Bennett Stewart is an expert in shareholder value and corporate performance management, and CEO of EVA Dimensions, a financial technology firm that provides software tools, databases and training and support packages that help companies to test and automate Best-Practice EVA, and investors to earn excess returns alpha. This article was excerpted with permission from the publisher, John Wiley & Sons, from “Best-Practice EVA” (March 2013).

Every business leader needs a way to amplify his or her business instincts and galvanize a team of players to win. The bad news is, conventional financial metrics will inevitably mislead business leaders and their teams into making suboptimal decisions that leave a lot of value on the table because all the measures have blind spots — they hide the truth or tell half-truths.

Earnings, for instance, can easily be inflated with balance sheet investments that don’t earn a decent return, and ROI-fixated companies will limit investments to the highest returns and forfeit lots of profitable growth opportunities that would increase the firm’s value. What’s desperately needed is one measure that correctly consolidates all the pluses and minus of business decisions into a reliable net score — in other words, into a measure that clearly measures value and which readily provides practical insights into how to increase value. That measure is EVA, standing for economic value added.

EVA, pronounced E-V-A, is a corporate profit measure that is better than all others. It measures profit according to economic principles and for the purpose of managing a business and maximizing value, and not by following accounting conventions. In simplest terms, it is net operating profit after tax, or NOPAT, less a full weighted average cost of capital charge for tying up balance sheet assets. If NOPAT is $150, and if a total of $1,000 has been invested in balance sheet assets with a weighted average cost of capital of 10%, for a “capital charge” of $100, then EVA is $50. It is the true profit after setting aside a priority return for the owners.

The goal of an EVA-focused firm is to increase it, to make a negative EVA less negative and a positive EVA more so. It’s the improvement in EVA that is the universal goal, which means it applies as well to laggards as leaders. A mission to increase EVA naturally puts a premium on asset management, on speeding asset turns, and on developing and deploying lean business models, in order to reduce the cost of capital charge. But unlike ROI, it also encourages managers in the best businesses to continue to innovate, to scale, and to invest in all opportunities they believe will earn more than the cost of the added capital.

The bottom line is, EVA measures all the ways that performance can be improved and wealth created — in any business. Beyond that, EVA is a great way — I will argue it is the best way — not just to measure value, but to assist management in driving improvements in shareholder value.

Brief history of EVA

EVA came out a little over 20 years ago with the publication of my first book in 1991, which started a global tsunami wave of corporate adoptions. But beginning about 10 years ago I began to notice chinks in the armor that were inhibiting EVA from being much more widely used. The most glaring deficiency was that EVA was just a money measure and lacked a companion ratio indicator or, better, an entire ratio framework to bring it to life, which was a severe handicap.

Without a ratio framework, CFOs found it difficult to use EVA to compare performance over time and across lines of business or against public peers that differed in scale. Line managers were also frustrated they could not easily trace EVA to familiar levels and performance drivers like sales growth, gross margin, working capital days and plant turns.

A set of pioneering innovations have now addressed these deficiencies. Today there is a new “best-practice” version of EVA that makes the adoption far easier and more rewarding. The biggest advance is a set of EVA ratio statistics that has made EVA an open book brimming with managerial and valuation insights.

These new metrics give business and finance leaders an opportunity to streamline their management equation. They measure profitability performance so thoroughly and accurately, and they so closely align decisions to shareholder value, that all other financial ratio measures become obsolete.

EVA Momentum

The headline ratio measure on the new EVA lineup is called EVA Momentum, which is calculated by taking the change in EVA versus the prior period, and dividing by the revenues in the prior period. It measures the growth rate in EVA, scaled to the sales size of the business. It is the only corporate performance ratio where bigger always is better, because it gets bigger when EVA does, which means it should be every company’s most important financial goal, the one ratio metric that everyone aims to maximize as the key measure of corporate success and added value.

EVA Momentum is also the basis for an incredibly revealing diagnostic tool. It unfolds in stages to reveal all of the underlying performance factors that determine corporate value. It not only shows how much value has been created, but where and why. It is the measure that really matters and a portal to the many that can be managed. Best-practice companies also are using EVA Momentum to measure the value of their business plans and to stimulate their line teams to deliver more value by making them more EVA capable.

EVA Margin

A second EVA ratio, EVA Margin, is a useful statistic in its own right and a key driver of EVA Momentum. It is the ratio of EVA to sales and is every firm’s true economic profit margin — the percentage of sales that falls to the EVA bottom line after deducting all operating costs and capital costs. It is a key summary measure of profitability and productivity, consolidating operating efficiency and asset management into a reliable and comparable net margin score. Unlike operating margins, it neutralizes the capital differences across business models or product lines, and produces an inherently fairer, purer and more comparable measure of performance. The median EVA Margin typically runs at only 0.4% across all Russell 3000 firms. It is 4% to 4.5% for the 75th percentile, and it runs at 9% for the 90th percentile.

EVA Margin provides a simple framework to help managers to think of ways to increase EVA and drive Momentum over time. It turns the question of how to manage a business for value into a familiar sales-based, margin-based construct. By doing so, it illuminates the two main paths to increase EVA and drive Momentum.

The first way is through “productivity gains,” that is, from generating an increase in the EVA Margin by improving pricing power, enhancing the product mix and extending process excellence through greater income efficiency and superior asset management — in other words, it is to make the business engine run stronger, with more torque and spark. The second way is through “profitable growth” by adding sales that can earn positive EVA Margins. It is stepping on the gas and fueling more innovation, more scale and more growth in profitable business models, which is something that pure productivity measures, like profit margin and ROI, overlook completely.

