Archive for August, 2009
Monday, August 31st, 2009
Starbucks is rolling out a new beverage pricing strategy, raising the prices of its frappuccinos and other specialty drinks by as much as 30 cents while lowering the prices of cappuccinos, lattes, and brewed coffee drinks by 5 to 15 cents. The move is the result of the company trying maintain its image as a premium brand while also keeping price-sensitive customers from switching to less expensive caffeinated alternatives.
Smeal’s Jennifer Chang Coupland says playing both the role of a premium brand and that of an affordable brand could be difficult for Starbucks to pull off:
In some respects, Starbucks’ new strategy makes sense in this day and age of tighter wallets, savvy consumers, and stiff competition. Price basic drinks lower so people can afford them. Price specialty drinks higher to signal luxury. From a marketing perspective, however, the approach is risky. It goes against the basic marketing adage that “you can’t be all things to all people.” Why try to appeal to everyone—high income, low income, specialty drinkers, and regular everyday drinkers?
The risk lies in the fact that Starbucks is not just selling consumers a commodity (i.e., coffee), it is selling a brand. When consumers walk into a Starbucks establishment, they buy a gourmet experience, an “I-deserve-it” break in one’s day. In fact, the gourmet-ness of Starbucks has become so identifiable that McDonald’s spoofed the arrogance of the (presumably) Starbucks coffee house experience in a commercial last year. And Dunkin’ Donuts now sells T-shirts that say, “Friends don’t let friends drink Starbucks.”
Do Starbucks consumers mind? All things being equal, probably not. It’s a part of the brand identity, a hierarchical perk of buying Starbucks. It makes the coffee taste—and feel—better. Therefore, Starbucks’ response to lower prices (and also introduce an instant coffee line in grocery stores) departs from its foundational brand identity, its gourmet appeal. Is the brand now for everyone? Or is the company trying to say, “We understand these are hard times for you, our loyal customer”? On the other hand, increasing prices for specialty goods creates an odd hierarchy among its own consumers, which could be problematic.
With all that said, there is a way this two-pronged approach could work. A smart strategy is to focus not on user segmentation, but on usage segmentation—that the same consumer might buy the basic Starbucks on a daily basis but specialty drinks for those days when one needs/deserves more. Will it work? Crafty marketing communications, consumer sentiment, and time will tell.
Friday, August 28th, 2009
With the U.S. government serving as a majority stakeholder in General Motors and the House of Representatives passing bills that forbid federal agencies from buying cars not made by Detroit, foreign automakers are becoming concerned over a Washington bias in favor of Chrysler, Ford, and GM.
Smeal’s Terrence Guay comments:
Despite rhetoric to the contrary, there is a tendency for all governments to protect strategic industries, although the definition of “strategic” can differ across countries. The automobile industry is considered strategic by most countries that have one (like the United States, Europe, and Japan) or are trying to create one (like China and India). The U.S. automobile industry, including its supplier network, still makes up a sizable part of the U.S. economy, although it has declined over the past two decades. So it should come as no surprise that the U.S. government is trying to support it in various ways.
While foreign companies may complain, these policies probably will have little effect on the U.S. industry if it is defined as GM and Ford. Chrsyler is now owned by Italy’s Fiat, and European, Japanese, and South Korean companies now have strong U.S. roots. Two-thirds of all “foreign imports” are built in the United States. CSM Worldwide, an automotive market forecasting group, predicted earlier this year that foreign-based car makers will build more vehicles in the U.S. than the “Big 3″ by 2010—and this was prior to the Fiat-Chrysler merger.
The point is, foreign automakers will increase their presence in the United State in terms of sales and production regardless of what Washington does to protect the remnants of indigenous companies. As this happens, the lobbying clout of foreign companies soon may drown out the voices of GM, Ford, and their protectors.
Thursday, August 20th, 2009
The New York Times reports that angel investors are tightening their purse strings during the recession and some are even “levying fees on entrepreneurs for guidance on finance and introductions to sources of capital.”
