“Any best practice activity – of any sort – without strategic intent and clarity and effective leadership is like putting gas into a car with no engine or driver.”     DBM, Jr.

“If executing a strategic initiative isn’t a bit scary and target customers have not promised to reward its value creation, then it won’t make any difference in 2008.”   DBM, Jr.

“Do what you feel in your heart to be right – for you'll be criticized anyway. You'll be damned if you do, and damned if you don't.”     Eleanor Roosevelt

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”      Chuck Prince (now “retired” CEO of Citibank to the Financial Times on 7-10-07.)

WHAT’S BRUCE BEEN DOING?

It’s been awhile since my last commentary; I’ve been busy with transitions. Both of my children went away to school this fall, so it was time to downsize. I sold my house in Chapel Hill – a delightful town where I have lived for 15 years – and moved to a rental apartment in the South End of Boston city proper on November 1st. I know this move may sound crazy to many, but in the bigger balance of things I hope it makes sense for me. (BTW, my corporate office, main phone number and assistant, Karen Green, are still in Chapel Hill. Readers can reach me at any time via my email address – bruce@merrifield.com or my cell phone number which is 919-357-2372.)

On the work front, aside from on-going speaking opportunities and tending to some corporate board and advisory positions, I have been working on three separate, but related start-up companies which all grew out of a contract turnaround assignment that I had with a $10MM family-owned distribution business that lasted for about 3 months two years ago. One of the key underlying aspects of these start-ups is deploying “service as a software” (SaaS) technology to create breakthrough, cost-and-service-value distribution models. These start-ups have been brewing for some time, but we now are getting to some critical action steps. So, I hope to have interesting start-up news to report as we move through 2008.

STREAKS IN SPORTS VS. THOSE IN BUSINESS

As I have told people about my move to Boston, many have quickly mentioned what a roll Boston sports teams have been on: the Red Sox’ world-series win; the Patriots now at 13-0; the Celtics with the best record in the NBA; and even BC football had a good run. On their way to the World Series win, the Sox put an end to a historically, great, winning streak by the Colorado Rockies whose destiny intersected with an almost, historically significant collapse by the NY Mets.

Having just moved from Chapel Hill, other peculiar streaks are on my mind. In my old neighborhood, the residents were split between rooting for two, current teams on streaks: the UNC’s men’s basketball team which is currently 8-0 and ranked #1 in the polls; and the Duke men’s team, which is currently 9-0 and ranked #6. In Boston, though, I’m reflecting upon a winning streak in squash, because at the age of 57, I’m once again taking up squash, which is an indoor racquet sport that I played competitively in college. The last time that I gave it up, at age 38, was because I was pulling body parts that I didn’t know I had. But, you can’t play tennis on clay courts, outside, for 10 months a year in Boston. So when in a cold city do as the locals do (?). Who do you think owns the longest winning streak in any professional sport? Jahangir Khan of Pakistan had 555 consecutive wins on the professional squash tour from 1981 to 1986. What a Dude! I’ll have to get his yoga and squash strengthening book.

What about streaks in business? Ever since “In Search of Excellence” sold 3MM hardback copies starting in 1982, there has been no shortage of business books on how to be consistently excellent. Much has emerged from “sustainable excellence” research of the last 25 years that we might apply to getting our own corporate winning streak going. But, while we think about win-streak ideas for 2008, we might reflect a bit deeper on what went wrong with Citibank’s streak of great growth and profits this summer? Because they were instrumental in making the global credit bubble music that helped many of our firms prosper over the past few years, and now it is deflating.

THE MUSIC STOPPED FOR CITIBANK; WILL OUR MUSIC FADE TOO?

Why does the quote above by the former CEO of Citibank get my vote for the most outstanding business quote of the year, perhaps even the decade? It is not only pithy, punchy, punctual (2 weeks after the quote, the first big credit-asset, write-off was announced), and poignant (Chuck has lost his job), but it was so honest. Chuck Prince was actually saying that the global credit bubble that the global financial firms had created with financial derivatives on top of the ocean of fiat money supply created by central banks was a scam that couldn’t last. He was saying that the $50T in synthetic debt instruments that Wall Street has created substantially in the past few years was missing some clothes.  

