I thought I had seen it all until a Business Week article last week entitled “What a long strange business plan it’s been”.  As it turns out, the Grateful Dead was quite a commercial enterprise. The band was highly profitable, had a Board of Directors, and a successful merchandising division whose lawyers protected its intellectual property.  Was Jerry Garcia a better businessman than the average Joe?

The real lesson here is the level of engagement that the band had with “deadheads,” the iconic fans that would travel the country to take acid and watch 5 hour concerts. “The Dead” had a phone bank announcing new shows and preferred seating for their best fans, a bizarre form of psychedelic CRM. This makes me wonder, if The Grateful Dead, who probably didn’t know what city they were in half the time could run a business with this level of sophistication, shouldn’t all businesses be capable of this level of structure?

We should at least aspire to have fans half as loyal. It appears that the deadheads would do just about anything to consume the product (I am talking about the music) time and time again. What can you do in your business to create raving fans? There are stories of how no two shows were ever the same which would suggest that the band relished the element of surprise. Fans never knew what would come next, and that was a big part of their fascination.

Business should find ways to do the unexpected for customers, like send a Thanksgiving card or an In-N-Out truck to their location. It wouldn’t surprise me if Jerry Garcia did the unexpected and showed up on stage some day.

I am often asked if organizations should include Facebook postings and other social media in their marketing plan. For those of you interested in a precise answer, here it goes: it depends.

Newspaper revenue has fallen off a cliff (down 40% by 2003) while magazines have not fared much better (down 20%). Television ad revenue is down 15%, this year alone.  Meanwhile, online media is growing at a 7% clip suggesting that as a whole, total spending on marketing is undergoing a precipitous drop.

According to Kiplinger, targeted campaigns will reap 75% of all marketing spending by 2013. Marketers, armed with the ability to regurgitate millions of data points such as age, gender, location, income and household size will find ways to market online to very specific audiences.

In these cases, social media will provide an inexpensive method for targeting specific customers.  In the interim, most of us are just spewing on social networking sites with little return. There is certainly room for consumables to be marketed through social media. A recent study published in the Harvard Business Review showed a significant lift in the popularity of certain products and services when Facebook  and Twitter are used to mold the consumers’ opinions, including the use of online coupons and the like.

Yet for now, it is hard to imagine a professional services firm (for example) using such sites for anything more than impressing their younger colleagues. LinkedIn is by far the most useful site for professional networking, yet few people take the time to mine their database beyond their existing relationships (which seems redundant and far from the point).

My conclusion is that if your primary audience is B2B, the focus of internet marketing should be search engine optimization, blogs, and LinkedIn. I have many of my B2B contacts on Facebook, but it is a slippery slope (some have even verbalized their preference not to have any business interactions on Facebook). It can be hard to mix business with pleasure, and Facebook certainly presents the opportunity for the horse to get out of the yard.

Combinations of internet marketing activities can be very powerful, such as linking Facebook, Twitter and LinkedIn posts to your blog. Some have gone as far as outsourcing to marketing professionals that do nothing more than ghost for a business on the internet.

I may be old school in this regard, but I think for most of us that money would be better spent trying to orchestrate meetings with people our own age who will be more impressed with what we have to say in person than how clever my Tweet is this week.

As our economy slipped into recession, private equity investors retreated and sat on the sidelines. As a result, the wizards of Wall Street find themselves in a tenuous position. Without their capital deployed, they cannot generate the management fees required to sustain revenue. They are like caged tigers waiting for their prey to enter the den.

The average multiple in smaller transactions (less than $250 Million) fell in 2008 to 6.9 times EBITA from 8.7 in 2007. Yet, business owners waiting out the recession may be eager to pull equity out of their businesses, even though the stock market offers a poor investment alternative.  In Q4 of 2009, mid-market transactions spiked 77% from Q4 of 2008, reflecting a changing mood and the need for investors to see their money put to work.

Private equity firms currently sit on a projected $609 Billion in un-invested capital. The S&P alone has an aggregate $1.4 Trillion in cash. This may seem unintuitive to many, but any business that is growing and has positive cash flow is in a tenable position to attract investment from financial or strategic buyers.

