Monday, June 28, 2010

Unlocking the elusive potential of social networks

To realize the marketing potential of virtual activities, you have to make them truly useful for consumers.

McKinsey Quarterly

JUNE 2010 • Michael Zeisser

Unlocking the elusive potential of social networks article, marketing social networks, Marketing

There is much hype about social networks and their potential impact on marketing, so many companies are diligently establishing presences on Facebook, Twitter, and other platforms. Yet the true value of social networks remains unclear, and while common wisdom suggests that they should be tremendous enablers and amplifiers of word of mouth, few consumer companies have unlocked this potential. At Liberty Interactive, which comprises many specialty e-commerce companies, we wrestle daily with the question of how to realize the promise of social networks.

… When you think of word of mouth as media, it becomes a form of content, and businesses can apply tried-and-true content-management practices and metrics to it. In addition, word of mouth generated by social networks is a form of marketing that must be earned—unlike traditional advertising, which can be purchased. We therefore concluded that we could succeed only by being genuinely useful to the individuals who initiate or sustain virtual world-of-mouth conversations.

So what does it mean to be useful in a world of virtual conversations enabled by social networks? … We have … learned a few lessons that can be encapsulated in two primary insights. First, a powerful way for a brand to be useful in the virtual world is to confer social importance on its users. Second, “virtual items” are critical to stimulating social interactions that may in turn generate word of mouth.

The power of importance

An effective way for a brand to be useful in the context of social networks is to make people who originate a word-of-mouth conversation seem important within their own social environment. Recognition by peers is a powerful motivator, and brands that allow users to gain it deliver real perceived value. When users publicize that recognition, it translates into word of mouth. Companies can confer this kind of importance—for example, by issuing achievement “badges” that users can post to their Facebook profiles or by deploying leader boards or achievement scores of all types. As Web sites evolve to become increasingly dynamic experiences that let people interact in real time, the value to core users of being recognized for their prominence in a community will only increase.

We’ve also learned never to underestimate the value consumers place on opportunities to brag online about their achievements. That’s made significantly easier through the clever integration of a Web site with Facebook and Twitter. We see this phenomenon daily—for example, on the forums of our site. When members boast of reaching their target weight or other goals with help from workouts, we receive authentic and credible word-of-mouth endorsements at almost no cost. In fact, if recent behavioral research is accurate, these experiences can create “contagions” in which the behavior of users is mirrored by their networks of friends, amplifying the word-of-mouth effect and reflecting well on the underlying brands.

The allure of virtual items

It’s our strong intuition that virtual items play an important role in facilitating virtual word of mouth. … While the notion of virtual goods—nonphysical objects used in online communities and games—still puzzles many executives, it’s quite apparent that consumers love them. People acquire or compete for virtual items obsessively on Foursquare, Zynga, and many other sites. …

So why do consumers pay real money for online objects that don’t actually exist? Their motives reinforce our notion that users seek online importance: they purchase virtual goods primarily for self-expression (such as virtual houses or virtual gifts) and for recognition (such as virtual badges for becoming, say, the “mayor” of a bar on Foursquare). … Brands should actively experiment with ways to use virtual goods as catalysts of word-of-mouth media.

Virtual gifting is becoming an important consumer activity among Facebook members. Today, much of this activity is free, but Facebook is introducing a virtual-currency “credit” system that will allow sellers to get real dollars for their gifts and other items. In the context of a social network, it is not a stretch to conceive of virtual gifts as important objects, especially as their availability can be strictly limited. …

We’ve also found that basic laws of consumer behavior still apply: consumers love a bargain, and companies should take full advantage of social networks as powerful notification tools. Users can be alerted to sales or to the expiration of a promotion, but companies must be mindful that these feeds and tweets are designed as catalysts to generate virtual word-of-mouth media. They are not social-media junk mail, but legitimate content objects—actual pieces of media that we want the initial recipients to distribute to their friends.

One final recommendation: no gimmicks. Forget dancing monkeys, artificial contests, or stupid tricks; they add no value and waste people’s time. A commitment to being useful in social-media activities means a commitment to creating only high-quality interactions. Again, regarding word of mouth as a media product makes it easier to define what quality means for your particular activities. There are clearly many ways for brands to make themselves useful to consumers, so managing virtual word of mouth goes well beyond maintaining a Facebook page or a Twitter account. Exactly how far remains to be seen, and companies should apply an experimental mind-set, while being careful not to overinvest.

Word-of-mouth marketing through social networks could emerge as an important tool in the marketer’s arsenal. That will depend on whether marketers can tame the fundamentally unpredictable and serendipitous nature of word of mouth without losing what makes it so valuable in the first place—its authenticity.

About the Author

Michael Zeisser, an alumnus of Mckinsey’s New York office, is a senior vice president at Liberty Media.

Enhanced by Zemanta

When It Comes To Retirement, 67 Is The New 55


by Alan Greenblatt

June 18, 2010

Looking forward to retirement? You may have to wait a bit longer. Financial pressures are pushing up retirement ages all over.


William Reichenstein, who teaches finance at Baylor University, tells his students that they will have to save a lot more of their working income if they hope to retire as comfortably as their parents and grandparents, simply because they're going to live longer.

