The Risk of Cyberwarfare

In the event you have not been keeping in touch with current events, President Obama has expressed displeasure with the current Syrian regime for it's alleged use of chemical weapons on it's own population (this claim is substantiated by Doctors Without Borders first-hand observations, in addition to Israeli intelligence info - both of which are very credible).  President Obama has stated that this action would be, "crossing the red line," and has inferred that military retaliation is warranted...although the terms of this have been vague, at best.  In any event, the pure might of the US military, when involved in just about any type of assault, is uncontested and cannot be stopped once set in motion.....we have seen this in both Iraq and Afghanistan. It would be reasonable to ascertain that if the US chooses to intervene with Syria, there would be swift and uncontested consequences from a military perspective.....but that is not the main issue.  Iran will likely get involved, which in turn, could involve Russia and China.....as you can see, this could turn into World War III rather quickly.  However, global military conflict is not the main concern.......or at least, it should not be.

In 2008, the Rand Corporation authored a paper about the dangers of a new type of war, called Cyberwar, for which is now a household term.  Some of the key elements of Cyberwar, making it different from conventional war, are:

• It is relatively inexpensive to wage, versus the vast costs of an army, navy, and air force.  Concurrently, it is expensive to defend against cyberterror, as the variables of vulnerability are drastically different
• The technology used to wage this war (coding) is easily transferred from creator to "highest bidder", versus conventional military technology which is tangible, large, and easily tracked
• Cyber attacks can be waged from just about anywhere that has an internet connection, versus conventional warfare which must be waged in a theater of combat
• Cyber attacks focus on areas of vulnerability and are constantly changing depending on the target, versus a standing military force which may have weaknesses but do not change regularly
• As more nations become reliant on computer technology, a cyber attack can cripple infrastructure whereas a conventional war will require pinpoint and extended military strikes to accomplish the same

Iran was the "lucky" recipient of the Stuxnet, which was specifically targeted at their respective nuclear facilities....it was revolutionary, paralyzed their reactors, and was introduced without military intervention (although many of the details of this are still classified, and my theories of how it was introduced are pure speculation).  Stuxnet was a game changer, and proved to the world that something like this was possible.  As we all know, computer programmers worldwide are getting better and better....and if you build a bigger mousetrap, the mice in this game simply get smarter. There is (and never will be) such a thing as a completely hack proof system, but it can be made more and more complicated.

The main concern on Wall Street is that military conflict can possibly disrupt oil supplies, as indicated by a $6 increase in the cost of a BBL of crude this week (prices have subsequently simmered down to an "affordable" $108.50/bbl this AM).  If indeed military conflict happens, this can and should be expected....simple laws of supply and demand, combined with the increased risk of transport of oil.  This, in turn, will impact business, and likely will affect the already shaky recovery from the 2008 Financial Crisis.  However, I feel Wall Street is missing the bigger risk......the possibility of a cyber attack by either a nation (Syria or Iran) or rogues acting within as a form of rebellion. 

Cyberwar is no different than cowardice acts of terrorism....The goal is to attack the soft underbelly of society in an area in which it is more vulnerable.  The targets are relatively easy to achieve, and the resulting widespread panic and disruption are the main goals.  Based on this premise, it is reasonable to conclude attackers will likely never pursue the most well-defended networks.....the Pentagon and White House come to mind as the most guarded and will likely require the greatest degree of effort to crack, as they have virtually unlimited resources that can be used to defend against such an attack.  That being said, the greatest opportunities will be the less well-defended targets, such as municipalities and business which lack the degree of resources that the Pentagon has.

I still hold very firmly the belief that the United States Military is uncontested in the world, and will be victorious in every conflict it is drawn into.  Iran and Syria would fall as quickly as Baghdad, but their population represents a different challenge - the presence of skilled programmers that could become cyber warriors.  The effects could be devastating beyond any calculation Wall Street has made.  Syria and Iran pose a threat not because of their military, but rather, the potential they have with their computer geniuses.  The stakes in this one are extremely high......

If You're Happy and You Know It, Go See Cal!

"Give a new car to your wife, she will love you all your life, go see Cal, go see Cal, go see Cal!"

If you are around my age and grew up in Southern California, chances are you recall the icon of used car sales, Cal Worthington.  In a recent survey I did with my co-workers, when I asked if they remembered Cal, they all said, "and his dog Spot?"  It is simply beyond debate that the marketing approach by Cal had an impact on an entire generation.......remember, they are open until midnight on Bellflower Blvd. in Long Beach....little things about this are always remembered by my generation.

In addition to his dog Spot never being a dog, one of the most captivating parts of Worthington Ford was the jingle in his commercials....it was fast, it was catchy, and chances are if you are reading this posting, you can hear the music in your head right now!  But the part that is really compelling is the origin of the music....remember the song, "If You're Happy and You Know It, Clap Your Hands"?  Well, that was the origin of the "Go See Cal" jingle.....speed it up a bit, give it a country twang (after all, Mr. Worthington is a Texan!), and you now have a song that everyone recognizes in their sub-conscious.  When people would hear kids singing "If You're Happy," they might even think about purchasing a car.  This ties to the fundamental principle of marketing.....the needs analysis.  Folks may have been thinking about purchasing a car, but the simple jingle (or something similar, like the kids singing the Happy song) may compel someone to transition from awareness to making a buying decision....and hopefully to Long Beach!

Where Mr. Worthington is a true genius was understanding that the car buyers were different, depending on their individual circumstances....hence his acres of cars, new and used, with prices for just about everyone under the sun.  His product offering is one of pure variety, but the main key was to get folks in the door in the first place.....getting them to "Go See Cal!"  In my opinion, true genius of a better time! Watch the full commercial!