The bottom line is, EVA Momentum — the EVA growth rate — should supersede sales and earnings growth as the growth measure that matters, and EVA Margin, which I call the EVA Momentum up-shifter, should replace ROI and the DuPont ROI formula with a framework that is more intuitive and far more practical as a tool to manage and maximize value.

In the past, EVA was something of a closed system, available to the select few. Now it is open architecture. All are welcome to join the Best-Practice EVA initiative. I call on investors and business consultants of all stripes, along with business school professors in finance, strategy and general management, to join the cause of creating a simpler and more effective corporate management framework.

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The only financial metric business leaders need to know originally published by SmartBlogs

In this three-part blog series sponsored by Prudential, we will examine how fixed income can enhance retirement menus. This interview was originally published in the November 2012 issue of Financial Advisor magazine.

In today’s Part 1, the experts explain why offering a wider selection and variety of fixed-income choices to DC plan menus can potentially provide higher returns, greater diversification and less volatility to retirement portfolios.

Part 2 of the interview will look at ways to construct a better portfolio.

Part 3 of the interview will explain how financial advisors can help in this effort.

Jerilyn Klein Beir, a contributing editor for Financial Advisor magazine, held a roundtable discussion on the topic of fixed-income choices with participants including Michael Rosenberg, senior vice president and director of IODC Distribution for Prudential Investments; Robert Tipp, managing director and chief investment strategist for Prudential Fixed Income; and Michael J. Collins, senior investment officer and portfolio manager for Absolute Return Bond and Core Plus Fixed Income Strategies at Prudential Fixed Income.

Through the course of the discussion, the subject of trends and the evolving needs of plan participants came up. Michael Rosenberg notes, “First, there’s an aging workforce and its participants tend to want to invest more conservatively, safeguard their assets and turn the assets they’ve accumulated into a stream of retirement income. Second, there’s been unprecedented market volatility due to the financial crisis of 2008 and the markets in general, so people are looking to become more conservative. The third trend has to do with the move away from off-the-shelf qualified default investment alternatives (QDIAs) to custom QDIAs. The vast majority of plans that are using custom QDIAs or custom target date funds use the core funds within the plan to create those QDIAs. So having a broader mix of fixed-income alternatives may provide potential to build better portfolios.”

Fixed income should be “represented in every plan menu,” Rosenberg says. “Like with equities, it’s a plan-by-plan decision. This is not a one-size-fits-all type of market. That’s where advisors and consultants need to have really interesting and thoughtful conversations to find out a plan sponsor’s goals and objectives for offering the plan, and what their participant base is looking to do,” Rosenberg says.

When asked about the underrepresentation of fixed-income investments in DC plans, and why the roundtable thinks plan sponsors currently offer relatively few options, Michael Collins says, historically, Defined Contributions plans have been thought of as always having “15 to 20 different flavors of equity — large cap, small cap, mid cap, value, growth, international, U.S. — and then there’s one bucket that says bonds.”

However, Rosenberg notes, “That’s not the way it happens in the defined-benefit world or the institutional world. It’s truly just like the equity marketplace — there are types of fixed income that you can put together to either help enhance your opportunities for returns or help lower your potential for risk.”

Be sure to check back for the next installment of this blog series to be published DATE HERE when the experts give their thoughts on how to construct a better portfolio, and learn more from this video by Rosenberg. Additional information may be found in this white paper.

Mutual fund investing involves risk. Some mutual funds have more risk than others. The investment return and principal value will fluctuate, and shares, when sold may be worth more or less than the original cost, and it is possible to lose money. There is no guarantee a Fund’s objectives will be achieved. The risks associated with each fund are explained more fully in each fund’s respective prospectus.

Fixed income investments are subject to interest rate risk, where their value will decline as interest rates rise. Diversification does not guarantee a profit or protect against a loss in declining markets.

Past performance is no guarantee of future results.

Consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and summary prospectus. Read them carefully before investing.

Mutual funds are distributed by Prudential Investment Management Services LLC, a Prudential Financial company. Prudential Fixed Income is a unit of Prudential Investment Management, a registered investment adviser and Prudential Financial company. Prudential Investments, Prudential, the Prudential logo, Bring Your Challenges and the Rock symbol are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide.

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How can fixed income enhance retirement menus? originally published by SmartBlogs

Big Business for UEFA

These championships are big business in Europe. The annual estimated gross commercial revenue expected from the 2012/2013 UEFA Champions League and the UEFA Super Cup is €1.34 billion or about $1.73 billion, according to UEFA. This compares to annual revenues of $9.5 billion for the NFL, $7.5 billion for Major League Baseball, $4 billion for the NBA, $3.4 billion for the NHL, and $300 million for Major League Soccer. UEFA isn’t the world’s biggest sports entity in terms of revenue, but it makes significant revenue and has fans worldwide.

In 2011, 178.7 million television viewers tuned in to watch Barcelona beat Manchester United in the final. It was the most-watched UEFA Champions League game ever and the most-watched worldwide annual sporting event that year. In the U.S., 2.6 million viewers tuned in, while the 2012 final between Chelsea and Bayern Munich drew a U.S. audience of 2 million. Both matches were shown live in the U.S. on FOX Sports.