On Wednesday, … California's Republican Gov. Arnold Schwarzenegger announced a deal with four state public employee unions to raise the retirement age by five years for newly hired workers.

These moves follow several recent age increases across Europe and among U.S. states. Faced with one of the worst pension shortfalls in the country, Illinois in March lifted the retirement age for new state workers from as low as 55 all the way to 67.

The increases also anticipate the coming debate among members of the White House deficit commission over raising the eligibility age for Social Security benefits. …

The motivations driving all these various governments are similar. People are living longer and, therefore, are drawing retirement benefits for longer periods. …

Retirement Ages Around The World

View a sampling of official retirement ages around the world, according to a 2009 report from the Organization for Economic Cooperation and Development, based on data from 2002-07. France is among the countries listed that have already announced plans to raise their retirement ages in the coming years.

A graphic showing retirement ages in several countries.

Adrienne Wollman/NPR

"If their parents are going to retire at 65 after working 40 years, they need to plan for about a 20-year [retirement]," [Reichenstein] says. "For my students' generation, with life expectancy going up about a month a year, in their cases they have maybe 25 years in retirement they have to plan for."

Another result of longer lifespans in the United States is that the ratio of people paying into Social Security, compared with those drawing benefits, is shrinking rapidly. "We know that in 2017, Social Security will begin paying out for the foreseeable future more in benefits than it collects in taxes," says Richard W. Johnson, director of the Urban Institute's retirement policy program.

The Social Security trust fund will be able to make up the shortfall for 20 to 25 years. "But that trust fund is now being used to offset other parts of the deficit," Johnson says. "Once we can no longer use that trust fund to fund other services, the deficit really balloons."

How Old Is Fair?

That's why President Obama's deficit commission is seriously considering raising the retirement age. … The full retirement age is set to rise to 67 for people born after 1960.

Raising the full retirement age by 2020, rather than 2027, would save $92 billion, according to the Congressional Budget Office.

"We have this huge problem we really have to address," says Steven Sass, director of the Center for Financial Literacy at Boston College. "We either have to cut benefits or increase revenues."

Sass points out, however, that raising Social Security's retirement age will disproportionately affect low- and moderate-income workers. People who work longer into old age tend to hold less physically demanding office jobs and are better educated. Those who are less educated or work in manual labor make up a greater share of people who are opting for the lower-paying early retirement benefits. Their numbers are increasing with the recession.

Because Social Security benefits are paid out on a sliding scale — you lose about 7 percent for every year you retire early — raising the full retirement age amounts to a de facto cut for those who are forced to retire early. "It's a terrible way to cut benefits," says Eric Kingson, a professor of social work at Syracuse University and co-director of Social Security Works, a coalition of unions and other groups that lobbies against benefit cuts.

"Life expectancy has improved, but not for all the groups," he says.

People protest against government plans to raise the retirement age in Barcelona, Spain.

Enlarge Manu Fernandez/AP

People in Barcelona protest Feb. 23 against the Spanish government's plans to raise the retirement age. The marches were sparked by Prime Minister Jose Luis Rodriguez Zapatero's proposal that Spaniards delay retirement from 65 to 67 to ensure the long-term stability of the country's pensions.

Political Fallout Across Europe

There are fierce arguments looming over whether taxes should be raised or Social Security benefits should be cut, either outright or through an increase in the retirement age. These kinds of debates are already happening across Europe.

Greece, until recently, allowed workers in more than 580 job categories considered hazardous to retire with full pensions as early as age 50 for women or 55 for men. In response to its fiscal crisis, that country has raised the retirement age to 65 for most workers.

In Ireland, the government has proposed gradually raising the retirement age from 65 to 68. Hungary raised its retirement age in 2008 from 62 to 65 — one big reason why the ruling Socialists got trounced in parliamentary elections in April.

French President Nicolas Sarkozy is bound to experience blowback on his new plan, too — even though it won't erase even half the nation's projected pension funding gap.

Reichenstein, … says there is no other option. "The governments have promised more than they can meet," he says. "The reality is that they have to cut back."

More States Are Cutting

Reichenstein notes that things aren't quite so drastic — yet — in this country. For one thing, the U.S. federal debt — although climbing rapidly — is not yet as great as a share of GDP as debt in many European nations. Our median age is lower, too, thanks in part to immigration. The median age in the U.S. is just under 37, while it's right around 44 in Germany, Italy and Japan. And there are still some years left to find fixes for Social Security.

But state systems may be another matter. A study from the Pew Center on the States in February found that state pension systems were collectively running a $1 trillion deficit — and that was based on figures compiled before the 2008 stock market crash.

The California Public Employees' Retirement System announced Wednesday that the state needs to increase its pension contributions by $600 million a year.

Schwarzenegger's new agreement raises the retirement age for state workers by five years and requires current workers to contribute more of their salaries into their own retirement accounts. …

Several states have already done so, creating two-tiered systems that are much less generous for new hires.

"It's a correction long overdue," says Dowell Myers, a demographer at the University of Southern California. "Not only are people living longer but they're living way longer than they were when these programs were set up, and we have less money than we used to."

