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Strategic risk: am I doing OK?
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Risk and its management have always been implicit in good business practice. Corporate governance, globalization, increasingly competitive markets requiring more risk to be taken to win business, political unrest and terrorism are some of many risk factors in the business environment. Uncertainty, ambiguity and risk are everywhere.
When considering business risk look at the following, amongst others:
business risk: that could prevent corporate objectives from being met;
financial risks: risks to the ability of our initiatives to deliver profit;
project and operational risk: risks in the implementation of strategy;
reputation risks: risks to our reputation which may follow from our activities; and
compliance risks: risks of non-compliance with good corporate governance practices, legislation and regulations.
The traditional approach to protecting and developing shareholder value has been based upon financial risk as defined by economic theory. However, in recent times, a wider view of risk has recognized that economic models of risk and shareholder value need to be moderated by less probabilistic factors such as reputation. Other factors which influence risk and shareholder value include:
Industry characteristics
Characteristics of the organization's decision makers
The process of achieving the organization's goals and the organization's resource base
The quality of strategic response to risk
Given that risk management can contribute to the protection and development of shareholder value, how can an organization tell if it is asking the right questions about its strategic response to risk?
There are well established stages to a risk management process, which are essentially:
1. Risk identification
2. Risk analysis, estimation and evaluation
3. Risk response
4. Risk monitoring
5. Risk reporting and communication.
However, what are the underlying key strategic questions an organization must ask itself if it is to not just manage risk well on a day to day basis but also have a conceptual understanding of the risk background and its current management competence in these areas?
Key dimensions to understanding risk in an organization
There are two key dimensions to the strategic understanding of risk within an organization:
1. The issue of understanding the organizational and personal attitudes to risk which will provide an "attitude and behavior" dimension
2. The business and project risk issues which will provide an "external and internal environment" dimension.
Combining these two dimensions will reveal four very important strategic challenges which, when accepted and satisfactorily met, will give an indication of how well a company is aware of real risk issues and the quality of its responses to those risks.
Do we understand the shareholder value risks of our strategy choices?
Our business choices are likely to increase or decrease shareholder value, so risk managing those choices is very important to protect the expected value and to deflect or out maneuver the inevitable uncertainties, ambiguities and risks which will occur as the business plan rolls out.
Risk management is not an option. It naturally occurs as part of the strategic planning process, like in more advanced applications of SWOT and PEST analyses. So the question is not whether or not it occurs, but how well it is understood and undertaken.
Strategic planning will often explicitly, or implicitly, use well established models for product-market strategies and implicit risk management of the competitive arena. Particularly important here are risks associated with the choice of product and market combinations in which to compete: clearly a market penetration strategy is potentially less risky than a diversification strategy provided that there is still a market to penetrate.
Branding is a high profile risk area at present. A failed brand extension, for instance, can undermine the customer's relationship with the whole brand not just the extension. Recent negative experiences for Royal Mail, formerly Consignia, and British Airways with their change of logo emphasize the risks of branding strategy.
In recent years we have witnessed reputations, like those of WorldCom and Enron, falling overnight. It is clear that there are a number of sources of risk to reputation. For instance, there are a number of threats from stakeholder groups that pose risks to reputation: from customers there is the threat of misunderstanding; from investors, the threat to value; from partners, the threat of defection; from the media there is the threat of exposure, and so on.
"The experience of a previous risk situation and decision can be a particularly important factor in an individual's perception of, and response to, risk"
Traditionally, risk has been associated with hazard or threat. However, modern risk management is moving towards recognizing that risky choices are as much about increasing shareholder value as they are about protecting such value.
Taking four generic strategies in response to risk there can be positive as well as negative responses:
1. While considering avoiding risk look to exploit risk
2. While seeking to transfer risk look for opportunities to share risk
3. Mitigation may, in certain circumstances, be replaced by enhancement
4. Acceptance in the baseline may be replaced, in certain circumstances, by simply ignoring the risk in the baseline.
The important practical implication here for managing risk within the business is to challenge whether chosen strategies are effective given the risk profile of the marketplaces. Have we managed risks to protect shareholder value and exploited those risks which offer potential development of such value?
Do we understand the risks that our structure and processes pose for implementation of chosen strategies?
We may understand the strategic risk of our business choices to shareholder value but a new challenge immediately arises. Is our approach to strategy implementation likely to support our strategic risk-aware choices, or will it adversely affect value creation and protection by the business?
Intuitively, the achievement of objectives will not stand or fall on one risk factor. Superb risk management in new product choices for instance will not be sufficient to ensure overall marketing success. It will, in this instance, be necessary to have diverse project risk management skills in place to ensure full and effective implementation of new product decisions.
A number of risk management maturity models exist. Such matrices suggest processes which, if followed, are likely to result in specific degrees of risk management maturity. The important practical implication here for managing risk within the business is that organizational structures and processes are key to effective risk response.
Is the risk appetite of our business consistent with the risk appetite of our staff?
Risk appetite is not a static concept within individuals. Risk will be perceived as either positive or negative depending upon the circumstances of the decision to be taken. Relationship to a strategic reference point - SRP - will have resonance for the organization, while individual staff will have their own internal SRPs.
Both gender and ethnicity have been found to influence risk perception and decision making under risk. Other factors to include in any analysis of managerial risk taking include framing, mood factors, dispersion of effects, and moral and ethical considerations based on heightened or reduced risk perceptions in consequential and non-consequential evaluations of outcomes.
Risk propensity or perception needs to be understood in a wide context with multiple measures taking account of the differences between organizational and individual risk attitudes and behaviors.
Are we confident that our staff are effective and efficient in reacting to and dealing with risks?
Understanding risk is important but responding to it is critical. We may have structure and processes designed to identify, analyze, evaluate, respond to and monitor risk but are our people willing and able to meet the challenges this brings?
Managerial decisions on allocation of resources are grounded in possible outcomes, likelihood of each of these outcomes, and ambiguity in these payoffs and probabilities. However, when making important decisions, managers rarely use formal risk analysis. Risk management is often ad hoc dependent upon the particular skills, experience and risk orientation of individual managers. Furthermore, corporate risk strategy varies across an organization with the consequence that an integrated approach to risk will need a watching brief company wide.
An important consideration for organizations is how risk is to be dealt with by staff. Do they need a set of competencies or simply an awareness? Who needs what? Clearly, where the move to enterprise wide risk management has begun the establishment of a chief risk officer is often appropriate. Such risk managers will need to combine technical and analytical excellence with an understanding of how risk measures relate to strategic and tactical business choices and decisions.
Managing Risks
Risk is complex, but is at the heart of the creation or destruction of shareholder value. An organization cannot wait for risk to be fully understood before attempting to manage risks.
There are instances of organizations buying in proprietary risk management products, which allow apparent compliance with corporate governance requirements, but which do not strongly influence the day to day risk awareness, mitigation and exploitation of risk.
Such an approach to risk is at the same time both a potential waste of effort and positively dangerous. In addition to adding cost for little benefit over compliance, such an approach can offer a chimera of risk awareness and management with the subsequent potential for overconfidence and negative surprises.
While nasty shocks cannot be completely avoided, for there are indeed some truly random events, it is evident that in many instances it is possible to isolate a set of damaging risks which, should they materialize, may derail the achievement of business objectives and compliance with corporate governance imperatives. Most importantly, an alert approach to risk management will find opportunity in many of the risks which may initially appear to be negative.
Issues that are of a concern to mainstream hard working Americans:Energy costs/Are we really pushing alternative energy-Health insurance costs/not just tax credits but lower monthly payments-Job creation/not just retail/service orientated jobs with no benefits or future.Lets see what happens.Bob
Lets see if its smoke and mirrors again:Bush Looks to Seize Political Initiative in Tuesday Speech
By Jim Malone
Washington
30 January 2006
Malone report - Download 535k
Listen to Malone report
President Bush
President Bush has an opportunity to seize the political spotlight Tuesday when he delivers the annual State of the Union address to Congress and the American people.
