Companies Struggle to Get Frequent Buyer Programs Right

As I mentioned in another of my blogs - En Words, covering the written word in its various forms - I mentioned a new loyalty program from Borders. And today I received an email from Staples about its revamped program.

No surprise that many companies go around and around in pursuit of customer loyalty, as I've found in the past when writing about the topic ... and when dealing with customers as I've had to do over many years. The underlying concept of a frequent buyer program should be disturbing to executives, because in essence it rests on two unsteady pillars: bribery and coercion. The former is clear, because the business in question essentially offers to pay customers to do business with it. The latter, though, is just as obvious when you think of it; the company is trying to make doing business with competitors so painful or disadvantageous that customers won't.

Unfortunately, bribery and coercion are poor ways of doing business. You either turn customers into mercenaries or prisoners. A mercenary is completely opportunistic and always looking for the better deal, whether from you or your competitor. Either you lose the customer or you keep increasing the total cost of servicing the customer, driving down profitability. A prisoner is just resentful and looking to bolt, and it costs a lot to keep the person so comfortable that switching becomes too much of a bother, which again means losing the customer or losing profitability.

Sometimes the strategy works. I think of Barnes & Noble. I have a membership there and am happy to pay the $25 annual fee because I've calculated that I save enough to make the relationship worthwhile. But I don't buy because I feel any connection to B&N. I also have a Borders Rewards card, but the program is so rigid and demands such high levels of purchasing participation to pay off that it's not worth my time shopping them. There's also a Staples card in my wallet, but I only use it when I have to get something at Staples (few choices out where I live) and figure that maybe there's a chance it will pay off. But if there was another local place with better prices, guess where I'd be?

Loyalty programs are important to a business, given that customers really hit their stride in profitability over the long term. However, a frequent buyer program is not a loyalty program. Price is important to most people, but it typically comes third to fifth in lists of factors important to buyers. Service, availability, a pleasant experience, reliability, convenience - most days all of these can trounce a bit of savings. Before considering how to improve a frequent buyer program, companies would do better to invest the costs in improving the cusotmer experience and quality of products and services. You're always better off with people who want to do business with you.

Poor SAP Succession Causes Loss of Vital Technologist

Most companies think of succession as a CEO issue - and it is. But it spills out into other areas as well. The Wall Street Journal is reporting that Shai Agassi, president of SAP's product and technology group, is leaving for other opportunities. He was considered one of the potential successors to CEO Henning Kagermann. But the latter just extended his contract through 2009, so Agassi is on his way out, probably looking for a place with greater career opportunities. Unfortuantely for SAP, this is not a run of the mill departure. Agassi, who joined in 2001, was head of a critical new technical direction for SAP: more flexible software that could use the Internet in better ways. In other words, he was in charge of the company's hope for the long-term future. Agassi may have lost out on the corner office, but guess who the real business loser is?

Book Store's Difficulties Show Large Business Shortsightedness

I realized that a story on my En Words site, about an independent book store being forced out of its digs by a shopping center operator's rent increase while not providing an anchor store, is just as much about business as about books.

Public Companies Borrow Money to Give to Shareholders

The Wall Street Journal reported on 3/27/07 that some public companies - such as Scotts Miracle-Gro, Domino's Pizza, Health Management Associates, and Deans Foods - are borrowing money to repurchase shares and offer dividends. In other words, they're going into debt and taking on risk to distribute cash to the people and institutions that own them. Some number of people in the investment community seem to think that this is a good idea:

"This is long overdue," says Robert Sellar, head of North American equities at Aberdeen Asset Management, which has $148 billion in assets, adding that "companies in the U.S. are underleveraged."

Maybe I've just become a fuddy duddy, but to go into debt to pass around the cash seems the equivalent of taking a home mortgage to go on vacation. It's fun, but eventually someone has to pay. The underlying assumption behind these transactions is that companies will remain profitable and that economic conditions will stay positive. Given what is happening in the housing market - subprime mortgates in trouble, meaning more houses on the market, lower prices, more people trapped by highly leveraged higher prices from the past - and that some like Greenspan see the potential for recession on the horizon, this seems like foolhardiness.

As the article further notes:

The best candidates are typically firms in maturing industries with slower expansion profiles, and whose shares are trading at low earnings multiples, notes Stefan Selig, vice chairman of global investment banking at Bank of America Corp., which also advises companies on such transactions.

If the industries is mature and management teams feel that there is too much capital tied up in low return uses, then maybe they should consider potential new brands/ventures and a reexamination of their current strategies.

I think the degree of underlying lunacy of this approach is apparent at the end of the article, where the CFO of Scotts Miracle-Gro is quoted as saying that "operating with more debt 'encourages more discipline' among management." And mortgaging your house up to your eyeballs encourages future budget discipline in a household. Oh, please, spare me.

