Ghilarducci's Guaranteed Retirement Account Plan & The Macroeconomy

The last couple of weeks there's this rumor that's been floating around that the Government plans to do away with 401K and replace them with what is being called Guaranteed Retirement Account. The idea apparently originates from an economist, Teresa Ghilarducci, who put forward a paper "Guaranteed Retirement Accounts Toward retirement income security" in November 2007. A year after the paper was published, in the wake of one of the worst financial crises in the history of the US, the author was apparently called to testify before Congress as the paper caught the government's eye. The paper proposes that workers "not enrolled in an equivalent or better defined-benefit pension" be enrolled in a "GRA" plan that combines the best features of defined-benefit and defined-contribution plans, offering workers guaranteed (?) retirement benefits- contributions will earn a rate of return guaranteed by the federal government. Upon retirement these funds will convert into annuities. Ghilarducci claims that combined with Social Security, these annuities will replace 70% of pre-retirement earnings (I thought most of the folks who entered the workforce within the past decade had given up ever seeing their Social Security benefits?). Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent (but remember you are foregoing the opportunity to generate market returns on your investment- not amounting much today, which is why we are even entertaining this discussion I guess). Assuming this thing works and the Feds will be able to deliver on their promise, what will be the fallout from pulling that kind of capital out of the investment markets? Of the total $17.1 Trillion in U.S. retirement assets, mutual funds managed $2.2 Trillion, while IRAs accounted for $4.5 Trillion (data as of March 31, 2008 from Investment Company Institute). If a $0.75 Trillion bailout was going to pull us out of the financial crisis, what will be the outcome of withdrawing $6.9 Trillion out of capital markets? Or am I missing the math completely?

P&G Giving Up on Facebook Marketing?

I was just reading an article by Jack Neff of AdAge covering P&G "Digital Guru" Ted McConnell. Ted believes that Social Networks like Facebook may never be able to show the ROI on Ad dollars marketers spend on their websites. The article quotes Ted as saying about consumer-generated Media "Who said this is media? Media is something you can buy and sell. Media contains inventory. Media contains blank spaces. Consumers weren't trying to generate media. They were trying to talk to somebody. So it just seems a bit arrogant. ... We hijack their own conversations, their own thoughts and feelings, and try to monetize it." I am not sure if someone rewrote the English language dictionary but last time I checked Media is defined as "means of mass communication" and with a Reach of 12% of global internet users according to Alexa, Facebook certainly fits that bill. Now is it a good medium for advertising, that's a whole another thing. Ted also raises concerns about the type of targeting afforded by Facebook, but that's a fallout of the Information Age. There was a lot of hue and cry about using Credit Bureau data for marketing, a few regulations later that is still an industry. Ted makes a good point about reach fragmentation though- there's just way too much people do online to effectively reach them with any decent amount of banner ads. On the other hand as technology advances the ability of online advertisers to track a target through their internet trail and persevering until a conversion is obtained isn't that difficult. Already re-targeters are identifying unique users and repeatedly hitting them with ads- check this article.

Return on Product Innovation: Measuring your Innovation Pipeline

Innovation is a critical growth driver for most industries, but more so for industries that are mature. Growth industries are less reliant on an ongoing pipeline of innovations because the full potential of the existing portfolio hasn’t been maximized yet, penetration can be further increased and new markets can be expanded into, where success with existing products can be replicated. Products and brands in mature industries on the other hand are characterized by a lack of differentiation outside of price- barriers to entry are low, which increases the number of market players, pushing marginal profits down. In such an environment, innovation provides a strong differentiating factor, allowing a brand to lower dependency on price as a competitive lever.
So if you are responsible for the strategic planning for your firm and not in an early stage industry, you need to be thinking about your innovation pipeline and it’s not enough to say you have a department for innovation- in most industries only 1 in 10 innovations succeed. So you not only need to have a team in place that has a network reach both inside and outside the organization that allows ideas to funnel up, but you need to also have the right metrics in place to evaluate the performance of your innovation strategy vis-à-vis your industry. A study by McKinsey (McKinsey Global Survey Results: Assessing innovation metrics, October 2008) suggests that a large percentage of executives even at companies that actively pursue innovation don’t formally assess innovations at all.
One way to evaluate innovations is using Return on Product Innovation (ROPI) measured through in-market tests (in-market tests are also risky because your competitors can copy it and bring to market faster than you, stealing your thunder). For ‘breakthrough’ innovations that you are planning to take straight to the market without first testing, ROPI can be estimated as ‘one-year out ROPI’, ‘two-year out ROPI’ and so on. At the end of year 1, forecasts can be used to estimate breakeven time for ROPI to turn positive and marketing ROI can be used to evaluate opportunity to optimize marketing strategy to improve ROPI.

