Strategy in the media

Citation

Henry, C. (2008), "Strategy in the media", Strategy & Leadership, Vol. 36 No. 1. https://doi.org/10.1108/sl.2008.26136aaf.001

Strategy in the media

Strategy in the media

Craig HenryStrategy & Leadership’s intrepid media adventurer, collected these sightings of strategic management in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).

Does your company need a chief strategy officer?

Even the most compelling strategy is useless if it isn’t implemented. But in many companies, no one’s driving execution. CEOs, grappling with the complexity of doing business in a global economy, are too overloaded to stay on top of strategy implementation. COOs and CFOs are too wrapped up in day-to-day dealings.

Some companies, including AIG, Kimberly-Clark, Motorola, and Yahoo!, have discovered a way to fill the execution void: hire a chief strategy officer. CSOs ensure corporate strategy gets translated into action, say Breene, Nunes, and Shill. CSOs communicate strategy to people throughout the organization and help them see how their work supports it. They ride herd on change initiatives needed to carry out strategy. And they make sure decisions at all levels align with strategic objectives.

Hire a CSO, and you help your senior team deliver faster, better decisions while building world-class execution capabilities throughout your company.

Why you need a chief strategy officer

CSOs handle three critical strategy implementation tasks:

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  Engendering commitment to strategic plans. CSOs articulate a clear definition of your company’s strategy and explain how each person’s work relates to it. This clarity enables CSOs to build the federation necessary to put strategic plans into action.

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  Driving immediate change. CSOs facilitate the change initiatives required to execute the strategy.Example:One health care company rebounding from bankruptcy in 2005 formulated a strategy focused on growth. A newly appointed CSO recognized that growth would hinge on rebuilding the company’s sales pipeline, offering additional product lines, and repositioning its brand. Therefore, he worked with the heads of Sales, Marketing, M&A, and Strategy Development to address stalled growth, identify attractive new markets, and formulate aggressive acquisition strategies. By the end of 2006, the firm had achieved dramatic growth and acquired several critical new businesses.

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  Promoting decision making that sustains change. CSOs ensure that strategic decisions don’t get watered down or ignored as they’re translated throughout the organization. They communicate with managers at all levels to determine whether decisions being made over time continue to be aligned with the strategy.

R. Timothy, S. Breene, Paul F. Nunes and Walter E. Shill, “The Chief Strategy Officer,” Harvard Business Review, October 2007.

The right remedy for IT problems

In our work with IT and business executives and dozens of companies in many different industries, we began to see a troubling pattern: even at companies that were focused on alignment, business performance dependent on IT sometimes went sideways, or even declined.

Why wouldn’t a high degree of alignment alone bring about improvement? In our experience, a narrow focus on alignment reflects a fundamental misconception about the nature of IT. Underperforming capabilities are often rooted not just in misalignment but in the complexity of systems, applications and other infrastructure. This complexity develops for understandable reasons. At Schwab, for instance, the enormous complexity of the company’s IT system wasn’t the result of IT engineers somehow running amok. Rather, the company’s various divisions were driving independent initiatives, each one designed to address its own competitive needs. IT’s effort to satisfy its various (and sometimes conflicting) business constituencies created a set of Byzantine overlapping systems that might satisfy individual units for a while but did not advance the company’s business as a whole.

Complexity doesn’t magically disappear just because an IT organization learns to focus on aligned projects rather than less aligned ones … As Richard F. Connell, senior executive vice president and CIO of Selective Insurance Group, told us, “Aligning a poorly performing IT organization to the right business objectives still won’t get the objectives accomplished.” That, in a nutshell, is the alignment trap …

In our experience, we have found three critical principles most significant in moving organizations to high effectiveness.

Emphasizing Simplicity. “Simplicity is the ultimate sophistication.” The words are Leonardo da Vinci’s, but the mantra should be that of every CIO. Any company’s first step should be to focus relentlessly on reducing complexity rather than increasing it.

