Theory: Best Companies can pay 10% less than competition

The theory that the best companies can pay 10% less than their competition has an exception to the rule - Goldman Sachs.  Over the last year, many have witnessed the financial crisis firsthand and if you happened to be working on Wall Street a year ago, there is a good chance you might not be working there now.  Bear Stearns, Citigroup, Merrill Lynch, and now most recently Lehman Brothers have all reported quarterly losses within the past few quarters and one of these companies (Bear Stearns) now no longer exists.  While these companies were losing money hand over fist, Goldman was preparing to make money hand over fist.  Their ability to recruit the best and the brightest has paid off substantially, by correctly hedging their balance sheet against the mortgage market correction and its employees will be rewarded accordingly.

At the end of every calendar year, the financial news media frequently enjoys reporting on the inflated salaries of investment bankers, especially when the years are good.  At the end of 2007 the media reports which bonus pool is the largest.  In 2006, Goldman paid out 46% of the bonus pool money from the five largest firms.  For 2007, it was predicted to be close to 53%.  These are just predictions, however if Goldman was able to outperform its competition in a year where almost everyone failed, it is probably considered among the majority the most well regarded investment bank on Wall Street.  Furthermore, they consistently pay out the highest bonuses of its top 4 competitors.  The theory that the best companies can pay 10% less than their competition may be true for a majority of companies, however in the investment banking industry, it surely is false!

Ries and Trout

The other day, after reading the Ries and Trout, I was enlightened what I learned regarding two aspects of the article.  The one strategy that marketers are focusing their time and efforts on now is position.  They realize that there is only so much room in their prospects brain for at the most 7 different brands for each product, that in order to reach their target customer, they have to position themselves as an entirely new brand.  I thought the article was most interesting when it comes to conglomerates.  Ries brought the example of Proctor and Gamble.  At least three of P&G's brands compete in the laundry detergent.  Unlike other conglomerates which emphasize diversification, P&G aims towards domination!  All three brands had different tag lines aiming towards making your clothes white, whiter than white and bright!  It would be riveting to step inside the market research group in Cincinnati working for P&G to see how frequently one brand is chosen over the other.  In my feeble, grad student mind, I would think that diversification would be more important than domination, but obviously P&G as a whole has been doing this a little longer than my month getting my MBA.

As I try to synthesize, analyze, and evaluate this towards my profession, its interesting to see how asset management firms position themselves in the marketplace.  After working at BNY Mellon for the last few years, they position themselves as a money manager with a rich history catering to extremely wealthy families, who are primarily a part of the "old money" crowd.  

If I had to guess, I would place Goldman Sachs and the other Wall Street bulge bracket investment banks as the money management preferences for the "new money" crowd, such as the technology tycoons out in Silicon Valley and the Mark Cubans of the world.  My reasoning is that they would have relationships with the investment banks already through IPO's, merger and acquisition services, and other relationships, that they would probably think of these competitors first.

With "old money" families and "new money" families lined up, I think that the remaining stock of wealth individuals falls into the glut of the thousands of financial advisers, brokerage firms, registered investment advisers, mutual fund companies, and insurance companies that compete ruthlessly to gather as many assets as possible.  It would be an interesting study to see how a wealthy individual selects the firm that they decide to manage their money.  In the asset management business, I think that sometimes its less about the brand that the salesperson is promoting, and more about the person selling the service.  Great salespeople are what will ultimately win over a client's assets and it won't end up being whether they choose a bull or a bear.  Unless of course that bear happens to be Bear Stearns...

This is not a plane, this is not a passenger

7 Up, the soft drink company had an ad campaign in the 1980's to make itself known as the Uncola.  The idea was to differentiate the 7 Up brand from its competitors in the ruthless cola that took place between Pepsi, Coke, and other soft drink makers.  The idea stems from the fact that consumers only have room in their heads for a limited amount of data regarding each market.  By telling consumers that 7 Up was a drink that wasn't a cola, but rather an uncola, they would be able to segment itself apart from the Cola wars into a new idea.

With this concept fresh in my brain, I was reading the WSJ this morning and came across an article on British Air launching a new airline.  The ad copy shows two advertisements.  The first one shows the front of a Jet with the phrase "THIS IS NOT A PLANE" and the second one shows an attractive female business executive laughing with the phrase "THIS IS NOT A PASSENGER".  In the same way 7 Up's campaign was an effort to differentiate itself from its competitors, BA is aiming to change the way passengers view their airline.  

This advertisement taught me that a technique used in 1980 can still be effective today.  Despite the many changes in technology and the means of communicating with consumers tastes and preferences, the techniques and methods used in appealing to the brain are still similar to those ad agencies used 25+ years ago.  

Market Segments

Its Sunday in Oakland, and I'm about to head off to church.  After learning about market segments over the past few weeks, I've come to realize that market segmentation is everywhere, especially within the church.  Having grown up in a great church community north of the city of Pittsburgh, its easy to see how different churches meet the needs of different people.  Similar to Gatorade, Powerade, and the timeless classic bottled water that all aim to quench one's thirst, churches all serve the same God, but in different ways.

