WTH is TAM, SAM, SOM?

This is a re-post from waaay back in 2005, which was my most popular post ever.  Google search picked up on it, and I would get occasional emails from students asking more questions.

 So posted here again, although my guess with almost 20 years more information on the web there are a lot of other places to find this info, so doubt it will get traffic today.

Professor Michael Porter is still alive today at 77.

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From the mailbag: Would you recommend a good book or two on the TAM/SAM/SOM/3C business planning process?

People make fun of scientists and engineers with their use of acronyms, but marketing has plenty of its own, and someone not in marketing may wonder what the hell they mean.

To answer the question, most marketing books today typically try to push a "new" concept - guerilla marketing, viral marketing, etc. - rather than this basic stuff, so I'll give a quick run down on these items using some real-world examples before getting to a recommendation.

Scenario - You market a widget for the cellphone camera market. Your widget is only used in phones that have cameras embedded in them.

TAM - Total Available Market - In this example this would be the total cellphone market.

SAM - Served Available Market - This would be cellphones with cameras since your product is only used in them.

So the first question, is why distinguish between TAM and SAM, especially since you don't even sell into phones without cameras? The answer is that one way to grow your revenue without increasing market share is to grow the number of cellphones with cameras (or the penetration rate). So the SAM/TAM designation is used to distinguish between actually growing your market share versus just growing your volume. It also allows you to look at strategies on how to push penetration for your served segment instead of just market penetration if you happen to be in a market where SAM penetration is stuck. This chart shows the TAM/SAM breakdown for cellphone cameras:




Obviously there are plenty of markets where the TAM and SAM are the same.

SOM - Share of Market - this is just the market share you have in your SAM, or in this case your total volume versus the total SAM volume. As noted above, by comparing your SOM to both your SAM and your TAM, you can get a feel if you are really growing market share, or just increasing volume along with the total market growth.

Okay so far? Next we get to the 3Cs. Everyone knows the 3Rs, but what are the 3Cs of Marketing? Customers, Company, and Competition. The idea is that when doing business planning you have to do an analysis and get an understanding of these items when creating a business plan. So in our case you would do an analysis of customers Nokia, Samsung, Motorola, etc. Look at what your competition has on the market, what their roadmaps are, and also understand what your company's products and roadmaps are and how they compare and serve the market. In doing this analysis you would probably do the 4Ps: Product, Pricing, Placement and Promotion.

When I do business planning, however, I like the model presented by Michael Porter in his book Competitive Advantage. This is a pretty hefty read, and a little dated now, but the model itself is timeless and what I use for business analysis. It expands on the 3C concept to understand an industry through its entire value chain:



The thing Porter points out with this model is that just understanding your competitors, customers and company is not enough. For example, can a supplier forward integrate into your market and become a competitor? Can a customer backward integrate and become a competitor? New entrants and substitutions are always a threat. And regulations by the government should always be considered since they can break - or create - entire markets on their own (v-chip makers owe their whole product line's existence to a government regulation).

Porter has some more recent books on this topic, and his model has been picked up by plenty of others, so I would suggest a look along this line of thought for anyone doing business analysis or planning.

Thinking More About Social Security

When I was 30 I didn't think much about Social Security (SS) except that I assumed that it would not be there when I retired.  So I started saving for retirement as if SS would not be there, or that the government would start means testing and deny benefits to anyone who had even a modicum of assets.

Over two decades later I can see the retirement light at the end of the work tunnel, and I find I want my  #)($*%# Social Security money!  Yeah, I planned ahead and I could live without it fine, but I've paid a lot into it for over three decades and I want back what was taken from me.  I am also tired of the free loaders who either never put in or took out a lot more than they put in, so I think it just fair that I at least get back what was stripped out of my paycheck for my entire career, plus interest.

But at this point I am actually not afraid of it not being there or being denied.  SS is too politically loaded for "major" changes for people already in or near retirement.  There would be old people riots and all sorts of politicians losing their jobs.  As usual the democrats are pulling out the scare tactics in an election year, but no one with any common sense believes there will be major changes.

Zman commented a bit on SS today, more about how Republicans basically allow themselves to be beat upside the head on this topic.  When democrats say the other side is going to "eliminate SS!", the Republicans don't say "LIAR!".  They say "well, you do know that the trust fund does need some minor changes to help solvency blah blah blah for ten minutes".  Retirees and near-retirees don't want nuance and statistics, the want assurances that they will keep getting their money, even if younger generations have to be screwed.

