Pete Alcorn has been in the forefront of several head-snapping changes in media over the past two decades. Starting as a computer-textbook writer in the late '80s, Alcorn became fascinated with the new electronic side of print. He founded NetRead in the early '90s to help book publishers work with metadata and understand the next world of e-publishing.
Since 2005, he has led the podcasting operation at iTunes, bulking up the iTunes Music Store's podcast library with thousands of free (and very findable) titles. Before Apple, he led the sale of ebooks and electronic documents at Amazon.com. In his spare time, he thinks big thoughts.
"Land nobody owns. The twenty-second-century enlightenment."
Tuesday, July 20, 2010
Public sector interactive ad
This public sector interactive ad is a wonderful example of teaching the population at large how to respond to a situation in which they are unsure if they can make a difference. Please watch.
Monday, July 19, 2010
Sunday, July 18, 2010
"All Marketers are Liars" - Seth Godin speaks at Google
4 years ago
Seth Godin is the author of six bestsellers, including Permission Marketing, an Amazon Top 100 bestseller for a year and a Fortune Best Business Book. His newest book, All Marketers are Liars , has already made the Amazon Top 100 and has inspired its own blog. Seth is also a renowned speaker, and was recently chosen as one of "21 Speakers for the Next Century" by Successful Meetings Magazine and is consistently rated among the best speakers by the audiences he addresses. Seth was founder and CEO of Yoyodyne, an interactive direct marketing company, which Yahoo! acquired in late 1998. He holds an MBA from Stanford, is a contributing editor to Fast Company magazine, and was called "the Ultimate Entrepreneur for the Information Age" by Business Week. This video is part of the Authors@Google series.
Seth Godin is the author of six bestsellers, including Permission Marketing, an Amazon Top 100 bestseller for a year and a Fortune Best Business Book. His newest book, All Marketers are Liars , has already made the Amazon Top 100 and has inspired its own blog. Seth is also a renowned speaker, and was recently chosen as one of "21 Speakers for the Next Century" by Successful Meetings Magazine and is consistently rated among the best speakers by the audiences he addresses. Seth was founder and CEO of Yoyodyne, an interactive direct marketing company, which Yahoo! acquired in late 1998. He holds an MBA from Stanford, is a contributing editor to Fast Company magazine, and was called "the Ultimate Entrepreneur for the Information Age" by Business Week. This video is part of the Authors@Google series.
Saturday, July 17, 2010
Hans Rosling and the rise of India and China
Hans Rosling is an amazing teacher and each and everyone of us could benefit from his clear illustrations of world populations and health studies.
Friday, July 16, 2010
Thursday, July 15, 2010
Wednesday, July 14, 2010
Tuesday, July 13, 2010
Logos
Logo Fail: 10 Ways to Avoid Making a Creative Logofrom WebUrbanist by Steph
A well-designed logo is timeless, simple, memorable, versatile and appropriate. But then there are the hideous, the bizarre, the unreadable and the offensive (whether due to unintended double entendres or Comic Sans). The things that make a logo truly awful aren’t easy to define, but you know a bad one when you see it – clip art, raster graphics, unrelated imagery and poor choices in typeface. Except in the hands of a truly exceptional designer, these 10 mistakes will cripple any corporate branding strategy.
Uninspired Fonts
For the love of good design, please don’t ever use Papyrus, Curlz MT or – heaven forbid – Comic Sans in a logo. Ever. These fonts have earned the vitriol of designers around the world with good reason; while they may have their place in personal communication between schoolteachers, they don’t belong in graphic design of any kind, let alone the most visible piece of branding your company has. Overused and cutesy fonts, especially of the widely available ‘free’ variety, do absolutely nothing to add to a brand’s identity. They scream ‘amateur designer’ and make companies look unprofessional.
Stock Art
On a similar note, stock clip art that can be acquired for free on the internet or on very cheap CD-ROMs can’t possibly set your company apart. It’s not just that the designs themselves aren’t usually great quality; if potential customers note the same little sketch of a house on your company letterhead that they saw earlier on an informational poster in their dentist’s office, they’re not going to take you seriously.
Photoshop Filters & Effects
Outer glow, inner glow, drop shadow, highlights, gradients, bevels – all of these effects have their place. Used sparingly by a good designer – as in the latest Apple logo – they add a bit of visual interest. Piled on, they make logos messy and harder to read. Technically, Photoshop and other image editing programs shouldn’t really be involved in logo design at all (more on that later), but things like ‘lens flare’ just don’t translate well in what is supposed to be bold, graphic imagery.
Inappropriate Imagery
Graphics that are vague or totally disconnected from what a company is all about can kill a logo’s memorability. What, for example, does a dolphin have to do with a security firm? How is an abstract art piece that sort of almost barely resembles a computer going to remind people of your software company? The graphics, color and mood associated with a logo should have some association what the company does – i.e., don’t use primary colors and a goofy typeface for a legal firm. But don’t take that too literally – a car company doesn’t need to have a car shape in its logo, for instance.
Really, Really Inappropriate Imagery
Not everyone looks at images like those above and immediately sees phallic symbols, sexual innuendo or four-letter words. But in the interest of not becoming a tired Beavis and Butthead joke, it might be best to take a good look at the graphics in your logo to ensure that they don’t resemble anything offensive or inappropriate.
Fuzzy Graphics
Being good at fine art does not make one good at logo design; an image from, say, a watercolor painting or pencil sketch will more than likely look muddy, complicated and unmemorable when used in a logo. The same typically goes for photography. Does that mean effective logos all have to be spare, bold and modern? No. But it certainly helps.
The bigger mistake, in this case, is using raster rather than vector images. Raster images are made up of tiny pixels, and get extremely fuzzy when blown up. Vector images, on the other hand, are scalable, so they look good at any size. Programs that don’t deal with vector images – like Photoshop – shouldn’t be used to create logos.
Reliance on Color for Effect
One of the best tests for logo design is to put it in black and white. If it’s still crisp and readable, even on a small scale or printed in reverse (i.e. a white design on a black background), it’s a good logo – if not, try again. For optimal results, many designers recommend creating a logo in grayscale first, then translating it to color.
The Corporate Swoosh
After over a century of ineffective, constantly changing logos, Pepsi has finally resorted to the corporate swoosh – the bland, meaningless decorative flourish that says “I give up”. The corporate swoosh is safe yet completely disconnected from brand identity, except in the case of Nike, who truly made it theirs. In Pepsi’s case, the uninspired swoosh-in-a-circle even takes on a rather unfortunate connotation (as illustrated by a graphic designer). A swoosh doesn’t make it good design. It’s just lazy.
Unnecessary Complexity
For every corporate swoosh there’s a logo that goes way too far in the other direction, with way too much going on. Not only do overly complex logos tend to look terrible on signage and other places that logos are commonly used, but they are simply too muddy to make much of an impact. And when they’re reproduced on a small scale, they become illegible. The original Starbucks logo, the new Sunkist logo, and far too many sports-related logos fall into this category.
Unreadable Jumbles
If reading your logo requires squinting and head scratching, it needs some work. Take, for example, the controversial London 2012 logo for the Olympic Games. It takes a moment or two to realize that those big blocky shapes are supposed to say ‘2012′, and there’s absolutely nothing clever about them despite a bunch of hyperbole from the designers about nuances in what the logo means. Luckily, the Olympics don’t need too much help getting publicity, but if this logo were for a company, they’d be in trouble.
15 Creative Custom Company & Business Logo Designs
The logo designs that really stand out manage to combine memorable branding with super-simple text & basic graphics that say so much in such a small package.
(Found on Google Reader from the weburbanist.com)
read more at the actual website: http://weburbanist.com/
A well-designed logo is timeless, simple, memorable, versatile and appropriate. But then there are the hideous, the bizarre, the unreadable and the offensive (whether due to unintended double entendres or Comic Sans). The things that make a logo truly awful aren’t easy to define, but you know a bad one when you see it – clip art, raster graphics, unrelated imagery and poor choices in typeface. Except in the hands of a truly exceptional designer, these 10 mistakes will cripple any corporate branding strategy.
Uninspired Fonts
For the love of good design, please don’t ever use Papyrus, Curlz MT or – heaven forbid – Comic Sans in a logo. Ever. These fonts have earned the vitriol of designers around the world with good reason; while they may have their place in personal communication between schoolteachers, they don’t belong in graphic design of any kind, let alone the most visible piece of branding your company has. Overused and cutesy fonts, especially of the widely available ‘free’ variety, do absolutely nothing to add to a brand’s identity. They scream ‘amateur designer’ and make companies look unprofessional.
Stock Art
On a similar note, stock clip art that can be acquired for free on the internet or on very cheap CD-ROMs can’t possibly set your company apart. It’s not just that the designs themselves aren’t usually great quality; if potential customers note the same little sketch of a house on your company letterhead that they saw earlier on an informational poster in their dentist’s office, they’re not going to take you seriously.
Photoshop Filters & Effects
Outer glow, inner glow, drop shadow, highlights, gradients, bevels – all of these effects have their place. Used sparingly by a good designer – as in the latest Apple logo – they add a bit of visual interest. Piled on, they make logos messy and harder to read. Technically, Photoshop and other image editing programs shouldn’t really be involved in logo design at all (more on that later), but things like ‘lens flare’ just don’t translate well in what is supposed to be bold, graphic imagery.
Inappropriate Imagery
Graphics that are vague or totally disconnected from what a company is all about can kill a logo’s memorability. What, for example, does a dolphin have to do with a security firm? How is an abstract art piece that sort of almost barely resembles a computer going to remind people of your software company? The graphics, color and mood associated with a logo should have some association what the company does – i.e., don’t use primary colors and a goofy typeface for a legal firm. But don’t take that too literally – a car company doesn’t need to have a car shape in its logo, for instance.
Really, Really Inappropriate Imagery
Not everyone looks at images like those above and immediately sees phallic symbols, sexual innuendo or four-letter words. But in the interest of not becoming a tired Beavis and Butthead joke, it might be best to take a good look at the graphics in your logo to ensure that they don’t resemble anything offensive or inappropriate.