Any inquiring business reader could see back in 2004, or earlier, that the entire supply chain for originating all sorts of marginal loans — mortgages, student loans, cars/SUVs, credit card debt, LBOs, etc. — that ultimately flowed through Wall Street to be securitized and then sliced and diced into different types of synthetic securities was loaded with increasing amounts of greed and fraud. This easy-lending pipeline in-turn inflated all other asset bubbles: housing in many countries; infrastructure construction in third world countries; the commodities pricing booms; LBO prices; commercial building prices; every country’s stock markets; all bond markets from treasuries to junk; art, diamonds; etc. Good thing the core inflation rate didn’t include any assets and stayed so artificially low.

Now, that the bubble is deflating and “mark-to-model” asset investments (this means there is no liquid market for them) are being written down, a global credit crunch has begun. As global credit deflates so will the asset values of all the things that were inflated. Will the central banks be able to and chose to re-inflate global credit without overshooting into hyper-inflation? Will they fail or not try, allowing us to experience debt deflation as Japan has for 14 years? Or, will we hopefully muddle along sideways with tolerable stagflation for some time? Who knows? But, every corporate manager should have strategic plans for each scenario with your own odds attached. I personally think that we are in about the first inning of this meltdown and that it will be, for most companies, the number one business environment factor to consider.

Some postscripts:

1) An economist/professor, Nouriel Roubini , who through his blog, has best nailed everything that has happened so far in the credit-bubble meltdown, has just made a 12/11 post on “the debate is shifting toward a hard landing recession in 2008”. The guy also gets more comments — deservedly so — than anyone out there. Here is the link:  http://www.rgemonitor.com/blog/roubini/231693.

2) The Fed just lowered the discount rate by .25% and the fed funds rate by .25%; everyone thought the fed funds rate was going to be .50%. The global markets tanked saying — I believe — “we are heading into a deflationary recession Dr. Bernanke; you have done too little too late.”

3) As Goldman Sachs continued to crank out bogus derivatives the first half of this year, they were also shorting the stuff. When the fraud-lawsuit avalanche arrives, can you see Secretary Paulson sitting on the hot seat being asked what he knew about this ethically challenged activity when he was co-chairman of GS?

2008 PLANNING: MORE THOUGHTS; GUIDELINES; QUESTIONS

Here are a few more 2008-thoughts that come to mine:

a.                          No book can give us a recipe for what is the best strategic path forward for our particular business within its own unique and shifting context. Unlike sports – where the rules, tools and boundaries don’t change good businesses are always innovating to change the rules to win. In the longer view, products require different categories of innovation as they move through their respective life cycles. And, eventually, even the processes and technologies that underlie industries also change (horse to car) which wipes out most traditional competitors. In every firm’s competitive context there is a cumulative amount of innovation that is always going on which must not only be reacted to, but proactively seized to continuously create unique, rewarding value. As environmental change rates increase, the average winning streaks for “great firms” continue to shorten.

b.                          Sports teams are a lot like service businesses in the sense that the collective performance of the people is the business; there usually aren’t huge, capital-asset or patented-technology barriers to entry. Getting a team of people to consistently work together at an outstanding level without getting arrogant and starting to slack off is difficult. If our firm has made great money for the past few years, because of the effects of the global credit bubble, how do we turnaround corporate hubris? I saw an estimate that Wall Street bonuses will total about $34B for 2007 while the shareholders have seen a loss of $75B and climbing for the year. The forward-looking, stock market obviously doesn’t think that the next six months will be as good as backward-looking incentive payouts may be leading employees to think.

