Dow sinks 777 points, -7%, S&P -8.8%

Brad Schmitt on the phone - "There are three phases to controlling a financial crisis:

1) Liquidate everything you have

2) Buy everything and put it all into silver bullion.

3) Buy your choice of firearm, go down into the basement with your bullion, and wait for the enemy to arrive.

These are the three steps to take when encountering a financial crisis.

America For Sale!

The past few classes we've discussed the impact globalization is having on our economy and what approaches we need to take in order to face this issue.  I have never been more cognizant of the struggles of America than in the past few years.  That could be partly due to my lack of education or interest in the American economy during the first 15 years of my life or it may be attributed due to the American economy has never been as appealing to foreigners that it is today.  Foreign investment is coming into this country and scooping up everything from the famous Clydesdale horses that represent Budweiser beer to such income revenue streams as the Pennsylvania Turnpike.  According to Dan Dennehy, "the American dream is alive and well, the problem is its primarily in India and China."  So what does this mean for the US of A?  I think the greatest challenge facing our nation today is creating the drive and passion for hard work that this country was founded on and is currently so easy to see in the people of emerging economies.  Until the US finds a way to encourage this attitude in citizens, it will continue to lag behind in the global economy growth race.

To paraphrase an article I recently read regarding the current troubles of America, "America's ability to delay gratification and make personal sacrifices today, potentially will steal benefits away from future generations."  In my mind this sense of entitlement is ingrained in our culture and contributes to why foreigners are having a field day scooping up flagship American companies.  Take the mortgage crisis for example.  The premise of almost every player in this recent event from the investment bankers, mortgage lenders, new home buyers, and CEOs were all based on finding gratification now instead of later.  I'm sure this is not any different from most bubbles, but its easy to see how caught up in today we can get.

Social insecurity, zero savings rate, and a sense of entitlement that is permeating throughout our culture may be the contributing factors to what leaves America behind in the race for global economic growth.  I don't want to point the finger at all citizens of this great country, because there are obviously some great examples of people that are doing well financially and getting ahead of the curve.  However, I don't think its difficult to see that the federal government has not helped this situation by running up budget deficits for as long as I can remember.  Going forward, Americans will need to learn to adopt some of the attributes of our Greatest Generation who pulled themselves up by their bootstraps and often carried multiple jobs just to make it in this country.  Until current citizens decide to take the lead in their finances, their careers, and their responsibility for their own economic well being, this country will get swallowed whole by the emerging economies that are truly capitalizing on the opportunities that a global economy is presenting. 

Everyone is in Sales

In class this past week, we discussed the role that sales persons play in an organization and also how every one actually in sales whether we know it or not.  I never thought about everyone being in sales, but thinking about it some more its interesting to notice.  To get most jobs, applicants have to sell the employer on the fact that he or she can carry out the tasks necessary required of the position.  To get into grad school, my peers and I had to sell ourselves either through our test scores or our interview that we were capable of handling the workload in grad school.  Furthermore, in the dating world - where I seem to be a pro - you have to sell yourself either through looks, humor, or an intriguing personality to get the other person to spend a significant amount of time with you.

I come from a long line of sales people.  My father is a sales manager in the wealth management department of a bank in ohio, my mom used to sell medical supplies equipment, and my grandmother was in sales for 30+ years selling insurance and deferred compensation products to city of Pittsburgh employees.  One of the reasons I came to Katz was to do some research into what it takes to be a good marketer, specifically as it relates to selling.  One of the industries I aim to work in post graduation is a sales capacity at a money management firm.

After reading the white paper article online, titled - "The Sales Manager's Precarious Perch" I agree with many of the statements regarding what it takes to be successful as a sales manager.  However, one of the areas of the article that I agree with the most is that not all sales people are successful sales managers.  The roles are entirely different and often require completely different skill sets.  But who most often is selected to be a sales manager?  The best performing sales person.  The transition to sales manager from sales person does seem like a paradox.  I think that companies that are looking for success in their sales department should not turn to excellent sales people, but rather excellent managers.  Excellent managers have the ability to encourage to negotiate at high levels as well as manage different personalities for the greater good of the organization.  For companies that are looking to hire people that can drive their organization, managers with successful backgrounds dealing with a variety of people are the way to go. 

