Posted on Thu, Feb 16, 2012
Applying business acumen in show business can be a bit tricky. Think of the high net-worth individuals who are asked to invest in a Broadway show. They know the odds of a blockbuster hit are very slim. According to a recent article in the NY Times, only about 30 percent of the shows even turn a profit. (If you do not subscribe to the NY Times, use: http://www.nytimes.com/2012/02/11/theater/phantom-of-the-opera-reaches-10000th-broadway-performance.html?_r=1 )
But when the probability of a business investment is akin to a crap shoot, standard approaches to making an investment decision such as discounted cash flow might best be put aside. Take the case of investor James B. Freydberg cited in the same NY Times article linked above. Back in late 1987, at the time of the infamous “Black Monday” stock market crash, he and his business partner decided to put up $500,000 in a play called “The Phantom of the Opera,” because he figured that this investment had a chance of making better return than anything he could find in the stock market. And, wow, was he right! Last Saturday, “Phantom” celebrated its 10,000th performance on Broadway. Freydberg told a reporter for the NY Times that this investment has since proven to be his second best, (his best being in Apple).
With such extraordinary returns that can be had in an investment in a Broadway hit, it would not be surprising if finance professors have been hard at work trying to come up with a model predicting a show’s success. Interestingly enough, marketing professors have already taken a crack at this. For example, several marketing professors wrote an article called “Exploring the Determinants of Broadway Show Success” published in the esteemed Journal of Market Research back in 1998. Studies such as this and others focus on factors such as reviews by critics, type of show, and receipt of awards, as well as marketing efforts such as spending on advertising.
If you’re interested in how sophisticated statistical analysis such as regression analysis is used in marketing research, read these academic papers. If you just want a quick read of a fascinating example of the effective use of the “Four Ps of Marketing (i.e., price, product, place and promotion), read the article in the NY Times. Regardless of which you choose, you appreciation of the impact of successful marketing on business success will be further enhanced by listening and reading our “Business Acumen: Your Key to Success,” and :Marketing Mastery: Your Key to Success.”
Posted on Sat, Feb 11, 2012
I just switched from an old Blackberry Tour to a new Apple iPhone 4s. There were three separate parties involved in this decision: Apple, Verizon, and the Verizon “Wireless Zone” store. I had wanted an iPhone before but could not buy one, because for a long time AT&T had the exclusive rights to sell the iPhone. I chose Verizon as my service provider, because I think it gives me better voice coverage in the New York Metropolitan Area. About a year ago, Verizon also got the rights from Apple to sell the iPhone. I could have gotten one then, because my two-year Verizon service contract was about to end. But there was inertia and the thought of getting used to another device’s interface.
Believe it or not, what also made me think there was no rush to get an iPhone was having to go to the Verizon store (which for me brought back memories of long waits and brusk customer service). Fortunately, as I related in my previous blog, I found a Verizon Wireless Zone store nearby and went there on a impulse, just to check out my options in switching to the iPhone. The service was prompt and friendly and the salesperson convinced me to go with the iPhone. I am happy to report that the service was equally good when I picked up my iPhone at the same store and had it set up there for use. Now that I’ve been using my iPhone for the past several weeks, I regret not having changed sooner.
Typical blogs about smart phones generally have more to do with the technical aspects of the devices and their warranties and limitations of usage. For example, one of the key features that has kept the party going for BlackBerry apparently has to do with the security issue. But I understand that is changing and that a number of companies have adjusted their security systems to accommodate the iPhone as an official company device.
We could could talk all day long about apps and lockouts, warranties and restrictions. But for me the tipping point in my getting an iPhone was the retail customer experience. We talk about the importance of marketing and customer service in Marketing Mastery: Your Key to Success.
Posted on Sun, Jan 22, 2012
What is the difference between “Ralph Lauren” and “Ralph,” between “Donna Karen” and “Donna” and between the Banana Republic, The Gap, and Old Navy? Savvy shoppers can tell you. The first names mentioned in each grouping are the flagship or premium brands. These are the ones that are the most fashionable and stylish. They also have the better materials and workmanship. And, of course, this means that they also command the higher prices. The pricing and quality hierarchy of brands, brand extensions or second-tier brands are fairly obvious for goods. But what about for services? Does the flagship service brand always provide the best service? Does one always get better service at the Marriott than at the Courtyard by Marriott or for that matter by the Fairfield Inn & Suites (owned by Marriott).
