Globalization has enabled unprecedented hyper-competition, and all types of dynamic comparative pricing models. Yet pricing within many segments of our economy appear like something from the The Stone Age.

If you go into a white tablecloth restaurant and order the sea bass on a Wednesday, you might pay $30.  If you return to the same restaurant on a Saturday the price would be the same, even though demand in the restaurant is likely to be very different.  Eateries price on the cost plus model built in the industrial age; the price is based on some multiple of raw materials (or labor).

Our economy doesn’t work this way anymore.  Consider the market for sports tickets. Sports franchises (the Lakers for example) set the initial price for a ticket. But the market resets the price in real time based on supply and demand. If it is a Tuesday night game against the Raptors, a seat may command a few dollars more than the face value.  A Sunday game against the Celtics could command double that within a market being energized by the likes of Stubhub and other online exchanges.

Variable pricing based on nuanced supply and demand is the future, and it is the present.  Marriott has historically been the most profitable hospitality company, as its revenue per available room (the industry benchmark) often exceeds that of rivals. In the case of hotel rooms (or airfares), business-to-consumer pricing models can shift daily based on numerous variables such as weather, events, or the calendar.  Like it or not, exchanges that provide comparative prices are proliferating, in both B2C and B2B.

I am not advocating the companies participate in such portals: they the fastest way to commoditize an industry. What I am saying is that the acceptance of such tools points out a broader problem (or opportunity), that markets re-price based on real demand, not arbitrary prices set by the seller.

Businesses, including those that market products and services business-to-business will need to be more analytical about which products and services could and should command higher prices and which will command less.  To set up a fixed pricing schedule seems overly convenient in a world where buyers have far more sensitivity over some purchases than others.  A software developer may need to sell a project at a low cost to win the business, but could charge far more (on an hourly basis) for change orders that are not foreseen by the client.

Most small and mid-market companies have not done enough research to understand the relationships between the products and services they sell.  If an accounting practice sells tax work and audit services, how should they price one against the other and what is the likelihood that clients will gravitate to them as a result of their pricing model or other variables? I think few really know.

Companies should test various pricing strategies to see what works best, and be more purposeful about tweaking pricing to reflect current demand.

Businesses constantly struggle with capacity issues. Manufacturers seek access to the ideal manufacturing capacity, and service providers look to employ the optimum number of employees.  Both understand their labor spend is a key component of a company’s profit formula. So how is the entrepreneur to scale in an uncertain economy?

Those who had not experienced rapid market erosion previous to the liquidity crisis learned an important lesson; high fixed costs can be truly catastrophic when demand contracts quickly. Employers must marry labor costs with demand. There are several steps one can take to mitigate labor capacity risk:

Optimize Labor Efficiently- Most entrepreneurs intuitively understand that they should push low value activities down through (or out) of the organization.  Senior managers should aim for “zero administration”, where virtually all of their time is spent improving service or profitability, and not loading paper in the copier.  A good administrative assistant is worth their weight in gold. Similar thinking should apply to all; all work should be allocated to the appropriate staff based on their skill level, experience and cost.

Outsource Low Value Activities Based on Demand- The zeal for outsourcing is far from over. Organizations are not only seeking lower costs, they are looking to move resources outside their organization so that they can scale  their bandwidth quickly. Look for outsourcing partners who have infrastructure that can move, (in real time) with your business. Such organizations typically have an existing core competency in the services provided, including technology and human capital geared towards executing such work.

Increase Weighting of Incentives to Total Cash Compensation-Those who only provide subjective bonuses are actually doing themselves a disservice. Practically the entire Fortune 500 have moved to some type of performance based pay. Part of the rationale is to only pay out incentives when an organization reaches certain performance thresholds.  Failure to have a significant portion of cash compensation in incentives (20% or more) creates fixed costs and puts stress on a business and on employees. Fluctuations in demand require drastic action such as lay offs or furloughs.

Measure Labor Meticulously- Labor KPI’s are amongst the easiest predictive indicators to measure, and directly affect the bottom line. Examples include overtime, labor dollars per unit, direct labor, indirect labor and labor as a percentage of revenue.

Beware of External Demand Indicators- Within virtually every business segment there are external measures that provide context on future demand.  Add external indicators to your scorecard/dashboarding system so that you can stay in tune to the market place. Government websites, trade associations, and private research organizations offer a litany of statistics.  Plot such data  against company revenue to find which numbers correlate with business growth.

