The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
Business Week has a great interview with author and marketing guru, Philip Kotler. He has a new book out called Chaotics: The Business of Managing and Marketing in the Age of Turbulance. Below is a portion of the interview.
Philip, in these troubled times, companies are cutting their marketing budgets—in fact, marketing is one of the first departments to be cut. Do you think it is a wise move to cut the marketing budget?
Yes, if the marketers cannot provide performance metrics for their expenditures. Marketers have had it easy in the past, getting lots of money for 30-second commercials without having to produce any evidence of their sales or profit impact. Advertising was a matter of faith, not reason. The plot was to get a large share of voice so that the brand was locked in the customers' memories. Hopefully the message promised something distinctive and the customer who wanted that point of difference would automatically choose that brand.
My guess is that only 1 out of 10, maybe only 1 out 20, advertising campaigns really makes a financial contribution. That means that the average company has only 1 chance in 10 or 20 that its ad campaign will create a memorable and motivating message. I don't like those odds.
Years ago, Will Rogers quipped, "If advertisers spent the same amount of money on improving their products as they do on advertising, they wouldn't have to advertise them." This theme was recently elaborated by Jean Claude Larreche in his new book Momentum. He claimed that heavy advertising spending is often on products that have little distinction. The company would be smarter to save that money and use it to build a better product.
Is cutting out the less-defensible parts of the marketing budget enough to do in difficult times?
No. I can even imagine where the proper step is to increase the overall marketing budget and spend more. A down period introduces as much opportunity as it does chaos. For example, customers are ready to switch to lower-price store brands and away from the more expensive national and international brands. Retailers such as Kroger, Tesco, and others are strengthening their private brands and offering two or three private brands on the model of "good, better, and best." Today, more people are fishing to solve the problem of having a good dinner with little cost. This is good news for companies that make fishing rods, nets, and bait. Some companies see cracks of sunshine in this otherwise gloomy picture.
Are there any marketing maxims that must be preserved even in bad times?
Yes. I would mention three:
1. Understand your target customers and solve their problems in a better way than your competitors.
2. Build your brand promise that is delivered by everyone in your business network (employees, distributors, suppliers).
3. Innovate continuously in your products, services, and supply chain.
See the full article here: http://www.businessweek.com/managing/content/jun2009/ca2009065_435823.htm?campaign_id=rss_daily.
This current economic recession, just like the ones that have preceded it, have a lot of people asking who's fault it is and why it happened. Blame has been placed on the mortgage companies, the banks, the federal government, deregulation, homeowners who overspent, Wall Street traders, etc. A really big-picture view of the whole thing is just that, in a free-market economy, booms and busts are just going to happen. They will happen due to any number of indeterminate, ephemeral and fluky reasons. These unpredictable reasons then cause a run, which devalues a market and money, or the valuation of something in terms of money, is lost. It's a two-stage process: the initial reason followed by the run. But it is the run that makes the market fall. Think of it like seeing a bear in the woods. The instinct is to run away, but if you do that he will definitely chase you and tear you to bits; but if you stay still, the bear might pass you by.
The causes, consequences and stories of market runs since the 1987 crash are the subject of Michael Lewis's Panic: The Story of Modern Financial Insanity. Lewis is the author of Liar's Poker, a story of his days at Salomon Brothers and a contributor to the New York Times Magazine, Bloomberg and Slate. Panic is an anthology of news reports, interviews, editorials and articles previously published in The New York Times, The Economist, The Wall Street Journal, Fortune, Bloomberg News and other media. The authors of these pieces include Lewis himself, Paul Krugman, Joseph Stiglitz, Jeffrey Sachs, Robert J. Shiller and even humorist Dave Barry. The book is divided into 4 parts: Black Monday 1987; the Southeast Asian and Russian currency crises; the dot-com bust; and the sub-prime mortgage collapse. Unfortunately, Panic's chronology ends just at the time Bear Stearns was collapsing. Still, the content provided by the previous two decades makes fascinating reading.
Part one of anthology begins with a July 1987 Time article describing the "wild bull market," and is followed by an excerpt from Lewis' Liar's Poker that describes the insanity he saw on October 19th, Black Monday, at Salomon Brothers. The look back to that time is enlightening. I had just graduated from high school the previous June, and although I didn't pay much attention to the crash itself, I do recall how the times suddenly changed, especially the job market. Part three, the dot-com days, is still fresh in my memory though. Anything Internet was always going to be the greatest thing. A March 2000 Barron's article, however, listed hundreds of companies that would soon go bust. One that was expected to fail almost immediately was Marketwatch.com, now owned by the Wall Street Journal. Salon.com was soon to follow, as was Amazon.com. CDNow.com looked healthy, though; it is now owned by Amazon. Investors tried, but the truth is that nobody can predict the future. The dot.com crash sorted it out though.
