Do you believe?

"I believe in America. America has made my fortune"

Amerigo Bonasera
The Godfather

As I've watched the unfolding financial crisis come to the forefront of our world, I, like many have attempted to grasp its impact and look beyond the loss of a staggering amount of accumulated wealth. In doing so I could not help but think of Amerigo Bonasera. the funeral director from the Godfather. An Italian immigrant in 1940's New York, his opening remarks to the Godfather made it clear of his standing, his belief system and that he embodied the American dream. With all Americans, immigrant or otherwise, our country has been defined by our belief and embrace of the democratic form of capitalism that our country has practiced since before its founding. Beyond demonstrating a definitive confidence in our country and its system, Bonasera also makes it very clear to Don Corleone that he achieved the desired outcome of a belief in America - "my fortune".

So as I have watched Paulson and the various talking heads on tv over the past couple of days, I could not help but think about whether or not I still believed in America and the dream that this belief defines. Sadly, if the American dream is the ideology that has created a system solely focused on providing the opportunity to make my fortune, then I must say that I no longer believe. In saying that, I don't mean that we don't have the opportunity to make a fortune and to create wealth, because we will. What I am saying is that the underlying ideology of capitalism that has defined the American dream is dead because it can no longer support our current definition.

What began as a crawl towards government activism when Bear Stearns imploded became a full sprint towards a nationalized financial system when Paulson announced the bailout plan and the decision to take ownership in banks. In announcing this plan, the administration didn't just commit taxpayers dollars to fixing a clearly broken system, they also committed to a fundamental change in America's ideology of capitalism.

After thirty years of allowing the financial sector to scale the heights of deregulated capitalism and reap the apparently limitless profits it provided, the sector reached the top of the mountain. When the climb finally stopped the government and the financial Gods on Wall St. realized there were only two ways down. It could follow its ideology and find a way back itself no matter how ugly or painful that might be or it could call for a lifeline. Assessing the options available they blinked and quickly abandoned their ideology of deregulated free markets. Apparently, an unyielding commitment to an ideology is not an American trait when it has an actual cost.

By choosing the survival of certain financial institutions rather than staying true to the principals that have governed our financing philosophy our country has effectively consented to fundamental changes in how risk is quantified and collateralized. Changes in this ideology will most definitely lead to an over correction in lending standards. This will impact every aspect of our country as cheap risk has allowed us to leverage ourselves into a nation of borrowers who consumed far above rational levels.

By providing a bailout that appears to partially nationalize our financial system, our government has concluded that the financial sector can no longer be the winner. Deleveraging of the American consumer and by extension American business must occur. This can only be realized by changing the lending paradigm from one that worshiped at the altar of OPM to one where the extension of credit is once again a privilege. Consequently, the tolerance of risk, a core element of how the American dream has been financed and collateralized will be substantially altered.

The impact of what we are witnessing and experiencing will be nothing short of a fundamental shift in our society. What we don't currently know is what is the extent of the social change and how will it impact the American Dream? As I consider this question, I am obligated to think of it in the context of Bonasera as this may be where the answer lies. The definition of the American Dream has evolved quite a bit since the days of Bonasera as the self made man. What has also changed is the manner in which that dream is achieved.

In Bonasera's day and probably the days before his, the American Dream was achieved when one had a reasonable level of financial independence. Perhaps this meant ownership of a home or other property but most likely meant that you did not live paycheck to paycheck and had the cash to acquire desired goods and services. The American Dream today requires the ownership of at least one home, two cars, big screen TVs', and the credit/cash flow to ensure that you have the ability to dine out virtually any night and travel across the globe. For Bonasera, his success in achieving and maintaining the American Dream was likely financed by his own capacity for hard work and saving/sacrifice or by family and friends that were confident in him. Conversely, our American Dream has been financed by a dizzying array of financial institutions who were more than happy to encourage and provide the leverage to finance whatever our hearts have desired.

For individuals and businesses alike, the American Dream today is the pinnacle of consumerism. What happens when the system that has driven the mechanics of our quest for more and better can no longer support blatant consumerism? Mr. Jones, meet Mr. Bonasera. Now, in making this observation I am not implying that we are going to go back that far - we can't put the consumer genie back in the bottle. But, I believe that American consumerism will be more reflective of Bonasera's American Dream than the one I have grown up with.

So, if I am to look forward three or five years, what do I envision? Here are some thoughts that I believe will occur:

1. Home ownership will no longer be practical for everyone. Buying a house will once again require a good chunk of cash in and it won't be realistic for most Americans to have $60,000 - $100,000 in cash to put into a home.
2. A continual decline in housing prices with eventual appreciation being relatively modest. The return on investment just won't be there and the general costs of ownership will make renting more attractive.
3. The return of the lay-away desk at your local Wal-Mart, Target and Kohl's. Credit cards will still be available, but credit will be focused towards those with the means to maintain zero or low balances. Retailers that cater to the poor and the lower spectrum of the middle class will need to adapt to reflect the change in credit.
4. As access to cash becomes more critical to running our daily lives, the savings rate will likely increase which will provide stability and soundness to the economy.
   