The road to the 2013 UEFA championships started in July 2012. Teams compete in a qualifying round, play-offs, Group Stage, Knockout Phase, and the Final. Teams from Eastern and Western Europe, Israel, Russia, the Ukraine, and some Asian countries compete in the UEFA championships. Holding nine titles, Real Madrid C.F. is the most successful UEFA team. The current champion is Chelsea F.C. from London, though they were defeated in the Group Stage in this year’s competition.

The UEFA league is made up of 53 football member associations throughout Europe and one provisional team. Each UEFA member has its own league system.

Explore the map below to learn more about the top 16 teams in this year’s Champions League.

Click on image to enlarge map.

Watch Soccer on TV

Even though soccer is not the most popular sport in the U.S., it is gaining fans due to participation in amateur youth and adult leagues and the influx of immigrants over the past decade. Some Americans love the sport and are most likely to watch the UEFA championships on television. Where are the Americans who will cheer on their favorites?

People in the U.S. who watch soccer on TV most frequently live along the Eastern seaboard, near Chicago and Minneapolis, and areas in the West, including California. ZIP codes with residents most likely to watch soccer on TV include: 21402 (Annapolis, Maryland), 65473 (Fort Leonard Wood, Missouri), 92145 (Fort Irwin, California), and 98433 (Tacoma, Washington). Residents in these ZIP codes are at least twice as likely as the average American to watch soccer on TV.

Click on image to enlarge map.

What type of American most likely watches soccer on television? Esri, a geographic information systems company, developed a Tapestry Segmentation system that classifies U.S. residential neighborhoods into 65 unique market segments based on socioeconomic and demographic characteristics.

Residents of Dorms to Diplomas, Las Casas, and Military Proximity neighborhoods are the most likely to watch soccer on television. Dorms to Diplomas residents are focused on their education. They have a median age of 21.9 years and most live in dorms. Las Casas residents are primarily young, Hispanic families with a household size of 4.14 people. Approximately half were born outside the United States. Residents of Military Proximity neighborhoods depend upon the military for their livelihood. Most are in the Armed Forces; others work in civilian jobs on base. Two-thirds of the households are married-couple families with children.

Residents of Prairie Living, Rural Bypasses, and Southern Satellites neighborhoods are the least likely to watch soccer on television. Prairie Living residents live on family-owned farms in the Midwest. Two-thirds of the households are married couple families; the median age is 43.3 years. Rural Bypasses neighborhoods are found in small Southern towns along back country roads near open space, undeveloped land, and farms. Unemployment is high in these neighborhoods; however, those who work have jobs in the agriculture, mining, manufacturing, and construction industries at a higher-than-average rate. Households in Southern Satellites neighborhoods are located in the rural South. Residents are primarily married-couple families who work in the manufacturing and service industries.

Why This Matters

Soccer has always been big business in Europe and Latin America. It has not been nearly as popular in the U.S. as other sports; however, some Americans love the sport. Soccer leagues – both domestic and international – can target U.S. soccer fans by understanding who they are and where they live in the U.S.

Many Americans who emigrated from Latin American and European countries or are first generation Americans from those areas are very connected to the game and want to watch it. They are often super fans who will do anything to view critical games played by their favorite teams as well as the league championships. Many fans are Hispanic, which are an increasing percentage of the total U.S. population. With the right marketing, messaging, and promotions, UEFA soccer leagues can increase their presence in the U.S.

More information about Esri’s data can be found at www.esri.com/data or to learn more about Esri in general, go to www.esri.com.

Pam Allison is a digital media, marketing strategist, and location intelligence consultant. You can visit her blog at www.pamallison.com.

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The big business of Champions League soccer originally published by SmartBlogs

In December 2011, the Social Security Administration noted that by county, more than 55 million Americans received disability (OASDI) benefits. Up from 44.7 million in 2001, this number has steadily increased in the past several years. As a comparison, in December 2011, 14 million Americans received unemployment benefits.

Illness or an accident prevents many Americans from working. They need disability benefits to survive. A recent story on NPR’s “This American Life” titled “Trends with Benefits” reported that in several counties, almost 1 in 4 working-aged residents receive disability benefits. What do we know about these counties? Is unemployment high there? Is education attainment a factor? Do these residents work out? The NPR story described one case where a doctor diagnosed a disability based partly on a patient’s education. Is there a correlation among educational attainment, fitness and disability?

Disability beneficiaries by county

On average, 7.3 percent of working-aged adults (18-64) receive disability benefits from the U.S. government. The percentage by county varies immensely throughout the country. Counties with the highest percentages of disability benefit payments for working-aged adults are: Lewis County, Idaho (27.7%), Buchanan County, Va. (26.0%) and Dickenson County, Va. (24.6%).

Many counties with high percentages of working-aged adults receiving disability benefits are in the South. In 16 counties, at least 20% of working-aged adults receive disability benefits. All of these counties are in the South, except for two, which are located in Michigan.

Some believe that areas with a high percentage of the population on disability correlates to high unemployment. This may be the case in some areas, but not in others. These two statistics tell different stories about the economy.

In 2011, counties with the highest unemployment rates were Imperial County, Calif. (29.7%), Yuma County, Ariz. (26.8%) and West Hampton Census Area, Alaska (20.7%), according to the Bureau of Labor Statistics. The percentage of working-aged adults of these counties that received disability benefits were 7.4, 6.8, and 6.8, respectively. In December 2011, the U.S. unemployment rate was 8.5%.

