Archive for May 2009

How the Obama Administration Motivates Behaviors

May 26, 2009

The Time Magazine article was extremely instructive in helping us to understand the behavioral science oriented steps being taken by the Obama administration. In this post we’ll focus on a number of them. Specifically, they are:

  1. Supplying knowledge
  2. Making it easy
  3. Creating social norms
  4. Legislating the activity

According to the Time Magazine article, studies suggest that better information can help us make better choices. This information can be disseminated in the forms of public service announcements (PSA’s) or appeals from well respected figures (remember our discussion about the use of Hubs in building communities) and even serial dramas.

What this means is that aggressive rules for disclosure and clarity will likely result in people making more informed and better choices. Documenting best practices will also produce meaningful results.

The second way to influence behavior is to make it easy for those who wish to make the choice that you wish them to make. This is why default options – opt-out instead of opt-in – are very successful. The push to create an electronic health record (EHR) is one step along the path of making generic drugs our default prescription of choice.

The creation of social norms is yet another way to influence what we choose. An appeal to conformity is very effective as we are a herdlike species. If our peers are obese, we are more comfortable choosing to be that way. What works is creating a sense that choosing not to participate in an effort sets us apart from social norms and therefore, we will take steps to be in sync with our peers. This is a technique that has been used successfully even in forwarding goals that are inappropriate or morally wrong (think McCarthyism).

The last factor that the Time Magazine article addresses is what happens when a nudge is insufficient. At that point, a strategy of making something mandatory is very useful. That’s why there is interest in taxing undesirable behaviors such as cigarettes, alcohol and even trans-fats consumption and subsidizing desirable behaviors such as weatherizing a home or the purchase of fuel efficient cars.

Now, when we hear a new initiative being proposed by the Obama Administration, our awareness to the work of the behavioral scientists will be present. Let’s hope that these efforts though are used to move us in the right directions.

In the ensuing posts, we’ll look at like some of the other models and variants that allow us to influence others.

Understanding the Science of Change

May 22, 2009

I have always been a big believer that the universe has a tendency to bring ideas, concepts and even people to you when you need them to be in front of you. When that occurs in my life, after I finally recognize that it is happening – and yes, sometimes it takes me a while to notice — I begin to immerse myself in the idea or get to know that person better.

Lately, a new concept has been showing up and so over the next few posts, I’m going to write about it. I’m also going to read about it and share what I learn along the way.

In the April 13th, 2009 edition of Time Magazine, there was an article by Michael Grunwald called “How Obama is Using the Science of Change.” The article cited the work of behavioral scientist Robert Cialdini who found that that the most powerful motivator was that “people want to do what they think others will do.” Cialdini is the author of the best seller “Influence.” (For what its worth, Cialdini is the name that keeps popping up…more on that in the next few posts)

According to Time, Obama leans heavily on the work of the behavioral scientists to understand what makes people tick and then, using this knowledge, he intends to spur behavioral change throughout the country. He’s leveraging what he learned about people to move forward his agenda on the economy, healthcare and energy.

The power of these nudges is huge. For example, is there a difference in the number of people who participate in a 401 K plan if they have to sign up or would that number change if they were signed up already and had to opt out? Well, a 2001 study showed that only 36% of women joined a 401K plan when they had to sign up for it…but when they had to opt out, 86% participated.

The implications of using behavioral science in our business and personal lives are huge. This notion affects sales, marketing, management, leadership and even how we lead our communities or exist within our families.

So how is the Obama Administration using what they have learned? Consider the way Americans received the $116 billion in payroll tax cuts from the stimulus package. Obama chose NOT to send one lump sum check even if that would have put the money in the hands of Americans faster. His administration was concerned that a lump sum check might be viewed as a windfall and deposited in a bank account instead of being spent to rev up the economy. Instead, the money is being released through decreased payroll withholding. Smaller amounts spread over time are more likely to be spent. The idea is to subtly nudge us to spend the extra cash.

Make no mistake – this is a radical departure from the way that we have let the free market dictate how things work. Some might call this “manipulation,” but to change our ingrained behaviors, this might be necessary. And we may discover that behavioral science is compatible with free market thinking as it may prove to be an accelerator in how we interact with the free markets.

The Time magazine article goes on to highlight several elements that help us to change behavior. And that will be the subject of the next post.

