Is your company ready for one-to-one marketing?

One-to-one marketing, also known as relationship marketing, promises to increase the value of your customer base by establishing a learning relationship with each customer. The customer tells you of some need, and you customize your product or service to meet it. Every interaction and modification improves your ability to fit your product to the particular customer. Eventually, even if a competitor offers the same type of service, your customer won't be able to enjoy the same level of convenience without taking the time to teach your competitor the lessons your company has already learned. Although the theory behind one-to-one marketing is simple, implementation is complex. Too many companies have jumped on the one-to-one band-wagon without proper preparation--mistakenly understanding it as an excuse to badger customers with excessive telemarketing and direct mail campaigns. The authors offer practical advice for implementing a one-to-one marketing program correctly. They describe four key steps: identifying your customers, differentiating among them, interacting with them, and customizing your product or service to meet each customer's needs. And they provide activities and exercises, to be administered to employees and customers, that will help you identify your company's readiness to launch a one-to-one initiative. Although some managers dismiss the possibility of one-to-one marketing as an unattainable goal, even a modest program can produce substantial benefits. This tool kit will help you determine what type of program your company can implement now, what you need to do to position your company for a large-scale initiative, and how to set priorities.     

Is a share buyback right for your company?

Contrary to popular wisdom, buybacks don't create value by raising earnings per share. But they do indeed create value, and in two very different ways. First, a buyback sends signals about the company's prospects to the market--hopefully, that prospects are so good that the best investment managers can make right now is in their own company. But investors won't see it that way if other, negative, signals are coming from the company, and it's rarely a good idea for companies in high-growth industries, where investors expect that money to be spent pursuing new opportunities. Second, when financed as a debt issue, a buyback is essentially an exchange of equity for debt, conferring the traditional benefits of leverage--a tax shield and a discipline for managers. For such a buyback to make sense, a company would need to have taxable profits in need of shielding, of course, and be able to predict its future cash flows fairly accurately. Justin Pettit has found that managers routinely underestimate how many shares they need to buy to send a credible signal to the markets, and he offers a way to calculate that number. He also goes through the iterative steps involved in working out how many shares must be purchased to reach a target level of debt. Then he takes a look at the advantages and disadvantages of the three most common ways that companies make the actual purchases--open-market purchases, fixed-price tender offers, and auction-based tender offers. When a company's performance is lagging, a share buyback can look attractive. Unfortunately, a buyback can backfire--unless executives understand why, when, and how to use this powerful and risky tool.     

How much cash does your company need?

In late 2001, the directors of Pfizer asked that very question. And with good reason. After its 2000 merger with rival Warner-Lambert, the New York-based pharmaceutical giant found itself sitting on a net cash position of $8 billion, which seemed extraordinarily conservative for a company whose products generated $30 billion in revenues. Most large companies with revenues that healthy would increase leverage, thereby unlocking tremendous value for shareholders. But knowledge-intensive companies like Pfizer, this author argues, are in a class apart. Because their largely intangible assets (like R&D) are highly volatile and cannot easily be valued, they are more vulnerable to financial distress than are firms with a preponderance of tangible assets. To insure against that risk, they need to maintain large positive cash balances. These companies' decisions to run large cash balances is one of the key reasons their shares sustain consistent premiums. Only by investing in their intangible assets can knowledge-based companies hope to preserve the value of those assets. A company that finds itself unable to do so because unfavorable market conditions reduce its operating cash flows will see its share price suffer almost as much as if it were to default on its debts. By the same token, with the right balance sheet, knowledge companies can profitably insure against the risk of failing to sustain value-added investments in difficult times. An optimal capital structure that calls for significant cash balances is certainly at odds with the results of a traditional capital structure analysis, the author demonstrates, but it explains the financial policies of many well-run companies, from Pfizer to Intel to ChevronTexaco.     

How fast can your company afford to grow?