ROPI={[Dollar Sales-Cannibalized Sales]/ [Fixed Cost + (Variable Cost*Units Sold)]-1}*100

Fixed costs can include development or other one-time costs related to production, variable costs are usually ongoing production, marketing and distribution costs. You need to deduct cannibalized sales, because these are sales you would have gotten even without the innovation. This equation can be modified for any custom inputs particular to your industry or the nature of innovation. For instance, if estimating ROPI for an in-market test then using the full fixed cost for development is not fair and should be factored down based on the ratio of size of market tested vs. the total market-size.

October Retail Sales

Macy's reported a disappointing sales for the third quarter losing $44 million. Other retailers are expected to report quarterly results later this week including JC Penney, Kohl's and Nordstrom. Few retailers are already reporting poor sales number for the month of October, which is going to put added pressure on the market and the economy. This is going to be a roller coaster fourth quarter.

Enjoy....

The U.S. GDP & The Non-farm Payroll

On the heels of one of the worst ISM Manufacturing Index numbers in over two decades, the Employment numbers that come out on Friday were expected to be bleak- and it exceeded this expectation as the decline was 40K worse than the consensus average of -200K. The report released by the Bureau of Labor Statistics is based on two different surveys with different sample sizes and the bigger focus is on the Non Farm Payroll number that comes out of the establishment survey because this survey is more comprehensive with a much larger sample size than the household survey (375,000 businesses vs. 60,000 Households). The number of total employed persons in the U.S. population has been falling for 10 consecutive months and in October '08 there are 1,138,000 fewer employed persons in the U.S. compared to the November '07 peak of 138,037,000. And all this time economists have been debating whether it's really a recession or not- fact of the matter is the relationship between Employment and GDP may not be what it was in the past- correlating Quarterly change trends in GDP vs Employment (15-year moving window) indicates that this relationship may be only half of what it was 4 decades back.

The Economy has become much more complex than what it was back then and we may need to be redefining how we look at these economic indicators.

Evaluating Market Expansion Strategies: Vertical or Horizontal?

With the recent turmoil in the Economy, deals and opportunities are soon to follow as astute business persons hunt for opporunities for consolidating their position by moving into spaces vacated by fallen players. Easiest venues for expansion are horizontal, as they encompass your core area of expertise and help topline growth. Cost efficiency benefits are critical components in evaluating a horizontal expansion opportunity. Horizontal expansion strategies can be further broken out into geo-demographic expansion versus channel expansion strategies, but all these still entail doing what you are good at in new venues. Efficient marketing and distribution networks are important to the success of horizontal strategies.

Vertical expansion on the other hand is a trickier proposition as it entails venturing into an area you are only familiar with but lies outside your core competitive advantage, but done correctly will significantly impact your bottomline. Synergy benefits are very important for vertical expansion opportunities. Operational excellence too can go a long way in making a vertical expansion strategy very successful.

Industry lifecycle is also a big determinant of the feasibility of one versus the other. Growth industries make horizontal expansion very attractive and important for market leadership, whereas for mature phase industries horizontal expansion may not offer as much ROI as margin improvement through vertical expansion.

