Archive for January, 2010
Friday, January 29th, 2010
In Domino’s Pizza’s new ad campaign, the company is doing something rather unusual in the world of marketing: admitting that its core product stinks. Video ads feature company managers reading customer comments about their pizzas, with glowing reviews like, “Worst excuse for pizza I’ve ever had,” “The sauce tastes like ketchup,” and “Totally void of flavor.”
The marketing message is this: Domino’s Pizza hears you, and we’ve completely revamped our pizza. The company has changed nearly all of the key pizza components—crust, sauce, and cheese—to produce a new and improved Domino’s Pizza.
For Smeal’s Jennifer Chang Coupland, the campaign initially reminded her of the colossal failure of New Coke in the 1980s, but, she says, changes in attitudes, culture, and technology might be working in Domino’s favor:
When I first saw the Domino’s ads, I thought to myself, “Oh no! It’s New Coke all over again.” What we learned in the Coke case is that competing brands don’t necessarily have to compete on the same attributes. In the early 1980s, when Pepsi started the Pepsi Challenge, it was all about taste—and Coke was worried, so they gave in and changed the recipe, along with their marketing messages, packaging, and the entire brand. What they later realized, however, is that people associated Coke not with taste, but with Americana, tradition, and nostalgia—and all of that was lost with New Coke. Coke and Pepsi both had their differentiators—Pepsi on taste and Coke on tradition.
We don’t see this in the Pizza industry. There are no strong differentiators between Domino’s and Pizza Hut, for example. So, what Domino’s is trying to do here is stand out from the crowd based on something as basic and functional as taste.
Another difference compared to the Coke case is the cultural shift since the 1980s. The ’80s were materialistic and arguably more superficial, and now our culture is more about being true to oneself and others—and that’s exactly what Domino’s is doing when it admits its past mistakes. This honest message goes over well nowadays. And so does the self-deprecating humor and the documentary/reality-TV style presented in its commercials and viral ads.
The third factor in favor of Domino’s is technology. The company’s humorous ads are showing up on YouTube, Facebook, and Twitter. People are sharing them and talking about Domino’s Pizza more and more. Pop culture commentators—like Comedy Central’s Stephen Colbert—are talking about Domino’s and clips from these programs are furthering the impact of the ad campaign.
While it’s risky for any company to come out and say that they have failed—and to post a live Twitter feed on their Web site with both positive and negative comments about their product—there are marketing, cultural, and technological principles in play in this case that just might make this move successful.
Thursday, January 28th, 2010
“In a stunning and unprecedented move, Toyota Motor Corp. on Tuesday halted sales of most of its popular models in the U.S. in response to growing concerns that possible defects may cause the vehicles to accelerate unintentionally,” The Wall Street Journal reports. The paper is also questioning whether the world’s No. 1 automaker “has sacrificed quality in its quest to capture global market share.”
Smeal’s Dennis Gioia, chair of the college’s Department of Management and Organization, weighs in below on the recall and its possible effect on Toyota’s reputation for safety. Prior to joining Smeal, in the 1970s, Gioia served as corporate recall coordinator for Ford Motor Co. and was initially in charge of the infamous Ford Pinto fires case, which resulted in a recall of the vehicles because of exploding gas tanks during rear-end collisions and an eventual indictment of Ford in 1980 on charges of reckless homicide.
Here’s Gioia’s take on the Toyota recall up to this point:
It seems like Toyota is making a good move in halting production. The problem is bad enough to justify it and Toyota seems to have been caught in the uncomfortable position of having a huge number of vehicles with similar, dangerous problems (floor mats trapping gas pedals open and now gas pedals that stick open). It seems apparent that this latest one is the more serious engineering problem. The most embarrassing part of this whole thing is that Toyota didn’t initiate the recall of their own volition. The U.S government forced the issue, which makes Toyota look even worse.
Of course, these days, any crisis manager will tell you that the prudent course of action is to “get out in front of the problem,” but it’s a little late for that now; so the company needs not only to fix the problem, but also appear to be dealing with it in an extraordinary fashion. Toyota leadership must know it’s serious and wide-ranging because you don’t shut down production lines solely for PR reasons. Shutting down lines does convey the sense of responsibility, however, and also gives them time to stop producing flawed vehicles that are going to cost a small fortune to fix once they are in the field. Not doing so would only magnify their problem.
Will this mess hurt? Oh,yes, financially and reputationally. Will it cause long-term damage? Maybe. Toyota finally has serious competition in the international market (Hyundai—see the latest Fortune magazine), so they can see the future from here and it looks much more problematic than the past. In addition, you can bet that other manufacturers are going to make hay with this one. Of even greater consequence is the perception that Toyota is the poster boy for Japanese quality, more generally, so when Toyota suffers, other Japanese companies could suffer, as well. Furthermore, many observers seem to think that this problem is a consequence of Toyota’s ambition to be No. 1 in vehicle sales, and that to achieve that goal they sacrificed quality for volume. That’s not a desirable perception for potential customers to have.