The Importance of Looking at External Threats and Opportunities

May 17, 2009

My recent forays into the housewares industry and events within my own community have heightened my sensitivity to the importance of looking at our businesses and organizations in the context of the environment within which we operate.

My friends in the housewares industry are very concerned about how their major clients will react to any efforts that they undertake to create new channels for their products and services. Still, the advent of online communities, while representing a unique opportunity, also represents a perilous threat. If the industry ignores the opportunity and someone else chooses to capitalize on it, their businesses may be further imperiled.

Closer to home, my community is experiencing a tuition crisis. The core lifeblood of the community for several generations has been its ability to educate its children about religious and cultural values. The recent economic downturn has accelerated a crisis that has been developing, and been largely ignored, for years. Parents are finding it difficult to pay for this type of education and many, by economic necessity, are choosing to send their children to schools that do not supply this core sustaining educational program. Leadership in identifying and addressing this problem has been conspicuously absent.

What both situations have in common is that there is an external environmental factor that needs to be seriously considered and addressed.

In the case of our housewares friends, failing to act and create that other channel may result in a significant competitor that further erodes their businesses. In the case of the community, failing to act may decrease the connection between the members of the community and their culture and ultimately lead to an unwillingness or lack of desire to support projects that are integral to the community’s growth, simply because the connection to its values has been compromised.

The lesson in external threats and opportunities is that failing to act has as significant a set of consequences as choosing to take action. Decisions and non-decisions have consequences. As long as one is prepared to accept the consequences, any decision is acceptable.

The important thing is to make sure that those consequences are considered before choosing whether to move ahead or whether to pass on an opportunity.

Returning to “Normal”

May 15, 2009

ile it is valuable to know how this challenging economic situation occurred, the gnawing question on everyone’s minds is “when will things turn around?”

Joel Naroff thinks that we are on our way but he does have some concerns for the future. In his own words, Naroff notes that “the pendulum has begun to swing.” Yet, it will likely take years to clean up the mess that was made while cleaning up the mess.

For the most part, he believes the government stimulus was the right solution.

His rationale is pretty straightforward.

For a country to exit a recession there needs to be a particular sector leading the way. We’d love it to b the business / housing sector. However, the business / housing sector assumed the turtle position. They went into a shell and reduced costs.

Our second choice would be the household sector but that sector is worried about having jobs and is hoarding cash, so this group won’t be our savior.

That leaves only one other segment to create growth – the government.

The reality is that there will be a lot of spending from the stimulus bill and it will start with construction.

And soon, 90% of those who have jobs will realize by the summer that they will make it and start to buy.

The jumpstart from the government will jumpstart the household sector which will jumpstart the private sector.

More good news…

The housing market is starting to bottom out. We know that this is happening because distressed assets (foreclosed homes) are starting to be purchased. If people are willing to make a deal, it means that they believe the price is close to its bottom.

Confidence is starting to rise.

And a lot of things have stabilized…even though we now need growth and not stabilization.

There are clouds though on the horizon.

The first concern rests on managing the potential for significant inflation. Naroff thiks that the Federal Reserve will have to increase the current low interest rates quickly – perhaps to 5 or 6% — and doing so will likely slow down growth.

Second, the latest budget projections has the federal deficit  approaching $2 trillion. And if interest rates go up, the debt service on this deficit will increase dramatically.

Banks will also move much more cautiously when lending money, in part because of their need to avoid the mistakes that were made so recently.

All of these factors will moderate growth.

Still – and this may actually be a good thing – we will need to learn to spend our income and not the appreciated financial or housing assets that so dramatically rose.

The bottom line for Mr. Naroff:.

Cleaning up the mess that cleaned up the mess will take 5 – 10 years. We have problems with interest rates, the deficit and the government being in the private sector.

We have not had real innovative growth for 20 years. We need to have technology innovation rather than financial innovation.  We have had recession then bubble then recession then bubble. Our growth has been driven by bubbles.

You can expect long periods of modest to moderate growth as growth conditions have changed dramatically

The Fed will raise the funds rates quickly because we will be worrying about inflation. Long term rates will likely rise by the Fall. He suggests that the Fed will be raising the funds rate from zero to 5- 6% in a year.

The ride will still be bumpy but it looks like, according to Joel Naroff, at least we are riding in the right direction.