5. The reemergence of the community bank and the credit union. While lending will continue to become more and more transactional, local institutions that focus their activities on all of the Five C's of lending will find an audience and market from companies and individuals who have been shut out of the larger system.
6. The formalization of peer lending. With tighter access credits cards, start ups and early stage businesses and individuals will need to look to their family, friends and fools to secure the initial capital to finance their business dreams. However whereas in the past this was a loosely monitored and under-managed segment of lending, technology will allow for this to become more sophisticated and pervasive.
7. Consumer driven industries that provide luxuries or convenience will be significantly impacted. Dining out will not be as prevalent and home entertainment options will become far more competitive and desirable for a society that cannot finance every trip to Applebees with a Visa.
   
8. As consumerism is down-scaled, the world will need to get used to slower growth. Investing in the stock market will be impacted, because the earnings growth will not be there to drive appreciation of the stock price.
9. With lower market returns, the country will need to reconsider its commitment to the entitlement society that we have created. The sizable baby boom generation that is just beginning its retirements will look to the government to subsidize their market losses. The generations behind them will revolt which will create an interesting dynamic among three or four generations that may be living in one house.
10. Smart people and businesses that have good businesses and concepts that work hard and can successfully function within the time-tested fundamentals of business and finance will continue to thrive.

I recognize that this is a rather lengthy post and I still haven't answered the question I have posed to myself - "do I believe in America"? As I ponder all that I have written and all I thought about I can only conclude that I do believe. Despite the current circumstances and the challenges ahead that I see I still believe that here is where I will make my fortune because as screwed up as it is, its still the most conducive country for wealth creation. And, while it may not be the fortune I and my generation had defined for ourselves, I can sleep well tonight knowing that above all it will still be mine.

Quick Hits

A couple of recent newspaper articles caught my attention, so I thought I would pass them along this morning.

In yesterday's New York Times, Thomas Friedman of the World is Flat fame, published an op-ed and the future of the US economy. Friedman makes some great points and they actually tie in quite nicely to an interesting book by John Kao entitled Innovation Nation about innovation that I am in the process of reading. Bottom line for Friedman and Kao is that for the United States to retain its position it needs to focus on continuous innovation within all sectors of the economy.

The other article that is worth a read is this one by Rob Weisman that appeared in yesterday's Boston Globe. The article targets the question of what is more important for leadership - youth and exuberance or age and experience. While it should be no surprise that Weisman's article didn't choose one or the other, I thought the article was interesting because it tied into a couple of the key points we made in our last post regarding criteria for choosing a successor.

I hope you enjoy the articles and have a good week.

The Question of Succession

Welcome back from the summer! I hope everyone out there enjoyed their vacations. In as much as the summer was fun, its great that its past because its time to get back to work! The fall is my favorite time of year to focus on business I find the season revitalizing - the crispness of the air seems to create a sense of urgency and a renewed focus on business and moving life forward.

As much as I enjoy the energy that fall provides, it also helps highlight the need to prepare for the "autumn of our lives". This means that succession planning should, if it is not already, be a topic to tackle in the coming months as it is too critical to leave to chance. Coincidentally, this fall is also our country's opportunity to do its own succession planning. As the polls seem to indicate, our country is equally undecided on who should be the next president. I have been torn between the two candidates - the maverick and independent nature of McCain is appealing as is the message of hope and confidence that Obama exudes.

I've long stopped worrying about what political candidates positions on the campaign trail as they are always negotiable soundbites (see moderate Republican candidate George W. Bush in 2000). The only way then to choose a political candidate is by measuring their actions while a candidate. From a business perspective, the most critical decision we make is the selection and development of our management teams which by extension implies our eventual successer. As the Commander-in-Chief, the most critical action a presidential candidate takes during the campaign is the selection of his Vice President - his/her own succession plan for the country.

Accordingly, with both picks announced, I thought it would be appropriate to apply what I consider the three primary tenants of succession planning to the picks to see how the candidates have done in their first decision as an executive. In considering a successor within a succession planning exercise, we ask these three questions:

1. Does the potential successor have enough of the necessary skill set and experience to inspire confidence within the organization in the event they need to immediately step into the leadership position?
2. Does the potential successor have a long enough runway to be a true successor; i.e. do they have the ability to be positioned to lead for a period of time that ensures organizational stability and establishes continuity of values/strategy?
3. Will the potential successor have the support of the organization? Will the organization rally around the successor or is this person a lightning rod, one that will create divisive fissures within the organization that will distract and ultimately undermine it.

Before I begin assessing the two VP picks, let me state that it is not my intent to make a political statement or to politicize this blog; the views I am expressing here are only mine and not those of my firm. My purpose here is to utilize a timely topic to shed some insight into the importance of succession planning and ensuring smart decisions. With that being said, I'll start by looking at Joe Biden:

1. In as much as you can question the experience of any lifetime politician, by the nature of the experience required in the job description, its safe to say that Biden is a yes when it comes to the first question.
2. At 65 years old and a two time Democratic primary loser, Biden does not provide a long-term succession for the Obama vision or for the democratic party. An Obama loss likely makes the 2012 Democrats look like the 2008 Republican field.
   
