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Powerful Indicator Foretells Economic Boom
By Steve Abdalla
Contributing Writer
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"Be fearful when others are greedy and greedy when others are fearful."
- Warren Buffett
In 2007, business owners nationwide were exceptionally confident of continued strong economic growth. Now, with the effects of the worst recession in two generations still lingering, business optimism is near record lows. The business owners were wrong in 2007, and they are very likely wrong now.
"Yield curve steepness," an obscure but extraordinarily prescient economic indicator, reached a record high in December 2009, foreshadowing a coming boom. Throughout most of 2007, the yield curve was negative, a condition which is almost always followed, within 6-24 months, by a recession.
So what is the yield curve? Graphically, it's a plot of the yield or the interest rate on US government notes of varying maturities, from one month up to 30 years. The yield curve on January 22, 2010, is illustrated in the chart below.
Ordinarily, interest rates are higher on longer term notes, causing the yield curve to have an upward slope. This is logical as note investors expect higher returns to give up their money for longer periods of time. The slope or "steepness" of the chart is measured by the difference in yield between the longer (10-30 years) and shorter (3 months - 1 year) maturity notes. Currently, the yield on the 10 year note is 3.6%, vs. a 0.3% yield on the 1 year note, for a near record yield difference of 0.3% and a very steep yield curve. This is a bullish economic signal.
By contrast, the yield curve had a negative slope for much of late 2006 and 2007, as illustrated in the chart below. This means that the yield on long term notes was lower than the yield on short term notes, a rare condition and a strongly pessimistic economic indicator.
To assess the reliability of yield curve steepness as a predictor of future economic growth, we analyzed the relationship between these statistics from January 1962 to December 2009 (the entire period in which data was available). During this period, peaks in yield curve slope were followed by periods of strong and extended economic growth in 7 out of 8 instances, as noted in the table below.
When the yield curve was negative, it was followed by a recession in 7 out of 8 occurrences as summarized below.
This relationship is shown graphically for 2000-2009 in the chart below, and for prior decades in the Appendix. Notice how the yield curve steepness (the solid line) becomes negative before both recessions of last decade (when the GDP growth bars become negative). It is currently at a bullish 48 year high.
Naturally, yield curve steepness is not perfect, and like all leading indicators, does give an occasional false signal. But its track record over 48 years is compelling.
Prudent business owners should become more cautious when the yield curve slope is negative, even if the economy appears to be booming by other measures. Take steps to mitigate risks from a possible downtown, such as reducing debt and curbing expansion plans. Many companies who failed to heed this warning in 2006-2007 did not survive the ensuing recession.
Now, when the yield curve slope is high and rising, consider pursuing a more aggressive stance. It requires courage and foresight to invest when so many are fearful, but the benefits of doing so can be extraordinary. In the worst days of the financial crisis, Warren Buffett calmly invested $5 billion in Goldman Sachs, and has since nearly doubled his investment. Hedge fund manager John Tepper made $7 billion buying stocks during the February - March 2009 panic.
You don't need billions to profit from this climate of fear. Industrial, retail and office rents have all fallen significantly from their market peaks. Recruiting experienced, quality staff is much easier and cheaper than a few years ago. Equipment, materials, advertising services and indeed - entire established and profitable businesses - are available for fire sale prices.
(The prices of business inputs historically lag gains in the stock market, itself a leading indicator, by a year or so)
Savvy business owners and aspiring entrepreneurs will invest now. If you wait until you're feeling more optimistic, this once in a generation opportunity will already have passed.
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Generating a Dominant Brand
Separating Yourself from the Rest of Your Market
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If you look at corporations such as McDonalds, Wal-Mart, Coca-Cola, Southwest, Apple and Microsoft; there are plenty of reasons why they are successful. But why are their names synonymous with the products that they represent? It all comes down to their brand.