Some months ago, I lost my Blackberry and fortunately I was covered by insurance. But I was a bit irritated when the the back of the replacement device said “refurbished in the Philippines.” Anyway, sure enough, in recent weeks, the normal handling of the phone took its toll and pieces of the phone start to crack. I managed to hold the phone together literally with scotch tape. Then, certain problems started to occur with the phone signal. I put off going into the Verizon Wireless store because it is somewhat out of the way and also I usually have to wait at least half an hour to get served. But in searching on the Internet, I found to my surprise that there was a Verizon Wireless store fairly close to where I live. It was much smaller than the Verizon Wireless store that I was used to going to.
As I was waiting to be served (it turned out to be a fairly short wait), I noticed on the wall 7 or 8 reasons why I was going to have excellent customer service. Reason #1 was that this store was locally owned and operated. After reading this, I suddenly realized that this was not really a company owned establishment but one that Verizon had contracted out using what I imagined to be some kind of franchising arrangement: similar perhaps to what McDonald’s or any other franchise operation does. But while one cannot tell whether a McDonald’s restaurant is owned and operated by corporate McDonald’s or by a franchisee, I could tell that I was not in a “genuine” Verizon store, because this one was called “Verizon Wireless Zone.” I also realized that the people assisting did not wear Verizon Wireless logos on their shirts but instead were dressed in a mixture of unmarked casual attire of their choice. (In fact, one of the guys was wearing a shirt with the guy riding on the horse.)
When I buy a “Ralph Lauren” polo shirt, I assume it will be of top quality and also recognized by people as such. When I buy a “Ralph” polo shirt, I accept the fact that the quality and prestige/recognition factor may be lower. So, I thought to myself, will this also apply to “Verizon Wireless ” vs. “Verizon Wireless Zone?” I know the good folks at Verizon would hope not and that the idea is for customers to have the same experience in Verizon Wireless and Verizon Wireless Zone stores. Guess what? I found my first experience in a Verizon Wireless Zone to be much better than any of the countless times that I have been to the corporate Verizon store. I leave you to think about why I found this to be the case. I’m not absolutely sure about why this is so, but I do have some thoughts that I will share in my next blog. But in any case, my point in this blog is that the quality and prestige distinction that can be made in products is not necessarily the same when it comes to services. We talk about branding as well as the gross profit margin in various types of goods and services in Business Acumen: Your Key to Sucess and Marketing Mastery: Your Key to Success.
Posted on Mon, Jan 09, 2012
During the past holiday season, Sears announced that it would be closing 120 of its stores across the country. This is sad news from a company that was once America's Number 1 retail business. Growing up years ago in Honolulu, Hawaii, I remember Sears as being one of the most popular store in the Islands. In the late 1980s. after decades of being at the top, Sears fell to Number 3 behind Wal-mart and Kmart At first it tried to do battle with the two "marts" by adopting what retailers call an "EDLP" (everday low price) strategy. To become a successful EDLP store, one has to have a higher asset turnover that compensates for the lower gross profit margin resulting from lower prices. This means increasing revenue relative to assets such as inventory and the actual store infrastructure. At the time Sears tried its EDLP strategy back in the late 80s and early 90s, it had a sub-par inventory control system and a lot of very expense real estate resulting from its strategy of being anchor stores in suburban shopping malls. In contrast, a main part of Wal-mart's original strategy was to be an industry cost leader by setting up stores in less expensive rural or "exurban" locations and focusing on improving what we recognize today as one of the top supply chain management systems in the world.
After failing in its "lower margin/higher asset turnover strategy," Sears next tried pursuing a higher margin strategy by building up its retail apparel business, particularly in women's clothing. Women's apparel is a general product category that is among the highest in gross profit margin for typical stores in a shopping mall today. From the advertising tagline "Sears: Where America shops!" the company switched to "Come see the softer side of Sears." In this case, the reference to the softer side is women's apparel, as opposed to tools, major household appliances and automobile batteries. But this didn't seem to work well for Sears either, particularly when compared to the success achieve by competitors such as Target and JC Penney in establishing themselves as attractive clothing stores for middle market consumers.