Detroit Gets What It Paid For: Uncooperative Unions

A few days ago I wrote about how bonuses for GM management were one of the more foolhardy actions the company could take when it faced finanical problems and needed union cooperation. It now seems, according to the New York Times, that the UAW is ready to take the gloves off. This is so unsurprising that it's almost amazing it has the title news. You might as well say that the law of gravity should be a surprise. According to the story, even Delphi, the huge auto parts supplier operating in bankruptcy, got the bankruptcy court to approve executive bonuses. What are these people thinking? You can't stick it to suppliers - which is what bankruiptcy effectively does - and ask for employees to tighten their belts while giving yourself a bonus. No wonder Toyota and other car companies are smacking the US auto industry about like a youthful Muhhamed Ali boxing a 97-pound weakling. The foreign businesses are dealing with competitors whose management hasn't learned that if a hot stove burns your fingers, touching it again is plain stupid.

Anti-Terrorism List and Law Forces Anti-Customer Business

Bad data can lead to bad decisions, and some of the details in this Washington Post story about customers being identified as terrorist suspects. According to the story:

:The lawyers' committee has documented at least a dozen cases in which U.S. customers have had transactions denied or delayed because their names were a partial match with a name on the list, which runs more than 250 pages and includes 3,300 groups and individuals. No more than a handful of people on the list, available online, are U.S. citizens.

Yet anyone who does business with a person or group on the list risks penalties of up to $10 million and 10 to 30 years in prison, a powerful incentive for businesses to comply. The law's scope is so broad and guidance so limited that some businesses would rather deny a transaction than risk criminal penalties, the report finds.

Not only does this present grave concerns for civil liberties, but companies are facing pressure to take actions under the law that can unnecessarily harm relations with customers based on poor information. Another quote from the article:

"'The law is ridiculous,' said Tom Hudson, a lawyer in Hanover, Md., who advises car dealers to use the list to avoid penalties. 'It prohibits anyone from doing business with anyone who's on the list. It does not have a minimum dollar amount. . . . The local deli, if it sells a sandwich to someone whose name appears on the list, has violated the law.'"

Dealing with the problem might mean lobbying for a change in the law.

Diebold Sues Massachusetts for Not Winning a Contract

From the sore losers department we get Diebold Election Systems, which is taking Massachusetts to court because the state chose a competitor's products. The Boston Globe article quotes a lawyer representing Diebold:

"We compete against AutoMARK around the country all the time," Weisberg said. "Based on the criteria set out by the Commonwealth, we had a fair degree of confidence we'd come out on top, and nothing we heard during the process dissuaded us of that confidence."

I understand that should the court not agree, Diebold will escalate the challenge, sending its CEO to sit in the office of the governor and hold his breath until he turns blue.

New Brand for Warner Books

The International Herald Tribune has a story about Warner Books changing its name to ... wait for it ... Grand Central Publishing. As brand/identity decisions go, this seems like a poor one to me. The name sounds like either a speciality press for train fanciers or a small publisher trying to sound like a big one. Other than Grand Central Station - which means these people have been in Manhattan way too long - what is the association supposed to be for most readers and retailers? Not that it necessarily means that much for the consumer. I've long believed that no one, but no one buys a book because of the company that published it. If it's well produced and the title and content grab you, who cares about the name of the faceless corporation getting your money? And if managers have little enough to do to make important choosing a name that customers don't and won't care aboutthe name is important, well, Hachette Book Group USA (American arm of the French book publisher Hachette Livre - book en Français) also owns Little Brown. Why not just use an established brand? Just think of all the money saved in unnecessary consultant fees.

Restaurant Chains Try Downsizing Portions

According to a New York Times story, some big name chain restaurants are looking to offer smaller portions, reversing a good decade of dedication to the proposition that all things should be created in larger portions for more money. The trick was that the restaurants increased prices proportionately more than their per-meal food costs, so everything became more profitable. Friday's is trying this because it's been experiencing a business slump, attributed by the article to increased gas costs making trips more expensive and fast food restaurants improving the quality of their food. (And could someone please point out a case where this is actually true?)

There are two concerns restaurants have faced on such moves in the past: disastisfied customers feeling that the weren't getting what they should be and lower average check prices, which means less profit. So the chain is dropping prices about 20% for 30% less food. According to the article, "Though the campaign is only a few weeks old, Mr. Snead says the early numbers show that the smaller margins on the Right Size portions have so far been offset by higher traffic."

Let me get this straight: more people are coming to eat less? The article quotes some studies that suggest people think portions are too big at restaurants. Then again, it may be that, like sex, when it comes to talking about food, people lie. And then again, perhaps the increased traffic is due to heavy advertising for the new program that attracts people who might ordinarily not have come.

