McKinsey on Economic Regulation: Calling a Spade a Spade...

...or stating the Obvious?


Mckinsey Quarterly just put out an article highlighting the need in the current economic scenario for an increased cooperation between business leaders and regulators. The article states that "As concern over global problems mounts, executives and regulators have everything to gain from building relationships based on trust, and developing solutions that benefit a wide range of stakeholders". First of all I think this is a key area to address as the average Joe asks how come their elected leaders stood by while the business machinery took the free markets doctrine to illogical extremes. If people were rational and self-regulating we wouldn't have the need for the police and the judicial system, and if businesses were rational we wouldn't need the FTC and the SEC. At the same time 2008 was not just about the failure of the free markets system and the article doesn't address some regulatory limitations on dealing with the special circumstances surrounding 2008. In spite of the breadth of the current economic problems, truth of the matter is that trouble began with capital markets and the blatant securitization of all kinds of assets, the true economic risks of which regulators weren't really equipped to assess. Secondly, to some extent the economy validated at least one aspect of the free markets philosophy- survival of the fittest. Take the US domestic automotive sector for instance- these guys were in trouble long before the housing bubble and sub-prime crisis began. The credit crisis and their stocks tanking is forcing them into extinction as their ratings get slashed and they struggle to meet their debt obligations, but the it all boils down to their inability to compete with foreign automakers- evolution principles in action.

Media, A Wharton Professor and Marketing Research - I

A couple of weeks ago I had the opportunity to actually attend a lecture by a Wharton professor - Peter Fader - at the Marketing Modelers meeting down at the ARF in NYC. The topic of conversation was "The Paradoxes of Interactive Media". Peter Fader is a professor at the Wharton school of business and is actually on the board of A-list journals such as Marketing Science and Journal of Marketing Research. He has built his reputation on his research on trial and repeat in the CPG industry, while also doing some mean research in the field of electronic commerce. Most notable was his testimony during the Napster trial. Based on that testimony it was clear that the man is a rebel and revels in lateral thinking. The talk just confirmed it.

Even though I - or most other people in the room - didn't agree with everything he said, but his approach prompted me and everyone in the room to question our beliefs and conventional thinking. In today's blog I am presenting one of the points made in the session.

Professor Fader iterated that cross-group differences across different demographics like ethnicity are often meaningless. Now this may be true from a total category point of view (he used the example of DVD purchaes by hispanic vs. non-hispanic consumers). But if you get down to the brand or attribute level, this actually leads to way different consumer behavior - and since marketing is brand-driven rather than category driven, I would have to say that distinct differences do exist and can be leveraged by marketers to drive sales differently among different demographic groups. However, his essential theory that people are the same (or distributed similarly/ normally, if you want to be statistical) everywhere is pretty solid. However, as soon as you start breaking down a category by its attributes (brand, size, flavor, feel etc.) ethnic differences come into play. I would love to hear other points of view on this. I will deal with a couple of other interesting points made by professor Fader in my next posting....

So the Recession is finally official- Now What?

On Friday, November 28, 2008 the Business Cycle Dating Committee of the National Bureau of Economic Research announced a peak in economic activity in December 2007. Since it is the NBER's sacred and ordained task to announce recession beginings and end, finally everyone including the government can admit that we are in an official recession until the NBER announces a 'trough', signalling the end of the recession. Interestingly, neither the GDP or the GDI (Gross Domestic Income) showed an extremely clear pattern in the two consecutive quarters of decline rule to identify a peak, only the payroll employment seems to have declined every month since December '07 and the NBER seems to have weighed heavily on this metric to dtermine that we reached a peak in economic activity in December '07. Interestingly, I had posted previously in Is GDP a Consistent Measure? No, GDP is actually a Deceptive Measure... that relying purely on the GDP to determine the state of the economy is not a good idea since this measure may no longer be as reliable as it used to be in the past. Even if the financial markets and the economic production begins to stabilize, employment may continue to decline (economists are expecting Friday's employment report to be abysmal at a 325,000 decline- ADP has reported a 250,000 decline in the private sector). What probably is also driving private sector declines is the fact that stock prices are down in the dumps and management will continue to leverage every opportunity to be efficient by cutting costs to appease shareholders, until revenue growth returns to a point where it offsets the need to improve profit margins through cost-cutting. After the 2001 recession, jobs took 4 years to return to peak levels according to the Economic Policy Institute and if that is any indicator, we are looking at late 2011 early 2012 for a full recovery. With the dramatic decline in House Prices and the bleak performance of retirement accounts, households are increasing their savings rate in "safer" securities (typically bonds), as they can no longer rely on their real estate equity as a retirement cushion. In any case we are a long way from getting out of the woods.