Fuzzy Graphics
Being good at fine art does not make one good at logo design; an image from, say, a watercolor painting or pencil sketch will more than likely look muddy, complicated and unmemorable when used in a logo. The same typically goes for photography. Does that mean effective logos all have to be spare, bold and modern? No. But it certainly helps.
The bigger mistake, in this case, is using raster rather than vector images. Raster images are made up of tiny pixels, and get extremely fuzzy when blown up. Vector images, on the other hand, are scalable, so they look good at any size. Programs that don’t deal with vector images – like Photoshop – shouldn’t be used to create logos.
Reliance on Color for Effect
One of the best tests for logo design is to put it in black and white. If it’s still crisp and readable, even on a small scale or printed in reverse (i.e. a white design on a black background), it’s a good logo – if not, try again. For optimal results, many designers recommend creating a logo in grayscale first, then translating it to color.
The Corporate Swoosh
After over a century of ineffective, constantly changing logos, Pepsi has finally resorted to the corporate swoosh – the bland, meaningless decorative flourish that says “I give up”. The corporate swoosh is safe yet completely disconnected from brand identity, except in the case of Nike, who truly made it theirs. In Pepsi’s case, the uninspired swoosh-in-a-circle even takes on a rather unfortunate connotation (as illustrated by a graphic designer). A swoosh doesn’t make it good design. It’s just lazy.
Unnecessary Complexity
For every corporate swoosh there’s a logo that goes way too far in the other direction, with way too much going on. Not only do overly complex logos tend to look terrible on signage and other places that logos are commonly used, but they are simply too muddy to make much of an impact. And when they’re reproduced on a small scale, they become illegible. The original Starbucks logo, the new Sunkist logo, and far too many sports-related logos fall into this category.
Unreadable Jumbles
If reading your logo requires squinting and head scratching, it needs some work. Take, for example, the controversial London 2012 logo for the Olympic Games. It takes a moment or two to realize that those big blocky shapes are supposed to say ‘2012′, and there’s absolutely nothing clever about them despite a bunch of hyperbole from the designers about nuances in what the logo means. Luckily, the Olympics don’t need too much help getting publicity, but if this logo were for a company, they’d be in trouble.
15 Creative Custom Company & Business Logo Designs
The logo designs that really stand out manage to combine memorable branding with super-simple text & basic graphics that say so much in such a small package.
(Found on Google Reader from the weburbanist.com)
read more at the actual website: http://weburbanist.com/
Saturday, July 10, 2010
British Safety Films
British Safety films from the past are quite scary. I include them here for consideration of the impact of fear and emotion. Does this work or it is over the top? Would it be appropriate today?
Friday, July 9, 2010
Thursday, July 8, 2010
John Quelch on CSR
This article was written by John Quelch of the Harvard Business Review in his blog in September of 2009. It argues for continued CSR during the recession.
How Corporate Responsibility Can Survive the Recession
8:31 AM Tuesday September 22, 2009
Corporations engaged in recession-driven cost-cutting are trimming or eliminating corporate responsibility initiatives. Though corporate survival is key and consumer skepticism of business CR initiatives at an all-time high, such actions are short-sighted. Now more than ever, businesses need to be saying "yes" rather than "no" to their social responsibilities.There are five key reasons:
1. Critical cross-border global issues require multinational corporations and their CEOs to lead in the search for solutions, recession or not.
2. Recession results in more poverty and exacerbates problems that national governments and NGOs alone cannot solve.
3. The global economic crisis has increased distrust of business. Corporations with a strong commitment to CR are better able to withstand the downdraft and put the brakes on increased regulation.
4. Employees are attracted to and motivated to stay with socially responsible companies, and want to see commitment to CR initiatives continue through tough times.
5. An increasing proportion of consumers are willing to pay price premiums for products and services marketed by companies with proven and sustained track records of doing good.
Despite these arguments, the pressure for CR cost cuts in the face of recession is often inescapable. But the companies most vulnerable to cuts are those that have not embraced and embedded CR in their corporate DNA. There are four progressive levels of CR commitment:
First, there are companies that see CR only in terms of corporate philanthropy. They find it relatively easy to cut their annual donations.
Second, there are companies that have integrated support for a social cause into their marketing programs. They are less likely to let go, as their brand equities have become entwined with particular causes. For example, the American Express Red card donates a percentage of the value of card member purchases to the fight against AIDS.
A third level of engagement finds CR considerations embedded in a company's daily operations. Qualifying suppliers, for example, might be required to comply with environmental and labor practice standards. Starbucks has long purchased more fair trade coffee than any other company in the world, while Wal-Mart has moved rapidly in recent years to catch up in its operational commitment to CR.
Fourth and finally, there are companies that have internalized CR values into their corporate cultures, mission statements and daily decision-making. The Johnson & Johnson credo puts the interests of customers, employees and community ahead of those of shareholders. In the words of former CEO James Burke, doing so "insures that the interests of all stakeholders are maximized."
The further along this CR continuum a company is, the less likely it is to trim its CR commitment in the face of an economic downturn. In fact, some companies are finding that pursuing environmental CR initiatives during this recession is helping them to cut costs and increase their CR budget without changing prices. Cadbury, for example, has lowered its energy input costs and invested the savings in a commitment to buying only fair trade cocoa.
A growing segment of consumers worldwide considers CR evaluations important in selecting among brands across a wide range of categories. In previous recessions, this segment typically shrank rapidly in size as price considerations became paramount. But, thanks to heightened public awareness of issues like global warming, CR concerns are now more deeply and broadly embedded in the consumer psyche. CR is increasingly a mainstream consumer concern, no longer the province of a wealthy niche.
Regardless of recession, some cutting-edge companies are capitalizing on the growing consumer interest in CR to both do good and differentiate themselves at the same time. The UK-based global retailer, Tesco PLC, has taken the lead in promoting its Sustainable Consumption Initiative, now being copied by Wal-Mart. Tesco plans to require carbon footprint information to be placed on the label of every product sold in its stores. Terry Leahy, Tesco's CEO, wants to make it easy for consumers to incorporate environmental impact criteria in their purchasing. As he says: "To achieve a mass movement in green consumption is to empower everyone, not just the enlightened or the affluent." Corporations cannot change the world on their own. They need to empower their customers to help change the world for themselves.
CEO leadership, such as Terry Leahy is providing, is essential for corporate CR commitments not merely to survive but to advance during the economic downturn. As David Gergen has stated: "More CEOs need to sign up as reformers."
This post is adapted from John A. Quelch and Katherine E. Jocz, "Can Corporate Social Responsibility Survive Recession?" Leader to Leader, Summer 2009, pp. 37-43.
How Corporate Responsibility Can Survive the Recession
8:31 AM Tuesday September 22, 2009
Corporations engaged in recession-driven cost-cutting are trimming or eliminating corporate responsibility initiatives. Though corporate survival is key and consumer skepticism of business CR initiatives at an all-time high, such actions are short-sighted. Now more than ever, businesses need to be saying "yes" rather than "no" to their social responsibilities.There are five key reasons:
1. Critical cross-border global issues require multinational corporations and their CEOs to lead in the search for solutions, recession or not.
2. Recession results in more poverty and exacerbates problems that national governments and NGOs alone cannot solve.
3. The global economic crisis has increased distrust of business. Corporations with a strong commitment to CR are better able to withstand the downdraft and put the brakes on increased regulation.
4. Employees are attracted to and motivated to stay with socially responsible companies, and want to see commitment to CR initiatives continue through tough times.
5. An increasing proportion of consumers are willing to pay price premiums for products and services marketed by companies with proven and sustained track records of doing good.
Despite these arguments, the pressure for CR cost cuts in the face of recession is often inescapable. But the companies most vulnerable to cuts are those that have not embraced and embedded CR in their corporate DNA. There are four progressive levels of CR commitment:
First, there are companies that see CR only in terms of corporate philanthropy. They find it relatively easy to cut their annual donations.
Second, there are companies that have integrated support for a social cause into their marketing programs. They are less likely to let go, as their brand equities have become entwined with particular causes. For example, the American Express Red card donates a percentage of the value of card member purchases to the fight against AIDS.
A third level of engagement finds CR considerations embedded in a company's daily operations. Qualifying suppliers, for example, might be required to comply with environmental and labor practice standards. Starbucks has long purchased more fair trade coffee than any other company in the world, while Wal-Mart has moved rapidly in recent years to catch up in its operational commitment to CR.
Fourth and finally, there are companies that have internalized CR values into their corporate cultures, mission statements and daily decision-making. The Johnson & Johnson credo puts the interests of customers, employees and community ahead of those of shareholders. In the words of former CEO James Burke, doing so "insures that the interests of all stakeholders are maximized."
The further along this CR continuum a company is, the less likely it is to trim its CR commitment in the face of an economic downturn. In fact, some companies are finding that pursuing environmental CR initiatives during this recession is helping them to cut costs and increase their CR budget without changing prices. Cadbury, for example, has lowered its energy input costs and invested the savings in a commitment to buying only fair trade cocoa.
A growing segment of consumers worldwide considers CR evaluations important in selecting among brands across a wide range of categories. In previous recessions, this segment typically shrank rapidly in size as price considerations became paramount. But, thanks to heightened public awareness of issues like global warming, CR concerns are now more deeply and broadly embedded in the consumer psyche. CR is increasingly a mainstream consumer concern, no longer the province of a wealthy niche.
Regardless of recession, some cutting-edge companies are capitalizing on the growing consumer interest in CR to both do good and differentiate themselves at the same time. The UK-based global retailer, Tesco PLC, has taken the lead in promoting its Sustainable Consumption Initiative, now being copied by Wal-Mart. Tesco plans to require carbon footprint information to be placed on the label of every product sold in its stores. Terry Leahy, Tesco's CEO, wants to make it easy for consumers to incorporate environmental impact criteria in their purchasing. As he says: "To achieve a mass movement in green consumption is to empower everyone, not just the enlightened or the affluent." Corporations cannot change the world on their own. They need to empower their customers to help change the world for themselves.
CEO leadership, such as Terry Leahy is providing, is essential for corporate CR commitments not merely to survive but to advance during the economic downturn. As David Gergen has stated: "More CEOs need to sign up as reformers."
This post is adapted from John A. Quelch and Katherine E. Jocz, "Can Corporate Social Responsibility Survive Recession?" Leader to Leader, Summer 2009, pp. 37-43.
