It is that time of year when the prognosticators come out of the woodwork. Unfortunately, most are predicting a similar economic climate in 2013. Here are some things to look for in the year ahead:

Even if the President and Congress are able to solve the Fiscal Cliff debacle, the U.S. economy is predicted to stagnate with 1.5% annualized growth[i] in early 2013, expanding to 3% by the end of the year (which could drop dramatically if no fiscal compromise is reached). Inflation is hovering at a modest 2% and the Fed has indicated that it will not raise rates much above zero until unemployment reaches a target of 6.5%. While unemployment is expected to drop to 7.5%, it would take a small miracle to ease below 7% this year. U.S. exports are expected to rise 5%, assuming stability in currencies.

Contrary to unfounded perceptions, U.S. manufacturing has been relatively strong, contributing 75% of total GNP growth over the last two years. In the last two quarters, manufacturing has pulled back considerably, including particular weakness in defense and transportation equipment.[ii] Look for soft manufacturing job growth in 2013.

What they refer to as austerity in Europe is a “fiscal cliff” in the U.S. (we are such drama queens). If you think our taxes are high, compare with France where the leftist leanings have upper rates set at 75%[iii]. While much of the press has centered on Greece, Portugal and Spain, the weakness of the French could drive Europe further into the abyss. Further economic instability in the region is likely.

Mongolia will sport the world’s highest projected growth at 18%.[iv]: China’s growth has cooled of late but is expected to maintain at an 8% growth rate. China’s economy generates $6,900 per person (about a 7th of the U.S.) and inflation of 5%. China’s new communist administration is expected to make few policy changes.

World economies are forecast to grow as follows:

• North America 2.2%
• Western Europe .3%
• Latin America 3.9%
• Asia 6.4% (excluding Japan)

Select industries such as automobiles are surging. U.S. automakers sparked by the loss of automobiles in Hurricane Sandy, expect a spike of 7% increase in volume.

Energy is the wild card. A recent ruling that allows U.S. firms to export natural gas could open up the floodgates in a market depressed by oversupply. While world events and accidents may drive fluctuations in energy prices, the fundamentals are better than they have been in decades, as the U.S. moves toward greater energy independence.

Health Care will be 18% of U.S. GDP (by far the most of any nation in the world; Germany is second at 11%). Companies are already seeing unprecedented increases in their premiums. Many companies will opt out of nationalized health care and pay the penalties. Some employers (such as restaurants) will move employees to part time to reduce their health care burden.

IT services and consulting continue to expand as companies find ways to exploit the cloud. Global growth of software services is expected to double to 6%. Big Data will lead the way in terms of technology innovation as companies exploit relational databases (large databases that can talk to each other), and mine information differently.

Industries not expected to fare as well include media (still being commoditized by the internet), pharmaceuticals and mining. Some raw materials such as copper are still in demand and could spike further.

Happy New Year, sort of.

One must contemplate the distinction between branding and rebranding. Rebranding is often miscast as an exercise in repairing one’s reputation. Some rebranding efforts focus on mitigating a negative image (such as Philip Morris’s name change to Altria or AIG’s move of their advisory business to Sagepoint). Yet rebranding may also represent subtle changes in positioning, or the recasting of visual identify, such as Starbucks recent move to a more contemporary look.

If you’re thinking about rebranding your company, bear in the mind the following considerations:

Seek out simplification-Today’s rebranding efforts are often a function of providing clarity to the marketplace and removing brand confusion. Citi’s recent rebranding removed a single word (if the word bank is in your name, it may not be a bad idea to remove it). Our cluttered market values simplicity.

Leverage Social Media from the ground up- Within our firm, we recently rebuilt our website, refreshed our brand, and printed new business cards (including a QR code). All of our marketing includes embedded social media components, with the intent of driving traffic to our website where prospects can experience various multimedia tools that are featured online.

Use emotional triggers-Google famous Parisian Love ad (when an American finds love in Paris) is a classic example of using emotional messaging to capture the imagination of your audience. All marketing should utilize emotional triggers.

Enter new markets- Pabst Blue Ribbon, perceived as an also-ran in the U.S. rebranded in China as an ultra-premium American lager (PBR) and is selling for upwards of $44 a bottle (the Chinese may not have everything figured out).