May the sellers beware that tigers seek the slaughter and are highly selective about which businesses they acquire and under what terms. Those organizations that performed well in the downturn present less risk and are desirous to those seeking safe harbor from economic fluctuations.  One would imagine that private equity fund managers, with more time on their hands, may be even more difficult than under normal conditions. Almost always in control of senior debt, equity managers are notorious for buying organizations, moving out management and strangling corporate cultures.

In the ten years starting in 1997, the U.S. share of global public equity securities fell from 49% to 34%.  The turmoil in the European and Asian markets may be the impetus for more investment in the US of A. For those entrepreneurs that have run their businesses prudently, who offer growth and profit, the M&A market may offer significant opportunity in the years to come.

You may have fantasized about visiting exotic places such as Portugal, Spain, or Greece, but you may not want to plant any money there anytime soon.  All it took was tiny Greece to signal a potential default on its debt to send the U.S. markets spiraling like something out of a Greek tragedy.  With its deficit ballooning to 13% of GNP, Greece is one of many European countries saddled with debt.  With lower reserve limits, European banks carry more risk at times when liquidity is low.  European banks represent merely a microcosm of a bigger problem; the outliers, the seemingly trivial and unpredictable events, can trigger a global panic.

Volatility is not a recent trend. Over the course of a decade, we have experienced Y2K, 9/11, Katrina, Enron/WorldCom, the Asian Financial crisis, mad cow, the tsunami, the bird flu (H1N1), and influenza strains that have not yet been named. Volatility has become the norm.

In this age of uncertainty, entrepreneurs must have a greater level of preparedness because there are more variables to prepare for. We must be prepared for the things that we control and even the things that we cannot.

Such volatility requires a different mindset, where infrastructure is more flexible.  Depending on the nature of one’s business, we need to have more flexible labor structures, less inventory, and the ability to be nimble.  Perhaps more importantly, we must be ready to change like a chameleon, on a moment’s notice.

In October of 2007, DuPont’s CEO, Chad Holliday, visited a customer in Japan who reported a sudden squeeze on cash flow. Upon his return to the U.S., Holliday heard that U.S. automakers (who order paint from DuPont only 48 hours before applying it to new vehicles) were dramatically curbing orders.

Holliday took swift action. The following morning, Holliday deployed the company’s crisis management plan and put 17 teams in charge of curbing production. Within 10 days, every manager in the company had met with their employees to “re-clarify expectations.”

If a company of DuPont’s size can change on a dime, so can mid-market companies.  The volatile market place requires that we prepare cautiously, move quickly, and act decisively.

In a remarkable irony, the seat of Ted Kennedy (who spent his life fighting for health care reform) was lost to a Republican who has now shifted the balance of power in Congress. With the threat of filibusters looming, Republicans have new found leverage. Will Obama’s sudden drop in popularity translate into a more modest economic agenda?

I always say that within our firm, our role is not to provide all the answers; it is to ask the right questions. As the new realities of the new year emerge, one must wonder if some widely held assumptions about pending legislation (that affect businesses) must be modified to reflect the political climate. Clearly, health care and other legislation will be watered down. What are the ramifications of a Congressional stalemate?

• What will the new health care bill look like? Will employers be burdened with extraordinary administration such as employer coverage requirements? Will Congress levy a tax on preferred health care plans?

• Will the administration, desperate to maintain a majority during the mid-term elections and facing the reality of 10% unemployment, introduce a new stimulus package?

• With labor’s agenda stalled, will the law that would have replaced secret union ballots with card checks stall?

• How will bank regulators respond when financial institutions, still mired in commercial real estate debt, begin to default?

• Will TARP money be spent on infrastructure? Will the Afghan war drive military spending, or will deficit woes bring about an early conclusion to the war?

• What will be done about the Federal debt? At $107,000 per tax payer (did you know you had another mortgage?), not including the looming deficits to Medicare and Social Security, the Federal credit card balance continues to swell.

• Will marginal tax rates (due to increase to 39% in 2011) be reset?

In the face of such uncertainty, strategists must continuously review their forecasts. If you own a small business, you must seek out external (government, industry, competitor, etc.) predictive indicators and monitor the pulse of the economy and your sector before it is too late to react. Businesses are also well advised to revisit their budgets regularly and make rapid decisions based on demand and socio-economic trends.