Dollars in Distribution

In class this past week we discussed how the impact of the distribution channel can impact the grocery store industry.  It was interesting to learn that a majority of the groceries that are placed in stores and restaurants in the area carry food supplied by Sysco, the food distribution company.  Sysco is huge and despite their size, their power comes from their ability to distribute food in mass quantities to their customers.  They are powerful because they manage the distribution channel and can determine the prices they set to customers based on supply and demand requirements.  Giant Eagle is not one of Sysco's clients because they manage and operate their own distributor which orders from Sysco's competitor's and other local food producers.  

Prior to this class, I would not know the significance of owning a distribution channel.  However, shortly after class, I read in the news that Sheetz is debuting a $50 million manufacturing facility located directly next to their distribution center.  The manufacturing facility will produce baked goods, test kitchen, and quality control area among other things.  The purpose of this expansion is to perfect the prepared food sold in their stores.  Furthermore, by creating the goods right next to its distribution center, they will be able to cut out the producer in their supply chain, thus eliminating the extra cost to each product.  Similar to Giant Eagle, Sheetz has realized that the more control the company can have over its supply chain, the more profit will arise.  

Its intriguing to see a dynamic company like Sheetz transform itself from a gas station to a convenience store to a fast food restaurant and now a mini mart.  This company is really tracking the needs of the consumer and trying to capitalize on the shifting demands of the market.  As the new millennium begins and consumer tastes and preferences change rapidly, the companies that are the most flexible in their overall ability to adapt to the market will find the most success.

The Traditional Marketing Model is broken

"Letting go of the past and looking towards the future."  This last line from the "Nightmare on Madison Avenue" article essentially sums up the current state of the advertising industry.  Mainstream ad firms in New York are having a difficult time keeping up with the rapid change going on in the media world today.  Despite the fact that the article was written four years ago, many of the same challenges still exist for media buyers in the industry today as well as some new challenges.  One of these new challenges is the proliferation of the social networking site Facebook.

Facebook was founded in February 2004 about four months before this article was written.   The growth of the site has been substantial growing from approximately 2 million users at the end of 2004 to more than 80 million active users today.  The company is estimated to be worth around $15 billion and many consider this company to be the next Google.  However, the company only brought in around $150 million in revenues last year, which seems like a lot, but for being one of the most trafficked websites in the world, its quite paltry.  These numbers show that the opportunity to capitalize on the Facebook phenomenon is still out there.  Until Madison Avenue firms realize that the mode of advertising is changing and other mediums like Facebook are the new avenues for advertising, only then will main street ad firms enjoy the success they once had in reaching their target market.

To further support the need to shift, the "Madison Avenue" article states that internet ad spending grew 20% in 2003 to $7.2 billion.  Furthermore, according to ZenithOptimedia, Internet ad spending is expected to exceed radio ad spending in 2008 as well as magazine ad spending in 2010.  This shift will be the most significant shift the ad industry has had since the introduction of the television.  I'm sure there are firms that have figured out the new Internet advertising medium already, however the ones that haven't must learn to adapt or will be the victim of consolidation or a buyout within the industry.  

Buzz Marketing and my generation

Periodically between classes I get to sit outside under the tent in the Oakland quad area and listen to music while I eat my lunch.  I've done this a few times and really enjoy getting some fresh air after sitting inside all morning.  On the past two occasions, there were two people walking around with shirts on that said the name of a social network.  They were college age students and hoping they wouldn't disrupt my lunch, I overheard them saying to groups of college age students - "...its just like facebook...".  After reviewing a list of popular social networking sites, I still couldn't find their name.  

