According to Pulitzer Prize winner and The New York Times columnist Thomas Friedman, the technology you use every day -- from computers to cell phones to Internet browsers -- has changed not only how you work, but also how businesses compete. It has certainly removed barriers to trade -- making it easier to sell digital cameras in India -- but it has also broken down the geographic and cultural barriers that previously kept countries like China and India from competing on the same level with western business. -The World Is Flat: A Brief History of the Twenty-first Century.
Last week Ken Verrett introduced the concept of brand and generic products in the market place. This week, Ken discusses how the lending industry has taken advantage of market opportunities to modify their businesses to better compete in today's Flat World.
Brand products are created as a result of a marketing campaign to distinguish the brand from their competitors. The perception must be created in the consumer's mind that there is a difference between Cambell's soup and the others on the shelf. Once that perception is achieved in the market, the higher price is justified by that perceived difference.
Generic products make no attempt to create such a perception. It is what it is. We can't conclude that generic is a poor or unacceptable product...there are certain standards that must be met for the product to be offered and accepted in the market place. But generic products didn't have the investment in marketing necessary to differentiate that product from the others on the shelf, so no price premium can be earned.
Part of the marketing campaign for the brand product is to suggest that there is such a difference by inference if nothing else. It's a perfectly legitimate marketing tactic as long as it is done by continuing to reinforce the positive attributes of the brand. It is not legitimate to accomplish the differentiation by attacking the generic product. That brings law suits.
We also discussed the evolution in the finance industry over the last few decades, how the changes shaped by technology created opportunities to change the fundamental way those institutions conducted business. The lending industry has taken advantage of those opportunities to modify their businesses to better compete in today's Flat World. Local and regional financial institutions sold out to money center conglomerates on the left and right coasts. Loans were modified to be grouped as inventory in packages (CMO's) to be sold in the secondary market.
The lending industry became more like the local retailer, with profits made from inventory turns, not as much from net interest margins as previously. The loans, now inventory items, had become commoditized; a generic product had been created. That is a truly fundamental change in the lending industry.
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