Friday, August 03, 2007

On Marketing

Wednesday's Wall Street Journal contained a review of the book "The Marketing Mavens," by Noel Capon. Mr. Capon, it is noted, is a professor at the Columbia Business School.

If this is the extent of new marketing discoveries at Columbia, they are in trouble.

According to the review, Capon led a team on a four year study

"to examine companies across 25 industries, interviewing 57 executives from an array of concerns."

The book alleges to provide "the lessons of the long-term winners." Nowhere, though, does the review cite what constituted "winners" according to Capon.

Before I reveal Capon's list of five "imperatives," let me recite another list.

Back in 1976, over thirty years ago, in a marketing course I took from Dr. David Lambert at Saint Louis University, he taught us the five bases for successful segmentation of markets:

1. Segments must have differing behavior, in order to have the behavior exploited through segmentation

2. The segments must be identifiable.
3. The segments must be specifically reachable, or targetable.
4. The segments must be of sufficient size to merit segmentation.
5. The segments must be such that serving them uniquely is profitable.

Now to Mr. Capon's imperatives, as reported in the book review in the Journal:

1. "picking markets that matter"
2. "pick the market segments where they can deliver the best product"
3. "securing a 'differential advantage' over competitors"
4. "adjust systems to better serve customers"
5. "measuring what matters"

Maybe it's just me, but I'm not just unimpressed with Capon's list. I find it, at best, derivative of the basic truths about market segmentation that I was taught, as an undergraduate, thirty years ago.

Capon's first imperative echoes Lambert's fourth basis of segmentation. His second, which closely resembles his third, is really just a no-brainer about business in general, and product development/management in general. There's no direct relation between the segmentation bases and Capon's fourth or fifth imperatives.

Having the rare combination of undergraduate and graduate degrees in marketing, I've probably sat through more hours of marketing instruction, by very capable professors, than most business graduates, and anybody I have personally yet met. For me, the most basic facet of marketing is segmentation.

Segmentation, as exploited by the University of Pennsylvania's pioneering, and the nation's first, marketing department, under genius Wroe Alderson, is a direct application of the microeconomic theory of segmenting buyers according to their price inelasticity behaviors. Observing the opportunity to discriminate, profitably, on price, and then provide other bases (product features, delivery, or promotional messages) on which to justify the price differences, is marketing's true core operational mission.

Of course, as Stanton wrote in his classic introductory marketing text, seen from a larger perspective, marketing is dedicated to satisfying consumer needs, over the long term, profitably.

Identifying and satisfying those needs leads, obviously, to segmentation, and, thus, the five bases.

When I reflect on that verity, Capon's work seems superfluous. So much neo-marketing fluff.

At root, marketing, even explicitly and appropriately consumer/customer-centric marketing, begins with segmentation. From this, all other marketing practices and knowledge flows.

To even attempt to speak of marketing fundamentals, and skirt the centrality of segmentation, is, I believe, to mark oneself as sadly, fatally misinformed.

Beyond his somewhat off-the-mark ideas on marketing, Capon, according to the article, chooses some examples that ought to raise eyebrows. Among them are Charles Schwab, Pfizer, and Target. The review doesn't provide details as to when in their life cycles Capon chose to study each company, but the first two are most assuredly not 'winners' on the basis of consistently superior total returns.

I personally respect and laud Target's marketing savvy, but that hasn't made it a consistently superior total return performer, yet, either.

What I conclude from the review of Mr. Capon's book is yet another academic conducting a dubiously-designed study, in order to publish a book and cash in on the resultant consulting business he hopes will follow.

I'm skipping this book. You should, too, now that you know Dave Lambert's five bases of successful market segmentation.

Thursday, August 02, 2007

CNBC's Erroneous Focus on "The Trade"

As the equity index volatility of the past few weeks continues, it makes the prospect of buying or selling equities fraught with concern that the market price is not truly reflective of long term factors.

Rather, the price at which one might sell an equity could be heavily influenced by temporary forces or misconceptions.

As such, it's caused me to reflect on something I see quite a bit these days on the cable business news network, CNBC. It seems that every day, some of the anchors and/or on-air staff will bark at a guest,

'so, if that's true, what's the trade?'

Or a correspondent will breathlessly describe some equity's price movement in terms of 'the trade' between it and something else.

This is a mistake. It's not about the trade. Here's why.

