Saturday, February 21, 2009

Giving Up the Cellphone Contract
Published: NYT, February 20, 2009

The key message is that in recessionary times, simplifying your offering and taking cost out maybe the best approach to ensure growth. In this example, offerings are being created that unbundle typical mobile phone packages to offering just basic services at lower cost and cost commitment via contracts. Customer segmentation is critical to know how to most effectively target and develop these new, downsized offerings.

Maybe Tony Soprano was onto something. As the lead mobster in the HBO series “The Sopranos,” he and his crew often turned to prepaid cellphones, presumably to avoid wiretaps.
But now these pay-as-you-go phones are winning over fans for different reasons — recession-battered consumers are buying them as a way to cut costs and avoid the lengthy contracts and occasional billing surprises that come with traditional cellphone plans.

“Frugal is the new chic,” said Joy Miller, 33, a piano teacher in Aubrey, Tex. After almost a decade on contract plans with Verizon Wireless, Mrs. Miller and her husband decided this month to test-drive a few prepaid plans, including MetroPCS. “In today’s economy, it’s not cool to pay $120 a month for a phone. It’s a waste of money.”

Although prepaid phones remain a fraction of the overall mobile phone market, sales of the category grew 13 percent in North America last year, nearly three times faster than traditional cellphone plans, according to Pali Research, an investment advisory firm. For the first time in its history, T-Mobile has been signing up more new prepaid customers than traditional ones. And Sprint Nextel is betting that a new flat-rate prepaid plan will help it wring more value from its struggling Nextel unit.

(The prepaid plans focus on basic calls, not the other features. It is critical to segment the user market to best understand how to target this downsized offering.)

Any stigma attached to the phones — they are a common prop in any show or movie about gangs and spies — is falling away as prices drop and the quality of the phones rises. Prepaid carriers like MetroPCS, Virgin Mobile and Sprint’s Boost Mobile division now offer sleeker handsets, better coverage and more options, from 10-cent-a-minute calling cards that customers refill as needed to $50-a-month, flat-rate plans for chatterboxes who want unlimited calling, Web browsing and text messaging.

The savings can be considerable. An AT&T customer with an Apple iPhone on a traditional plan pays at least $130 a month, excluding taxes and fees, for unlimited calls and Web use. Compared with the $50-a-month, all-inclusive prepaid plans, the iPhone owner pays nearly $1,000 more over the course of a year

Saturday, February 14, 2009

Internet Giants Return to Basics
Published: NYT, January 21, 2009
Growing away from your core is difficult as highlighted by these examples of VERY successful companies. However, some have done it quite well like Apple (used to be Apple Computer). We will try to highlight why some can do it and other can’t in future positings.

Microsoft and Google have more in common than the dominance of their respective markets. Both are also essentially one-trick ponies that have used their prodigious cash flows to pursue many side projects in attempts to diversify. And neither has had much success.

A trying economic climate is reining in their efforts. Google, the more recent empire builder, just axed its print advertisement ambitions, and Microsoft sold its long-held stake in the cable operator Comcast. Their other noncore projects should be next.

Microsoft’s core expertise remains software — its ubiquitous operating system and other programs. These account for 82 percent of its revenue and nearly all of its operating income. The company has used a lot of those profits to support forays into products like video games and online search.

But those have not become the money spinners it hoped for. Microsoft’s Xbox game console just turned its first profit last year after seven years on the market. In 2007, the company had to take a $1 billion charge to repair defective units. Microsoft’s online search effort has also struggled. Its MSN portal has a dismal 8.5 percent share of the American search market, and the unit that houses it lost $480 million last quarter.

Google makes virtually all its revenue from advertising related to Internet searches. Still, that has not stopped it from pouring money — and employee time — into online video, cloud computing and lobbying for renewable energy projects.

For example, it snapped up YouTube for $1.65 billion in 2006. Analysts say the video site remains barely profitable. The same goes for Google’s free online software initiative, in which it has invested heavily.
Of course, some loss leaders can be strategically valuable. Google’s online utilities directly threaten its search rival Microsoft’s cash-cow software business. And Microsoft’s hordes of loyal Xbox gamers may add a crucial bit of cachet to the otherwise stolid reputation of its software.

But with both companies’ shares down sharply over the last year, and few of these noncore projects generating money, shareholders have diminished tolerance for using profits to finance long shots. Investors would probably applaud if Microsoft and Google shed more of these nonessential distractions.

Tuesday, February 03, 2009

Leading through uncertainty
The range of possible futures confronting business is great. Companies that nurture flexibility, awareness, and resiliency are more likely to survive the crisis, and even to prosper.
DECEMBER 2008 • Lowell Bryan and Diana Farrell

This is a great summary of how to manage in these highly uncertain times and is a continuation from the January 27 posting (

What we don’t know

Yet there is much that we don’t know, and won’t for some time: how well will governments work together to develop effective regulatory, trade, fiscal, and monetary policies; what will these responses mean for the long-term health of the global capital market; how will its health or weakness influence the pace and extent of change in areas such as the economic role of government, financial leverage, and business models; and what will all this imply for globalization and economic growth?
Although these questions won’t be answered in the short or even the medium term, decisions made in the immediate future are critical, for they will influence how well organizations manage themselves now and compete over the longer haul. The winners will be companies that make thoughtful choices—despite the complexity, confusion, and uncertainty—by assessing alternative scenarios honestly, considering their implications, and preparing accordingly.