Wednesday, July 7, 2010
Tuesday, July 6, 2010
Monday, July 5, 2010
Sunday, July 4, 2010
Saturday, July 3, 2010
Friday, July 2, 2010
Sony demonstates and Explains its Advertising concepts
This wonderful ad is followed by an explanation of Sony's rationale for its marketing approach. The ad is quite delightful and experiential and the talk afterward is enlightening. Enjoy!
Thursday, July 1, 2010
Vaughan Beal's IQ
In order for great company comebacks to take place many factors are necessary. The list would include: getting back to the basics of producing a quality product that people truly wanted, reviving a mystique, recognizing the stage of growth the company was in, understanding how to diversify, defending a core market niche, and modernizing technology and logistics. These are all important ingredients in the recipe but the key in every case appears to me to be a leader with distinctive characteristics.
Every time I review what I have learned, it distils to something that I was surprised to see in spite of my training in psychology. Every leader in had the qualities that add up to emotional intelligence. They did not just have the pedigree or the education to understand the events, the components and the business. They had the ability to understand people in a profoundly productive manner.
Beals was hired by AMF Harley-Davidson in 1975. He had a Masters degree in aeronautical engineering from MIT and he had several years of experience before he led a leveraged buyout of the company and became CEO. Thus he had both education and experience that could partially account for his success with the company.
By the late 1960s Harley-Davidson was producing only 16,000 motorcycles a year and their quality was poor. In a move to gain capital to build new manufacturing facilities they sold the company to AMF in 1969. While production increased relationships with dealers and customers declined further and the Japanese manufacturers were stealing market share without much effort. By the late 1970s it seems like only the company’s management and employees still believed in the brand. In June of 1981, a group of 13 managers led by Beals purchased the company from AMF and Beals became CEO. Together they resurrected Harley-Davidson.
But why do I think EQ was the magic ingredient when he had all of the other ingredients already in his mix? Let’s observe his pattern of actions.
The first indicator was that he was able to lead and inspire a group of people to follow him and put their own money, reputations and futures on the line to follow his vision of a gloriously different future for the company. People believed in him and somehow he also made them believe in themselves to attempt this daring manoeuvre when market share in North America was only 3%. He was able to identify people within the company like Jeff Bleustein who was expert in engineering and knew what needed to change and Willie G. Davidson who was a creative genius who would design the Harleys of the future.
In his first major coup, Harley-Davidson’s lobbying convinced congress to impose a huge tariff on Japanese motorcycles in 1983. This was a brilliant move to limit competition to ensure survival. The next move was to restore the faithful core to belief in the company. This was done with the grandson of the founder. His name was Willie G. Davidson and his role in the company focused on design. Talk about EQ! To bring in the founder’s grandson, give him a role in design at a time when design was not front and center in American business ideology and then to get him into contact with the customers themselves! It was a brilliant humane move. People love a story where the company’s founder is still at least partially at the helm. Beals wisely never tried to change Willie either. His appearance as a middle aged hippie was just right for the task at hand. The faithful love to hob knob with the ‘real McCoy’. Getting the designer and the CEO in contact with the common people at rallies where they were not just on display but actually listening to the customers who wanted to believe in the product and who loved the mystique was exceptionally insightful. Restoring confidence in the product and its quality was crucial. They drove Harley-Davidsons to rallies and met Harley owners and evangelists. They learned about concerns and complaints and even their ideas and promised to implement what they learned. Part of what they learned was what people were willing to buy. Slowly they rebuilt their base and encouraged their employees to contact the base as often as possible.
In order to make quality a reality, Beals showed EQ in another way. He and his executives went to the competition and found out how they did it. They did not alienate the competition, they were humble enough to go and learn in Japan and in Ohio. From what they learned they reduced inventory by 67%, reduced scrap and reworking by 2/3, reduced defects by 70% and increased production by 50% between 1981 and 1988. They also made product innovations to reduce vibration and improve the quality of the riding experience.
At a time when the big three auto companies were struggling with the same labour issues, Harley-Davidson again used EQ to change its relationship with its employees. They improved incentive plans, they added better employee assistance programs and benefits, they also increased the amount of autonomy that employees had over their own tasks and the quality. It worked well. When others were outsourcing, laying off and selling out, Harley-Davidson’s actions stabilized the security of their work force and reaped amazing rewards from it. This is clearly EQ when you swim against a current of accepted business practice to humanize the relationship you have with employees.
Business people who are high in EQ understand the need for savvy marketing. Beal seems to have understood this as well. Beyond the initial reference to his collaboration with Willie G., he led Harley-Davidson to branding the company logo on all sorts of products. Noting that the faithful even tattooed the logo on their bodies and realizing what an endorsement that represented, an entire line of licensed and logoed products emerged.
“One big hurdle was convincing potential buyers that Harley had truly solved its quality problems. To bring home the message, the company in 1984 committed $3 million to an unprecedented demonstration program it called SuperRide. A series of TV commercials invited bikers to come to any of the company's 600- plus dealers for a ride on a new Harley. Over three weekends, the company gave 90,000 rides to 40,000 people, half of whom owned other brands. The venture didn't sell enough bikes to cover its cost, but it made the point nonetheless. Many who rode the demonstrators came back to buy a year or two later when they were ready for new motorcyles. Today SuperRide is the only such consistent program in the industry, and so successful as a sales generator that Harley has a fleet of demo bikes that it takes to motorcycle rallies.” (Reid, 1989)
This led to an understanding of the “Rubbies” market of middle aged dreamers who wanted to be included in the Harley mythology. They came to buy one in three Harleys by the end of the 1980s when Beal stepped down. In that time he took the company from a deficit when he took over to over $39 million in profit when he stepped down.
So I have pointed out Beal’s EQ with government, competitors, customers, employees, marketing and peers. While EQ is controversial, it appears to me to be the key ingredient in the Harley-Davidson comeback and I can see it in the turn around of McDonalds, Continental and Proctor and Gamble. Not bad for a concept that has been considered a pseudo science! One person with the ability to understand the business and truly understand the people involved in the business can make a comeback happen. As demonstrated by all of the less successful leaders that came before them, no amount of technical expertise without the true understanding of the people quotient can make a great comeback happen.
Every time I review what I have learned, it distils to something that I was surprised to see in spite of my training in psychology. Every leader in had the qualities that add up to emotional intelligence. They did not just have the pedigree or the education to understand the events, the components and the business. They had the ability to understand people in a profoundly productive manner.
Beals was hired by AMF Harley-Davidson in 1975. He had a Masters degree in aeronautical engineering from MIT and he had several years of experience before he led a leveraged buyout of the company and became CEO. Thus he had both education and experience that could partially account for his success with the company.
By the late 1960s Harley-Davidson was producing only 16,000 motorcycles a year and their quality was poor. In a move to gain capital to build new manufacturing facilities they sold the company to AMF in 1969. While production increased relationships with dealers and customers declined further and the Japanese manufacturers were stealing market share without much effort. By the late 1970s it seems like only the company’s management and employees still believed in the brand. In June of 1981, a group of 13 managers led by Beals purchased the company from AMF and Beals became CEO. Together they resurrected Harley-Davidson.
But why do I think EQ was the magic ingredient when he had all of the other ingredients already in his mix? Let’s observe his pattern of actions.
The first indicator was that he was able to lead and inspire a group of people to follow him and put their own money, reputations and futures on the line to follow his vision of a gloriously different future for the company. People believed in him and somehow he also made them believe in themselves to attempt this daring manoeuvre when market share in North America was only 3%. He was able to identify people within the company like Jeff Bleustein who was expert in engineering and knew what needed to change and Willie G. Davidson who was a creative genius who would design the Harleys of the future.
In his first major coup, Harley-Davidson’s lobbying convinced congress to impose a huge tariff on Japanese motorcycles in 1983. This was a brilliant move to limit competition to ensure survival. The next move was to restore the faithful core to belief in the company. This was done with the grandson of the founder. His name was Willie G. Davidson and his role in the company focused on design. Talk about EQ! To bring in the founder’s grandson, give him a role in design at a time when design was not front and center in American business ideology and then to get him into contact with the customers themselves! It was a brilliant humane move. People love a story where the company’s founder is still at least partially at the helm. Beals wisely never tried to change Willie either. His appearance as a middle aged hippie was just right for the task at hand. The faithful love to hob knob with the ‘real McCoy’. Getting the designer and the CEO in contact with the common people at rallies where they were not just on display but actually listening to the customers who wanted to believe in the product and who loved the mystique was exceptionally insightful. Restoring confidence in the product and its quality was crucial. They drove Harley-Davidsons to rallies and met Harley owners and evangelists. They learned about concerns and complaints and even their ideas and promised to implement what they learned. Part of what they learned was what people were willing to buy. Slowly they rebuilt their base and encouraged their employees to contact the base as often as possible.
In order to make quality a reality, Beals showed EQ in another way. He and his executives went to the competition and found out how they did it. They did not alienate the competition, they were humble enough to go and learn in Japan and in Ohio. From what they learned they reduced inventory by 67%, reduced scrap and reworking by 2/3, reduced defects by 70% and increased production by 50% between 1981 and 1988. They also made product innovations to reduce vibration and improve the quality of the riding experience.
At a time when the big three auto companies were struggling with the same labour issues, Harley-Davidson again used EQ to change its relationship with its employees. They improved incentive plans, they added better employee assistance programs and benefits, they also increased the amount of autonomy that employees had over their own tasks and the quality. It worked well. When others were outsourcing, laying off and selling out, Harley-Davidson’s actions stabilized the security of their work force and reaped amazing rewards from it. This is clearly EQ when you swim against a current of accepted business practice to humanize the relationship you have with employees.
Business people who are high in EQ understand the need for savvy marketing. Beal seems to have understood this as well. Beyond the initial reference to his collaboration with Willie G., he led Harley-Davidson to branding the company logo on all sorts of products. Noting that the faithful even tattooed the logo on their bodies and realizing what an endorsement that represented, an entire line of licensed and logoed products emerged.
