From Customer Interactions to Emotional Engagement: 5 Trends Shaping Marketing

Our world is nothing like our “father’s Oldsmobile.” Change is a constant yet those four words do not adequately capture what is going on. We are in the midst of a world shift that will forever change our and the lives of our grandchildren.

The shift is not about a faster more fluid global world or the rise of new technology, it is more profound than that. We, individuals and organizations, are losing our separateness and becoming a collective. The catalyst as well as what binds us together is technology.

Call it the Internet of Things (IoT) or the connected economy, the bottom-line is that technology binds us – individuals, communities, economies – together and is reshaping how we value and define relationships. What affects one, affects us all.

For marketers this is an exciting and terrifying time. We understand the customer in ways that was unimaginable in the past. We’re moving beyond customer interactions to emotional engagement. With new depths of data and analytics marketers can guide every corner of their entire organization on how, when and with what to create meaningful emotional connections with B2B and B2C customers. We continue to automate repetitive process and data intensive tasks and empower machines to make routine decisions so we can get out of the weeds. Our time is better spent on things like long-term strategy, social responsibility, and consciously with intent defining how we want our world to be in 2020 and beyond.

Technology coupled with the rise of customer has set an irreversible course forward that is redefining marketing and what it means – to customers, marketers and the C-Suite. To understand where we are in this transformation we need to understand how we got to this point.

I had the pleasure of interviewing a number of B2B CMOs from Fortune 10 down to Fortune 2000 companies at the request of Marketo who funded this research. The interview focused on the most significant trends that shaped marketing today as well as those on the horizon that CMOs are closely watching.

These five trends that shaped the state of marketing today:

1. Social media mainstreams

Social media is pervasive and has been embraced by B2B and B2C buyers as a key mechanism for taking full control of their brand relationships. The ease with which buyers can reach their peers has forever changed the influencer landscape. Brands and sales teams are increasing losing their role as trusted sources of knowledge. Both are increasingly viewed as a commodity. What drives a customer to purchase from a brand is not price, product or brand cache but their reputation within the buyer’s social graph, past experience and their ability to build value-based human-to-human relationship.

Buyers give more credibility and weight to the opinions and advice of their peers than they do to brand content, media relations or campaigns. That reliance on peers, easy access to customers and digital sites like G2 Crowd has all but obsoleted traditional industry analysts and media relations. The effect has been a complete redefinition of how trust is built and who communicates brand messages. Increasingly it is not the brand but customers, peers, communities and thought leaders that define positioning, messaging and the company’s reputation. Savvy marketers have embraced these trends by shifting their marketing culture, skill sets, programs and investments to be customer-aligned.

2. Death of outbound marketing

There has been over the past two years the steady decline in the effectiveness of outbound marketing. CMOs are finding that over 50 percent of their leads come from inbound marketing activities and they are shifting spend accordingly. Inbound marketing is more effective in pulling buyers to the brand and through their journeys though all would agree the practice remains nascent.

A significant portion of the early stages of the buyer’s journey is driven by buyer self-discovery – from understanding the problem, alternative solution approaches, outcomes their peers have realized and best practices. Brands have realized that the awareness-attraction-engagement cycle needs to be redefined to educate-enable-engage. The result of this trend has dramatically reshaped marketing team competencies.

3. Marketing’s street cred, finally

Marketing has struggled for decades to be seen as a value-adding member at the board table. Being seen as a cost center, the “colors” or “party team”, or the blamer for when things go wrong gets old real fast. Gaining street cred with peers and boards has been a major focus for CMOs. Technology has not only improved marketing execution but data driven decision outcomes as well.