As evidenced during the Arab Spring, and earthquake in Japan, we are often unable to recognize the magnitude of events as they unfold. Such could be true of the Occupy Wall Street Movement.  Are world-wide protests an indicator of momentum into a global revolution of the people, or will it fizzle into a clash between local police and a group of poorly organized discontents? What effect will all of this have on the business climate?

Many remain skeptical. One analyst said that a friend of hers had mused that she could, “smell them through the TV.”

Yet this is no ordinary protest, and to dismiss “the movement” on its face would seem shallow and naive. Regardless of ones political leanings, we must all be conscious that the movement on Wall Street has struck a nerve on Main Street. It is clear there is a faction within America who believes that significant reforms are required, and they believe they represent 99% of Americans.  It is hard to know if Wall Street CEO’s are paying much attention, but  one must assume that legislators are watching the 6 o’clock news with some discomfort.

The most direct effect will be the influence all of this has on the Presidential election, not only in terms of the selection for President, but of the agenda, which will define his term. Seemingly, the protestors will embolden those who seek higher taxes on the rich and broader controls and regulations.  The inability for the Republican Party to provide a clear front-runner, with a populace message could only further the left’s ambitions to reallocate American wealth.

Regardless of the winner, it would appear that laissez-faire capitalism is the institution under greatest attack. There seems to be a belief that the corporation itself is an instrument for evil.  A tentacle of the movement seems to be that government should legislate or guarantee employment, a concept with deep implications for labor law, unions, and taxation.

In the year ahead, the executive branch will continue to drive on tighter regulation. While there are streams of regulations under review, some of the most noted include[i]:

• Stricter interpretation by the IRS on expenses related to meals and entertainment, and a new tax on self insured health plans.
• A revamp of the SEC, including greater oversight of “broker/dealers”.
• Labor Dept. enforcement on the use of “contractors” and more restrictions on the use of minors on farms.
• Environmental controls on “fracking” and similar activities.
• The revamp of Medicare by the “deficit panel, including the potential of extending the Medicare eligibility age.
• New rules by the Equal Employment Opportunity Commission that crack down on discrimination against disabled workers.
• The Occupational Safety and Health Administration focus on violence in the work place and protections required in “high risk” work settings.
• A push by the Consumer Financial Protection Bureau for new rules on banks offering high-interest direct deposit loans.

The spread of protests in Europe is of particular concern, as the degradation of fragile economies there could provide fuel to the fire.  Those feisty Europeans are not new to protest, and their governments are not immune to violence. One thing that is hard to reconcile is that governments (such as Greece) are completely broke, yet their residents seem to expect a preservation of services, a zero sum game for all.  The failure of banks in Europe poses a much greater threat than in the U.S. It is a situation ripening quickly.

The fact that tax rates will escalate for the wealthy is somewhat inevitable. The President is calling for an unfathomable increase in corporate tax rates to boot.  Let us hope that such impetus does not create much in the way of immediate stress on the U.S. economy in the short term.

Batten down the hatches; it could be a long winter.

And now for my very favorite quote of the year, offered by Nissan CEO Carlos Ghosn.  In reference to the Nissan Leaf, a zero emission vehicle, Ghosn said “this is the future, and everything else is going to look obsolete, like sending messages with pigeons”[i].

As Gnosh put it in an interview in Fast Company, “if you already have an emissions problem with 700 Million cars, what problems are you going to have with 2 Billion?”. In the case of Nissan, Ghosn is looking beyond the defined needs of customers and is anticipating the needs of the global market in a decade or more. It is not good enough to solve problems we can see, the strategist must seek to solve problems that are not readily apparent. To consider such scenarios, strategists must consider Social, Technological, Economic, Ecological and Political trends and consider how various combinations may change the landscape of an industry.

In my book and blog“ Intended Consequences”, I predicted remarkably volatile prices for fuel and the potential for oil to reach prices of far north of $100 a barrel. The predication which became an eventuality was based on an evaluation of “converging factors”, independent trends that combine to create a tipping point. The automobile industry is on the cusp of such a fundamental shift. Toyota has been selling the Prius since, 1997 but the initial curve for adoption was remarkably slow. What we see in evidence today are converging trends that will provide the impetus to create disruptive change in the form of rapid adoption of alternative vehicles:

Political: The U.S. government’s recent announcement of an agreement with thirteen automakers that will reset the Café fuel economy standards to require an average of 54.5 miles per gallon by 2025.[ii] The willingness of OEM’s (original equipment manufacturers), to work with the government in a race to dramatically improve fuel efficiency illustrates their understanding of radical changes in their operating environment.