Many counties with a high percentage of disability recipients for working-aged adults also have high unemployment rates. However, several counties in the West with high unemployment rates have rates for disability benefits for working-aged adults lower than the U.S. rate of 7.3%.

Compare counties with high percentages of disability benefit payments for working-aged adults to unemployment rates:

View larger map

Residents in counties with the highest percentages of working-aged adults receiving disability benefit payments also have lower rates of college degrees than the average American. According to the Census Bureau, 17.7% of Americans have earned a college degree.

In counties where at least 20% of the working-aged population receives disability benefits, just 6.4% of the population has earned a college degree, on average. The rates vary from 4.3% up to 14.2%. Although no information is available about the education attainment of disability benefits recipients, there does seem to be a correlation between counties with a high percentage of working-aged people receiving disability benefits and a lack of college degrees.

Explore more about the percentages of adults who have attained a college degree in this interactive map:

View larger map

Healthy lifestyles

How much people exercise can have a great effect how an eventual need for disability benefits. It is more likely that people who lead a healthy lifestyle might be less likely to need disability benefits in the future, unless they are hurt or ill. One statistic that determines an area’s health is the number of people who exercise at a gym twice per week.

People who live in the South and Midwest are less likely to exercise regularly than people who live along the Eastern Seaboard or in the West. As noted above, working-aged adults living in counties in the South are more likely to receive disability benefits. This correlates to people who are less likely to exercise. Although people in the Midwest are less likely to exercise, overall, they are also less likely than the average American to receive disability benefits.

Click on image to enlarge map.

What types of Americans are the least likely to exercise? Esri, a geographic information systems company, developed a Tapestry Segmentation system that classifies U.S. residential neighborhoods into 65 unique market segments based on socioeconomic and demographic characteristics.

For example, residents of Southern Satellites neighborhoods are the least likely to exercise. These neighborhoods are found primarily in the rural South. They are comprised of married-couple families who work in the manufacturing and service industries. Residents have a median age of 39.9 years and a median household income of $36,759.

Why this matters

Growing numbers of disability claims affect the economy significantly. If more people are working, paying taxes and spending their disposable income, the U.S. economy will improve. Government agencies must understand the types of people are receiving disability benefits, where they are located, and if possible, what steps can be taken to get them back to work. Keeping their current employees can also help companies avoid hiring and training costs. Businesses can offer wellness and education programs to improve employee fitness and encourage them to work toward a degree.

There is a clear trend in the South where a higher percentage of Americans are receiving disability benefits — especially among working-aged adults. There are various outside factors likely contributing to this high percentage. Studying the lifestyles of residents in these areas can help government agencies and companies better understand why some areas have a higher rate of benefit recipients than others. In the South, a lower percentage of residents hold a college degree and a lower percentage of those who exercise regularly than in other parts of the country. However, these are just two factors that may contribute to the issue. This knowledge can help the government and companies adjust their programs to address the issues in order to keep people in the work force.

More information about Esri’s data can be found at www.esri.com/data or to learn more about Esri in general, go to www.esri.com.

Pam Allison is a digital media, marketing strategist and location intelligence consultant. You can visit her blog at www.pamallison.com.

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Disability insurance and the U.S. economy originally published by SmartBlogs

Alan Jay Kaufman is chairman, president and CEO of independent wholesale insurance brokerage Burns & Wilcox, as well as Kaufman Financial Group, its parent company. He recently answered SmartBrief’s questions about leadership, continuing education and other issues in insurance.

How would you describe your leadership style?

It is framed from a variety of experiences. I learned a great deal from my father, the late Herbert W. Kaufman, who founded Burns & Wilcox in 1969. I find that my work ethic, leadership style and entrepreneurial spirit are complemented from years as an attorney in private practice.

My father built Burns & Wilcox into a nationally recognized wholesale broker and underwriting manager. When I took over the leadership of the company, my focus was the future growth of Burns & Wilcox and the Kaufman Financial Group. We expanded internationally and added other leading companies that deepened our expertise and made us more globally competitive.

My team would probably tell you that I lead by example. This is a relationship business, and I am often on the road visiting our 45 offices throughout the U.S., Canada and U.K. Each visit includes meetings with our clients, the brokers and agents who rely on Burns & Wilcox and the Kaufman Financial Group companies for our exceptional expertise and partnerships with insurance companies. Despite the conveniences that technology allows today, I firmly believe in the power of face time.

How has your experience in the legal field influenced you in your role as an insurance executive?

I took over the leadership of the Kaufman Financial Group following an accomplished law career and understood the value that outside perspectives could deliver to our business. I built my management team by bringing together the insurance industry’s top talent as well as senior executives with management consulting and international finance experience. Today we continue to recruit well-rounded people whose unique professional backgrounds help to deepen our expertise.

Additionally, I see a real gap in how the insurance industry recruits and develops talent compared to the legal world. Law firms fixate on talent. The best firms maintain close relationships with the top universities, never losing sight of the need for a constant influx of excellent people. And they typically have extensive programs in place to grow and develop their prized recruits. In insurance, there simply is not the same level of commitment. I applaud industry associations that have embarked on basic talent development and continuing education initiatives, but greater investment is required to meet the demand.

You founded the Kaufman Institute to provide continuing education for insurance professionals. How great was the need to provide more continuing-education opportunities? Does the institute offer courses for professionals at different levels and across various lines of business?

