Marketing Lessons Learned: Riding Bubbles at Lehman Brothers

When “the next big thing” is identified—whether it is tulip bulbs, internet technologies, real estate or financial derivatives, market mania is not far behind. And while riding and making a mint from a bubble of “irrational exuberance” is possible, it’s also beneficial to know when to exit the moving train before it explodes. Just ask the former executives of Lehman Brothers.

It’s been said the phrase, “this time is different” is one of the most dangerous sentences in business. That’s because executives keep making the same mistakes again and again say economists Carmen Reinhart and Kenneth Rogoff; “We gullible humans (believe) that the laws of financial physics have been repealed for us.”

Why do humans keep making the same mistakes? Perhaps it’s because over optimism—and resulting speculation—is very much a part of the human psyche. We like to believe those who have previously failed just didn’t have the right information, or that a new paradigm has emerged. And sometimes changes are so fundamental and drastic that they do create new markets. But more often than not, we’ve exchanged our money, time and hope for worthless swamp land.

Now what does any of this have to do with marketing?

An important role for marketing executives is to provide direction to our business leaders regarding trends, white space, and best areas in which to compete or avoid. We do this via a thorough understanding of competitive, social, governmental, and economic forces within a market.

In adding a potential new product or service to our portfolios, we need to ask ourselves, is this market sustainable —or does it depend on unstable factors? How long will this market exist? At what stage of the lifecycle is the market? Does my company have the capabilities to compete? Can my company make a profitable impact?

And this is where diagnosis of a market bubble comes into place.

Now let’s be clear. Not everyone believes in economic market bubbles. Some economists are convinced that people have all the information they need and therefore always make rational decisions. Efficient and rational market theorists from the Chicago School of Business, in particular Eugene Fama, don’t believe in unstable and wild market inflations. “I don’t know what a bubble means,” Fama recently declared to writer John Cassidy.

However, since there’s an abundance of evidence for market euphoria, let’s assume economic bubbles do in fact exist. The next step is identifying whether the market in which you plan to participate is in fact prone to speculative behavior (even mania), and if so, should your company compete or walk away from the opportunity?

These are a few questions that could have been asked by senior management at Lehman Brothers as they jumped headfirst into frenzied markets.

In the book, “A Colossal Failure of Common Sense; the Inside Story of the Collapse of Lehman Brothers,” former Lehman Brothers vice president, Larry McDonald cites how then CEO Dick Fuld and his second in command Joe Gregory made bet after bet, first in derivatives such as collateralized debt obligations (CDOs) and credit default swaps (CDS) and then grandiose real estate purchases.

These purchases—with borrowed money—were made with the following inherent assumptions:

  1. the market would keep rising indefinitely,
  2. there would always be a market for securitized debt, and
  3. what’s profitable for competitors must also be the same for Lehman Brothers.

Sadly, we know how the story ends. McDonald relates, “When a high rolling market goes wrong, history tells us that it happens with lightning speed, as everyone stampedes for the door at the same time.”

Indeed, as the market for derivatives self destructed, Lehman was stuck with a bag full of product than nobody wanted, to the tune of sixty billion dollars. Senior management failed to ask themselves, “how long can this market sustain itself?” or even “what’s our current position and what happens if this bubble pops?”

It seems that it’s quite easy to get caught up in the euphoria of a new market, especially when everyone appears to be making boatloads of money. An ebullient market looks like it will never end.

However, it’s very possible to enter at the very top of the market and not know it, effectively joining the party just as the host removes the punchbowl. And this is where very careful analysis from the marketing function can come into play.

While a frothy market may be pretty easy to identify, it’s difficult to know when it’s going to end. Participating in a market bubble is a risky proposition and timing (getting in and out) is everything. And for those analytical types, even if deep market analysis is performed, it’s possible your timing may be off by just a bit, leaving you short or long. After all, as John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.”

One thing is for certain, history repeats, or as others have said, it rhymes. Lehman Brothers stood for 158 years but participation in one of the largest asset bubbles in history brought this noteworthy firm to the steps of bankruptcy court. Lehman rode the bubble and didn’t “get out”. The musical chairs stopped with nary a seat.

It really wasn’t different this time.

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Marketers, do bubbles exist? Is it possible to discern a bubble? How can one discern when to “get out” of a frothy market before it implodes?

New Markets: Too Late for Green Technology?

In a quest to grow revenues, marketers are often charged with discovering and branching into new markets. And while the “green economy” sure looks promising, Western companies are discovering that state and privately owned Chinese enterprises are establishing strong footholds. In a race to develop green technologies and dominate green markets, does China have an insurmountable lead?

Paul Volcker, chairman of U.S President Barack Obama’s Economic Advisory Board recently said, “(The United States) needs to do a better job at the new industries coming along, the so called green economy.” However, an article from the New Yorker titled “Green Giant” suggests that China has invested in green technologies for decades and already has a significant head start.

Why China and green technologies? Call it a matter of survival. As factory to the world, China is now responsible for a larger carbon footprint than even the United States. And while links between carbon emissions and global warming are debatable, Chinese leaders haven’t taken any chances investing in technologies that are more environmentally friendly such as wind and solar. Moreover, its export heavy led economy needs energy to sustain itself, so renewable energy is definitely a national security imperative.

Strategic planning is often about seeing significant trends on the horizon, making big (and wise) bets and laying the foundation for future dominance. To this point, according to the New Yorker article, as far back as 1986 Chinese leaders saw the beginnings of a “new technological revolution” and started building green capabilities and setting targets for heat and wind turbines, solar panels and hydro-electric dams.

Indeed years of heavy investment have paid off in that China now manufactures “more solar cells than any other country” and has doubled its wind capacity for three years running (2006-2008).

It’s tempting to dismiss the prowess—and progress of China with a vision of cheap goods, backwards factories, inefficient processes and thousands of workers in assembly lines producing with ancient technologies. Yet, in many cases Chinese factories are just as productive, clean, and advanced as Western enterprises, and in some instances the only place a product can be made—cost effectively—is in China!

There is a sliver of good news, however for Western companies. While the New Yorker article cites China’s ability to scale and mass produce green technologies, much of the innovation and science behind the scenes still comes from the West.

One can only wonder, however, how long this lead in innovation will hold, especially as R&D expenditures, “have grown faster in China than other big country—climbing about 20% per year for two decades to $70B last year.”

Perhaps there’s a future in collaboration between Western countries and China. “Chinese manufacturing and American innovation is powerful,” says Kevin Czinger, a former Goldman Sachs executive. Mr. Czinger calls it the “Apple model” where innovation and know-how is born in the West and execution resides in Asia.

On the other hand, with a just small portion of the overall “value” of a product staying in China, it seems unlikely that China will be content as simply the muscular strength powering the world economy.

Questions:

  • Marketers; dominance of green markets isn’t just limited to green energy. Green design, building, packaging, chemistry, and nanotechnologies are also in play. Which areas hold the most promise for Western companies?
  • With unemployment levels nearing 12-17% in some US states and cities, the green industry is often seen as a potential panacea. Are Western countries in danger of losing green jobs to developing countries? If so, what’s the remedy?
  • How does “green technology” fit in the future of your company?