Teri Bernstein, MBA, CPA has been teaching full time in the Business Department of Santa Monica College since 1985. Prior to that, she worked in Internal Audit and Special Financial Projects for the 1984 Los Angeles Olympics, CBS, Inc., and Coopers & Lybrand. She attended the University of Michigan and Wayne State University.
image from freeenterprise.com
What would you call an entity with the following attributes? This entity:
Sounds like some kind of renegade, out-of-compliance bank, doesn't it? Actually, it is a money market fund. Like the ones run by all the major brokerage firms.
Mary Shapiro, of the Securities and Exchange Commission (SEC), is proposing rules that would impose the sames kinds of constraints and safeguards surrounding money market customer deposits that bank customers have. Not surprisingly, there has been substantial resistance from brokerage firms and the US. Chamber of Commerce (a private lobbying group for businesses). They have put up a web site. They are lobbying other SEC members who will be voting on this change.
Mary Shapiro of the SEC; image by Saul Loeb/Getty Images
Money market funds do have ONE rule they already have to meet. Each money market share is valued at $1. By law, the value of these shares is not allowed to fall below 99.5 cents. Therefore, they can't be invested in very risky or rewarding instruments without falling below this standard. Morever, if the value sinks to slightly above that threshold, and a major depositor makes a withdrawal that has to be redeemed at the $1 level, the value will sink below the 99.5 cent value, because there are no reserves.Shapiro is proposing that reserves be maintained, and/or that shares that are less that $1 in value only be paid out at the reduced value when redeemed. This would offer some protection to the remaining money market depositors, who won't get stuck holding all the losses. When situations like these have arisen in the past, either other parts of the brokerage has stepped in to shore up the losses, or the federal government (i.e. the taxpayers) have had to bail out the funds. Shapiro wants to have the entities who benefit bear the cost--in terms of reserves, or insurance, or fair payouts. Big businesses are fighting any rule changes. They think any changes to the rules will make customers withdraw from money market funds.Meanwhile--what advantage does an individual investor have with respect to money held in a money market fund instead of a bank? Money markets used to pay higher interest rates, but not any more. In addition, the funds aren't insured as a bank deposit would be. Hmmm...maybe it is time to pull personal funds out of the money markets--and get out ahead of those big institutional investors.
Source: New York Times: "Money Market Funds and Their Allies Resist New Rules" Floyd Norris, June 28, 2012.
If embedded video doesn't open, click on: Leo Burnett's YouTube story
"Reverse psychology" is an attempt to get someone else to do what you want them to do...by telling them to do what you DON'T want them to do. A famous reverse psychology situation in American folk literature is the story of Brer Rabbit and the Briar Patch. Brer Rabbit had been caught by Brer Fox and was on track to be punished. Brer Rabbit begged and begged NOT to be thrown into the briar patch, claiming that it was the worst punishment imaginable. Said Brer Rabbit:
“‘Skin me, Brer Fox,’ sez Brer Rabbit, sezee, ‘snatch out my
eyeballs, t’ar out my years by de roots, en cut off my legs,’ sezee,
‘but do please, Brer Fox, don’t fling me in dat brier-patch,’ --Joel Chandler Harris, Uncle Remus and other Stories. "How Mr. Rabbit Was Too Sharp For Mr. Fox"
What Brer Rabbit knew that the others didn't was that Brer Rabbit was born and raised in the briar patch, and it was one of the most comfortable places he could imagine. As the story goes, Brer Rabbit eventually prevailed...
A real-life success with reverse psychology is described in Leo Burnett's YouTube story. A small tax (0.7%) to keep the Troy, Michigan library open was on the ballot, and the Tea Party (which has taken a pledge to oppose any and all taxes) was advertising against its passage, focusing on "taxes, taxes,taxes." Those in favor of the library, who therefore supported the tax, used a very risky tactic. They pretended to also oppose the tax, but made it about the library having "books to burn." They staged (fake) book burning parties. The advertising company waited until there was substantial public disgust for the "book burners" before coming clean about the real motive behind the campaign: to change the discussion from "taxes, taxes, taxes" to "library, library, library."
The effectiveness of this campaign was astonishing. Check out the video and see for yourself.
YouTube: Save the Troy Library "Adventures in Reverse Psychology"
image from squidoo.com
Does it seem rather quaint to imagine sipping a Coke out of a glass bottle? As it turns out, glass is making a comeback as a container-of-choice, according to an article in this week's New York Times. Glass went out of favor because it was breakable and therefore unsafe, but plastic and metal containers have been found to leach dangerous chemicals into the water or whatever beverage is housed in the container. Microwaves also release chemicals from plastic containers into food. Consumers are worried about these chemicals--primarily BPA, or bisphenol A, which mimics estrogen and cannot be removed from plastics that are recycled.