Smeal’s Anthony Warren, Farrell Clinical Professor of Entrepreneurship, comments:
The belt-tightening in the current economy has spread to so-called angel investors who invest their own money into startup companies. This is making it even harder for entrepreneurs to find money to build their companies. Unfortunately this has spawned a group of intermediaries that promise to “train” entrepreneurs on how to make a pitch to investors and then make introductions. For this, the entrepreneurs pay a fee of perhaps a few thousand dollars out of their already meager funds. And to little end. If you cannot figure out how to make a good pitch and locate and approach possible sources of money, then you are hardly the person to build a successful company in any case. Finding investors and pitching them is your first challenge. Smart entrepreneurs network to narrow their targets to just a few potential investors who are a great fit to their company, and use free resources such Smeal’s IdeaPitch Web site, which provides all an entrepreneur needs to put together the perfect investor pitch.
That is not to say that getting advice is not a good idea. But it is important that the objectives of the entrepreneur and mentors are aligned. This is hardly the case when advisers take a fee just for a meeting. It’s much better for both parties when they have a common interest in long-term outcomes. This can be through a small investment with a lot of networking provided by the investors. New “micro-equity” programs such as Y Combinator and DreamIt Ventures provide much better opportunities for budding entrepreneurs.
So hold onto your limited funds, use them to “bootstrap” your idea to the first milestone. Then work on your pitch targeted to a narrowly defined investor audience. After all, if you are not the best person to tell your story, then maybe you do not really believe in it yourself.
Wednesday, August 19th, 2009
The current issue of BusinessWeek makes “The Case for Optimism” in our economy by focusing on positive outcomes, including lower shipping rates and increased metal prices. Another reason to be optimistic? Research by Smeal’s Anthony Kwasnica finds that pessimism in our stock markets may actually be the cause of our struggling economy, rather than just an indicator of it.
Kwasnica says that short-selling and other techniques that reward negative performance communicate pessimism about the economy that can infiltrate the markets and may actually cause economic performance to dip into the negative.
In the current U.S. economy, with the news media constantly focused on the stock market’s performance, the negative effect of perceptions can do even more damage, according to Kwasnica. As more and more bad news is conveyed by the stock markets, pessimistic beliefs are reinforced over and over again and the markets can make a bad economy worse, and do so quickly.
To get out of this vicious cycle, Kwasnica and his coauthors say there are at least two fixes that are already at work in the U.S. economy now. The first option is to quiet some of the pessimistic views on the economy by disallowing investors to profit from negative predictions that come true. The proposed rules regulating short-selling fall into this category.
The other fix is through leadership. The actions of a highly visible and trusted public leader may convey market confidence and instill optimism in other investors.
“Ultimately, some balance between government intervention and industry leadership must be struck to ease the negativity currently in our markets,” Kwasnica says.
Wednesday, August 12th, 2009
General Electric last week agreed to pay $50 million to settle an SEC lawsuit accusing the company of committing accounting fraud. Smeal’s Edward Ketz reacts to the settlement in his column on SmartPros.com:
The real tragedy is that the $50 million fine will be paid by the stockholders of GE rather than the criminals who created the fraudulent schemes and carried them out. We have again let the bad guys get away with their shenanigans and have penalized the innocent.
The SEC should understand that civil penalties and criminal sentences serve two purposes in this society. These objectives are first to satisfy our collective sense of justice and second to deter future crimes. By punishing shareholders, the SEC itself becomes a tool of managers and is an instrument to carry out their devilish plots. The organization also promotes future crimes because managers feel that, with a couple of exceptions such as Lay and Koslowski and Rigas, they can do whatever they want with impunity.
Mary Schapiro may have provided the perception that the SEC is doing something after the malaise of the Bush administration, but so far it is only perception. If she wants to do something substantive, she needs to go after the managers who commit accounting frauds and the directors who approve their tomfoolery. If she really wants to get their attention, and if she really wants justice and the deterrence of accounting crime, then send the leading perpetrators to prison.
Tuesday, August 11th, 2009
The New York Times reports on the growing trend of American college graduates seeking refuge from rising unemployment at home by accepting entry-level jobs in China. “They are lured by China’s surging economy, the lower cost of living, and a chance to bypass some of the dues-paying that is common to first jobs in the United States,” according to The Times. But what happens when they return home to the United States? Jonathan Woetzel, a partner with McKinsey & Company in Shanghai, tells The Times that Chinese work experience is not an automatic ticket to the top, nor is it noted by employers as an accomplishment on par with an Ivy League education.
