Here’s a scary statistic - consumer debt on revolving credit
For years, it has bugged me that there seems to be no political will to set up rules that would keep people from getting in over their heads on credit card debt, or that would prevent financial institutions from charging them usurious interest rates once they got there. Perhaps we’re now reaching some tipping point after which there will be momentum to provide some basic boundaries for this business.
Business Week, in an article called “The Subprime mess, now in plastic?” offers some chilling evidence about the rapid growth of revolving credit. From September of 2006 to September of 2007, according to the Federal Reserve, revolving credit card debt will go from roughly $860 billion to about $925 billion - and that’s all money that is being ‘loaned’ to consumers are horrifically high interest rates.
To read the article click here.
I wonder who the geniuses are that will figure out how to make an opportunity out of this mess.
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- Posted Rita McGrath on December 10, 2007
Incredible shrinking economies
My colleague, Michael Schrage of MIT sent along a fascinating editorial story from the New York Times in which an observer notes that projections for the size, wealth and growth rates of emerging economies - specifically India and China - are way off. With the projections actually much smaller, the attractiveness and wealth of those markets appears to be exaggerated. This will be quite a blow to the growth strategies of many global companies who are counting on building in supposedly fast-growth markets.
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- Posted Rita McGrath on December 10, 2007
Real Leading Indicators in Retail
When it comes to information that is used to make managerial decisions, it’s useful to think of it in terms of three timeframes: Lagging indicators (which are the bulk of those in use) reflect past events - you can’t change them. Current indicators tell you where you are. The most valuable, and often the least used are leading indicators - information that tells you where you’re likely to be going. Leading indicators are often subjective, however, meaning that people frequently disagree about their meaning and therefore don’t use them effectively.
I was therefore really intrigued to run across an article in Forbes (October 1, 2007 beginning page 52) that spells out the effective use of leading indicators by Christine Augustine, an analyst with Bear Stearns. She makes recommendations on retail stocks based on her observations. She’s got a checklist that she uses to figure out where a particular retail establishment is going. Among the items on her list:
How full are the parking lots?
How clean are the stores?
How well stocked are the shelves?
How much of the apparel has been marked down or put on clearance?
Are there enough of the basics and are they easily accessible?
How many cash registers are open?
How many people are waiting on line?
How long is the average check out time?
A red flag for her is if the store seems short on staff and the end of the quarter is near. She noted, “It may mean the store is cutting back on payroll expenses to make sure it makes its numbers for the quarter.”
Specific, tangible measures such as these are a good first step to making sure that grand strategies conceived in headquarters translate to actual behavior at the operating level.
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- Posted Rita McGrath on December 03, 2007
Business Model Change as an industry sector evolves
Both Clayton Christensen and Geoffrey Moore have noted that players exploiting different business models are advantaged in different stages of a categories’ evolution. I’ve build on their thinking to argue the following:
Stage I categories: Most offerings aren’t yet good enough, interfaces aren’t standardized, and a strong hand needs to be exerted on value chain players to ensure that customers and end users have an acceptable experience. Current examples would include the iPod ecosystem, and Nokia’s vertically integrated approach to handset design and development throughout the 90’s. Search, dominated by Google, too, appears to have many characteristics of a Stage I ecosystem. Advantage in these cases go to vertically integrated players or to those who can more or less control the key elements that create the user experience. Over time, interfaces become more standardized, different players chafe at the control exerted by the dominant player, and the category moves to stage II.