Enhanced by Zemanta

Thursday, June 24, 2010

Globalization’s critical imbalances

Future financial crises could accelerate the rebalancing of global economic activity from developed to emerging markets.

McKinsey Quarterly

JUNE 2010 • Lowell Bryan

Globalization’s critical imbalances article, rebalancing of global economic activity from developed to emerging markets, Strategy

To some extent, the rebalancing of global economic activity from developed to emerging markets simply reflects economic laws of gravity. In a world where ideas can flow freely and countries are at different stages in adopting modern modes of production, communication, and distribution, less developed nations should grow more rapidly than their counterparts in the West as they catch up.

But it’s also important to understand that emerging-market economies have a structural advantage that is grounded in the operation of the global economy. …[It’s] roots run … all the way down to the fundamental issue that labor can’t be freely traded on a single global market, while capital and commodities can. Any company sourcing its production or service operations in a lower-wage emerging-market country therefore can save enormously on labor costs. That’s painful for displaced Western workers, but it’s good for the company’s profits, good for consumers in developed markets, and good for the newly minted citizens of the global economy who are working in emerging-market factories and call centers. This is a dynamic we take so much for granted that it’s easy to imagine it as a semi-permanent condition that will underpin global economic development for the foreseeable future.

… I believe senior executives need to prepare now for a world that—as China’s recent decision to relax its informal peg of the yuan to the US dollar underscores—will be coming to grips with an unsustainable set of economic relationships. Their unwinding will have serious long-term implications for those executives’ strategic priorities, including where they locate operations and what customers they serve in which markets. Equally important is the need for preparedness in case the unwinding process is sudden and abrupt. While we surely seem to be headed toward a new global equilibrium, the transition to that future world may not be smooth and gradual.

Adam Smith meets the global economy

We usually think of the global economy in terms of outputs such as cars and packaged goods. Yet the real integration of the world’s economy begins with factors of production. Of those, commodities, capital, and labor are the most important for understanding our structural economic issues. The test of whether a market has fully formed is whether all customers get the same items at the same price, allowing for transaction and transportation costs. (This condition, called the law of one price, was originally advanced by Adam Smith.) Such market conditions have long existed at a global level for natural commodities, such as crude oil, bauxite, and iron ore, as well as for manufactured commodities, such as petroleum, aluminum, and steel. The law of one price also exists for freely traded foreign exchange and most instruments traded in the capital market. It does not exist for labor, however—which is the fundamental structural issue the global economy faces.

To understand labor’s role, of course, you need to understand arbitrage. … In the real economy, such arbitrage focuses on capturing differences in the cost of production across geographies. As markets have opened and transaction and transportation costs fallen over the past quarter century, arbitrage opportunities in global financial markets and commodities have been quickly exhausted, so they easily meet the global law-of-one-price test. Yet there are still enormous arbitrage opportunities available in labor rates: the cost of performing the same job in different nations can vary significantly. As a result, multinational corporations that are able to source their production in emerging markets can enjoy large labor cost savings.

Until recently, labor arbitrage across countries was hard to capture because high-quality, highly productive labor was scarce in emerging markets. In the past decade, however, it has become relatively easy for companies to capture such opportunities, thanks to the combination of urbanization, education, infrastructure investments, new technology, the spread of advanced production techniques, and the evolution of digital standards. Even today, the cost of labor in China or India is still only a fraction (often less than a third) of the equivalent labor in the developed world. Yet the productivity of Chinese and Indian labor is rising rapidly and, in specialized areas (such as high-tech assembly in China or software development in India), may equal or exceed the productivity of workers in wealthier nations. Given such differences, more and more companies around the world are locating production in emerging markets.

Labor costs and currencies

The structural issue facing developed-world nations is that the amount of high-quality, high-productivity labor that will be mobilized over the next decade in Brazil, China, and India (not to mention Mexico, the Philippines, and Thailand) is likely to be measured in the hundreds of millions of people. By comparison, the entire US labor force comprises 150 million people. This is a wonderful trend for humankind and would be a boon for everyone in the world if emerging-market employment were directed largely toward production for domestic consumption. The challenge for developed-world governments and citizens seeking jobs, however, is that a significant fraction of this emerging-world labor displaces jobs that would otherwise be created in Europe, Japan, and the United States. This may be the underlying reason why unemployment in Europe, Japan, and the United States is becoming more structural rather than cyclical and may get worse over time no matter how much public stimulus is provided. Certainly, the job losses of the Great Recession look quite different from those of past recessions (Exhibit 1).1

In a completely open global capital market, foreign-exchange rates would adjust until labor markets in the developed world began to be competitive again, even if it took a major currency revaluation to achieve competitive parity. However, exchange rates in countries such as India and China have often been subject to foreign-exchange controls and interventions of various kinds. The result is that exchange rates haven’t adjusted freely, leading to the shifting of developed-world service jobs offshore (particularly to India) and the migration of manufacturing jobs (particularly to China).

