Recognizing Signs of Contagion

The Great Recession has taught business executives that even small ripples in the fabric of markets may cascade into fast spreading swells. These waves of contagion threaten to derail even the “best plans we have for the future, whether we are mice or men.”  Marketers, is it possible to recognize and act upon the early warning signs of contagion? Or are we consigned to simply batten down the hatches for the next market storm?

Think back to January 2008. Was your company prepared for the coming financial crisis that would happen later that year with Bear Stearns and Lehman Brothers collapsing? Even better, look further back to April 2, 2007 when New Century Financial (one of the biggest body shops for sub-prime mortgages) filed for bankruptcy. Did you see the warning signs?

Now if you didn’t, please don’t feel too bad. Most economists also missed the signs of contagion.

What is contagion? Some dictionaries call contagion the “spread and transmission of disease, ideas, influence and emotions.” Other financial dictionaries cite contagion as “the likelihood of significant economic changes in one country spreading to other countries.”

What the dictionary definitions omit, however, is the rapid speed of transmission in contagion.

With today’s global economy tightly linked by capital, labor, and information flows at the speed of light, it’s not uncommon for bad news, nervousness, or outright panic to spill across borders and disrupt even the most stable of companies and industries. Indeed, everything’s connected, and sometimes in ways that we can’t quite see under the surface.

With just a few recent examples, the concept of contagion is quite prevalent in today’s periodicals:

• A European official recently compared the growing European debt crisis to the Ebola virus.
• To stop the debt crisis contagion, Eurozone finance ministers rolled out a rescue package designed to “shock and awe” investors with a whopping “$644B emergency facility to protect the Euro area from potential disaster.”
• Researchers at Kellogg School of Management at Northwestern University have found that if your neighbor strategically defaults on their home mortgage, the odds increase that you will choose to do the same
• The Financial Times writes regarding Kyrgyzstan, “When demonstrators took to the streets … few, if any, foresaw that what started as a protest against a rise in electricity prices in the remote copper and gold belt of Kyrgyzstan would develop into a full-blown revolution that toppled a central Asian government.”

Whether it’s financial default of countries, companies or persons, government upheaval, or the decision to walk away from a mortgage because “everyone’s doing it,” small ripples of contagion tend to cause big waves elsewhere. And once those waves start rolling, it’s hard for marketing executives with their best laid plans to get out of the way.

The warning signs aren’t really hard to spot. In fact, they’re everywhere. What’s difficult to extrapolate is whether a rock thrown in the pond lands with a thud, or causes a full-blown title wave. And that’s the difficult part of understanding contagion, because in complex systems the next crisis could come from the smallest of beginnings.

With this in mind, how can a marketer separate signal from noise?

The first step is to read and listen. Pay close attention to global media for disruptions, trending topics, and events gaining critical mass. Reach out to peers for their perspective on today’s events (the more cross-industry perspective the better). Also, talk to customers for their point of view.

Second, watch your own company key performance indicators. In times like these, a strong analytical infrastructure with near real-time data feeds can help alert you to coming challenges. Use analytics to identify variances, strengths, softness, and project trend lines.

Third, leverage internal and external expertise to help distinguish matter from mania. Providing you have access to or have already hired the smartest brains, learn from PIMCO on how they hold weekly meetings to “square off in hours-long debates that are a cross between Socratic dialogue and bare-knuckled slugfest.” Challenge, debate, and try to project outcomes from today’s events.

The next crisis could come from left field, right field or drop from the sky. However, armed with the above processes, the probability of being blindsided is greatly reduced.

Is the Speed of Decision Making Accelerating?

speedometer2As the forces of globalization continue to connect and intertwine commercial and financial markets, and new technologies come online in the marketplace, the time between “event” and “action” is rapidly closing.

In the past, managers could take weeks or days to make important decisions, however to effectively compete globally, some companies are making critical decisions in hours, minutes or even seconds. With windows for decision making closing faster than ever—are your decision making processes setting you up for success—or failure?

While most would agree that strategic decisions require thoughtful consideration that should rightly stretch out months or weeks, the financial market turmoil of the past year plainly shows that decision making windows can open and close quite rapidly. In fact, as marketplaces grow more complex, and financial markets interconnect in ways analysts still struggle to understand, strategic decisions (even those involving M&A) sometimes need to be made in 24-48 hours.

The window for operational decisions is also shrinking. Companies now need the ability to detect and respond in real-time or near real time when fraud is occurring, products are out of stock, lines at store checkout are too long, online shopping carts are abandoned, or customers are calling with product/service quality issues.

There can be significant financial benefit to speeding operational decisions. Case in point is the financial services industry.

As early as the 1990s, trades were conducted on a system called SuperDot which still exists today. However, according to Richard Bookstaber, an equity fund manager and author of “Demon of Our Own Design”, there was nothing super about the system. “Orders were sent using primitive 386s communicating via Hayes micromodem,” he writes. “Between short sale restrictions and bottlenecks from excessive volume, there was no guarantee orders would get executed at all.”