Social: Shifting sensibilities towards sustainability will drive adoption. Electric cars are somewhat impractical for working people who may not have time to charge them (up to 8 hours) providing a leg up to hybrids.

Technology: The new Prius plug in will offer up to 87 miles to the gallon illustrating explosive improvement in battery technology. Many of the world’s top scientists are working on batteries that could expediently improve performance, size and cost.

Ecological: In Nissan’s case,  the rapid growth of highly polluted Asian markets is viewed as a driver for future demand. Recent disasters in the gulf and elsewhere have heightened awareness of the risks of oil exploration.

Economic: Americans are still fearful of OPEC’s influence and the ability of the cartel to manage worldwide oil prices. As battery prices decline, the value proposition of hybrids will only continue to improve, and the total cost of ownership for such vehicles will be drastically reduced.

Businesses are well advised to review such variables as to develop scenarios about their industry. It may not be possible to look into a magical crystal ball to predict the future, but careful study of trends provides us context on what products and services to develop in order to create disruption.

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

In Outliers, Malcolm Gladwell asserts that one needs to invest 10,000 hours in an activity in order to become an expert. I take solace in knowing that I am evidently both an expert in Strategic Planning, and overcoming the drama induced by teenage daughters.

The rapid escalation of global competition has brought about a new round of hyper-specialization.  The concept of specialization is nothing new; the division of labor has been a key tenant of economics since the birth of capitalism. Yet sites such as Guru or eLance, have propelled specialization to a new art form, where one can access dozens of specialists from around the world in any conceivable competency in a matter of minutes.

Specialties that do not require any special education (other than what is readily available on the internet) such as graphic arts have quickly commoditized. You can hire a graphic artist online for $15 an hour.  In cases where greater technical aptitude is required, specialists still out-earn generalists. The median Internist in the U.S. earns $176K per year, while Cardiologists earn a median of $403K (some make $800K or more). [i] If you had a heart attack, which would you see?

Perhaps the most common strategic blunder I observe within entrepreneurial companies is a penchant for addressing overly broad targets. Marketers, seeking the largest audience cast too wide a net. In their need to satisfy the largest number of prospects, they become de facto generalists. That is, instead of addressing a niche market with specific solutions, they try to satisfy a larger audience with a multitude of products and services. At some point, the value they can provide suffers from diminishing returns.

The more crowded a space, the more difficult it is to differentiate, and the greater the need for expertise. Before its bankruptcy filing, GM attempted to sell within every segment, from sub-compact to Hummer. GM experienced what is often referred to as the peanut butter effect; the wider you spread something, the thinner it gets. GM’s branding was diluted and ability to control quality constrained.

Many small businesses may employ generalists because of their lack of talent depth. To have one IT professional manage a network, build the company website, select an ERP package and fix all the desktops is an archaic paradigm worthy of recalculation.

The reason that specialists are worth more than generalists is that they have a deeper subject matter expertise that drives:[ii]

Quality-Processes replicated over time promote less deviation, less defects and fewer errors.  The specialist thinks deeply about an area of expertise in which they have experience and are less likely to make mistakes.

Speed- Specialists do not need to reinvent things. Cycle times on proposals and product delivery is faster. If a company offers 50 stock products instead of 500, they can manage less inventory and ship items quicker. For every new project outside the boundaries of a company’s expertise there is resource draining learning curve that costs time and money.

Relationships-As the specialist is highly respected, their opinions are sought after by the media and people who want to know them, hire them and refer them to others.

The realities of outsourcing and off-shoring are driven by these phenomena. It is inherently inefficient to participate in activities that are not within a firm’s core competency and do not directly contribute to the bottom line. Thus, the migration of labor (outsourcing) will rise at a fervent rate.

In fact, the entire concept of the corporation, with its multiple functional departments (such as accounting, sales and marketing, design, operations, engineering, manufacturing, etc.) is under some attack. Social norms around what constitutes a working environment are shifting quickly and enabling greater specialization. Collaboration tools make the world of work far more virtual, which will continue to feed the frenzy.