Assume, for the moment, that Europe, Japan, and the United States continue to run structural fiscal deficits and relatively loose monetary policies and to struggle with job creation. Also assume that China’s recent announcement of a return to the “managed floating exchange rate” that prevailed from 2005 to 2008 does not mark the end of currency market interventions by emerging-market nations. Both scenarios are likely, so tensions between developed-world currencies and emerging-market currencies will probably continue to build. In particular, as more and more emerging-market citizens capture job opportunities associated with production and services for developed-world nations, the structural pressures on advanced countries will continue to increase. For example, it’s hard to see how the United States can resume the rapid GDP growth necessary to reduce its fiscal deficit—which requires increased tax revenue and lower government spending—when almost 20 percent of its working population is unemployed or underemployed.

As the GDP growth of emerging-market nations continues to outstrip that of the developed world, the pressure on currency values will continue to build. Eventually, the tension must be released, and currency values will readjust. For all of us, the speed of that adjustment makes a big difference. The dollar and euro would need to be devalued by between 30 and 50 percent for financial foreign-exchange rates to reflect the purchasing-power-parity (PPP) exchange rates of emerging-market currencies more closely (and, therefore, for labor of equal quality and productivity to be priced relatively equally across geographies). An adjustment of this magnitude that took just a few weeks, rather than a few years, would obviously jolt the global economy.

Commodity complications

Commodities are a further complication. Ramping up production in China, India, and other countries to capture the economic returns from the increasing supply of high-quality, productive labor requires more commodities to produce more output. Since the global law of one price applies to commodities, this means that, with all else held equal, producers in China and India end up paying more than they would if those countries’ currencies were stronger. Simply put, commodity prices are too high in emerging-market countries and too low in developed-world countries.

As a result, developed-world consumers are using more commodities than they should, while emerging-market consumers are using fewer than they otherwise would. That’s distorting pricing feedback to customers and suppliers. What’s more, some of the returns that companies theoretically should be earning by taking advantage of low-cost, high-quality, productive labor in emerging markets is instead transferred to commodity-exporting nations. The resulting surpluses often then wind up in sovereign-wealth funds for deployment in the global capital market.

The fact that commodity prices, to a greater extent than currency values, are set in truly global markets where nations have little power over prices suggests that financial tensions will build earlier, and with greater volatility, in commodity than in currency markets. Some argue, in fact, that the last crisis was precipitated by the unbelievably rapid commodity price rise, in mid-2008, that saw oil jump to $140 a barrel, from $60 in early 2007, and coal increase to $170 a metric ton, from $50, over the same period. There are already signs that commodity prices are coming under pressure, even though developed-world growth remains relatively stagnant. Most commodity prices have doubled from their 2009 lows. Perhaps most disquieting, food prices have risen rapidly (Exhibit 2). It seems quite plausible that we could have a repeat of the commodity price movements of 2008 in late 2010 and 2011, even if developed-world GDP growth is only modest.

A dramatic increase in commodity prices could stall global economic recovery and also be the catalyst for emerging markets to revalue their currencies upward against the dollar and euro to reduce the high cost of imported commodities. Even the prospect of such a revaluation could cause large dollar and euro asset holders, such as sovereign-wealth funds, to accelerate the diversification of their holdings away from those currencies into foreign direct investment in emerging markets. That, in turn, could help trigger a currency crisis.

Adjustment uncertainty

It is very difficult to say how these issues will play out. The global rebalancing that is needed is obvious: developed-world countries need to save more, consume less, become more fiscally disciplined, and run current-account surpluses (or at least be neutral). Emerging-world countries need to let their currencies rise until PPP rates are closer to financial-exchange rates. They need to consume more, save less, run current-account deficits (or at least be neutral), and continue investing, with some of the capital provided by outsiders. If major national governments work proactively together to rebalance and coordinate their fiscal, monetary, trade, and foreign-exchange policies, the adjustment process could be gradual.

But such a policy adjustment is easier said than done. Developed-world politicians must respond to the demands of voters who don’t understand how the global economy works or what has changed in recent years and who mostly want policies that are fiscally unbalanced. They generally want governments to spend more money on social programs—in the United States, for example, on Social Security and Medicare—without increasing taxes to pay for that additional spending. The usual response by developed-world governments to such dilemmas is to run bigger fiscal deficits and to borrow more money. Yet most developed-world governments have been rapidly exhausting their debt capacity, and some nations, such as Greece, Portugal, and Spain, are already experiencing fiscal crises. At some point, the International Monetary Fund and major nations could become unable, or unwilling, to bail out overly indebted governments, at which point defaults and debt restructurings would become inevitable.

Emerging-market leaders have different challenges. In general, they have been “virtuous”: most have low debt-to-GDP ratios, maintain large currency reserves, continue to run current-account surpluses, and provide more capital to the developed world than they receive. Their economies are based upon undervalued currencies, low-cost labor, high savings rates, exports, and investment in infrastructure. These countries are wary of growing too rapidly or allowing too great a volume of capital inflows, particularly since, with undervalued currencies, they don’t want to sell their assets cheaply. They also are wary of anything that would derail their growth, given the rising expectations of their populations.