What’s really ironic is that Toyota has enjoyed a reputation as a very quality-oriented, safety-conscious, and responsive company. I remember them recalling cars in the early ’70s because one customer (one customer!) had a Coke bottle fall off of an under-dash tray and lodge behind the gas pedal—a true freak occurrence, but Toyota responded by recalling all affected cars and won big points in the public eye. Now their eyes are blackened a bit and they are trying to avoid adding to an increasing reputation for arrogance, ambition, and imperiousness because they have had such profitability that they can ignore complaints. Not this one. This one will hurt at a time when they can least afford it.
Tuesday, January 26th, 2010
According to a recent report from the Kauffman Foundation, Pennsylvania is ranked dead last out of all states in entrepreneurial activity. Smeal’s Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, weighs in:
Pennsylvania is ranked well below our neighbors Delaware, New Jersey, Ohio, Virginia, and West Virginia. And Philadelphia is worst among all major cities. What has gone wrong? There is ample evidence that the creation of new innovative companies is the lifeblood of long-term economic growth, sustainable high-paying jobs, wealth creation, and tax revenues. Companies are like people—eventually the old ones die off, to be replaced by energetic youngsters.
Some say that the problem is with Pennsylvania’s history and farming culture. Are we worse off in this regard than Alaska, Louisiana, or North Dakota—certainly not. Do we lack world-class higher education? Hardly, with leading research institutes such as Carnegie Mellon, Penn, Temple, and Penn State all with highly regarded educational programs in entrepreneurship.
Unfortunately we have to look at our leaders in Harrisburg, who, a few years ago, took on an outdated model for economic development, namely Porter’s cluster analysis method. This is best suited for established industries and designed to support the old, rather than nurturing the new. Politically expedient perhaps, but not good for the long haul. With markets globalized, and technology changing by the hour, new corporate structures must be fast and flexible, not solid and slow to change.
This “old is good” mindset is recently evidenced by major cuts in the budgetary support for Ben Franklin Technology Partners, a long-standing and successful program for helping early stage companies. While other states have envied this model and are looking to introduce similar programs, Pennsylvania is rapidly destroying any fertile ground we once had for growing new companies. Currently the economic environment has never been so bad for start-ups; those states that realize this, and provide support, will reap rich harvests in the future.
Monday, January 25th, 2010
The Wall Street Journal and the Heritage Foundation last week released their annual rankings of the freest economies in the world, with Hong Kong and Singapore retaining the No. 1 and No. 2 spots, respectively, for the 16th straight year. Smeal’s Austin Jaffe recently visited these two areas (along with South Korea), and wrote about their real estate economies on Just Listed, the blog of the Pennsylvania Association of Realtors:
Though capitalism has been in vogue for a generation in these countries, it sometimes takes different forms from the American version we’re used to.
For example, Singapore is one of the most dynamic city states in the region, yet its government is involved in virtually every decision (certainly all real estate decisions) on the island. Democratic principles sometimes give way to government mandates and many controversies remain close to the surface. Hong Kong is a Special Administrative Region of mainland China and has a delicate relationship with Beijing. South Korea remains dynamic and considerably different from its closed and very poor neighbor to the north.
There are also similarities among real estate markets in each of these three countries. For the most part, the decision to develop land is strictly a government affair; state agencies maintain tight control over the supply of land. Given the high population densities, especially in Hong Kong and Singapore, most housing units are apartments or condominiums. In Singapore, home ownership rates are among the highest in the world (over 90 percent) since the Singaporean government has long had a policy of privatization of flats to sitting tenants at deep discounts, using the state’s pension fund for financing. Given Singapore’s continuing economic growth, trading up from “HDB flats” (public housing projects) to higher quality condominiums (generally privately developed and managed) is a national obsession.
It’s said in Hong Kong that real estate is the only business in town. Indeed, I heard about the new record price of a condo sale in Hong Kong: HK$92,000 (or almost $12,000 USD) per square foot! The talk of the real estate community for several months, this vast sum is thought to be even too high by local standards.
In Singapore, prices continue to rise and construction continues around the site where one of two casinos is being developed. Once considered offensive to Singaporean sensibilities, the casinos are scheduled to open next year—with entrance fees of more than $100 USD! In Seoul, real estate values are escalating, along with bumper-to-bumper traffic.
Read Jaffe’s complete post here.
Thursday, January 21st, 2010
Smeal’s Rajeev Sooreea says that Google’s threat to leave China is a risky move that could damage its ability to succeed in China if it ultimately decides to continue operating there:
Google’s threat to exit China is not only an economic decision but also a key strategic one.