GM Gives Bonuses to Upper Management Before Asking for Union Concessions

According to a Wall Street Journal story, GM is giving restricted stock and options grants to chair and CEO Rick Wagoner and other top execs. Unfortunately, although the company's stock has climbed 38% over the last year, when adjusted for splits and dividends, it's still down 40% from when Waggoner became chief executive. This might well have wiped out the pay cut that Waggoner and other top executives took in 2005 - all while the company is still in the dumps. And this all happens shortly before the company goes into contract negotiations with the UAW and seeks to spend less on healthcare. So let's get this straight: less for stockholders, aiming for less for the people who actually have to build the cars, and more for management? For some reason I suspect this is a strategy that is going to blow up so badly that burning dung will be raining down for years. GM is hardly out of the woods, so why would the board and management agree to do the one thing almost guaranteed to put the union's back up, just when they need those workers to cooperate? I've heard the saying that Greed is Good, but does it have to be so Dumb?

Bumping Bozos Theory of High Growth Disaster

A business colleague today was telling me of a time he heard Bill Joy, one of Sun's founders, talk about what he called bumping bozos. The theory is that in an early-stage company, the entrepreneur is probably hand-picking good people and things work well. Then those people are picking others but still the original group gets to meet people and screen out those who won't work. Eventually, though, the company gets big enough that the entrepreneur and hand-selected early employees no longer get to meet everyone. At that point, some Bozos get into the organization.

This isn't necessarily a problem - yet. There are only so many competent people in the world, and you aren't going to get them all. Yet these clowns aren't complete problems because there was probably some area of talent they showed. But outside of that narrow space, they are dangerous because they will suggest things that could only crawl out of a clown car - seemingly tiny to start, but suddenly expanding into a ridiculous concept under any degree of sane observation.

Even this isn't necessarily a problem. The problem occurs when a Bozo reports to a Bozo manager, who then signs off on the clown car emissions. When that happens, the company is in real trouble because there are no longer any common sense checks and balances.

I sometimes wonder whether many companies are in quest of too much growth - that maybe deliberately restraining the ultimate size could result in nice regular income with higher profit margins than they might ordinarily see.

Interview: Jack Dolmat-Connell on CEO Severance

There has been significant news about CEOs leaving companies on poor stock results, and still receiving huge severance packages, so it seems that perspective is in order. Jack Dolmat-Connell, president of compensation consultancy DolmatConnell & Partners, is one who can provide it.

BB: Why are cases of failure getting such elaborate severance packages?

JDC: If you let someone go, there are usually clauses in the severance agreement that they will get X portion of their unvested equity, which is often the biggest piece of some of those eye popping numbers. Looking at the value up front – two or three years out, when you have some significant equity to go – that’s where you can see 20, 30, 50 million dollars.

BB: Why do boards agree to such packages?

JDC: Because [the CEOs] end up giving up a lot when they are let go or leave, they want that more or less guaranteed on the front end of coming to a new place. The person didn’t perform, but that’s what it took us to get them here in the first place, otherwise they probably wouldn’t have come. You settle on your candidate. You’re trying to woo them, often away from someplace where they’re doing well. The candidate often does have bargaining advantage.

BB: But when the average tenure of a CEO these days is between 2.5 to 3 years, don’t the boards consider the likelihood of paying out?

JDC: Worse case scenarios or negative case scenarios are not modeled out. Everything looks good and nobody’s considering the fact that this person won’t work out. Five years down the pike, the stock price is 25% down.

BB: What about stronger negotiation on the company’s part?

JDC: Particularly with your high profile companies and CEOs, the CEO hires a top-tier lawyer and law firm to negotiate these. Inside counsel is generally doing the negotiation [for the company] and writing the contract. It generally is an unequal playing field.
(Note: I'll have an in-depth article on this topic in the April Corporate Secretary.)

Profile: Tim Maples of Delta

Brand equals company plus positioning and advertising, right? Not if you’re Tim Mapes. Many credit Delta’s managing director of marketing with the branding of Song, the company’s former targeted entry into low-cost flight. But while he had a heavy advertising background, it was a stint in operations that really taught how to brand.

As a child Mapes knew his career direction. “I wanted to be in advertising from the moment I watched Bewitched: come home to a beautiful wife called Samantha, drink martinis with Mr. Tate, and fool around art boards,” he remembers.

He majored in advertising and worked at agencies before going to Delta in 1992 and becoming director of advertising in 1993. The results were … industry standard. “I presided over some of the most hyperbolic ad campaigns in Delta’s history,” admits Mapes.

Then he time running Delta Express and had an epiphany. Marketing had to be more than image and empty promises. “You go out to the field and see how hard ramp agents and pilots [and flight attendants] are working and you say, ‘We’re setting our people up for failure.’”

So when Delta started Song and Mapes became its second employee, he wanted brand based in understanding a customer segment, women travelers, and then organizing to delight the customers with style, entertainment, respect – and low cost. He wanted a revolution.

“I’ve been 28 years in the airline business, and it wasn’t anything any marketer thought we could do,” says Joanne Smith, Song’s former CEO, now Delta vice president of marketing. Early on she remember sharing with Mapes a cab trip to a meeting. She thought it was time to introduce the brand campaign to the line employees. “He said, ‘Let’s not show them any ads. Let’s bring our employees in and work on building brand culture.’ He was marketing from the inside out, building the culture that was going to build the product innovation.” Employees bought into the concept, became enthusiastic, and Mapes got these evangelists out in front of prospects in the context of their lives – serving food and drink at store openings, for example.