Both sides, of course, need to give way. In the longer term, the capital markets will discipline governments if the imbalances—particularly the fiscal imbalances of developed-world governments—continue to grow. But in the short term, the powerful market states involved (for instance, the United States, the eurozone countries, Japan, China, India, Brazil, and major commodity-exporting nations) are so large and can pull so many levers that they exercise significant power in the global capital market, resisting its discipline. If that’s the path they choose, it’s likely that the tensions created by unbalanced and divergent policies will build until they cause rapid currency shifts, massive changes in commodity prices, and punitive interest rate increases (or even defaults) for overly indebted sovereign borrowers.

The corporate agenda

Companies have much more freedom in the global economy than governments do. They can more easily capture the opportunities created by divergent, unbalanced government policies. They can position themselves to capture profits from both cross-geographic labor arbitrage and the consumption growth that results from rising incomes in emerging markets. They also have significant opportunities to serve the changing needs of aging populations in the developed world.2 The underlying global economic processes under way are very powerful, and the profit opportunities will be enormous as four billion people in emerging markets triple or quadruple their incomes and wealth over the next 20 years.

That said, business leaders should not be sanguine about what lies in store. Although it’s impossible to know in advance the speed or intensity of the needed adjustment, turmoil probably lies ahead. Here are four suggestions for executives hoping to get out in front of it:

  • For starters, as companies plot their global footprints, executives should not assume that the prevailing reality of globalization will continue. Labor arbitrage opportunities won’t disappear, of course, but strategies predicated on them could become less remunerative—maybe gradually or perhaps all at once.
  • Second, it would be wise to be prepared for the high probability of future financial shocks. To do so, most companies need to become more adept at risk management and to err on the side of being overcapitalized, overliquid, and overprepared.
  • Third, companies should engage in serious scenario planning around “unthinkables.” These might include the potential for significant, rapid shifts in currency values (for example, a 30 percent decline of the dollar versus emerging-market currencies); an exit from the euro by some nations; dramatic, rapid changes in commodity prices (for example, oil prices spiking to $200 a barrel); or defaults on debt by major nations.
  • Finally, multinational-company executives who set strategy in emerging markets need to stop saying that those markets may someday be at least as important as drivers of consumption as they are platforms for low-cost manufacturing or services—and to start acting as if that day was near. … China’s scale makes its potential to transform the competitive balance of industries, and thus its importance, somewhat unique. But as currency adjustments bring purchasing power closer to parity around the world, the importance of emerging-market consumption will be reinforced everywhere. …

These suggestions represent specific applications of the more dynamic management approach I have urged companies to adopt in the past. The hallmarks of that approach—heightened awareness, greater resilience, more flexibility, and the timely alignment of leadership around needed adjustments—will be invaluable for companies as they navigate the choppy waters of global economic rebalancing. This process will continue and perhaps even accelerate in the years ahead, not despite, but because of the structural adjustments that are needed to put the global economy on a more sustainable trajectory.

About the Author

Lowell Bryan is a director in McKinsey’s New York office.

Back to top


1 For a perspective on the relationship between offshoring and employment from 2000 to 2003, see Martin Neil Baily and Robert Z. Lawrence, “Don’t blame trade for US job losses,”, February 2005.

2 See David Court, “Serving aging baby boomers,”, November 2007.

Enhanced by Zemanta

Tuesday, June 22, 2010

When companies underestimate low-cost rivals

Attackers are threatening premium players in market after market—and not only at the low end.

JUNE 2010 • Adrian Ryans

When companies underestimate low-cost rivals article, low cost threat, low cost challenge, low cost telecom, Strategy

When low-cost competitors appear, one of the toughest decisions facing executives in companies with premium products and brands is whether to respond. Should the company or business unit adjust its strategy to meet the low-cost threat or should it continue business as usual, with no change in strategy or tactics?

As these established companies attempt to define the nature and magnitude of the challenge, they often underestimate it. … Complacency and arrogance produce blind spots that delay a response and leave incumbents vulnerable.

But our study of low-cost competitors suggests that they also build momentum in slower-moving and more subtle ways—factors that established players might do well to pay closer attention to. At times, low-cost challengers build their presence stealthily by competing in undeveloped segments of a market. Or they can narrow capability gaps by tapping the look, feel, and suppliers of bigger rivals. In other cases, competition between low-cost entrants can produce unintended second-level effects that escape the notice of incumbents until it’s too late to prevent a severe erosion of their market position.

Taking time to gain momentum

If the new low-cost challengers are competing in undeveloped segments on the fringe of the incumbents’ market, the initial sales impact may be muted. … This dynamic is a particular issue for companies operating in developing markets, especially in second- and third-tier cities or in rural areas, where market data are often much less transparent than they are in more mature markets. In some cases, low-cost players tap segments that take time to develop; they may require significant changes in behavior and new infrastructure to support growth. Typically, these types of changes do not happen overnight. …

As a result of the dramatically lower prices that companies such as easyJet, Ryanair, and Southwest Airlines have brought to the air travel market, customers have quietly adopted new forms of behavior that in turn rewrite the rules of the market. More people in Europe take weekend breaks in countries that are farther afield; before the rise of the low-cost airlines, these passengers would have traveled locally or regionally. Many workers in one part of Europe take advantage of job opportunities hundreds of miles away. Some doctors who live in continental Europe have part-time practices in the United Kingdom to help meet a practitioner shortage in certain regions. Even people with relatively low incomes, such as construction workers, “commute” between their homes and families in central and eastern Europe and their jobs in western and northern Europe. As prices fall and new kinds of behavior are established, growth accelerates rapidly.