J.P. Morgan has estimated that Google could potentially lose $600 million in revenue if it withdraws from the China market. And such market share could be a boon for companies like Microsoft, which is there to stay, and Baidu, which already has 63.9 percent of the market, compared to Google’s 31.3 percent.
Whether Google leaves or stays essentially comes down to how it prioritizes its goals: market presence versus market growth. If Google leaves, it could still have an indirect market presence by transferring its China businesses to local players in exchange for equity stakes. But then it would severely compromise its market growth. Microsoft has had bumpy times with the Chinese authorities but its focus is on growth. For Microsoft, the China market is too big to walk away from. Over the years it has learned its lessons and Google will have its own if it stays.
It is important for foreign firms to realize two things: First, successful longstanding multinational companies in China are those that contribute to the welfare of the economy. Second, the business-government relationship and culture in China are far more complex than what one could anticipate. One of the premises on which Google is founded is freedom of expression. But freedom of expression is molded to a large extent by culture, and what may be valued and promoted in the United States may not be admissible in some other cultures, including China. Besides, in some cultures, freedom of expression may not be a social or political priority.
Google’s threats to exit China could be viewed in several ways. It could be real or strategic. If it is real and Google exits, it will lose a big market (but it may be honorable in the sense that Google was already struggling against competitor Baidu and it has upheld its no censorship philosophy). If the threat is fictitious and used to strategically force information out of the government, then it may land itself in a worst-case scenario, making its future growth in China more politically difficult. This could well be the case, too, even if the threat is real and Google stays in China.
For the company’s sustainability in China, threats seem to be damaging because the stick component of the carrot and stick is seldom welcome there. Again, the parallel is with Microsoft which used to send threatening letters to the Chinese authorities in its early years but then it had to change its strategy and adopt a friendlier approach. Today it is more successful than ever before.
On the other hand, China has to proactively do its fair share of the trade. Google simply withdrawing from China will not make the attackers go away. All across Asia, China is renowned for giving red-carpet treatment to foreign multinationals. If it wants to maintain its leadership, it should realize that the playing field is flattening out, and reinforcing its intellectual property laws would be a key factor for its own long-term success. Hacking is a deliberate violation of privacy and this is an area where the Chinese authorities need to do something more concrete. Only collaboration between Google and the Chinese government could be welfare-enhancing for both.
Wednesday, January 20th, 2010
President Obama last week unveiled his plan to recoup federal bailout funds with a new tax on the nation’s biggest banks. According to Smeal’s Brian Davis, the tax is little more than an acknowledgement of the populist anger directed toward big banks:
When looking at President Obama’s bank tax, it’s important to consider the following four statistics:
1) Unemployment Rate: 10%. (Bureau of Labor Statistics)
2) Lending and Credit: As of Dec. 23, the latest date for which data are available from the Federal Reserve, bank lending, at nearly $6.7 trillion, was down $100 billion from the month before. In the past year, the volume of loans outstanding by banks in the United States has fallen by more than $500 billion. (Time.com)
3) Wall Street Bonus Pay: The top 38 U.S. banks and securities firms are on pace to pay their people a record total sum of $145 billion for 2009. (The Wall Street Journal)
4) Obama Approval Rate: 50% vs. 62% in the prior year. (CBS News)
Clearly, the tension has been building. “I did not run for office to be helping out a bunch of fat-cat bankers,” President Obama assured Main Street voters again and again in speeches defending the Troubled Asset Relief Program (TARP). Repeatedly, administration officials warned bankers about exorbitant compensation packages and anemic lending volume. Jaw-boning was clearly not working.
The new fee applies to institution with assets of more than $50 billion. Each will pay 0.15 percent of its eligible liabilities, measured as total assets minus capital and deposits. Investment banks with few deposits, such as Goldman Sachs and Morgan Stanley, will be hit much harder than commercial banks, so the fee is being sold as a tax on the riskier asset positions of the trading and hedging activities of larger investment banks. (These are also the institutions paying out the largest compensation packages.)
The fee will last a minimum of ten years—longer if it is necessary to recoup the full cost of TARP. The Treasury expects the fee to raise $90 billion over that period; however, conservative estimates peg TARP losses at $120 billion—perhaps pushing the application of the fee past 2013.
In examining the effects of this new tax, it seems little more than a populist “tip of the cap” to Main Street voters seething over Wall Street bailouts. First, relative to total bank earnings, the fee is minuscule. Upon the fee announcement, bank stocks did not react, as investors seemingly shrugged off the effect of such a tax on bank earnings. Second, it is fairly certain that banks will be able to recoup any negative tax incidence by passing higher fees onto consumers—resulting in unintended consequences. Third, if the intention of the fee is to force banks to internalize the costs of risk-taking behavior, again, other bank regulation initiatives involving the Federal Reserve and the FDIC seem more effective and appropriate.