“One big hurdle was convincing potential buyers that Harley had truly solved its quality problems. To bring home the message, the company in 1984 committed $3 million to an unprecedented demonstration program it called SuperRide. A series of TV commercials invited bikers to come to any of the company's 600- plus dealers for a ride on a new Harley. Over three weekends, the company gave 90,000 rides to 40,000 people, half of whom owned other brands. The venture didn't sell enough bikes to cover its cost, but it made the point nonetheless. Many who rode the demonstrators came back to buy a year or two later when they were ready for new motorcyles. Today SuperRide is the only such consistent program in the industry, and so successful as a sales generator that Harley has a fleet of demo bikes that it takes to motorcycle rallies.” (Reid, 1989)
This led to an understanding of the “Rubbies” market of middle aged dreamers who wanted to be included in the Harley mythology. They came to buy one in three Harleys by the end of the 1980s when Beal stepped down. In that time he took the company from a deficit when he took over to over $39 million in profit when he stepped down.
So I have pointed out Beal’s EQ with government, competitors, customers, employees, marketing and peers. While EQ is controversial, it appears to me to be the key ingredient in the Harley-Davidson comeback and I can see it in the turn around of McDonalds, Continental and Proctor and Gamble. Not bad for a concept that has been considered a pseudo science! One person with the ability to understand the business and truly understand the people involved in the business can make a comeback happen. As demonstrated by all of the less successful leaders that came before them, no amount of technical expertise without the true understanding of the people quotient can make a great comeback happen.
Wednesday, June 30, 2010
A Blog Worth Reading
The blog located at the address below has a lot of information on facilitating meetings and bringing out the best in a group.
http://www.ideaarchitects.org/?expref=next-blog
http://www.ideaarchitects.org/?expref=next-blog
Monday, June 28, 2010
Why Is Canadian Banking the Envy of the World?
Canada's Banking System Really So Smart?
One of the odder turns in the financial crisis has been the emergence of what can only be described as a worldwide cult of the Canadian banks. Yes, those Canadian banks: fat, slow, bone-stupid, deniers of loans and graspers of fees, easy targets for generations of low-rent columnists and politicians on the make.
Yet look at them now, the toast of five continents. The Financial Times calls Canada's banks "the envy of the world." Newsweek's Fareed Zakaria gushes that, thanks to its banks, "Canada has done more than survive this financial crisis. The country is positively thriving in it." Barack Obama, no less, confessed during his recent visit that Canada "has shown itself to be a pretty good manager of the financial system in ways that we haven't always been here in the United States," while Paul Volcker, the former Federal Reserve chairman and eminence grise in the Obama administration, has touted Canada's banks as the model for what a reformed American system should look like.
He's not alone. At this week's conference of the G20, Stephen HARPER would have found an attentive audience whenever the subject turned to financial regulation. The notion that "the Canadian system" offers a blueprint for other countries' BANKING sectors has become accepted wisdom - in Ireland, for example, they are more or less explicitly copying it. And, needless to say, the Prime Minister has not been shy about trumpeting our success at home, even urging Canadians to set aside their usual modesty and toast their banks' good health. If other countries wish to idealize Canada, who is a Canadian politician to argue?
But what is this "Canadian system"? Are we really as others imagine us, an island of financial prudence in a sea of recklessness? What accounts for this, if so? Is it, as so many suggest, our more strict system of oversight and regulation? Or is it the more buttoned-down, risk-averse culture of our bankers? Is the future of banking the simple, no-frills model that Volcker suggests, where banks take deposits and make loans, but do little else? You know, like they do up in Canada?
We can date the origins of this particular mania with unusual precision. On Oct. 8 of last year, with stock markets collapsing around the world and several major banks threatening to do likewise, the World Economic Forum released its annual Global Competitiveness Report, a dense compendium of statistics purporting to rank the "competitiveness" of various national economies across a number of categories, or "pillars": infrastructure, innovation, labour market efficiency, and so on. Canada ranked 10th overall in 2008, up from 13th the previous year: a respectable showing, but hardly earth-shattering. But buried in the numbers was one striking figure, of unusual interest at this particular moment: in the category of "soundness of banks," Canada ranked number one. The world's soundest banking system. That caught people's attention.
The methodology of the report may be debated. It's survey-based, for starters. The World Economic Forum did not collect a lot of hard data on each country's banking system - leverage ratios, loan-loss provisions, that sort of thing. Rather, they asked 75 Canadian executives what they thought of their country's banks. And they compared this to the responses other countries' executives gave to the same questions about their banks. As it turned out, our guys thought our banks were sounder than their guys thought their banks were.
Still, there's no denying that Canadian banks have weathered the storm better than most. It's true that we have suffered no bank failures since the crisis began: the United States had 25 in 2008, with more banks likely to shut their doors this year. It's true-ish that Canada's banks have not had to be rescued by their government, if you don't count the $25 billion - later raised to $75 billion, then $125 billion - in government purchases of MORTGAGE assets through the CANADA MORTGAGE AND HOUSING CORPORATION: not a bailout, as such, since the CMHC was on the hook as the insurer of the mortgages anyway, but not quite laissez-faire either.
And it's true that, by virtually any measure, Canada's banks are in healthier shape than their international rivals: profitable, well-capitalized, even raising $9 billion in capital since the fall through fresh share issues - an unheard-of feat in today's markets. As American banks have tumbled, collapsed, or merged, Canadian banks have risen in relative terms. Of the 10 largest banks in North America, measured by assets, four are now Canadian; a decade ago, we had none in the top 10. Just seven banks in the world retain a AAA rating from Moody's Investors Service. Two - Royal and Toronto-Dominion - are Canadian.
But their record is hardly unblemished. If Canada's banks did not issue the dodgy sub-prime mortgages that were at the root of the crisis, they did buy them, or rather derivative products based on them: CIBC, for example, was forced to take a $3.5-billion charge on its portfolio of mortgage-backed securities last year. All told, the banks have taken some $20 billion in writedowns since the crisis began - nothing on the U.S. scale, but hardly chicken feed.
The banks also played a small but pivotal role in the collapse of the asset-backed commercial paper (ABCP) market in Canada. What turned a debacle into a full-blown crisis was the Canadian banks' refusal to honour their commitments to the issuers of these products to be the buyers of last resort. That was no doubt prudent, but it's probably not the sort of thing the banks' new-found fans have in mind.
What explains the less-awful performance of the Canadian banks, when compared to their international counterparts? For many, the answer lies in the stringency of the Canadian regulatory system, the most conservative, by some accounts, in the world. Viewed strictly in prudential terms, there is some truth in this. Where the international standard, as set out in the first Basel Capital Accord - a 1988 agreement among the world's leading monetary and banking authorities - required banks to hold no less than $4 in "tier 1 capital" (common equity, published reserves and equivalents) for every $100 they lent out, and where U.S. regulators consider a bank well-capitalized at a six per cent ratio, Canadian regulators set the bar at seven per cent.
But it's a long way from this to explaining the relative performances of Canadian and, say, American banks as a simple matter of regulation versus deregulation. For one thing, the actual capital of the Canadian banks has consistently been in the neighbourhood of 10 per cent, well in excess of the regulatory standard. To be sure, banks would normally want to add some margin of safety, just to be sure of not running afoul of their overseers, but the size of the margin suggests their prudence had a commercial rationale as well, whether impressing the ratings agencies or reassuring prospective business partners.
For another, there was no deregulation of American banks in the last decade, or certainly none that had anything to do with their willingness to issue subprime mortgages. Nor was there any regulation to prohibit it here; indeed, subprime mortgages make up about seven per cent of the Canadian market. And while American banks were typically more leveraged, it's not clear that imposing higher capital ratios would have changed matters, given the American banks' heavy reliance on securitization, that is, on selling mortgages to third parties. Since the purpose of securitization was to get these assets off the banks' books (so they would not be counted against their capital), tighter capital requirements might have simply spurred even more securitization.
Finally, in important ways Canadian banks are actually less heavily regulated than the American. Canadian banks do not labour under anything like the Community Reinvestment Act, for example, which obliges American banks to extend mortgages to low-income households, even at the cost of watering down their usual lending standards. Nor is there any Canadian equivalent to the government-sponsored enterprises known as Fannie Mae and Freddie Mac, which by their own strenuous efforts to provide funding for subprime mortgages did so much to bring the system to ruin.
The truer statement about the Canadian approach to financial regulation is not that it's tighter, but that it's different. Where other countries adopt a detailed, "rules-based" approach to regulation, Canada uses a more discretionary, "principle-based" approach. The Office of the Superintendent of Financial Institutions doesn't set out a fixed formula for what it considers adequate provision against loan losses, for instance, but it knows it when it sees it - and has the power to step in to compel banks to make the necessary adjustments. Likewise, where other countries' bank regulators have involved themselves in a wider range of concerns, from privacy to racial profiling, ours have kept the focus on risk - risk, whatever its source or precise form.
An example: long before the 1999 reforms lifting the long-standing ban on American banks owning other types of financial institutions, Canadian banks were free to do the same. After the MULRONEY government's 1987 deregulation bill, most of the country's large investment houses were swallowed up by the Big Five. But whereas each subsidiary of an American banking conglomerate might be subject to a different regulatory authority, according to whether it was classed as an insurance company, investment bank, or commercial bank, in Canada power was consolidated in the OSFI to regulate the whole entity. So, far from destabilizing the banks, the brokers' absorption into the banks served to stabilize the brokers. Where a Lehman Brothers or Bear Stearns had neither parents with deep pockets nor prudential regulation to save it from disaster, our investment banks had both.
So the notion that seems to be afoot among some of our international admirers, that "the Canadian model" amounts to confining banks to the traditional deposit-and-loan knitting, untainted by any suspicion of investment banking, currency hedging, or other dark arts, is hard to square with the facts. It's not true, and it wouldn't be a good idea if it was.
Perhaps of greatest importance, Canadian banks are federally chartered, and nationally based. There never was any Canadian counterpart to state and federal laws forbidding interstate banking or even branch banking within states, which has stuck the U.S. to this day with more than 8,000 banks of hugely varying degrees of solvency, not to say competency. Likewise, Canadian banks are spared some of the wilder state laws, such as those permitting homeowners to tear up their mortgages once their houses are "under water" (when the value of the house sinks below that of the mortgage). Much of the behaviour of the American banks can be explained as an attempt to get around the limits imposed by regulation: just as the securitization craze was driven in part by banks' efforts to diversify their asset base beyond their immediate surroundings, so their traditionally greater reliance on commercial paper markets for funds, as opposed to deposit-taking, owed much to legal restrictions on the interest rates they could pay depositors.