Which was my point in the comment section.  SS will be forced into some changes within ten years. What will happen is that anyone over 40 won't see any changes, but anyone younger than that will have a year or so added for "full retirement", then there will be a bump in social security withholding.  Note that the max income they take SS goes up every year WAY over the inflation rate, so a SS tax increase is already baked in to income, they will just raise how much it is.

I agree with the lunacy of even bringing this (SS) up in an election year as the discussion is nuanced. But SS will have automatic cuts in benefits starting about 2033. It’s written into law. And apparently this is not hand wringing BS, it’s going to happen if not addressed 

Like my own SS benefits way back when, the typical answer is to raise the age for full benefits for people under 30 by a little and raise the withholding tax a bit. This of course makes everyone on or near SS feel no pain and puts the problem on the young. It’s the baby boomer solution to everything and what will happen.

But there is time to do this after the election and have it done in the back room. Or kick the can to 2030 when cuts are imminent and everyone panics.

The general response to my comment is that nothing will happen until midnight before the automatic SS cuts start in 2033, so in a bit less than 10 years.  I will be eligible to take SS then but probably not taking it yet as each year you wait, the greater the monthly payout.

Avoid Target Date Funds

I'm a conservative investor, coming out on the side of "wealth preservation" versus "gambling".  But I was pretty lucky when I read an article and decided that "Indexing" was for me, plowing the vast majority of my equity investments into Index funds over 20 years ago.  It has been a great wealth builder, but whether this was because of John Boggle, who came with the concept of Indexing at Vanguard, or because everyone else on the planet piled into them over the past two decades is up for debate.

One investment where I wasn't so lucky was my kid's 529 college fund.  It didn't offer much except Target Date funds.  For those of you not familiar with the concept these are funds that invest in a mix of stocks and bond FUNDS with a target date in mind (for 529 the date they would start college, for retirement funds the year you retire).  The further out the target, the more stocks funds it holds to capture a higher risk/reward over time, the closer in the date the more bond MUTUAL FUNDS it holds.

And the "MUTUAL FUNDS" part of the bond investment is the main problem with these instruments.  Bond funds are risky!  I lost $10,000 in one week in a "safe" US bond fund when the Fed raised interest rates.  Sure, people made a ton when they lowered them due to ZIRP (Zero Interest Rate Policy), but bond funds have duration risk, which means that they will move up and down with more sensitivity the longer out the bond (or group of bonds) mature.

This is a long way to say that my kid's 529 invested over 18 years in a Target Date fund was a lousy investment due to duration risk.  It basically was invested in stocks when they went down, then investment into bounds right before interest rates went up since it was on autopilot.  That is not to say it appreciated some, but it could have done a lot better either actively managed, or if it had held bonds to maturity, not "bond funds".

Holding individual bonds - never bond funds - is now what I do with my personal assets.  Lesson learned.

My personal experience is reflected in a recent Barron's article, which had me nodding the entire time.  It is behind a paywall, but basically restates my folksy experience in a more professional manner.

Some say that many target-date funds are too heavily invested in a slice of the fixed-income market—investment-grade bonds—and that can leave portfolios overexposed to U.S. interest rates. They say investors could get higher returns over time and less volatility during periods of rising rates by owning a broader mix of fixed-income assets...or being actively managed.

Short Term T-Bills As a Good Investment

Wolfstreet confirms my investment strategy for the last six months of parking lots of cash into short term treasuries (T-Bills), or money markets that hold them and pay about the same.

I never bought into inflation coming down (I can see it with my own eyes), nor the Fed lowering interest rates multiple times this year (not for economic reasons anyway, politically they will be pressured to do one in an election year).  So I have lots of money in a ladder at 5.1-5.3% where one matures every month, which I just put it back into another T-Bill earning 5.1% or better.  Note I am in a high tax state so it would take a CD earning 5.5% or better to match a T-Bill.

The risk here is if I get caught with lowering interest rates then end up having to re-invest at a lower rate than if I had locked in a longer duration.  I am betting my own money that inflation isn't going anywhere and rates are not coming down.

My run-on sentence comment there:

I’ve been keeping a large pile in short terms and money markets that buy them since I never bought into the rate cut mania. I’ll make 5+ risk free all this year, just a question on when I lengthen duration, but won’t buy anything less than 5%, which I expect to happen further out the yield curve since inflation isn’t cooling and government spending keeps going through the roof.