It was the right approach according to Paul Parkin, principal of San Francisco branding firm SALT and a veteran of brand consulting with Virgin. “Simply relying on mass communications to build a brand is no loner enough,” he says. You need to engage with people in many different ways and let them experience the difference.”

(Note: the above originally ran in Advertising Age last year.)

Pay for Results Advertising Coming from Google

The New York Times wrote about Google experimenting with an advertising approach where advertisers would only pay for results. Think of it as Pay for Pay. The advertiser states what the action should be - purchase a product, download something, sign up for an email list - and what it would pay. Then sites decide whether they will run the ads.

According to the story, Google's VP of product management, Susan Wojcicki, said "We’re optimistic that it will be something that will be very compelling for advertisers." No kidding - and terrifying for sites (read that more generally as publishers), advertising agencies, consultants, and many others who have made money without having to prove their ultimate usefulness to the strategic interests of the advertiser. Not all will quake; direct marketers have been judged on results for years. But this could have an enormous leveling effect on an entire industry that too often gets away with a dance and a smile.

Wal-Mart Slaps Back at Ex-Marketing Execs - But is the Move Smart?

Today we see that Wal-Mart is playing tough in dealing with two marketing executives that the company fired last fall for an alleged conflict of interest when awarding the company's significant advertising account. As part of its court filings, Wal-Mart included emails that it claims are between the pair that allegedly (Wow, multiple qualifications in the same sentence.) to show an extra-marital affair between them. The company also claims - and I can't tell if there are emails to back this up - that the executives were accepting gifts and also talking to one chosen agency about getting permanent jobs there.

It may be that all this is right and that Wal-Mart had a legally-defensible reason to can both of them. But let's think beyond this for a moment. At least one of the executives, Julie Roehm, sued Wal-Mart for firing her without a reason and for owing her money under her contract. I can't imagine that this won't cost the company more than it will save. Even though it apparently is seeking reimbursement for its own legal fees, is it realistic that they'll ever collect the money?

More importantly, from a completely practical view, is to ask what the company strategy is. Does management hope to scare other potential problems? I'd say that it's more likely to scare off good management candidates instead. People aren't going to want to work at a place that is likely to air their personal dirty laundry - and we all have some in some form or other - in public when that suits its needs. Also, people in management do keep their own interests in mind all the time. No, you shouldn't be looking for work from companies when you're in the position of giving them money to avoid at least the appearance of a quid pro quo. But combined with the releasing of the emails, ambitious and talented people are likely to do a risk analysis and conclude that the benefits aren't going to outweigh the potential costs. How much cheaper - and quieter - would it have been to pay off their contracts? Sometimes driving a hard bargain can make the total price dear.

Viacom Drives for Online Ads

A New York Times story discusses how much attention Viacom is putting into online video advertising. Aside from the silliness in which some companies indulge when trying to sell their services (like a Viacom ad sales rep doing a rap at the company's annual ad presentation), it's sobering to think how quickly online advertising has been taking off. Viacom and other media companies have little choice. Missing online would be like a retail chain insisting on standalone locations and spurning malls. Companies have to go where the people are.

Companies Get Smart and Give Patents Away

The Associated Press (via the Cincinnati Post) ran a story about companies giving away dormant patents, particularly to non-profits and governments to develop. It's not pure altruism and also not just about tax deductions. The article quotes an expert saying 90 to 95 percent of all patents are idle. I've heard somewhat lower numbers from various IP experts, but it's still well over 80 percent. Now multiple that by the number of patents large companies hold and then by $100,000 - which is the conservative amount of hard costs for maintaining a patent over its lifetime. Big companies went on sprees patenting everything because of the once popular thought that there was uncounted wealth waiting in the unprotected and undeveloped intellectual property they owned. Instead, the exercise turned out to be massively expensive. So cutting losses and sweeping out the cabinets is a wise thing.

Ballmer Calls Google Employee Growth Insane

Bloomberg News (in this case via the Seattle Post-Intelligencer) attributed to Microsoft CEO Steve Ballmer a statement from a speech that Google's pace of employee growth is "insane." And he might be right that the company is adding too many people too quickly - it takes time to get people up to speed and working productively.

However, he also apparently said the following:

"They're still really one business, and it's a search and advertising business," he said. Google's other efforts have been "cute," he said.

That is an ironic remark from Microsoft, 80% of whose income is in Office and Windows, and that's what makes it ultimately vulnerable. If there isn't a big enough uptick on adoption of new versions of their software, suddenly the revenue dries up. Yes, Google seems to be going in many directions, but I think that instead of being scattered, those attempts actually do have a single focus of providing certain kinds of services to customers, which will make for a loyal following. And when you have a devoted audience, you have the chance for a good business.