Meanwhile, inventors have been busy making glass that is shatter-proof and less breakable, so glass is once again "on the table" as a choice. Here are some new and re-introduced glass products:
Walt Himelstein, scientist, inventor and entrepreneur, with his Pureglass bottles. from article linked below
Walt Himelstein, inventor of the Pureglass bottle, is working to get gyms to reverse their policies against glass bottles..or at least allow his product. This is not the only hurdle he has had to face. Because so few producers of glass bottles exist in the USA, he has had to find a producer in China. He also had difficulty financing production, but finally connected with investor Marc Heinke, who had owned a Canadian producer of melamine, but was looking for another project. Heinke will remain involved in the marketing of the new bottle.
Source: New York Times Business Day: "Wary of Plastic, Some Consumers Turn to Glass" by Stephanie Strom. June 20, 2012
this print ad pointed up how the "film" on teeth looked, but earlier ads taught consumers to feel the "film"See below for details...
Today's post focuses on how marketers create consumer habitsIn the previous two posts, we looked at the new brain-science perspective on habit formation. Charles Duhigg, in a Harvard Business Review podcast, described how the the
frontal cortex of the brain is responsive to a "Trigger," which is a
person, place, time of day, physical sensation or emotional feeling.
This cue leads to a "Routine," which is the physical manifestation of
the habit. The release of dopamine is the chemical part of the Reward that tells the brain it wants to make the behavior into a habit.
Duhigg also discussed how marketers--even without knowing the science--understand the pattern and use it to instill new habits in consumers. They strive to create Triggers that will lead to a specific Routine: the purchase and use of an advertised product. This Routine is established in an effort to achieve a certain Reward which is symbolized by or satisfied by the product purchase.
Duhigg told the story of a man he called one of the greatest ad men of all time: Claude C. Hopkins. Hopkins achieved an ad man's dream: He got people to use a product on a daily basis that they'd never used before: toothpaste. More specifically: Pepsodent toothpaste. He did this by educating people about
a new "Trigger"--the filmy feeling of unbrushed teeth. His ads taught consumers to notice the filmy feeling, and to see it as unclean and undesirable. A problem. A personal hygiene problem. Check out this vintage ad's headline: "Awake or asleep--FILM is gluing acid to your teeth!"
this image is from vintage-adventures.com and shows how print ads "educated" consumers, 1950.
also provided a new "Reward"--the tingly feeling provided by the mint and citric acid in the toothpaste--slight irritants. His ads trained people to experience the tingle as equivalent to "clean." According to Duhigg in the "How Do You Make A Product Into A Habit?" article:
"When researchers at competing companies started interviewing
customers, they found that people said that if they forgot to use
Pepsodent, they realized their mistake because they missed that cool,
tingling sensation in their mouths. They expected — they craved — that slight irritation. If it wasn’t there, their mouths didn’t feel clean.
Claude Hopkins, it turns out, wasn’t selling beautiful teeth. He was
selling a sensation. Once people craved that cool tingling — once they
equated it with cleanliness — brushing became a habit."
The ad campaign was expanded to promote a long-term reward for continued use: whiter teeth. The subsequent ad line was "You'll wonder where the yellow went, when you brush your teeth with Pepsodent."
Check out this: LINK to a 1950's Pepsodent ad on YouTube
This marketing campaign established what would become a classic marketing feedback loop. It identified and exploited a human weakness--fear of having a defect of some kind. It provided a cure with both short term (tingle) and long term (white teeth) rewards. The campaign was pure genius from a marketing perspective.
Changing Institutional Habits June 18th's post delineated how modern brain science can explain and direct habit formation for the individual. As you probably know from experience, businesses also have habits. A visionary CEO, who understands how a corporate entity functions, can effectively change corporate habits. Paul O'Neill did this for Alcoa (the Aluminum Company of America). Charles Duhigg, author of The Power of Habit: Why We Do What We Do In Life And Business, discussed O'Neill's success as part of an interview on a recent Harvard Business Review
podcast. According to Duhigg, O'Neill focused on changing a "keystone
habit" at Alcoa: the response to accidents. [Note: a "keystone habit" is
a habit that is instrumental in changing other habits].
had a history of employee unrest
(huge strikes) and numerous safety violations when Paul O'Neill took
over as CEO. O'Neill's attitude toward safety was that accidents
happened when employees did things wrong--committed procedural
violations. But, rather than trying to implement a punitive "quality
control" plan focusing on "efficiency," O'Neill made "safety" every
manager's number one priority. He instituted this Keystone habit: When ANY accident occurred, the manager
had 24 hours to write up an accident report. Employee input was welcomed. Only managers with good
safety records got promoted. The message that trickled down to employees
was that EVERY EMPLOYEE MATTERED. Every accident was taken seriously,
and followed up with care. Alcoa's employee problems abated, and its
profits increased under O'Neill's leadership. (You can listen to this
story as part of the HBR podcast linked above, or read about it at BusinessWeek.)