Currency Exchange 101 and Uncle Ben

We all hear that the US Dollar is either strong or weak, and this has an impact on foreign trade, currencies, and profits.  I'll be very honest - this is a topic I have always struggled with....the weaker v. stronger US Dollar versus different currencies, blah blah blah.  Considering Mrs. Jackson and I have a forthcoming trip abroad, I now have a vested interest in developing an understanding (although the impact is minimal, as our travel plans are already established and currencies have been paid for 6 months now, so present changes yield no effect).  To develop my own understanding, I decided the best way to demonstrate this is by modeling how it works in Excel.  In the models, we will examine the impact of currencies, both weak and strong, versus a relative currency.

In the first example, we use the Chevy Spark as the baseline unit of measure, in terms of relative value (i.e. what it costs to purchase).  For this example, we will compare the relative purchasing power versus the Japanese Yen.  First, one must establish baseline values of the currencies against one another, as this will measure changes and their relative impact.  Second, there must be a unit of value that the currency will be measured against, as in the following table:

First, the baseline of relative cost is established based on exchange rates, so one can determine the cost of an object of value (this is the common in the equation) when compared to a foreign currency (exchange rate is variable).   When the demand for the US Dollar is weaker, you will be given fewer Japanese Yen in exchange, thus resulting in the export vehicle requiring fewer Yen to purchase.  Conversely, when demand for the US Dollar is greater, the same vehicle will cost more Yen.  Therefore, it can be safely concluded that a weaker US Dollar makes exports more favorable.

Now, let's refer to the import example.....

In this example, the constant (Camry) is priced in Yen, and translated to US Dollars.  When the dollar is weaker, the relative cost of a Camry in US Dollars goes up roughly 7%.  Conversely, a stronger US Dollar results in a relative decrease of cost in the same good.

So how does Ben Bernanke (aka Uncle Ben) figure into all of this?  Simple....he prints US Dollars, and under Quantitative Easing, he has printed LOTS of them.  As you know from supply and demand 101, the more of a specific item of value is in the market, the less it tends to be worth in relative means, making the US Dollar weaker.  As a result of this, it can reasonably be deduced that imports to the US will become less favorable, and exports from the US will become more affordable.  As we know, many developing nations have labor costs which are substantially less than those in the United States, this may help contribute to a competitive advantage in trading.....until a nation such as China files a complaint with the WTO for the US Fed actively manipulating currency.  In the meantime, say thanks to tourists who vacation in the US, as a result of their currency having greater buying power than it may have in the past.

Make sense now?

JC Penney's "New" Strategy

Seems like just about a year ago, JC Penney was taking the stance of eliminating sales, and offering every day low prices.  This thinking was radical, and seemed to work well for Wal-Mart (whom has always been in a low price leadership position and, as far as I am aware, has never had sales), so the logic made sense for JCP and their former CEO Ron Johnson.  Mr. Johnson's decision was a bold one, as it was geared towards eliminating "fake inflated prices" and focusing on core values.  The name of this campaign was the Fair and Square Plan.  Genius, right?  Not so fast......

Fast forward a year later.  JCP lost over $1bil, department store sales were down, and significant market cap was lost.  17 months into his tenure, Mr. Johnson was shown the door.  Although I hate to see a CEO leave a company in a very short period of time such as this, the bottom line is just that - the bottom line.  A CEO is required to produce revenues for his or her company, and if they fail to do so, they must be shown the door for failure to perform their job.  There are many who feel executive compensation is out of control (and my response to this depends on the situation), but one must also consider the risk involved, as well as the responsibility for delivering results of the entire organization - if the CEO fails, they are fired. 

In the case of Mr. Johnson, it kind of reminded me of being a captain of a ship making a daring move....a ship does not move quickly, once the decision to make a move is made it is challenging to change course, and the end results can produce severe consequences, both good and bad.  History is filled with daring maritime moves which come to mind....HMS King George and HMS Rodney (they are the ships that sank the Bismarck), the Costa Concordia (wreckage off the coast of Italy is still being removed), the Titanic are a few.  In some instances, there were positive outcomes, and in others, there were negatives. 

JCP and the Fair and Square Plan were a little different than the consequences of the ships above, as there were both positive and negative outcomes.  On the negative side, there are the obvious answers - substantial loss of revenue, market cap, and market share - all of which led to Mr. Johnson's termination.  However, the strategy highlighted  a major changing demographic, which is the evolution of online shopping and decreasing market share of the traditional retail department stores.  One can see this in the market with the rise of institutions such as Amazon.com and Zappos, combined with the substantial decline of old-school stores such as Sears and JCP. 

One final note to consider with this case is the rise of technology and smart phones.  Many successful retailers have discovered that to be competitive, it is imperative to leverage technology as consumers tend to like their gadgets.  The online retailers mentioned above have demonstrated mastery with this new technology and have successfully utilized it as a competitive advantage.  In addition, many smart retailers have adopted electronic coupons which not only cut the cost of paper printing, but can be delivered directly to the smartphone many of us have become so dependent on.  This is a major point for the JCP case - coupon use is on the rise (as tends to be the case during a recession), and the perception of a sale can carry a business during such times of financial hardship.  Let's be honest - everyone likes a deal, and a coupon is one of the best ways to let the consumer think they are getting a great deal. 

Mr. Johnson made some radical changes to how JCP did business.  Let's be honest - radical change will result in either radical success or substantial failure, as there is no real middle ground.  I think it would be appropriate to give him credit for understanding that the traditional model of business was no longer viable, and that for the organization to survive, radical changes needed to be implemented.  However, the changes he chose were too radical as demonstrated by substantial decline in sales.  Perhaps could have been phased in over time to be successful, but then one must consider the brand identity associated with JCP versus that of a Wal-Mart (low-price leadership).