c.                          Service firm managers must continuously work on trying to get reinforcing success (virtuous) cycles going while nipping losing (vicious) cycles before they really become visible. There are no status quo, steady-as-she-goes personnel performance graphs; human systems are always in a dynamic flux of proactively improving and innovating or relaxing and falling behind, especially when industry conditions have been floating all players to several years of record profits, until the tide turns.

d.                          In many service firms, only about 10% of the employees are the real game changers for today and tomorrow. Top management should have individual cultivation programs going on for these key employees to: keep them; keep them motivated; and remove any hurdles on their respective performance/growth paths. One client estimates that they get a 20 to 1 annual ROI on the out of pocket expenditures for their “tiger plans”. At the other extreme, token Christmas-party gifts for all may feel good, but it will not affect 2008 results. What are our “tiger plans” for 2008? Ask the tigers what they need and want; write it down; review, revise and revive it monthly in about 30 minutes per tiger.

e.                          If a planning team gets quickly supportive of an idea for 2008 implementation, it will yield insignificant results. If everyone already has the words and categorical concepts in their heads for understanding a “new” idea, then: isn’t it likely to be the same old industry/groupthink stuff, perhaps in a new dress? Trying harder at the past is nice, but it won’t deliver compelling new value to best target customers in the right, best niche for a particular profit center. How do we get more of those kind of ideas? How should we live with a lot of better ideas for a while to let them become more understood, refined and winnowed until we have one or two great ideas that could deliver valuable, innovative results for a company’s unique, present reality and immediate future?

f.                          For a proactive initiative to have a chance of making a significant impact, it has to be initially confusing to the team and then scary to implement; otherwise, the team is not understanding and learning enough new stuff with which to pursue new paths with real potential. There are no roadmaps for creating important, new value propositions. If a plan feels comfortable and doable to all, the company is on its way to maintaining its spot in the middle of the industry herd that will all do only what industry conditions will provide.

g.                          Many firms that have been tied into the epic housing bubble are now in radical downsize mode. That’s good; by all means do what is necessary to survive. But, where is the simultaneous infusion of innovation as opposed to the lets-just-try-harder in conventional ways drill?

h.                         In independent distribution channels for mature products, I have recently facilitated sessions between distributors and either their key suppliers or their key customers. Some of the biggest breakthrough innovations still unrealized within most independent distribution channels are those that must be co-created by channel partners inter-business process innovations. Why have not more channel firms, for example, figured out how to achieve Wal-Mart type continuous replenishment economics 20 years after WMT first proved it? Why have not more distributors created truly Amazon.com type interactive web capabilities for their customers that also make “long-tail”, niche-item selling profitable 10 years after Amazon started doing it? If every channel partner has its own, on-premise, legacy IT system with core design elements that date back 20 or more years, then there will be big, inter-business, IT-processing challenges. How could on-demand software either replace or work around these hurdles?

i.                           Where will we get the discipline going forward to stick to the true, right principles and goals that make good sense for the company over the next 5 to 10 years? Who in the company is thinking about 2008 plans, plus the longer term with bi-focal harmony? When the King has a mood run who in the management court can calm him down and help him to stay on the long-term path that he too knows is right?

j.                           What about new products? Haven’t they always been the life blood of growing distributors? If we think in terms of the life cycle of both an industry channel and its products, that isn’t the case. Most mature product channels have end-users begging for lower total procurement cost process solutions for 90% of their spend. How can we address those needs both more and better? There are two categories of “new products”, however, that do seem to be on many channel players’ minds that get some extra time below: private label and green.

SCOTT BENFIELD’S 5^TH BOOK ON PRIVATE LABEL GOODS

In tougher times, every firm is looking for ways to grow profits. Many have turned to sourcing and selling what appear to be more profitable private label goods, and others have gotten creative on how they might raise prices and tighten terms to different niches of customers, especially the ones that are unprofitable to begin with. Well the answer-man for both of these ideas is: Scott Benfield.