Reshape perceptions about quality-Rebranding should not appear cosmetic or contrived. Harley Davidson’s slide in perceived quality in the 80’s was magnified by stiff competition from Japanese competitors.  The company’s drastic repositioning included a return to its core products and the formation of the Harley Owners Group (HOG’s),  which reestablished Harley a bad boy brand.

Identify unmet needs- Your offer may need to change as the utility of your product or the benefits that differentiate it may shift over time.  Marketers will often use a tag line when they wish to preserve their brand equity, and point out new features or benefits.

Use professionals- Rebranding can back fire when companies draw attention to their marketing.  Many smaller companies try to utilize self service template web sites and similar home grown tools that come off as……home grown. Marketing requires constant investment. Hire people who can assist you with both messaging and technology.

Understand the hard and soft costs- Change can be expensive, given the need to reprint, re-sign, change email addresses, etc. Consider all your hard and soft costs (including management team band) with as you refresh your brand.

Organizations often under appreciate the importance of branding. In this world of hyper-competition, the way you communicate the nuances of your brand are more important than ever.

Whenever they call a day “black”, you know something bad is going to happen. On the Friday after Thanksgiving, I wanted to vomit. Not because I ate too much, but because of the destruction done to the U.S. economy. As a purveyor of value creation, I find Black Friday repugnant. Even if you are not a retailer, there are lessons here for all of those fighting off commoditization.

U.S. retailing used to be the Pareto Principle in action, with as much as 75%-80% of profits being realized in the 4^th quarter. The holiday season has turned into a race of who can open the earliest, and sell the cheapest flat screen TV (you could have bought a 42 inch flat screen at Best Buy for $199).

Last year I was talking to a corporate Vice President who was quite happy with herself after doing all of her Christmas shopping on a single day (I believe 4 AM is still the middle of the night if you want to get technical). I asked her, “how many items did you buy”, “17” she said. “How many were on sale” I asked- “17” she replied.  The defense rests.

Retailers work on “blended margin”, the ability to attract customers with lower priced goods, only to flip them to higher margin products.  In grocery stores, staples such as milk which are very low margin are at the back of the store, and higher margin produce and deli at the front in the “traffic pattern”.  Black Friday represents the destruction of 100 years of merchandising evolution, and creates a frenzy of deep discounts (one shopper in Porter Ranch, CA used pepper spray on another over an Xbox).

Some may argue that the “strategy” is to win shoppers for future trips and control market share. That may work for the low price leader (WalMart), but it doesn’t work for other retailers and boutiques. Those are the retailers trying to train their customers to realize the value of their service, knowledge, and unique offerings, and may only have one or two shots at the buying crazed mother with three kids.

Here is the single most important and basic business principle one could ever communicate in a business blog: prices should be high when demand is high, and prices low when demand is low. The destruction of the industry is inevitable if retailers continue to discount the deepest when demand is high. The shame, the shame!

Here is a prime illustration of how deeply this perverse thinking has infiltrated the industry. Recently I was shopping at Macy’s, selected a garment and brought it to the register, clearly marked with the price I was willing to pay. The cashier pulls out a coupon and says, I can give you another 25% off.  The defense moves for an immediate verdict your honor.

Defenders will say that the competition made me do it. What competition? China, WalMart, Best Buy? The true answer is Amazon and other online retailers who have changed the game forever, and this year kicked in free shipping to make their offer more compelling (online purchases are predicted to rise another 17% this year). So the real problem is not some evil empire. We have seen the enemy and it is us.

In order to fend off deep discounting:

1. Find products that can co-exist with online purchases. How can your products compliment the deeply discounted products? An iPad offers very little margin to the retailer, but accessories such as head phones and adapters are very high margin and offer the opportunity for repeat business.
2. Reinvent your model so that you are purposeful in selling complimentary goods. If you are going to sell them a gun at cost, you had better have the staff, expertise, merchandising and inventory to sell them some bullets as well.
3. Teach your employees the profit formula. Most of your employees think you are making a ton of margin on those handguns, so you need to teach and incent based on your objective of selling more ammo (I would have picked a more pleasant example but I am feeling like a curmudgeon after all of this discounting).
4. Provide the ultimate in-store experience that rivals or beats the online experience. Perhaps customers can see, touch and feel products that are shipped to them later, or to their loved ones.
5. Select targets (product, location, etc.) that are less vulnerable to price attacks from discounters and online retailers.

Let the treasure hunters go to the competition; they are the least loyal of shoppers and you can’t make any money selling to them anyway.