The Financial Crisis — One Leading Economist’s Perspective

May 12, 2009

Earlier this week, I had the opportunity to hear nationally acclaimed economic expert Joel L. Naroff, Ph.D. Naroff is a well decorated economist.  He was selected for having the most accurate economic forecast among the Blue Chip Economics Indicators survey participants for the years 2004 to 2007. Bloomberg Business News also named Naroff Top Forecaster in America for 2008 and he has been quoted in most of the major business publications and appeared on many of the major business news networks.

I was therefore very interested in what he had to say about the economy. Because I found his perspective unique, I thought to share my understanding of what he said with you.

Generally speaking, he presented an optimistic view of the immediate economic future, although he had some concerns about the long term picture.

Naroff first explained that the most important responsibility of an economist is to tell when things change. In fact, this is the same major role of a business leader. S/he too must know when conditions change. He views his job as looking at turning points.

So here was his take on what got us into this mess…

Naroff believes the villain in all of this is the dot coms. (The dot coms? Yes, that was what he said…read on) The dot coms taught us all a very valuable lesson and that was not to invest in vapor. Companies needed to have value and be tangible.

Learning this lesson paved the way for what we are experiencing today.

The byproduct of this lesson is that our next investment choice would be something that is the antithesis of vapor and something that always appreciates. And so we targeted real estate.

As you may recall, in order to get a mortgage, one needed to place 20% down, have a credit rating of 720 and show several years of meaningful income as evidenced by your tax returns. This was a good way of determining who was willing to put “skin in the game” (the downpayment part) and who could afford to make payments on a mortgage.

So the real estate market gets hot, and the finance industry sells to this target segment that has these credentials to purchase real estate.

Eventually, though they exhaust this target segment, and therefore a new target segment is needed. The financial community then lowers the standards by which one could be deemed worthy of receiving a loan in order to increase the size of the segment. In 2003, the standards are lowered and then, they are lowered again in 2004.

Before long, the requirement of putting money down disappears, people with less than stellar credit ratings are considered appropriate and all one had to do was spell the word “j-o-b.”

People began to flip houses because it is easy to do. Real estate prices increase 40% in one year and then 30% in the next.

And so, we experience a dot com boom all over again. People are “investing” in real estate without placing any money down. As Naroff explained, when you place no money down on a house, it is not a mortgage – it is a lease.

This bubble had to burst.

Construction starts to collapse and its collapse ripples to all supporting businesses including electrical, woodworking and manufacturing.

Meanwhile, Wall Street discovers that it can bundle all of these distressed mortgages and have them rated as securities. And with no money down, these bundles get AAA ratings.

Housing starts to devalue and once the mortgage exceeds the value of the property, people decide not to pay their mortgage. With no money down, it is easy to walk away.

The problem began to mushroom when many of the banks keep these securities on their books. This was a huge mistake. When people walk away from their obligations,  the housing values plummet and when they plummet, so do the values of these securities.

The decelerating cycle was now underway.

In September, Lehman Bros goes under. A bank actually sends several million marks to Lehman twelve minutes before Lehman marched into Federal Court. When a bank learns it can’t lend to another bank and, because everything in our economy operates on credit, this is tantamount to a kiss of death.

A crisis of confidence emerges as we listen each weekend for news that another major financial institution is about to go bankrupt.

In October, we get TARP, the first financial bailout program. It is partly designed to mask the problem before the national election – and even though we wasted money, the financial system was stabilized.

So in 2005 – 2006 – everyone got credit

And in 2007 – 2008, no one gets credit.

In our next post, we’ll share what Joel Naroff explains about how and when he thinks we will get out from this crisis.

Reclaiming the Business…the Conclusion or Perhaps, the Beginning

May 8, 2009

Well, the presentation took place this past Tuesday and now it’s time to review the recommendations.

There are really two distinct issues in this discussion.

(1)   How does this industry protect and grow its current business (with Wal-Mart, Target and the other superstores)? and

(2)   Should it and if it should, how does it create a sustainable business outside of this clientele?

The solution set must take into consideration these constraints or challenges:

1)      There is, and will likely be, a low frequency of purchasing houseware products multiple times

2)      These items tend to be modestly priced so spending extensively on advertising is not feasible

3)      Branding on the web is very difficult

4)      The cost of selling low priced items through the web is prohibitive ehen you factor in associated labor costs

To address these issues and constraints, a framework was offered. In order to avoid being redundant, I will simply reference the prior two posts. Please review them to get the details.

The key takeaway is that, in this framework, doing any one of the suggested steps will help the business situation but doing all of them, I believe, will produce a very dramatic and meaningful result.