Scott is a distribution consultant whom I have known and admired for a long time. What I like about Scott is that he likes to do true, grass-roots research on topics that he thinks are important to the independent distribution world and that he gets both the big picture and the nitty-gritty detail. Scott is getting ready to publish his 5^th book entitled: Disruption In The Channel: The New Realities of Distributors and Manufacturers in a Global Economy.

As I did a quick read through the manuscript, it is substantially on the why’s, what’s, how’s and who’s of private label outsourcing from Asia. But, a chunk of the content is also allocated to what manufacturers should do about this trend. The authors’ (he has a co-author on this one) findings and conclusions are built on hundreds of hours of survey and interview work across a wide spectrum of both distributors and manufacturers. I would posit that anyone who is spending any time on the “private label” trend will get somewhere between a good to a great return on their money/time investment in this book.

If anyone in reader land would like to get the full promotional story on this book and find out when and how it will be shortly available, feel free to contact Scott directly at: benfldgp@aol.com; or, 630-428-9311.

While you are at it, you might also inquire about his service for helping distribution firms create their own customized pricing and terms database. By raising prices and tightening terms in many, customer-niche-focused ways that Scott meticulously identifies, I have had clients who have doubled their operating profits or better without losing any sales volume. Tell him I sent you!

GREEN PRODUCTS? GORE’S INCONVENIENT OVERSIGHTS

I have had a few clients ask me what I think about moving more aggressively into marketing green products in 2008. The right answer to any complicated question is “it depends” on lots of factors. One phenomenon that I am wary of is how “green” seems to be following the same marketing trends of “low carb” and “fat lite” food items. In the past, when these diet products started taking off, it got to the point, where companies could reduce fat content by a tad, put “lite” on the label and sell both good volume at impressively higher prices justifying two lines of product: standard and special diet.

In your channel, how big an impact will your green product options really have on the environment is one philosophical issue. The other issues, of course, are: will the products sell regardless of whether they are really economically effective for the environment; and; what happens to your total economics when you stock secondary green products that will cannibalize the first line of products that you will usually still stock. Selling personal, ingest-the-food or put-the-cosmetic-on-your-body products support much higher prices and margins than green commercial products. So, the math for green-in-the-consumer-channels is not the same math for commercial or impersonal products. Don’t get caught in a resource-trap, line-extension move.

If you are selling a one-stop-shop array of items to a tight target of customers, than you can do some quick survey work to find out just how important the green sub-category is to that niche. But, be wary of selling “green” across a number of non-consumer customer segments.

And what about global warming anyway? I haven’t heard our latest Nobel Peace Prize recipient ever dig into questions like:

·                           Do you ever wonder how North America could have gotten so cold to have glaciers creating Long Island?

·                           How did the planet get so warm that Greenland got its name and was used for farming and good, live-stock grazing around 1000AD before man-made C02?!

·                           Are there other longer-term, temperature cycles that have to do with the Earth’s orbit; its axis rotation; and sun spot activity?

·                           If such cycles do exist and could cause the ice age and the Green in Greenland, how big a deal (what percent of the total global warming effect) could be due to man made carbon emissions?

·                           If you were a scientist on a university campus looking for government (political) funding and political credibility with the college community, would you raise more money and fans by seeking to prove or disprove mankind’s impact on global warming?

·                           If lots of scientific research is being done in narrow aspects, who will be the integrators that sum up all that is discovered? What media will give them a voice?

·                           What if carbon emissions are not a big deal, but human emotions still want to “solve global warming” what would you suggest if you were a Presidential candidate for 2008?

If you would like to read more on what really causes global warming, here is a link to an article by a guy that I know extremely well and have trusted for my entire life J You might read the introduction, skim through the body of the paper looking at the charts and read the summary. Hard core students might then go back and read it all. http://www.americanthinker.com/2007/07/global_warming_and_solar_radia_1.html

That’s all for this commentary. Here’s wishing everyone a happy holiday season and a wonderful 2008!

Sincerely,

Bruce

bruce@merrifield.com