“Rightsourcing” Capabilities. An effective IT organization needs a wide variety of capabilities, ranging from staffing the help desk to creating and integrating innovative business applications. Traditionally, most organizations did as much as they could in-house. Today nearly all the capabilities any company might want are available from a range of suppliers, including low-cost IT specialists in India and elsewhere.

Creating End-to-End Accountability. Companies cannot build effectiveness unless they hold IT and the business accountable for delivering expected results on time and on budget. It sounds obvious, but many companies observe it only in the breach. Survey data suggest that about three-quarters of IT projects are canceled or fail to deliver expected results on time and on budget.

David Shpilberg, Steve Berez, Rudy Puryear and Sachin Shah, “Avoiding the alignment trap in IT,” Sloan Management Review, Fall 2007.

The limits of social-network marketing

New York: When Coke relaunched its Web site a year ago, it ditched a dry corporate venue in favor of a global YouTube-like outpost to celebrate consumer creativity with a series of monthly contests. Just one year later, the beverage giant has changed course, quietly closing down The Coke Show, the site’s challenge series, and launched a less ambitious site that links to Coke’s many Web destinations.

With brands ranging from cars to tequila to retail setting up community hubs, The Coke Show joins a growing list of cautionary tales, including Wal-Mart’s ill-fated social network The Hub and Anheuser-Busch’s Bud.tv, showing it is far from easy to tap the same kind of sharing vibe that’s fueled the rise of MySpace, YouTube and Facebook.

Those that have succeeded either tap into the existing passionate audience of a niche brand or offer some functionality that cannot be found already on popular social media sites.

“There’s been a me-tooism on the social-networking front of ’I need to create a MySpace of my brand,’” said Pete Blackshaw, CMO at Nielsen BuzzMetrics. “Every brand needs to do some element of it, but do they need to go all out? It’s not clear.”

That hasn’t stopped them from trying. Wal-Mart set up a social network for teens called The Hub that shuttered after three months last October. Since its much-ballyhooed introduction at the Super Bowl, Bud.tv has been a disappointment and is now being retooled. Coke billed The Coke Show as a radical embrace of consumer-generated content, running contests that solicited submissions from users worldwide to do things like send in videos that “bottle the essence of you.”

Coke officials declined to talk about the site, but sources said the company was disappointed with low traffic numbers and determined that the global site needed to do more than just serve as a social platform. According to Nielsen//NetRatings, traffic to the site fluctuated along with the promotions offered to entice users. Some challenges only yielded a handful of entries while others proved more popular.

“Why some brands seem anti-social,” Ad Week, 24 August 2007.

When brand erosion is a self-inflicted wound

Wharton marketing professor Leonard Lodish admits he is somewhat to blame for the erosion in brand pricing power that has hit many consumer-goods companies – but not entirely to blame.

In 1993, as store-level scanning data started to become widely available, Lodish coauthored an article outlining the power of this technology to gauge the effect of price promotions on revenue. However, he also warned that while these tools could be an effective way to measure the impact of discounting, they were not the only determinant of brand power. He insisted there are other long-term measures that may not be as easy to collect, but are just as important, perhaps more important, to sales, market share and stock price over time.

Brand managers heard the first part loud and clear. The second part? No so much. “People will go toward what is easy and precise, and shy way from the more difficult and complex,” says Lodish. “It’s human nature.”

Now, Lodish has written a new paper titled, “If brands are built over years, why are they managed over quarters?” with Carl F. Mela, a marketing professor at Duke University’s Fuqua School of Business. This paper shows how widespread adoption of easy-to-harness, short-term measures has altered consumer behavior and made it more difficult for brand managers to maintain pricing power and compete in the marketplace. “This paper says, “I told you so,”” Lodish states.

The authors point to research indicating that market share for branded products is declining, and that consumer sensitivity to price has increased in the past 25 years. Meanwhile, between 1978 and 2001, trade promotion spending – or discounts – has increased from 33 percent to more than 60 percent of marketing budgets. At the same time, spending for advertising, which is hard to link to sales but can build brand power more effectively over the long term, is down from 40 percent of marketing budgets to 24 percent.