The inspiration for the State of the Union address comes from the U.S. Constitution, which says the president shall, from time to time, report to Congress on the State of the Union.
Throughout much of U.S. history that has taken the form of a written message from the president to Congress. But the address has taken on a life of its own in the modern media age with a prime-time television audience watching at home.
Most political analysts now see the address as an opportunity for the president to build support for his foreign and domestic policy initiatives and to frame the political debate for the year ahead, which happens to be a congressional election year.
Republicans hope Mr. Bush will use this year's speech to begin a political rebound after a difficult 2005 during which the president's public approval ratings fell to new lows over Iraq, domestic energy prices and the response to Hurricane Katrina.
"I am going to continue to talk about an optimistic agenda that will remind folks that we have a responsibility to lead," said Mr. Bush.
Democrats will offer a brief rebuttal to the president's speech. Virginia's new Democratic governor, Tim Kaine, will make his debut as a spokesman for the opposition party.
"We need to hear honesty, humility from the Commander in Chief, not swagger from the campaigner in chief," said the Senate Democratic leader, Harry Reid of Nevada.
In addition to outlining his domestic and foreign policy agenda for the year ahead, Mr. Bush is also expected to make an impassioned defense of his leadership in the war on terror and to remind Americans of the importance of staying the course in Iraq.
University of Virginia political analyst Larry Sabato says Iraq will remain a defining issue for the American public this year much as it did in 2005.
"I think most Americans, in signing on for this venture [Iraq], which they did somewhat hesitantly, they assumed that it would be short-term event and of course, already it has turned into two years," he said. "The projections are that it will go many years in the future, at least to a certain degree. Inevitably in 2006 the president will have to reduce the troop levels. Either that or Republicans will suffer greatly in the midterm elections."
The November congressional elections are expected to drive much of the political debate this year with Democrats hoping to take advantage of a historical trend that opposition parties usually make gains in the House and Senate in the sixth year of a two-term presidency.
Political analyst Stuart Rothenberg says the Democrats hope to take advantage of public unease over Iraq and a growing corruption scandal involving a once influential Republican lobbyist, Jack Abramoff.
"So while there has been some criticism that the Democrats do not have a detailed plan, they do not really need one and they are not rushing to one," said Rothenberg. "They do not have one. Basically, the Democratic argument is that things are not going well, give us a chance."
Experts also note that the political leverage of presidents tends to weaken toward the end of their second terms as both parties prepare for the next presidential election, in this case in 2008.
"Traditionally, historically, a president re-elected has, maybe at the outside, two years of a second term to really be seen as still the undisputed leader of the country politically," commented Patrick Basham, who monitors the U.S. political scene for the Cato Institute in Washington. "After two years, his power begins to fade away quite quickly and quite considerably and I think this president recognizes that."
For all the attention paid to State of the Union addresses, historians note that the public often pays relatively little attention. In fact, a ranking of the top 100 American speeches in the 20th century includes just one State of the Union speech, the one given by President Franklin Roosevelt in 1941.
http://www.voanews.com/english/2006-01-30-voa56.cfm
And a Big welcome to you glory.All input is welcome pertaining to business or business related to stock investments.Thanks for stopping bye.Thier are no stupid questions in regards to small business or the markets.We are only here to help each other out.Have a great weekend. Bob
Welcome TJW,I have lots to talk to you about regarding the insurance industry.I feel bad for many that just can not afford insurance or it is not available to them.Owning a business I pay 500.00 a month for a family of 4.Another couple hundred and it will be more than my house payment.Thanks and stop by more.All opinions are welcome here.Bob
Sharpen those pencils small business owners:S&P 500 Futures Pare Gain as Economic Growth Trails Forecast
Jan. 27 (Bloomberg) -- Standard & Poor's 500 Index futures pared their gain after a report showed economic expansion slowed more than forecast, threatening to undermine earnings growth.
S&P 500 futures expiring in March gained 2.40, or 0.2 percent, to 1280.20 as of 8:35 a.m. in New York. The futures were up as much as 0.5 percent.
The U.S. economy increased at a 1.1 percent pace in the fourth quarter as consumers spent at the slowest pace since 2001 and corporations limited equipment purchases.
The rise in gross domestic product, the value of all goods and services produced in the U.S., followed a 4.1 percent annual rate of increase in the previous three months, the Commerce Department reported today in Washington. A measure of inflation rose more than expected.
Economists expected 2.8 percent fourth-quarter growth.
I've often wondered if business minded people wouldn't be better in political positions. Governors seem to bridge this gap successfully.
I have to balance my vision for 5 years, 10years, etc, with the need to survive THIS year! Developing a business model that allows the dreamer [visionary] to dream, and still maintain communication, documentation, and accountability with managerial types [without getting bogged down in day to day issues].
Problems that plague the country are problems that plague the company.
Of course, lol, this is all "wisdom from the small pond".
Ha,I guess I am a statesman at heart and a spinmaster politician at business.OOHHHHH will we ever find common ground :)
ha, Do you know the difference in a politician and an statesman?
A politician looks forward to the next election, a statesman looks forward... to the next generation!
Agree,Thats why most average middle class people I speak with daily are telling me how hard it is.The over all view from what people tell me is that its getting where thier are going to be two classes.The Rich and the Poor.The poor feed off government subsidies and the Rich don't have to worry about it.That is the opinions I have gotten for months from many people.You are correct politicians will not step in because they have to be spin doctors to win re-election.ANSWER ???
Excellent point. Unfortunately the discussion might lead to the same quagmire that we find ourselves in politically.
The poor can't afford it. The wealthy can. Anyone who dares attempt to find a solution will be eventually drawn and quartered by at least one, maybe both camps.
Stalemate. Sad.
A common sense solution is probably available, but like so many issues facing our country today, there is little middle ground, and imo that is where common sense is found.
The Cure to a Robust economy is fixing the current crisis in the Health insurance industry(monthly premiums)and the Energy industry(gas/heating bills).How and who will take responsibility to fix it?
Just hit continue as per my post below.The link is screwed up.Good reading though.Bob
Here is the energy outlook as it directly effects retail sales:http://www.eia.doe.gov/emeu/steo/pub/contents.html
Retail sales forecast for 2006:http://retailindustry.about.com/od/statistics/a/2006forecast.htm
Speaking of Books - I bought "Good to Great" and a little story called "Who Moved my Cheeze" on CD's and gave them to everyone in my organization.
Change is essential, if you don't think so, try exhaling and holding it. But most people perceive change as loss. "Changing" that perception is one of issues leaders face.
FYI - I work as a clinical counselor in the State of Ohio ond have a practice working with both private insurance and indigent clients on medicaid/medicare. Although gas prices are high and budgets tight, what I see is people need their meds and the indigent population is huge, along with baby boomers aging! The psychiatrists I work with are jamed packed with clients and the whole counseling industry is moving toward electronic notes and monitoring. I believe that any company that can streamline the process of medication ordering and delivery will be setting themselves up to be profitable especially if they are involved in the medicaid/medicare Government industry. With this said, I would encourage a look at INCA. Just my thoughts.
You got that right rager.I know many business owners and the increasing costs of everything(personal and business) over the last year in particular has made us all sharpen our pencils and tighten our belts.I can not speak for the whole country.In the northeast I believe it is going to be a challenging year for small business.The average consumer is truly feeling the energy pinch.The wage increases workers get yearly are not covering the increases forced upon them across the board.I speak to many people daily.One common theme is that if prices keep rising on everything yearly what will happen to the middle class?We know that the middle class keeps the country humming along.Something has to give.