One of the problems with a higher margin strategy, particularly in women's apparel, is that one has to offer a shopping environment and lines of clothing (e.g. well-known designers) that attract women shoppers into the store and, more important, gets them to buy things. Sears' ongoing problem of not being able to achieve either a successful higher asset turnover or higher profit margin business has created serious cash flow problems. This in turn has forced it to close many of its stores. In a recent article in the NY Times, the current CEO of Sears was quoted as saying that these closings will enable the company to "focus our investments on serving our customers and members through integrated retail -- at the store, online, and in the home." In short, Sears is apparently basing its strategy on "operational excellence." But regardless of how integrated Sears' distribution channels are, this strategy will only work if people actually buy things, regardless of the channel. Sears had better rethink its marketing strategy as well as its operational strategy. We discuss this in Marketing Mastery: Your Key to Success.
Posted on Mon, Jan 02, 2012
A frequently cited example of how innovation led to exceptional business success is the case of Southwest Airlines (SWA). Years ago, I had the pleasure of meeting Mr. Rollin King, co-founder of Southwest Airlines, when he and other speakers like myself were making presentations at a corporate seminar. (After retiring from the company in 1988, King formed his own corporate education company.) I recall his telling the seminar participants that the original idea for their innovative “low-cost” airline approach was sketched out on the back of a cocktail napkin. Thanks to the wonders of the Internet, I think I found a reasonable representation of that original drawing.
SWA started back in 1967 with the idea that an airline could make money simply by providing point-to point, short haul flights within a triangle of Dallas, Houston and San Antonio. It has since expanded the concept over the years and now flies to 72 cities in 37 states in the US. 
Several weeks ago, when I participated in a corporate training program for SWA, I learned that the company was planning to expand its service to Hawaii. To do this, it announced that it was going to purchase Boeing 737-800 planes that could make the longer trips to Hawaii and also to spend more on training the pilots for these longer over the water flights. Does the planned expansion to Hawaii signify a change in direction of its “low cost” business operations model? Why does it feel it needs to fly to Hawaii?
Here’s my take on this. The heart of the SWA strategy is to keep costs down by avoiding the “hub and spoke” system of the major airlines (which SWA people call “legacy airlines.”) This reduces the time spent on the ground for planes, while waiting for passengers of connecting flights. This also enables economies of scale to keep the costs of maintenance down (with only one type of plane, the Boeing 737, inventory and training costs are reduced). But higher fuel costs are making it harder for all the airlines (both low-cost and “legacy”) to make money. Furthermore, relatively more fuel is used during take-off and so this especially hurts SWA and its short-haul, point-to-point system.
To top this off, I was surprised to learn that on average SWA’s pilots are the highest paid in the passenger airline industry (pilots for UPS and FedEx on the average have higher salaries). For one thing, they work longer hours than their counterparts in the legacy airlines. For another, the financial pressures that legacy airlines such as Delta and United Continental have experienced in the past have led to agreements with the pilots’ unions for salary caps or reductions. In addition, SWA tends to higher more experienced pilots who then start off at SWA at higher levels than the newly entering pilots in other airlines. It’s pretty hard to run a low-cost airlines with rising fuel costs and pilots’ pay. I have to believe that SWA believes that expanding its routing to such popular leisure travel destinations as Hawaii will boost its profit margin. Maybe SWA feels it is time for more business innovation. We discuss the process of developing innovation for businesses in “Business Innovation: The Art of Creative Thinking." Happy New Year and since I'm originally from Hawaii, I'll also say "Hau'oli Makahiki Hou!"
Posted on Sun, Dec 25, 2011
In the spirit of the holiday season, I continue with part two of my story on vodka. How does one differentiate a commodity product? We can start with the traditional marketing mix or what the textbooks call the “Four Ps of Markeing:” Price, Product, Place (distribution as well as location), and Promotion.
Vodka is a drink that is neutral in taste , color and odor. One can start to differentiate by adding flavors and coloring. Of course like perfume, packaging is critical. And then there are the celebrities and the beautiful people who appear in media advertising and event marketing. But how about vodka’s ingredients and where it is distilled?