Thinking back on the dot com bubble, many of the companies made mistakes that to some of us seemed obvious at the time. You can't have a successful business that thinks the concept of revenue is old-fashioned. However, there's an even more proven concept: the money will come if you do well by your customers.

Instead of writing Google off as a one trick pony, let's remember how big and varied a business advertising is. By acting as a conduit to willing people, Google now offers a vital outlet to companies in many industries, giving it a potentially more secure foundation than virtually any other single company. Or is Steve Baller ready to say that advertising agencies, broadcast and cable networks, specialty printers, and print publications are all one-trick ponies because they all depend on advertising?

New York Times Runs CEO Compensation Series - and Becomes Example

The New York Times business section has been running multiple pieces on CEO compensation, particularly when companies are getting into hot water over how much their chief executives make. So the irony was heavy when a story came out in the New York Post on how the Times changed the rules on bonuses so that upper brass and family members could get three-quarters of their bonus payments even though the company lost $3.76 per share in 2006.

Where didn't the story appear? One guess.

Bob MacDonald on Relationship Between Boards and Auditors

I had interviewed Bob MacDonald, a former insurance industry CEO and current member of some corporate boards, about the changes in the relationship between boards and outside auditors. This was to be for a piece in Directorship Magazine, but after I had the assignment,the publisher nixed the idea of actually paying for an article, then apparently fired the entire editorial staff, supposedly to move the operations from NYC back to Boston, where he was based. It's a pity - the former editor, Bill Holstein, is one of the best editors of business material I've worked with. But he's on to doing books now and I thought it would be good to get some of this material somewhere.

ES: You've been public in the past about problems in the relationships between boards and outside auditors. What was the state of things a year or two ago?

BM: We had seen the relationship between independent auditors and management of public companies move from cozy to animosity and outright conflict.

ES: How did things go between them before?

BM: If you had an issue, you worked with [the auditor] to try to determine what was the best solution What that evolved into [at some companies] was any solution that you could get away with was the right solution, which I thought was [bad].

ES: How did things change?

BM: The government changed its approach to handling problems with (financial) numbers. Never before were audit firms held liable, then it basically said if something goes Wong, it’s your fault. The independent auditors developed a head in the shell mentality: sacrifice everything you can and anyone you can for us to survive. [It] went from [a cooperative and helpful relationship] to literally no help from the independent auditors. They took the most conservative of possible roads. [For example, if you asked a question about a tax interpretation], that response was deemed to be inappropriate and the audit firm said there was a material weakness in the management of the firm because it relied on the opinion of the audit firm.

ES: And now?

BM: Now it’s swinging back to a more reasonable management of the process. I’ve seen it over the last year or so it get much better. It’s settled down – still with a sharper edge, and that’s good.

ES: How do you avoid future problems?

BM: The way you avoid it is that you don’t have humans running companies. Some companies are going to slip back. But that’s human nature and you’re going to have to live with it. Overall, we’re going to be better than we were. We’ve just raised the bar. Under the system they’re able to nip these things in the bud. In the past there was no incentive to see these things be brought before the board or discussed. Now there is the incentive to do that, and because of that the issues don’t become big before they’re resolved. What this has caused is an earlier recognition of the possible problems or conflicts and then the resolution of those things quickly. No one ever knows that you always pay your bills; [they only know] when you don’t pay your bills. A lot of these issues don’t become issues because you now have a relationship that encourages people to bring up the issues and get them resolved.

Police Copyright? Face Libel Charges?

Reuters reported that Viacom is suing Google for allowing people to post copyrighted videos. As Viacom put it:

YouTube's strategy has been to avoid taking proactive steps to curtail the infringement on its site," Viacom said in a statement. "Their business model, which is based on building traffic and selling advertising off of unlicensed content, is clearly illegal and is in obvious conflict with copyright laws."

I certainly have sympathy for copyright owners, as keeping control of my own IP is a constant fight. However, there's another issue. According to my understanding of previous court decisions, the only way companies carrying messages for others - like MSN offering public forums - can avoid getting entangled as defendants in libel suits is to not police traffic. The act of editing can make them become responsible for what they leave up. That leaves Google in a pickle: does it look for copyrighted material? How is it suppsoed to know? Have someone go through every single post? And if it does, what if one person defames another in a video? We are seeing the fallout of ideas that get ahead of business models and the law.

CEOs Face Pressure on Pay

CBS is reducing Sumner Redstone's salary and bonus, resolving an investor lawsuit from 2005. This won't be the last time companies scale back on CEO pay. Market and regulatory pressures are driving boards to take action. While this case was a definite reaction, a growing number of boards are reconsidering how they do executive pay. As I'm learning in preparing an article to appear in Corporate Secretary next month, there are a lot of ways that boards have unnecessarily participated in driving up executive pay. Now they're having to work their way back to more reasonable amounts - particularly when results for the shareholders just aren't that appealing.