I only mention this because in the last five years or so of the social networking phenomenon, I can never recall anyone walking up to me or viewing some communication material for that matter advertising social networking of any kind.  Every type of social networking I've come in contact with or learned about was through a friend or from buzz marketing.  In 2005 a buddy of mine told me about facebook and how it was going to change the way people communicate because all college students were using it.  Sure enough, a year later I joined then a few years after that I now have 418 people that call me a friend.  

I think buzz marketing began with my generation and the Internet.  The first week I arrived at college in the summer of 2000, I learned about Napster and how to download music on the Internet illegally.  During my senior year at college a person walked up to me on campus and told me that the Mercedes car company was having a demo day at the stadium and giving out free test drives of their vehicles and I went.  A few weeks before the end of every spring semester, Penn State has a free concert called Movin' On that stages some of the biggest bands in the country and I heard about it from a few roommates shortly before it happened.

I think for Generation Y and the Echo Boomers, buzz marketing might be more effective than putting up billboards or traditional marketing efforts.  The success of the most popular technologies of my generation were all communicated by word of mouth between peers and that seems to be the preference of choice.  This often poses a challenge to marketing departments that want to appeal to demographics that are very wide.  What I'm learning in the technology arena is that my parent's generation also is affected by buzz marketing, however its not from their peers but from their children or young adult friends.  I recall telling my father about facebook, digital music, and digital cameras.  My parents friends aren't on the cutting edge and they also aren't targets of buzz marketing campaigns.  Maybe that's because buzz marketing doesn't appeal to them.  As long as new technology continues to change and constantly evolve, the Generation Y and Echo Boomers will be on the receiving end of buzz marketing campaigns.

Price Waterfall and the Financial Advisor Business Model

In class this past week we looked at a McKinsey study describing the concept of a price waterfall.  This concept describes the net price that the company would sell a product for after all expenses were paid.  Furthermore, the concept also described the number of customers and the amount of their "pocket margin" or percentage of target price.  Since I am targeting the investment management business as a career after graduation, I thought about what this means to clients within this industry.  In my view, there are two sides to applying a price waterfall approach - one viewpoint from the product side that investors utilize to accomplish their retirement, savings, and investing needs.  The second is from the advisor side, as they try to serve their most profitable clients.

From the product side, advisers have many options when putting their clients in different investments.  Take an investor that has $10,000 to invest.  If an advisor uses a load fund with a 5.75% front end load the net balance an investor will have as their cost basis will be $9,425.  On top of this initial investment, the average mutual fund carries an annual 1.0% expense ratio that is imputed in the fund return.  If a typical fund returned 10% gross, 9% net the investment would have $10,273 left after one year or 2.73% return on a $10,000 investment.  A different way an advisor can set up his practice would be to use no load funds that have comparable returns as load funds, however no upfront sales charge and lower expense ratios.  These advisers charge 1% of net assets annually in order to earn their compensation.  If this same investor made a $10,000 investment, achieved a 10% return, no up front load charge, and the expense ratio was 0.20% then the net balance at the end of year 1 would be (10k*(1.1)*(.99)*(.998) = $10,868.  The net return for this investment would be 8.68%, substantially higher than for the previous example.  I think its important for clients to understand the fees that are involved when investing with a financial advisor.  If the fees are not described in detail up front, the cost to an investor can be substantial.

From the advisers perspective this pocket margin can be applied to their clients.  Assuming the advisor uses the fee based form of compensation like the second example above.  Using this method, the advisor will soon realize that his most profitable clients are the largest ones that provide the highest amount of fees.  One way of analyzing this total fee revenue stream would be to categorize the accounts in increments of $250,000 and show how much fees are generated from each category.  Because fee based financial advisers typically scale down their fees as the size of assets grow higher, advisers may find that the more lucrative clients are the ones with lower assets.  It would be an interesting study to analyze how much revenue is  generated from each "asset under management" category and divide that by the time spent on that client.  If an advisor doesn't spend a lot of time on small accounts but still generates 1% of fee revenue from them, they could end up being the most profitable accounts to collect.  In addition, analyzing this pattern in a bar graph form would provide further insight into which clients an advisor should aim to collect.