Saturday, December 27, 2008

Spinning This Economy

I have to admit that I have an addiction to reading online news stories. Every night, I come home from work and surf between MSNBC.com, CNN.com & FoxNews.com to read the same stories and the different spins from each news organization. At first, I thought this was a relatively safe habit, not nearly as dangerous as being hooked on drugs, alcohol or some other vice. Yet I am starting to worry that my mental health is at risk and before long I will actually start believing the negative blather populated in those headlines rather than taking the time to understand the true story of what is happening in our economy.

Here is a perfect example of what I am blogging about. The below link is to a story on CNN.com with the title, For Stores, a Very Unmerry Holiday.

http://money.cnn.com/2008/12/26/news/economy/holidaysales_finalnumbers/index.htm?postversion=2008122611

I will let my readers peruse this link on their own time and make their own judgment whether these sales figures really represent a reason to be unhappy, or worse yet, whether this is a sign of Economic Armageddon. I'm sorry, I take that back. I can't let this one slide by without some commentary.

$470 Billion in projected sales for a holiday season and we are upset? In a nation of about 305 million people, that equates to about $1,540 per person. That's not yearly, that is just for the holidays. Hey Mom and Dad, I know I am over 18, but you gave me less than average gifts this year. Luckily, my children don't pay attention to my blog, because I am also below average in gift giving. Thanks CNN for highlighting another one of my inadequacies!

It really is all about spin. But when it comes down to it, there is no denying the statistics show that reality is not nearly as dire as what the headlines implicate. People are still earning money and people are still spending money. Our economy is a fast moving animal and trying to take a snapshot of where it stands now requires some high speed analysis that will be outdated the moment it makes it to the presses.

Here is a little thought that I would like to throw out there. Every year consumer buying habits will fluctuate. And while the spinmeisters will give global economic theories on what is happening, the basic fact is that they just don't have a clear understanding of the emotions of the American consumer as a whole. Furthermore, what our emotions were yesterday, will change tomorrow. We are all complex individuals with complicated and fickle emotions that influence us to make purchasing decisions.

Don't believe me. Explain to me the past fervor over Atari? Cabbage Patch Dolls? Tickle Me Elmo? Wii? Every year there are hot items that consumers want that defy all logic for the mass demand and often includes pricing that just defies economic theories on demand elasticity. Remember the bidding wars for some of these items? Those events also defy logic, but it happened in the past and some new magic item will warrant this type of spending frenzy in the future.

In the aforementioned CNN article, I found a line that just shows how little the experts understand the psyche of the American public. The reporter refers to a discussion with a consumer strategist with Global Hunter Securities. She notes in her article that Richard Hasting said, “there's no enthusiasm to shop if you really don't need anything.” I dare anyone to take an inventory of all our holiday gifts that we actually needed. Insert your own fruitcake or soap on a rope joke here! With apologies to Mr. Hastings, his comment was probably one line taken out of context from a discussion, but it still shows how the media chooses to spin their understanding of our consumer's psychology.

To all the small business owners who are looking for a ray of hope to weather this economic storm, remember that purchasing is not about needing. It is about wanting! Find out how to deliver at a profit what everyone wants and you can rule the world. Excuse the hyperbole, but obviously, this is impossible. Still, we can aspire to sell at a profit what some of the market wants.

Every year during the holiday season consumers buy things that are not necessary staples of sustenance. This season was no exception. I still encountered throngs of holiday shoppers as I defiantly ignored the gloom and doom prognosis for our economic future and went to the mall to get my daughter the purple, Chuck Connor's Converse sneakers that she absolutely needed. (I was all for spending that money on a practical pair of snow boots, but hey, we really don't need that in the North Country according to the logic of my daughter).

To all the small business owners out there who are reading the news, I encourage you to get past the negative spin and figure out what you can do to be more successful next year. You can spin this economy any way you want, but spin is reactionary. Demand will change all the time and there may be no logical reason. Ultimately, you will only succeed if you think about your existing and potential customers and fulfilling their wants. Be proactive and position your business to meet the fluctuating market demands.

People will always want things. Those wants are based on the emotional state of the consumer. That also changes over time. It is obvious that all the spin in the media is sparking some fears in consumers and this in itself is changing demand. Can you figure out how to fight this?

So the challenge is how can you convince your customers that they still want what you sell? Can you create an emotional message to help maintain the demand for your products or services? Can you sell something else that they want if you your demand falters with existing product or service lines? I'm asking more questions and my answers are sparse. But I am not the one running your business and it is your responsibility to find the path to success.

I do add this bit of advice. People talk about bear and bull markets. Now is not the time to feed the bears! If a product or service line is not producing, consider making a change.

It's obviously easier said than done, but in a competitive marketplace, those who move to meet the demand will ultimately succeed. Just remember that in our marketplace, emotion will always trump logic. Now, more than ever, you have to develop a compelling marketing strategy. I would love to tell you what the marketplace will want in the coming months or years, but I refer you to this Bertrand Russell quote, “The demand for certainty is one which is natural to humans, but is nevertheless an intellectual vice.”