The authors reject the common contention that retail consolidation is to blame for pervasive margin erosion. They argue that in the 1990s, Vlasic (seller of pickles and other foods) caved into demands by Wal-Mart to cut its price, and eventually wound up in bankruptcy court. Meanwhile, Nike stood its ground when Foot Locker reduced its orders to protest changes in the running shoe manufacturer’s pricing and selection. Nike responded by cutting back its allocation of shoes to Foot Locker, which accounted for 10 percent of Nike’s sales. When customers could not find Nike shoes they wanted at Foot Locker, they moved on to competitors. Foot Locker eventually agreed to Nike’s terms. “Nike owned its customers while Vlasic ceded them to the channel,” the paper states …

“If brands are built over years, why are they managed over quarters?”, Knowledge@Wharton, 22 August 2007, http://knowledge.wharton.upenn.edu/article.cfm?articleid=1790

Doing well by doing good

eHarmony is a singular Internet company – one that shows how many great business opportunities remain for those who can creatively apply technology to basic societal challenges.

This 7-year-old online matchmaking startup has revenues of almost $200 million annually, and is “very very profitable,” according to its CEO Greg Waldorf, with whom I spent a fascinating lunch recently.

eHarmony was started by Dr. Neil Warren, a psychologist who, after counseling thousands of married couples, came to the less-than-earthshaking conclusion that the single biggest factor that determines a marriage’s success is picking the right partner. And he thought of something he could do about it. So he started the company with that unconventional corporate purpose. He found a bunch of programmers and went to work.

So now, for $59 a month or $251 for a full year, members can take advantage of eHarmony’s sophisticated matching algorithms. The software analyzes your answers to 250 questions that all members tackle when they join, to figure out who you might work well with. About 15,000 people submit their answers on an average day …

As it is now, it’s a great business. Waldorf says by year end the company will have $100 million in cash, and he is aiming for an IPO in the not-distant future. Paid subscribers are up 30 percent year over year, and revenue and profits, he says, roughly track that figure. Now the company has expanded into Canada, with the UK and China next. The challenge is that each national market requires an entire new set of sociological research to underpin the matching software.

“eHarmony does what tech ought to do,” Fortune, 14 September 2007.

The perils of following an icon

Ms Anderson’s turbulent tenure shows how tough it is for today’s CEOs to please their many constituents. “We did create $2.2 billion worth of shareholder value last year,” she says, referring to stock gains at both Wendy’s and its Tim Hortons chain, which the company spun off in 2006.

But that hasn’t stopped the likes of Mr Peltz – who holds Wendy’s shares through a hedge fund – from pushing for major changes, or Mr Thomas’s widow and son from griping that Ms Anderson is out of tune with customers.

Investors “don’t have to like me,” Ms Anderson allows. “I just have to perform.”…

Other big companies, such as Apple Inc. and Sony Corp., have strained to sustain their edge after the loss – or even temporary departure – of an iconic founder. In addition to crafting strategies and inspiring workers, their leaders each made distinct cultural imprints on the brands they built.

Dave’s shadow

It hasn’t been easy working in the shadow of Mr Thomas, the high-school dropout who grew his single-location hamburger outlet into the nation’s No. 3 fast-food chain and starred in its folksy commercials.

After Wendy’s went public in 1981 and Mr Thomas became chairman, he filled his board with acquaintances and local businesspeople. He also handpicked the company’s chief executives. Directors deferred to him on most decisions, says James Pickett, Wendy’s current chairman.

No one questioned that approach. After all, the chain’s sales and earnings grew steadily for most of the next quarter-century. Wendy’s salad bars, fresh (not frozen) beef and baked potatoes gave it a reputation for serving higher-quality food than McDonald’s Corp. and other rivals.

Wendy’s “was all driven by Dave,” says Gary Rozanczyk, a Wendy’s franchisee who began working for Mr Thomas more than 30 years ago. “You just trusted this man that he was going to do the right thing.”