Bristol-Myers Changes CEO Comp Procedure

I've been thinking about CEO compensation as I'm writing a piece for Corporate Secretary on the topic. So I found the following story interesting: Bristol-Myers has taken a Harvard B-school professor's suggestion to make changes in CEO comp dependent on a vote of three-quarters of the company's board instead of a simple majority. In the wake of payouts at Home Depot and the NYSE, and the hail of criticism that followed, directors appear ready to change business as usual.

Duels Over Recorded Music

The New York Times covered (after others had, to be fair) the growing battle between those who recorded live music in the past on television and radio shows and those who played it. In the rush for content to fill the ever widening maw of the intersection of telecommunications and entertainment, the gloves are coming off. But what it leaves me wondering is are any of the people looking for the content really asking their customers what they'd like? Or is this the same rush we saw on revenue-less dot com enterprises and the disappointment that mobile commerce became? One big mistake from which generations of managers don't seem to learn is that you can't make people want what you sell. Assuming that they'll want your wares is usually a losing game.

New Business Song Refrain: What Have All the Grownups Gone?

The often amusing Ben Stein - in whom conservatism has melded with a healthy dose of common sense - had a wonderful piece in the New York Times. His thesis is that from the bellyaching about stock market turbulence and the risk of sub-prime lending to the many cases of CEO self-serving shenanigans we're seeing the result of an adolescent society. It's well reasoned, though I'd point out that I know a good number of adolescents - my daughter and all her friends being examples - and would suggest that the expectations of getting getting everything without investment of time or energy is not something I see them exhibit in any great measure. That suggests two things to me. One is that perhaps there's hope for the future of the country. The other is that Mr. Stein might actually be setting the developmental clock a bit too far. Everything "owed and nothing owed in return?" A complete lack of patience. I think the age model, and the results, are sounding more like the six-year-old set. A reasonably intelligent and energetic teenager is already working hard in studies as well as holding down a job, because he or she knows that all the things on the wish list aren't going to come from the largesse of mom and dad.

Company Value is in IP, not PR

Companies often act as though marketing and image were everything. Promote yourself enough and you're bound to succeed. but as any good marketer knows, good promotion only helps if you have something to promote. A great campaign can actually be the fastest way to kill a company. that's because ultimately there has to be substance - something that people really want and that the company owns.

A court has ordered Vonage to pay $58 million as well as 5.5% of future revenue to Verizon for infringing on three patents out of the seven over which the latter originally sued. Vonage says it will appeal and Verizon isn't getting the injunction against operating that it wanted. But there's a lesson here: underestimate the power of intellectual property at your own peril. Vonage says that it has workarounds to avoid further infringement. So why didn't it have a lawyer review what it was doing early on when anyone could have guessed that there were many patented features and technologies in telecommunications? Because most companies simply don't get IP, as I noted in 2004 in both the Financial Times and Chief Executive. They don't see how they can use intellectual property as a strategic weapon - and they don't see how others could as well.

Would a CEO take factories and warehouses for granted? Inventory? IT systems? Intellectual property is probably more fundamentally important than any of these and it's the least understood and guarded asset at most companies. Think your company is the exception? Here are a few questions to ask yourself:

1. Could you print out a list of your patents?
2. Out of those patents, could you immediately identify the 10 that offer you the greatest strategic advantage?
3. Have you profiled the IP inventory of your biggest competitors?
4. Do you know without asking which technologies critical to your business are owned by other companies?
5. Do your R&D efforts - whether in products or services - happen within a solid IP strategy?

If you answered no even once, you've got a potentially serious problem on your hands.

Take-Two Interactive Shareholder Revolt

In the investor relations and governance circles (two business topics I cover), there's been lots of talk about activist shareholders. But at Take-Two Interactive Software, maker of the Grand Theft Auto series of video games, we're seeing an investor auto de fe. According to the Wall Street Journal:

The investor group -- comprising OppenheimerFunds Inc., D.E. Shaw Valence Portfolios LLC, Tudor Investment Corp. and Steven A. Cohen's S.A.C. Capital Management LLC -- will nominate six people to Take-Two's board at the company's annual meeting March 23 according to a Securities and Exchange Commission filing.

That means replacing the majority of the board. And a New York Times story reports that the investors are looking to replace the board's chair and the CEO and CFO as well. The former chief executive a few weeks ago "pleaded guilty to falsifying records in a stock option backdating scheme," again according to the New York Times. According to a variety of experts quoted, the company will still face enormous problems because growth will mean breaking out of the car chase rat race. If the Times was correct, then Take-Two's board was taken by surprise and is still deciding what to do.

A bigger question, though, is whether this will remain an isolated incident, or if institutional investors are getting so fed up with some companies that they're more wiling to take extraordinary measures. It would seem unlikely - they don't want to spend the time and I'd think are more likely to shift their money to other investments - but performing such an action once does make it easier to consider again. That's got to leave a lot of directors unnerved.

