Entrepreneurship: October 2008 Archives

Ok, it looks like we've all decided to get together and have a recession.  What to do?

I'm reading an interesting book right now, Shock Doctrine by Naomi Klein.  If your Milton Friedman deregulated economic philosophy can stand the jolt of a reality check I recommend it.  

A point she makes that is relevant to this conversation is that when a system is shocked (post WWII Japan, post 9/11 USA, post tsunami Sri Lanka) there is a window in which fundamental shifts can take place because intrenched interests have been numbed, distracted, or destroyed.  

This can work in positive ways (post WWII Japan) which was able to rebuild its industrial infrastructure without regard to how things had been done in the past.  Or it can be negative (post 9/11) like the Patriot Act, or post tsunami Sri Lanka where once generations of fishing villages peacefully plied their trade, now highrise hotels are mushrooming because in the aftermath of the catastrophe, the villagers were in no shape to mount a defense of their homes and livelihood.

We are in the throes of a similar situation.  The banks have been so shocked they are paralyzed.  The paper the other day said that AT&T could only get it's banks to loan money overnight.  Now that's paralyzed.  Sooner or later, the banks will remember that if they aren't loaning money, they aren't making money, at least other than the amazing creativity they have applied to the fees they charge for almost everything.  The industry made $4.5 billion (with a B) on bounced check charges alone last year.  I also read recently that the banks have no interest in actually loaning out the $700 billion the government is planning on giving them.  Makes you wonder what their plans are for that money.  

Where might that offer an opportunity for you?  I suspect there are lots of people around who have money to invest and are waiting to see where it might be put to good use other than the stock market (which seems to have gone completely insane) and real estate which remains unstable.  Do your customers pay you in 30 days?  If you teamed up with an investor to offer your customers 90 or 120 day trade credit, would that get the attention of your credit-worthy but credit starved customers?  Would you get a lock on the business they are currently sharing with several vendors?  Reasonable possibility.  You have to deal with a lot of regulatory hurdles to be a bank.  All trade credit requires is doing your homework on the creditworthiness of your customer and an handshake.

What else might you do?  If you sell through distribution it is long past time to think about selling direct to your customer or consumer.  Your distributor may not like it, but since everyone is doing it, there's not a great deal they can do about it.  If you've historically sold through distribution, odds are good you don't know much about direct marketing.  This would be an excellent time to learn.

If you are not selling through the web (and I mean selling, not putting up an electronic brochure) then you are way overdue to crack the code on that.  Just understand as you try to cut through the hype that exists around the web that it is just another direct marketing medium.  Granted one with some remarkable properties, but if you don't understand direct marketing see the above paragraph.

This may be a great time to get into other businesses.  If you understand how to organize your company into strategic business units (SBUs) and internal service units (ISUs) then you have a natural system in place to graft a new business onto your existing organization structure.  If not, buy my book and learn how.

When looking at new business opportunities, the unfortunately late internet marketing genius Corey Rudl laid out the foundations of a good business to be in or build.  They are:

1. A clearly definable and reachable market.

2. Something people want, not need.

3. A great sales process.

4. A strong back end.

Let's look at each of these briefly.  The also unfortunately late marketing genius Gary Halbert used to say at his seminars, "If we're all going to open a hamburger stand, what competitive advantage to you want?  I'll give you any advantage you want except the one I want."  He'd ask people what they wanted: a tastier bun, better beef, snappier sauce, etc.  Then he'd come back and say, "You can have all that.  I only want one thing, that I know will make me successful -- a hungry crowd."  

There are many interesting markets out there that are not readily reachable.  How about people with heart conditions?  Where are you going to go to rent a list of people with heart conditions?  Even in the pre-HIPPA days, this was information you could only infer through age demographics and actuarial information.  This makes acquiring customers very expensive.  You have to throw a wide net and spend money to get in front of a lot of people who are not prospects.  In direct marketing that's called "waste circulation".  

By contrast, bass fishermen who have bought something from a catalogue in the last 90 days are as easy to find as that bass you know is lurking in the weeds by that fallen tree.  All you have to do is get the right bait in the water at the right spot during the right time of the day and you're going to take him home for dinner.

Corey's second maxim, something they want rather than need means don't take on something hard if you can find something easy.  There is an old saying, "There is no one with endurance like the man (or woman) who sells insurance."  Why?  Because it's something everyone needs and no one wants.  One of the oldest mistakes in the marketing book is to get excited about a market for something that everyone needs.  People hate buying what they need.  They love buying what they want.  Nobody "needs" a bass boat.  But that hasn't stopped one hell of a lot of people from shelling out $20-50k to buy one.

A great sales process is entirely under your control.  That you have to design and build.  The key thing to understand here is efficiently focusing your sales resources.  In direct response marketing, there is the concept of RFM which stands for recency, frequency, monetary value.  What direct marketers know with people who bought from you most recently, do so with the most frequency and spend the most on each transaction are the most likely to buy from you again.  Those are the people you want to focus your sales resources on, not that whale (e.g. Wal*Mart) that if in one in ten thousand chance you did land would bury you and make your life miserable. 