Lewis' retrospective on runs is like watching a stampede from a helicopter. Panic gives us the benefit of hindsight about some of the rationalized absurdity that causes a market to go amok. The sell-offs that happen when a market falls are perfectly rational at the time because free-markets are not collective or communal and thus every participant must protect himself. As Panic demonstrates, this is the way of things. Sometimes it's merely a correction, but sometimes, when we run from the bear, it's a collapse.
This book is an interesting read especially in these times, when the whole world is wondering, is the panic over… or are we just building up to the big one?
Most everyone has heard the term “comps” as applied to valuation. It means data from comparable sales of businesses.
But the data itself is problematic. The most common databases are Pratt’s Stats and BizComps. These sources of data are organized by Standard Industry Codes (SIC). This may seem reasonable, but in fact there is as much variation within a particular SIC as between different SICs. The reason is there are an infinite number of business models, and each produces a different return on investment. This, and other facts outlined below indicate that the so-called “data” is not really data at all as used in the statistical analysis sense. It is really a series of loosely correlated data points, which much be interpreted virtually as anecdotal evidence. It also is usually unverifiable, coming from third party volunteer sources.
The shortcomings generally are that they represent different:
3. accounting methods
4. business models
5. scale (i.e. gross sales)
6. geographic areas
7. economic climates
In analytical terms it is a multivariate array which makes attempts to analyze it with conventional statistical analysis tools, using normal distributions and standard deviations, meaningless.
So how do you deal with this information? American ValueMetrics uses a methodology known as “heuristics.”
What is Heuristics? Heuristics is a “decision support” methodology. It is a predictive method (in appraisal, predicting a value). It is an important methodology that appraisers, and users of appraisals, should become familiar with. It is an alternative to mathematical/statistical analysis that can be used when data does not meet the relatively rigid requirements for use of mathematical/statistical analysis methodologies.
The Source of the word “Heuristics” (pronounced hyu-RIS-tiks) is the Greek "heuriskein" meaning "to discover". This is the same source as the word “Eureka” meaning “I have found it.”
In the past twenty years it has been refined into a modern problem solving and analysis methodology, usually associated with systems science.
It deals with decision making where specific reliable data is not available, and/or the time and cost of obtaining such data necessary for a conventional statistical analysis is simply not feasible. Heuristics is the art of drawing inferences when faced with limited, incomplete or fuzzy data.
For valuations in the area of business assets, or unregistered, exempt, closely held securities or where transaction data is sparse, it is an appropriate methodology for determination of central tendencies, such as price/earnings ratios. It is especially valuable in evaluating minority and control discounts in a defensible way.
In practice, the information is ranked and weighted, based upon the judgment of the appraiser. This requires experience. The heuristics process is dependent upon an innate quality of the human brain called “pattern recognition.” We all operate this way. A good example is our understanding of words in a language context. Words are comprised of letters, which approximate sounds, which are strung together to convey ideas. When you hear a spoken sentence, your mind completes pattern recognition and you can intelligently understand (hopefully) what the speaker is saying without trying to analyze each letter or each sound.
The same process holds true in an appraiser’s analysis of comparable business sales data. An experienced appraiser sees patterns in the data, and can readily rank or weight the data as to relevancy to his subject business. The problem is broken into many small decisions, and reintegrated using a mathematical approach, usually a weighted average. When the resultant is a capitalization rate or a capitalized value, it is amazing how accurate it is.
So when data is not limited to one variable, and is not widely available, and is not verifiable, the heuristics approach is the most efficacious approach available for making sense of the comparable sales data.
Inc.com created a very interesting list of the best industries for starting a business right now. Add to the list in the comments!
Here are their picks:
Check out the full slideshow with explanations here: http://www.inc.com/ss/best-industries-for-starting-a-business?partner=rss#1
Every year the U.S. Chamber of Commerce ranks the 50 states for the corporate law structure each has established. Delaware is unique in that it ranks #1 for the 7th year in a row in a survey generated by the United States Chamber Institute for Legal Reform. The survey polled judges, attorneys, professors and others for opinions on which state offered the best structure. Many states that are supposedly “corporate friendly” such as Nevada, are buried deep in the list and continue to decline year after year, while Delaware flourishes. The residents of the State of Delaware are grateful for the strong corporate law structure their state has created because it benefits each and every resident. Almost one third of Delaware’s income can be attributed to the Division of Corporations. This strong corporate law structure protects individuals behind the company, which is why money is generated from people around the world looking at Delaware to incorporate. This revenue even enables Delaware to be one of the few states without a sales tax! The State of Delaware will continue to keep the laws on the cutting edge through consistent judgments and by keeping a reasonable, fair legal environment for the corporate entities.