“After Dave, how Wendy’s faltered, opening way to buyout,” Wall Street Journal, 29 August 2007.

Rescuing strategy from the annual plan

Most corporate strategic plans have little to do with strategy. They are simply three-year or five-year rolling resource budgets and some sort of market share projection. Calling this strategic planning creates false expectations that the exercise will somehow produce a coherent strategy.

Look, plans are essential management tools. Take, for example, a rapidly growing retail chain, which needs a plan to guide property acquisition, construction, training, et cetera. This plan coordinates the deployment of resources – but it’s not strategy. These resource budgets simply cannot deliver what senior managers want: a pathway to substantially higher performance.

There are only two ways to get that. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment – in technology, consumer tastes, laws, resource prices, or competitive behavior – and ride that change with quickness and skill. This second path is how most successful companies make it. Changes, however, don’t come along in nice annual packages, so the need for strategy work is episodic, not necessarily annual.

Now, lots of people think the solution to the strategic-planning problem is to inject more strategy into the annual process. But I disagree. I think the annual rolling resource budget should be separate from strategy work. So my basic recommendation is to do two things: avoid the label “strategic plan” – call those budgets “long-term resource plans” – and start a separate, nonannual, opportunity-driven process for strategy work …

For example, I think high-bandwidth opportunities are being overhyped in this 3G game. As Clayton Christensen has pointed out, technologists often overshoot consumer demand. I tend to think this is happening in the 3G arena, so I am much less interested in the higher-bandwidth applications, like streaming video, than in lower-bandwidth opportunities, like streaming audio and mobile search. Give me a cell phone that combines voice recognition with location-filtered search results and you have a product that a wireless company can differentiate.

Now, speculative judgments like these are the essence of strategic thinking, and they can be the starting points for taking a position. Can you predict clearly which positions will pay off? Not easily. If we could actually calculate the financial implications of such choices, we wouldn’t have to think strategically; we would just run spreadsheets. Strategic thinking is essentially a substitute for having clear connections between the positions we take and their economic outcomes.

Strategic thinking helps us take positions in a world that is confusing and uncertain. You can’t get rid of ambiguity and uncertainty – they are the flip side of opportunity. If you want certainty and clarity, wait for others to take a position and see how they do. Then you’ll know what works, but it will be too late to profit from the knowledge.

“Strategy’s strategist: an interview with Richard Rumelt,” McKinsey Quarterly, Number 4, 2007.

Harnessing the wisdom of crowds for better decision-making

I think I actually understated the extent to which information technology is opening up new possibilities about decision making and governance within organizations. In “The Great Decoupling” I focused only on disappearing information costs, but there’s also another very interesting development: the appearance of technologies for collecting and distilling distributed knowledge in novel ways. These include:

An internal blogosphere. I spent time recently at one of the world’s largest technology companies, talking with the people who were responsible for deploying enterprise 2.0 tools, including employee blogs. On the page that listed the most recent blog posts I saw a title something like “Why Our Recently Announced Strategy is Misguided.” I was a little surprised by this, and asked the team if this level of feistiness was rare, and if the people who wrote such posts found themselves in hot water. They assured me that the answer to both questions was no.

It struck me that I was looking at an excellent tool for gathering informed feedback on topics of interest. And there seemed to be a lot of cross-talk among blogs; employees were leaving comments for each other, posting in response to previous posts, etc. I try not to be a wide-eyed technoptimist, or to say “everything’s different now!” each time I see a new technology, but I do think this internal blogosphere was something new under the sun. I don’t see how a company, especially a large and geographically dispersed one, could hold an ongoing, public, open-to-all conversation about important topics without E2.0 tools.

Wikis. In the default configuration for mediawiki software, each page has an accompanying “discussion” page where contributors have background conversations, hash out any differences, and together decide what should go on the main page. This arrangement facilitates not only collection of information, but also convergence of opinion.