Just found this board - excellent! Got you marked also and will contribute when appropriate.
You are welcome Bob, I appreciate this kind of effort to help others.
It is harder than ever to make it out there.
Folks need all the help they can get.
You might have an interest in this
CEO Voice Caster,
http://www.investorshub.com/boards/read_msg.asp?message_id=9231380
Rager Thanks for stopping by.Nice article and reading material.Our thread here is starting to get packed with very helpful information.Just as in the markets,one can never have enough information pertaining to business.The two are very similar in that when you stop learning breakdowns will occur.You can never eliminate all risk.You can however eliminate a high percentage,thus putting the odds of success in ones favor.Thanks again Bob
A must read imo if you are going to succeed in business...>
Good to Great: Why Some Companies Make the Leap... and Others Don't
http://www.amazon.com/exec/obidos/tg/detail/-/0066620996/102-5197933-5230519?v=glance
Leaders Must Look the Part
Thursday January 19, 8:13 am ET
By Carmine Gallo
While conducting research for my first book, I had the opportunity to interview a true military hero, Commander Matt Eversmann. He teaches leadership at Johns Hopkins University. Eversmann led troops into battle in Mogadishu, Somalia, in 1993. The fierce battle served as the inspiration behind the movie Black Hawk Down.
I asked Eversmann, "What's the secret of leadership?" His answer puzzled me for a moment. He said it starts with how a leader wears his "uniform." Eversmann said the first time he meets a subordinate, his whites are whiter, his shoes are shinier, and his pants are better pressed. Always dress a little better than everyone else, he advised.
After my initial conversation with Eversmann, I filed those words away without giving them a second thought. A few weeks later I interviewed a man who wrote speeches for Ronald Reagan. Funny thing about Reagan, he said, the former President always looked a little better than everyone else in the room. I realized we were on to something. Listeners will size you up before you say a word. Pay attention to what your wardrobe says about you.
Look Sharp.
James Citrin runs the global technology and communications practice for the world's largest private executive search company, Spencer Stuart. The outfit is responsible for 60% of Fortune 500 CEO placements. He knows what to look for in an executive.
Citrin and I have had long discussions about leadership communications. "How much emphasis do you place on packaging, especially how one looks?" I asked him.
"Nobody would talk about it as important, but it's important," Citrin said. "The proper way it's discussed is, 'She has executive presence,' or 'He has a command.' But what they're really saying is, Do they project neatness? Physically, are they what you expect? Do they dress appropriately to fit the culture? Are they well-groomed? People respond to all these things."
Citrin and others tell me if someone looks the part before they say a word, it mentally allows their audiences to check the box that says, "This person looks like a leader, someone I should listen to." It allows your listeners to be more receptive to the message.
Talk Is Cheap
. Several weeks ago, I worked with a very wealthy financier to help him prepare for a major conference. We worked on his message, presentation, and body language, but when it came time for the dress rehearsal he had on a worn-out dress shirt [the kind where the collar is so old it starts to turn up on the sides], a tie that looked as though it came off the under-$2 rack, and a coffee stain on his white shirt. Do you really think people in his audience are going to look past his wardrobe to focus on his message? Probably not.
Since your listeners will form first impressions -- and, in many cases, make up their minds about you -- in the first seven seconds, it pays to look your best in any type of presentation. "The way we dress says a lot about us before we ever say a word," Donald Trump writes in How to Get Rich. Trump used to wear inexpensive clothes because he didn't think it made a difference. He later learned that his attitude was "wrong-headed."
Trump now buys "very high-quality shoes, and they seem to last forever, whereas the cheapos wear out quickly and always looked as cheap as the price I'd paid for them. The same is true for suits."
Take a look at other great business leaders. They dress remarkably well: Oracle (NasdaqNM:ORCL - News) CEO Larry Ellison, GE's (NYSE:GE - News) Jeffrey Immelt, eBay's (NasdaqNM:EBAY - News) Meg Whitman. They all have style. They all wear high-quality clothes that fit well. They also pay attention to the color combinations that complement their hair and skin color.
Professional Help.
To learn more about shopping for suits, I turned to a mecca of fashion: Barneys New York on Madison Avenue. Tom Kalenderian is Barneys' executive vice-president and general merchandise manager.
Kalenderian believes a business professional who's well-dressed in "better products," as the high-end category is known, will feel better, have higher self esteem, and exude a "sense of comfort and confidence in their presentations."
Kalenderian recommends that customers find a retailer whose styles they like and establish a relationship with the sales professionals in the store. The merchants are paid to be aware of styles and trends. Few of us have the time to keep up with all the fashion magazines, but if you find someone you trust, he or she can make sure you always look professional, contemporary, and your best. It's critical to winning people over.
It'S Your Turn.
Thank you for all the great feedback on this column. Now I would like to hear directly from you for future topics and profiles. Please feel free to send me examples of men and women you admire as great business communicators, especially if they inspire their audiences.
In addition, if you have faced professional communications challenges, I would like to hear from you. We can tackle the subjects from time to time. E-mail me at carmine@gallocommunications.com. Thanks for your support.
Beige Book full text Jan 18 [re-post by bob3]
Economic expansion continued across the twelve Federal Reserve Districts through the last several weeks of 2005. Six--New York, Philadelphia, Chicago, St. Louis, Minneapolis, and Kansas City--characterized their economies as expanding moderately or modestly. Activity accelerated or increased at a solid pace in the San Francisco, Richmond, Atlanta, and Dallas Districts. Boston characterized activity as continuing to expand, while Cleveland reported that conditions remained reasonably strong.
Most Districts reported moderate increases in employment. Labor markets tightened in some areas and for some occupations, but on the whole, wage increases were characterized as moderate. Contacts reported that input-price pressures have continued for many items, particularly early in the supply chain, but they were less intense at year-end than earlier. Retail prices and producers' prices for more finished goods, however, were widely reported as rising only moderately or remaining stable.
Retail sales rose in most Districts, and those Districts that reported on travel and tourism spending said it was generally strong. Increases in manufacturing activity were widely reported. Most Districts indicated some cooling in residential real estate activity, while many noted that commercial real estate activity generally continued to improve. Consumer borrowing was flat or fell in most Districts, while commercial borrowing was more mixed, with many Districts reporting moderate increases in activity. Conditions in the energy sector seemed strong, while agricultural activity was mixed.
Prices
Several Districts (San Francisco, Kansas City, Chicago, Richmond, Cleveland, Philadelphia, and Boston) reported that increases in energy prices moderated, or actually fell, albeit from high levels. In the San Francisco, Cleveland, and Richmond Districts, these developments were thought to be associated with a wider easing in overall price pressures. However, in the remaining nine Districts, nonlabor-input-cost increases continued to concern companies, particularly those in the manufacturing sector. Producers were reported to have attempted to recoup these costs, although, according to the Atlanta, Boston, San Francisco, and Dallas Districts, intense competition was thought to be holding down price increases in parts of the supply chain further "downstream." Increases in the prices of construction materials were widely reported.
Retail prices were generally regarded as stable, though there was some significant discounting reported in the Cleveland and Atlanta Districts during the holiday selling season. More moderate discounting was reported in the Dallas District, levels about the same as last year were reported in the San Francisco District, and no widespread discounting was reported in the Philadelphia District. Price increases are planned in the months ahead by a large share of retailers, according to the Kansas City District.