Friday, December 12, 2008

The Bravery of Being Out of Range

Everybody seems to be weighing in with their opinion of what went wrong with the economy. We all have our opinions, but focusing on what went wrong won’t necessarily fix the problem. That is not to say that we can’t learn lessons from our mistakes, but the solutions to improving our economy will not come from placing blame or pointing fingers. We have to roll up out sleeves and get to work to make things better.

I’ve stated in numerous posts that I am against all of the bailout plans. They are too complex and they utilize the resources derived our tax dollars for the benefit of a few select businesses. Another issue with the bailouts is that they do not address solutions to one of the key fundamental problems with our economy.

This problem is that too many people are making key financial decisions with the “bravery of being out of range.” What I mean by that is that those who are running these companies into bankruptcy are not suffering the consequences for their failures. These executives have the so called “golden parachutes” in their compensation packages to ensure they can live a life of luxury well into the future, whether their companies succeed or fail. Meanwhile their employees get laid off, usually with minimal severance packages and a complete loss of health benefits.

Entrepreneurism, whether on a large scale or small scale, refers to a very simple concept of running enterprises to be profitable. By definition, entrepreneurs are people who have possession over companies, enterprises, or ventures, and assume significant accountability for the inherent risks and the outcome. (http://en.wikipedia.org/wiki/Entrepreneur, target="wikipedia"). Yet if we look at the leaders of the companies at the forefront in this economic crisis, you will see compensation packages that eschew all risk and accountability. How else does a CEO fly a luxury jet to Washington to ask the government to help them from failing? How else does an executive ask for a $10 million bonus after losing billions of dollars and laying off thousands of workers (yes, I am referring to John Thain from Merrill Lynch, who has since come to his senses and withdrew that request).

I have to admit that I feel quite a bit of anger that people who don’t get it, somehow got placed in these positions of great power. But anger won’t solve the problem, so I’ll get over it.

Now comes the solutions part. I am a firm believer in Occam’s Razor, which refers to a principle that basically states, “All other things being equal, the simple solution is the best.”

So I’ve come up with 3 simple steps we could take to help fix our economy:

1. Invest in assets that will generate revenue. I wrote quite some time ago about the simple genius of this strategy that is covered in Robert Kiyosaki’s book, Rich Dad, Poor Dad. If government wants to invest in turning the economy around, then government has to put more thought into the development of its assets and how it derives income from those assets. Things like our highways, ports, our military and our national parks are all assets that could be generating more income. We have to change the paradigm of how our government invests so we continue to be innovative in developing these assets to provide more lucrative revenue opportunities. For our government, that means using the development of our assets to generate jobs and income opportunities (user fees at National Parks, resource development on government owned lands, selling of government funded technology, etc.). As for the private sector, this step will happen out of necessity. There is an old saying that cream rises to the top. Eventually the last investors standing will be those who are wise enough to follow this basic strategy.
2.Make accountability a part of all financing and investment decisions. Everybody talks about regulation, whether we should increase it or decrease it to spur the economy. To me, there is no need for this debate if accountability is included in all investment decisions. Consequence is an amazing regulator. Our problem is that we have allowed too many people to be insulated from the consequences of their poor decisions. We could change this by having shareholders demand that executive compensation be tied to company performance. There could also be an insistence by all lenders that there is some form of personal investment made in any financial investment deal to make sure decision makers have some “skin in the game.” If I had my say with our Congress, I would make sure that all executives who are making decision with bailout money have some of their personal assets pledged as collateral. Then we would find out how confident they are in their ability to properly utilize that public investment. Those who are not willing to be accountable should not ask for handouts and should wait this crisis out on the sidelines.
3. Increase financial education. William Durant wrote, “Education is a progressive discovery of our own ignorance.” One of the things that we have learned in this economic crisis is that quite a few people had losses in the marketplace and they really had no clue in regards to the level of risk they were taking with their investments. The use of mutual funds and IRAs as an investment tool really didn’t gain traction until the late 80’s and early 90’s. It brought millions of new investors into the marketplace, with many of them not having a clear understanding of what they stood to lose. Most people didn't realize what they should be researching or even have a clue as to whether their investments were high risk or safe. That is because times were good and they believed their advisers as long as they were making money. But now that people are watching their values dwindle, all of a sudden they are starting to take notice and ask questions. Well, let’s not forget this progressive discovery of our ignorance and insure that we learned our lesson and teach others what we have learned. The fundamentals of business and investment should be taught in all secondary schools and community colleges should make financial educational more accessible as a non-credit curriculum so anyone who wants to learn more can.

I remain optimistic about our economic situation. I am obviously over simplifying some complex issues, but this is where we have to begin. We live in a big world with quite a bit of consumers who need products or services. Eventually more entrepreneurs will recognize this and profit from their ventures. That is if they maintain the bravery to be accountable for their actions and work responsibly towards achieving success.