Prediction markets, which are essentially stock markets where traded securities are tied not to the future profits of a company, but instead to other future events such as the results of an election, whether or not a competitor will ship a product on time, or next quarter’s total sales. Securities in prediction markets have prices (just like shares in a “normal” stock market do), and people use the market to trade with each other by buying and selling these securities. Because traders have differing beliefs about what the securities were worth, and because events occur over time that alter these beliefs, the prices of securities vary over time in prediction markets …

All of these technologies help accomplish a critical task: aggregating relevant knowledge in ways that were not previously possible. And this is where things get really interesting because as I wrote earlier, the Golden Rule for decision making is that decision rights should be aligned with relevant knowledge.

Andrew McAfee, “Input by many, decisions by ????”, 16 September 2007, http://blog.hbs.edu/faculty/amcafee/index.php/faculty_amcafee_v3/input_by_many_decisions_by/

Has enterprise software become too complex to be effective?

Is enterprise software just too complex to deliver on its promises? After all, enterprise systems were supposed to streamline and simplify business processes. Instead, they have brought high risks, uncertainty and a deeply worrying level of complexity. Rather than agility they have produced rigidity and unexpected barriers to change, a veritable glut of information containing myriad hidden errors, and a cloud of questions regarding their overall benefits. Leaders in computer science are clearly worried. “Complexity is death,” says Chuck Thacker, one of 16 technical fellows at Microsoft Corp. “We are hanging on with our fingertips right now.”

Business executives, however, simply want to continue to believe that technology will lower costs, improve processes and reduce the size of the workforce. They don’t want to understand IT issues. In part, this is because technology requires special skills and intellectual talents that are quite distinct from those needed to understand and manage business organizations, markets and strategy. But it is also because executives do not like to hear about the downside of technology. Observes Jim Shepherd, senior vice-president of Boston-based AMR Research Inc., “Senior managers often don’t particularly want to be told that there’s a high risk and that there’s a great deal of expenditure involved in minimizing it.” Yet the only sure thing about new technologies and the changes they introduce is their uncertainty. In summarizing decades of research into technological change, MIT Sloan School of Management’s Wanda Orlikowski and the National Science Foundation’s Suzanne Iacono conclude that changes involving technology are both “profoundly complex and uncertain.”

For their part, CIOs and their managers rate aligning IT with business strategy as their number one priority. They struggle year after year to prove the value of IT to the business side of the organization. Yet the cost overruns, delays and outright failures of enterprise systems have if anything widened the digital divide between IT and the executive suite.

Cynthia Rettig, “The trouble with enterprise software”, Sloan Management Review, Fall 2007.

The continued value of qualitative research

There is a great deal of value to be had in measuring our world – and a great deal of value in continually questioning the methods and results obtained by our current measures.

Clifford Geertz, one of my particular heroes in this field, wrote a wonderful piece entitled “Thick description” which compared the thin descriptions of measurements with the thick description of context and meaning that qualitative research can provide in any given situation …

This is how qualitative research can make a contribution: by identifying and describing the meanings that people have of themselves and of the situation. These are the meanings that drive their responses to changes in their environment. To quote Geertz again:

Man is an animal suspended in webs of significance he himself has spun, I take culture to be those webs, and the analysis of it to be therefore not an experimental science in search of law but an interpretive one in search of meaning.

Qualitative research is, at its heart, an attempt to understand how people (or fish) interpret their reality and as a result make it. Anyone who has both looked at manufacturing statistics and wandered the factory floor knows that you can learn a lot by watching and talking to the workers about their work and their lives.

And so, when you decide you want your company to be more innovative – and you decide to reward those who are “innovative” – you need to be very careful how you are measuring innovation. As the WSJ describes:

What [Carly] Fiorina doesn’t mention is why the number of patents skyrocketed. Much of it had to do with a program put in place in 1999 to get HP into the top 10 patent producers. It relied on paying engineers for each new possible filing. At the time, it was $175 for a basic “invention disclosure,” $1,750 if it became a patent application, and another chunk of cash and a plaque for an actual patent. One engineer, Shell Simpson, nearly tripled his salary by working weekends in the first year by filing 120 disclosures and 70 patent applications-at one point taking two weeks off to work on patents full-time.