Duhigg pointed out that great CEOs talk about running a corporation by managing small choices. And what are these small choices? Habits. Habits around routine matters free up the frontal cortex of the brain to concentrate on the important stuff. So logically, "good" habits can increase productivity.
In another interview with the Fiscal Times, Duhigg related Starbucks' success in establishing skillful habits in their baristas and store managers. Employees practice responses to "inflection points" where there might be equipment failure or problem customers, so that they get comfortable with a habituated response. This training model was a part of a company turnaround when Howard Schultz returned as CEO.
Duhigg also related that not only did good habits lead to company success; the inverse was true: bad habits can lead to bad company outcomes. He cited the London King's Cross Fire in 1987, where "no individual worker or department took responsibility for company safety." Result? Thirty one people died. It seems important to take the correlation between habits and outcomes seriously.
Habits and Individuals: a new perspective: post 1 of 3 in a series about how HABITS affect business.
Habits are an integral part of our lives--according to Charles Duhigg they make up 40-45% of our actions every day. (see HBR podcast linked below.) But when we describe habits as "Good" or "Bad," we are probably thinking about habits from an outdated standpoint. Current brain science research shows us that habits are just a result of brain chemistry--brain chemistry that we can manipulate with training. According to both the HBR podcast and the Connectome podcast (also linked below), actions that are habits are housed in the "basal ganglia" portion of our brains. This is a primitive section of our brains from which no articulated thoughts arise--so these actions feel "automatic." Like most parts of our brains, however, the basal ganglia is responsive to the powerful and pleasurable brain chemical, dopamine.
Harvard Business Review podcast: Gretchen Rubin
We do our thinking and experience new behaviors in the "frontal cortex" of our brains. The frontal cortex makes the judgments about what we might consider a "good" or "bad" habit, and can be the architect of changing our habits. In both school and work environments, many of us want to be perceived as a person who is trustworthy and reliable, so most of us what to have habits that are valued by the environment. Dealing with email, taking breaks, how we use the phone and how we interact with colleagues are all habitual behaviors that we can change. Using what scientists now know about habits can help.
Charles Duhigg, in an interview on the Harvard Business Review Idea Cast, used one of his own habits to illustrate how to break down the process of habit formation on the individual level. Duhigg had a late afternoon cookie habit at the New York Times office where he works. He first analyzed this habit, breaking it into three parts: Trigger, Routine and Reward. Recent research has shown that the most important pieces of this triad are those that affect our brain chemistry: "Triggers" and "Rewards." The Triggers are usually based on Time, Place, People, Sensation or an Emotion. Duhigg figured that his cookie Trigger was Time-based. He identified the Routine (that he wanted to change) to be: go to the cafeteria, buy a cookie and eat the cookie while chatting with colleagues.
The Reward piece was more difficult for Duhigg to analyze and unpack...because what might look like a reward (a cookie) might not be the reward--there might be several rewards embedded in the routine, only one of which would really satisfy the craving and power the habit. Duhigg had to ask himself:
Duhigg tested out a few combinations, and discovered that what was really "hitting the spot" for him was the interaction with colleagues. Once he knew this, he was ready to set up a new habit that would address the Trigger and the Reward, but insert a different Routine--one that would lead to less cookie consumption while maintaining the "fix" he needed--interaction with colleagues.
The Connectome podcast tells us more about the chemistry of the brain...and the importance of the Reward, which in every case leads to the release of dopamine that satisfies the craving. According to Ben Thomas, anyone wanting to change a habit needs to identify exactly what part of the routine constitutes the reward that would set off that dopamine release. Thomas goes further, addressing the issue of why new habits might go fine for the first few days, but become harder to maintain. He also describes techniques--again, based on the way scientists now know our brains work--to ensure that the reward system for the brain stays in place while the actions that were initiated by the frontal cortex become a part of the habits of the basal ganglia. If a person wants to hard-wire a new behavior, and make it a habit, Thomas recommends the following:
As individuals, we can apply these techniques to improving our personal lives and our business image and productivity. But these are powerful techniques. We can also apply what we know about habits to:
image from d4deepan.blogspot.com
If you have a bank account, it is insured by the FDIC, right? Well--no: not in all circumstances. If there is a "run on the bank" involving your personal bank account, it's one thing. But if cyber-criminals use malware or viruses to steal from your business account, it is another situation entirely. Small businesses are particularly vulnerable. First of all, they are a more attractive target than an individual account-holder, because business carry higher cash balances to meet business operational needs. This means that there is more cost-benefit for the criminal. Secondly, banking operations are often delegated to clerical help, and employees at all levels frequently access social networking and other computer sites while on work-breaks. These excursions might leave a small business--without an IT department monitoring firewalls--vulnerable to attack.
