Aaron Daniels, MIM

I am absolutely amazed by Michael Phelps’ performance at the 2008 Beijing Olympics. But am I the only one that sees the enormous marketing potential for western businesses courting the growing Chinese middle class? Not only did Phelps break a world record by winning the most gold medals at an Olympic game as well as the most career gold medals, he won EIGHT GOLD MEDALS!

The Chinese are a traditionally superstitious people, and the number 8 has a great deal of significance to them. The Mandarin word for 8 sounds like the word for “prosper” or “wealth”. In fact, Chinese merchants spend a great deal of time and money trying to get phone numbers with as many “8′s” as possible to insure the prosperity of their business.

There will certainly be a great deal of competition between companies trying to secure Phelps’ as a spokesman and/or sponsor – in the west. But will western companies realize the special significance of his accomplishments in China and to the Chinese people?

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During my visit to China I was struck by the capitalist nature of the country that identifies itself as “communist”. In keeping with that hidden nature, last Friday’s Wall Street Journal announced that the owners of China’s “Birds Nest” stadium and “Water Cube” aquatics center are selling corporate naming rights to the highest bidder.

Ben Sturner, chief executive of New York-based Leverage Agency, which is helping broker both deals, says six multinational companies are competing for title rights to the stadium, which cost $500 million to build and whose steel superstructure resembles a bird’s nest. He won’t name them but says he has been taking top executives through a whirlwind sales pitch in recent days, including visits to high-profile Olympic events.

“I would call it the most valuable piece of real estate in the world right now,” Mr. Sturner says.

Among the presumed bidders are Coca-Cola, Adidas and Lenovo. Mr. Sturner is correct in his declaration of the marketing importance of these buildings. China’s emerging middle class is the most important strategic market for many (if not most) western businesses that sell consumer items. Whoever hangs their brand on either of these buildings will be signaling an enormous commitment to that market. However, it does not come without risk.

In past blogs I’ve written about the importance of understanding culture when marketing in China (here, here, here and here). Branding these Olympic buildings is an even more sensitive issue than Starbucks opening a store in the Forbidden City.

Where the Forbidden City is a symbol to the Chinese people of their proud heritage, the buildings that house the Olympic games represent China’s present and future ambitions as a global political and economic power. The Olympics are for all intents a “coming out” party for the Middle Kingdom after decades of isolation.

That party was soured when westerners protested what Chinese consider purely “internal issues” (i.e. Tibet and human rights issues). Those protests contributed to growing nationalism and east/west polarization there.

IF the CCP (Chinese Communist Part) allows this sale to go through, it is likely the only marketing winners would be a Chinese company like Lenovo or Haier. A western company would be taking on an enormous risk of incensing the Chinese people. And it is certain that a Japanese company (or any company with ties to Japan) would be blocked from such a sale.

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In grad school I really appreciated the fact that I had business experience before attending class.  I think it added to the depth of my understanding of the things we discussed.  And the experience I gained operating my own business inspired a number of great classroom conversations.

Thinking about those conversations and what I learned (the hard way) as an entrepreneur led me to a new blog idea.  Each week I will (try) to touch on what I consider essential business survival topics. 

Cash Burn Rate

My first major lesson in business was in discovering the concept of “cash burn rate”, or the rate at which cash is expended to support business functions.  When a business grows (or expends cash) faster than receivables come in, excessive burn rate created by rapid growth can actually kill your business.  Simply put – success is good, but rapid success is dangerous.

In establishing my business I worked so hard to succeed that the rapid growth I encountered nearly put me out of business…  Most businesses fail because they are not properly funded.  But to go a step further, in addition to adequate cash reserves, credit is key to a startup’s success.  This is even more important now as we face a global “credit crunch“.  Access to credit could give your firm a strategic advantage over competitors.

Some types of credit are less obvious than others.  Traditional bank financing (i.e. a business line of credit) is what most entrepreneurs seek.  Less obvious are home equity lines of credit, credit cards, the so called “3 ‘F’s” (friends, family and fools), and factoring.

Factoring is a means to sell receivables to a 3rd party for a modest discount.  Had I known about factoring when I was self-employed, my life would have been much easier.  Purchase Order Funding is a relative to factoring. For manufacturing businesses, P.O.’s issued by credit-worthy firms can be sold to investors for cash so that materials or equipment can be purchased to fulfill the order. This is usually critical for small businesses that receive an order larger than normal from bigger firms.

Absolutely last in the list of sources of funds should be Venture Capital.  Venture Capitalists rely on a steady stream of leads to pick the safest business ideas for funding. The reality is that an extremely small number of business opportunities presented actually get funded. And the dirty secret of Venture Capital is that the money usually comes with a replacement of management (i.e. YOU!).

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The US media seems to be slow to reveal the extent of economic troubles the US could expect.  Either because the media doesn’t thoroughly understand economics or it is afraid crying wolf could lead to a self-fulfilling prophecy, news outlets have yet to paint the full picture. 

This past week a number of new revelations came to light. The US “Mortgage Meltdown” showed signs that there is no end in site to the troubled US mortgage crisis as the Federal Government announced that it may have to step in to secure ailing Fannie Mae and Freddie Mac, lending institutions that offer government-backed mortgages like the FHA program.

If Fannie Mae or Freddie Mac collapsed, it could cripple the U.S. housing market, dealing a staggering blow to the wider economy, and would saddle the federal government with massive debts if it chose to seize control of either firm.

A failure of either company would also rattle global financial markets because their shares and debt are widely held by pension funds, mutual funds and foreign governments.

In this week’s Economist, it was revealed that the “Big 3″ US auto manufacturers are caught in a so called “perfect storm” of economic conditions.

Carmakers have been ambushed by the disastrous housing market and, above all, by the soaring cost of fuel. Falling house prices have persuaded many people to put off buying a new car, and petrol at over $4 a gallon is radically changing demand. Detroit is still stuck with model ranges heavily biased towards the big, thirsty sport-utility vehicles (SUVs) and pickup trucks that raked in the profits when petrol cost half of today’s price.

So just how bad are things for the Big Three? Their survival has been in doubt before. But two things are different this time. The first is that the carmakers’ finance arms used to bring in cash even in hard times. That is not happening now. More buyers are defaulting on their car loans, and the resale value of SUVs and pickups has collapsed so catastrophically (see chart) that the finance offshoots are losing huge sums on vehicles returned after lease.

The second change is that it seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit’s old business model is now obsolete.

Fueled by rapidly increasing oil and food prices, inflation in the US is already a major concern.  The lack of confidence that would be created with the collapse of either one of the lending institutions or a Big 3 automaker would have devastating consequences for the US economy, and the effects of that would certainly ripple throughout the world. 

If you look at recent events in the context of the recent near collapse of Bear Stearns (and connect the dots), the direction of the economy seems clear.  I think we’re a long way from seeing the bottom of this economic cycle.

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One of the most important things I learned in business school was the importance of price.  A 1% improvement in price yields a 7% improvement in profit.  Traditional managers are trained to manage costs – modern managers are trained to manage price.

The key to managing price is in brand strategy.  Consider the price differentiation between name brand sodas and store brand sodas at your local grocery store.  The products are essentially the same – the same ingredients, packaging and delivery.  But name brand sodas command 10% – 15% more price than the Safeway brand.  Do the name brands compete against Safeway based on price?  No!  Even though the products sit side-by-side on the supermarket shelf, name brands maintain their price, targeting a different market segment instead.

Does your firm have a brand strategy?  How much of your management resources are devoted to managing price?

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