One of the legends of the spirits business is a man named Sidney Frank (above photo). In 1997, he came up with a name (Grey Goose) and then told his staff to look for a vodka made in France. As Frank said: “ People are always looking for something new. It’s all about brand differentiation. If you’re going to charge twice as much for a vodka, you need to give people a reason. “ The Grey Goose “story” was indeed compelling. It is made in France, the country famous for its production of luxury goods. It was shipped in crates like fine wine, not in cardboard boxes like the ordinary 80 proof stuff from Eastern Europe. Even the characters on the popular TV series “Sex and the City” began asking for “Grey Goose Cosmos.” After 7 years of ramped up sales, Frank sold his company to Bacardi for a cool $2billion. Shortly after the sale, he gave a gift to his alma mater, Brown University (Class of ’42) of $100 million for scholarships to students in financial need. When, Frank passed away in 2006 at the age of 86, he was ranked #186 on the Forbes 400 Richest Americans. 
We all know how popular microbrews have become in the American beer industry. Now we see a trend towards “microdistillers.” One of the most successful ones is “Tito’s Handmade Vodka.” I haven’t tried this product yet, but I do admire the company’s use of social media in its marketing.
Diageo is a good example of the power of celebrity to market a product such as vodka. The ccompany that calls itself the “leading premium drink business,” engaged hip-hop star/entrepreneur Sean Combs (aka “Diddy”) in a multi-year contract to promote one of its vodka brands, Ciroc, for a percentage of the profit, rather than a fixed fee. I have been told by an influential person in the industry that the product is doing extremely well, thanks in large part to Diddy’s endorsement.
In Business Acumen: Your Key to Sucess, , we talk about companies that “make money by spending money.” The premium drink business is a great example of this. Our Marketing Mastery: Your Key to Success explains the marketing concepts that we see are used so effectively in the selling of vodka. Happy Holidays everyone!
Posted on Mon, Dec 19, 2011
Several weeks ago while waiting around at the American Airlines Admiral’s Club, I overheard a young professional order a “Belvedere with soda” for himself and a “Belvedere with orange juice” for his friend who was going to join him shortly. My ears perked up because my son’s good friend happens to be the product manager for this particular brand of vodka. So I felt compelled to ask the gentleman who ordered the drinks why he asked for this particular brand. He could have said “vodka and soda” (as one would order a “vodka tonic”). He also could have used an expression perhaps more common to my generation: “screw driver,” instead of the Belvedere with orange juice. “I used to drink Grey Goose,” he said, “but now I prefer the taste of Belvedere. “
I didn’t want to bother him further so I stopped there. But I found it interesting that people can distinguish the taste of vodka, particularly when it is mixed with other types of liquid. Moreover, there are dozens of brands out there in the market. I would have been less surprised if his explanation had something to do with the cooler looking bottle, the million plus hits of a YouTube video featuring the product, endorsemets by a reality show celebrity, or all the Belvedere bottles prominently displayed by his Facebook friends in posted photos of their parties.
There are a number definitions of vodka but here’s one provided by www answers.com that originally comes from the Encylopedia Brittanica: http://www.britannica.com/ (The words in bold font are my doing.)
Colourless distilled liquor of neutral spirits usually made from a grain mash (generally rye or wheat). Potato vodka originated in Russia in the 14th century. Today most vodka is distilled from cereal grains. It is highly neutral, most flavouring substances having been eliminated during distillation and filtration, the latter process employing charcoal purifiers. Distilled water is usually added before bottling in order to lower alcohol content to 40 – 43% by volume (80 – 86 proof). Vodka is not aged. It is traditionally consumed unmixed and chilled, in small glasses; in the U.S. and elsewhere, it is often used in mixed drinks.
So by most accounts, vodka is an alcoholic beverage that has no distinct color, odor, or taste. When it is combined with mixers such as fruit juices it takes on the color, taste and odor of the mixers. When it is taken “straight” or when a splash of soda is added, might it be then that the superior taste of a particular brand comes out, or by chance might marketing have something to do with it?
As a marketing professor once told me, “if you can differentiate water, you can differentiate anything!” And since we all know that there are many brands (and price points) of bottled water, of course the same can be said of vodka.