Employment and Wages
Most Districts reported signs of continued, if generally moderate, increases in employment. Cleveland, Minneapolis, and Richmond all cited moderate employment gains, with Richmond noting that its rate represented a slowdown. New York, Atlanta, Kansas City, and Dallas reported evidence of stronger employment growth. However, Boston noted that output growth had generally not translated into higher employment, while St. Louis reported a widely mixed pattern of layoffs and hiring. Hiring at financial and legal services firms is boosting the New York District's employment growth, although New York also reported some hiring in manufacturing. Atlanta reported strong demand for both skilled and unskilled labor, in part boosted by storm-recovery efforts.
Atlanta reported several locations with tight labor market conditions, while Boston, New York, Philadelphia, Chicago, Kansas City, Dallas, and San Francisco all reported specific occupations in which jobs have been difficult to fill. Several of these Districts cited trucking jobs. Skilled construction workers are relatively sought after in Dallas and San Francisco, and skilled manufacturing jobs were mentioned by Boston, Chicago, and Dallas. Atlanta listed a variety of specialties in "extreme shortage." New York and San Francisco noted that finance-industry labor markets were relatively tight. Despite reports of labor market tightness, Boston, Philadelphia, Minneapolis, Kansas City, and San Francisco all noted that wage increases have been generally moderate. However, New York, Chicago, and Dallas all reported some acceleration in compensation.
Consumer Spending
All Districts reported that their retail sales rose during this latest holiday selling season except Cleveland, where sales were generally flat or less than at this time a year ago. Philadelphia, Chicago, St. Louis, Minneapolis, and Kansas City reported modest to moderate increases. Boston, New York, Richmond, Atlanta, Dallas, and San Francisco reported stronger holiday sales than these Districts. The Cleveland, Richmond, Chicago, Minneapolis, and Dallas Districts noted significant increases in gift card sales, which led retailers in Richmond and Dallas to anticipate stronger sales and profits in early 2006. Most merchants appear to have carefully controlled their inventories, which are generally at desired levels.
Automobile sales were generally somewhat sluggish across the nation. Dealers fared best in the Richmond, San Francisco, and Dallas Districts, where sales improved from low levels. Sales trends were somewhat more mixed in the Chicago and Atlanta Districts. Atlanta and Philadelphia reported that sales remained strong for foreign brands, even as demand waned for domestic ones, sales of which were reportedly not helped much by manufacturers' promotions. Philadelphia and Kansas City characterized truck and SUV sales as especially slow.
Travel and Tourism
Travel and tourism remained robust across most of the country. The San Francisco District reported that travel and tourism spending in Hawaii toward the end of the year occurred at a record-setting pace. Elsewhere, ski resorts throughout the Kansas City and Minnesota Districts have done well this winter, though a few areas have suffered from a lack of snow. In the Southeast, the Atlanta and Richmond Districts also reported robust activity, some of which was thought to be the result of unusually warm weather. Tourist activity appeared to be recovering somewhat in hurricane-affected areas. Finally, in the Northeast, travel and tourism remained strong.
Manufacturing
Increases in manufacturing activity were widely reported across the country. Only the St. Louis District characterized industrial activity as mixed. Elsewhere, robust expansion was reported in the San Francisco, Dallas, Kansas City, Minnesota, Chicago, New York, and Boston Districts. More moderate expansion was indicated in the Cleveland, Richmond, Philadelphia, and Atlanta Districts.
Production of high-technology goods was steady to slightly increasing toward the end of 2005, according to the San Francisco and Dallas Districts. And defense and aerospace industry production improved in the San Francisco, Boston, and Atlanta Districts. Manufacturers of machine tools and industrial equipment also reported more robust demand in the San Francisco, Chicago, and Philadelphia Districts. Production of construction-related materials and equipment expanded noticeably in the San Francisco, Dallas, Chicago, and St. Louis Districts but was characterized as slightly less strong in the Boston District. Primary metals producers reported strong demand in the Cleveland, Chicago, and Dallas Districts. Producers of plastics and petrochemicals noted some slowing in demand in the Philadelphia and Dallas Districts, though this was from fairly high levels. By contrast, reports from the Richmond and St. Louis Districts suggested some improvement in the sector. And weakness in the textile industry was reported in the Boston, Richmond, and Atlanta Districts.
In the transportation equipment sector, reports from the Boston, Philadelphia, and Atlanta Districts suggested weakness among automakers and their suppliers. However, in the Cleveland and Chicago Districts, activity appeared to be somewhat stronger. Heavy truck production was also characterized as improving in the Chicago District. Conditions in the transportation equipment sector were more mixed in the St. Louis District.
Trucking and Shipping
Trucking and shipping demand remained strong across the country, but companies were constrained by continuing driver shortages in the Atlanta, Cleveland, Chicago, and Philadelphia Districts. In addition, despite the ongoing use of fuel surcharges, contacts in Cleveland, Dallas, and Atlanta noted that margins tightened because of fuel-cost increases. Cleveland and Dallas reported plans for increased capital spending in the trucking industry. Dallas also reported that both railroads and airlines saw rising demand.
Construction and Real Estate
Many Districts reported moderation in residential real estate activity, although from a high level. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, and Minneapolis reported some cooling in real estate markets. While some of the hottest markets in the San Francisco District have cooled--for example, Southern California and the San Francisco Bay Area--other areas, such as Oregon and especially Hawaii, have reportedly heated up further. Kansas City and Dallas continued to see strong housing markets. And construction and repair work remained brisk in Louisiana and Mississippi.
Conditions in Districts' commercial real estate markets generally continued to improve. Vacancy rates fell in the San Francisco, Minneapolis, New York, Dallas, Richmond, and Kansas City Districts. Chicago reported a more mixed picture, with some areas of the District expanding but activity in the city of Chicago flat. Largely because of lower vacancy rates, rents rose in San Francisco and New York, while previous concessions were reduced or eliminated in Dallas. New construction activity was reported to be increasing in the San Francisco, Minneapolis, St. Louis, Atlanta, and Cleveland Districts, and many contacts expect this trend to continue in 2006.
Banking and Finance
The Cleveland, Kansas City, Philadelphia, San Francisco, and St. Louis Districts saw moderate increases in commercial lending activity, while Chicago and Richmond reported that activity had slowed and Atlanta reported that activity was mixed. Consumer lending was flat or fell slightly in the Atlanta, Chicago, Cleveland, Kansas City, New York, Richmond, St. Louis, and San Francisco Districts. The Philadelphia District was an exception, noting gains in consumer and residential real estate loans, but contacts noted that they expected lending for residential real estate to experience modest declines in the future. In the Dallas District, deposit growth was strong, while Cleveland, Kansas City, and St. Louis reported modest increases in total deposits. New York reported that conditions in the securities industry remained robust, with employees receiving significant increases in bonuses this year.
Energy and Natural Resources
Conditions in the energy sector were characterized as strong or stable at a high level by four of the five Districts reporting on natural resources. As a result, San Francisco, Dallas, and Kansas City all reported shortages of labor, materials, and equipment among energy-related enterprises. Producers of natural gas and oil reportedly operated near 100 percent capacity in the San Francisco District, while the Atlanta and Dallas Districts reported that facilities in the Gulf of Mexico continued to recover from hurricane-related damage. Minneapolis reported that most mining operations in its District were running near capacity.