Similarly, the Canadian banks' more restrained behaviour is probably best explained as a consequence of historical accident - dumb luck, in other words. In broadest strokes, where financial regulation in America, with its populist, agrarian tradition, has historically been tilted to the benefit of creditors - notably in the matter of mortgage interest deductibility - ours has tended to favour the lenders. Partly in response to earlier American adventures in hyper-localized "unit banking," dating back to Andrew Jackson's dismantling of the Second Bank of the United States, the FATHERS OF CONFEDERATION chose to make banking a federal matter. Banks were thus able to develop broad, national branch systems, which the best of them soon did. Indeed, in a curious way our thinly dispersed population proved to be a source of strength for the front-runners: once a bank had gone to the trouble of setting up the extensive branch networks needed to service such a customer base, each additional branch cost much less.
Economies of scale and survival of the fittest quickly served to winnow down the number of banks, from 38 in 1890 to just 10 in 1925. With the collapse of the Home Bank in 1923, the last major bank failure in Canadian history, the industry had assumed broadly its current form, with five or six major national banks (the Toronto and Dominion banks merged in 1954) dominant, all with roots going back to the 19th century. With a broad base of depositors to draw upon, and similarly diversified loan portfolios, our banks have been less hostage to the ups and downs of local economies, while the steady stream of fees from their retail banking activities lessened the need to gamble on riskier ventures. The dominance of the big five banks, moreover, disadvantageous as that can be at most times, may well be a source of strength in a crisis. Fewer, larger banks makes for greater institutional memory, better risk management, and, if necessary, more easily coordinated responses.
Still, attempts to explain our banks' ability of late to avoid the worst excesses of their international rivals in terms of a more risk-averse national culture have to reckon with repeated episodes in the past where those same banks collectively showed a talent for rushing off the nearest cliff. From the Third World debt crisis of the early 1980s, through the Dome Petroleum fiasco and Northland and Canadian Commercial bank failures later in the decade, all the way to the Olympia & York meltdown of the early 1990s, Canada's bankers have shown themselves capable of blowing their brains out with the best of them. Had they been permitted to merge some years ago as they intended, the better to compete in foreign markets, they might have spent the last decade following the global herd to disaster.
Therein may perhaps lie the best explanation for their recent, relative success. Having sown their wild oats, as it were, in previous decades - with painful, though not fatal consequences - the Canadian banks were a chastened lot by the time the party was really getting under way. A stable industry structure, a firm regulatory hand: these played their part. But there's nothing like a crushing hangover to bring a sinner to Jesus.
Maclean's April 13, 2009
One of the odder turns in the financial crisis has been the emergence of what can only be described as a worldwide cult of the Canadian banks. Yes, those Canadian banks: fat, slow, bone-stupid, deniers of loans and graspers of fees, easy targets for generations of low-rent columnists and politicians on the make.
Yet look at them now, the toast of five continents. The Financial Times calls Canada's banks "the envy of the world." Newsweek's Fareed Zakaria gushes that, thanks to its banks, "Canada has done more than survive this financial crisis. The country is positively thriving in it." Barack Obama, no less, confessed during his recent visit that Canada "has shown itself to be a pretty good manager of the financial system in ways that we haven't always been here in the United States," while Paul Volcker, the former Federal Reserve chairman and eminence grise in the Obama administration, has touted Canada's banks as the model for what a reformed American system should look like.
He's not alone. At this week's conference of the G20, Stephen HARPER would have found an attentive audience whenever the subject turned to financial regulation. The notion that "the Canadian system" offers a blueprint for other countries' BANKING sectors has become accepted wisdom - in Ireland, for example, they are more or less explicitly copying it. And, needless to say, the Prime Minister has not been shy about trumpeting our success at home, even urging Canadians to set aside their usual modesty and toast their banks' good health. If other countries wish to idealize Canada, who is a Canadian politician to argue?
But what is this "Canadian system"? Are we really as others imagine us, an island of financial prudence in a sea of recklessness? What accounts for this, if so? Is it, as so many suggest, our more strict system of oversight and regulation? Or is it the more buttoned-down, risk-averse culture of our bankers? Is the future of banking the simple, no-frills model that Volcker suggests, where banks take deposits and make loans, but do little else? You know, like they do up in Canada?
We can date the origins of this particular mania with unusual precision. On Oct. 8 of last year, with stock markets collapsing around the world and several major banks threatening to do likewise, the World Economic Forum released its annual Global Competitiveness Report, a dense compendium of statistics purporting to rank the "competitiveness" of various national economies across a number of categories, or "pillars": infrastructure, innovation, labour market efficiency, and so on. Canada ranked 10th overall in 2008, up from 13th the previous year: a respectable showing, but hardly earth-shattering. But buried in the numbers was one striking figure, of unusual interest at this particular moment: in the category of "soundness of banks," Canada ranked number one. The world's soundest banking system. That caught people's attention.
The methodology of the report may be debated. It's survey-based, for starters. The World Economic Forum did not collect a lot of hard data on each country's banking system - leverage ratios, loan-loss provisions, that sort of thing. Rather, they asked 75 Canadian executives what they thought of their country's banks. And they compared this to the responses other countries' executives gave to the same questions about their banks. As it turned out, our guys thought our banks were sounder than their guys thought their banks were.
Still, there's no denying that Canadian banks have weathered the storm better than most. It's true that we have suffered no bank failures since the crisis began: the United States had 25 in 2008, with more banks likely to shut their doors this year. It's true-ish that Canada's banks have not had to be rescued by their government, if you don't count the $25 billion - later raised to $75 billion, then $125 billion - in government purchases of MORTGAGE assets through the CANADA MORTGAGE AND HOUSING CORPORATION: not a bailout, as such, since the CMHC was on the hook as the insurer of the mortgages anyway, but not quite laissez-faire either.
And it's true that, by virtually any measure, Canada's banks are in healthier shape than their international rivals: profitable, well-capitalized, even raising $9 billion in capital since the fall through fresh share issues - an unheard-of feat in today's markets. As American banks have tumbled, collapsed, or merged, Canadian banks have risen in relative terms. Of the 10 largest banks in North America, measured by assets, four are now Canadian; a decade ago, we had none in the top 10. Just seven banks in the world retain a AAA rating from Moody's Investors Service. Two - Royal and Toronto-Dominion - are Canadian.
But their record is hardly unblemished. If Canada's banks did not issue the dodgy sub-prime mortgages that were at the root of the crisis, they did buy them, or rather derivative products based on them: CIBC, for example, was forced to take a $3.5-billion charge on its portfolio of mortgage-backed securities last year. All told, the banks have taken some $20 billion in writedowns since the crisis began - nothing on the U.S. scale, but hardly chicken feed.
The banks also played a small but pivotal role in the collapse of the asset-backed commercial paper (ABCP) market in Canada. What turned a debacle into a full-blown crisis was the Canadian banks' refusal to honour their commitments to the issuers of these products to be the buyers of last resort. That was no doubt prudent, but it's probably not the sort of thing the banks' new-found fans have in mind.
What explains the less-awful performance of the Canadian banks, when compared to their international counterparts? For many, the answer lies in the stringency of the Canadian regulatory system, the most conservative, by some accounts, in the world. Viewed strictly in prudential terms, there is some truth in this. Where the international standard, as set out in the first Basel Capital Accord - a 1988 agreement among the world's leading monetary and banking authorities - required banks to hold no less than $4 in "tier 1 capital" (common equity, published reserves and equivalents) for every $100 they lent out, and where U.S. regulators consider a bank well-capitalized at a six per cent ratio, Canadian regulators set the bar at seven per cent.
But it's a long way from this to explaining the relative performances of Canadian and, say, American banks as a simple matter of regulation versus deregulation. For one thing, the actual capital of the Canadian banks has consistently been in the neighbourhood of 10 per cent, well in excess of the regulatory standard. To be sure, banks would normally want to add some margin of safety, just to be sure of not running afoul of their overseers, but the size of the margin suggests their prudence had a commercial rationale as well, whether impressing the ratings agencies or reassuring prospective business partners.
For another, there was no deregulation of American banks in the last decade, or certainly none that had anything to do with their willingness to issue subprime mortgages. Nor was there any regulation to prohibit it here; indeed, subprime mortgages make up about seven per cent of the Canadian market. And while American banks were typically more leveraged, it's not clear that imposing higher capital ratios would have changed matters, given the American banks' heavy reliance on securitization, that is, on selling mortgages to third parties. Since the purpose of securitization was to get these assets off the banks' books (so they would not be counted against their capital), tighter capital requirements might have simply spurred even more securitization.
Finally, in important ways Canadian banks are actually less heavily regulated than the American. Canadian banks do not labour under anything like the Community Reinvestment Act, for example, which obliges American banks to extend mortgages to low-income households, even at the cost of watering down their usual lending standards. Nor is there any Canadian equivalent to the government-sponsored enterprises known as Fannie Mae and Freddie Mac, which by their own strenuous efforts to provide funding for subprime mortgages did so much to bring the system to ruin.
The truer statement about the Canadian approach to financial regulation is not that it's tighter, but that it's different. Where other countries adopt a detailed, "rules-based" approach to regulation, Canada uses a more discretionary, "principle-based" approach. The Office of the Superintendent of Financial Institutions doesn't set out a fixed formula for what it considers adequate provision against loan losses, for instance, but it knows it when it sees it - and has the power to step in to compel banks to make the necessary adjustments. Likewise, where other countries' bank regulators have involved themselves in a wider range of concerns, from privacy to racial profiling, ours have kept the focus on risk - risk, whatever its source or precise form.
An example: long before the 1999 reforms lifting the long-standing ban on American banks owning other types of financial institutions, Canadian banks were free to do the same. After the MULRONEY government's 1987 deregulation bill, most of the country's large investment houses were swallowed up by the Big Five. But whereas each subsidiary of an American banking conglomerate might be subject to a different regulatory authority, according to whether it was classed as an insurance company, investment bank, or commercial bank, in Canada power was consolidated in the OSFI to regulate the whole entity. So, far from destabilizing the banks, the brokers' absorption into the banks served to stabilize the brokers. Where a Lehman Brothers or Bear Stearns had neither parents with deep pockets nor prudential regulation to save it from disaster, our investment banks had both.