Demand Limited Economics

(Updated to Remove Missing Links)

From an article no longer on the web:

What has changed in recent decades is that the mobility and automation of productive processes, combined with a glut of the supply of financial capital, results in a macroeconomic production function that is demand-constrained rather than supply constrained.

I have walked through empty malls with miles and miles of goods stacked to the ceiling, and no one around to buy.  We have global over capacity, and for the economy to run (or at least not break down) governments have to get more people to soak up this excess capacity.  So we have these perverse effects:

• The need for mass immigration, to create more consumers to buy crap
• The push for broken households, who spend more and save less 
• The push for more welfare and income distribution programs to create more buying
• The push for ever increasing amounts of consumer debt
• The push for ever more student loans
• The push for people to buy houses who shouldn't (yes, it's happening again)
• Ever increasing levels of government debt and monetary devaluation

The global economy is in a giant debt trap.  If consumers stopped buying the whole house of cards would come down. 

The Fallacy of "Green Jobs"

Every time I hear a politician talk about government spending to create "green jobs" I can't believe the illogic of the argument:

1. If "green" energy works, it will take the place of "old" energy - oil, coal, natural gas, etc.
2. So if green jobs go up, old energy jobs go down.  Best case there is a one-for-one trade off a lost carbon energy job for every green worker who gains a job.
3. If green energy really is more efficient, it means that the total energy needs of the U.S. will be supported by fewer people, so green energy means a net loss of jobs.

But at the end of the day "green jobs" is just a code word for government spending boondoggles that do nothing to help the employment picture, or create more energy, or bring energy costs down, but some people go along with it because it "sounds good".

In Case You're a Sound Sleeper

As a dedicated insomniac for the last decade I always have trouble sleeping.  But for those of you who have no trouble finding the Land of Nod, here are a few things to keep you awake tonight:

• Federal Spending vs. Median Income.  As the link of Ace of Spades states, "Holy Effin $&it!"

• Why the Fed's policies will collapse the economy.  Key thought of the article:

In a credit-driven monetary system, you can only get "inflation" (in the truest sense, where it flows through to wages and prices, thereby debasing - that is, helping - people pay down indebtedness) if there is credit expansion.


But when the limit of credit expansion is reached ...further machinations of this sort do nothing other than bankrupt the population.

We essentially have the Fed trying to create inflation in order to pump the economy and stabilize employment, but it isn't working because no one wants new credit.

So we have the government spending like mad, the Fed pushing ZIRP (Zero Interest Rate Policy) AND having bought all sorts of bonds (one type of paper) by issuing new money (a different kind of paper) through quantitative easing, and now hinting to do more.  And so far all of this has done...nothing, except rack up more debt that someone has to either repay or that has to be defaulted on.

What, Wealth Is Supposed to Go Up in a Down Economy?

Looks like it's time for another entry in my Continuing Stories from the Annals of the Obvious: American's wealth sinks as economy stalls.

The article talks about how Americans spend less when their wealth goes down, but it doesn't once mention taxes - a sure fire way to lower American wealth and reduce spending.

Six New Economic "Normals"

Fortune has a list of what they consider the five new "Economic Normals":
1.Long-term unemployment
2.Renting over owning
3.Saving over spending
4.Staycations over vacations
5.Higher taxes for 'the rich'
 
And I will add my own:
6. "Flat" is the new "Up"

"Temporary" Tax Increases Never Are

Does anyone ever believe a democrat when they ask for "temporary" tax increases?  And it's always democrats who promise they are temporary and then ask to "extend" (and extend) or just make permanent.  The three listed here were put in as "temporary" measures by the California legislature

• Extend a 0.25 percent income tax increase by two years (DM: Ha!  Just make it permanent now). The move would raise $1 billion in the next fiscal year.


• Extend the reduced dependent care credit from $309 to $99 for another two years, generating $430 million in the next fiscal year. (DM: Stick it to the parents some more, dems)

• Extend the increase in the vehicle license fee for two more years (DM: Two years is just enough time for the average voter to forget the tax increase was "temporary"), and raise it again (DM: Except for illegals in unregistered vehicles who don't carry insurance), bringing the total to 1.45 percent of a vehicle's value, generating an extra $1.2 billion in the next fiscal year.

I am sure with all these measures California will bring its fiscal house in order...