3. Biden is on the edge here, but ultimately his baggage is typical of those of a politician. He's got the plagarism thing and a history of foot-in-mouth disease but there doesn't seem to be any true vitrol towards him or his views. He is what you expect of a career politician.

Next up is Sarah Polin:

1. I don't care how much you want to spin her time as governor and mayor, she does not have the experience on the national and global stage to warrant being the Vice President. Given the circus of the past couple of days regarding her selection and experience, it appears that her selection does not inspire confidence amongst the masses.
2. With this metric, she does measure up as she has the runway to become a big time player in national politics. Furthermore, her views are certainly aligned with those of the current administration and the base of the party, indicating that she will be able to provide the continuity of leadership that the party wants.
3. With Palin the Republicans think they found thier "Obama"; what they haven't realized yet is that they have likely found their "Hillary". She is opinionated, has controversial views and as her speech last night demonstrated, she is not afraid to be aggressive and take shots at her opponents - much like Hillary. The confluence of those traits typically mean people will like her or hate her; their is no middle ground. Bottom line - she is a lightning rod.

These picks are the polar opposites which makes them great examples when discussing the question of succession. As these gentlemen will surely attest, finding the right successor is never easy but a critical decision for a leader and a key barometer to measure a leader. Based on the basic tenants of choosing a succeser its clear that both could have done a better job with their selection.

In closing, when making your own succession decisions, carefully consider how your choices will fit into the three tenants I laid out. And, for comparative sake, consider them in the context of our Presidential candidates VP selections.

Summer Reading

Before I get into my picks and pans for summer reading, I wanted to comment on a couple of items. First of all, many thanks to all of you who attended my recent presentation for the RTC covering "Strategic Planning in a Downmarket". We had almost forty people on a Friday in July - great turnout and I greatly appreciate all of you attending and the fantastic questions I got.

No need to belabor the point, but what a sad fall for Fannie Mae. From one of only 11 companies identified as a Good to Great Company, to the subject of legislation providing a bailout. Just goes to show you how hard it is to sustain greatness. For an excellent breakdown on the recent bailout legislation, check out this post from Dealbreaker. No comments necessary on this, but as a fiscally responsible taxpayer, I cannot begin to tell you how disappointed I am in this legislation.

For more on the impact of the implosion of the housing market, check out this article from the New York Times on the challenges businesses are facing in getting bank loans. No surprise and I hate to say it, but I think secretly there are many banks happy about this about face. Many will tell you that for too long the easy money that was available was screwing up the balance of power between borrower and lender.

With those out of the way, on to the summer reading list. In providing this list, I'm only going to comment briefly on a couple of books - there are enough sources of reviews out there.

Buying In by Rob Walker. I've just about finished this and I'll be candid - I'm going to need to read it again to fully grasp all the key points about the concept of murketing. Fascinating read and I'm convinced that it will take a place of cocktail conversation starter for the Blink/Freakonomics/Tipping Point crowd.

Outsmart! How to Do What Your Competitors Can't by Jim Champy. This is a nice quick read that profiles a number of different companies, including Smith & Wesson on how they were able to think a little outside the box to gain a competitive advantage. At the end of each chapter the author provides a number of probing questions that I found interesting for assessment purposes.

The Breakthrough Company by Keith McFarland. Can't say that this one wasn't a disappointment as it was hyped as being in the family of Good to Great because of the extensive research that the author and his team undertook. Decent read but doesn't provide the "it moment" that you look for in a business classic. Still, if you got time to kill on the beach its worth giving a read.

In addition to these three, I would also recommend a classic to read. If you haven't read it yet, you must readThe Godfather by Mario Puzo, a classic business book that I refer to a on a constant basis. I'm bringing it with me to the beach this week for another read. In addition to these, I've put togehter an aggressive list for my week away. This includes:

• The Age of Speed by Vince Poscente - sent to me complimentary by the Entrepreneurs Organization. Somebody there thinks enough of it, so I thought I should give it a go.
• The E-Myth Revisted by Michael Gerber - I read this years and years ago when I didn't think it applied to me. Going to try it again now.
• Making Innovation Work by Tony Davila. With all apologies to Clayton Christenson, I'm still searching for a book on innovation that grabs me.
• The Granularity of Growth by Patrick Vigurie - it looked kind of interesting sitting on the bookshelf, so Ithought why not.

And, lest anyone think that all I'm going to do is read about business on my vacation, I am also going to pick up The Guns of August which covers the start of World War I. Enjoy your reading.

Fixing the Republican (and your local newspaper)

This past week I had the opportunity to spend a lot of unwanted quality time in airports and planes. It’s never good when a three-hour trip turns into eight. Needless to say, I had more time than I desired to read and think than I cared to have. Fortunately, it turned out to be a productive use of time as I came across an interesting article in the most recent issue of Business Week. The article, “Writing on the Wall (and the Web)” provides a commentary on the current state of the newspaper industry. Let’s just say it’s appropriate that they publish obituaries!