So the notion that seems to be afoot among some of our international admirers, that "the Canadian model" amounts to confining banks to the traditional deposit-and-loan knitting, untainted by any suspicion of investment banking, currency hedging, or other dark arts, is hard to square with the facts. It's not true, and it wouldn't be a good idea if it was.
Perhaps of greatest importance, Canadian banks are federally chartered, and nationally based. There never was any Canadian counterpart to state and federal laws forbidding interstate banking or even branch banking within states, which has stuck the U.S. to this day with more than 8,000 banks of hugely varying degrees of solvency, not to say competency. Likewise, Canadian banks are spared some of the wilder state laws, such as those permitting homeowners to tear up their mortgages once their houses are "under water" (when the value of the house sinks below that of the mortgage). Much of the behaviour of the American banks can be explained as an attempt to get around the limits imposed by regulation: just as the securitization craze was driven in part by banks' efforts to diversify their asset base beyond their immediate surroundings, so their traditionally greater reliance on commercial paper markets for funds, as opposed to deposit-taking, owed much to legal restrictions on the interest rates they could pay depositors.
Similarly, the Canadian banks' more restrained behaviour is probably best explained as a consequence of historical accident - dumb luck, in other words. In broadest strokes, where financial regulation in America, with its populist, agrarian tradition, has historically been tilted to the benefit of creditors - notably in the matter of mortgage interest deductibility - ours has tended to favour the lenders. Partly in response to earlier American adventures in hyper-localized "unit banking," dating back to Andrew Jackson's dismantling of the Second Bank of the United States, the FATHERS OF CONFEDERATION chose to make banking a federal matter. Banks were thus able to develop broad, national branch systems, which the best of them soon did. Indeed, in a curious way our thinly dispersed population proved to be a source of strength for the front-runners: once a bank had gone to the trouble of setting up the extensive branch networks needed to service such a customer base, each additional branch cost much less.
Economies of scale and survival of the fittest quickly served to winnow down the number of banks, from 38 in 1890 to just 10 in 1925. With the collapse of the Home Bank in 1923, the last major bank failure in Canadian history, the industry had assumed broadly its current form, with five or six major national banks (the Toronto and Dominion banks merged in 1954) dominant, all with roots going back to the 19th century. With a broad base of depositors to draw upon, and similarly diversified loan portfolios, our banks have been less hostage to the ups and downs of local economies, while the steady stream of fees from their retail banking activities lessened the need to gamble on riskier ventures. The dominance of the big five banks, moreover, disadvantageous as that can be at most times, may well be a source of strength in a crisis. Fewer, larger banks makes for greater institutional memory, better risk management, and, if necessary, more easily coordinated responses.
Still, attempts to explain our banks' ability of late to avoid the worst excesses of their international rivals in terms of a more risk-averse national culture have to reckon with repeated episodes in the past where those same banks collectively showed a talent for rushing off the nearest cliff. From the Third World debt crisis of the early 1980s, through the Dome Petroleum fiasco and Northland and Canadian Commercial bank failures later in the decade, all the way to the Olympia & York meltdown of the early 1990s, Canada's bankers have shown themselves capable of blowing their brains out with the best of them. Had they been permitted to merge some years ago as they intended, the better to compete in foreign markets, they might have spent the last decade following the global herd to disaster.
Therein may perhaps lie the best explanation for their recent, relative success. Having sown their wild oats, as it were, in previous decades - with painful, though not fatal consequences - the Canadian banks were a chastened lot by the time the party was really getting under way. A stable industry structure, a firm regulatory hand: these played their part. But there's nothing like a crushing hangover to bring a sinner to Jesus.
Maclean's April 13, 2009
Saturday, June 26, 2010
Thursday, June 24, 2010
Wednesday, June 23, 2010
Tuesday, June 22, 2010
Monday, June 21, 2010
We won Marketplace 6
For the final course of my MBA we participated in a head to head game of Marketplace 6 in 3 member groups. In my group one person did not participate so I did marketing, sales, human resources and manufacturing and we won! We not only won but we kicked butt! I cut and pasted the final results (which give us an A+ on 50% of our grade) below so that I can save them long after the game results are no longer open. The game took place over 6 quarters of a computer company start up. We ended up with 67% of the market!!
Balanced Scorecard IP (Infinite Possibilities)
Quarter:6
Review your balanced scorecard for quarter 5. Your performance on the individual criteria should have improved.
Your balanced scorecard should be positive by now. If it is not, it may be that you have not generated enough sales to drive your costs down. You may have to consider revising and expanding your marketing program.
Check how well you performed relative to the industry. The industry scores represent your benchmark on how well you should be doing. Your firm should be above average in all areas measured. If not, try to find the weaknesses and correct them.
Industry results for quarter: 5
Minimum Maximum Ave. IP (me)
0.21 45.43 15.69 45.43
Financial Performance 20.11 85.86 42.67 85.86
Market Performance 0.13 0.54 0.30 0.54
Marketing Effectiveness 0.54 0.69 0.61 0.69
Investment in Future 1.55 4.83 2.69 1.70
Wealth 0.85 1.58 1.12 1.58
Human Resource Management 0.75 0.89 0.82 0.89
Asset Management 0.07 0.64 0.37 0.64
Financial Risk 0.79 0.95 0.89 0.94
Review the results of your company's performance during the previous quarter. This scorecard will be used to measure your firm's performance in comparison to the other firms participating in the exercise. The final evaluation will be based upon your performance during the last four (4) quarter of play.
First segment: Workhorse
Second segment: Traveler
Total Business Performance = 85.86 * 0.54 * 0.69 * 1.70 * 1.58 * 0.89 * 0.64 * 0.94 = 45.43
Financial Performance = 85.86
Market Performance = 0.54
Marketing Effectiveness = 0.69
Investment in Future = 1.70
Wealth = 1.58
Human Resource Management = 0.89
Asset Management = 0.64
Financial Risk = 0.94
If one of the performance measures is less than zero, then the total overall performance measure will be zero.
Total Business Performance.
The Total Business Performance indicator is a quantitative measure of the executive team’s ability to effectively manage the resources of the firm. It considers both the historical performance of the firm as well as how well the firm is positioned to compete in the future. As such, it measures the action potential of the firm.
The index employs what is called a balanced scorecard to measure the executive team’s performance. The most important measure is the team’s financial performance, and thus its ability to create wealth for the investors. However, the focus on current profits has caused many executives to stress the present at the expense of the future.
The long-term viability of the firm requires that the executive team be good at managing not only the firm’s profitability, but also its marketing activities, production operations, human resources, cash, and financial resources. The management team must also invest in the future. These expenses might depress the current financial performance, but are vital to creating new products, markets, and manufacturing capabilities.
In short, top managers must be good at managing all aspects of the firm. The balanced scorecard puts this perspective into practice. It focuses attention on multiple performance measures, and thus multiple decision areas. None can be ignored or downplayed. The best managers will be strong in all areas measured.
The Total Business Performance measure is computed by multiplying several indicators of business performance. This model underscores the importance of all measures. This is because any strength or weakness will have a multiple effect on the final outcome, the Action Potential of the Firm.
The following is a summary of the measure of the firm’s Total Business Performance and its key performance indicators. The computational details follow.
Financial Performance measures how well the executive team has been able to create profits for its shareholders. A positive number is always desired and the larger the better. It is computed in three steps. First, the net profit from operations is computed by taking the operating profit shown in the income statement and adding back investments in the future that are expensed in the current quarter. It measures how well the managers are able to create revenue from the current quarter’s marketing, sales and manufacturing activities.
Note that the income statement includes expenditures for R&D, new sales offices and quality control. However, this money is spent to create future business opportunities. Thus, these expenses are added back to the operating profit so that the financial performance measure is entirely focused on current quarter revenues and expenses.
Second, the total number of shares of stock is computed by adding all forms of equity investment. If an emergency loan has been taken out, shares of stock will automatically be issued to the loan shark and they become a permanent part of the equity financing.
Third, the net profit from current operations is divided by the number of shares of stock issued to determine the net profit from current operations per share of stock.
financial performance = net profit from current operations / total shares issued
= 8,473,844 / 98,698
= 85.86
net profit from current operations = operating profit + investments in firm's future = 7,038,945 + 1,434,899 = 8,473,844
operating profit: 7,038,945
investments in firm's future = 380,000 + 994,899 + 60,000 = 1,434,899
cost to open new sales offices and new web center: 380,000
R&D investment in new brand features: 994,899
R&D to create new brands: 60,000
total shares issued: 98,698
number of shares issued to executive team: 40,000
number of shares issued to venture capitalists: 40,000
number of shares issued to loan shark: 18,698
Market Performance is a measure of how well the managers are able to create demand in their primary and secondary segments. The firm’s market share in two target segments is used to measure this demand creation ability. The market share score is adjusted downwards if there were any stock outs. This penalty for stock outs is to underscore two points. First, unnecessary resources have been spent to generate more demand than can be satisfied. Second, ill will has been created by having potential customers become frustrated when they do not find the products that they have been persuaded to buy. The score ranges from 0 to 1.0 and will depend upon the number of competitors. If there are 3 firms, a good score would be greater than 0.5. If there are 8 teams, a good score would be greater than 0.35.