Uh Oh. Another "Unexpectedly"

U.S. Jobless Claims Surge

In a troubling sign for the U.S. labor market, the number of workers filing new claims for unemployment benefits unexpectedly surged by 25,000 to 471,000 last week to wipe out most of the recent declines

Note to the MSM: all is not well.  Unemployment is still near 10%, mortgage applications are plummeting with the expiration of the tax credit, mortgage delinquencies are rising.  In the mean time the government is on an anti-business crusade demonizing anything and anyone who makes money (and these are the folks who employ people).
 
In the mean time we are watching a realtime melt-down of the Euro, with money outflows from Germany accelerating now with the new trading rules being put in place (which will decrease liquidity). Additional outflows are expected out of the Continent if the rules go pan-European.  Once the Euro crashes and burns, along with some of the European capitals, it might be a good time to take a cheap vacation there later this summer - if anything is functioning.

There's Enough "Money" But Not Enough "Wealth"

The European bailout. TARP. GM. Fannie May. The list goes on and on. The basic premise in all these deals is that something was "too important" to the economic system and had to be bailed out by the government or the central bank.

In all these cases the bottom line was the money was simply created for the bailout. Poof. There was nothing behind these dollars or Euros being created. The U.S. government simply borrowed more, the Fed simply printed more.

So while all this created money did save these various institutions, the question is if there is enough wealth in the world to eventually pay off all these debts. There isn't. The world is not going to "grow" or "tax" or "save" its way out of this problem. And like Greece, countries and states will keep on borrowing and spending beyond their means since they know they will be bailed out in the end.

There is a fixed (but slowly growing) amount of "wealth" in this world that is being represented by a rapidly growing amount of "money". The denominator is growing much more rapidly than the numerator, so this means the value of "money" is simply getting smaller and smaller and smaller.

Inflation is already locked in. Are you smart enough to see it?

You Think Man Can Control The Environment?

I know a dozen people hit by the volcano eruption, including one guy from my company. Right now it looks like jet travel will be slowly put back into place over the next week, but the affect from eruption will be felt logistically for weeks, economically for months.

It’s just another example of how little control man can put over nature. Any attempt to control it is an illusion and it’s one of the fallacies of the "global warming" crowd (besides the data being total bullshit). The fact is that there is not some ideal world temperature can be controlled by man; there is no magic thermostat than can be achieved by just controlling enough people and their daily lives.

The world will do what it is going to do. Despite there being billions of people, millions of machines and hundreds of thousands of cities, it has no affect over nature, and ultimately man has no control over the environment. Earthquakes, volcanoes, weather, it doesn't matter. The name of the game is to adapt to the environment, not to control it.

In the end the earth will disappear, swallowed up in a few billion years when the sun turns into a red giant. So the next thing you know the global warming crowd will try to force measures into place to delay or eliminate that too. It won't do anything, but it makes them feel better.

Heard In Some Companies This Month: "Happy New Year - You're Fired"

All the bean counters and strategy folks worked hard over the holidays while the rest of us overate. "Rationalization", "belt tightening" and other general bad crap are going to be hitting corporate America over the next few weeks. Here are two actual emails I received this morning:

I can see the belt tightening already.... there will be smoke from the burnt bodies and more...

and

We got a nice letter from management over the holidays saying we will have a 5% layoff coming up early 2010. Happy New Year!

My guess this is a LOT of this out there....unemployment will NOT be improving this quarter.

Walking Away From Debt

I have known people who have had a bankruptcy, have friends contemplating short-sales. In all these cases it involved a failed business or lost job, not stupidity, or walking away from a debt they could pay, or lying on a loan application. Bankruptcy has it's place - taking risk is a part of life and unforeseen circumstances change things - but I think people who are stupid or spend more than they can really afford should be thrown into debtor's prison.

So this article about deadbeats hits home. The woman who walked away from not one, but three mortgages, then goes out and buys expensive furniture is human scum in my book.

People from the Depression who couldn't pay off debts lived thriftily and modestly, the moral obligation of what happened to them hanging over them for years.

While You Were Eating Turkey...

The Federal Reserve's balance sheet hit a new all time record of $2.2 Trillion in assets

Add to this the "all time record" of our deficits, and you have to wonder why the bozos in Washington are furiously looking to add another trillion dollar entitlement.

One thought is that as long as the country is going to go bankrupt you might as well run up all the credit cards as high as you can. There is no conceivable way we can climb out of this mess other than massive inflation or default.