Tuesday, January 19th, 2010
With the Supreme Court now weighing a decision in yet another property rights/eminent domain case, Smeal’s Austin Jaffe explains the concepts behind the Fifth Amendment’s Takings Clause and recent developments in property law:
In recent years, thousands of property rights disputes involving eminent domain claims by governments seeking to convert private property into something else have appeared. Traditionally, the cases dealt with government plans to limit, alter, or suspend private usage for which property owners typically claimed that these plans constituted a taking. There is a fundamental difference between “takings” and “regulations”: only the former are compensatory under the Fifth Amendment of the U.S. Constitution. Every government agency generally tries to argue that their action was regulatory; every citizen argues that it was a taking of private property.
Historically, the debate was generally about what constituted a taking. “Just compensation” was required to be paid if it was a taking and the power of eminent domain could only be used for takings when there was a “public use” involved. This is the literal language in the Fifth Amendment.
In 2005, Kelo v. New London shifted the focus away from the issue of public versus private usage. In an amazingly unpopular and yet far-reaching 5-4 decision (e.g., to date, most states have banned or eliminated eminent domain usage for economic development via legislation or court decisions), the U.S. Supreme Court allowed governments to take private property and hand it over to other private owners if they were expected to redevelop the site and increase its value. So much for the importance of private ownership protected by the Constitution.
Thursday, January 14th, 2010
The U.S. Department of Commerce on Tuesday announced that the U.S. trade deficit jumped up nearly 10 percent to $36.4 billion in November—a 10-month high. While a widening trade gap is generally portrayed as an economic negative by the media, there’s good news in this latest report, according to Smeal’s Fariborz Ghadar, director of the Center for Global Business Studies:
While the current trade deficit is unsustainable long term, there are reasons to be optimistic in this latest trade report.
First of all, U.S. exports are growing at a faster clip than we’ve seen in recent history. Thanks to the rapid economic growth in countries like China and India, there’s an increasing demand for U.S. heavy machinery. Other U.S. exports are becoming more appealing, too, because of the weakening U.S. dollar. As a result, the United States is experiencing growth in the manufacturing sector that hasn’t been seen in years. As U.S. manufacturers catch up with global demand and fill the pipeline, I expect to see exports grow at an even faster rate in the near future.
The rapid growth in imports also signals a strengthening U.S. economy. We’re seeing consumers loosening their purse strings a bit, ratcheting up the demand for imported goods in the United States.
Ultimately, though, this imbalance cannot continue unabated. The trade deficit has historically been managed by recycling the outflow of dollars by foreign entities buying U.S. debt. Given the ballooning debt facing the federal government and the recent financial crisis originating in the U.S. financial sector, we should eventually reduce our heavy reliance on foreign purchases of our debt instruments. U.S. exports must begin to close the gap on imports if our economy is going to have long-term viability.
Overall, the current imbalance is to be expected during economic recovery, and I think it’s promising that we’re seeing such rapid growth in exports. Let’s hope it continues.
Thursday, January 7th, 2010
After addressing a rough year for IPOs in 2009, Bloomberg BusinessWeek recently discussed the more positive outlook for 2010, although some skeptics aren’t as optimistic. In the article, Deepak Kamra, a partner at Canaan Partners, says the degree to which investors’ engage in risky behavior depends on the overall performance of the stock market. “Tell me how the Nasdaq does and I’ll tell you how many IPOs,” he says.
Smeal’s Tim Pollock tends to agree with Kamra, adding that IPOs are very risky and rely heavily on investor optimism and their willingness to take risks.
More from Pollock:
If investors, particularly institutional investors who buy about 70 percent of all IPO shares issued, are being cautious and pessimistic about the market, then there aren’t going to be a lot of IPOs. Although, I do think there is a pent up supply available.
I’m sure some venture capitalists (VCs) are getting nervous if the funds they invested into a company are coming to a close and they can’t liquidate their positions. (VCs raise capital for a specific fund that typically has a ten-year life. At the of ten years, the fund is liquidated and all the principle and any gains are returned to the investors in the fund.)
If the stock market stays okay, then we will see some of the companies that have been profitable for a while go public. If those companies do all right, then younger companies that may be less profitable are likely to have the opportunity to go public as investors’ appetites for IPOs increase.
I don’t know that companies like Facebook and Twitter are profitable yet. If they are, they could probably go public and do okay, although not as well as if it were a hotter market. If they aren’t profitable at this point, they may want to wait until they can show some profits. They may still be able to go public simply because of their name recognition and celebrity, but once they do, if they aren’t making money, it will be a bumpy ride. Their stars may start to fade. This doesn’t mean they won’t survive, but the media and other folks may become more critical of them and the flaws in their business models.