In particular, organizations must think expansively about the possibilities. Even in more normal times, the range of outcomes most companies consider is too narrow. The assumptions used for budgeting and business planning are often modest variations on baseline projections whose major assumptions often are not presented explicitly. Many such budgets and plans are soon overtaken by events. In good times, that matters little because companies continually adapt to the environment, and budgets usually build in conservative assumptions so managers can beat their numbers.
But these are not normal times: the range of potential outcomes—the uncertainty surrounding the global credit crisis and the global recession—is so large that many companies may not survive. We can capture this wide range of outcomes in four scenarios (exhibit).

(go to the web site for a clearer picture)

To see them in perspective, consider some results of the McKinsey Global Institute’s research. This research, focusing on the United States, the center of the storm, suggests that if capital markets rebound quickly, GDP would be 2.9 percentage points lower than it would have been if trend growth had continued over the next two years. If financial markets take longer to recover, as the middle two scenarios envision, US GDP growth could fall 4.7 to 6.7 percentage points from trend over the same period. At the “long freeze” end of the spectrum, Japan’s “lost decade” shaved 18 percentage points from GDP compared with its previous growth trend.

Regenerated global momentum
In the most optimistic scenario, government action revives the global credit system—the massive stimulus packages and aggressive monetary policies already adopted keep the global recession from lasting very long or being very deep. Globalization stays on course: trade and capital flows resume quickly, and the developed and emerging economies continue to integrate as confidence rebounds quickly.

Battered but resilient
In the second scenario, government-wrought improvements in the global credit and capital market are more than offset—for 18 months or more—by the impact of the global recession, which leads to further credit losses and to distrust of cross-border counterparties. Although the recession could be longer and deeper than any in the past 70 years, government action works, and the global capital and credit markets gradually recover. Global confidence, though shaken, does rebound, and trade and capital flows revive moderately. Globalization slowly gets back on course.

Stalled globalization
In the third scenario, the global recession is significant, but its intensity varies greatly from nation to nation—in particular, China and the United States prove surprisingly resilient. The integration of the world’s economies, however, stalls as continuing fear of counterparties makes the global capital market less integrated. Trade flows and capital flows decline and then stagnate. The regulatory regime holds the system together, but various governments overregulate lending and risk, so the world’s banking system becomes “oversafe.” Credit remains expensive and hard to get. As attitudes become more defensive and nationalistic, growth is relatively slow.

The long freeze
Under the final scenario, the global recession lasts more than five years (as Japan’s did in the 1990s) because of ineffective regulatory, fiscal, and monetary policy. Economies everywhere stagnate; overregulation and fear keep the global credit and capital markets closed. Trade and capital flows continue to decline for years as globalization goes into reverse, and the psychology of nations becomes much more defensive and nationalistic.

Leading through uncertainty
These descriptions are intentionally stylized to enliven them; many permutations are possible. Scenarios for any company and industry should of course be tailored to individual circumstances. What we hope to illustrate is the importance for strategists of considering previously unthinkable outcomes, such as the rollback of globalization. Unappealing as three of the four scenarios may be, any company that sets its strategy without taking all of them into account is flying blind.
So executives need a way of operating that’s suited to the most uncertain business environment since the 1930s. They need greater flexibility to create strategic and tactical options they can use defensively and offensively as conditions change. They need a sharper awareness of their own and their competitors’ positions. And they need to make their organizations more resilient.

Most companies acted immediately in the autumn of 2008 when credit markets locked up: they cut discretionary spending, slowed investment, managed cash flows aggressively, laid off employees, shored up financing sources, and built capital by cutting dividends, raising equity, and so forth. While prudent, these actions probably won’t produce the short-term earnings that analysts expect, at least for most companies. In fact, it’s time they abandoned the idea that they can reliably deliver predictable earnings. Quarterly performance is no longer the objective, which must now be to ensure the long-term survival and health of the enterprise.

More flexible
Companies must now take a more flexible approach to planning: each of them should develop several coherent, multipronged strategic-action plans, not just one. Every plan should embrace all of the functions, business units, and geographies of a company and show how it can make the most of a specific economic environment.
These plans can’t be academic exercises; executives must be ready to pursue any of them—quickly—as the future unfolds. In fact, the broad range of plausible outcomes in today’s business environment calls for a “just in time” approach to strategy setting, risk taking, and resource allocation by senior executives. A company’s 10 to 20 top managers, for example, might have weekly or even daily “all hands on deck” meetings to exchange information and make fast operational decisions.

Greater flexibility also means developing as many options as possible that can be exercised either when trigger events occur or the future becomes more certain. Often, options will be offensive moves. Which acquisitions could be attractive on what terms, for instance, and how much capital and management capacity would be required? What new products best fit different scenarios? If one or more major competitors should falter, how will the company react? In which markets can it gain share?

As companies prepare for such opportunities, they should also create options to maintain good health under difficult circumstances. If capital market breakdowns make global sourcing too risky, for example, companies that restructure their supply chains quickly will be in much better shape. If changes in the global economy could make a certain kind of business unit obsolete, it’s critical to finish all the preparatory work needed to sell it before every company with that kind of unit reaches the same conclusion.

A crisis tends to surface options—such as how to slash structural costs while minimizing damage to long-term competitiveness—that organizations ordinarily wouldn’t consider. Unless executives evaluate their options early on, they could later find themselves moving with too little information or preparation and therefore make faulty decisions, delay action, or forgo options altogether