In any case, here’s how the company that makes Belvedere describes its product: http://www.belvederevodka.com/collection/belvedere-red
The world’s first super premium vodka, Belevedre represents the pinnacle of the Polish vodka-making tradition. Distilled exclusively from the finest Dankowskie Gold Rye and quadruple distilled to create the perfect balance of character and purity., Belvedere Vodka is the true expression of luxury vodka. Complete additive-free and diluted with wter from Belvedere’s own atesian well, this is a vodka that combines over six hundred hears of vodka producing expertise with an uncompromising commitment to quality and heritage.
In my next blog, I’ll talk about some of the success stores in the production and sale of vodka from both a marketing and financial point of view. We talk about these factors in Business Acumen: Your Key to Success and Marketing Mastery: Your Key to Success.
Posted on Fri, Dec 09, 2011
I planned this to be my third and last blog on the retail industry in India and it seems to be great timing, because the Indian government has just decided to reverse its decision to allow foreign direct investment into the country. In any case, I want to share some personal experiences in the Indian retail sector that may provide some added perspective to the ongoing debate about whether the Indian government should allow the big foreign retails chains into the country.
1. On one of my trips to India, I developed a toothache on the plane going over. My hotel recommended me to a dentist who said I needed antibiotics to tide me over until I got home. He wrote out a prescription and told my taxi driver to go to the nearest neighborhood pharmacy. The driver dropped me off at a street corner and pointed in the direction of the store. The store was what we might describe as a “hole in the wall,” complete with a sleeping dog at the entrance. But it had four people behind the counter and was packed to the ceiling with all kinds of items. (I glanced in the glass case below the counter and spotted a familiar item: about half a dozen boxes of Colgate Toothpaste.) I handed over the crumpled paper with the dentist’s prescription and within a minute, a packet of just the right number of pills appeared. Main points of story: There are millions of small shops in India that provide even more millions with jobs. And although the appearances of these shops are not what we are accustomed to, they certainly “deliver the goods.”
2. One another of my trips to India, I was bothered by a cough that had started in the U.S. brought on by allergies. I had forgotten to bring along the medicine that my doctor in NY had prescribed. During a coffee break, I just happened to mention to one of the seminar participants my regret in not having this particular medicine with me. The participant said that by coincidence, his son was taking the same medicine for his allergies. He then said that he would call his local pharmacy and that they’d deliver the medicine to his house and so not to worry cause the next day he’d bring it for me to use for the balance of my stay in India. Main point of this story: Indian households can call their local shops for delivery of medicine (without a prescription) as well as most other common household items and food. How convenient!
3. During my free time on a recent trip to India, I went to a local mall to check out the retail scene. Large retail chains make up only about 3 percent of the total retail sales in india. The rest are accounted for by the small “mom and pops,” commonly referred to as “kiranas.” I started to browse in one particular clothing department. Although there seemed to be many sales associates standing around throughout the store, no one came to help me. I tried looking for someone in the vicinity (it was quite a big store) and couldn’t find anyone to help. Finally I cornered a sales person who had just come out of the storage area and on her way to some other activity. Main point of the story: Without even considering the differences in price and location with the kiranas, big Indian retail chains can have poor or spotty customer service. They had better get their act together if and when the big foreign retail chains are allowed to enter the country.
If someday, the Indian government finally allows foreign competition in the retail sector, I have no doubt that their financial power, business acumen and marketing skills will shake things up both for the small and large Indian retailers. And interestingly enough, there is still a possibility that the Indian government will now allow “single brand” stores such as Nike, Ikea and the Gap to operate as majority owners in India. I find this interesting because the gross profit margins of these stores are typically higher than the “multi-brand” store and these stores can be equally disruptive to the Indian retail sector as the multi-brand ones. I discuss this in previous blogs as well as in Business Acumen: Your Key to Success
Posted on Sat, Dec 03, 2011
Recently the India government has decided to allow foreign direct investment (FDI) in the nation’s retail sector. In a broader sense, the debate in India about the plusses and minuses of this decision are very similar to those discussed when the Indian government decided to take major steps to liberalize the nation’s economy back in 1991. We now know that the steps taken at time to ease government restrictions and to promote freer trade and the privatization of the means of production were the foundation on which India has made its amazing economic progress over the past several decades. The difference in this case is the relatively large number of people being affected in the service sector, i.e. the millions of small shopkeepers who make up the 97% of the nation’s retailers. An early study estimated the total number, including the shopkeepers’ families, to be around 140 million.