In a NYT article, Pamela Ryckman describes a couple of small businesses that used hijacked usernames and passwords to steal $125,000 from one company and over $500,000 from another. Owners were quite surprised to find that the banks don't cover these types of losses.
photo by Craig Dilger, NYT: Mark Pattinson's construction company was a hacking victim
Some suggestions to small businesspeople to ward off trouble:
Source: New York Times: "Owners May not be covered when hackers wipe out a business bank account" by Pamela Ryckman
photo by Tracy Frank from article linked below in huffington post
Tim Ryan, a Congressman from Ohio, spoke in Santa Monica earlier this month about topics from his book A Mindful Nation. His main thesis is that meditative practices can reduce stress in many modern environments. Meditation practice has also helped him maintain his productivity and avoid burnout. On a personal level, his experience might serve as a guide to anyone in a stressful school or work situation.
In his book, Ryan also notes that there is a lot of overlap between principles underlying meditation practices, and what he believes are basic American values. A partial list of these qualities, from Chapter 1 in his book include: "Self reliance, stick-to-itiveness, persistence, perseverance, diligence, hard work, innovation, resilience, and thrift." These are also values espoused by the local Rotary Club, and that speak to small-business success and increased profitability.
image is from amazon.com, where the "click to look inside" tag is functional
His speech at the Broad Center for Performing Arts addressed business and military situations where meditation techniques have been taught and tested scientifically to measure the effects of meditation on productivity and stress minimization. The Huffington Post article linked below focused on questions from the audience that were inspired by his speech. For example, there was one question about how other Congressional Representatives perceived his meditation practice.
Julie Carr Smith, in her article, "Mindfulness Grows in Popularity--and Profits," used Tim Ryan's book as a jumping-off point to explore how "mindfulness" is a buzzword in today's marketplace. Entrepreneurs, psychologists, and consultants are using meditation training-for-a-fee and mindful-awareness instruction and therapies to help people communicate in the workplace, and to reduce personal stress. The entrepreneurial spirit meets buddhist practices. Smith notes: "Of the $34 billion Americans spent on alternative medicine in 2009, $4.2 billion--about 12%--was spent in sectors that included mindfulness concepts, such as meditation-related classes or relaxation techniques, according to federal data."
If Tim Ryan has it right, maybe increased meditation practice could be win-win--by individually improving quality of life, and by stimulating the economy through job growth and increased productivity.
Sources: article by Kathleen Miles, Huffington Post 6-5-12"Mindfulness Grows in Popularity--and Profits," by Julie Carr Smith of the Associated Press (via ABC News online) A Mindful Nation: How a Simple Practice Can Help Us Reduce Stress, Improve Performance, and Recapture the American Spirit, by Tim Ryan
Hybrids by Dave Wheeler, from the article linked below
A useful technique to use when you are making any kind of big-ticket purchase is "incremental analysis" or "differential analysis." This involves brainstorming or listing the various costs or benefits associated with the purchase, and calculating the incremental difference in cost between two or more items. Typically, this type of analysis is set up in columns. When it comes to buying a car, a major factor in these days of escalating gasoline prices is the price of fuel. A chart to compare the variables associated with making a choice between a regularly powered car and a hybrid might look like this:
In favor of…
Gas Price for 5 years
Estimates of gas prices and mileage are used to fill in the columns, as well as estimates of car costs. It can be very tricky to accurately project differential costs because it involves making guesses about future events. There are so many political and economic variables that influence gas prices. Also, hikes in gas prices can be seasonal. Car usage is a factor in gas expenditures, and they can be affected by unplanned moves, changes in public transportation alternatives, or the addition or subtraction of a carpool buddy.
The article linked below concludes that owning a vehicle for a longer time period and driving more miles in the city than on the highway are two factors that favor the purchase of a hybrid.