I’m normally not a sentimentalist about industries that have found themselves irrelevant or altogether extinct as there is usually a reason for it. After all, I don’t miss MS-DOS any more than I would miss buggy whips or freeze dried ice cream. That being said, as fan of the medium and a former newsboy I am disappointed that future generations will likely not have the opportunity to enjoy the full depth of the newspaper experience. I’ve always loved reading the paper and have since I was old enough to read. I would often ride my bicycle up to the nearest corner store and buy two or three newspapers to read; usually over breakfast at a diner by myself. There has always been a great joy in spreading the paper over the table and consuming its knowledge more voraciously than my eggs and bacon. I don’t get to do it much anymore, but reading the Boston Globe is a Sunday ritual for Amanda and I, regardless of where we are.

Note that I said the Boston Globe and not my hometown paper the Sunday Republican. We subscribe to the Globe because of the depth and content. A Sunday paper should take a least two hours to read and that hasn't been the case with the Republican in a long time. To be fair, up until recently we subscribed to the Republican but that was only because Amanda liked to have access to the local coupons. The subscription lapsed months ago, but for some reason we still receive the paper. I can only assume that circulation counts matter in setting ad rates and giving us a paper for free makes sense financially.

This past Sunday I happened to briefly read through the Republican as I hadn’t had the opportunity to get on Masslive to check out the local news. I was saddened by what I came across or rather what I didn’t read in the paper. There was essentially no business section, the editorial page was lacking, the local section was bland and much of the overall content seemed to be AP wire stories. This was not the paper I proudly delivered when I was growing up. Neither was it something that I would pay to have come to my house or I would buy in a store.

So as I sat in the Louisville airport and then the Charlotte airport reading my magazine I thought about what could be done to make our hometown paper relevant again; something that I would want to read as I eat my Top Pot Donut and drink my Grande Pike’s Peak coffee (Starbucks needs to pay me for this plug!). While brainstorming it I came up with three basic concepts that I think could help the Republican and other newspapers, particularly the smaller community types survive and transition into the digital age as viable business entities.

Partner with Local Publications
Do you know that the business section of the Republican essentially consists of a two-sided rehash of the past weeks Wall St. Journal articles? Do the publishers realize that there is a good chance that most of the people who read the business section actually read those articles during the week? Also, what does it communicate to the region and to companies considering locating their businesses here that we don’t have a business section that covers the local business scene? Wouldn’t it make sense to partner with someone that has a pulse on the region, has the reporting capacity and the advertiser network to generate ad revenue?

My suggestion to this challenge would be to have a branded Business West business section on Sundays. They can provide stories on local business topics and leverage their advertisers to sell more ads. The Republican can provide the print and distribution and they can split the revenue. It would be a win/win for both parties – Business West could expand its reach and the Republican could provide value content and ideally both would make money.

Beyond Business West, the same could be done with the Valley Advocate for the entertainment/living section and the Western Massachusetts Sports Journal could do the same with the sports section. Getting out the content side of the business would allow the Republican to focus its content generation on in-depth local stories and distribution.

Publish User Content
There is a reason why Blogs and other sources of individual created media are popular. User created content is unique in that it provides insight and perspective that one cannot find with traditional media. The Republican should embrace this concept and publish a section that is user generated content. I’m not talking letters to the editor, but insightful writings and artwork. Masslive has a whole blog section, why not take the best posts each week and print them in the paper? Taking that a step further, why not have the Masslive users choose what will get printed?

A Blended Approach
As more and more people get their news from online sources, newspapers need to find a way to attract these readers to the paper. Leveraging the strengths of each medium to create a blended news experience can do this. As an example you could have a review of a new music artist online and in the paper but within the newspaper provide a password for a free download of a song. The only way to get the song is to buy the paper.

Another potential way to blend the two would be to follow WRNX’s Save 30 model and provide discounts on gift certificates and other items to print subscribers. They would need a code that would be found in the paper to go online and buy the item. Or, you can have your advertisers provide specific codes for their ads leading them to online coupons and shopping. In the long-term shotcodes will allow this to happen with the snap of a cell phone camera, but until then it would be an easy way to blend the offline with the online.

Whether my ideas make sense or not, the newspaper industry needs some creative thinking if its going to remain a viable business. Clearly there are many minds working on the issue as this other article in Business Week attests to. As always, we are willing to contribute our two cents to a business challenge, so if you own or run a newspaper, send us an email or post a comment - we'll be happy to help!

Its been a while.....

So this blogging thing is not as easy as I figured it would be. Finding inspiration for a particular topic takes a while and then it can be rather time consuming to get it all down. Since I last posted I have probably started half a dozen posts and have discarded them all because I didn't like the flow, there wasn't enough to the idea or the concept turned out to be really lame!

I've got a pretty good one that I've been formulating and will probably publish it soon but in the meantime, I thought I would take a bit of a Larry King approach and ramble off some thoughts that I have had recently. Here they are!

I can't decide if I like what Starbucks is doing strategically but I do like the fact that they seem to have a strong sense of urgency. Right or wrong they are being aggressive in their decision making and trying new things. Often times you are better off making a bad decision than no decision at all and it appears that Howard Schultz agrees with that thinking. As a regular customer I can tell you the difference is noticeable in customer service. The launch of the Pike's Place coffee was brilliant as is the loyalty card. I'm not sure about the extensive marketing campaign and I don't like the fact they are giving product away, but at least they are trying.