Filling resource and capability gaps

Some low-cost competitors rise more quickly than premium players anticipate by finding clever ways to overcome capability gaps. For example, when low-cost attackers get under way, they may copy the products of premium companies, sometimes matching designs, colors, model numbers, and promotional materials. (One Chinese manufacturer of textile machinery even helped its customers identify the product they should choose by indicating, in its own model numbers, both the premium brand and the model being copied.) In many industries, intellectual property can be licensed and used for a modest fee. Also, low-cost competitors have acquired interests in companies with access to desired technology, distribution channels, and customer relationships.

Sometimes, low-cost competitors close quality and performance gaps with their premium rivals by taking advantage of support from customers and suppliers that are trying to protect and further their own business interests. Customers are often quite keen to have more competition among suppliers and in some cases help low-cost suppliers upgrade their offerings by providing information and support. Suppliers of capital equipment and parts used to manufacture products are eager to see low-cost competitors buy the latest equipment and components. Often, this material incorporates information from the suppliers’ premium customers and represents a transfer of knowledge and experience that may have built up over decades.

The role of second-order effects

The initial impact of low-cost players on incumbent companies may not be the most important consideration. In many markets, if they are relatively easy to enter, a number of low-cost competitors may do so. … But as direct competition intensifies, one or two of the low-cost companies—sometimes “losers” in price wars in the market’s lower tiers—may try to escape it by differentiating their offerings and moving up in the market. The strategy of these losers often poses a much more direct and formidable threat to the traditional players than the original low-cost strategy, since the attackers typically offer an enhanced product or service built on a low-cost base. …

Sometimes second-order effects derive from the interplay between a low-cost competitor’s offers and the behavior of customers over time. One Indian chemical producer initially sold only a narrow range of offerings, but high volumes and low changeover costs allowed it to undercut a US rival in the European market and to capture a high share of sales. … [The] low prices would lead customers to rethink how they could formulate a broader range of their products to take additional advantage of the Indian producer’s relatively inexpensive chemicals. More volume shifted to the Indian producer, leaving the US company with an increasingly less economic mix of products.

Fighting back

Premium-brand companies have a few options for responding to these subtler attacks on their market position. The possible responses range from directly confronting a low-cost competitor in its market segment by launching competitively priced products to adjusting strategy in an attempt to isolate the business from the low-cost threat. … A customer focused primarily on product quality and reliability, for instance, may switch to a low-price offering if its producer can show that it is good enough in these respects. By contrast, customers attracted to a premium brand because it offers a total solution—for instance, financing, very high levels of technical support or service, and strong personal relationships—may be much less likely to switch. Premium players could therefore focus on selling solutions rather than physical products. …

Executives always regret it when they don’t anticipate the scope of a low-cost threat and respond forcefully. To be sure, a failure to see competitors is an example of the forces of “creative destruction” at work in capitalism. But companies alert enough to identify the nature and magnitude of the challenge will be in a better position to find ways to hold the new competitors at bay.

About the Author

Adrian Ryans is a professor of marketing and strategy at the International Institute for Management Development (IMD), in Lausanne, Switzerland. This article is based partly on his book Beating Low-Cost Competition: How Premium Brands Can Respond to Cut-Price Rivals (Wiley 2009).

Tuesday, June 8, 2010

Danger, danger! Tech overload ahead


Researchers say our tech fixation is causing us to lose focus and become forgetful. Cringely says that's all a crock of ... what were we talking about again?

…I want to talk about yesterday's New York Times Website, which has an entire series of articles about how technology is rewiring our brains, and not in a good way.

Apparently, technology overload ruins your ability to concentrate and causes you to repeat yourself. It also ruins your ability to concentrate and causes you to repeat yourself.

I think I read that somewhere.

The more technology you consume, the more you multitask, the more gadgets you own and use, the more email/ facebook/ Twitter/ text messages you manage, and the more you multitask, the more your brain begins to resemble a finely aged hunk of Swiss cheese -- or so says the Times.

All I can say is, thank God. I thought it was all that Lemon Pledge I'd huffed in college. Instead, it's information/gizmo overload. In other words, my brain problems are something I might be able to file a Worker's Comp claim for.

According to the Times:

In 2008, people consumed three times as much information each day as they did in 1960. And they are constantly shifting their attention. Computer users at work change windows or check e-mail or other programs nearly 37 times an hour, new research shows. …

I'm not sure what the rest of that article said because there was a link inside to a game that tested how good I am at ignoring distractions … I was doing pretty well at it until I noticed another test for how fast I am at juggling tasks. …

I was doing OK on that one until my cell phone started buzzing. I didn't recognize the number, so I listened in as the caller left me a voice mail. Yep, another PR drone calling to see if I'd received their press release -- good thing I didn't waste any time on that.

Admittedly, I often feel like that guy in "Memento" (what was his name?) who had no short-term memory at all and survived by tattooing important information on parts of his body, which explains why I woke up to find “Milk, eggs, light bulbs” written on my thigh this morning -- at least, I hope it does.