Unless you know what someone already holds in their portfolio, describing 'the trade' is a meaningless term. It is a mistaken focus on 'the trade,' rather than relative buying or selling opportunities.
For example, suppose you and I each hold a single equity. I hold a technology-oriented company's stock, while you hold the stock of a durable good manufacturer.
We are sitting together, watching CNBC, when a reporter announces a significant rise in the price of oil. The on-air anchor then turns to a guest and excitedly asks,
"so, what's the trade here, Ron?"
Well, Ron can't know what's in either of our portfolios. So Ron can only say, univocally for all viewers, something like,
"I can't say what 'trade' to make, Dylan, because I don't know each viewer's portfolio composition. However, given the reporter's news, I would say that this makes energy stocks more attractive, relative to other things consumers might buy. So several sectors may now be less attractive, such as consumer discretionary items, luxuries, durables, etc. However, I don't think it will affect business technology spending."
But "Ron" never actually says something like that. Instead, there will be some platitude about selling this and buying that.
It's just typical business cable "news" network entertainment nonsense.
Last week, I believe, I saw a really excellent few seconds of commentary from CNBC's morning guest host, Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co. She basically made light of the current equities volatility, and called attention to the real investment needs and objectives of Schwab's retail base of customers. Sonders noted that, for the average retail investor, or any investor with a long time horizon, this recent spate of market turbulence and volatility are no basis to "trade" anything.
Rather, she argued for simply continuing with existing investment strategies, and ignoring temporary, emotionally-based pricing dislocations and hysteria-based volatility.
I think this is very wise. Volatility is no reason for trading, per se, for most investors. Perhaps for those investment bank and hedge fund trading desks for whom this is their business. But not longer-term investors.
Temporary valuations driven by fears involving sub-prime mortgages, counterparty risks in credit derivatives, and overall debt liquidity, are hardly the stuff on which to base long term investment approaches. These influences on equity prices will be volatile and uncertain during their duration.
Certainly, these factors cannot be the basis for someone in the business media to solemnly announce 'the trade' which is now compelling. At best, their exhortations are simply silly. At worst, they can cause real damage for the unwise, who are not well-advised or knowledgeable as to what, if anything, they should remove from their portfolio, in order to buy the hyped equity.
For investors, trading is simply the means by which our strategies are implemented. We trade when our investment processes indicate to own less of some equities, and more of others. We don't trade simply for the sake of trading.
We invest.

Wednesday, August 01, 2007

Microsoft's Latest Attempt at Resurrection: Craig Mundie's Mandate

A very recent Wall Street Journal article focused on Craig Mundie, the man who is being touted as 'Bill Gates' replacement.' Mundie is the new chief of strategy and research at Microsoft.

I wrote several posts, here, here and here, among others, about Microsoft's dilemma, and a potential solution. The last of the three, and its predecessor a few days earlier in November, 2005, contain the seeds of my ultimate recommendation and prophesy for Microsoft.

Simply put, as good a guy as Mundie probably is, he can't and won't personally, single-handedly overcome:

- the wooden-headed, arrogant and wealthy Steve Ballmer's insensitivity to Microsoft's shareholders

- the vast, entrenched, far-flung bureaucracy and operational mindset at Microsoft, which has been built over two decades of prior success

- a company so large that it simply will never be able to match the speed and innovation of smaller startups in any area in which Microsoft chooses to try to 'lead' from a technological base

- the apparent trusim that technology firms, as technology firms, simply do not have successful second acts. Ever.

As I read the Journal article, I was struck by how very much like the old AT&T, at which I plied my trade in the 1970s and '80s, Microsoft now is. So large that the same solutions are developed in isolation, multiple times throughout the firm. A single leader is annointed to fix the problem and shake things up, but without sufficient authority.

Time and again in the article, Mundie exhorted some or other staffer to go see another, kindred group, meet with the senior executive of some similar activity, or build stronger ties to produce groups.

The trouble is, it matters to people who gets credit for solutions. Mundie seems oblivious to how the groups in power will respond to being presented with 'solutions' by smaller research units from far away locations. The integration of the various ideas and solutions will not be seamless, if it happens at all.

So long as Microsoft tries to use its existing structure to be something it hasn't been before, it will fail. As I wrote nearly two years ago, what Microsoft needs to do is think and behave like a venture capitalist, and spin out various smaller entities to work on the areas in which it wishes to lead. By retaining a stake in the firms, seats on their boards, Microsoft, the parent, will share in the innovation-based value that these startups will create. In time, these startups could become the next Googles, etc.

But so long as senior Microsoft executives respond to Mundie's efforts with comments like Tom Gibbons, VP for various non-computer software efforts,

"I need to think of this as a completely new effort,"

in response to Mundie's stimuli involving mulicore processors, I think Microsoft is doomed to remain a large, hulking, mediocre giant whose best days of consistently superior total return performance are way, way behind it.

One talented, even motivated executive like Craig Mundie just cannot overwhelm the weight of factors arrayed against him at Microsoft, no matter how correct Mundie's insights and actions are.

Tuesday, July 31, 2007

Bancroft Family Reveals True Whorish Capitlistic Values

Today's Wall Street Journal, and CNBC, reported on the final stages of the Bancroft family's sale of Dow Jones to Rupert Murdoch's News Corporation.

What is delicious irony, of course, is that, after all the Bancroft crowing and public fretting about 'editorial independence,' the deal's closing is now dependent upon them extracting a sort of modern "greenmail" from Murdoch.