Now let’s fast forward to the future. In Technology Review, an article titled, “The Blow Up” mentions that many high frequency financial services traders make 1,500 or more trades a day, whereas the computers at some brokerage firms execute “hundreds of thousands of trades everyday”—most of which are automated by computers following complex business rules and require no human intervention.

The same article details how the “science of event processing” allows computers to “read, interpret and act upon news” such as making a trade in response to an “FDA announcement—in milliseconds!”

The ability to act upon information faster than others—in this instance to execute a trade faster than other market participants—can make a huge difference in profits or loss.

Creating business value via faster and better operational decision making extends to other industries as well.

In retail, analytical systems are enabling workforce and inventory optimization to ensure plenty of staffing and products, notifying managers of stock outs, and even helping speed up the checkout process.

According to an article in the Economist titled, “Watching While You Shop”, one very large British retailer is using a system to sense the number of shoppers that enter and leave the store, and then use that data to predict how many check-stands should be open. Systems predict, “up to an hour in advance and monitor average waiting times and queue lengths.” Since most of the point of sale systems at this retailer are self service, the system can detect when lines get too long and then open check-stands accordingly.

Faster and better decision making can infer a competitive advantage for companies, but those advantages don’t traditionally last very long. Competitors can invest in the same technologies and copy workflows. However, those companies that create a culture based on analytical decision making are hard to imitate as “thinking by the numbers” becomes a way of life.

Getting back to the original premise, I believe that in a complex and global economy, there is less room for error as economies, companies and even individual actions are more tightly coupled. Nothing happens in a vacuum anymore. This means there is less time to react as single events often start chain reactions.

To thrive in a global economy, companies must be able to make the best decisions based on accurate data sources that present as complete a picture as possible. Windows of opportunity are opening and closing faster than ever before. The ability or inability to capitalize on those open windows could be the difference between sustained competitive advantage and obsolescence.

Perishing for Lack of Vision

toxic warningMarketing executives should have a pulse on shifting consumer preferences, macro-economic conditions and emerging competitors. However, in forecasting the financial crisis of 2008 and beyond, most marketers (and economists for that matter) failed to accurately “call” the collapse, even though signs of catastrophe were ubiquitous.

Does marketing have a leadership role in influencing business strategy, and if so, why did so many of us miss the warning signs?  read original column

The Great Recession: Things Are Different Now

2008 recessionThe global financial crisis of 2008 and beyond has shaken countries, markets, and individuals, in turn causing increased pessimism, angst and even anger. And yet, for those wishing for things to “return to normal”, a new survey argues that we’re in the “new normal”. What are the lasting impacts of the so called “Great Recession” and how should marketers respond?

Almost every consultant hates the phrase “paradigm shift.” And in effect, because of the recent global financial crisis, it is easy to see how consumer and business sentiments have changed quite radically. At least for now, the days of freewheeling risk taking, unabashed materialism and wanton spending have been replaced with frugality, caution and spending cutbacks.

PIMCO bond king Bill Gross, would agree that “thrift” is a new mainstay. In an Atlantic article, Mr. Gross suggests that as a result of the global financial crisis there’s something different regarding investor outlook:

“Risk taking went over the edge. We are inventing something new. We’re very afraid. We know from the Depression that people who lived through it didn’t change their mentality for the rest of their lives. They were sewing their socks. My sense is that it will take 10-20 years to find that kind of risk taking in people again.”

A recent survey conducted by Money Magazine validates Mr. Gross’ positions. Polling over 1,200 Americans, the survey discovered:

• 54% report they are worse off now than a year ago
• 89% say they’ve changed how they manage money
• The top three new habits are: eating at home more often, looking for discounts and cutting back on luxury purchases
• New attitudes are emerging with 88% surveyed saying they will be more frugal, 81% playing it safer with investments and 74% ignoring advice from Wall Street
• Men seem more pessimistic about the economy than women
• 73% said in the future they will play it safer with money and focus less on materialistic gain

To be sure, the results of the survey—at least for Americans—present a new prototypical consumer who is less trusting, a bit more conscious of his or her finances, and one that is getting “back to basics.”

Whether we are permanently in a new paradigm—or not—these statistics paint a new reality that marketers must take into account. Most companies have accepted this new reality and are baking marketing strategies accordingly.

But many company executives anxiously sit on the sideline, hoping that market conditions get “back to normal” so they can raise prices, increase capacity and worry less about operational efficiencies.

In statistics, reversion to the mean indicates there are driving forces towards the average, and that outliers will eventually join the “normal”. Perhaps however these changes in consumer and business sentiments are permanent—and in effect, the mean has moved.

Questions:
• Longer term (in the next four years) will you be better off than today? What’s your outlook—optimistic or pessimistic?
• Target commercials show your home patio deck as the new vacation spot, a “Slip and Slide” as the new water park, and playing with a Wii as the new dance club. What do you think of these commercials? Does Target have their messaging right?
• Do new attitudes of frugality and safety have staying power? Once the recession ends—and it will—is it back to the past, or is this the new reality for consumers and businesses?