With the sluggish selling season will be plenty of opportunities for deep discounts. Deep discounting marginalizes a business (unless you are the low cost leader). Retailers may need to offer products at cost, but should do so with a clear pricing strategy built on balancing market share and profit.

Many CEOs feel that they are the victims of a lackluster economy and a government that is ineffective at offering any meaningful stimulus. In fact, 79% of CEOs fear that the fundamentals of our sluggish economy will remain the same or get worse.[i]

Economists have long understood that our thinking about the economy is governed by emotion. U.S. history is riddled with periods of growth and decline steered by the mood of the nation.

My generation grew up with a relative level of stability. We are simply not accustomed to the notion of “economic uncertainty” and we are not very happy about it. As a result, we have the tendency to overreact to stimuli in the form of collective euphoria or collective despair. This emotional response explains the nature of bubbles, as we all race to adhere to the conventional wisdom of the moment.

Today’s wisdom is that we should be scared…about sluggish growth, high raw material prices, health care costs, China, the Federal deficit, taxation and lots of other things. You know our psyche is a bit fragile when people are worried about inflation and deflation at the same time.

Our thinking often crystallizes around “the economic cycle,” which is something of a misnomer. Every business participates in this broader cycle, as well as a monetary cycle, industry cycle and company life cycle. The economy itself is merely a component in a spider-web of stressors that can be triggered by a myriad of forces from around the world.

Our expectations seem unrealistic, framed during a time when banks over leveraged, real estate was overpriced and stock market multiples were in the stratosphere.

The reality is that our economy is still growing (although perhaps in tepid fashion). Forecasts are for GNP growth of 1-2% for the remainder of 2011. When our GNP is growing at 4% we are bulls, but at 2% we are bears.  This meager difference illustrates that our fear is based on perception and is somewhat irrational. It is like the fear of flying: one knows that statistically there is virtually zero chance of a crash, yet to some, the fear is quite real.

Perhaps what we really have to fear is fear itself.  We should not be scared of a 2% variance, we should embrace it. In many instances, it will be the confidence of the CEO that will drive the level of investment businesses make, which will in turn either be the impetus for growth or maintain mediocrity.

Of the CEOs recently surveyed, 41% believe that prices of their products or services will rise next year. The potential for rising raw material and energy prices in 2012 could actually be a boon to vendors who are posturing to raise prices.

It is time to reset expectations with our customers, vendors, employees and ourselves. Within this data, there is plenty of salt, but perhaps there are a few grains of sugar as well.

A good leader must exude confidence in his or her business every day. If you don’t see the value in your products and services, no one else will. When the competition is weak, it is time to attack. Let your competitors have the scarcity mindset, while you focus on the strategic gambits that will grow your business and create sustainable competitive advantage. We will get our 2% back some day—we just need to be a little patient.

[i] Vistage CEO Confidence Index

The protesters marched on the highway, despondent about rapid inflation.  They shut down the thoroughfare for hours. 1000 miles away, protesters flocked the capital and drove the legislators to safe haven in neighboring territories.

These were fundamentalists in Tunisia or Libya; they were students in California and state workers in Wisconsin.

The impetus for civil unrest in the Middle East is that of the “lost generation” of unemployed misdirected youth.  In some regions of the world, unemployment is 40% or more.  In the U.S. , it is not just the young that face underemployment but generations of workers whose skills have become irrelevant.  The U.S. has the western world’s widest income distribution. The Top 10% make 6 times that of the bottom 10%, compared to 4.2 X for Great Britain and 2.8 X for Sweden[i].  The labor market has hollowed, as wages earned by shop floor workers have actually declined (when adjusted for inflation) over the last two decades.

The labor imbalance in the U.S. has far reaching implications, not only for the unemployed but for our economy as a whole.  The inability of low wage earners to consume is a strain on U.S. growth.

While there is plenty of banter about the need for jobs, there is no systematic solution in place for retraining American workers such as displaced auto and steel workers. President Obama has called on U.S. business leaders to: “generate ideas for creating jobs, sustaining the economic recovery and making America more competitive”[ii].

Of course the notion of “creating jobs” is a little too convenient. Jobs are created when there is a need for them, and Americans get the jobs when they offer the most value. The problem is not that there are not enough jobs; it is that the cost-benefit for the employer often tips towards off-shoring.  If our workers do not offer enough value in the form of specialized knowledge, ability to use technology, etc., jobs will continue to be shipped overseas.