Good news on the economic front. The Fed just recently announced that inflation in March eased to .2% from .3% in February. This drop occurred despite the largest increase in food prices in 18 years. Fortunately, the increase in food prices was offset by reductions in energy costs. Huh? Based on the government accounting process they were able to determine that energy costs were flat an gasoline actually decreased by 2 percent! It appears that the government learned a thing or two from the Enron accountants.

One other Starbucks note. As mentioned, I am in the Chicopee Starbucks on a daily basis, having my Pikes Place and my Top Pot Donut (alas I'm beginning to feel like a donut). On my visits I often talk to the partners about the products and I also like to listen in and hear what people are ordering. What I've noticed is that Starbucks appears to be busier than ever. I've also noticed that the orders are for regular drip coffee or the Cafe Americano which is a lot cheaper than their other caffeine crack-like drinks. What that tells me is that Starbucks is still driving traffic but the sale per customer visit is dropping. They need to find a way to increase that -and no the answer is not by selling CD's!

I've got a brilliant idea. Let's grow food so we can add it to gas. Yes, it will probably have adverse environmental impacts and make both food and gas more expensive, but so what - inflation is down! By the way, don't forget to send that government check to the farmers so they won't farm - we gotta make sure the farmer can make money. This message was brought to you by the Farm Caucus.

In my opinion there is no better shopping or customer service experience than an Apple store. The staff is exceptionally knowledgeable, the products are presented in a great layout and the genius bar is pure brilliance. A couple of weeks ago my Macbook was having some technical issues. I brought it in and they determined that it needed some surgery to replace some parts. Within two and a half hours I had my machine back better than ever. Can you imagine that with any other store? Then, when it comes time to check out, you don't even need to bother standing in line as each staff person is equipped with a credit card unit to ring up your purchases. They will also email the receipt to you so you don't lose it. Everyone who has customers should go to an Apple store to see what they can learn about their business.

Here it is: Washington's response to the energy crisis. John McCain and Hillary Clinton think we should suspend the federal gas tax of 3.4 cents per gallon. George Bush thinks we should expand drilling in the Arctic. Good to see those neurons firing on all cylinders in Washington.

I read this morning in the Globe that the Zoots dry cleaning chain has folded. I used to be a customer of Zoots because I thought it had a great concept for a fragmented industry - 24/7 pickup, onsite tailoring, online monitoring, great locations, etc. Unfortunately, they did an absolutely horrible job in cleaning garments. I never lost anything but it just seemed that nothing ever really got cleaned. I can remember the last time I patronized them I brought in a suit with a stain; watched them mark the stain; the stain was still there when I picked it up. Amanda ended up getting it out. It once again proves that a great strategy doesn't mean a thing if you can't execute.

I've become addicted to the Huffington Post. I'm an information junkie and its constantly got new posts on everything from politics to business to entertainment. I've been particularly enthralled with the Democratic primary (better than anything Hollywood could come up with; oh wait Hollywood has created this). If your a blog junkie like me, here are a couple of my other favorites: Noah Wasserman's Founder Frustrations blog; Verne Harnish's the Growth Guy blog; VC/Angel?Private Equity gossip board The Funded; business help site Small Biz Trends; and brand insight from the Branding Strategy Insider.

Lastly, as I've stated before I'm by no means an expert on the economy, but I'm convinced that this is going to be a long-term recession that will have some serious impacts on the way the American economy functions in the future. My basic belief is that the financial industry disregarded the fundamental rules of lending an did so with the worst possible people - the American consumer. This is like feeding a gremlin after midnight and the impact has been just as destructive. Washington's response has been to get the consumer to spend even more which is how previous recessions were overcome. Unfortunately, consumer spending will only make the problem worse. To get the economy corrected the financial industry, Washington and the American consumer are going to have to get religion about leverage and property values. It could be ugly as I don't think we've seen anything yet.

So there are my thoughts on the world today. Look for another post shortly.

The Genius of Apple

As a break from my daily routine I often like to think strategically about other companies. I particularly like to look at some of the bigger companies that impact our daily lives. Starbucks is one that I like to watch as is Dell. One that has caught my eye lately and that I find intriguing is Apple. Apple was recently named the most admired company in the world by Fortune Magazine. It's a good article as is the follow on piece about Steve Jobs. What makes Apple particularly interesting to me is their BHAG - "to democratize technology by providing products everyone will want to use". Apple pursues their BHAG relentlessly and utilizes this passion in their product development process which consists of three questions: : 1) what do we hate; 2) what do we have the technology to make; and 3) what would we like to own?

This is classic Blue Ocean Strategy. By focusing on democratizing technology Apple has transformed the digital market from one that focused on owning technical standards to creating products that people wanted to have. That is why today, I'm writing this blog on a Mac; its current sales growth is double the next competitor. As I type, I'm listening to music on iTunes; now the second largest music retailer in the world. Later, I'll go to the gym and will listen to those tunes on my iPod; that has 70% of the market for digital music players. And, the iPhone has been such a rage that people stood in line to buy one and Apple expects to ship 10 million this year.