Intel’s earnings release last week was revealing. The company reported a 28% revenue surge, driven by a 42% increase in microprocessor sales within its data center group.  The shift from personal computing to server farms and cloud computing is clearly underway.

Clouds represent a disruptive force in the delivery model of the Internet and information technology.  Computer makers are talking about a new wave of laptops that are even smaller and lighter than Netbooks and contain no hard drives.  Apple is about to release its tablet, an even thinner multi-media device that serves as iPhone, iMac and Kindle all in one.

Thus our business use of the Internet is about to take on a dynamic shift. Many are resistant to have their information stored on servers they don’t control, but to believe that information is safer on your desktop at home is simply flawed given vulnerability to viruses, hackers, disasters and lost data. Software as a service (i.e. ASP’s) have been popular for several years, but the movement to launching all applications via a browser (such as Microsoft office) has significant business implications, not only in terms of how we use the Internet, but how we invest in technology.

On any given desktop or server, there is a massive amount of underutilized space and computing power. Clouds present the opportunity for the population to collectively use the computing power we need, at the time that we need it, reducing the overall cost and energy depleted. There are also other potential benefits as various applications may be integrated at the server level, reducing the integration required by IT departments and users (an example would be syncing your Outlook and CRM or Blackberry).

For the business community to optimize (still my favorite word) the use of cloud computing will require a paradigm shift. While all companies will seek to mitigate their risk of losing vital information, the upside in terms of IT ROI may be extraordinary and worthy of our attention and investment.

For years, various employment surveys have yielded the same results. They tell us that employees value encouragement and trust over money, yada, yada, yada. Such surveys are inherently flawed, because we know that responses to such surveys often differ to the way people actually respond to various stimuli.

A study published in the Harvard Business Review reveals a vital lever in the execution of strategy. It appears that what employees truly value most is “progress”. In other words, workers want to feel a sense of accomplishment about their activities and that they are contributing to something that is creating value in some way.

This point may seem subtle but it has tremendous ramifications for the strategist. It reinforces a paradigm we have long since advocated; the more people who are involved in the formation of strategy, the better the execution will be.  It means that:

* As organizations develop strategies, they should retrieve data from a wide breadth of internal and external stakeholders.

* To tap innovation, companies should plunge deeper into the organization and seek out information from front line employees on what pain is being felt by customers and how the customer experience can be enriched.

* Key strategies must be communicated to all employees so that they have a better sense of how their daily activities align with the greater good.

* Measurement and accountability for execution must be shared throughout the enterprise.

* Decision making is vital to the pulse of an organization, and executives are well advised to push the envelope (and perhaps make a few bad decisions) as opposed to making slow decisions via paralysis by analysis.

The study, conducted by Harvard professors Teresa Amabile and Steven Kramer, was based on a more rigorous scientific method than merely asking for employees to provide their opinions. Instead of measuring their satisfaction on a given day, they measured their attitudes, behaviors and motivations in a diary format and synced them against achievement of specific milestones. When obstacles were overcome or key objectives were met, employee satisfaction and engagement spiked dramatically.

Amabile and Kramer concluded that management has control of the levers of both employee engagement and execution of strategy, and that they are one and the same.

Amidst the scandal and meltdown in the financial sector, many have been waiting for a taxing regulatory response.  One was not forthcoming until last month, as the House approved the most significant expansion of Federal regulations since the Great Depression.  In an effort to avoid a repeat of the liquidity crisis, the bill includes leverage limits and the ability for regulators to break up large banks.

But the more ominous government action will take place in 2010, as the Obama administration is positioning for significant tax increases which will dramatically impact small businesses.  The Treasury’s recommendations to enhance “revenue” include:

* Tax cuts for families and individual in the form of more aggressive MWP (Making Work Pay) credits,  Earned Income Tax Credits (EITC) and Child Tax Credits.

* Reinstatement of the 39.6 tax rate, 36% for couples over $250,000 in income, and elimination of deductions for certain taxpayers in this tax bracket.

* Imposition of  a 20% rate on dividends and capital gains (at incomes above $250k)

* Changes in 401K rules that will encourage retirement savings for lower wage earners

* Elimination of Capital Gains taxation on investments in small business stock (primarily in manufacturing).

* Making the Research and Experimentation (R&E) credit permanent.

*Expansion of the Net Operating Loss Carryback.