Andrew Hargadon, “On the virtues of qualitative research“, The Harga-blog, 11 August 2007, http://andrewhargadon.typepad.com/my_weblog/2007/08/on-the-virtues-.html

LEGO discovers cost-effective innovation

In tandem with the planning and consultative processes, the leadership ordered a pilot program designed to make sourcing more strategic. At its helm they placed Chief Financial Officer Jesper Ovesen – a clear signal that this initiative was of the utmost importance. Ovesen’s team believed that rationalizing the cost of the company’s materials would be one of the easier parts of the transformation and would yield savings immediately. Not coincidentally, the initiative went right to the heart of the Lego Group’s innovation capability: the resins that gave the bricks their distinctive colors. If it succeeded, the pilot would do more than save money. It would demonstrate that the Lego Group really could change.

The price of colored resins, always a major expenditure for the company, was highly volatile. The sourcing team analyzed the prices of the raw materials and worked with a narrowed roster of suppliers to stabilize pricing. The resulting contracts made production much easier to plan. More importantly, the success of the sourcing project created a sense of optimism and the momentum to move ahead with other changes. At each cost center along the supply chain, the transition team applied its new insight: Constraints don’t destroy creativity or product excellence, and they can even enhance them …

Cost transparency gave developers a new way to define their achievement. “The best cooks are not the ones who have all the ingredients in front of them. They’re the ones who go into whatever kitchen and work with whatever they have,” wrote a senior manager in a memo to the Lego Group’s own Kitchen. The designers seemed to take those words to heart. The product development group “initially saw reducing complexity as pure pain,” says Knudstorp, “but gradually they realized that what they had seen at first as a new set of constraints could in fact enable them to become even more creative.”

Keith Oliver, Edouard Samakh, and Peter Heckmann, “Rebuilding Lego, brick by brick,” Strategy + Business, Autumn 2007.

Misusing customer data can backfire

The ability to harness customer data is proving to be a significant source of competitive advantage for service industries. Initiatives like Amazon.com Inc.’s suggestions of relevant titles based on buying behavior have delighted more than a few customers. And customers will readily share all kinds of information when they see firms using data to enhance their experiences. But as we’ve seen above, data-driven interactions can easily cross the line from customer delight into customer despair, and oftentimes this despair is caused by one of three common pitfalls.

The first pitfall is asking customers for data and then neglecting to use it for the customer’s benefit. For example, a returning e-customer or hotel patron with a loyalty card should never again be asked for routine personal information. Customers assume that if you collected that information once, it is available in any future encounter.

The second pitfall is failing to protect data security. Losing customer data in a breach quickly drives despair. Firms from TJX Companies Inc. to Fidelity Investments have learned this the hard way when their customers have had to scramble to protect themselves from identity theft after breaches in data security.

By far the gravest pitfall is a customer’s perception that their data were somehow used to harm them, either by wasting their time with an avalanche of unwanted solicitations or by cornering them with hidden costs or restrictions. The analogies in other businesses are unthinkable. Can you imagine purchasing a meal only to be denied dessert because a video camera showed that you had not eaten your asparagus? Yet the airlines are not alone in adopting such a customer-damaging pitfall. Apparel retailer Express, using customer purchasing information, tried to deny returns to customers who appeared to be abusing their policies, only to see their efforts end in an uproar.