Everyone knows that starting a business requires cash, and growing a business requires even more. But few people understand that a profitable company that tries to grow too fast can run out of cash even if its products are great successes. So a big challenge for managers of any growing concern is to strike the proper balance between consuming cash and generating it. Authors Neil Churchill and John Mullins offer a framework to help identify and manage the level of growth that a company's cash flow can support. They present a formula to calculate an organization's self-financeable growth (SFG) rate, taking into account three critical factors: a company's operating cash cycle--the amount of time the company's money is tied up in inventory and other current assets before customers pay for goods and services; the amount of cash needed to finance each dollar of sales; and the amount of cash generated by each dollar of sales. The authors offer a detailed hypothetical example that carefully considers these three factors; they then illustrate how a company can influence its SFG rate by carefully managing some combination of those factors--that is, some mix of speeding cash flow, reducing costs, and raising prices. They expand on the original example by showing how to include income taxes and depreciation; plan for asset replacement; and identify which one of multiple product lines holds the greatest growth potential. The authors also discuss how various kinds of businesses--manufacturing firms, importers, and service companies--differ greatly in their abilities to finance growth from internally generated funds.     

Who really makes the big decisions in your company?

In many companies, the top management team is officially responsible for helping the CEO make a company's big decisions. But another, unofficial group usually does that job de facto. That's the way it should be, argues Frisch, of the Strategic Offsites Group, provided that the CEO is deliberate in devising the role of this informal and unnamed "kitchen cabinet." Problems can nevertheless arise when senior executives learn about important decisions after the fact, mistakenly assume that they have real power to protect their departments, and find themselves in a system where the way decisions are actually made goes unacknowledged. The key, according to Frisch, is to make better use of senior executives' time and talents by giving them specific responsibilities that complement--but do not overlap--the advisory duties of the kitchen cabinet. A CEO who explicitly acknowledges the role of her cabinet and strikes the right balance between it and her official advisory group of executives can get the best from both.     

Is there cyclical bias in bank holding company risk ratings?

This paper examines whether bank holding company (BHC) risk ratings are asymmetrically assigned or biased over business cycles from 1986 to 2003. In a model of ratings determination which accounts for bank characteristics, financial market conditions, past supervisory information, and aggregate macro-economic factors, we find that bank exam ratings exhibit inter-temporal characteristics. First, exam ratings exhibit some evidence of examiner bias for several periods analyzed. When the business cycle turns, examiners sometime depart from standards that they set during the previous phases of the cycle. However, this bias is not widespread or systematic. Second, exam ratings exhibit some inertia. Our results suggest that examiners rate on the side of not changing (rather than upgrading or downgrading) an institution’s exam rating. Third, we find robust evidence of a secular trend towards more stringent examination BHC ratings standards over time.     

Emerging markets: Is the trend still your friend?

Using an extensive sample consisting of 30 emerging countries and 38 years of data, we examine the profitability of two momentum and two trend following strategies. Over the entire sample, we find excess returns that are economically and statistically significant for all four strategies. Furthermore, we show that the significance of the excess returns remains after adjusting for macroeconomic risk factors. In addition, we find that in spite of their relative neglect, trend strategies frequently demonstrate superior performance, compared to momentum strategies. However, contrary to previous research, we do not find that time series momentum strategies outperform cross-sectional momentum strategies. Finally, we show that the effectiveness of the alternative strategies is largely diminished once transactions costs and liberalizations in emerging markets are considered.     

Is silence golden? An empirical analysis of firms that stop giving quarterly earnings guidance

We investigate firms that stop providing earnings guidance (“stoppers”) either by publicly announcing their decision (“announcers”) or doing so quietly (“quiet stoppers”). Relative to firms that continue guiding, stoppers have poorer prior performance, more uncertain operating environments, and fewer informed investors. Announcers commit to non-disclosure because they (i) do not expect to report future good news or (ii) have lower incentives to guide due to the presence of long-term investors. The three-day return around the announcement is negative. Stoppers subsequently experience increases in analyst forecast dispersion and decreases in forecast accuracy but no change in return volatility or analyst following.     

Do your commitments match your convictions?