Soda Makers Claim Beverages are "Healthy"

The New York Times has a story about soda manufacturers claiming that vitamin-enhanced diet drinks are "health and wellness" products. Yup, it's a case of trying to change the mind of the populace by redefining reality. This is ultimately foolish. The tobacco industry did it for decades and is now reaping the law suits and tsunami of regulation. When a company tries to convince consumers that black is white, they're putting themselves on a treadmill of having to constantly reconvince people. What worries them is that soda sales decrease year after year.

In this case, consumers already have an image of soda not being healthy. The new products might be less unhealthy, but with the chemical sweeteners, who knows? Just say they taste as good but have fewer calories, as the story mentions Cadbury Schwepps having done with diet Dr. Pepper.

BP Fought Life-Saving Safety Equipment in TX - and Probably Lost Money Doing So

Yesterday's Financial Times ran a front page story of how BP lobbied against Texas regulators demanding additional environmental equipment and monitoring that would have saved at least some of the lives lost in the 2005 Texas City refinery explosion. (Sorry, no free link.)

According to the FT story, "The US Chemical Safety Board said the upgrade would have prevented - or at least mitigated - the blast that killed 15 and injured 500." Even BP's group vice-president for exploration and production said in his May 2005 report on the accident that adopting the additional environmental protections would have "reduced the severity of the incident."

Why did the company work hard - and even give someone a $1,000 bonus for the successful fight? Because the changes would have run an estimated $150 million. Instead, the company is bound to face law suits from the injured and the families of the dead - with negligence now in court room play. Combine that with the bad publicity and any effect on stock price, and I suspect that $150 million would have been the cheap way out.

Too often businesses scream that they want public policy based on risk analysis - and yet few companies are proficient at the practice themselves. Analysis only extends to costs that the company might avoid, not additional costs that will come up when something goes drastically wrong. It's a foolish practice and in the end actually costs shareholders unnecessarily. Will the company learn from this? I doubt it; few companies, as people, ever seem to learn anything.

Ads Should Obtain Results, Not Talk

Advertising Age (disclaimer, I frequently write for them) ran a column by Rance Crain called "Just When Did Marketers Decide That Advertising Isn't for Selling?" It's worth reading if only to remember, judging by what we see, how few people in marketing really seem to accomplish something.

The problem, at least in my view, is a basic misunderstanding of the principles of working marketing:

• People buy what they want to buy, not what you want to sell.
• There has to be something in a marketing message for the buyer.
• Nobody owes you anything.

In a shorter form, good marketing is always about the buyer and never about the seller, and if the seller mentions itself, it can only be in the context of talking about the buyer. In buzz marketing, the seller makes itself the center of attention - and that's all. If sales come, the company is lucky. That's why marketing has become probably the biggest waste of money in corporations, because it's the one area that for most businesses has never come under any kind of discipline. As I think department store pioneer John Wanamaker pointed out, half of a company's marketing is wasted; the question is which half. There's actually an answer: the half, or more, that isn't about the customer. Really focus on people and you'll get at least some return on your spending.

Best Buy Misleads Customers with Secret Web Site

According to this story from the Hartford Courant, Best Buy has used an intranet-hosted shadow version of its consumer web site to sometimes deny customers advertised prices. When someone would ask for a given Internet-advertised price, employees would see the same site on their computers, showing only the higher usual cost. As George Gombossy, author of the article, writes:

"Although Best Buy also refused to talk with me on specifics of the intranet site or its use, it insisted that its policy is to give customers the best price."

I guess the question is best for whom? This story puts a new light on a previous experience I had, both trying to purchase something from Best Buy and documenting it as part of an article for CMO Magazine. I don't think it's available online, so I'm posting it here:

Best Buy Customer Retention

Sometimes customers stop being statistics and poor systems drive customers away. Shortly before Christmas, I was trying to purchase an electronics gift for a kid. Having good experience with Best Buy stores in the past, I tried them online.

The company’s e-commerce system lets customers specify a pick-up store. As time was getting tight, I took that option. Three stores near me were out of stock, but one in Boston had the item. I placed the order and everything was fine – for about half an hour. Then I receive an email explaining that the store actually didn’t have the product. So I called customer service - my only choice for resolving the issue. The product is now in a store right outside of Boston. My order confirmation comes through – then the out of stock notice.

I’m back on the phone, a service representative apologizing because their systems only think that there’s stock, and a real human at the particular store checks, then sends the email in case of trouble. But I’m in luck, as a store me has a unit. But … wait. Wasn’t that one of the stores that didn’t have inventory this morning?

Technically, yes, but the system says that it is there. Perhaps someone made a return. No matter: the order is changed and the confirmation comes. And then the out of stock notice.

I’m starting to understand how a customer can go from pleased to pissed in a New York minute. Back to the phone, back to someone telling me that one of the other local stores has what I need. At this point, I trust nothing and no one at the company, so I cancel my order.