Think about how to specialize as to optimize your revenue, margin and profit.

I recently had a conversation with a CEO who was lamenting about the disparity between public company valuations and those of privately held concerns. As of July 2011, the S&P is trading at a multiple of 14, while private company multiples remain in the 5-6 range. Investors value public company access to capital, and scalability into large consumer markets.  Of the Top 10 U.S. companies by size, none are pure play B2B companies.

Small companies come in all forms; some compete with larger branded companies, and some market directly to them.  In the age of confluence, some do both. How can small companies survive in a land of giants?

The primary difference between Fortune 1000 companies and smaller ones is more fundamental than which markets they serve. Intel founder Geoffrey Moore makes a distinction about business architecture – the difference between “complex systems” and “volume operations”[i].

Many smaller B2B companies are built to support specialized and custom solutions, while most Fortune 500 companies are built from the ground up to serve the masses. While customization may command higher prices (per transaction) than generalization, high volume companies cross a threshold where their infrastructure promotes a lower cost per unit and the experience curve takes full affect. Thus, B2B companies face an inherent profitability disadvantage.

Where Microsoft offers its highly useful suite of Office products at around $400 per license, Apple’s B2C model (which is often utilized by small businesses and micro-businesses such as designers and the like) offers Pages and Numbers at $9.99 each. One offer is based on high intellectual capital value and the other on mass appeal and ease of use.

For smaller B2B companies to reach new levels of profitability, requires they find a path to scalability. Of course not every business wants to be big. Some entrepreneurs prefer a “family culture” and more tempered growth (with less risk).

One way to effect profitable volume is to find a balance, where products and services are “mass customized”. Mass customization is all the rage in consumer products where individuals can even build their own handbags and Nike basketball shoes to their specifications.

Smaller companies (B2B and B2C alike) should seek out solutions that allow for better utilization of existing solutions across more customers. In other words, the provider should not need to reinvent the wheel with each project. Often, optimizing margin requires leverage of a base product or service that can be replicated, at times with features configured to the customer’s individual needs. To configure from a menu of choices is considerably different than satisfying each specific whim, which may offer greater intimacy with the customer, but may also require the business to sacrifice profit. For every feature created for an individual customer, there is a resulting opportunity cost (time, money and energy that could be invested elsewhere).

The other requirement for getting big is a shift towards systems thinking, where management teams make decisions within the framework of their company’s capabilities. For a new initiative to succeed requires careful analysis of the resources required to implement it. The key for smaller companies who aspire to do business with larger ones it to utilize systems and processes consistent with the expectations of the customers they serve.

Competing against larger companies requires a unique mindset. Often small businesses use concepts like judo (where the larger opponents energy is often used against him) to beat the larger foe at the point of attack. Consider the depth and width of the market you want to serve, and scale your resources accordingly.

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

Depending on whom you talk to, a product, company or industry may have five or six stages in its life cycle.  In the case of an industry, or perhaps a technology, there is the initial development, followed by introduction, growth, maturity and decline.   These phases can take months or years. The key is to optimize the most profitable periods in a life cycle (in the maturity phase, a company is able to build volume leveraging existing infrastructure), and to reinvent as to avoid decline.

Netflix recently reported it has 17 Million subscribers as of September, up 52% from the prior year.  Meanwhile, cable subscriptions in the U.S. dropped during the last two quarters, for the first time since the inception of cable.[i] While businesses such as cable TV and DVD’s wane, Netflix successfully adjusted its model to remain relevant. Amazon, Apple and others are expected to enter the fray, permanently changing the delivery system for media content including television and film.

Retailers carefully measure “same store sales”, to measure when particular locations have peaked, a sign that their offering may be stagnating or that competition has changed the playing field.  Entrepreneurs intuitively know when decline has arrived. If a business has flat lined for two or three years, one needs to ask; are the fundamentals likely to change in any material way that will spark some type of competitive advantage? If the answer is no, then drastic modification of the business model is critical for survival.  One trend is a return to vertical integration where companies are buying up their suppliers to create advantage in the face of price competition.

Businesses need to recognize what phase they are in, and adjust to build the right infrastructure including systems, processes and talent (that supports the stage). I have come across entrepreneurs who wait too long and fail to recognize that decline is imminent; leading their products and services to extinction. Don’t be a dinosaur!  If your business is flat, take note, and do something about it. 2011 should be a good year.

Happy Holidays to all.