The most dramatic of these changes is the 13% tax increase in the marginal tax rate for the wealthy.  In a remarkable irony, the 35% rate (due to sunset in 2010) was part of the Jobs and Growth Tax Relief Reconciliation Act of 2003. Now that some in Congress believe that jobs and growth are seemingly not as important, the proposed rate will escalate to 36.6% for high income earners should the legislation pass.

The news is not all bad for the manufacturing sector as new tax laws may include the elimination of capital gains taxes for non-service businesses. To qualify, stock must be issued in 2009 or later and be held for 5 years. Tax savvy manufacturing entrepreneurs should seek counsel from their tax professional (that would not be us) and watch as these tax rules unfold in the months to come.

As many view the holiday season as a glimmer of hope, I was struck by several news items this week:

 Apple vs. Google

The battle for Silicon Valley supremacy has heated up in the last few weeks as the two behemoths vied for two start-ups:  La La Media (bought by Apple) and Ad-Mob (purchased by Google in November).  As technology often drives M&A activity, these deals may be a spark for a wave of acquisitions, as investors who have been sitting on the sideline may re-enter the fray.  The release of operating systems from Microsoft have often been the trigger for waves of technology spending, and it will be interesting to see how the sector fares this year.

Retail Discounting

I was struck by an offer by a local golf course this week. It read “What Rain, Play all Day on Friday for $39”. It used to be that marketers offered discounts when demand was low. Now, everyone from carpet cleaners to retailers are trying to drive demand to offset over-capacity or excess inventory. Such a combination creates a double whammy, where high costs are only exacerbated by diluted margins. It appears as if our worst fears for the retail sector are coming to fruition.  A shocking 95% of Americans say they are holding off purchases to take advantage of last minute sales.

 The uber discounting in the retailer sector is truly horrific. Retailers used to make all their margin in the fourth quarter, but they are sabotaging any enterprise value by giving away the store.  If you feel compelled to start a price war in your business, do it at a time when you want to introduce new customers to your product or services, not when they are going to buy from you anyway.

Boeing Tests 787

 The aerospace sector has also been crushed by high oil prices, the recession and the delay of new products.  Yet this week Boeing’s 787 airliner will make its inaugural flight and begin a year of field testing. The 787 is Boeings’ response to the European Airbus A350, a generation of planes built using up to 50% composite materials.   

United Airlines ordered twenty five 787’s and twenty five A350’s, suggesting that airlines may be ramping up capacity, especially in more profitable long range routes.   With the exception of military suppliers, the American aerospace industry has been in a deep freeze and is eagerly awaiting a rebound.

It appears that some sectors of the economy are starting to improve while others remain stagnant.

It seems that corporate acquisitions have come full circle.  In the 80’s, behemoth conglomerates fell out of favor as many of them were seen as too fat and inefficient.  Over the last decade, specialization and commitment to “core competencies” have been the mantra of CEO’s and management consultants.

Yet a recent trend has emerged as companies are going vertical, and seeking out business combinations that enhance positioning within the value chain. Our firm has recently worked with several companies employing this strategy, at a time when PepsiCo is buying back bottlers they spun off in the 90’s, and Oracle is purchasing Sun to which Larry Ellison spewed, “We’re really brilliant, or we’re idiots.”

Two converging trends seem to be the impetus to a return of vertical integration.

• Complex computer and distribution systems make integration critical to the success of an organization.
• The movement towards thrift and efficiency amplify a basic rule of distribution-the last mile of distribution is the most expensive (the implication being that it is more important than ever to control the distribution channel).

Many U.S. companies who have outsourced manufacturing and service overseas are starting to see the  upside of owning their suppliers.  Recent activity begs the question, when do such acquisitions make sense?

Much research around M&A’s over the last few years has yielded data that suggests that return on investment in these deals is realized through incremental revenue, not through cost cutting and efficiency. With the staggering costs of completing such deals, shaving a point or two of margin does not provide a very enticing payoff.

Thus companies seeking alliances and mergers should be focused on acquiring companies that complement their business in a natural and synergistic way.  For example, buying a supplier of quality parts provides the opportunity of integrating systems which may optimize inventory, improve cycle time and enhance the customer experience. If such synergies translate into more revenue, vertical integration can contribute to both the top and bottom line.