Agriculture
Dallas, Kansas City, St. Louis, and Chicago all reported that low levels of precipitation were affecting crops and have the potential to lower yields in the spring, while Richmond reported that cold weather and abundant precipitation slowed harvesting activity in November and December. Citrus producers in the Atlanta and Dallas Districts reported a boost in profits from an increase in prices in the wake of substantial hurricane damage to the citrus crop in Florida. Livestock reports were mixed, with San Francisco reporting increases in sales, Chicago reporting rising cattle prices and stable hog prices, and Dallas and Kansas City reporting reductions or anticipated reductions in herd sizes.
http://www.federalreserve.gov/
Thanks for the chart.I read all the news releases and a few months worth of posts from trustworthy investors/traders I know of.Personally I know the company is in the right sector for years to come based on my research dealing with business trends looking forward(see my previous post about new urbanism post #31).As we know this is another bb company so extra caution is in order.The problem seems to be the 504d information.The good news is it looks like it expires in May 2006.Will keep on watch for signs this 504d is complete.I also actually like some of the projects loftworks is working on.Taken from loftworks board:
"The company has an open 504D. In May of 2005, the issuer, a Nevada Corporation, opened a 504D; the 504D was filed and received by Securities and Exchange Commission on 05/03/2005 (file number 021-76843). The 504D offered for sale up to $1 million US dollars of common stock of the Company at the purchase price of .001 only to “accredited investors” as the term is defined in the Securities Act of 1933, residing in the state of Texas.
Presently, the most recent 504 information available is contained above, ie. as of June 23, 2005, 2005, 392,000 shares
of 504 stock have been issued. The 504 is expected to remain open at this time (expires May 2006) in anticipation of raising $1million; the company intends to utilize this method
to finance the pilot and six episodes of the hi-def television production.
In summary: CEO Dennis Ammerman was issued 20 million shares for services, including maintenance of company. 392,000 shares were sold via the open 504D.The remaining 21,500 shares of restricted stock was issued for professional services for the company."
"$1 million US dollars of common stock of the Company at the purchase price of .001". That is 1000M!!! Does this mean they can issue 1000 million shares to “accredited investors” who can dump them on the market? I don't get this 504 business. The sooner this matter is clarified by Dennis the better. The plot is getting too thick.
LFWK annotated chart:
Trops, this will get you started. When stockcharts fixes the spikes, I'll add a few indicators and re-post it.
I am going to do a little more dd on loftworks.They are in the right business at this time and looking forward.Could you put up a annotated chart for me.Thanks Bob
just to interject...LFWK happens to
be at its' bottom now, with a very tight spread, for those who may be interested.
Power I believe in time we will get more business owners posting or people thinking of starting a business posting and more discussion will take place.It is a unique board that I think can help people.I figure if we only get 20-30 seasoned business posters it will be a very productive board.
Thanks for the 'Welcome' Bob...
I have a couple of businesses besides my trading...One is a small fleet of Cross Country trucks...The other involves two websites...
I'm wondering if there will be discussions about the best way to Advertise websites for the lowest cost possible...And other subjects along those lines...
I am getting eaten alive by the 'pay per click' fees I pay using 'Yahoo Sponsored Search', and Googles' similar system...
Have a Good! Week ALL ;^))
Power,Thanks for stopping by.We started this board for two reasons.First,so people interested in small business have a place to talk about ideas that effect thier business.That goes for established business owners or people thinking about starting a business.Secondly we want to talk about traded stocks that may be relevant to business sectors people are already involved in.A example would be myself being a retailer.I would help people interested in that sector along with giving opinions/ideas of stocks in that industry that correlate to the retail sector.Of course being a business owner a lot of aspects pertain to all businesses.Bob
Hi! 4godnwv and Bob...I see you got this board...
Up and Running...I just now found it, and it's late, so I will look at it more tomorrow after the Market closes...
BoardMarked!...Good Luck on you new Board!
You know what I was trying to recall loftworks.I traded it once a while ago.Yes they tie in with my post.Back on watch with that one.
Trops - Great post! - Are you familiar with LFWK? Ammerman's company converts older warehouse type buildings to lofts in downtown areas. Urban revitalization is one of the perks of the project. Zoning is one of the issues for them as well.
http://investorshub.com/boards/board.asp?board_id=4436
The changes in retail development that could effect our businesses and the way consumers shop in the coming years:http://www.newurbanism.org/pages/416429/index.htm http://money.cnn.com/2005/01/11/news/fortune500/retail_lifestylecenter/
Wholesale prices up most since '90
From Wire Reports
Originally published January 14, 2006
WASHINGTON // Soaring energy prices pushed wholesale inflation up in 2005 by the highest amount in 15 years, the Labor Department reported yesterday, as another report showed that retail sales rose by a moderate 0.7 percent in December with almost all of the strength coming from higher car sales.
"The reports underscore the importance to the consumer of this huge rise in energy prices," said Christopher Low, chief economist at FTN Financial in New York. Energy prices "have taken a big bite out of people's spending power."
Wholesale prices rose by a bigger-than-expected 0.9 percent last month, closing out a year in which they climbed 5.4 percent, the biggest advance since a 5.7 percent jump in 1990.
However, core inflation, which excludes energy and food, was much better behaved, rising by a tiny 0.1 percent in December and just 1.7 percent for the year, even better than the 2.3 percent increase in core prices in 2004.
Energy prices shot up 3.1 percent as gasoline prices skyrocketed by 12.3 percent last month. That was close to the 12.7 percent surge in September, when widespread production shutdowns at Gulf Coast refineries led to gasoline rising briefly above $3 a gallon.
While the tame core inflation number showed surging energy has not translated into higher overall prices, analysts said it will keep the Federal Reserve on guard and will likely translate into two more quarter-point rate increases at the Fed's Jan. 31 and March 28 meetings.
"This alerts us to the fact that we still have to deal with the issue of a possible spillover of high energy prices into core inflation," said Lyle Gramley, a former Fed governor. "It hasn't happened yet, but there is a potential problem."
Analysts said that the weaker-than-expected increase in retail sales last month provided evidence that the economy is slowing, which should help dampen inflation. Many economists believe overall growth in the final three months of 2005 slowed to a rate of 3 percent or less, compared with 4.1 percent growth in the third quarter of last year, as debt-burdened consumers cut back on spending.
The 0.7 percent rise in retail sales in December followed a 0.8 percent November increase, but both months were heavily influenced by auto sales.
Excluding autos, December sales rose by just 0.2 percent. November sales fell by 0.4 percent when autos were not counted.
Sales were down by 0.3 percent at department and other general merchandise stores in December, and were flat at specialty clothing stores. Electronics stores' sales dropped 0.1 percent.
Hey Glassy Thanks for stopping by.All input is welcome because all small business owners face similar problems in one way or another.
glassy, welcome aboard - glad to have you - I know you are a business owner so your comments and suggestions will be a welcome addition.
well, good grief! the first statement inna I box is no insulting of anyone- how am I gonna be able to post? what else can I do?!?LOL JK>>>>>>>>>>>>>..................great board! Like the idea!
Real world answers for small business.http://www.thesmallbusinessguru.com/
The online content business model
In general, something is said to be online if it is connected to some larger network or system (which is implicitly the "line", though this interpretation is often useless). Several more specific meanings exist:
1. In common parlance, the larger network in question is usually the Internet, so that 'online' describes information that is accessible through the Internet.
2. In a system for the performance of a particular task, an element of the system is said to be online if it is operational. For instance, a power plant is online if it is supplying power to the power grid. Alternatively, a section of road may be said to be online if it is open to traffic.
3. In telecommunication, the term has another very specific meaning. A device associated with a larger system is online if it is under the direct control of the system. It it is available for immediate use by the system, on demand, without human intervention, but may not be operated independently of the system.
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The low-cost carrier business model
A low-cost carrier or low cost airline (also known as a no-frills or discount carrier / airline) is an airline that offers generally low fares in exchange for eliminating many traditional passenger services. The concept originated in the United States before spreading to Europe in the early 1990s and subsequently to much of the rest of the world.