Back to the Times article:

A portion of the brain acts as a control tower, helping a person focus and set priorities. More primitive parts of the brain, like those that process sight and sound, demand that it pay attention to new information, bombarding the control tower when they are stimulated.

So while your brain is trying to get that Boeing 737 into the air (drive to work), Bruce Willis has sprinted onto the runway (new text messages) and is trying to wrestle it to the ground (fender bender).

At least, that's what I think it was saying. The rest of that paragraph was continued on page three of that story, and I never read past page two.

Another link on that page leads to an article that likens tech addiction to food disorders:

The problem is similar to an eating disorder, says Dr. Kimberly Young, a professor at St. Bonaventure University in New York who has led research on the addictive nature of online technology. Technology, like food, is an essential part of daily life, and those suffering from disordered online behavior cannot give it up entirely and instead have to learn moderation and controlled use.

… I didn't finish that article either. However, I did click a link to a graphic that lists some of the warning signs that you're hooked on tech. Among them:

OK, I made that last one up. But the other three -- well, that's not me, but I have this really good friend, and boy does he have a problem. You have to pry the keyboard out of his hands with a spatula.

Incidentally, while I've been writing this, 132 of my Facebook friends have “Liked” the same New York Times article. And three of these people I've actually met. Isn't technology wonderful?

Hmm, I feel like there was something else I wanted to talk about but forgot. Oh well, it'll come to me eventually.

How has tech overload affected you? Post your tales of digital despair below or email me:

This story, "This is your brain on tech" was originally published at Read more of Robert X. Cringely's Notes from the Field blog.

Enhanced by Zemanta

Wednesday, June 2, 2010

Wellness infused with motivation, measurement and management

Employee Benefit News

By Bruce Shutan

The blind spot of employee wellness programs is they tend to focus on telling employees what they should be doing to live healthier without addressing how people are motivated to make changes or helping sustain desired behaviors. ...

Participation in {one well-structured wellness} program can range anywhere from 40% to 85% depending on how a company designs their program and what incentives they offer, whereas ... the number tends to be only about 5% to 15% among traditional programs. Moreover, because the focus is on motivation, measurement and management, corporate clients have reported a return on investment that’s as high as 5:1 over the course of a year based on lower medical costs and precursor conditions to chronic illnesses and an increase in employee productivity.

Culture of prevention

One strategic position that {this wellness program} seeks to reinforce when helping companies develop a culture of prevention that rewards personal responsibility is that the interests of employers and employees are aligned because both parties are seeking to contain mounting health care costs.

Many of these expenses are clearly preventable in that they’re related to lifestyle – producing poor health outcomes that are driving down productivity, spiking absenteeism and disability claims, triggering presenteeism and threatening profitability.

Milliman Inc. analysts recently noted that a typical family of four will spend $18,074 on average for medical care in 2010 – a 7.8% increase from the previous year. But perhaps most alarming is that the Centers for Disease Control and Prevention estimate that 75% of the nation’s health care costs, or $1.5 trillion, are traced to chronic diseases, most of which are preventable. …

{a well-structured wellness program} favors budget-neutral employee incentives that are aligned with preventative strategies that result in healthy behaviors. The approach is akin to a good-driver discount in that individuals who exhibit healthy behaviors are rewarded just as those with an accident-free driving record. Employees who participate in health and wellness programs, for example, would be eligible to receive a discount on their monthly health insurance premiums …

The initial focus is on physical activity because of its high impact in preventing diseases that are driving health care cost increases, as well as how easily it’s measured. … [It’s] easy to track the number of miles walked or calories burned by simply wearing a pedometer.

Making programs fun

Another key component of this proactive approach is to encourage social interaction with friends and colleagues, which often drives physical activity on a daily basis. … But in order to do these programs justice, employers need to recognize that there are different behavioral levers to motivate employees.

...[A] biometric measurement station ... enables employees to track key measures such as their weight, body fat and blood pressure.

… Using these measurement stations provides real-time and accurate data that’s provided to the employer in an aggregated fashion ... So employees get to accurately track their progress over time and the company gets to track the results of their employee population as a whole. ...

To learn more, download the Virgin HealthMiles white paper, PAY-FOR-PREVENTION™:An Emerging Health and Productivity Paradigm.

About the author Bruce Shutan, former managing editor of Employee Benefit News, is a freelance writer based in Los Angeles.

Enhanced by Zemanta

When Millennials Rule the World

June 1, 2010 ( – A new study finds workplaces will be different when Millennials are CEOs.

The survey, titled Millennial Inc., conducted by the marketing firm Mr. Youth and the market research firm Intrepid, indicates the long boardroom table will be replaced with round tables, as Generation Y values collaboration, shared responsibility, and consensus.

The quantitative study completed by nearly 1,000 participants found 82% of Millennials believe it is important to have a staff that can do each other’s jobs. More than half (54%) of Millennials prefer to make decisions by consensus, and that number shoots up to 70% when they are among their peers.

While 401(k)s and stock options are nice, Millennials need to be in an environment that continually keeps them stimulated and engaged or they will keep looking. The study found the number one reason in both the UK … and U.S. … for switching jobs was, “Just needed a change,” - far exceeding the desire for a better salary, benefits, or a more senior position.