The cost of the talent gap within the insurance business is enormous. Few of the leading undergraduate and graduate business schools offer insurance-related coursework, which means that qualified students repeatedly choose other careers in business such as accounting, finance, banking or consulting. The insurance industry then finds itself with a limited number of top performers who are frequently poached, forcing firms to advance mediocre professionals. Ultimately, it raises the likelihood of costly mistakes, the burden of which is shouldered by our companies and clients.

The Kaufman Institute, coupled with our leadership and executive-education initiatives, is working. To date, more than 10,000 Kaufman Institute courses have been accessed by our team. We find our employees are enjoying more clearly defined career paths, and they are emerging better-equipped to serve our brokers and agents. As retention rates show, these professionals are also more likely to stay with us.

It has been such a good experience for our team members that this spring we will re-launch the Kaufman Institute to make these sought-after courses more widely available to the industry. The courses in general business, insurance and risk management, which have previously been provided to the more than 1,200 Kaufman Financial Group employees across North America and Europe, will become available to the entire industry via our online corporate university.

The curriculum reflects our broad and deep industry expertise and affiliations with a number of academic institutions. We have designed courses to benefit all insurance professionals, from those seeking leadership roles in their organizations to individuals who simply need their licenses renewed.

You serve on the legislative committee of the National Association of Professional Surplus Lines Offices. What are some of the biggest issues facing the surplus-lines market?

Regulation will continue to be one of the biggest issues facing the surplus-lines market. Surplus lines actually thrive with less regulation because the market can be flexible enough to provide coverage for risks that cannot be handled in the standard market. We refer to it is as the freedom of rate and form and are against any regulation that would impede the continued flexibility of the surplus-lines market.

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Alan Jay Kaufman of Burns & Wilcox on leadership and education in insurance originally published by SmartBlogs

Kaihan Krippendorff

Innovation has for years come from designers and marketers, from the creators of new products. The top innovation consulting firms all spring from the roots of building new products. “Most innovative” lists are populated by … well, Apple is always first … then comes a predictable list of companies that make cool products: Nike, Samsung, etc.

But today’s new generation of innovators knows that innovation is no longer limited to the domain of companies who makes things you can see and touch.

The clothing retailer Urban Outfitters, for example, has grown from under $500 million in revenue to nearly $3 billion over the past ten years. Not only does the company consistently grow faster than the competition, they are also significantly more profitable.

I asked the CEO to explain his success. He seems to have a secret formula. Why aren’t competitors copying him? He gave me four reasons:

1. While his main competitors want to appeal to a broad customer base, Urban Outfitters cares only about one: college students. This means that for a competitor to copy his strategy they would have to give up selling maternity wear, baby clothes, and ties. A choice too expensive for his competitors to consider.
2. He sells used clothing while his competitors only sell new clothing. For a competitor to copy this element of Urban Outfitters strategy they would have source old jeans, ship them to the U.S., wash them, dry them, iron them, measure them, SKU them, and sort them before sending them out to their stories. This is enormously disruptive to the well-oiled supply chain competitors have spent decades refining.
3. Though his competitors hire managers from business schools, he hires from design schools. He looks for managers who have a natural aesthetic sense. So he can give them more leeway in how they design their stores. They can bring in artifacts from the streets and put them on display, they can play their own music. Traditional retailers can’t trust their managers to do this because they hired business people not artists.
4. As a result of this managerial freedom, every Urban Outfitters looks a little different while his competitors’ stores look the same. And for Urban Outfitters core customer – college students – this is really important.

The trick behind the success of any fast-growing, disruptive company is to do things your competition, being smart and well-funded, will choose not to copy. The trick is to find the courage to think beyond the obvious choices and introduce a set of “fourth options.” This is AFLAC offering cancer insurance in Japan at a time when no one else would (today, Japanese cancer insurance is the key driver of AFLAC’s business). This is Common Bond disrupting the student loan business by enabling direct alumnus-to-student lending.

The “fourth option” is the option others don’t see and don’t expect. Your competitors contemplate three choices and feel satisfied that they are considering enough. But the strategic innovator is not satisfied. She asks, what else? What other option are people overlooking?

We’ve helped innumerable companies find multi-million-dollar “fourth options.” The process takes work, but it is not difficult to do once you understand the process through which “fourth options” emerge. Let’s take a look at Google’s Android mobile phone platform to break the process down.

Google decided to enter the mobile phone war in 2007, when RIM’s blackberry was the dominant player and Apple was about to launch the first iPhone. First, Google recognized the strategic threat/opportunity: if they did not remain relevant in a mobile world, their advertising might dry up.

Then Google created a compelling vision: hundreds of millions of mobile phones running on Google’s software so the company is first in line to feed them advertising.

Then Google tried out a sequence of “fourth options”:

1. While competitors build phones (RIM, Nokia, Apple), Google decided just to build software. It briefly stepped into handset production, but soon exited.
2. While competitors protected their proprietary operating system, Google decided to give it away for free.
3. While competitors, particularly RIM, focused their sales efforts on IT departments, Google focused on consumers.

The result: today well over 50% of smartphones in the world are based on Google’s Android operating system, significantly more than any other competitor, including Apple.

“Fourth options” work because competitors resist copying them. They are anchored away from reacting by their prejudices and commitments.

To be great, to grow rapidly, to significantly impact your market and our world, find the courage to think beyond the obvious choices and find your “fourth option.”