A Brand is the sum of functional and emotional characteristics, both tangible and intangible, the consumer attributes to a product or service. It is the difference between a bottle of sugared, flavored and carbonated water and a bottle of Coca-Cola. These characteristics are embodied in a name, trademark, symbol, design or any combination of these.
With the Internet growing more pervasive, many online brands have no tangible attributes; making the definition of a brand broader. This means that the concept of branding can no longer be restricted to products and services Brands such as Amazon and Google exist solely in virtual reality, one could say. Everyone from movies stars to politicians to company executives realize now that their success is dependent more and more on their ability to market themselves as brands.
Incorporating All Aspects to Build the Brand
In order to create a successful brand for a business, you have to mobilize the entire organization from the ground up. Every aspect from the premises through the behavior of employees (customer-facing roles especially) to company letterheads and formal marketing communications should reflect the values of the brand.
Branding Encourages Consumers to Buy
The brand is for most businesses the primary source of competitive advantage and their most valuable strategic asset. The marketplace would be based on undifferentiated products and commodities that are traded based on price if branding did not exist. Having a brand allows businesses to actively influence the demand side of the equation by encouraging consumers to base their purchase decisions on factors other than price.
Branding enables the consumer to make informed purchase decisions and help them steer their way through the astronomical number of products that exist in every category and sub-category. In a world where our basic needs have been satisfied, branding allows us something to help define our identities as to what we prefer and don't.
Differentiation Defines the Brand
Regarding brands, differentiation is the most effective concept in creating them. Brands can be defined by products and service, which leads to four different types:
Commodity
This is when an offering is not defined by terms of product or service. Precious metals and staple food products are still largely traded as commodities.
Product Brand
When an offering is defined solely on product terms without any service ones, it's a product brand. These can be differentiated in terms of intrinsic and extrinsic benefits. Generally, most consumer goods are product brands with most containing elements of both intrinsic and extrinsic differentiation.
For example, hi-fi manufacturers focus on the functionality of their products, while soft-drink brands vary from each other by image. Automobiles play on both function and emotion.
Service Brand
Any offering that's based on providing an intangible service is called a service brand such as financial services. However, creating one can be difficult since it's based on a person delivering that service to the consumer. Historically, human production is going to be less reliable than mechanical.
System Brand
This is different because it's based on both product and service terms such as with TGI Friday's that's centered on high quality food, fast service and cleanliness of the restaurant location.
Laying Down the Foundation to a Brand
To create a brand, there are three essential building blocks that you must have: brand proposition, brand positioning and brand identity.
Brand Proposition
This is the statement of the functional and emotional benefits that a product or service offers to the consumer. Coca-Cola's brand proposition combines both functional and emotional benefits.
Brand Positioning
This is the description of whom the brand is aimed at and where it stands relative to the competition.
Brand Identity
Also known as brand image, this is the aggregation of the words, images and ideas that the consumer associates with a brand. There is an increasing tendency to characterize brands, where businesses talk about brand personality and attitude - particularly, in youth markets, where consumers regard brands as statements of their preferences and beliefs.
Having the Tools to Push the Brand
For brand creation to be successful it starts with product design; but the visual presentation makes it up a lot of that as well. In the consumer goods industry for example, packaging is a key source of differentiation, both as a powerful tool for creating band identity and as a means whereby brands can stand out from the crowd on increasingly cluttered supermarket shelves.
Advertising has always been a strong tool to push a brand; especially now with the role of the Internet, providing a major outlet for businesses to reach out to consumers. Print and broadcast media continue to have the power to influence consumer behavior, particularly with television with gives a full onslaught of sound and vision.
In the past decade, the task of branding has become more complex and sophisticated due in part to the fragmentation of media as well as cynicism from consumers. As a result, business owners have had to become more innovative, continually modifying their brands to keep one step ahead of their competitors and consumers.