Business model
Typical low-cost carrier business model practices include:
1. a single passenger class
2. a single type of airplane, commonly the Airbus A320 or Boeing 737 (reducing training and servicing costs)
3. a simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations, known as "yield management")
4. unreserved seating (encouraging passengers to board early and quickly)
5. flying to cheaper, less congested secondary airports (avoiding air traffic delays and taking advantage of lower landing fees)
6. short flights and fast turnaround times (allowing maximum utilization of planes)
7. simplified routes, emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft utilization)
8. emphasis on direct sales of tickets, especially over the Internet (avoiding fees and commissions paid to travel agents and corporate booking systems)
9. employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs)
10. "Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for in-flight food and drink
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The servitization of products business model
Service economy can refer to one or both of two recent economic developments. One is the increased importance of the service sector in industrialized economies. Services now account for a higher percentage of GDP than just 20 years ago. If you look at the current list of Fortune 500 companies, more of them are service companies and fewer are manufacturers than in previous decades.
The term is also used to refer to the relative importance of service in a product offering. That is, products today have a higher service component than in previous decades. In the management literature this is referred to as the servitization of products. Virtually every product today has a service component to it. The old dichotomy between product and service has been replaced by a service-product continuum. (See service#The service-goods continuum). Many products are being transformed into services. This is a service-centric view of the economy : everything purchased has a significant service component.
For example IBM treats its business as a service business. Although it still manufactures computers, it sees the physical goods as a small part of the "business solutions" industry. They have found that the price elasticity of demand for "business solutions" is much less elastic than for hardware. There has been a corresponding shift to a subscription pricing model. Rather than receiving a single payment for a piece of manufactured equipment, many manufacturers are now receiving a steady stream of revenue for ongoing contracts.
Full cost accounting and most accounting reform and monetary reform measures are usually thought to be impossible to achieve without a good model of the service economy.
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The industrialization of services business model
The industrialization of services business model is a business model used in strategic management and services marketing that treats service provision as an industrial process, subject to industrial optimization procedures. It originated in the early 1970s at a time when various quality control techniques were being successfully implemented on production assembly lines.
Theodore Levitt (1972) argued that the reason that the service sector suffered from inefficiency and wide variations in quality were that it was based on the craft model. Each service encounter was performed as if it was an isolated event. He felt that this erratic approach could be systematized through the use of planning, optimal processes, consistency, and capital intensive investments. This model was the foundation of the success of McDonalds and many other mass service providers in the 1970s, 80s, and 90s.
Unfortunately, the application of assembly line techniques to service provision had several undesirable consequences. Employees found working under these conditions disempowering, resulting in low morale, high staff turnover, and reduced service quality. One of the most difficult aspects of this model for employees to deal with was the "smile incentives". Employees were instructed to put a smile on their face during the service encounter. This manufacturing and commercialization of apparent happiness has been criticised by many commentators, particularly Mundie (1987). Also many customers prefer the "personal touch".
By the early 1990s most service providers turned their attention back to the human element and personalized their services. Employees were empowered to customize the service encounter to the individual characteristics of customers.
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The Collective business model
A collective business system or collective business model is a business organization or association typically comprised of relatively large numbers of businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or provides other benefits for their members. In the past, collective business systems such as the trade association, the cooperative and the franchise were created to allow groups of independently owned businesses with common interests to successfully compete in the marketplace.
Overview
Beginning in the middle of the twentieth century, the business world in the United States of America and many European countries has witnessed the consolidation of all types of businesses through mergers, rollups or acquisitions. Typically, by the end of the consolidation process, a particular industry or profession becomes dominated by three or four nationally-based enterprises. Under these circumstances many smaller companies (often serving only local requirements and in private ownership) are often forced out of business or decide to sell to one of the dominant entities because it can no longer compete profitably with them. Typically, locally based businesses are unable to compete because they lack the capital, global marketing capabilities, purchasing power and expensive technology necessary to operate efficiently. This trend toward consolidation is expected to continue well into the twenty-first century and is sometimes shortened in developing countries, where the initial business in a market sector may a single, large enterprise able to compete on the international market.
Presently, and for the foreseeable future, the inherent limitations of traditional collective business systems such as the trade organization, the cooperative and the franchise render them considerably less effective than they once were in advancing the business interests of their constituents. The following is a brief synopsis of those traditional collective business systems.
Trade Association
Trade associations are non-profit organizations in which the individual members are companies or individuals engaged in a common business pursuit. Competitors join together to create a platform format in which they deal with common problems of their industry. Any applicant meeting the standards of the association must be accepted as a member. Anti-trust law prohibits a member trade association from denying an otherwise qualified applicant's membership based upon a geographical proximity to an existing member. Trade associations commonly offer their members educational programs, the opportunity to come together at meetings to discuss common problems, and marketing materials designed to be imprinted by each member with its relevant information. Trade associations also offer elective group purchasing plans. The trade association bears no credit risk in these transactions but instead, provides chosen vendors with access to a large body of member customers. Because the trade association does not pledge its credit, the vendor must rely upon the credit worthiness of each purchaser.
To sustain its operations, a trade association generally receives an initiation fee and/or a yearly membership fee (collectively "dues") from its members, and it may collect rebates or commissions from the purchasing plan suppliers.
Cooperative
A cooperative is a non-profit organization somewhat similar to a trade association. A significant difference between the cooperative and the trade association, however, is that with a trade association, the members have a non-equity position in the association, whereas in the typical cooperative the members will have an equity interest as all members of the cooperative own a portion of the cooperative. Generally, a cooperative only addresses one facet of business operation needs of interest to its members, e.g., purchasing of goods and services at advantageous prices. A purchasing cooperative is at risk in that it holds considerable assets in the form of inventory and provides credit to the businesses in the cooperative. In addition, the members of the cooperative risk loss of invested capital if the cooperative proves unsuccessful.
The cooperative utilizes its volume leverage with suppliers in purchasing products and services for less than the individual member company could obtain outside of the cooperative. The cooperative marks up the purchased products or services in order to cover operating expenses. Any net income achieved by the cooperative is then returned to the cooperative members in the form of a redistribution of profits or dividends. Like a trade association, cooperatives cannot exclude members on the basis of geography or create exclusive territories.
There are also cooperatives in which the sole function is for marketing and advertising in a given region. New car dealers and fast food franchisees typically form marketing and advertising cooperatives.
Cooperatives are often hampered by being unwilling or unable (depending on legislation and the practicalities of the type of business they are in) to carve out or assign geographic territories to their individual members. They are usually limited to executing a single business function, e.g., purchasing of products and services or marketing.
Franchise
The franchise is a for-profit collective business system wherein the franchiser offers proprietary products or services to its franchisees. The franchiser generally gives considerable marketing support to its franchisees. In exchange, the franchisees are subject to a substantial amount of control by the franchiser concerning its operations and marketing including the use of the franhisor's trade names, trademarks and copyrighted materials. A franchisee's employees typically are required to wear uniforms and to dress as specified by the franchisor. Franchises can be offered by the franchisor on a teritorial basis without violating antitrust laws. Ordinarily, the franchisee owns the non-real estate assets of a franchise. There is generally a substantial fee paid by the franchisee for the privilege of becoming a franchisee. This is followed by a period of training that is offered on an ongoing basis throughout the franchise. Most states have laws highly protective of franchisees in prohibiting the franchisor from terminating the franchise so long as the franchisee meets predetermined business requirements and does not otherwise violate the terms of the franchise agreement.
The franchisor derives income from the initial franchise fees and products and services, which are offered to the franchisees on either a mandatory or optional purchase basis. The franchisor generally derives additional income based upon a percentage of the volume of business conducted by the franchisee. The franchise agreement also usually provides that the franchisee can only sell products supplied or approved by the franchisor.
Among the traditional collective business systems only the franchise can create exclusive trade territories. Conversely, however, the franchise structure severely inhibits the independence of the franchisee and the success of the franchisee is inextricably tied to the success of the franchisor. The franchisee is not free to introduce non-approved products or services and is generally precluded from introducing innovative business or marketing strategies by the extensive control imposed by the franchisor.