The second key point in having a framework is that it creates flexibility in thinking. There is “no one size fits all” solution but that does not mean that there is no solution at all. It must be tailored and constructed based on reasoned thinking and analysis.

And it requires one more element – COURAGE.

In recessionary times, we are prone to inaction. Our confidence is shaken and we see all the other companies around us taking very limited actions to grow their business.  Each of us is no different and when faced with an environment where inaction is acceptable, we invariably find it easier to go along with the pack

The framework that was presented speaks to having the courage to move forward with a decision and action plan if one has confidence in the plan. That can only be achieved by taking all of the analytical steps outlined in detail in this blog.

So let’s go back to our issues that we raised above.

The overarching message is that when a company has ceded its client relationships to a third party (and that is what every company does when it uses distributors) and when that distributor takes advantage of the relationship, the only solution is to get the client relationship back. And in this circumstance, creativity is a requirement.

In working with the superstores, the companies must perform the necessary in-store and out-of-store research to understand what its customers need, value and appreciate and respond in the context of what it learns. It must use traditional low cost marketing tools such as public relations to create presence and branding. It must identify new promotional opportunities and collaborative marketing opportunities. It cannot and must not be held hostage by its distributors.

Because the way we communicate is changing, it is imperative that the new social media techniques are utilized to their fullest and a new additional way of connection be created. A web store won’t work for this industry for all of the reasons noted above but creating a central community for those who share the passion probably would. Determining the nature of that community would be the challenge.

The most important reason though for undertaking such an effort is simply this: Make no mistake about it. If these companies don’t undertake a new social media effort and associated community building soon, someone else will.

So there you have it.

A special thanks to all those who shared the fervor and enthusiasm in creating the solution set and, particularly to Carl, Suzy, Mitch of Raspberry Red, Yair, Steve Clark of Andover Communications and of course my wife, Annie, and son, Eli. Learning from you made this enlightening but more important than that, it made it fun. Special thanks to Karla Robertson of Shifting Gears for being a superb coach and guide.

And to Chuck Rosner of CORE (Chief Officers Reaching Excellence) and the International Housewares Association, we thank him for his love for the organization, industry and its leaders. A tip of the hat to you sir. Your leadership and commitment is inspiring and is reflective of the desire to learn that was so evident in all those that attended the session.

If anyone would like a copy of the PowerPoint or would like to discuss the session in more detail, please e-mail at david_blumenthal@msn.com or call me at 201-837-2445 and we’ll set up a time to chat.

And in Summary…Part 2

May 3, 2009

A review of our final five lessons will help us prepare for our upcoming session on May 5th and the introduction of a framework by which we can build a vibrant consumer franchise.

Lesson 6: Draw Attention Using Traditional Approaches. Do not forgo the use of traditional techniques to build awareness just because there are new social media techniques available. Being in a technologically driven world does not mean we should discount or overlook effective traditional methods of promotion. It is very possible to create customer demand through the effective use of traditional marketing and push-pull techniques.

Lesson 7: Use Technology to Forward Your Business. Technology is never the solution in and of itself. Technology is a tool – a very effective tool for transforming the way one processes transactions on behalf of its customers or delivers products or services to them or communicates with them. Use social media to promote and support your business and build presence.

Lesson 8: Rethink…and Rethink Again. It is only natural to assume that what has made a business a success in the past will continue to allow it to be successful in the future. However, when we successfully step back from the way we have run our businesses we intuitively know that this cannot be true. Engage yourself and your colleagues to rethink the ways that you have done business and explore options to create new ways of marketing or new niches to pursue.

Lesson 9: Understand Your Value and Leverage It. The success that you have had with your most successful products is likely the result of your innovative way of uniquely addressing a consumer’s challenge. As an example, your most successful products have likely created a following. Leverage this following to create additional opportunities in building and generating new sales opportunities.

Lesson 10: Re-examine and Re-define the Business. Businesses are living beings in that they have specific cultures and DNA’s that dictate how they function. And like many living beings, in order to survive, they need to evolve.  Allow your business to change with the times and needs of your clientele.

As I prepare for the session, it has become apparent to me that this is the next appropriate stage in my own learning experience. My goal will not be to provide a “solution” but rather to stimulate a conversation whose whole hopefully will be far greater than the sum of its parts.

It should be an exciting conversation…I’ll let you know what I learn in the next post.


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