market performance = average market share in targeted segments/100 * percent of demand actually served/100
= (53/100) * (100/100)
= 0.54
average market share in target segments = (55 + 52)/2 = 53
market share in first segment: 55
market share in second segment: 52
percent of demand actually served = ((6,491 - 0) / 6,491) * 100 = 100
total net demand after ill will: 6,491
number of stock outs: 0
Marketing Effectiveness is a measure of how well the managers have been able to satisfy the needs of the customers as measured by the quality of their brands and ads. Customer perceptions of the firm’s brands and ads in its primary and secondary segments are used to measure customer satisfaction. The two scores are then averaged to obtain the indicator for marketing effectiveness. The score ranges from 0 to 1.0. A good score would be greater than 0.8
marketing effectiveness = [average brand judgment/100 + average ad judgment/100]/2
= [69/100 + 70/100]/2
= 0.69
average of best brand judgments in target segments = (65 + 73)/2 = 69
highest brand judgment in first segment: 65
highest brand judgment in second segment: 73
average of best ad judgments in target segments = (76 + 63)/2 = 70
highest ad judgment in first segment: 76
highest ad judgment in second segment: 63
Investments in the Firm's Future reflect the willingness of the executive team to spend current revenues on future business opportunities. They are necessary but risky. In the short-term, these expenditures can cause large negative profits on the income statement. As a result, the retained earnings may become highly negative, thus indicating that a substantial portion of the stockholder's investment has disappeared into the operations of the firm. In the long-term, these investments are absolutely necessary if the firm is to be competitive. Thus, there is a need to balance the loss of stockholder's equity against investments which could create even greater returns for the investors in the future. The score is always greater or equal to 1.0 and a good score would be greater than 3.0.
investments in the firm's future = (current expenditures that benefit firms future / net revenues) * 10 + 1
= (1,434,899 / 20,457,733) * 10 + 1
= 1.70
current expenses that benefit firm's future = 380,000 + 994,899 + 60,000 + 0 = 1,434,899
cost to open new sales offices and new web regional centers: 380,000
R&D investment in new brand features: 994,899
R&D to create new brands: 60,000
R&D licenses: 0
net revenue = 22,603,309 - 2,145,576 + 0 = 20,457,733
sales revenue: 22,603,309
rebates: 2,145,576
interest income: 0
Creation of Wealth is a measure of how well the executive team has been able to add wealth to the initial investments of the stockholders. During the start-up phase of the company, it is expected that expenses will greatly exceed revenues leading to large losses and retained earnings figures that are largely negative.
To compute the creation of wealth measure, the net equity of the firm is first computed by adding the retained earnings to the total of the investments from all of the stockholders. The retained earnings figure is the sum of all profits from the inception of the firm. As noted above, the retained earnings will be negative in the early quarters as the firm invests money to startup and grow the business.
Next, the net equity is divided by the total of all equity investments to obtain a ratio of wealth creation. A value of zero or less indicates bankruptcy. A value greater than zero and less than one indicates the executive team is relying upon the initial stockholder's investments to pay day-to-day expenses plus invest in the future. A value greater than one indicates the firm is adding wealth to the stockholders.
creation of wealth = net equity/total stockholders equity
= 12,616,490 / 8,000,000
= 1.58
net equity = 4,616,490 + 8,000,000 + 0 = 12,616,490
retained earnings: 4,616,490
common stock: 8,000,000
dividends paid to date: 0
total stockholders investment = common stock = 8,000,000
Human Resource Management is a measure of how well the executive team is able to recruit the best employees, satisfy their needs and motivate them to excel. Sales force productivity and factory worker productivity are averaged together to obtain a single score. High performance is only possible if the firm's compensation packages is competitive and in tune with what is important to employees over time. The scores range from zero to 1.00 and a good score would be greater than 0.80.
human resource management = (sales force productivity/100 + factory worker productivity/100) / 2
= (83/100 + 95/100) / 2
= 0.89
sales force productivity: 83
factory worker productivity: 95
Asset Management is a measure of the executive team’s ability to use the firm’s assets to create sales revenue. The first step in measuring asset management is to compute the asset turnover of the firm. Effective managers are able to use the assets to create sales which are two or three times the value of the assets. Thus, a very good score would be 3.0
In addition to asset turnover, ending inventories are also measured and included. To avoid stock outs, and their associated penalties, managers might be inclined to build excessive inventory. To discourage large ending inventories, there is a penalty for producing more inventory than is needed to meet demand. The penalty increases as the proportion of ending inventory to production increases.
asset management = asset turnover * penalty for excess inventory
= 1.42 * 0.45
= 0.64
asset turnover = net revenue/total assets = 20,457,733 / 14,424,183 = 1.42
net revenue = 22,603,309 - 2,145,576 + 0 = 20,457,733
sales revenue: 22,603,309
rebates: 2,145,576
interest income: 0
total assets: 14,424,183
penalty for excess inventory = (1-ending inventory/production) = (1 - 5,895 / 10,770) = 0.45
ending inventory: 5,895
production: 10,770
Financial Risk measures the executive team's ability to manage debt as a financial resource. The financial risk indicator is based upon the degree to which debt is part of the capital of the firm. As debt increases relative to the total capital, then the financial risk associated with the company increases. Conversely, as the proportion of equity in the total capital increases, then the perceived financial risk in the firm decreases.
To compute financial risk, the proportion of equity is obtained by computing the amount of equity in the firm and dividing it by the amount of capital invested in the firm from all sources. Specifically, the amount of equity is equal to the sum of common stock plus retained earnings. The amount of capital is equal to the sum of debt plus common stock plus retained earnings. As the ratio of equity to capital decreases (meaning more debt), then financial risk increases.
A value of 1.00 would indicate there is no debt and, therefore, no perceived financial risk.
It is important to realize that financial managers do not want to totally discourage debt. The optimum capital structure will vary by firm depending on its tax situation, overall risk, asset base, and financial slack. Some debt may be desirable in order to help the firm take advantage of value enhancing business opportunities (i.e., opportunities that earn more than the company's weighted average cost of capital).
In order to mitigate or downplay the effect of low amounts of debt in the capital structure, the value for the share of equity in the company is raised to a power of 0.5 (square root). Thus, if debt represented 20% of the capital structure, then the Financial risk indicator would be 0.89 (0.80 ** 0.5). If debt were 50% of the capital structure, the Financial Risk indicator would be 70.
A Financial Risk indicator below 0.80 (more than 36% debt) would be considered unfavorable.
financial risk = (total equity / total capital)0.5
= (12,616,490/14,424,183)0.5
= 0.94
total equity = common stock + retained earnings = 8,000,000 + 4,616,490 = 12,616,490
total capital = debt + common stock + retained earnings = 1,807,693 + 8,000,000 + 4,616,490 = 14,424,183
Balanced Scorecard IP (Infinite Possibilities)
Quarter:6
Review your balanced scorecard for quarter 5. Your performance on the individual criteria should have improved.
Your balanced scorecard should be positive by now. If it is not, it may be that you have not generated enough sales to drive your costs down. You may have to consider revising and expanding your marketing program.
Check how well you performed relative to the industry. The industry scores represent your benchmark on how well you should be doing. Your firm should be above average in all areas measured. If not, try to find the weaknesses and correct them.
Industry results for quarter: 5
Minimum Maximum Ave. IP (me)
0.21 45.43 15.69 45.43
Financial Performance 20.11 85.86 42.67 85.86
Market Performance 0.13 0.54 0.30 0.54
Marketing Effectiveness 0.54 0.69 0.61 0.69
Investment in Future 1.55 4.83 2.69 1.70
Wealth 0.85 1.58 1.12 1.58
Human Resource Management 0.75 0.89 0.82 0.89
Asset Management 0.07 0.64 0.37 0.64
Financial Risk 0.79 0.95 0.89 0.94
Review the results of your company's performance during the previous quarter. This scorecard will be used to measure your firm's performance in comparison to the other firms participating in the exercise. The final evaluation will be based upon your performance during the last four (4) quarter of play.
First segment: Workhorse
Second segment: Traveler
Total Business Performance = 85.86 * 0.54 * 0.69 * 1.70 * 1.58 * 0.89 * 0.64 * 0.94 = 45.43
Financial Performance = 85.86
Market Performance = 0.54
Marketing Effectiveness = 0.69
Investment in Future = 1.70
Wealth = 1.58
Human Resource Management = 0.89
Asset Management = 0.64
Financial Risk = 0.94
If one of the performance measures is less than zero, then the total overall performance measure will be zero.
Total Business Performance.
The Total Business Performance indicator is a quantitative measure of the executive team’s ability to effectively manage the resources of the firm. It considers both the historical performance of the firm as well as how well the firm is positioned to compete in the future. As such, it measures the action potential of the firm.
The index employs what is called a balanced scorecard to measure the executive team’s performance. The most important measure is the team’s financial performance, and thus its ability to create wealth for the investors. However, the focus on current profits has caused many executives to stress the present at the expense of the future.
The long-term viability of the firm requires that the executive team be good at managing not only the firm’s profitability, but also its marketing activities, production operations, human resources, cash, and financial resources. The management team must also invest in the future. These expenses might depress the current financial performance, but are vital to creating new products, markets, and manufacturing capabilities.
In short, top managers must be good at managing all aspects of the firm. The balanced scorecard puts this perspective into practice. It focuses attention on multiple performance measures, and thus multiple decision areas. None can be ignored or downplayed. The best managers will be strong in all areas measured.
The Total Business Performance measure is computed by multiplying several indicators of business performance. This model underscores the importance of all measures. This is because any strength or weakness will have a multiple effect on the final outcome, the Action Potential of the Firm.
The following is a summary of the measure of the firm’s Total Business Performance and its key performance indicators. The computational details follow.
Financial Performance measures how well the executive team has been able to create profits for its shareholders. A positive number is always desired and the larger the better. It is computed in three steps. First, the net profit from operations is computed by taking the operating profit shown in the income statement and adding back investments in the future that are expensed in the current quarter. It measures how well the managers are able to create revenue from the current quarter’s marketing, sales and manufacturing activities.
Note that the income statement includes expenditures for R&D, new sales offices and quality control. However, this money is spent to create future business opportunities. Thus, these expenses are added back to the operating profit so that the financial performance measure is entirely focused on current quarter revenues and expenses.
Second, the total number of shares of stock is computed by adding all forms of equity investment. If an emergency loan has been taken out, shares of stock will automatically be issued to the loan shark and they become a permanent part of the equity financing.