This is not a protectionist rant, and my comments aren’t intended to incite a riot on free trade, or China manipulating currency, etc. I am focused on what we can control.  What our nation needs is a retraining effort. The money we are spending on unemployment and other services would be better spent invested in people so that they can acquire new skill sets that are relevant in an ever changing world.

The question is who will lead, and who will pick up the bill?  To prepare our workers for the future will require collaboration across business and government. Tax and other incentives need to be in place to encourage the retooling of America. So as GE Chairman Jeffery Immelt and the rest of the White House Council of Economic Affairs weighs in on jobs, I hope they emphasize that we need to create opportunities for workers, and provide them will the skill sets required to compete.

Otherwise, the marches may extend to Washington D.C. and a state capital near you.

[ii] Obama wants business world’s best ideas on jobs USA Today

Many business owners are asking, just what should I expect in 2011 and beyond in terms of growth and demand?  Recent 2011 forecasts from Kiplinger’s include:

*        GDP Growth 2.8%
*        Unemployment Ending 2010 at 9.5% and slightly lower in 2011
*        Prime Rate 3.25%
*        10 Year T-notes 3% by late 2011
*        Inflation of 1.5%
*        Crude Oil $75-%80 barrel in early 2011

Demand and pricing is scattered.  The deflation debate seems to have softened as prices are stable and flat (projected to rise 1-2% next year). Upward pressure on raw materials and commodities such as cotton and copper are higher.  Providers of some consumables such as gasoline, coffee and cereals are raising prices, while prices for electronics, computers and automobiles are eroding. [i] A battle could be brewing over “rare earth” elements 95% of which are controlled by China. Materials such as Lithium, used in micro-electronics and products such as iPhone batteries could skyrocket.

The jobless recovery continues.  While the addition of 151,000 jobs in October was encouraging, it would take 20 years of growth at that rate to return back to the level of employment before the recession. Over 2% of Americans have been out of work for a year or more, and with the eventual waning of unemployment benefits, the future is bleak for the unskilled.  As a whole, soft employment and tepid housing prices will offer little in the way of a significant recovery; and the economy will be split between growing and sluggish industries.

The most creative and opportunistic will flourish.  Forms of social media and online marketing are practically free, providing impetus for those with a great idea to get the message out quickly and cheaply. Those with cash will buy up competitors and commercial real estate.

Venture Capital investment has exploded from the depths of a cataclysmic drop to less than $4 Billion in Q1 of 2009 to a projected $11 Billion by Q4, 2011.[ii] With multiples exceeding 6x, this is still a great time to sell a business.

The Federal government is about to enter a phase of complete stagnation. Splintered ideology will not provoke much in the way of bipartisanism and compromise.  Consider health care. A complete repeal of the health care is unlikely, and Republicans will push for less costly reforms. But Parma, and the medical community are gearing up for the addition of  nearly 30% of Americans who are uninsured and offer the industry new volume. In the absence of legislative movement, the administration will be forced to rely on regulatory actions led by political appointees and their cronies.  Early signs are that the Fed’s attempt at “quantitative easing” is not moving the needle very much on lending.

Emerging markets continue explosive growth in Singapore, China, India and Brazil (representing 75% of global GNP growth in 2011).[iii] Infrastructure stocks continue to boom. Cloud computing enables continued strength in the technology sector.

There is momentum behind the return of low level call center jobs to the U.S. as “rural outsourcing” is hot in information technology and other sectors. Small town America offer substitutes for outsourcing,  including Indian Tribes offering U.S. based alternatives, at only 10-20% premium from their Asian counterparts[iv] .

There is plenty of room for optimism. Competitors are weakened, and companies with strong balance sheets and cash flow should prosper.  Well run companies will invest based on relatively stable macro-economic assumptions. The strong will get stronger. Focus on being one of them.

[i] The Kiplinger Letter November 19th 2010

[ii] Money Tree Reports

[iii] The Kiplinger Letter November 19th, 2010

[iv] Rural Outsourcers” Vs. Bangalore

Just because the economy is treading water, doesn’t mean your business has to.

History suggests that the stock market performs best under a Democratic President and a Republican Congress. Investors like predictability. If this scenario becomes a reality it will yield little in the way of new legislation.

The market has generally been a leading indicator, and many have been waiting for our economy to switch gears. But our economy appears stuck in a vicious cycle.  Lackluster GNP growth translates into little job creation.  The combination of unemployment and underemployment (thought to be close to 20%) is creating downward pressure on any potential housing recovery.

