The March Hare CEO

May 19, 2012 by Steven R. Gerbsman

The March Hare CEO

By Jim McHugh Member Gerbsman Partners Board of Intellectual Capital

Have you attended a “Mad Tea Party” Board of Directors or management meeting and listened to the CEO’s unrealistic expectations about future performance? Did you leave the meeting scratching your head about what you heard?

Lewis Carroll introduced us to the strange Mad Hatter and the March Hare in his 1865 book Alice’s Adventures in Wonderland. The Mad Hatter hosted the Mad Tea Party; during this raucous event there was one revealing exchange with Alice:

‘Have some wine,’ the March Hare said in an encouraging tone.

Alice looked all around the table, but there was nothing on it but tea.

‘I don’t see any wine,’ she remarked.

‘There isn’t any,’ said the March Hare.

How many times has a corporate leader told you there was plenty of wine about, but in fact, there was only tea at best? Your gut is screaming… “There is no way this company can hit those targets”. But your hope and the March Hare CEO’s enthusiasm get the better of you. I have seen this scenario repeated many times at stuck companies; there can be over optimism and not enough effort focused on analyzing the brutal facts and confronting reality.

What’s wrong with being optimistic and aiming high?

Nothing, as long as the predictions are believable and achievable. In the July 2003 issue of the Harvard Business Review there is an article entitled ‘Delusions of Success: How Optimism Undermines Executives’ Decisions’. The authors (Lovallo and Kahneman) warn of the negative consequences of ‘flawed decision-making’ based upon over optimism. They state ‘…when pessimistic opinions are suppressed, while optimistic ones are rewarded, an organization’s ability to think critically is undermined.’ Recognizing that people like to rally behind optimism, they say there ‘…needs to be a balance between realism and optimism.’

Jim Collins, in his acclaimed best-seller Good to Great, devoted an entire chapter (‘Confront the Brutal Facts, Yet Never Lose Faith’) about dealing with reality. Collins’ research proved that great companies were continually objective about their performance, their competitive position and their customers’ needs. He said “…breakthrough results come about by a series of good decisions, diligently executed and accumulated one on top of another.” That is, breakthrough results don’t happen by simply rallying the troops with a lot of hot air.

Collins also discussed the potential negative impact a persuasive leader can have on an organization. “Indeed, for those of you with a strong, charismatic personality, it is worthwhile to consider the idea that charisma can be as much a liability as an asset. Your strength of personality can sow the seeds of problems, when people filter the brutal facts from you. You can overcome the liabilities of charisma, but it does require conscious attention.”

How can you spot The March Hare CEO?

During one consulting engagement, I ran into a classic March Hare CEO who was functioning as a part-time Chairman/CEO for a struggling company with revenues around $120 million (let’s call it “SportsCo”). SportsCo was in a restructuring phase and had the following issues:

a huge debt burden, a history of covenant violations, and an impatient senior lender
tight cash flow and some seasonality
strong vendors that dictated purchasing practices
a high overhead cost structure
significant product line and business unit complexity
old and bloated inventories
mediocre information systems
insufficient and untimely financial reporting
low morale
a thin management team
an unfocused strategic direction

SportCo’s CEO had a long history of working for and running large corporations (note the word large) with ample resources and staff. He was accustomed to the perks that accompanied corporate power and prestige. The CEO was an extrovert… a gregarious and affable guy who had accomplished many good things in his early tenure with SportsCo.

SportsCo’s difficult circumstances meant there was still A LOT of hard work needed to fix the business and radically change its direction. Despite all the significant challenges ahead, the March Hare CEO told his investors and management team that: 1) expenses had been ‘cut to the bone’; 2) revenue would increase 50%; and 3) EBITDA would triple in three years. Fifty percent revenue growth and EBITDA tripling!?

March Hare CEO made those broad, sweeping pronouncements without any reasonable action plans on how to back up the targets. He was offering up expensive wine to the investors when there was only lukewarm tea available. Fifty percent revenue growth was equal to about $60 million dollars additional annual revenue by year three. Where was this growth going to come from when…

The industry was experiencing modest, but not spectacular growth rates
SportsCo was closing some of its weaker operating units
There would be no additional capital for acquisitions from the investors
The bank was not going to expand the credit line to accommodate growth; in fact, they were on a path to reduce the credit line
Funding for capital expenditures would have to come from cash generated by operations
In some product lines, margins had started to decline from increased competition

Getting to the $180 million level was not going to happen under those circumstances.