Third, the net profit from current operations is divided by the number of shares of stock issued to determine the net profit from current operations per share of stock.
financial performance = net profit from current operations / total shares issued
= 8,473,844 / 98,698
= 85.86
net profit from current operations = operating profit + investments in firm's future = 7,038,945 + 1,434,899 = 8,473,844
operating profit: 7,038,945
investments in firm's future = 380,000 + 994,899 + 60,000 = 1,434,899
cost to open new sales offices and new web center: 380,000
R&D investment in new brand features: 994,899
R&D to create new brands: 60,000
total shares issued: 98,698
number of shares issued to executive team: 40,000
number of shares issued to venture capitalists: 40,000
number of shares issued to loan shark: 18,698
Market Performance is a measure of how well the managers are able to create demand in their primary and secondary segments. The firm’s market share in two target segments is used to measure this demand creation ability. The market share score is adjusted downwards if there were any stock outs. This penalty for stock outs is to underscore two points. First, unnecessary resources have been spent to generate more demand than can be satisfied. Second, ill will has been created by having potential customers become frustrated when they do not find the products that they have been persuaded to buy. The score ranges from 0 to 1.0 and will depend upon the number of competitors. If there are 3 firms, a good score would be greater than 0.5. If there are 8 teams, a good score would be greater than 0.35.
market performance = average market share in targeted segments/100 * percent of demand actually served/100
= (53/100) * (100/100)
= 0.54
average market share in target segments = (55 + 52)/2 = 53
market share in first segment: 55
market share in second segment: 52
percent of demand actually served = ((6,491 - 0) / 6,491) * 100 = 100
total net demand after ill will: 6,491
number of stock outs: 0
Marketing Effectiveness is a measure of how well the managers have been able to satisfy the needs of the customers as measured by the quality of their brands and ads. Customer perceptions of the firm’s brands and ads in its primary and secondary segments are used to measure customer satisfaction. The two scores are then averaged to obtain the indicator for marketing effectiveness. The score ranges from 0 to 1.0. A good score would be greater than 0.8
marketing effectiveness = [average brand judgment/100 + average ad judgment/100]/2
= [69/100 + 70/100]/2
= 0.69
average of best brand judgments in target segments = (65 + 73)/2 = 69
highest brand judgment in first segment: 65
highest brand judgment in second segment: 73
average of best ad judgments in target segments = (76 + 63)/2 = 70
highest ad judgment in first segment: 76
highest ad judgment in second segment: 63
Investments in the Firm's Future reflect the willingness of the executive team to spend current revenues on future business opportunities. They are necessary but risky. In the short-term, these expenditures can cause large negative profits on the income statement. As a result, the retained earnings may become highly negative, thus indicating that a substantial portion of the stockholder's investment has disappeared into the operations of the firm. In the long-term, these investments are absolutely necessary if the firm is to be competitive. Thus, there is a need to balance the loss of stockholder's equity against investments which could create even greater returns for the investors in the future. The score is always greater or equal to 1.0 and a good score would be greater than 3.0.
investments in the firm's future = (current expenditures that benefit firms future / net revenues) * 10 + 1
= (1,434,899 / 20,457,733) * 10 + 1
= 1.70
current expenses that benefit firm's future = 380,000 + 994,899 + 60,000 + 0 = 1,434,899
cost to open new sales offices and new web regional centers: 380,000
R&D investment in new brand features: 994,899
R&D to create new brands: 60,000
R&D licenses: 0
net revenue = 22,603,309 - 2,145,576 + 0 = 20,457,733
sales revenue: 22,603,309
rebates: 2,145,576
interest income: 0
Creation of Wealth is a measure of how well the executive team has been able to add wealth to the initial investments of the stockholders. During the start-up phase of the company, it is expected that expenses will greatly exceed revenues leading to large losses and retained earnings figures that are largely negative.
To compute the creation of wealth measure, the net equity of the firm is first computed by adding the retained earnings to the total of the investments from all of the stockholders. The retained earnings figure is the sum of all profits from the inception of the firm. As noted above, the retained earnings will be negative in the early quarters as the firm invests money to startup and grow the business.
Next, the net equity is divided by the total of all equity investments to obtain a ratio of wealth creation. A value of zero or less indicates bankruptcy. A value greater than zero and less than one indicates the executive team is relying upon the initial stockholder's investments to pay day-to-day expenses plus invest in the future. A value greater than one indicates the firm is adding wealth to the stockholders.
creation of wealth = net equity/total stockholders equity
= 12,616,490 / 8,000,000
= 1.58
net equity = 4,616,490 + 8,000,000 + 0 = 12,616,490
retained earnings: 4,616,490
common stock: 8,000,000
dividends paid to date: 0
total stockholders investment = common stock = 8,000,000
Human Resource Management is a measure of how well the executive team is able to recruit the best employees, satisfy their needs and motivate them to excel. Sales force productivity and factory worker productivity are averaged together to obtain a single score. High performance is only possible if the firm's compensation packages is competitive and in tune with what is important to employees over time. The scores range from zero to 1.00 and a good score would be greater than 0.80.
human resource management = (sales force productivity/100 + factory worker productivity/100) / 2
= (83/100 + 95/100) / 2
= 0.89
sales force productivity: 83
factory worker productivity: 95
Asset Management is a measure of the executive team’s ability to use the firm’s assets to create sales revenue. The first step in measuring asset management is to compute the asset turnover of the firm. Effective managers are able to use the assets to create sales which are two or three times the value of the assets. Thus, a very good score would be 3.0
In addition to asset turnover, ending inventories are also measured and included. To avoid stock outs, and their associated penalties, managers might be inclined to build excessive inventory. To discourage large ending inventories, there is a penalty for producing more inventory than is needed to meet demand. The penalty increases as the proportion of ending inventory to production increases.
asset management = asset turnover * penalty for excess inventory
= 1.42 * 0.45
= 0.64
asset turnover = net revenue/total assets = 20,457,733 / 14,424,183 = 1.42
net revenue = 22,603,309 - 2,145,576 + 0 = 20,457,733
sales revenue: 22,603,309
rebates: 2,145,576
interest income: 0
total assets: 14,424,183
penalty for excess inventory = (1-ending inventory/production) = (1 - 5,895 / 10,770) = 0.45
ending inventory: 5,895
production: 10,770
Financial Risk measures the executive team's ability to manage debt as a financial resource. The financial risk indicator is based upon the degree to which debt is part of the capital of the firm. As debt increases relative to the total capital, then the financial risk associated with the company increases. Conversely, as the proportion of equity in the total capital increases, then the perceived financial risk in the firm decreases.
To compute financial risk, the proportion of equity is obtained by computing the amount of equity in the firm and dividing it by the amount of capital invested in the firm from all sources. Specifically, the amount of equity is equal to the sum of common stock plus retained earnings. The amount of capital is equal to the sum of debt plus common stock plus retained earnings. As the ratio of equity to capital decreases (meaning more debt), then financial risk increases.
A value of 1.00 would indicate there is no debt and, therefore, no perceived financial risk.
It is important to realize that financial managers do not want to totally discourage debt. The optimum capital structure will vary by firm depending on its tax situation, overall risk, asset base, and financial slack. Some debt may be desirable in order to help the firm take advantage of value enhancing business opportunities (i.e., opportunities that earn more than the company's weighted average cost of capital).
In order to mitigate or downplay the effect of low amounts of debt in the capital structure, the value for the share of equity in the company is raised to a power of 0.5 (square root). Thus, if debt represented 20% of the capital structure, then the Financial risk indicator would be 0.89 (0.80 ** 0.5). If debt were 50% of the capital structure, the Financial Risk indicator would be 70.
A Financial Risk indicator below 0.80 (more than 36% debt) would be considered unfavorable.
financial risk = (total equity / total capital)0.5
= (12,616,490/14,424,183)0.5
= 0.94
total equity = common stock + retained earnings = 8,000,000 + 4,616,490 = 12,616,490
total capital = debt + common stock + retained earnings = 1,807,693 + 8,000,000 + 4,616,490 = 14,424,183
Sunday, June 20, 2010
Saturday, June 19, 2010
Executing Strategy
Executing strategy as an operations-driven activity that revolves around the management of people and other business processes involves the following framework:
1. Building an organization that is capable of good strategy execution which involves staffing, core competencies, competitive capabilities, and structuring the value chain to effectively use its resources.
2. Staffing the organization with a strong management team and hiring as well as retaining skilled workers.
3. Developing and instituting policies and procedures that facilitate strategy execution.
4. Constantly improving value-chain operations.
5. Installing information and operation systems that enable company employees to effectively do their jobs
6. Rewarding employees when they achieve strategic and financial targets.
7. Creating a corporate culture that is conducive to good strategy execution.
8. Exercising strong leadership that propels the organization forward, keeps making improvements upon the execution strategy, and achieves optimum operation performance in an efficient manner.
Good strategy execution involves a holistic view of the company in its environment. It should be proactive rather than reactive. Inviting and inspiring every employee, supplier and customer to be part of this process increased the likelihood of success. Successful implementation and follow through are of paramount importance. Organizing the work effort involves: deciding which value chain activities to perform internally and which to outsource, making internally performed strategy-critical activities the core building blocks in the organizational structure, deciding how much authority to centralize and what to decentralize or delegate, providing for internal cross unit coordinationa dn collaboration to build and strengthen internal competencies and capabilities and providing for the necessary collaboration and coordination with suppliers and strategic allies.
1. Building an organization that is capable of good strategy execution which involves staffing, core competencies, competitive capabilities, and structuring the value chain to effectively use its resources.
2. Staffing the organization with a strong management team and hiring as well as retaining skilled workers.
3. Developing and instituting policies and procedures that facilitate strategy execution.
4. Constantly improving value-chain operations.
5. Installing information and operation systems that enable company employees to effectively do their jobs
6. Rewarding employees when they achieve strategic and financial targets.
7. Creating a corporate culture that is conducive to good strategy execution.
8. Exercising strong leadership that propels the organization forward, keeps making improvements upon the execution strategy, and achieves optimum operation performance in an efficient manner.
Good strategy execution involves a holistic view of the company in its environment. It should be proactive rather than reactive. Inviting and inspiring every employee, supplier and customer to be part of this process increased the likelihood of success. Successful implementation and follow through are of paramount importance. Organizing the work effort involves: deciding which value chain activities to perform internally and which to outsource, making internally performed strategy-critical activities the core building blocks in the organizational structure, deciding how much authority to centralize and what to decentralize or delegate, providing for internal cross unit coordinationa dn collaboration to build and strengthen internal competencies and capabilities and providing for the necessary collaboration and coordination with suppliers and strategic allies.
Friday, June 18, 2010
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