How many of us keep pace day to day, up-holding our obligations to our bosses, families, and the community, even as our overall satisfaction with work and quality of life decline? And yet, our common response to the situation is: "I'm too busy to do anything about it now." Unfortunately, unless a personal or professional crisis strikes, very few of us step back, take stock of our day-to-day actions, and make a change. In this article, London Business School strategy professors Donald Sull and Dominic Houlder examine the reasons why a gap often exists between the things we value most and the ways we actually spend our time, money, and attention. They also suggest a practical approach to managing the gap. The framework they propose is based on their study of organizational commitments--the investments, promises, and contracts made today that bind companies to a future course of action. Such commitments can prevent organizations from responding effectively to change. A similar logic applies to personal commitments--the day-to-day decisions we make about how we allocate our precious resources. These decisions are individually small and, therefore, easy to lose sight of. When we do, a gap can develop between our commitments and our convictions. Sull and Houlder make no value judgments about the content of personal commitments; they've devised a somewhat dispassionate tool to help you take a thorough inventory of what matters to you most. It involves listing your most important values and assigning to each a percentage of your annual salary, the hours out of your week, and the amount of energy you devote. Using this exercise, you should be able to identify big gaps--stated values that receive little or none of your scarce resources or a single value that sucks a disproportionate share of resources--and change your allocations accordingly.     

What's your story?

When you're in the midst of a major career change, telling stories about your professional self can inspire others' belief in your character and in your capacity to take a leap and land on your feet. It also can help you believe in yourself. A narrative thread will give meaning to your career history; it will assure you that, in moving on to something new, you are not discarding everything you've worked so hard to accomplish. Unfortunately, the authors explain in this article, most of us fail to use the power of storytelling in pursuit of our professional goals, or we do it badly. Tales of transition are especially challenging. Not knowing how to reconcile the built-in discontinuities in our work lives, we often relay just the facts. We present ourselves as safe--and dull and unremarkable. That's not a necessary compromise. A transition story has inherent dramatic appeal. The protagonist is you, of course, and what's at stake is your career. Perhaps you've come to an event or insight that represents a point of no return. It's this kind of break with the past that will force you to discover and reveal who you really are. Discontinuity and tension are part of the experience. If these elements are missing from your career story, the tale will fall flat. With all these twists and turns, how do you demonstrate stability and earn listeners' trust? By emphasizing continuity and causality--in other words, by showing that your past is related to the present and, from that trajectory, conveying that a solid future is in sight. If you can make your story of transition cohere, you will have gone far in convincing the listener--and reassuring yourself--that the change makes sense for you and is likely to bring success.     

How does service drive the service company?

"How Does Service Drive the Service Company?" presents commentators on Leonard A. Schlesinger and James L. Heskett's September-October article. Commentators include Michael R. Quinlan, Ron Zemke, Jim Snider, Dinah Nemeroff, Steven S. Reinemund, Robert Ayling, Karmjit Singh, James A. Perkins, Joseph E. Antonini, and Walter F. Loeb.     

Is “voting with your feet” an effective mutual fund governance mechanism?

Investors in open-end mutual funds can vote with their feet by withdrawing assets from or adding assets to these funds. This paper assesses the effectiveness of this market discipline mechanism by investigating whether voting with the feet prevents the abusive practices that led to the 2003-2004 trading scandals. The research results indicate that funds with higher flow sensitivity—that is, a higher density of vigilant clients—have lower arbitrage potential and fewer abnormal flows, which in turn implies less opportunistic trading. As a result, these funds have a lower probability of being implicated in scandals. These findings suggest that investor ability to withdraw assets from or add assets to the funds is an effective mutual fund governance mechanism. In funds with less sophisticated investors who cannot use this option, other means of governance are especially important.     

Case study. Does this company need a union?

No doubt about it, the top managers in this fictitious case study agree, Wellington Associates is a great place to work. Analysts at the high-tech consulting firm enjoy some of the best pay in the industry. And their benefits are extensive: flextime, liberal educational opportunities, comprehensive medical and dental coverage, generous vacation leave, and even on-site day care. So it came as something of a shock to CEO Jane Wellington and her top executives when HR chief Elvin Cusack started out the weekly senior-management meeting by declaring that the United Office Workers Union had begun organizing the support staff. Turns out, Cusack explained, that the company looks very different from the support staff's point of view. Although their starting salaries are indeed competitive, raises average a mere 2% to 3%, and promotions to professional ranks are rare. Medical and dental coverage take a greater chunk out of clerical pay than out of the larger professional salaries, and the cost of the day care center is pretty much out of reach for the support staff. Flextime is impractical for workers who need to be in the office to answer phones and to file papers. Worse, the support staff is expected to accommodate the analysts' flexible schedules; if an analyst decides to work late to finish a project, the secretary has to stay as well. What to do? Suggestions ranged from "fire 'em" to "say nothing before calling in legal counsel." Five commentators examine Wellington's options and its legal obligations.     