Following the company meeting where the grandiose and unachievable plans were presented, I told the investors the CEO had gone from ‘being a leader to a cheerleader’. After challenging me on why I thought a cheerleader attitude was NOT beneficial to the business at that point in time, they ultimately decreased his influence throughout the change process. SportsCo was restructured based upon the theme of ‘less is more’: the business was downsized to the strongest, core operating units; corporate expenses were dramatically reduced; liquidity and cash flow significantly improved; and a new, clear strategic focus rallied the troops.

What are some ways to deal with a March Hare CEO?

If you think too much ‘wine’ is being offered up on an increasingly regular basis by the management team, go back to some basics:

Trust your own instincts and your gut.
Challenge all the assumptions behind the strategic and annual plans.
Understand the industry forces – think external, not just internal – data, data, data. Are customers and/or competitors consolidating? Is substitution occurring in your product lines?
Understand in detail your competition across customer segments. Does the company have strong niche positions or is it just an “also ran” in each segment?
Assess the strength of the R&D and product development efforts – where’s the future growth going to come from?
Talk to some of the key customers – get their unfiltered opinions on the company.
Determine the nature of external relationships with lenders, vendors, and/or customers that are or will be impediments to future success.
Look for specifics on the details of execution – are there monthly and annual operating plans that articulate priorities and assign who is accountable and in what time frame?
Follow up on the company’s performance on a very regular basis using the details of the operating plan as the discussion structure. Measure management on a regular basis.

‘There is no worse mistake in public leadership than to hold out false hopes soon to be swept away.’ – Winston Churchill

Posted in Board Of Intellectual Capital, Gerbsman Partners, James McHugh- McHugh & Co., Leadership, Management | Leave a Comment »

For Average Investors, Long Odds on a Big Facebook Payday

May 18, 2012 by Steven R. Gerbsman

Article from NYTimes.

Facebook shares will be tempting to buy when they start trading on Friday. The company has hefty profit margins, a household name and a shot at becoming the primary gateway to the Internet for much of the planet.

But if history offers any lesson, average investors face steep odds if they hope to make big money in a much-hyped stock like Facebook.

Sure, Facebook could be the next Google, whose shares now trade at more than six times their offering price. But it could also suffer the fate of Zynga, Groupon, Pandora and a host of other start-ups that came out of the gate strong, then quickly fell back.

Even after Facebook supersized its offering with plans to dole out more shares to the public, most retail investors will have a hard time getting shares in the social networking company at a reasonable price in its first days of trading.

Facebook’s I.P.O. values the company at more than $104 billion. And the mania surrounding the offering means Facebook shares will almost certainly rise on the first day of trading on Friday, the so-called one-day pop that is common for Internet offerings. At either level, Facebook’s price is likely to assume a growth rate that few companies have managed to sustain.

New investors, in part, are buying their shares from current owners who are taking some of their money off the table, a sign that the easy profits may have been made. Goldman Sachs, the PayPal co-founder Peter Thiel, and the venture capital firms DST Global and Accel Partners are all selling shares in the offering.

“It is a popular company, but it is still a highly speculative stock,” said Paul Brigandi, a senior vice president with the fund manager Direxion. “Outside investors should be cautious. It doesn’t fit into everyone’s risk profile.”

For the farsighted and deep-pocketed investors who got in early, Facebook is turning out to be a blockbuster. But by the time the first shares are publicly traded, new investors will be starting at a significant disadvantage.

Following the traditional Wall Street model, Facebook shares were parceled out to a select group of investors at an offering run by the company’s bankers on Thursday evening, priced at $38 a share. But public trading will begin with an auction on the Nasdaq exchange on Friday morning that is likely to push the stock far above beyond the initial offering price.

That is what happened to Groupon last fall. Shares of the daily deals site started trading at $28, above its offering price of $20. It eventually closed the day at $26.11.

The one-day pop is common phenomenon. Over the last year, newly public technology stocks, on average, have jumped 26 percent in their first day of trading, according to data collected by Jay R. Ritter, a professor of finance and an I.P.O. expert at the University of Florida.