Predictive Targeting In Digital Media Marketing

I was just reading an article on MarketingProfs.com that was talking of leveraging a technique called "CARVER" (reminds me of Thanksgiving!) used by the military to "identify and prioritize" targets ("How to Target Your Prospects With Military Precision" http://www.marketingprofs.com/8/target-prospects-with-military-precision-meachum.asp?sp=1). This won't be the first time ideas from the military have been leveraged in business 'warfare'. In fact Precitive Trageting is exactly the area where another concept from military surveillance has been used- Receiver Operating Characteristic Curves or 'ROC' Curves. ROC Curves are used to evaluate how well predictive models are able to identify targets that are most likely to respond to specific media tactics. The concept is based on the effectiveness of Radars to identify targets by sifting signal from noise. ROC curves are used to evaluate econometric models that identify prospects that are most likely to respond to media tactics. Wikipedia has a good explanation of this approach: http://en.wikipedia.org/wiki/Receiver_operating_characteristic_curve. Although the CARVER concept is interesting, the optimization of the weights for each factor seems a bit subjective inc comparison to the scientific precision provided by an econometric model. This link provides a fairly decent expanation of the method: http://www.ni2cie.org/targetanalysis.php.htm
Compared to the subjective approach utilized here, an econometric model not only helps identify most opportunistic targets, but also quantifies specific relationship between probability of response to marketing and amount invested in each media tactic available. Of course to do this successfully you do need a training sample based on historical programs, so if the CARVER approach doesn't need any historical data, there may be something there.

ISM Manufacturing Index says the worst is not over yet in the U.S. Economy

So we were just talking about how the GDP is not a very consistent measure of the economy.
The Institute for Supply Managements Manufacturing index (formerly known as the NAPM Survey) just came out today and this little guy's been historically good at measuring contractions. The Index is constructed such that levels at 50 or above signal growth in the manufacturing sector, which is a good measure of actual demand. Levels between 43 and 50 indicate the economy is still growing but the manufacturing sector is slowing down it's activities in anticipation of lowering demand. Levels below 43 indicate that the manufacturing sector is taking drastic measures to counter a significant and extended slowdown in demand- basically the manufacturing sector considers the economy in deep recession. Guess what the Index number that came out today read? 38.9- a 26 year low, just 1 basis point above the September 1982 low of 38.8! This underscores the importance of credit in today's economy in a way, the bank's tightening of the credit faucet, and the events in the Financial markets and broader economy, consumer spending has taken a beating. Another point no one is factoring is the impact of people becoming austere in their spending to shore up their battered retirement accounts. With over a Trillion dollars lost in the country's retirement funds, people who were planning to retire within the next 1 to 2 decades are going to need to increase their savings rate to offset the loss of this year. Guess what that means for spending?

The Employment Situation report is coming out later this week, with such a drastic drop in manufacturing, I am expecting a pretty gloomy picture with the Non Farm Payroll number.

Is GDP a Consistent Measure? No, GDP is actually a Deceptive Measure...

In economics, expert and layman alike keep looking at the GDP quarter over quarter for some direction as to the true health of the economy. Talk about the blind leading the lame! If bubbles are reflective of an inflation of values of goods and assets, be it stocks, real estate or currencies, then an inconsistent metric is one that lacks robustness not to be influenced by bubbles. Look at the GDP- it is easily swayed by pretty much any bubble there is out there. The GDP may have been a good measure when the world was simpler, and production and consumption were driven by real growth in wealth, not by credit cards and home equity loans. According to Federal reserve statistics, Revolving Home Equity $100 Billion to $200 Billion from 1997 to 2002, but from 2002 to 2006 reached $500 Billion. It is difficult to believe that people's equity in their homes more than doubled in 4 years, so basically they were riding the wave of the real estate bubble and an artificial inflation in the value of their homes (old news now since even your neighborhood grocer by now knows about the sub-prime crisis). What's bad for the GDP (even Real GDP) as a metric is how much it is influenced by consumption (more than 2/3rd). With such a spike in Home Equity withdrawal, consumption is bound to spike as well, but this growth in consumtpion can hardly be said to be driven by a real increase in wealth and well-being- it is all driven by money advanced through Home Equity withdrawal, on the assumption of sustained growth in Home prices and not as much due to a genuine increase in actual Home Equity. When that market corrected it was payback time for all the uncontrolled spending driven by Home Equity- and GDP as a metric, was not able to see through that scam.