The study noted the average 26-year-old has changed jobs seven times from age 18, in search of something more.

… With Millennials, authority is earned and proven through direct interactions, not given blindly based on titles and experience. In creating virtual companies during the study, Millennials designed a model that required each employee, despite title or skill set, to start at the ground level and move her way up through the company.

This approach ensured that every “employee” would have some face-to-face contact with his customer base and experience the brand firsthand. Those who excelled would be promoted quickly and paid more for their ability, rather than being rewarded for a demonstrated facility in corporate politics. Many Millennials believe that high-level executives lack proper understanding of the front lines of their own business.

Millennials believe individuals with big ideas are successful and gain respect through their work, and they expect this to be true everywhere, especially in their career.

In addition, the study found Millennials view technology as a facilitator that allows companies to cater to consumers and create uniquely personal experiences.

More about the study is here.

Rebecca Moore

Tuesday, June 1, 2010

Investors Tap Into 401(k) Money Tax-Free for Business Startups


May 27, 2010, 6:28 AM EDT

By Amy Feldman

May 27 (Bloomberg) -- Hal Mottet, a Lake Oswego, Oregon, businessman bought a family-owned packaging company for $3.5 million in late 2007, and he and a partner financed 40 percent of the sales price with their retirement money.

Mottet and his partner used a loophole in U.S. tax law to roll over $1.4 million from their existing 401(k) retirement plans to finance the purchase of Carson, California-based Empire Container Corp. The strategy saved them taxes and penalties they would have faced for cashing out the plans.

“If we hadn’t done it this way, we would have had at least $1 million more debt, and we wouldn’t have made it through the recession,” said Mottet, 51, who’s now chief executive of the firm. “It’s been a fantastic investment.”

Transactions like Mottet’s let entrepreneurs access their retirement funds without tax consequences. Withdrawals from 401(k)s are generally subject to income taxes on the proceeds, and cashouts done before age 59 1/2 incur a 10 percent penalty, according to the Internal Revenue Service.

Here’s how it typically works: An investor sets up a corporation, establishes a new 401(k) plan there, rolls over his or her existing 401(k) or Individual Retirement Account, and then uses part or all of the plan’s assets to buy shares of the new company. This funds the new business, while keeping the tax- advantages of the retirement plan.

The transactions have drawn the scrutiny of the IRS, which dubbed them ROBS, for Rollovers as Business Startups, and said in an October 2008 memo that some may run afoul of the law. The IRS is coordinating efforts with the Department of Labor because these rollovers may also raise issues under the rules that govern retirement plans, according to the memo.

Not ‘Home Free’

“Like many other recently marketed tax savings strategies that appear to have been designed to take advantage of the law, ROBS arrangements, designed to fit within existing law and guidance, do not present a ‘home free’ result,” the IRS said in a November 2008 newsletter. “In fact, they may violate the law.”

Among the issues the IRS found were prohibited transactions, questionable valuations of the company stock, and a failure for the rollover retirement plans to be available to employees other than the principal owner. …

Monika Templeman, acting director of employee plans for the IRS, said the agency would be reviewing these rollover transactions, and auditing them on a case-by-case basis over the next few years.

“It can be done just right, but we’re seeing problems,” Templeman said. “It’s open to abuse because of the structure, and the promoters are taking advantage of that.”

‘Saber Rattling’

In cracking down on tax shelters, the IRS generally goes after the promoters of a shelter, she said. She declined to say if the IRS was targeting any rollover promoter.

Stephen Dobrow, president of Primark Benefits, a Burlingame, California-based benefits consulting firm, called the IRS memo “saber rattling,” and said he expected increased IRS auditing of the transactions….

The rollovers are a relatively inexpensive way to finance a new business, said Jeremy Ames, chief executive of Bellevue, Washington-based Guidant Financial Group, which advised Mottet on the process. …

Cashing Out

…Joanna and Frederick Neubert, of Cleveland, South Carolina, used a 401(k) rollover to buy a residential cleaning franchise in 2004, after both were laid off from corporate jobs. The Neuberts used the entire $118,000 proceeds from their 401(k) plans, Joanna Neubert said. Last December they closed the business.

Risking Future

The result for the Neubert’s retirement savings: The business was valued at zero, and their 401(k) savings are gone, according to Joanna Neubert.

Of the rollovers that the IRS has reviewed, many of their sponsors had gone bankrupt, Templeman said.

“Our thinking tends to be that if you can’t raise enough money with friends and family and people who find your business compelling, it may not be a business that should be started,” said Dan Rosen, a principal in the Lexington, Massachusetts, office of venture capital firm Highland Capital Partners.

“There are a lot of ways to get a business funded without risking your future,” he said.

Investors using this strategy also may face risk of an audit. If a rollover transaction is deemed to be a tax shelter, its plan sponsor or manager may be subject to excise taxes, in addition to regular taxes and penalties, according to IRS regulations. …--Editors: Rick Levinson, Rob Urban.

To contact the reporter on this story: Amy Feldman in New York at

To contact the editor responsible for this story: Rick Levinson at