In many of the hottest technology stocks, the rise has been more dramatic. LinkedIn, another social networking site, surged 109 percent on its first day in May 2011, and analysts say it is not hard to imagine a similar outcome with Facebook, given the enormous interest.

Unfortunately for investors, the first-day frenzy is not often sustained. In the technology bubble of the late 1990s, dozens of companies, Pets.com and Webvan among them, soared before crashing down.

At the height of the bubble in 2000, the average technology stock rose 87 percent on its first day. Three years later, those stocks were down 59 percent from their first-day closing prices and 38 percent from their offering prices, according to Professor Ritter’s data.

The more recent crop of technology start-ups has not been much more successful in maintaining the early excitement. A Morningstar analysis of the seven most prominent technology I.P.O.’s of the last year showed that after their stock prices jumped an average of 47 percent on the first day of trading, they were down 11 percent from their offering prices a month later. Groupon is now down about 40 percent from its I.P.O. price.

“It’s usually best to wait a few weeks to let the excitement wear off,” said James Krapfel, an I.P.O. analyst at Morningstar who conducted the analysis. “Buying in the first day is not generally a good strategy for making money.”

There are, of course, a number of major exceptions to this larger trend that would seem to provide hope for Facebook. Google, for instance, started rising on its first day and almost never looked back.

Even among the success stories, though, investors often have had to go through roller coaster rides on their way up. Amazon, for instance, surged when it went public in 1997 at $18 a share. But the stock soon sputtered, and it did not reach its early highs again until over a decade later. The shares now trade near $225.

More recently, LinkedIn has been trading about 140 percent above its offering price of $45, enough to provide positive returns even for investors who bought in the initial euphoria. But those investors had to sweat out months when LinkedIn stock was significantly down.

Apple is perhaps the clearest example of the patience that can be required to cash in on technology stocks. Nearly two decades after its I.P.O. in 1980, it was still occasionally trading below its first-day closing price, and it was only in the middle of the last decade — when the company began revolutionizing the music business — that it began its swift climb toward $600.

Facebook’s prospects will ultimately depend on the company’s ability to fulfill its early promise. It has a leg up on the start-ups of the late 1990s, which had no profits and dubious business models. Last year, in the seventh year since its founding, Facebook posted $3.7 billion in revenue and $1 billion in profit.

But investors buying the stock even at the offering price are assuming enormous future growth. While stock investors are generally willing to pay about $14 for every dollar of profit from the average company in the Standard & Poor’s 500 index, people buying Facebook at the estimate I.P.O. price are paying about $100 for each dollar of profit it made in the past year.

When Google went public in 2004, investors paid a bigger premium, about $120 for each dollar of earnings. But the search company at the time was growing both its sales and profits at a faster pace than Facebook is currently.

Facebook may be able to justify those valuations if it can keep expanding its profit at the pace it did last year, a feat some analysts have said is possible. But especially after the company recently revealed that its growth rate had slowed significantly in the first quarter, the number of doubters is growing.

“Facebook, by just about any measure, is a great company,” Professor Ritter said. “That doesn’t mean that Facebook will be a great investment.”

Why Successful Branding Still Happens Offline

May 16, 2012 by Steven R. Gerbsman

Why Successful Branding Still Happens Offline

By Ed Keller and Brad Fay

: Agence France-Presse/Getty Images; Does Facebook offer better branding opportunities than word-of-mouth and human interaction?

The Facebook IPO has both the financial and marketing communities abuzz, and with good reason. Facebook is the king of the social media hill, and its growth and ability to attract a loyal and highly networked audience is to be admired.

For brands, however, online social networks are far from the Holy Grail of marketing. The research is increasingly clear and compelling that for brands that want to be social and generate conversation, a far bigger and more powerful force is real world, face-to-face conversation.

It has been said that online social media is “word of mouth on steroids.” Key to that argument is a belief that online conversations will spread to hundreds or thousands of people (and maybe more) with the click of a mouse. But while that is theoretically possible, it is not the way online sharing usually works. Most links that are shared reach only 5-10 people. And the huge legions of Facebook fans, it turns out, are not so actively engaged with the brands they once “liked.” Fewer than 1% of brand fans on Facebook have any type of active involvement, bringing those huge numbers back down to earth.

Meanwhile, our research finds that 90% of word-of-mouth conversations about brands take place offline, primarily face-to-face, in people’s homes and offices, in restaurants and stores, really anywhere people congregate. These conversations bring with them greater credibility, a greater desire to share with others, and a great likelihood to purchase the products being discussed than conversations that take place online.