In Stage II, the most profitable players are those that control a key layer of functionality, while leveraging the infrastructure of ecosystem partners to create a complete solution. Focusing on one horizontal layer makes sense here. The best known examples here would include the “Wintel” dominance of the software and chip layers for PC’s. Eventually, however, the functionality of these layers gets to the point where it simply doesn’t need improving (at least for most customers). It becomes increasingly difficult for dominant players to persuade customerst to pay for further improvements (witness Forbes columnist Peter Huber referring to the attempts to improve the operating system and office software by Microsoft as “Blunder 2007”). Facebook has this feel to me (which is one reason Google is treating the social-networking site as such a threat). What happens next? Advantage goes to those who can deal with the remaining problems users have, often by specializing on key process technologies or on price, leading to…
Stage III: In this stage, advantage goes to those firms who are spectacular at process innovations (such as Dell in supply chain management) or to those who control a key component, and can in effect ‘sell bullets to the combatants’. The key point here is that they make money on solving problems that are sufficiently interesting to enough customers that they will gladly pay to have those dealt with. Inevitably, however, technological development, firm strategies and the relentless quest for new spaces to compete in leads to…
Stage IV—> Stage I: The Empire strikes back. here, an entirely new category emerges, with interfaces that are not ‘good enough’ and the race once again goes to key players that can control all the necessary interfaces.
I was fascinated therefore to read about Verizon Wireless opening its network to many different kinds of devices - which is an interesting move from trying to dominate in a walled garden (a Phase I strategy) to trying to develop a business model that emphasizes domination of a layer (a Phase II strategy). As Business Week (December 10, 2007 edition) reports, Verizon “had built the most profitab le U. S. wireless business by tightly controlling the devices and programs, such as games and maps that could operate on its network. How tightly? The examples are legendary, but just this summer Verizon disabled the GPS navigation capability built into a Blackberry device; in November, it introduced its own similar service.” Perhaps the company is anticipating the category transition that is likely to make the current business model of mobile operators irrelevant.
Microsoft is potentially also sparking a shift from a Phase I to Phase II category in portable music with the continuing development of its Zune player. Although few would argue that it is at the stage to topple Apple’s iPod yet, there is already clear evidence that Apple’s partners (such as music and movie companies) are beginning to chafe at its category dominance and would be willing to support alternative approaches. Stephen Wildstrom, Business Week’s Tech & You columnist, suggests that the future of on-line music is likely to be a monthly subscription that allows users to play all their music on any device. Such a system would spark a massive horizontalization in the music business as well.
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- Posted Rita McGrath on December 03, 2007
Is your company unintentionally creating executive blind spots?
One of the nice things about being a very senior executive with a multinational company is that the job comes with perks. Sometimes, however, these perks can have the unintended effect of isolating key decision-makers from the very information they need most.
Example: For decades, the top executives at America’s leading automobile manufacturers always drove the latest models—washed, maintained, and looked after by in-company employees. How on earth could they possibly know about quality, maintenance, service or other issues faced by ordinary customers when they never encounter them?
Example: One of our telecommunications manufacturing clients used to routinely give the latest handsets and toys to its key executives. As a result, these folks never had to go into a phone store, never had to deal with inefficient or even hostile distributors, and never had to compare their offerings with competing products. It was only when the company radically changed this policy and forced its folks to go directly through the same channels customers had to use that they realized that their once-unassailable advantages with customers were starting to erode.
Example: A mobile telecommunications operator routinely had its operations staff make sure that the cellular signals in the headquarters office and even key residential areas inhabited by senior executives were strong, reliable and consistent. Imagine the surprise these executives felt when friends and relations expressed their infuriation with spotty coverage, dropped calls or weak signals—after all, this never happened to them!
The message? Sometimes, buffering senior people from exposure to ordinary experiences unintentionally gives them a false sense of security with respect to the quality, reliability or convenience of your offerings. This in turn can breed dangerous complacency and a lack of urgency with respect to underlying problems. In best-practice companies, in contrast, there are mechanisms to make sure that direct contact with customers is a part of every executives’ normal job. At Amazon.com, for instance, executives routinely spend time on the phones with customers. At Ikea, a few times a year executives and line-level staff work together. At Continental and Southwest airlines, it would not be unusual for executives to spend time at the ticket counter or handling baggage. We’ve found that there is no substitute for first-hand experience when it comes to creating the impetus for improvement.
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- Posted Rita McGrath on November 28, 2007