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Revitalization of Service in Business
Moderating e-Commerce with Strong Customer Care
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During the initial Internet explosion in the 90s, many businesses in the U.S. went off the hinges, strategically speaking. Consumed by the e-commerce song and dance, many dot-com businesses made strategic blunders that would be unforgivable to first year MBA students. Executive teams of many established businesses, paralyzed by the fear of not keeping up, threw major money at anything that looked as if it may qualify as an Internet strategy.
As a result, many lost businesses, the majority of dot-com companies disappeared overnight. However, the biggest loser was the customer since service quality had been sacrificed as a result of putting so much energy into e-commerce.
Today, there's a more realistic approach to Information Technology (IT) in business that has forced a return to basic principles of focusing on the customer and value creation, culture building, skillful execution of quality practices and inspired leadership.
Rise and Fall of the Service Trend
In the mid 80s, the business world embraced service management wholeheartedly. You could find a plethora of books, articles, conferences, seminars, training programs, videos, newsletters, consulting companies, professional societies and academic research programs that were aimed at making customer focus a critical and permanent part of management thinking.
However, this enthusiasm didn't last long. By the mid 90s, many companies moved into a reconstruction phase, where there was an explosion of mergers, acquisitions and skyrocketing growth of retail giants. Since the economy was booming with low unemployment rates and ever-flexible workforce, businesses sought to rearrange to maximize their strengths but ultimately profits.
Business Management switched from value-based to resource-based competition. A large bank found it better to gain more customers by buying out several main street banks instead of adding value or reinventing their service packages. A major airline didn't think to improve service when every airline had educated their customers to decide on airfare by price alone; therefore, it was easier to force out the smaller ones. These were quick solutions without a hefty investment that may fizzle such as what they thought with changing customer service programs.
TURNING OF THE TIDE
The economy has always been ever-changing; and what business management, economists and analysts have started to determine is that as inseparable as information technology is to an economic structure, it's not the embodiment of it.
Information is one of five key factors of economic growth and development: land, capital, energy, labor being the other four. Each one is just as important as the other. For example, you can't transmit information anywhere on the Internet without electricity to assist.
Making Service the Main Driving Force
There are four steps necessary that will help improve value of your business through service:
Refocusing on the Customer
This should be obvious, but for too many businesses, it isn't. You want to conduct customer research regularly. Your employees should know what your customer value is and how to deliver it. Be sure to have a viable system in place that measures customer perceptions of your business value, and share your results within your company.
Revamping Strategy for Service
What is the core customer value that you base your business model on to design your service system as well as the operation at large? You want to make sure that this makes sense and that everyone in your infrastructure not only understands it but takes it seriously. You may need to rethink your model or realign what your priorities are for your business.
Conduct a Comprehensive Review of Your Organization
Perform a thorough evaluation of all your operating systems and the ability to deliver on the business strategy. See if there are any discrepancies, gaps, errors or lack of intelligence in your system, and the people that are critical to the success of your business.
Involve the People that Work for You
Many managers ignore or forget this aspect entirely when there are crises and other priorities taking place. They get so caught up with everything going on that they forget to stay in touch with their very workforce. You want to understand the needs of your employees, what they want, what do they seek with their jobs and careers, what frustrates, inhibits or de-motivates them. It's imperative to get their energy up and all the heads pointing in the same direction as yours.
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THE VR BLOGGER
Always Keep Good Books
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Have you ever wondered about the consequences when business owners don't report all of the revenue that they're creating? Business intermediaries know that buyers will only pay for what can be proven, so one ramification is the eventual selling price of the business will be lower due to the decreasing number of documented profits.
The question is how much lower will the price be as a result? A more important question from this arises: how much can a second set of books save - disregarding the potential costs, financial and getting caught for underreporting income? It may sound like a good idea in the beginning, you may be able to get away with it for a while; but like karma, you'll find out that it will come back to haunt you 100 fold.
Continue Reading the Full Article.
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Highlighted Transactions
And New Engagements
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SUCCESSFUL TRANSACTIONS
Internet Marketing Company
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VR Mergers & Acquisitions of Austin, TX, a leader in the sale of privately-held companies, recently facilitated the strategic sale of an Internet marketing company.