Back end is a term that direct marketers know and understand that may not be intuitively obvious.  What it means is something else to sell the person to whom you just made a sale.  The principle is that customers are very expensive to acquire.  You may give up your entire gross margin on the first transaction to get that person's name on your list.  If you expect to make any money, you'd better have other relevant and meaningful products to sell that person in order to generate a return on the investment you made to acquire them as a customer.

Take a look at your own business.  Does it meet these four criteria?  If not, what can you do to correct the situation? Ponder on these things and get your buns in gear.  Just because everyone has decided to throw a recession doesn't mean you have to come to the party.

It's embarrassing actually.  Sophisticated grown men and women with six, seven eight figures and more to invest running in wholesale panic.  The Dow almost 1000 points down one day up 700 the next, back and forth, completely improbable swings.

Then there's Bernanke..."broader economic recovery will not happen right away."  There's an encouraging word.  At least Greenspan understood that economics was a behavioral science and knew how to spread oil on the water to calm the markets down.

There's an old saying, "When your neighbor's out of work, it's a recession.  When you're out of work, it's a depression."

What is it when your business is growing like gangbusters while the pundits wring their hands and gnash their teeth about how awful it all is?  There are companies out there doing that as we speak.  Back in the '92 recession, which was tough for many companies, I had two clients that were growing like crazy.  One was on a 100% annual pace and the other a 200% a year pace.

Granted, when things are as ridiculous as they are at the moment, it's hard to get people to make decisions.  But human needs don't change, human aspirations don't change.  During the great depression the movie moguls made huge fortunes.  

I hope one lesson comes out of all this madness: deregulation is a bad idea.  Ok, I know this is tantamount to worshiping the antichrist to conservatives, but look back at the savings and loan crisis.  Now the banking crisis.  How many billions (trillions?) of debt do we have to burden our children with before we figure out that business cannot be trusted to police itself?  As a former client of mine used to say, "Lead us not into temptation, for we will fail."  

By the way, whatever happened to fiscal responsibility?  Reagan left a huge deficit.  Bush has doubled the national debt.  Incomprehensible numbers.  

We complain about energy costs, since we import most of our oil, the cost is a function of the value of the dollar isn't it?  Historic lows for the dollar and historic highs for energy.  Suppose there is a correlation?  Would you loan money to a friend who is clearly spending more than he earns?  Why would anyone want to loan money to us.  Our fiscal policy is not remotely sustainable.  But, our presidents are only in office for up to eight years, so it will wind up being someone else's problem.  

After decades of republicans bashing democrats for being "tax and spend liberals", how ironic is it that the only people in Congress who seem to have any concern about fiscal responsibility these days are the so-called blue dog democrats?   

I understand all the Friedman economics behind the idea of deregulation but as the old song says, "freedom's just another word for nothing left to lose."  Unlimited freedom is a utopian idea which does not work.  Limits are intrinsic to life.  If it weren't for limits, what possible use would we have for creativity?

If we want to deregulate an industry, how about we charge them a tax which is kept in a pool to bail them out when they fail (as if politicians could ever keep their hands off such a pool).  Autos, airlines, banks, S&Ls, telecoms.  You name it.  Deregulation breeds big companies, who inevitably create big influence with big politicians.  This is the result of Friedman economics.  I'm not a fan of big government but I'm also not a fan of being forced to bail out a bunch of irresponsible insurance, brokerage and banking executives to the tune of almost a trillion dollars while the rich get richer and the middle class shrinks.  

It's not an issue for me personally, because I've always made a decent and comfortable living and I'm very confident of being able to continue to do so.  But people are living at the margin in unprecedented numbers, at least in our lifetime.  How come?

Part is the pressure of the baby boom generation which had blown up every system it's hit from education, to real estate, and now to healthcare.  Part of it is we've become a knowledge economy and we haven't effectively built companies that effectively leverage our people.  Which translates into the fact that we haven't created the productivity gains from knowledge workers that we got from factory workers after World War II which gave rise to the middle class our parents largely enjoyed.  

It's time to get past the religious fervor of conservative doctrine.  Ism's don't work.  We have to mature as a people to take what works from wherever we find it.  Balance freedom with responsibility and accountability to society.  That is what we pay government for: to make sure that members of society play by the rules and to make sure there are rules to play by.  If that means business people need to work a bit harder to exercise their creativity on how to prosper within the constraints of regulation, so be it.  It won't kill them or us.  Chaos in the markets can devastate a lifetime's worth of work and effort.

My father graduated from Cal Tech in 1932.  He was one of two graduates to get a job when he left school.  Unthinkable today.  The depression marked him for his whole life, even though he was very successful by most standards.  We do not need another great depression.

What to do?  Chin up.  Good attitude.  Spread the word.  Vote for some sanity.  Find opportunities for your business, learn to leverage your people (they have more creativity and talent than you have any idea).  Sanity begins at home, with your family and your colleagues at work.  It's a brave new world.  We just need to get creative and we can all figure out how to prosper in it.