In comes the confirmation. And then another note: “Have you ever thought of getting a Best Buy Gift Card? It can be the perfect gift for that impossible to shop for person.” There was probably one at a store near me. Or not.

The point of this story is not to complain, but to see how a series of mistakes can lose a customer and create bad word of mouth. Best Buy obviously had some sort of retention system in place. Unfortunately, it was focusing on the order, not the customer.

We tried to reach Best Buy for a comment and got as far as a corporate PR type who had someone call me: not an authoritative source for the story, but someone who handles customer complaints, and that only turned into a series of traded voice mails.

The moral of the story? When a retention program is really for the money, and not the customer, a company is likely to lose both.

Viacom YouTube Breakup Brings Business Models to Question

According to a story in the Financial Times (no link, unfortunately - you have to be a subscriber), Viacom has seen a big uptick in traffic at some of its sites, like Comedy Central's Daily Show. Management says that the increase corresponds to having YouTube pull Viacom video material off its site.

If that correlation is accurate, we're facing two questions both fascinating and, for those in the media industries, important. The first, brought up in the article, is the more obvious, I think: how much will people go for user-generated content? If other media companies follow Viacom's lead, we'll see one test at YouTube. Traffic will drop, but how much? I"m not convinced that the site only exists on the strength of pirated video. MySpace certainly took off, and Viacom thought enough of "amateur" (read that as non-mainstream) content to purchase Internet shorts stop AtomFilms last year for $200 million.

That price seems more than a hedge against the possibility; when a realtively smart company like Viacom invests hundreds of millions, you've got to figure that Sumner Redstone expects the new property to pay. So perhaps there will be two media worlds - big commercial properties and alternative niche plays that, because of the distribution capabilities of the Internet, can reach enough audience to grow respectably. We've certainly seen that before ... in the print world. Alternative weeklies gathered readers and economic force by doing things that large dailies couldn't, or wouldn't.

And now for the more complicated question: where will consumers decide to go for information and entertainment, directly to producers or indirectly through aggregators? We've seen this to some degree in the past. Newspapers had people hawking on the street as well as kiosks - but they also had news stands. Magazines could sell subscriptions directly or sell through distributors to resellers. Both subscriptions and news stand sales became important to advertisers. Broadcast started out strongly as producer-owned because affliliates beamed content into homes, but then cable came about and many niche producers had to find ways to get distribution.

A similar situation is likely to be playing out on the Internet. Sure, people are going to Viacom now, but what happens with such aggregators as Google, Yahoo, and MSN? Or what about individual influential sites like the Drudge Report? Yes, Viacom can help drive traffic to its site via television. But what if people start going immediately to the Internet for video in a few years? Will they keep hopping from site to site? I would argue not. Sure, the public channel surfs, but that's jumping around from a single unifying interface. Sure, there could be subscription-based service, like with magazines, when material gets sent to you, but the size of teh pipes to most homes won't allow long format high-definition video, particularly if many people want simialr access. And while people like the idea of enormous choice, I would bet that they focus down on a few choices. So media companies will have to make themselves available on aggregator sites. And who's to say that an outside site like YouTube might not be the one to come out on top?

Firing of Walter Reed Head Offers Business Lessons

I typically avoid overt politics, but the situation at Walter Reed offers good lessons for all businesses. The Pentagon has reassignment - read that as canned - a number of people, including the general in charge of the facility. Absolutely the right thing to do. If you have responsibility for an operation, then you get the credit and you get the blame. For him not to have been going around the hospital, seeing what things were actually like and taking necessary action, is disgraceful. It's also too close to how many companies operate. Upper level managers too seldom spend time talking with the front line employees, observing how things work, and talking to customers of all sizes. You can't just observe from above based on some numbers, because you have no idea how people are trying to present the operations to make themselves look good. When you're the last to hear, then you should be the first to go.

The second lesson is that responsibility doesn't suddenly end at a convenient scapegoat. If a division head wasn't taking care of business, why didn't the CEO know? The hems and haws give away when someone is trying to make up an answer without knowing for sure. Shouldn't the CEO be having regular conversations to smell when something is going bad? Similarly, it's right to fault General Weightman, but how about all the people above who never took a trip to the facilities? Also, what about when Bush and Cheney have visited the hospital? Why not take the opportunity to see how things really operated? Similarly, directors might consider taking visits through facilities to see how their fiduciary charges are actually doing. A little time here and there might indicate when glowing reports didn't seem to jive with the atmosphere on the floor.

Dunkin Donuts Edges Out Starbucks for Brand Leadership

Forbes among others reported that Dunkin Donuts had gained a brand edge on Starbucks. Forget about seeing this as a Starbucks or coffee story. In a microcosm you can see a problem for many companies. Nothing wrong with profits, but when you pursue them at the expense of who and what you are, you'll eventually reach a point where customers grow tired of you. Here's a link to a blog from the founder of brand research firm Brand Keys, which did the research showing the change in brand power between the two coffee sellers.