Take a look at churches in Oakland.  Northway Oakland, where I've attended the past month is a Christian community full of young students - undergraduate and graduate alike, families in the medical field (due to all of the hospitals in Oakland), and young families.  After attending twice in the past few weeks, I don't recall seeing anyone over the age of 60 in the audience.  This church is appeals to a social group that is searching for a sense of community with their peers and the opportunity to connect with people who have similar beliefs.  The congregation experiences God through multimedia videos, live worship music, and dynamic speakers that relate real life to scripture.  Northway Oakland has structured their service to fulfill a market segment's desire to experience a service that is contemporary and relevant to the culture today.

In contrast to Northway Oakland, I also visited the Church of the Ascension in the past month.  This church is on the same Protestant side of palette, but is much more traditional than Northway Oakland.  The service lasted a solid hour and 40 minutes, the congregation was mainly families with kids between 2 and 10 and some members in their 60s and 70s, and the service was very traditional.  This church appeals to the segment of the market that desires a liturgical church which does not depart from tradition.  The church did not have many college students at all, primarily because of its conventional tone.  The church was founded in 1889 and was in an old building with stained glass windows, pews, and an altar - very different from Northway Oakland's stage with many instruments, stackable chairs, and free coffee and pastries for the taking.

Both of these churches' underlying mission is to help people connect with God and are achieving this mission in very different ways.  Preferences of one market segment can vary dramatically from another.  However, the interesting thing to me is how the overall mission of the churches will not waver.  Over time the culture may dictate which church will prevail due to the tastes and preferences of the congregants, as well as the giving flows.  But until that time comes, new market segments will be developed and organizations evolve.  Staying contemporary with your audience will become of utmost importance in order to maintain an organization, but so will the ability to adapt to meet your congregations needs as culture changes. 

Encouraging Census Data

A few years ago I read an article in the Post Gazette, which can be read here.  The article stated that Allegheny County had the second oldest population in the entire country compared to any other county, which is a startling fact!  

As a soon to be graduate of the Katz MBA program, its important to understand the city demographics of the future location of my next job.  In many ways its tempting to go explore the growing cities like Phoenix, Charlotte, or Jacksonville, not just because they are a lot warmer, but also because of the tremendous potential for opportunities to succeed.  However, this article made a poignant comment that due to the fact that Pittsburgh has one of the older populations of all counties located in the US, this could be a source for growth potential.  

For example, take the baby boomer generation.  This generation comprises all people born between 1946 and 1966.  Add 65 years to each of those and you get 2011 and 2031.  If the baby boomers begin to retire in a few years and with unemployment at 4%.  There are going to be plenty of jobs available, especially in Allegheny County.  This is a promising statistic for graduates looking for places to settle down or start a career.  This is also an amazing stat for students like myself who are interested in going into the financial planning and advising field.  The more retirees that settling down, the more retirement accounts that will need to be managed.  Jane Bryant Quinn agrees with the above facts by stating that there is a need for 50,000 financial advisors over the next several years to service this transfer of wealth.  

Understanding market segmentation within your industry, between your competitors, and towards future customer demographics can go very far in comprehending the intricacies of our interests.  Because markets change rapidly, staying current and realizing your own stance might be the only thing preventing getting lost in the noise. 

How much my time is worth

This past week I was responsible for calculating how much my time is worth.  Right before beginning business school my tax adjusted, cost of living adjusted hourly rate was $29/hour.  If I relate this to sleeping 8 hours a day, it costs me about $240/day to sleep, or almost $88,000 per year.  That of course wasn't the purpose of this exercise, but rather to understand the power of the old adage - time=money, and to realize why serving the customer should be a top priority for many companies.

A prime example of this was going to lunch today with some friends.  I'm friends with a married couple and after church this morning we went out to eat at Uncle Sam's, a sub shop right off of Forbes Avenue in Oakland.  The husband is two years from being a full time orthopedic surgeon and his wife is a pediatrician.  According to some elementary research an orthopedic surgeon's average earnings was $389,000 in 2007 and a pediatrician's average earnings in 2007 was about $154,000.  Doing some simple arithmetic, their gross average hourly rate, assuming they work about 60 hours per week was $189/hour.  The reason I bring this up was because at this sub shop, which eventually served some great cheese steak sandwiches, our meals took 27 minutes to come to our table.  My buddy expressed his unhappiness to the waitress and had a small confrontation with her shortly before our meal came.  

If the food wasn't so good, he probably wouldn't go back there again, but its interesting to see how such a bad experience can form distaste in a customer.  In conclusion, I think that all retail establishments and customer service departments should treat their customers as if their time were worth $189/hour.   What if that waitress severed her finger chopping up steak for a sandwich and was rushed to an emergency room and discovered that the person that was going to put her severed finger back on was the guy who waited 27 minutes to receive his cheese steak this past weekend.  It would be unfortunate if the Doctor decided to wait a half hour and she bled a little longer just because he was busy chatting it up with the nurses.  Bottom line - serve all your customers as if they are of utmost importance because the world is small (especially Pittsburgh) and you never know when you'll need the assistance of a customer or colleague in the near future.