There are a number of habits – which we discussed in detail in my recent Securities Industry Institute (SII) class – that derail your teams’ efforts to find a fourth option. Here are four things you can do to help sidestep these habits and discover your fourth option:

1. Define the “mess”: collectively describe what will happen if you continue with business as usual and make sure people reach a state of discontent
2. Paint the ideal: create a compelling, exciting, vivid vision of an ideal future that you are all committed to winning
3. State the obvious: List out the obvious choices, what your competitors do and what they expect you will also do
4. Ask uncommon questions: In my SII workshop I introduce key questions that unlock fourth options for participants like “Where is the next battleground?” “Who else benefits if you win?” and “What can you create out of nothing?” Asking different questions – more precisely introducing new narratives into the conversation – naturally leads your team to unexpected options.

Kaihan Krippendorff is a business strategist, best-selling author and consultant. He is a visiting professor at SIFMA’s Securities Industry Institute (SII), the premier executive development program for securities industry professionals.

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The Fourth Option – The Source of Innovation originally published by SmartBlogs

“21,000 gallons of sewage
One ton of garbage
170,000 gallons of wastewater from sinks, showers and laundry
More than 25 pounds of batteries, fluorescent lights, medical wastes and expired chemicals
Up to 6,400 gallons of oily bilge water from engines”

Cruise ships haven’t lost favor with consumers, they won’t be outlawed, and they won’t voluntarily quit. But they can improve their environmental footprint and efficiency. One company that’s done this is Disney, which scored highest in a report card from Friends of the Earth last year for its efforts in sewage treatment, water quality, cuts in air emissions and improvement from two years prior.

How did this happen? Some insight into that was provided Monday at the Milken Institute Global Conference in Beverly Hills, Calif., in a panel session that included Disney Chief Financial Officer Jay Rasulo.

Employees care what the company does: The new “counterparty risks” are focused on the supply chain, that companies are being responsible around the world, and this is something that employees are passionate about, Rasulo said. Employees will not only react to, say, a fire in Bangladesh, but their neighbors will, too, asking them about working for a company that lets something like that happen.

Make the argument for CSR from the CFO’s perspective: Companies can find it quite difficult to know how to weigh environmental and other social-impact issues, particularly in relation to financial considerations, Rasulo said. As a public company, Disney must also work in the best interests of its shareholders, so, “if you want to cut out certain activities, whether it’s environmental activities, whether it’s labor activities around the world … if you want to cut these out of your value chain, it can have a very big financial impact in the short run on your company,” Rasulo said. When these decisions rest with the CFO, however, all these questions are asked in one place.

Align strategy with messaging: At Disney, CSR is part of the CFO’s duties because “to be successful, ultimately successful financially and strategically, you really have to have a match between the authentic nature of your of message that is delivered” through products, the workforce and the CEO. And, because of the trust suppliers and customers place in Disney, anything that threatens that, such as problems in the supply chain, becomes not just a social concern but a core financial and strategic concern, Rasulo said.

Company structure can overcome the conflict between the bottom line and doing right: As mentioned, cruise ships are big business at Disney. The business “scores off the scale on value and entertainment.” But these type of ships have a tremendous carbon footprint, whether emissions or otherwise. “We wanted to expand this business, but there is yet to be discovered the technology that will yield a cleaner experience, a cleaner footprint for the business.” Rather than isolate this problem, or ignore it, Disney made the issue a companywide problem to solve. The company makes all business units assess environmental impacts in any capital requests — essentially, Rasulo said, an internally imposed carbon tax — “and one of the costs that they’ve got to consider … is the cost of us, today, buying carbon offsets to the footprint they create.”

Such managers don’t want to be taxed, even internally, Rasulo said, and so this policy spurs them to innovate around the problem where they might not have otherwise. “The goal is to really innovate and to change the business model such that you don’t have to worry about [carbon issues].”

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How Disney built environmental concerns into its financial planning originally published by SmartBlogs

CME Group Executive Chairman and President Terry Duffy

SmartBrief caught up with CME Group Executive Chairman and President Terry Duffy this week on the sidelines of the Milken Institute Global Conference. In Part one of this two-part interview, Duffy addressed the evolution of leadership in the exchange world. Today he chats about regulatory reform, the London Interbank Offered Rate and social media.

We are coming up on the three-year anniversary of the Dodd-Frank Act. What did Dodd-Frank get right?

The implementation of the first phase of mandated clearing went into effect in March and came off without a hitch because the central clearinghouses that are involved in it have been doing this for a lot of years, just using futures. We take our risk models and deploy them toward swaps. Obviously you have to add in a deeper cushion of liquidity with the swaps versus a standardized futures contract, but you are basically deploying the same kind of risk-management strategy.

One of the problems with swaps is that they were “marked-to-myth” instead of “marked-to-market.” What we do is mark-to-market and do the risk management. Those are all good things related to Dodd-Frank. Even some of the people who were opposed to Dodd-Frank would still think that is a good thing because you want to know the value of a product. When you’re marking it to a myth, it’s really not good for anybody.

What are your thoughts on what Commodity Futures Trading Commission Chairman Gary Gensler said recently about revamping Libor so it is based on transactions?

First of all, Libor has hundreds of trillions of dollars benchmarked to it and another $70 trillion in cash benchmarked to it. A lot of these contracts go out years. To try to unwind that and say that we have to have a transactional vehicle in order to price all these instruments overnight is a pretty daunting task. You hate to throw the baby out with the bath water. What they are doing is making some changes to the way they calculate Libor to take out the inherent conflicts of interest and make sure everyone is comfortable with the way things are benchmarked. … If you were creating something today, you’d probably want something that was more transactable. But that is not the case, so we have to look at how we are going to transition.