Source: Los AngelesTimes "Can Gas Prices Make Up For A Hybrid's Higher Sticker Price?" June 10th, 2012, by Jerry Hirsch.
photo by Joe Raedle, Getty images, and is from the article linked below
A significant cost for small businesses are employee benefits. The costs for one of those benefits--health care--has risen faster than inflation for several years. Fewer employers are offering health care benefits to new employees...but Obamacare (the Affordable Care Act) has saved the day for 6.6 million young adults. One provision of Obamacare allows parents to keep their adult children on the parents' insurance plans until they are 26 years old.
One problem: the Affordable Care Act is being reviewed by the US Supreme Court, and by the end of the month, the law may be reversed. These 6.6 million young people would lose their health care, unless benevolent insurance companies or state laws intervened to keep the provisions in place. For example, according to the article linked below, "In California, state law provides that this provision must remain in effect, regardless of the court's ruling."
The Commonwealth Fund, a leader in healthcare research, noted that not all of these young people currently insured under Obamacare would become un-insured--they may have other options. One option is to remain on their parents' healthcare plans by maintaining full-time student status between the ages of 19 and 23. Those whose course load falls below full time would lose insurance if Obamacare is reversed. Other young adults, 23 or older, or out of school, might be able to obtain less desirable coverage through their own employers or by purchasing it independently. But what young person wants that expense?
Most people who have health care insurance are grateful, and they want to maintain it. The business issue is: who will pay for it?
Source: Los Angeles Times, Business section, Friday June 8, 2012: "Law is helping young adults" by Noam Levey. The links is to the related article online
image from Bloomberg.com
Here is a fact that might not seem fair: As a result of the Facebook IPO, Mark Zuckerberg owns 18% of Facebook stock...but he controls 57% of the voting shares, according to an article by James Suroweicki in a recent New Yorker article (linked below). The way common stockholder rights theoretically are supposed to work is: one share, one vote. Basic common shareholder rights include a pro-rata share in profits and pro-rata voting rights. But Facebook created two classes of stock and divided up the voting rights unequally. I hope Facebook investors all took note of the fine print in the IPO prospectus and were fully aware of this discrepancy.
Actually, most of the tech company IPOs in the last several months have also had a "dual-class" share structure. These companies include Google, LinkedIn, Groupon, Yelp and Zynga. Google did an even stranger thing when its shares split recently--the new shares were issued with no voting rights, period. Suroweicki comments that this is as though "Zuckerberg and his peers are insisting on the right to say, 'Thanks for your money. Now shut up.'"
What does this dual class structure mean? How does it cause companies to behave differently? According to one study, companies with dual share structures underperformed the market between 1994 and 2001. On the other hand, tech companies--who are operating in new and rapidly changing markets--do not want to have to bend to the whims of pushy, big institutional investors with voting rights. Instead, tech company managers can focus on long term market strategies.
So, why do investors put their money into companies with dual class stock structures--that take their money but give back less in voting power? Well, investors still invest for the money--and it is the tech stocks with the unequal voting structures that look as though they can provide the best return on investment dollar.Surowiecki mentions one fact which I find quite baffling: "...companies like Facebook don't really need the money that an IPO raises...Facebook's operating profit is more than enough to fund its growth." Ironically, the classic reason for a public stock offering has been that companies NEED investor money to expand their business. As Suroweicki points out--Facebook doesn't need the money...but investors need a company they believe in like Facebook.
So...was the Facebook IPO just a publicity stunt? I don't get it.
Source for most of article information: The New Yorker, May 28, 2012, The Financial Page by James Suroweicki
image from guerillaonline.com
Part of being a really, really successful businessperson is being able to accurately predict what the next, new exciting "thing" will be. Last week, the New York Times Magazine devoted their issue to innovations--specifically delineating 32 innovations that will change everything. The editors also gave a mini time-line for how soon these innovations might become a reality.
Some of the innovations included:
Most of these innovations will supposedly be available in 2 to 4 years. Knowing what businesses are developing these products can create investment opportunities...as well as consumer delights.
Source: NYT Magazine: "32 Innovations that will change your tomorrow"June 3, 2012
a picture of Tommy Mitchell's cell phone charger, from article linked below
Tommy Mitchell was inspired to develop a solar panel for charging cell phones and other devices in parks, by two events:
After his conversation at Occupy, Tommy immediately put together a prototype "camper's charger" and took it back to Zuccotti Park to test it out. It was successful...and it didn't cost anything in terms of environmental impact, or ongoing variable costs.This is compared to costs to charge things at home: 12 cents per kilowatt hour...or to use an AAA battery: $400 per kilowatt hour.
Tommy Mitchell hopes to expand on his idea through his company, Green Barrel Energy.
Tommy Mitchell...photo by Mandy Oaklander
Source: NYT Green Blog: "An Idea Charged up at Zuccotti Park" by Mandy Oaklander