So if not via Facebook and other social networking sites, what can brands do to get conversations started? It is important to fight the urge to start your marketing strategy with a particular tool or approach. Instead, start a story that consumers will want to talk about. What are the messages about your brand and category that make you talkworthy?

Next, it’s important to tap the right talkers. Who are the consumer influencers in your category, and your brand advocates? When and where do they talk, about what, and why? Often the people who have credibility when they talk are not the target customer. And the places to reach these influencers will not flow naturally from your media optimization plan unless you’re clearly focused on word of mouth as a primary goal. Media with the largest concentrations of influencers will surprise you.

Once you have your message and target in mind, only then does it make sense to choose the channels through which to reach people and to encourage sharing. And it turns out, the biggest and most productive channel to spark conversation is not online social media, but paid advertising. Fully one-quarter of conversations about brands include an explicit reference to ads. In fact, television advertising is far and away the single biggest driver of consumer conversation. Far from being a dinosaur, as some pundits say, television and other traditional media play a key role in today’s social marketplace.

Today’s consumer marketplace is highly social, but not because of particular platforms or technologies. The businesses that will be the most successful in the future are the ones that embrace a model that puts people– rather than technology – at the center of products, campaigns and market strategies. Those who achieve the greatest success will recognize that there are many ways to tap the power of today’s social consumer.

The great social wave is an opportunity that no business can afford to ignore or look at myopically. It’s happening all around us – and to the continuing surprise of many, it’s mostly happening face-to-face.

Ed Keller and Brad Fay are co-authors of The Face-to-Face Book: Why Real Relationships Rule in a Digital Marketplace, to be published in May by Free Press. They are also principals of the Keller Fay Group, a market research and consulting firm.

Posted in Branding, Business models, Digital Marketing, Social Commerce, Uncategorized | Leave a Comment »

Why I Became A Principal and CEO Of A Social Media Agency

May 15, 2012 by Steven R. Gerbsman

Article by Don Middelberg, CEO of Laundry Service and member of Gerbsman Partner Board of Intellectual Capital.

First the news: Yes, in addition to my role as CEO of Middleberg Communications I have become a Principal and the CEO of Laundry Service, a social media agency.

Why? Because I am absolutely convinced that Public Relations is now inexorably linked to social media and content creation. I have felt this way only once before and that was about the Internet. I now feel the same sense of excitement and urgency, and with the same conviction.

Roughly twenty years ago I told everyone and anyone that PR programs had to include Internet based communications. I totally dedicated my PR agency in that direction. It turned out to be the absolutely right move for our clients and for my agency. Today I feel the exact same way about Social Media. It is no longer good enough to simply help place client news in print and broadcast media. Communications now must encompass the tools of social media—to create exciting content covering video, infographics, games, blogs and mobile apps. All managed within the social media platforms that allow marketers and companies to reach and motivate their constituencies in new and exciting ways.

So we are in a new age of communications. One in which PR and Social Media must now be part of all communications programs. While many Advertising and PR agencies say they have a Social Media capability, it is usually not a core competency. That is why Laundry Service is an independent agency 100% dedicated to Social Media. Few firms in the nation have the chops to do both Public Relations and Social Media really well and even fewer have the strategic skill and experience to create fully integrated communications programs the way we can.

Together, Middleberg Communications and Laundry Service provide clients communications programming offering the very best of social media, public relations and interactive services to help companies build their brands and grow their business.   I’ve never been more excited and very much hope to introduce Laundry Service to you in the very near future.

Posted in Board Of Intellectual Capital | Tagged boic, Laundry service, Middleberg Communications | Leave a Comment »

Who is Ross Levinsohn?: Yahoo’s new salesman-in-chief

May 14, 2012 by Steven R. Gerbsman

Article from GigaOm.

Ross Levinsohn, appointed Sundayas interim CEO, doesn’t have to learn Yahoo — he’s spent the last 18 months immersed in it.

And he doesn’t have to learn digital media — from helping to create online sports powerhouses at CBS Sportsline and Fox, to building a $1 billion-plus digital portfolio for Rupert Murdoch, to launching and investing companies through his own private equity fund, he’s covered the digital media waterfront and then some.