Printing Money and Handing it Out isn't "Growth"

Instapundit blurb on GDP announcement: U.S. Economy Is Growing Once Again. But here’s a cautionary note: “But we don’t think that rate of growth is sustainable because it is distorted by all the government stimulus. The challenge here is to get organic growth – growth that isn’t helped by fiscal steroids.”
There was no "growth" in the economy. There was the government shoveling money out the door, which will have to be paid for later. In the mean time the "economic good news" is that things "are not bad as forecast" on unemployment, foreclosures, debt, housing, earnings, etc., etc.

What we basically have is a bubble being created by quantitative easing and government spending. When one or the other eases off all this magic GDP "growth" will stop.

America’s Götterdämmerung

“Is it better to be living in a civilization’s ascendency or its descent?”

For you non-classical music fans out there, “Götterdämmerung” translates to Twilight of the Gods, Wagner’s famous opera. And I believe, and have felt it now for a while, that I am living in my civilization’s descent.

I look around me and see the signs all around, and I think most Americans realize it, even if it’s on a subconscious level. Something started going terribly wrong about forty years ago and took root, and the rot is now showing. Schools, universities, all our institutions exist to serve themselves and not the citizens that come to use them. We elected a man-child with no experience as executive, send corrupt politicians to congress for generations and send unqualified judges to the Supreme Court. The document that defines our nation is under constant attack with “rights” that aren’t mentioned added daily, and the rights that are written in steadily being taken away.

Perhaps these signs are just a reflection of the decay of the people who make up this country – Americans stuff their faces, are unable to save, run up debts they can’t pay for, and walk away blaming someone else for their ills. They now look to a mommy-government to right the wrongs of their own bad decisions, to take their responsibilities away and give them free support for all their needs.

If you think I am being harsh remember that I travel extensively and I see the difference overseas in Asia - the hard work, determination, drive to succeed, and the belief that a country must go out – like a person – and make its place in the world. While America hobbles itself with over-the-line environmental regulations, drilling bans and anti-business policies, countries like China are aggressively taking over natural resources through strategic acquisitions, partnerships and political ties to insure they have a sure and steady supply of things that make a country go.

I don’t so see other countries catching up so much as the U.S. committing cultural suicide.

Restaurants and The Recession

Every time I go out to eat these days - and I probably go out more than most people since I entertain for business - there are lines, people waiting, crowded bar areas. The first thing I think is "Recession? What recession?"

And if you were to gauge the economy this way I think one might think the recession is mostly over, or less than reported. But there are some counter-intuitive things going on here:

• Fewer Seatings - Restaurants are reporting fewer turns per table per evening, meaning they might be getting only a single round of eaters instead of two, or even higher. And that one seating happens at "prime time", making the place look crowded as usual.
  
• More Munchies, Less Dining - A lot of those people in the bar are having a drink and appetizers where before they would stay for a full course. Revenue per patron is actually lower even if the number of patrons in the place looks the same.
  
• Fewer Weeknights - Even with less money to burn people are still going to go out once in a while, have dates, etc., especially towards the weekends. What you are not going to see is the "additional" eating out on other random nights out for the week for the hell of it. During my business dinners recently I find that things are pretty empty on Monday nights.

Add in the fact that places have lowered prices, are holding specials, coupons, etc. and we see a business that is having a tough time, although it might still be hard to get a table every once in a while.
Update: Restaurants Have 22nd Month of Decline

The Problem is Not Too Little Stimulus, It's Too Much Government

Amid talk of a "second stimulus package" (it would in fact be the third), it doesn't seem to dawn on anyone that it's the anti-business rhetoric, stances and regulations coming of Washington in that are creating more drag than any sort of stimulus could cure.

We have a situation where the people who hate business the most are in control of government, right when business needs the most support. Because the government doesn't create jobs, businesses do. And until businesses start to hire, unemployment isn't going to go down.

So while unemployment is skyrocketing we have a new energy tax passing the house, the promise of some beast of a health care plan encumbering businesses even more, increased taxes, and a array of new rules and regulations being issued almost daily. The rule of law is trumped for political favoritism, and the government is sinking money in money-losing industries and companies, propping up the losers at the expense of the winners. And in light of all these new burdens, businesses are just supposed to go out and hire more people? Why bother?

And why do the democrats think that getting consumers to buy a little more will help the U.S. economy? If consumer spending goes up a few percent all it means is that a few hundred more shipping containers arrive in ports on the West Coast from China and the lines get a little longer at Wallmart. All it does is put more money in the hands of the Chinese and maybe causes Wallmart to hire a few checkers. This is supposed to cure the economy's ills?

The wheels are coming off the car and the democrats in Washington are steering it towards a cliff.