I maintain that this may actually be a riskier strategy over the long term as competitors who continue their innovation program will be in better shape once the economy returns to normal growth.

Arguably, innovation can be seen as an “assembly” of tools, techniques, or assets to meet those deep customer needs. But without the foundation of basic research, it is very difficult to source assets to put into a solution. Of course there are grey areas within both fields, but I believe these days it is becoming increasingly difficult to justify investments in basic research which makes partnerships with universities an interesting way to explore getting access to more fundamental work.

In my opinion, innovation (which I define as meeting stated or unstated customer needs) is different than basic research or invention. While both are important, it is harder to make the case in today’s corporate environment for basic research, which is why I believe that many corporations are reducing their investments in these areas to (hopefully) concentrate more on innovation and getting more value from their existing assets. Keep in mind that the best way to use these assets is understanding the needs and taking a simple (but not dumb) approach to serving them.

In this economic climate, we at Brandsential work towards this goal by using “Value Extraction;” to leverage what’s inside the company to satisfy deep customer needs. And as I’ve said before, now is a perfect time to develop and innovate with these existing assets to make sure the company is well positioned to lead the market once the economic climate improves.

How not to conduct a Social Media campaign

Here is a great parody (really?) of a conversation between an advertiser and a consumer. Its not about the goals of the advertiser, but understanding the needs of the consumer.

I love the part where the advertiser says, “Did you miss the billboard in Times Square? That was like a 200 ft tall declaration of love.” Not exactly a “dialogue.”

Innovation in the Auto sector?

With all the talk lately around how to bail out the Big 3 automakers, there have been many comments on how to administer / police the firms that receive government bailouts. Which is all well and good: many of these firms have been less than successful in adapting to the needs and realities of the current market. As a condition of a bailout, the taxpayers should have some measures to ensure that their “investment” is being properly used to rebuild a stronger more responsive industry.

But in talking to a colleague with a long history in the automotive industry, they mentioned that this has been coming for a long time based on the structure and bureaucracy rampant in the firms. One example they recalled was that resources were not allocated to the projects with the best chances of success, but those which were championed by persuasive leaders in each silo of the company. So one has to ask; will this bailout give the firms a chance to re-organize for success or just continue along the same path? I believe that what can tip the balance towards the former is a belief from the top down in product/service innovation.

Looking back to the late 1979 and Chrysler’s last brush with insolvency we can see fundamental differences between today’s market conditions, industry players and other elements that make direct comparison difficult. But there are a few notable items to highlight that point toward why they were successful in making it through their earlier crisis.

At the same time as the company asked the U. S. government for $1.5B in loan guarantees former Ford executive (and “car guy”) Lee Iacocca was brought in to lead the company. A persuasive leader, he was able to rally the public behind the comeback and by to some extent, bashing the Japanese imports that were selling in greater numbers in the U.S. (It also helped the company’s cause that the U.S. Military bought thousands of Dodge pickups to bring into service.) Iacocca also brought in quality improvements on the assembly line which made the vehicles more reliable and the factories more efficient.

However what I believe gave the company its most significant boost was the development of the (at the time) innovative models, the K-car and the Minivan. As Iacocca believed in the products, the entire company could see that from the top down, product innovation was being given the support it needed to flourish. (What was interesting is that both of these concepts had been initially investigated at Ford and rejected.) Coming after the oil crisis of the late 70’s, the front-wheel drive K-car platform sold extremely well paving the way for the introduction of the Minivan.

Introduced in late 1983 (a three-year development cycle, which was unprecedented in the U.S. auto industry at the time), the minivan concept met customer needs for a vehicle with the space of a van, but could fit in a residential garage and have a low step-in height for small children. It continues to be the best selling minivan in the industry with over 12 MM units sold to date.

So although there are few direct comparisons that can be made between the two situations, I fear that unless the companies start to do a better job of really listening and responding to deep customer needs, we may be extending the automakers a few more months or years of struggling sales and poor performance.

Business Innovation in a recession drives profit

As we become more entrenched in recession, many companies are thinking that any spending is risky to the health of their companies and are battening down the hatches to cut expenses wherever they can. However, this behavior may actually be contributing to a long-term decline in competitiveness in their industries compared to companies that actually spend strategically during a recession on Innovation to accelerate growth.

An article by McKinsey suggests that companies that invest during a recession actually do significantly better than their peers who choose to cut back. They studied about 1,000 mainly US  corporations from 1982-1999 and identified attributes that industry leaders (top quartile performers) or challengers (those that moved into the top quartile) possessed. Including a contrarian approach to M&A (top performers actually increased M&A during periods of uncertainty), they had quite a different strategy when it came to spending.

Successful challengers actually spent significantly more cash than their more conservative peers during a recession. But what is most striking is their approach to expense spending: with greater focus, these challengers spent more on selling, general and administrative (SG&A) than those competitors that lost market share. In addition, relative to their competitors these successful companies more than doubled their spending on R&D during the recession.

The reward for this approach showed as market conditions improved after the recession as the successful companies’ market-to-book ratios were 25% higher than their unsuccessful competitors.

As part of responsibly managing a company, leaders have to look beyond current conditions
and see that a careful scrutiny of expenses is necessary to assess if all parts of the organization are moving in the right direction. But leaders have to be sure that they are not taking on more risk by failing to invest in the right areas now, to pay benefits later.

Innovation – The time is now!

I have been talking with several business owners about prospects given the uncertainty in the current marketplace. The instinctual reaction is to cut back on spending on Innovation, customer needs investigation and product development. However we feel that now is the best time to Innovate and this can actually decrease risk. Why?

  • the cost is relatively low, given that there very talented people on the market to lead these initiatives
  • it is easier to get teams to focus on one or two very important Innovation initiatives (after companies re-commit to their strategy, making sure they are well positioned for the conditions)
  • customer needs analysis when the market conditions are tough will unearth needs that are more core to customer’s lives and this insight will help define more enduring products
  • when the market picks up, concepts are ready to be fast-tracked to development. Those products and service are those that differentiate companies and customers will pay a premium for them.

Perhaps not all companies would benefit from a concentrated effort on Innovation, but for those companies who do not just want to compete on price, it is key to maintain focus on Innovation. Investment, not cuts are necessary to keep this focus because cutting talent fosters a bunker mentality. This turns the rest of the company inward concentrating on cutting in all areas to “follow the leader” instead of focusing on growth opportunities.

Proctor and Gamble has put Innovation at the heart of their strategy, focusing on the consumer and the CEO A.G. Lafley even going so far as to call Innovation a “team sport” because “Innovation doesn’t spring fully formed out of the head of one man or woman.” Keeping the right social climate for an innovative culture is part of how they are re-inventing the company.

Apple certainly understands this and as Steve Jobs said in an interview with Fortune:

“We’ve had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren’t going to lay off people, that we’d taken a tremendous amount of effort to get them into Apple in the first place — the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that’s exactly what we did. And it worked. And that’s exactly what we’ll do this time.”

Not only can Innovation help with growth opportunities, because it is centered around customer needs, it can actually help retain customers through difficult times. In fact you could argue that Innovation decreases risk as a company that retains customers can maintain cash flow on the one side and develop new ideas for increasing growth without see-sawing back and forth between inward and outward focus.

Just as financial discipline is part of the way leading companies operate, Innovation should be part of a company’s strategy not only in good times but also in challenging times.