Yesterday was an interesting news day for Apple watchers as word leaked that Apple is strongly considering some type of subscription model for music. As is typical of news about Apple moves, details of the plan are sketchy at the best so its virtually impossible to comment on the merits of the model. Rather, what is interesting about this "news" is that it appears to the pundits and followers of Apple that this is a significant change in Apple's strategic thinking. Steve Jobs is on the record as being against a subscription model as he believes that consumers want to own their music. If Apple does in fact come out with this type of model it would appear to signal a strategic change. Personally, I'm not sure that this really isn't just a long planned strategic move that gets Apple closer to its BHAG.

From a historical perspective I'm inclined to agree with Jobs about music ownership. As much as I use iTunes I have historically only bought singles, not albums online. There is something I like about having that CD in hand and know that my ownership is not limited. Given the success of the iTunes model and the lack of success for subscription models like Napster and Rhapsody, it seems that the market concurs.

However, as time has gone by I have gotten comfortable with online music and I have begun buying whole albums. I'm now buying all my music online. Because its all online, I don't necessarily feel like I own my music - that attachment is gone. To be honest, I don't miss the experience of having a CD in hand because I like the ease and depth of iTunes. Three years ago when I got my first iPod I did so because I didn't like the subscription model. Today I would be comfortable with a subscription model because the music ownership no longer has a personal connection for me. Rather, the idea of unlimited music at a fixed cost is hugely appealing.

Consider my conversion within this context. Apple indicates that it has sold 140 million iPods and over 4 billion songs on iTunes! It stands to reason that if a user like myself can get comfortable with buying all their music online and lose that attachment to the ownership aspect of music that the other 140 million users could as well. Assuming so, perhaps Jobs has determined that a tipping point has been reached in the need for music ownership.

The question then becomes is a subscription model a dramatic change in strategic thinking for Apple or a predetermined recognition that the need to own the music would disappear? If I didn't understand Apple's BHAG and approach I would concur with the pundits that this is a strategic change. However, knowing what we know about Apple its pretty clear that this strategic move has long been a foregone conclusion. Why do I say that? Well, think about the BHAG - "democratize technology". What is more democratic - ownership or unlimited access? Obviously unlimited access is as the ability to own is limited by the amount of capital you have to acquire. Also, unlimited access implies freedom of choice - I can listen to whatever I want whenever I want. The only constraints are my imagination and music tastes. In Apple's BHAG subscription based music becomes the ultimate demonstration of the democratization of technology!

Many will argue that Apple has been less than democratic with iTunes. After all, you can't play it on any other player besides the iPod. Also, Apple has been adamant about its pricing model when dealing with the music companies. All true, but if Apple determined long ago that the market was not ready for subscription music why would it bother pursuing that model? Additionally, by waiting for the tipping point to arrive Apple has been able to build a dominant market position in the music business. When subscription music finally arrives all those iPod owners will signing up for Apple's offering. And, as anyone in the banking, cable and telephone industry can tell you, its very expensive to convert customers. That's because people only change those services if the case for doing so is extremely compelling because its a pain to do so. Assuming Apple can continue to meet their customers expectations defections to other services will be limited.

The bottom line for me is that I think a subscription model done right could be pure genius for Apple. The reoccurring revenue they will generate will be mind boggling - do the math at any subscription number. If Apple can truly democratize technology with a subscription model, they will have happy customers and very happy shareholders.

So there you have it.

Recommended Cool Stuff

Being the inquisitive mind that I am, I am always on the lookout for cool stuff that can actually help our businesses run more efficiently and effectively. Since the theme of our week has been riding the recession, I thought I would further contribute to your cost saving efforts with some recommendations and links to tools that I have found. Many of these tools are free and can actually help you cut costs if you decide to use them. In no particular order, here are some of the ones that I have come across and that I am using.

On the telecommunications front we have a couple of different technologies that I have been using as of late. The first is Skype. Skype allows you to call anybody on Skype free of charge. You can also buy time and call a regular phone for a very reasonable price or for something crazy like $3 a month you can get unlimited calling. They also have video capabilities so you can see who you are talking to as well. I use Skype through my computer but you can also buy a standard handset to use it. We've been doing international conference calls with it for free and the quality is good.

Another telecommunications offering we use is Free Conference. With Free Conference you can either set up a 800 number for 10 cents a minute or get a general number and local rates apply. With Free Conference there are no more thousand dollar conference calls. I believe there are a couple of other competitors in this space, so Google "free conference calls" to find the others.

We are also beginning to use YuuGuu. This is a free web conferencing technology that allows unlimited participants on a web conference. For those of you spending a fortune on Web X, this is a great alternative. You can also use this to collaborate with others through the web. You can share documents and your photos and all sorts of other stuff on your computer.

For those of you who are not fortunate enough to use a Mac and the new Time Machine for backing up data, a great and economical solution is Mozy. Pricing is as cheap as $3.95 per month for online back up. A lot cheaper than having a server and certainly better than having everything lost when your Windows machine inevitably crashes!