The transaction, which closed this month was handled by Gary Zolnierek, a business intermediary specialist.
VR is celebrating 30 years as the world's only network of full-time professional business intermediaries.
VR has sold more business in the world than anyone®.
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SUCCESSFUL TRANSACTIONS
Commercial Printing Company
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VR Mergers & Acquisitions, located in Charlotte, NC, the leading business intermediary firm in the area, has recently facilitated the strategic sale of a commercial printing company.
Greg White, a VR Intermediary, represented the seller throughout the transaction that was completed in February 2010.
VR is celebrating 30 years as the world's only network of full-time professional business intermediaries that addresses the needs of small and mid-sized businesses.
VR has sold more business in the world than anyone®.
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NEW ENGAGEMENTS
Custom Kitchen Design Center
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VR Mergers & Acquisitions located in Ewing, NJ, announced today it has been engaged by a custom kitchen design center to assist in facilitating the sale of their business.
This is a well-positioned, custom kitchen design and installation business that serves southeastern Pennsylvania and New Jersey. Go to VR Web Site for further details.
VR is celebrating 30 years as the world's only network of full-time professional business intermediaries that addresses the needs of small and mid-sized businesses.
VR has sold more business in the world than anyone®.
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NEW ENGAGEMENTS
Vending Company
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VR Business Sales in Boston/Hingham, MA, specializing in the sales and acquisitions of small and mid-sized businesses, has announced that the company has been retained to facilitate the sale of a vending company.
This vending business has been active for 15 years during which time it has been servicing long-established accounts. To date it has 220 vending, water, or coffee machines in service. It enjoys repeat sales and tremendous customer satisfaction. Click here for further details and contact information.
Celebrating 30 years as the world's only network of full-time professional intermediaries, VR addresses the needs of small and mid-sized businesses.
VR has sold more business in the world than anyone®.
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Now is a Great Time to Become Part of VR!
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 With baby boomers selling their businesses to retire and frustrated corporate executives and managers looking to buy a business to replace their corporate job, NOW is a great time to become part of VR!
VR's Newest Office
Panama City, Panama
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2010 Today's Business Owner® Publishing Dates
January 19, 2010
February 15, 2010
March 15, 2010
April 15, 2010
May 14, 2010
June 15, 2010
July 15, 2010
August 13, 2010
September 15, 2010
October 15, 2010
November 15, 2010
December 15, 2010
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One East Broward Boulevard
Suite 1500
Fort Lauderdale, FL 33301
Phone (954) 565-1555; Fax (954) 565-6855
http://www.vrbb.com
Copyright © VR 2009-2010
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Ask a VR Intermediary?
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How Can I Determine Human Capital in My Business?
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Dear Suzanne,
This particular area has always been difficult, especially for accountants who have struggled to determine a way for a business to measure the intangible assets of human-capital development and how to add their value to business.
First, you have to know what human capital is: the sum total of individual intelligence that's built on the acquisition of skills, training and educational experience over a lifetime. Applying this to the workplace will create the value for your business.
In order to obtain the highest-possible financial value, you have to merge human, organizational and customer capital. But emphasizing the investment in human capital will produce better business returns because it provides cost savings and efficiencies as well as maximizes the use of available resources. Finally, it addresses specific performance and productivity issues.
To achieve this, it will help if you:
Have investments in human capital that are measured in cash
Particularly, you want to highlight the benefits of acting and the perils of inaction.
Assess the personal knowledge of employees across the organization
What this does is give your managers benchmarks in understanding the strengths and weaknesses of what your workforce has in value to your business.
Select relevant and appropriate performance development programs
These programs, particularly in education and training, should be linked directly to productivity improvement needs and the strategy of the business such as the skills that are needed to progress to the desired goal.
Apply a human capital measurement system
This will give you the best return on investment by focusing on both short and long-term resolutions.
Such management strategies for human-capital investment encourage business. |
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