Month: March 2017

A Path Forward in Uncertain Times

Some news outlets have become arguably hyperbolic in their coverage of events in the United States as of late.  Globally, things aren’t much more stable.

Let’s revisit Hugh Courtney’s four-level framework to assess just how uncertain the present business environment really is.  It’s important to clarify that the framework applies to the level of “residual uncertainty” only.  “Residual uncertainty” what’s unknown after taking steps to eliminate variability.  For example, it’s possible to reduce uncertainty by conducting or buying market research, studying price elasticity, or researching activities of competitors.  Once obtaining that information, what remains is residual uncertainty.

  • Level 1 – Relative Clarity – The level of uncertainty with which most of us are familiar. Consider expanding in to a new product category. It’s possible to study the performance of similar lines at retail or among comparable direct sellers, survey Distributors, and thoroughly research the investment required to develop and launch a collection.  That leaves relatively little residual uncertainty in most business contexts.
  • Level 2 – Alternative Futures – A situation in which a business may identify multiple likely scenarios, which are clear and discrete. For example, if there were three (3) variations of a bill that would regulate direct selling in play, it’s likely possible to develop a finite set of fairly clear future scenarios for how to move forward.
  • Level 3 – Range of Futures – A future determined by several key variables, with a likely range of outcomes along a known continuum. For example, trying to decide how to expand a multilevel opportunity from the U.S. into Mexico may seem fairly intimidating right now, with talk of tariffs, the volatility of the peso, and changing perceptions of the United States among Mexican consumers.  But research and scenario analysis can help narrow down risk points and identify a possible range of outcomes on key variables.
  • Level 4 – True Uncertainty – When multiple variables stack up in an environment where it’s not possible to anticipate a range of outcomes whatsoever. If you initially went right to Level 4 after reading the news this morning, you’re probably not alone.  But Level 4 is really quite rare, and it applies to fairly unusual situations.  Courtney points to the situation facing businesses after the fall of an unstable government in which regulations, supply chains, currency stability, etc. are unknowable.  We are most certainly not in that situation today.

In looking across these levels, most Direct Sellers may be facing strategy and operational planning challenges in Levels 2 and 3.  We don’t yet have enough information about key policy and economic decisions to have “relative” clarity at Level 1, but we are also not truly in uncharted territory at Level 4.

The planning techniques that accompany each level of uncertainty vary, but at Levels 2 and 3, the use of game theory, sensitivity analysis, and scenario planning become relevant.  Let’s revisit the Mexico market entry example.  In this Level 3 scenario, a company’s strategy team would be well served to identify the areas with the most risk, such as currency exchange rates, tariffs, and consumer adoption.  Building models that allow the team to vary these quantitatively will allow it to better evaluate the venture and determine which ranges would yield positive returns and which would not.

In looking at our present situation, we’ve identified some areas to watch that have the potential to impact Direct Sellers most:

  • Changing Consumer Demand & Sentiment: Some view Direct Selling as a countercyclical industry, citing increased interest in earning money via a Direct Selling opportunity when unemployment rates rise.  While anecdotal evidence would support that, this equation is often much more complex, and it depends heavily on the product, plan, and methods at a given company.  Many Direct Sellers offer premium quality and premium priced items, which tend to thrive in good economic times and suffer to some degree in recessions.  Further, the degree of “opportunity” or earnings focus in a company’s promotional mix may influence how successful it is in capitalizing on a recession.  Forecasts put U.S. economic growth at 2.3% in 2017 and 2.5% in 2018—a cumulative increase of 0.5% since before the election.  [4] That may bode well for product-focused direct sellers in premium categories.
  • More Favorable U.S. Regulatory Environment: Acting Chairwoman Maureen Ohlhausen is expected to take over control of the Federal Trade Commission (FTC), one of the primary regulatory bodies impacting our channel.  We recapped the prior Chairwoman, Edith Ramirez’, guidance in prior messages, which promised a renewed focus on customer sell-through and earnings claims.  It’s expected that the FTC may approach Direct Selling less aggressively in the future, as Ohlhausen is viewed as a proponent of self-regulation.  She spoke to the Direct Selling Education Foundation on the parameters of effective self-regulation in April of 2015.  [5] Donald Trump has also demonstrated an affinity for our channel over the years.  For example, the Trump brand was licensed to Direct Seller Ideal Health in 2009. [6]
  • Trade Instability: One of the major risk areas identified by economists is the “fraying” of cross-border economic integration. [6] Direct Sellers’ supply chains are often global, and reversals of prior trade agreements, imposition of new tariffs, and other new forms of taxation can dramatically influence cost of goods.  Further, the impact of a trade war could spread to the macro-level environment, raising prices of important commodities and reducing available household income.
  • Currency fluctuations for global Direct Sellers – The U.S. dollar has appreciated in real terms by over 6% since August of 2016, per the International Monetary Fund (IMF). [6]  Further shifts in currency values will make repatriating earnings or obtaining reasonable margins on U.S.-made products in overseas markets a challenge.

With these risk areas in mind, we’ve identified several areas for focus in strategic and operational planning.  Each business is unique, so these may not apply to your specific situation.  In general, these are fairly risk-averse opportunities to which to allocate resources:

  • Supply chain diversification and flexibility: With the possibility for abrupt changes in global trade more pronounced than before, efforts to decentralize product assortment planning and sourcing start to look more attractive. Market-specific products often strengthen the businesses of Distributors, they can also carry attractive gross margins and help mitigate currency risks.
  • Implementing technological tools to “modernize” the channel: Technologies that mobile-enable the Distributor and Customer experiences, help connect the home office to the field, and that allow for more robust business analytics should be “safe” investments regardless of market uncertainty.  General trends in how the public consumes information, shops, and connects to each other aren’t likely to change much, and meeting those changing expectations will be imperative to Direct Sellers.  That means more mobile tools and simpler, easier-to-use technology will remain important.  Furthermore, equipping the home office with analytical tools to understand and respond to a changing environment could pay off in changing times.
  • A renewed focus on the U.S. market, with an emphasis on growing customer lifetime value through the Distributor base. The current consensus among 57 nonpartisan economists indicates that expected reductions in taxes paired with increased investment in infrastructure should boost economic growth in the U.S. through 2018.  [7] With domestic growth forecasts looking more favorable, and the risk of costly regulatory investigations or penalties reduced, the U.S. remains an attractive market for Direct Sellers.   Strong purchasing power by U.S. consumers should support customer-centric strategies via healthy Distributor businesses.

How we can help

Hepfer & Associates has deep experience designing and implementing comprehensive strategic planning processes for emerging and global direct sellers.  These processes take uncertainty into account while ensuring that there’s a clear tie between business objectives and metrics needed to measure success.  When it comes time to drive strategic initiatives forward, we have the in-house expertise across the Direct Selling value chain, from product development to supply chain optimization to technology.

 

[4] International Monetary Fund, World Economic Outlook, January 16, 2017

[5] Washington Post, “The Trump Network sought to make people rich, but left behind disappointment,’ March 23, 2016

[6] Forbes, December 5, 2016

[7] Wall Street Journal, The Outlook, November 13, 2016