Boot strapping your business and maxed out on the credit cards or don't want to pay the "market rate" of 22%? Or, got some extra cash lying around and want to get better rates than what you can get from your bank? Then check out some of the peer-to-peer lending sites out there that let you borrow up to $25K. The biggest is Prosper. But a couple others are coming on strong and have different structures. Also check out Zopa and Lending Club.

Does your son/daughter/wife or best friend want to borrow money from you? Formalize the process with Virgin Money USA. Formerly Circle Lending it provides all the documentation necessary to formalize the loan and they will even do the collections for you at a reasonable price.

Those of us in the service business know what a pain in the ass it is to track our time and do our billing. Check out Fresh Books which is an online invoicing and time tracking software. I'm just beginning to play around with this, but its pretty affordable and from what I've seen it does a pretty good job.

On the personal money management side there are a number of financial manager websites out there that warrant taking a look. A couple to check out include Mint, Wesabe and Smart Hippo. I can't provide recommendations on them yet, but each looks pretty cool and given that the recession is going to make us all watch our spending a little more closely they are definitely worth exploring to see which one works best for you.

If your like me and don't necessarily think in a straight line, it might be time to look into Mind Mapping software which allows you to actually connect those random thoughts together. I use Mind Jet, which I believe is the best software out there. I particularly like it because I have handwriting that even I can't read, so when I'm in a meeting I just Mind Map the meeting and save it. You can then export it to a Word document or a Powerpoint. Reasonably priced at something like $79.95.

Lastly, we can't be all work and no play, so check out GameTap. They have close to 1,000 games that you can play online. This includes some classic arcade games like Pac Man, Galaga, Dig Dug and Burger Time. They have free games or you can join the service for $9.99 a month. Amanda, if your reading this, I never ever have time to play!

That is all I have for today, if your like me and in the office on this snowy day, take some time to explore these sites. It will be worthwhile.

Ride the Recession Wave

Interesting news day today. If you believe the economists, we are not in a recession. According to President George we are not headed into a recession. Hmmm. I have to admit that there is a part of me that enjoys delusional people. I mean I can be an optimist as much as the next guy, but at some point you need to recognize that Elvis has left the building and Rick Pitino was right - Larry Bird is not walking back through the door. So let's do it, let's make the official announcement of what all of us who make the economy run already know - ladies and gentlemen we are in a recession! (applause please)

Ok, this is not news to cheer about as we know there is a lot of pain being inflicted and there will be casualties. If we are not careful it may get you, me and my best friend's sister's boyfriend's brother's girlfriend plus a bunch of other people we don't know. But, as GI Joe once said - "knowing is half the battle" and if we are going to battle the recession we better face it head on. Therefore in officially acknowledging its arrival, I am pleased to provide five simple tips on how to ride the recession wave. The advice is free of charge, but donations are accepted!

Focus on what you do best
Yes, tip one is boring and for most of us pretty obvious, but you would be amazed at how many companies fail to get back to the basics. Your customers came to you and stay with you because of what you do well. So my first piece of advice is to retrench and focus on doing what made you successful in the first place. Starbucks is a great example of this. In as much as I hope they don't do something stupid with their coffee prices, I applaud them for announcing to the world that they stopped doing their core well. Shutting down for five hours to train employees cost a lot of money and shows some real commitment and testicular fortitude!

Get Creative about costs
Human nature seems to require us to cut the wrong costs as soon as things go bad. No raises for our best people this year, cut training, stop advertising, reduce research/development, etc. Please, I beg you, don't do it! Tell your controller to step back and think for a minute before slashing everything. Instead of just cutting costs, be creative in considering what to cut. I advise our customers to ask themselves and their management team to ask themselves two questions: 1) - what can we do to reduce the cost of producing/delivering our product/service by 25% without impacting our customer value proposition? 2) - what can we do to run our business more efficiently today without impacting our ability to grow? Positioning the cost cutting discussion in these terms should lead to innovative solutions that will help the business today and tomorrow while not being demoralizing to management and staff. It takes a negative and creates a positive that will hopefully position your company to ride out the downturn and come out faster/stronger than everyone else.

Invest in your brand
One of the first cost casualties when times get tough is the investment in branding initiatives such as new collateral, advertising campaigns, updating websites, etc. Go against conventional wisdom and take advantage of their unwillingness to invest. I know its painful and expensive, but by keeping your brand fresh and in the public your demonstrating to both current and potential customers that you are here to stay and that your confident about your business. Your brand is one of your most important assets, so treat it accordingly.

Get cozy with your best customers
Your best customers are your best customers for a reason. Unfortunately, if the 80/20 rule is right most of us are typically spending far too much time dealing with our smaller, problem child customers. Or, we are so focused on getting the next customer we forgot about why we got the good one in the first place. My advice - stop it! It's a lot easier and less expensive to grow an existing customer than to get a new one so spend some quality time with the ones you already have. Doing so is pretty easy as you already have the relationship. Take them lunch/dinner, out for a drink or just get them on the phone to talk. One of the things I try to do from time to time is engage my customers in general business conversations that I can steer towards specifics of their business. It almost always leads to more work.