To wit, some of the Bancrofts are demanding reimbursement for legal and advisory fees connected with the entire negotiation process. This, they argue, is in lieu of a simply higher price for their weightier, on a voting basis, and, thus, more valuable shares.

As my partner noted to me, in an email containing the initial inklings of this on Friday, it demonstrates that, in the end, the Bancrofts are shameless capitalistic whores, just as many decry Rupert Murdoch to be. It wasn't simply a matter of protecting the Journal's editorial sanctity that would lead to the deal's closing.

Oh no. That was just a first step. The real action comes now that the family is seeking to extract the maximum price they believe Murdoch will tolerate paying for their publicly-listed, but, ultimately, family-controlled company.

I posted on this topic at the time of Murdoch's bid, here, back in May. Then, the Bancroft family enlisted various greybeards, such as Peter Kahn, a former Journal executive, to publicly fend off Murdoch. In the ensuing months. they've looked high and low for other alternatives. However, as I wrote then, the truth is, print-only companies are simply too small, in an economically efficient sense, to survive in today's media world.

Murdoch is the best fit for the Dow Jones Corporation media assets. Others share his vision for how to use them, but only Murdoch actually has the goods. As for retaining a stake in the entity, as one interloper suggested, the family members who want to participate in future growth of the brand under Murdoch can simply by News Corp stock.

But the real story now is how the Bancrofts are making use of the two-class stock they created when Dow Jones went public, to extract maximum gains only for themselves. Personally, I have no pity for the non-family shareholders. Despite what some, like CNBC's guest host this morning, Ron Insana, may say about family shareholders not being entitled to their gains because they simply "inherited" the shares, other shareholders bought the stock knowing full well that they could not vote a controlling interest, even as a united class.

Thus, they knew that they always faced the prospect of the Bancrofts screwing them in order to cut a better deal for their controlling shares. And that is exactly what is happening now.

By demanding that the advisory fees they incurred during the sales process be paid by Murdoch, some Bancrofts are, in effect, receiving higher prices for their shares than other owners are. We used to call this "greenmail," back in the 1980s, when people like Carl Icahn accepted higher prices directly from management in order to repurchase his shares of a takeover target.

Now, however, the Bancrofts are using the tactic in reverse. In order to takeover Dow Jones, Murdoch must pay greenmail.

No doubt, if we were to search back through the sainted editorial pages of the WSJ back in the 1980s, we'd find sanctimonious pieces by the Journal staff decrying the practice of paying greenmail, or otherwise treating shareholders of the same company differentially.

All of which goes to show, in the end, it's all about capitalism, capital, and the money. No shame in that. Things generally go better when we are honest about our motives and keep financial activity in its realm, and charity or "public interest" elsewhere.

Obviously, in the end, the Bancrofts believe this, and are no different than the man who runs the company to which they are selling theirs.

Monday, July 30, 2007

Microsoft's Xbox 360 Dilemma

The Wall Street Journal ran an interesting piece earlier this month, sourced from

Essentially, the article contended that Microsoft's latest troubles with its gaming unit's product should spell the end for the product group. At least under Microsoft's aegis.

I could not agree more, and have written as much last spring (2006). In this post, I suggested the following,

"My friend S, a consultant, was discussing corporate performance with me recently. While debating the recent fortunes of tech companies such as Google, Intel, and Microsoft, she challenged me to articulate what I would to fix what ails the last one. I had opined that Microsoft is, essentially, finished as a company capable of generating consistently superior returns, in part, as I have written recently, because of its chairman's excessive wealth. By the way, according to S, my estimate of Gates' net worth may have been light by as much as 50% or so. He apparently was worth some $50B as recently as 6 months ago, not the $25B I thought.

In any case, I said that the first, and, for a while, only thing I would do at Microsoft would be to essentially execute the threatened anti-trust remedy of the Netscape case- split the company into three: an applications software company, an operating systems company, and an internet-related company."

The recent Journal article also advocates spinning off Microsoft's gaming unit. It notes that the Xbox group accounts for only 10% of the company's revenues, yet has become a drain on profits, as sales of the gaming consoles have failed to meet expectations.

As I have written before, having too much financial cushion, and a complicated internal capital allocation process, tends to make units of conglomerates like Microsoft less competitive in the marketplace. They aren't as committed to "do or die" innovation and product success, because, regardless of the group's performance, they will still get paid.

Trouble is, the online gaming business is now a bare-knuckles, innovative slugfest among Nintendo, Sony and Microsoft. There's no room for a half-hearted entrant to dominate the sector.

Between the recent Xbox recall, and its already-slow sales start, I would agree that it is time for the software giant to cut this entity loose to sink or swim on its own.

It isn't doing shareholders much good, and CEO Ballmer still has his hands full with the other two major divisions- applications software and operating systems. Neither of which is yet on track to return Microsoft to its glory days of consistently superior total return performances.