What's your personal social media strategy?

Social media are changing the way we do business and how leaders are perceived, from the shop floor to the CEO suite. But whereas the best businesses are creating comprehensive strategies in thi area, research suggests that few corporate Leaders have a social media presence--say, a Facebook or Linked in of page--and that those do don't use it strategically. Today's leaders must embrace social media for three reasons, First, they provide a low-cost, highly accessible platform on which to build your personal brand, communicating who you are both within and outside your company. Second, they allow you to engage rapidly and simultaneously with peers, employees, customers, and the broader public--in order to leverage relationships, show commitment to a cause, and demonstrate a capacity for reflection. Third, they give you an opportunity to learn from instant information and unvarnished feedback. To formulate your personal social media strategy, it helps to clarify your goals (personal, professional, or both), desired audience (private or public), and resources (can you justify using your company's?). You must also consider the risks of maintaining a large number of connections and of sharing content online. Active participation in social media can be a powerful tool--the difference between leading effectively and ineffectively, and between advancing and faltering in the pursuit of your goals.     

What's your real cost of capital?

In valuing any investment project or corporate acquisition, executives must decide what discount rate to use in their estimates of future cash flows. The traditional approach is to apply the capital asset pricing model (CAPM), which has remained fundamentally unchanged for 40 years. But the formula--in particular, its beta element--has long been a source of frustration. In fact, corporate executives and investment bankers routinely fudge their CAPM estimates, say the authors, because experience and intuition tell them the model produces inappropriate discount rates. CAPM has three main problems: First, beta is a measure of both a stock's correlation and its volatility; second, beta is based on historical data; and third, CAPM rates don't take into account the term of the investment. These factors together result in discount rates that defy common sense. As an alternative to CAPM and its beta element, the authors developed a forward-looking approach to calculating a company's cost of capital, the market-derived capital pricing model (MCPM). It does not incorporate any measure of historical stock-to-market correlation, relying instead on estimates of future volatility derived from the options market. This is helpful since investor expectations from the options market are built into a company's current stock price. Using GE as an example, the authors give step-by-step instructions for how to calculate discount rates with MCPM. They also offer evidence from a range of industries to show that MCPM's discount rates are more realistic--especially from the corporate investor's perspective--than are CAPM's.     

Is creative accounting dead?

Because it has been seen as a short‐sighted way for local authorities to escape from the Government's expenditure controls, creative accounting now has a bad reputation. However, creativity will be needed in accounting, as in every other aspect of management, if local authorities are to stand a chance of facing up to the challenges of the 1990s.     

Is momentum really momentum?

Momentum is primarily driven by firms' performance 12 to seven months prior to portfolio formation, not by a tendency of rising and falling stocks to keep rising and falling. Strategies based on recent past performance generate positive returns but are less profitable than those based on intermediate horizon past performance, especially among the largest, most liquid stocks. These facts are not particular to the momentum observed in the cross section of US equities. Similar results hold for momentum strategies trading international equity indices, commodities, and currencies.     

Is recovery risk priced?

Recovery risk to explain corporate debt premia has not received much attention so far, most likely due to the difficulties around decomposing the expected loss. We exploit the fact that differently-ranking debt instruments of the same issuer face identical default risk but different default-conditional recovery rates. This allows us to isolate implied recovery under the T-forward measure without any of the rigid assumptions employed by prior studies. We find a pronounced systematic component in recovery rates for which investors should receive a premium. Comparisons to physical realizations show that the premium is quite time-stable and similar for different debt seniorities.     

Is Chapter 11 Efficient?

The efficiency of the Chapter 11 bankruptcy process is examined by estimating the impact of Chapter 11 filings on the operating performance of bankrupt firms. We control for firm‐level heterogeneity in prefiling characteristics using matching methods to select benchmark firms comparable to filing firms. We compare bankrupt firms’ operating performances with those of matched nonbankrupt firms. Our results challenge the contention that Chapter 11 is an inefficient, debtor‐friendly mechanism that rehabilitates economically nonviable firms. We demonstrate that firms that file under Chapter 11 perform no worse and, if anything, better than comparable nonfiling firms.