The bottom line is that at some point your competitors will go after your best customer. You've got a much better chance of keeping them and surviving the tough times if you've built and managed the relationship . Now is the time to invest in your relationships.

Think
Its a concept that is largely underrated but one that really deserves most of your attention. I try to take one day a month to get out of the office and do nothing but think. In doing so, I might spend the day reading or just driving around but whatever it is, it provides me an opportunity to recharge my batteries and step away from the noise created by the day-to-day business challenges. In doing so I get to work on my business rather than work in my business. To be honest some of my best ideas (like this blog post) come from this process. Even if you can't get away for a full day, find an afternoon or two where you can do it. You'll be amazed at the solutions you come up with and the results you achieve.

So there you go, my free advice for riding out the recession. Hopefully it helps and if not, well you get what you pay for!

Starbucks - Just Say No!

Consider the recent news for Starbuck's:

• Overall transactions per store were down in the last quarter for the first time ever
  
• Dairy prices have significantly increased, negatively impacting margins
  
• Economic woes have consumers spending money on $3 a gallon gas instead of $4 lattes
• McDonald's has decided to throw itself completely into the coffee business; Dunkin Donuts continues its nationwide expansion
• Share price in the past year has been cut in half
  

Starbucks response to these market conditions was to fire its CEO and restore Howard Schultz to his throne as CEO. With his return Schultz sent a message to all employees that stated:

"We will be refocusing our entire organisation on the Starbucks experience, by going back to our heritage and what made us so successful in the first place. 'We are going to play to our strengths ... ethically sourcing and roasting the highest-quality coffee in the world; the relentless focus on our customers; the trust we have built with our people; and the smart, entrepreneurial risk-taking, innovation and creativity that are the hallmarks of our company."

Recognizing that the Company had been growing too fast, Schultz's first move was to announce that they were going to slow down the number of store openings this year. Good first move. His second move was announced this week - in the Seattle market the Company is test marketing the introduction of an 8oz cup of coffee for $1 and free refills. NO!

Wait a second - I'm upset about a company that I patronize almost everyday cutting their price? Yes I am! While it might be nice to get my Breakfast Blend for half price I'm extremely disappointed because its a very bad strategic move. Let me explain. You can argue that Starbuck's is a poster child of the Blue Ocean Strategy. It built its entire business on overcharging for a commodity and convincing us that overpaying was a good idea because the Starbuck's experience was worth it. It revolutionized the coffee house business and no competitor has been close in matching it. Now, at the first sign of trouble the Company's first real strategic move is to take a classic red ocean approach - lower prices, give the product away! Rather than focus on what made Starbuck's successful - customer experience, great coffee consistent customer service and innovative products its going the McDonald's and Wendy's dollar menu route.

The most overpriced mass consumer product in the history of the world is suddenly selling for a dollar with free refills? Great news you say its just one product and it shows they are focused on making the customer happy. Wrong - believe it or not, rather than build goodwill with its loyal caffeine addicted customers it sends the opposite message. Whether anyone realizes it or not, with this move Starbuck's is coming clean and acknowledging that they have lied to us for all these years. Even though we knew that coffee and lattes really didn't need to cost $4 we bought into it because we believed in Starbuck's, believed in the experience. and embraced the brand. There was a small part of us that wore our Starbuck's patronage on our sleeve. Being a Starbucks customer showed we were smarter than others because we had a knowledge of coffee and we were proud of our ability to pay ridiculous prices for a cup of coffee. Now, we find out that Starbuck's knew all along that they were price gouging and that there was nothing special about their product. After all, if I can get a bottomless cup of coffee for a buck at any local diner why should I go to Starbuck's anymore?

And, don't think it stops with a cup of coffee. In making this move Starbuck's has announced that price is an important factor in making your coffee purchasing decision. It will become ingrained in the mind of the consumer and soon it will impact other products. Once one price falls, the next product is bound to fall as well. Its the cold war domino theory modified for the breakfast wars!

Sadly, by pursuing this strategy, they are playing into McDonald's and Dunkin Donuts hands. Starbuck's currently has the upper hand in the coffee wars because of its market share and value its built as a brand. Before this move, there was no way that I would to to McDonald's for coffee, no matter what the price - its McDonald's and as we know about McDonalds, you get what you pay for. Now, I'll consider it because Starbuck's has informed me that if they can sell their product for the same price as McDonald's then there can't be much different. By engaging in a price war, its allowed its competitors to choose the field of battle. Price wars are those guys forte - they are transactional in nature and providing their product as cheap as possible is ingrained in their corporate DNA. That's not the case with Starbucks who have had an institutional arrogance about their importance for years and have been living off of huge margins. This decision reinforces that point. Smart companies don't engage in price wars unless they are positioned to win a price war.

Sadly, I fear that if this move goes company wide it will signal the beginning of the end of the Starbucks era. While it will try and try it will never return to its glory days when customers lined up to spend $4 on a double mocha latte. With one bad strategic move Starbuck's will acknowledge to the market that coffee is a commodity. Welcome to the red ocean Mr. Schultz.

By the way, on the day the $1 coffee and free refill was announced, Starbucks shares jumped 7%