M. Eric Johnson, “Delight or despair,” Sloan Management Review, Summer 2007.

Google’s unconventional IT strategy

Google is different. And it’s different not only because its thinking is original and its applications unique – witness search queries morphed into a lobby display of bursting color – but because the company’s unconventional IT strategy makes it so. Commodity hardware and free software hardly seem like the seeds of an empire, yet Google has turned them into an unmatched distributed computing platform that supports its wildly popular search engine, plus a burgeoning number of applications. We used to call them consumer applications, but Google changed that. Businesses also use them because, well, Google is different …

Google’s great IT advantage is its ability to build high-performance systems that are cost efficient (we didn’t say cheap) and that scale to massive workloads. Because of that, IT consultant Stephen Arnold argues, Google enjoys huge cost advantages over competitors such as Amazon, eBay, Microsoft, and Yahoo. Google’s programmers are 50 percent to 100 percent more productive than their peers at other Web companies, a result of the custom libraries Google developed to support programming of massively parallel systems, Arnold says. He estimates the company’s competitors have to spend four times as much to keep up.

How does Google do it? For one thing, Merrill says, “we build hardware.” Google doesn’t manufacture computer systems, but it does order them to its own specifications, then installs and tunes them like something out of MTV’s Pimp My Ride. “What it comes down to is we’re very good at buying commodity servers and using them to their fullest, to the point where they’re almost so damn hot they’ll melt,” open source program manager Chris DiBona says.

That hands-on approach, born of the frugality of a garage startup, persists because Google’s scale demands it. Google has between 200,000 and 450,000 servers spread among up to 65 data centers, depending on how you define them and who’s doing the counting. And those numbers continue to rise.

The company won’t discuss these estimates; it considers such numbers to be a competitive advantage. In fact, one of the things Google likes about open source software is that it facilitates secrecy. “If we had to go and buy software licenses, or code licenses, based on seats, people would absolutely know what the Google infrastructure looks like,” DiBona says. “The use of open source software, that’s one more way we can control our destiny.”

Scale works in Google’s favor. The marginal advantage of custom-built servers becomes significant when multiplied by hundreds of thousands of machines. The company is constructing a 30-acre data center along the Columbia River in The Dalles, Ore., where it can get low-priced hydroelectric power for computing and cooling.

“Google revealed: the IT strategy that makes it work,” InformationWeek, 28 August 2006.

US companies discover the benefits of regulation

After years of favoring the hands-off doctrine of the Bush administration, some of the nation’s biggest industries are pushing for something they have long resisted: new federal regulations.

For toys and cars, antifreeze and fireworks, popcorn and produce and cigarettes and light bulbs, among other products, industry groups or major manufacturers are calling for federal health, safety and environmental mandates. Some of those industries are abandoning years of efforts to block such measures, often in alliance with the Bush administration, which pledged to ease what it views as costly, unnecessary rules.

The consequences for consumers, though, are not yet clear. The tactical shift by industry groups is motivated by a confluence of self-interests: growing competition from inexpensive imports that do not meet voluntary standards, and a desire to head off liability lawsuits and pre-empt tough state laws or legal actions that were a response to laissez-faire Bush administration policies. Concerns that Democrats could soon expand their control in Washington have also prompted manufacturers or producers to seek regulations that they consider the least burdensome, regulatory experts say.

“There seems to be, at the moment, a fair amount of efforts under way by individual industries to put into statute what had either previously been voluntary consensus standards or industry goals,” said Rosario Palmieri, a regulatory lobbyist at the National Association of Manufacturers which has often opposed government regulations. “This year, we have seen quite a bit of it.”

“In turnaround, industries seek US regulations,” The New York Times, 16 September 2007.

Private equity firms benefit from vendor-financing

The Henny Youngman economic era – the time when desperate lenders begged borrowers to take their money – has ended, thanks to mortgage defaults and a sudden realization that debt can go bad. And now there is a different sort of Youngmanism at work. With credit suddenly no longer so free and easy, companies eager to raise cash or rid themselves of troublesome assets are imploring private equity firms to help them.