This news may come as a disappointment to repatriates, who often feel like their organizations do not recognize or value their international experiences, according to research by Smeal’s David Harrison. This disillusionment often leads to the repatriate’s departure from his/her organization.
“Repatriates who come back from international assignments have paid a huge price,” Harrison says. “They feel like they’ve sacrificed a lot. Just as importantly, they have a whole new, global or international identity for themselves that they would like to see reinforced by their firm. They are no longer who they used to be, and their firm—which asked them to sacrifice friends and sometimes family during their expatriation—is not validating who they are now.
“They come back with an expectation that all the new knowledge they’ve gained will be used by the firm, they’ll be paid more, and have a nicer job with more responsibility; but, for the most part, they’re severely disappointed,” Harrison says. This disappointment leads to tensions of identity distress, which often leads to turnover.
To combat these effects, Harrison recommends that employers recognize and validate repatriates’ international employee identity by involving them in international operations, giving them the chance to utilize the skills they learned abroad while contributing to the organization. Employers can also use repatriates as a resource to prepare other expatriates and repatriates with their transitions.
Thursday, August 6th, 2009
BusinessWeek.com reports: “Clear Capital, which provides real estate valuation data for investors, said today that U.S. home prices jumped 5 percent in the quarter ending July 25 compared to the previous quarter. The index showed an 11.2 percent quarter-over-quarter gain in the Midwest, a 5.3 percent gain in the South, a 2.4 percent increase in the Northeast, and a 1.1 percent rise in the West.”
This news, coupled with last week’s Case-Schiller index recording a 0.5 percent increasein home prices after 34 straight months of decline, may be signaling that the housing market has finally bottomed out. Not so fast, says Smeal’s Austin Jaffe, writing on the Pennsylvania Association of Realtors‘ blog, Just Listed:
I believe that the nationwide upturn in house prices is a significant signal that if the bottom hasn’t been hit, it will soon. But—and this is important—you need to be cautious in making predictions based on a few month-to-month changes. Remember, the annual price decline is still significant and is expected to continue to decline over the months ahead.
Foreclosure sales have declined, in part because many lenders have agreed to keep some properties off the market to attempt to stabilize prices. If successful, this will be a short-lived victory. There are still millions of Alt-A and Option ARMs about to be reset over the next several months. These will doubtlessly add to the foreclosure experience.
Unemployment is expected to rise to double-digits soon and despite rhetoric to the contrary, job creation is proving to be problematic for government policy-makers. This factor will ensure that any economic recovery will be quite slow and very moderate.
Finally, swirl all of these (and other factors) together and what do we get? House prices will likely continue to decline a bit longer, even if the end is in sight, to be followed by an extended period of “no growth” in property values. Stay tuned!
Tuesday, August 4th, 2009
A recent article in BusinessWeek highlights a new generation of predictive technology used by e-marketers to determine the wants and needs of online shoppers. Author Stephen Baker says this technology is “fueled by growing rivers of behavioral data, from mouse clicks to search queries—all crunched by ever more powerful computers.”
Smeal’s Arvind Rangaswamy takes an in-depth look at the past, present, and future of predictive technologies:
Over the past 100 years or so, there has been substantial research to mathematically model people’s preferences, which could then be used to predict their future behavior. Consider a simple example. If we somehow determine that a person prefers a red hat to an orange hat, then we could predict that this person would probably prefer an orange hat to a yellow hat.
The same logic can be extended to products, such as movies, which have more than one attribute, perhaps dozens of attributes. Thanks to the Internet, businesses with an online presence, such as Netflix, now collect enormous amounts of preference data in the form of product ratings. Movies, restaurants, books, and travel destinations are among the set of products for which customers are willing to provide ratings based on their experiences. These ratings can be aggregated across millions of customers to develop preference models, which can be used in real time to generate product recommendations.
What was once an esoteric topic in the halls of academia is now finding potentially huge applications in practice. If a customer gives a high rating to a movie A, then the preference model can predict other movies this customer is likely to rate highly, based on the high ratings given to other movies by customers who have rated movie A highly.
This is the core idea expressed in the BusinessWeek article. Correlations among ratings can also be supplemented with contextual data—if you recognize that someone at your Web site has logged in from Phoenix, it is a safe bet that this person is not shopping for an umbrella. And, you can provide such product recommendations without knowing the identity of the person.