He’s Hollywood and Santa Monica but he speaks fluent Silicon Valley.

Most important, he knows Yahoo is a media company — and he knows how to sell it that way. Of all the things he found when he joined Yahoo in late 2010, the most disconcerting was how much the company was doing right and how very bad it was at making that count. Here’s how he put it during an interview with paidContent last year as he emerged from a quiet period:

“I spent six months digging into the company making sure I’m not crazy — and I’m not crazy.

“Yahoo is the premier digital company in the world and embracing that isn’t a hard thing to do. That’s just fact-based. Tell me what other type of media can sit with you and say ‘I’ve got the top 19 #1 or #2 newspapers, I’ve got the top 20 shows, I’ve got the 19 of the top 20 radio stations, 19 of the top 20 magazines’?

“Duh. But you have to fully embrace that. You can’t half-ass that.”

Last fall, he took the stage at paidContent Advertising to pitch the company. The interview came just days after Carol Bartz, who hired him to head media and ad sales for The Americas, was fired. At the time, he was considered a leading internal candidate for CEO. He talked about Yahoo’s need for “a little bravado, a little swagger”:

“Yahoo is a huge, mature, gigantic business. Some of that is overlooked right now. Businesses grow at different rates. We’re 16 years old and we’ve been on top for 15 years. It’s hard to maintain that. When you think of entertainment and gossip, you think of TMZ, but OMG is twice as big with 30 million users a month and still growing. But no-one knows that.”

Levinsohn’s biggest coup at News Corp. was acquiring MySpace from under Viacom’s nose for $580 million in 2005. In hindsight, given how MySpace panned out, perhaps it was anything but a coup — but, at the time, it was transformative, and as big a statement as News Corp. could make about being in the digital game.

Here’s how Levinsohn described it when we talked about why MySpace wasn’t a fit for Yahoo in 2011:

“We bought a social networking site in 2005, before anyone knew what social networking was and now look at where social networking is — so if you look at the trendline we were way head of the game.

“When we bought it, it was doing about $1 million a month; 24 months later we were on a run rate to do $500 million a year. You’d have to say that was a pretty good trajectory.

“Users went from, when we bought it, to 70,000 signups a day (which I thought was astounding), to the month I left about 450,000 signups a day. So again, trajectory, unbelievable.”

Levinsohn was replaced at Fox Interactive when it switched from M&A to operating mode. He’s been battling against perceptions ever since that that he’s not an ops guy.

In addition to rebuilding the internal sales organization and partnering with AOL and Microsoft in a digital sales alliance, and with his top media exec Mickie Rosen setting up a series of high-profile original content deals, Levinsohn has been out telling that story. Not the one of the company that can’t shoot straight – the one about the media company at its core.

Since then, he’s interviewed Tom Hanks to promote a new Yahoo original, been on stage with Katie Couric at the Yahoo digital upfront last month and a few days later being photographed with Sophia Vergara during the White House Correspondents Dinner festivities. He upgraded and expanded an existing relationship with ABC News.

Levinsohn hasn’t left M&A behind but he insists Yahoo doesn’t need a big acquisition to fix its problems, although, if he could have found a way, Hulu would be a Yahoo property. Look at him to focus on making the pieces Yahoo already has fit better, pick up tuck-in acquisitions — and finally decide whether Yahoo should be in the ad tech business or sell it.

Until now, everything he’s done at Yahoo has been in the shadow of CEOs making the final decisions on resources and setting the overall tone. Now — at least for the interim — Yahoo is Levinsohn’s Pottery Barn. He told Yahoos in a lengthy internal e-mail Sunday:

“I know there is one thing we should definitely all be doing in light of this news, and that is to focus on the momentum we’ve created over the last few months.

“Many of you have heard me talk about the possibilities we have, and about the opportunities in front of us. In spite of the very bumpy road we’ve traveled, we are achieving genuine and meaningful successes in the marketplace every day and heading in the right direction.”

What he’ll have to decide now is whether to spend the next months acting as CEO or auditioning for it. Here’s Demand CEO Richard Rosenblatt’s advice, following a Forbes piece by outspoken Yahoo shareholder and tech writer Eric Jackson:

And, yes, that is the same Richard Rosenblatt who was the CEO that sold MySpace to News Corp., then bought back some of the pieces that helped build Demand Media.

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