In May, DaimlerChrysler, eager to end the ill-fated trans-Atlantic marriage of Daimler and Chrysler, struck a deal with private equity firm Cerberus Capital to take the stalling US division off its hands. Cerberus agreed to invest $7.4 billion for an 80.1 percent equity stake in the company, with Daimler continuing to hold 19.9 percent. But most of Cerberus’ cash would go into Chrysler’s coffers, not into Daimler’s. What’s more, DaimlerChrysler agreed to lend about $400 million to the new company, and to pay off a chunk of the Chrysler unit’s debt. But that wasn’t the end. Daimler, eager to close the deal on Aug. 3, noted that “in light of highly volatile US loan markets,” it would make a $1.5 billion, seven-year loan to the newly formed company. Rather than simply sell Cerberus a banged-up used car, Daimler paid a ton for repairs, lent the buyer a chunk of the purchase price, and then committed to pay a portion of the vehicle’s insurance. Daimler hasn’t so much liberated itself from Chrysler as reduced its exposure to a business it no longer wants …

To a degree, companies helping buy-out firms take unwanted assets off their hands is simply another form of vendor financing, the practice of companies lending money to their customers. For decades, GMAC (now majority-owned by Cerberus) lent money to car buyers to buy General Motors cars, and then profited as the loans were paid back. Department stores lend money to their customers, who buy suits and home furnishings. The New York Times reports today that doctors are offering 0 percent financing to patients for laser eye surgery and tooth implants. But vendor financing can lead to trouble, especially when booms go bust. In the late 1990s, as competition heated up, telecommunications equipment companies such as Northern Telecom and Lucent loaned billions of dollars to fiber-optic cable companies and internet firms, who used the proceeds to purchase equipment. When the bubble popped, the vendor financers suffered doubly: Orders dried up when all their customers failed, and they suddenly found themselves sitting on loads of bad debt. Should these deals go bad, former parent companies like Home Depot and Daimler will find themselves swallowing huge losses. Until recently, publicly held companies saw private equity firms as nonprofit divorce counselors – people who would allow them to get out of failed marriages painlessly. Now, they’re more like expensive divorce lawyers.

Daniel Gross, “Take my company, please! The desperate corporations that will do anything to unload unwanted subsidiaries”, Slate, 30 August 2007, http://slate.com/id/2173101/

New media, new methods

Marketers of luxury brands have been laggards in advertising online because they have considered the traditional media better showcases for their glamorous, glitzy pitches. Now, Chanel is joining the ranks of brands with big Internet presences, devoting a considerable part of a sensual new global campaign to efforts in the new media. The campaign, for the Coco Mademoiselle fragrance, includes ads on Web sites like eonline.com, instyle.com, nymag.com and nytimes.com as well as search-engine marketing on Google and Yahoo.

There is also a special Web site mademoiselle-forever.com where computer users are able to watch video clips as well as get a virtual tour of the Paris apartment of the designer Gabrielle (Coco) Chanel.

To generate “buzz” about the special Web site, Chanel has been communicating with the writers of 200 blogs around the world, including Beauty Addict (beautyaddict.blogspot.com), Blogdorf Goodman (blogdorfgoodman.blogspot.com) and Kristopher Dukes (kristopherdukes.com). The bloggers received a mysterious box offering them a preview of the special Web site along with an inside look at the making of a sexy commercial that is the centerpiece of the campaign, featuring the young actress Keira Knightley …

Coco Mademoiselle “is a perfect fragrance to do this with,” says Maureen Chiquet, global chief executive at Chanel, because it appeals to a younger woman than other Chanel mainstay scents like Chanel No. 5 and Coco.

“We all know our next generation of consumers is consuming information in this way,” she adds, referring to the digital media. “We can’t afford not to be there.”

“The Chanel brand has been around for a hundred years and we want it to be for at least a hundred years more,” Ms Chiquet says, “so we’ve got to start talking to consumers of the next generation in the way they’re used to be communicated to.” …

The idea of Chanel working with bloggers may seem unusual because the company is known for exerting careful control over the marketing and advertising of its products. But this is an era in which the consumer is increasingly gaining control of the communications process.

“They’re going to talk about you anyway,” Ms Chiquet says of the bloggers. “You may as well give them information, give them content.”

“Campaign spotlight: Chanel intensifies online effort,” The New York Times, 10 September 2007.