Trade association
The trade organization imposes relatively low membership dues on its members. However, because initiation fees and annual membership fees are nominal, the trade organization lacks the ability to engage in offering its members national marketing capability, access to expensive technologies and cost-effective purchasing programs for major purchases due to a lack of capital. Furthermore, being non-profit, trade associations do not have the management mentality necessary to sustain major projects such as national sales and marketing.
While offering potentially valuable services to businesses, few trade associations offer much direct help in the major business areas of purchasing, production or marketing.
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The Loyalty business model
The loyalty business model is a business model used in strategic management in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed. A typical example of this type of model is: quality of product or service leads to customer satisfaction, which leads to customer loyalty, which leads to profitability.
(The service quality model)
A model by Kay Storbacka, Tore Strandvik, and Christian Gronroos (1994) is more detailed but arrives at the same conclusion. In it, customer satisfaction is first based on a recent experience of the product or service. This assessment depends on prior expectations of overall quality compared to the actual performance received. If the recent experience exceeds prior expectations, customer satisfaction is likely to be high. Customer satisfaction can also be high even with mediocre performance quality if the customer's expectations are low, or if the performance provides value (that is, it is priced low to reflect the mediocre quality). Likewise, a customer can be dissatisfied with the service encounter and still perceive the overall quality to be good. This occurs when a quality service is priced very high and the transaction provides little value.
This model then looks at the strength of the business relationship; it proposes that this strength is determined by the level of satisfaction with recent experience, overall perceptions of quality, customer commitment to the relationship, and bonds between the parties. Customers are said to have a "zone of tolerance" corresponding to a range of service quality between "barely adequate" and "exceptional." A single disappointing experience may not significantly reduce the strength of the business relationship if the customer's overall perception of quality remains high, if switching costs are high, if there are few satisfactory alternatives, if they are committed to the relationship, and if there are bonds keeping them in the relationship. The existence of these bonds acts as an exit barrier. There are several types of bonds, including: legal bonds (contracts), technological bonds (shared technology), economic bonds (dependence), knowledge bonds, social bonds, cultural or ethnic bonds, idiological bonds, psychological bonds, geographical bonds, time bonds, and planning bonds.
This model then examines the link between relationship strength and customer loyalty. Customer loyalty is determined by three factors: relationship strength, perceived alternatives and critical episodes. The relationship can terminate if: 1) the customer moves away from the company's service area, 2) the customer no longer has a need for the company's products or services, 3) more suitable alternative providers become available, 4) the relationship strength has weakened, or 5) the company handles a critical episode poorly.
The final link in the model is the effect of customer loyalty on profitability. The fundamental assumption of all the loyalty models is that keeping existing customers is less expensive than acquiring new ones. It is claimed by Reichheld and Sasser (1990) that a 5% improvement in customer retention can cause an increase in profitability between 25% and 85% (in terms of net present value) depending upon the industry. However, Carrol and Reichheld (1992) dispute these calculations, claiming that they result from faulty cross-sectional analysis.
According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs because:
• The cost of acquisition occurs only at the beginning of a relationship: the longer the relationship, the lower the amortized cost.
• Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
• Long term customers tend to be less inclined to switch and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.
• Long term customers may initiate free word of mouth promotions and referrals.
• Long term customers are more likely to purchase ancillary products and high-margin supplemental products.
• Long term customers tend to be satisfied with their relationship with the company and are less likely to switch to competitors, making market entry or competitors' market share gains difficult.
• Regular customers tend to be less expensive to service because they are familiar with the processes involved, require less "education," and are consistent in their order placement.
• Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into higher customer satisfaction in a virtuous circle.
For this final link to hold, the relationship must be profitable. Striving to maintain the loyalty of unprofitable customers is not a viable business model. That is why it is important to for marketers to assess the profitability of each of its clients (or types of clients), and terminate those relationships that are not profitable. In order to do this, each customer's "relationship costs" are compared to their "relationship revenue." A useful calculation for this is the patronage concentration ratio. This calculation is hindered by the difficulty in allocating costs to individual relationships and the ambiguity regarding relationship cost drivers.
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The bricks and clicks business model
Bricks and clicks is a business strategy or business model in e-commerce by which a company attempts to integrate both online and physical presences. It is also known as Click-and-mortar or clicks-and-bricks.
For example, an electronics store may allow the user to order online, but pick up their order immediately at a local store. Conversely, a furniture store may have displays at a local store from which a customer can order an item electronically for delivery.
The bricks and clicks strategy has typically been used by traditional retailers who have extensive logistical and supply chains. Part of the reason for its success is that it is far easier for a traditional retailer to establish an online presence than it is for a start-up company to employ a successful pure dot.com strategy, or for an online retailer to establish a traditional presence (including a strong brand).
The success of the strategy in many sectors has destroyed the credibility of analysts who argued that the Internet would render traditional retailers obsolete through disintermediation.
Advantages of the model:
Click and mortar firms have the advantage in areas of existing business models and products. In these cases it is better to retain ties to your physical company. This is because they are able to use their competencies and assets, which include:
1. Core competency. Successful firms tend to have one or two core competencies that they can do better than their competitors. It may be anything from new product development to customer service. When a bricks and mortar firm goes online it is able to use this core competency more intensively and extensively.
2. Existing supplier networks. Existing firms have established relationships of trust with suppliers. This usually ensures problem free delivery and an assured supply. It can also entail price discounts and other preferential treatment.
3. Existing distribution channels. As with supplier networks, existing distribution channels can ensure problem free delivery, price discounts, and preferential treatments.
4. Brand equity. Often existing firms have invested large sums of money in brand advertising over the years. This equity can be leveraged on-line by using recognized brand names. An example is Disney.
5. Stability. Existing firms that have been in business for many years appear more stable. People trust them more than pure on-line firms. This is particularly true in financial services.
6. Existing customer base. Because existing firms already have a base of sales, they can more easily obtain economies of scale in promotion, purchasing and production; economies of scope in distribution and promotion; reduced overhead allocation per unit; and shorter break even times.
7. A lower cost of capital. Established firms will have a lower cost of capital. Bond issues may be available to existing firms that are not available to dot coms. The underwriting cost of a dot com IPO is higher than an equivalent brick and click equity offering.
8. Learning curve advantages. Every industry has a set of best practices that are more or less known to established firms. New dot coms will be at a disadvantage unless they can redefine the industry's best practices and leap frog existing firms.
Pure dot.coms, on the other hand, have the advantage in areas of new e-business models that stress cost efficiency. They are not burdened with brick and mortar costs and can offer products at very low marginal cost. However, they do tend to spend substantially more on customer acquisition.
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The online auction business model
The online auction business model is one in which participants bid for products and services over the internet.
When one thinks of online auctions they typically think of eBay, the largest online auction site. Like most auction companies, eBay does not actually sell goods that it owns itself. It merely facilitates the process of listing and displaying goods, bidding on items, and paying for them. It acts as a marketplace for individuals and businesses that use the site to auction off goods and services.
Several types of online auctions are possible. In an English auction the initial price starts low and is bid up by successive bidders. In a Dutch auction, multiple identical items are offered in one auction, with all winning bidders paying the same price -- the highest price at which all items will be sold. (Treasury bills, for example, are auctioned this way). Almost all online auctions use the English auction.
The strategic advantages of this business model are:
1) No time constraints. Bids can be placed at any time, 24 / 7 . Items are listed for between for a number of days (normally between 1 and 10) (at the discretion of the seller), giving purchasers time to search, decide, and bid. This convenience increases the number of bidders.