Kiplinger’s (October 8^th) predicts a housing double dip, with prices declining as much as 3% next year.  With housing starts at soft 600,000-700,000 units, massive shadow industries such as construction, and building materials, will remain depressed.

The wild card in world economics is currency fluctuations as governments continue to manipulate their currencies and provide subsidies on various products and raw materials. China, who now possesses about $1 Trillion in U.S. debt, is only raising their influence within the U.S. economy.  If the dollar were to crash and raw materials or energy prices rise (most are imports), hyper-inflation could become a reality quickly.

So we are likely in for much of the same.  I maintain what I have been saying for 2 years, there is more downside risk than upside risk, but the greatest probability is that growth remains positive but sluggish.  Stronger companies who planned for a downturn and have sufficient cash, and/or those with strong value propositions will continue to be profitable.  Those stuck in a wave of commoditization that has marginalized their business will tread water. The weak will go away.  Those industries that have not yet consolidated are ripe for M&A activity.

Some executives got fat and lazy in the extraordinary run of the last two decades, knowing they could pass on a 4% price increase ever year and generate 10% on the bottom line. The economics of the day require us to view the world differently. The problems are not cyclical, they are permanent.

It all comes down to the same formula that works in times of boom or bust. Companies need to find a sweet spot, a narrow range in which they can provide value to the marketplace.  Customers are fickle and professional buying organizations more frugal; often requiring a Request for Proposal (RFP) process, for even the most mundane (one bid we heard of included toilet paper).

The downturn has only reinforced that to maintain a sweet spot the marketer may have to be narrower than in the past. The world has become hyper-competitive, and if anything competitors from emerging markets are becoming stronger. Most businesses do not have a cost problem, they have a revenue problem. Don’t rest on your laurels, become completely consumed with improving your offer; every day.

Here we go again. Suddenly, people are fleeing the stock market for the safety of muni’s and other low risk investments. The U.S. dollar is strong only because of the weakness of the Euro and other foreign currencies supported by extraordinary deficits.  Emerging markets such as China, India and Singapore are the only ones growing and even China’s forecasts are cooling. Some economists are calling all of this a dreaded double dip.  Is this spasm an overreaction?

I am not here to offer a prediction as much as some perspective. Historically, there have been two elements that have preceded U.S. recessions.  Typically, there has been a scandal such as the Savings and Loan Crisis, Michael Milken, Enron/Worldcom, and most recently the liquidity crises triggered by the likes of Goldman Sachs, AIG, Lehman Bros, and Bear Stearns, where someone has manipulated a market (most recently derivatives and credit default swaps).  Secondly, the recession usually follows a bubble (dot.com, real estate, etc).  In other words, our economy gets fat and happy, investors take advantage, and then the bubble bursts.

We certainly have not seen our economy swell over the last 12 months.  People have been so desperate for good news that we accepted what little there was as signs of a recovery.  The reality is that our economy grows at about 5% in times of prosperity, and 2% in times of stagnation.  Three percent swings us from optimism to pessimism, which reinforces the magnitude of emotions in our decision making. Fear is always the most powerful emotion and motivator, greater than love and all the others.

So how will the next few months play out? I don’t have a concrete answer for that but what I do know is that our reaction to the sound bites from economists and experts is quite personal. Our practice is thriving at the moment (in part due to the acceptance of the book) which is proof positive that the performance of an organization can be driven in part by one’s confidence and sheer will. Certainly, market forces are in play and in some businesses (like construction) you can still hear the giant sucking sound.  In others the business can best be described as mediocre and the entrepreneur must decide how much investment (in sales and marketing for example) is appropriate.  What I have seen from manufacturing clients is that are petrified of expanding their factories out of fear that they will not be able to dial back capacity.

In a universe where most are passive, there is more opportunity for the aggressors.  I read of one recent investor who bought BP and shorted Apple, a counter strategy that clearly made him a lot of money. While I am not dispensing any investment advice, I am suggesting that we all must make individual choices on the level of risk we are willing to accept. In an age when things are uncertain, there is as much evidence that we will continue along a modest recovery path as there is that the bottom will fall out, and I have made the choice to stay on course. If you are not comfortable with the status quo, it may be time to find new product, services, channels or sectors because there does not appear to be a hockey stick coming any time soon.