Do you have any concerns about other regulatory reform efforts taking place around the world?

My concern is timing on [the European Market Infrastructure Regulation] and [the Markets in Financial Instruments Directive] and efforts like that. You have to make sure that the coordination is similar with the U.S. as we implement these reforms. … We passed Dodd-Frank three years ago. We’ve written up a good portion of the rules and we are starting to implement them. Yet, we are still not seeing some of the roll out coming out of Europe. You could have an inherent regulatory arbitrage built into that, but I hope that is not the case. Hopefully we will get more uniformed rules across the globe because that’s what makes sense for the participants.

During one of your panel discussions here at the Global Conference, CFTC Commissioner Bart Chilton talked about the hack of the Twitter account belonging to the Associated Press that resulted in a tweet going out that said the White House had been bombed and President Barack Obama had been hurt. That tweet moved markets. What is your opinion of the role social media stands to play now that the Securities and Exchange Commission has given firms the green light to dispense investor-related information via platforms like Twitter?

It’s like any other new technology in that you have to be aware of what you are accepting. How true and how factual is it? You have to be careful. I think we need to walk a little slower before we start releasing all our information via Twitter. Operational risk is a big problem that we all have and if somebody can get into the Associated Press account and hack the information they hacked, that can be very damaging information. I am surprised markets didn’t react more to what was said in that tweet. The markets almost looked at it and said, “There is no way that is true.” But at the same time, if you are trading and you have your algorithms based on Twitter, you’d do a lot of strange things if that came across your wire.

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CME Group’s Duffy talks Dodd-Frank, Libor and Twitter originally published by SmartBlogs

CME Group Executive Chairman and President Terry Duffy

SmartBrief caught up with CME Group Executive Chairman and President Terry Duffy on the sidelines of the Milken Institute Global Conference. In Part 1 of this two-part interview, Duffy talks about leadership in the exchange industry. In tomorrow’s Part 2, Duffy shares his views on what Dodd-Frank got right, Libor reform and the role Twitter stands to play in the financial markets.

How has leadership in the exchange world evolved during your time in the industry?

We walk a very fine line. What we never want to do is disintermediate our futures commission merchants community. … When you are working with a big bank and you are working with their clients, you must work together. I think that is different today than it has ever been in the history of our business. An exchange used to be just four walls for gathering price. Now you have to go out and cultivate clients. We do that via partnerships with our FCMs and I think it is the most important thing we do.

CME Group has a presence in around 150 countries. How do you manage such a global business?

We all have operational risk. Most of it is in technology in today’s world. Obviously you aren’t sending people all over 150 countries. You are deploying your technology, building out telecommunications, making infrastructure investment and then cultivating clients in different parts of the world. You have to differentiate yourself. You have to have a world-class trading engine, a world-class clearinghouse and world-class risk management procedures and protocols.

Here at the Global Conference, we are surrounded by leaders from all walks of business. What is the best piece of leadership advice that you can offer?

The best advice I’ve got on leadership is something I’ve learned on my own, which is discipline. You need to have discipline in order to be successful. I truly live by this: If you don’t have an exit strategy before you enter into a trade, you will always fail. And I look at business the same way I look at trading. You must have an exit strategy before you deploy a strategy in your business. A lot of things don’t work and a lot of people don’t have the discipline to admit that they are wrong. That is the hardest thing for anybody to do. It’s hard for all of us. I am not afraid to do that and I think that is one of the things that has helped me throughout my career, whether it has been in trading or management.

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CME Group’s Duffy talks leadership in the exchange world originally published by SmartBlogs

Who are the do-it-yourselfers? Does it depend on the type of work?

Interior painting

A relatively quick, easy way to change a room dramatically without spending a lot of time or money is to repaint the walls. These projects can often be done in just a day or a weekend — depending upon the commitment and skill of the painters. The biggest challenge is usually selecting the color and doing the preparation work. Where do these do-it-yourself painters live?

Interior painters live all across the U.S.; large concentrations are in the Northeast corridor as well as in pockets of California and around Denver. Households in ZIP codes 08510 (Millstone, N.J.), 46814 (Fort Wayne, Ind.), 76034 (Colleyville, Texas) and 99516 (Anchorage, Alaska) are twice as likely as the average American to paint the interior of their homes themselves.

Click on image to enlarge map.

Who is most likely to paint the interior of their homes themselves? Esri developed a Tapestry Segmentation system that classifies U.S. residential neighborhoods into 65 unique market segments based on socioeconomic and demographic characteristics.

Residents of Boomburbs, Cozy and Comfortable, Green Acres, Prosperous Empty Nesters, Sophisticated Squires and Suburban Splendor neighborhoods are one and a half times more likely than the average American to paint the interior of their homes themselves. All of these neighborhoods represent a cross-section of demographics; however, many households have higher-than-average median incomes.

Boomburbs communities are home to busy, affluent young families with young children who live an upscale lifestyle. Cozy and Comfortable neighborhood residents are settled, married and working in suburban areas of the Midwest, Northeast and South. Many couples still live in the pre-1970s, single-family homes in which they raised their children. Green Acres neighborhoods are a “little bit country,” in pastoral settings of developing suburban fringe areas, mainly in the Midwest and South. Residents of Prosperous Empty Nesters neighborhoods are educated, experienced, and enjoying their transition from child-rearing into retirement. Sophisticated Squires residents are educated, married-couple families that hold good-paying jobs and are willing to commute longer distances to maintain their semi-rural lifestyle. Suburban Splendor residents are successful suburbanites who live in growing affluent neighborhoods.