2) No geographical constraints. Sellers and bidders can participate from anywhere that has internet access. This makes them more accessible and reduces the cost of "attending" an auction. This increases the number of listed items (ie.: number of sellers) and the number of bids for each item (ie.: number of bidders). The items do not need to be shipped to a central location, reducing costs, and reducing the seller's minimum acceptable price.
3) Intensity of social interactions. The social interactions involved in the bidding process are very similar to gambling. The bidders wait in anticipation hoping they will "win" (eBay calls the successful bidder the "winner"). Much like gambling addiction, many bidders bid primarily to "play the game" rather than to obtain products or services. This creates a highly loyal customer segment for eBay.
4) Large number of bidders. Because of the potential for a relatively low price, the broad scope of products and services available, the ease of access, and the social benefits of the auction process, there are a large numbers of bidders.
5) Large number of sellers. Because of the large number of bidders, the potential for a relatively high price, reduced selling costs, and ease of access, there are a large number of sellers.
6) Network economies. The large number of bidders will encourage more sellers, which, in turn, will encourage more bidders, which will encourage more sellers, etc., in a virtuous spiral. The more the spiral operates, the larger the system becomes, and the more valuable the business model becomes for all participants.
7) Captures consumers' surplus. Auctions are a form of first degree price discrimination. As such, they attempt to convert part of the consumers' surplus (defined as the area above the market price line but below the firm's demand curve) into producers' surplus. On-line auctions are efficient enough forms of price discrimination that they are able to do this.
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The auction business model
An auction is the process of buying and selling things by offering them up for bid, taking bids, and then selling the item to the highest bidder. In economic theory an auction is a method for determining the value of a commodity that has an undetermined or variable price. In some cases, there is a minimum or reserve price; if the bidding does not reach the minimum, there is no sale (but the person who puts the item up for auction still owes a fee to the auctioneer). In the context of auctions, a bid is an offered price.
Auctions are publicly seen in several contexts:
1. in the antique business, where besides being an opportunity for trade they also serve as social occasions and entertainment
2. in the sale of collectibles such as stamps, coins, classic cars, luxury real estate, and fine art
3. for the sale of second-hand goods of all kinds, particularly house clearances and online auctions
4. in thoroughbred horseracing, where yearling horses are commonly auctioned off; and
5. in legal contexts where forced auctions occur, as when one's farm or house is sold at auction on the courthouse steps.
Although less publicly visible, the most economically important auctions are those in which the bidders are businesses or corporations. Examples of this type of auction include:
6. sales of businesses
7. spectrum auctions, in which companies purchase licenses to use portions of the electromagnetic spectrum for communications (for cell phone networks, for example)
8. timber auctions, in which companies purchase licenses to log on government land
9. electricity auctions, in which large-scale generators and consumers of electricity bid on generating contracts
10. environmental auctions, in which companies bid for licenses to avoid being required to decrease their environmental impact
11. debt auctions, in which governments sell debt instruments, such as bonds, to investors. The auction is usually sealed and the uniform price paid by the investors is typically the best non-winning bid. In most cases, investors can also place so called non-competitive bids which indicates an interest to purchase the debt instrument at the resulting price, whatever it may be.
The world's three largest auction houses are Christie's, Sotheby's and Bonhams. Internet auctions have become very popular; the world's largest auction site is eBay.
Auction catalogs are frequently printed and distributed before auctions of rare and/or collectible items; these catalogs may be very elaborate works, with considerable details about the items being auctioned.
Auctioneers are usually trained in the legal and practical aspects of conducting auctions. Some jurisdictions require auctioneers to be licensed and bonded. In the U.S., auctioneers who have completed Auctioneer School commonly use the title Colonel and are given this honorary title because in the U.S. Civil War, Colonels of the armies were called upon to auction off the spoils of war.
Types of auctions
12. English auction: This is what most people think of as an auction. Participants bid openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined "buy-out" price is reached, at which point the highest bidder pays the price. The seller may set a 'reserve' price and if the auctioneer fails to raise a bid higher than this reserve the sale may not go ahead.
13. Dutch auction: In the traditional Dutch auction the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined minimum price is reached. That participant pays the last announced price. This type of auction is convenient when it is important to auction goods quickly, since a sale never requires more than one bid. The Dutch auction is named for its best known example, the Dutch tulip auctions; in the Netherlands this type of auction is actually known as a "Chinese auction". "Dutch auction" is also sometimes used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders. Economists call the latter auction a multi-unit English ascending auction.
14. Sealed first-price auction: Also known as Sealed High-Bid Auction or First-Price Sealed-Bid Auction (FPSB). In this type of auction all bidders simultaneously submit bids so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.
15. Sealed second-price auction, also known as a Vickrey auction: This is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than their own. In theory, this is mathematically equivalent to the English auction, because in both the first-place bidder receives the item at a price equal to the second-place bidder's willingness to pay, plus the bid increment. True strategic equivalence requires a modified model of the English ascending auction in which the price rises continuously with bidders choosing when to drop out. When all but one bidder drops out, the good is allocated to the remaining bidder at the price at which the second-to-last bidder dropped out. Implemented as such, this is known as a Japanese Auction.
16. Silent auction: This is a sealed variant often used in charity events, but involving the simultaneous sale of multiple items. Participants submit bids normally on paper, near the item. They may or may not know how many other people are bidding or what their bids are. The highest bidder pays the price they submitted.
17. Procurement auction: This kind of auction reverses the roles of seller and buyer. The buyer puts out an RFQ for a given commodity and providers offer progressively lower prices in hopes of getting the business. At the end of the auction, the lowest bid wins.
18. Digital art auction: In this indefinitely long auction, designed for unreleased works that are trivially reproducible at zero cost (recordings, software, drug formulae), bidders openly submit their maximum bids (which may be adjusted or withdrawn at any time). The seller may review the bids and close with a price of their choosing at any time—the successful bidders that pay this price are those whose bid meets or exceeds it, and these are the only bidders who receive a copy of the item.
19. Open outcry auction: This type of auction is used in stock exchanges and commodity exchanges, where trading occurs on a trading floor and traders may enter verbal bids and offers simultaneously. Transactions may take place simultaneously at different places in the trading pit or ring. This type of auction is being replaced by electronic trading platforms.
20. Unique bid auction: In this type of auction users post blind bids and are given a range of prices they can place a bid in, often a capped limit. The highest, or lowest, unique bid wins. For instance an auction is given a maximum bid of 10. If the top five bids are 10, 10, 9, 8, 8 then 9 would be the winner being the highest unique bid. This a popular online type of auction.
21. Buy-out auction: This auction has a predetermined buy-out price in which the bidder can end the auction by accepting the buy-out price. The buy-out price is set by the seller. The bidder can choose to bid or use the buy-out option. If no bidder chooses to utilize the buy-out option, the auction ends with the highest bidder winning the auction.
If more than one identical item is sold, there are two possible generalizations of the second-price auction. In a uniform-price auction, all of the winning bidders pay the price submitted by the highest non-winning bidder. Bidders will not typically bid their true value in a uniform-price auction with multiple units. In a Vickrey auction, the pricing rule is more complicated, but preserves the property that bidders will bid their true valuation. It is also possible to auction each identical item individually. Once each item has been priced, the winning bidder is entitled to buy the remaining goods at the same price. Items the winning bidder opts not to purchase are auctioned again. This system creates a tension between the desire to hold back on bidding since later items will almost certainly be cheaper, and the chance that by losing the first round of bidding all possibility of purchasing will be lost.
Bidders in the traditional Dutch auction and sealed first-price auction will tend to underbid what they believe the item is truly worth in hopes of getting the item for less, or in order to avoid the winner's curse. This behavior is known as bid shading. These two auctions are also theoretically equivalent, but in practice Dutch auctions will produce less revenue than sealed first-price auctions.
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