Here are a few excellent articles on the pros and cons of FDI in Indian retailing:
1. An article in the Economic Times of India talks about the benefits of new job creation
2. A CNN-IBN site talks about the specific problems that will beset the small retailers
3. A blogger on an Indian Legal site that provides and excellent summary of the pros and cons of FDI in the Indian retail sector
4.A PowerPoint presentation with VERY, but informative slides about FDI in general from a historical perspective (e.g. talks about the early days for IBM and Coca-Cola in India).
5. An academic study done about 10 years ago that accurately foresaw the very challenges being discussed today.
I believe that opening up the retail sector to foreign direct investment in India is an inevitable part of the liberalization process that began two decades ago. No doubt there will be tough challenges for the mom and pop stores and for that matter the large Indian-owned retail chains that make up the other 3 percent of the nation’s retailers. I anticipate that political pressures will ensure that the Indian government will try to ease the FDI process by providing such help to the small shops as credit and financing, training, and government sponsored co-operatives. But many small shops will undoubtedly be displaced, as small American retailers were when Wal-mart and other large chains expanded throughout the country. And so to survive, these small shops as well as the major Indian retail chains will need to have basic business acumen and marketing skills. Many of these basic skills are presented in Business Acumen: Your Key to Success and Marketing Mastery: Your Key to Success. I’ll give you some of my personal experiences and observations in my next blog.
Posted on Fri, Nov 25, 2011
I was in Bangalore, India last week doing a corporate education program for a global IT company with a very strong presence in India as well as throughout the world. This was my third trip to India and I learn a lot each time I’m there. I’m sure that all of you readers are familiar with the story of how Thomas Friedman was inspired to write his best-selling book, “The World is Flat,” after visiting Bangalore, India back in 2005. The book talks about how the Internet, broadband communications and advances in computer hardware and software have leveled or "flattened" the global economic playing field for India and other emerging and growth market countries.
But one aspect of the Indian economy that remains mired in the last century, both in statistics and in actual observation is its retail industry. India is often called a “nation of shopkeepers. Approximately 97% of the value of retail trade is done through what we would call small “mom and pop” stores, commonly called "kiranas" in India. Just to give you an idea of how many and how small these shops are: there are about 11 shops for every 1000 people in the country ….45 for every 1000 in the capital city of Delhi. (Here in the U.S., the land of consumerism, the number is about 4 out of every 1000. ) Moreover, almost all of the retail stores in India occupy an area less than 500 square feet!
All the stories you’ve ever heard or photos, videos, and movies (e.g. “Eat, Pray, Love”) that you’ve ever seen about traffic in India are absolutely true, but 10 times more dramatic when you’re actually in a taxi as the driver skillfully maneuvers through the dusty, bumpy, crowded streets of any of its major cities. But the slow pace at which the car is usually moving enables you to observe the myriad of small shops that line the roads. What do these stores sell? Who shops in these little stores? Do they make any money? Based on my limited experience in India and my interaction with Indians that I have meet while there, the answers are: “every possible consumer product,” “the people in the neighborhood, “and “apparently they make enough to survive.” For small, family-owned businesses, "making a living" is often more important than profitable growth.
Now, as announced in yesterday’s business press, the Indian government has finally agreed to allow foreign companies to own and operate retail stores in the country. And, of course, you know what this means…. Wal-mart (and Ikea and Carrefour et. al.) is coming to town! Wal-mart is already a partner with Bharti in India in a wholesale joint venture. (Bharti is a business powerhouse in India and among other thing is the owner of the country’s #1 mobile service operator: Airtel.) By coincidence, in last week’s class, I taught a case called” Wal-mart and Bharti: Transforming Retail in India class about this particular Indian joint venture. At the conclusion of the case, we were speculating about what Walmart’s chances would be if they in fact were allowed to enter the retail market directly. We’ll soon find out.
In my next blog, I will say more about what I think Wal-mart has to do to succeed in India. As big as they are in the United States, its record of overseas’ success is not consistent. But if successful, India could be a key factor in Wal-mart's profitable growth strategy. The factors that I’ll consider are all spelled out in our courses: Business Acumen: Your Key to Success and Marketing Mastery: Your Key to Success. More on all of this next week.