Because they rent and have relatively low incomes, home improvement projects are not a priority for residents of High Rise Renters, Inner City Tenants and Modest Income Homes neighborhoods. Their median household income is less than half of the U.S. median of $50,157.

High Rise Renters neighborhoods have a diverse population and are located in densely populated urban communities. Inner City Tenants neighborhoods are a mix of young, multicultural, married and single residents who rent economical apartments in mid- or high-rise buildings. Modest Income Homes neighborhoods are in older suburbs of metropolitan areas and mainly consist of single-family housing.

Bathroom remodeling projects

Bathroom and kitchen remodels are the most common home-remodeling projects. These can significantly affect the daily lives of residents and, if done properly, can often increase the value of a home. A bathroom remodel can cost a few thousand dollars to tens of thousands, depending on the size of the bathroom and the quality of the interior finishes such as fixtures, cabinetry and flooring chosen by the homeowner. The website BathroomRemodel.com states that an average small bathroom remodel using a contractor costs between $5,000 and $8,000. Many homeowners do not want to spend that much — or think they can make the changes themselves. Where do these people live?

DIY bathroom remodelers live all across the U.S.; however, people in southern California, parts of Nevada and Arizona, and southern Texas are less likely to remodel their bathrooms themselves. Households in ZIP codes 14059 (Elma, N.Y.), 27712 (Durham, N.C.), 44026 (Chesterland, Ohio) and 62563 (Rochester, Ill.) are one and a half times as likely as the average American to do a bathroom remodel themselves.

Click on image to enlarge map.

What types of homeowners are most likely to do a bathroom model themselves?

Residents of Exurbanites and Prosperous Empty Nesters neighborhoods are one and a half times more likely than the average American to do a bathroom remodel themselves. Residents of these neighborhood types are very concerned with their financial health, so they likely try to do things themselves to save money. Exurbanites are in affluent neighborhoods of empty-nesters and married couples with children. Many hold professional or management positions. Prosperous Empty Nesters residents are educated, experienced and enjoying transitioning from child-rearing into retirement.

Residents of City Lights, High Rise Renters, Inner City Tenants, International Marketplace, Las Casas, Laptops and Lattes, Metro Renters, NeWest Residents and Urban Melting Pot neighborhoods are the least likely to do a bathroom remodel themselves. Many of these households are located in large U.S. cities; except for the affluent Laptops and Lattes neighborhoods, these residents are young with modest incomes and tend to rent in multiunit buildings.

Kitchen remodeling

The kitchen is often the heart of the home. Remodeling a kitchen can greatly affect the flow of a household as well as increase the home’s value. The average cost of a kitchen remodel is $27,000, according to TheStreet.com. Because of the high cost, many want to save money on the remodel. Who does kitchen remodels themselves? Where do they live?

DIY kitchen remodelers are more likely to live in the Northeast and Northwest than in other parts of the country. Households in ZIP codes 34758 (Kissimmee, Fla.), 72058 (Greenbrier, Ark.), 85353 (Tolleson, Ariz.) and 87121 (Albuquerque, N.M.), are one and a half times more likely than the average American to do a kitchen remodel themselves.

Click on image to enlarge map.

Who is most likely to do a kitchen remodel themselves?

Residents of Industrious Urban Fringe and Midland Crowd neighborhoods are one and a half times more likely than the average American to do a kitchen model themselves. Family is central to residents of Industrious Urban Fringe neighborhoods, which are located on the fringe of metropolitan cities. Many homes, which are owner-occupied, single-family housing, are multi-generational. Midland Crowd neighborhoods are in villages and town in rural areas throughout the U.S.. Most households are comprised of married-couple families, half with children.

Residents of College Towns, Dorms to Diplomas, Laptops and Lattes, Military Proximity, Milk and Cookies and Urban Chic neighborhoods are the least likely to do a kitchen remodel themselves. Many of these Americans are young, have low incomes and atypical environments such as college life or military service. Because of their transient lifestyle and life stage, most are renters.

Why this matters

Home improvement stores such as Home Depot and Lowe’s are ramping up their marketing for the spring season, focusing on the DIY market. As the housing market continues to rebound, more owners are investing in their homes. Many don’t want to spend a significant amount of money on remodeling projects, so they use their own skills to do the work. Many rely on home improvement stores for advice and to purchase tools and materials. Stores that offer how-to classes in the store or on the Web will encourage more novices to tackle simple projects. It is critical for these retailers to understand the markets where their stores are located — and where to open new stores. This location-based demographic and lifestyle information can help them make good decisions.

Retailers should have different messaging for their marketing based on the demographics of their stores. Some may be in areas where people are more likely to remodel a kitchen or bathroom — or paint on their own. Ads in these areas should focus on the types of projects people would most likely do — or encourage them to try another project. Stores in areas where people would prefer to contract for projects should focus on selling complete packages of designs that a contractor can use.

More information about Esri’s data can be found at www.esri.com/data or to learn more about Esri in general, go to www.esri.com.

Pam Allison is a digital media, marketing strategist and location intelligence consultant. You can visit her blog at www.pamallison.com.

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The economic makeup of the DIY crowd originally published by SmartBlogs