Marketing automation, ERM, CRM and predictive analytics technology are enabling CMOs and their marketing teams to significantly improve their ability to credibly and transparently measure and report on marketing-attributable revenue and ROI. The ability to measure and predict how various marketing activities will perform and be able to adjust on the fly based on detailed insight into how buyers are reacting to marketing campaigns is the baseline to success. A number of CMOs have invested heavily in building very detailed market models that predict the yield from spend in various categories. Being able to confidently (and accurately) forecast pipeline and booked revenue from B2B marketing spend is changing the perception of marketing. Challenges remain in achieving full customer lifecycle visibility and using data science to advance customer engagement.

4. The link between employee and customer satisfaction

Organization theorists have long touted the importance of employee satisfaction. Yet CMOs have only recently recognized the strength of the linkage between employee engagement and customer satisfaction and loyalty. To that end, programs have been implemented, often in partnership with Human Resources, to keep employees up-to-date on company developments, news and product information. That information comes in many forms ranging from product announcements, knowledge bases, technical information, and financial news to real-time customer feedback.

CMOs are realizing that employee engagement and satisfaction doesn’t come from free lunches, Friday beers and fussball but from making sure that employees have meaning, mattering and belonging. The data shows there is a direct correlation between how happy, informed and trusted an employee is and the satisfaction of the customer they interact with. It doesn’t matter whether it’s the contact center, field maintenance, sales, marketing or finance – the linkage is real. This trend has focused organizations on equipping employees with the information and insights they need to better understand and respond to customer needs and expectations.

5. Only talk about revenue

Some things haven’t changed, namely B2B Boards of Directors and CEOs continue to only be interested in revenue pipeline metrics. While CMOs have made great strides forward in accounting for the revenue impact from marketing spend, Boards and CEOs have little interest in understanding the softer attributes that impact revenue such as reputation, reach and customer experience.

The frustration for CMOs is that the conversation has so narrowed that neither understand the power of marketing or how the discipline’s dramatic changes impacts how companies spot and respond to opportunities. Having been burnt in the past by pushing non-financial issues, CMOs are sticking to the script.

There were a number of surprises from these interviews. One was that the sophistication of an organization’s marketing was not defined by company size, budget or CMO’s vision but by their customers. Regardless of company size, progressive CMOs are constrained by how comfortable their customers and Boards of Directors are with new methods of engagement.

These past trends have dramatically reshaped what marketing means today and what it will look like in the future. Everything from competencies, organization structure, reporting metrics to how CMOs keep their organizations agile and healthy is being rethought.

The future of marketing is exciting as well as challenging. CMOs are faced with the duality of managing breakneck pace of change within their customer segments and marketing practices while educating their peers and boards on the new role of marketing, revenue impact of customer alignment and the value marketing brings to the table.

Christine Crandell

Как найти и развить идею для бизнеса

The Performance Management Revolution

“Research indicates that workers have three prime needs: Interesting work, recognition for doing a good job, and being let in on things that are going on in the company.” Zig Ziglar

 Many years ago I read “The Structure of Scientific Revolutions” by Thomas Kuhn. The main idea he developed is that once a theory cannot explain the observable reality anymore, a crisis must emerge, a revolution should occur, and a new theory must be formulated and embraced, until the process begins again. The most common Performance Management system, the one based on numerical ratings and a one-time a year appraisal, is in crisis. The existing theory cannot explain anymore the observable reality of a worker’s performance, a crisis is evident, and a performance revolution must happen.

In my opinion, as proven throughout recent history, the existing Performance Management system was intrinsically flawed and doomed to fail, particularly the approach to assess whether individuals and teams are top performers or not.

This is not just my subjective observation; there is research to support this argument. The “2013 Global Performance Management Survey Report” by the consulting firm MERCER found that “51% of respondents said that their [goal] planning process needs work, 42% said the linkage to compensation needs work, and 48% said that the overall approach needs work”.

The most remarkable finding made by MERCER, however, is that only 3% of respondents “reported that their overall management system delivers exceptional value”. It is important to notice that nearly 90% of organizations surveyed have a common Performance Management system: goal setting, mid-year check in and individual-rating-based appraisals. The same report indicated that the most important manager’s skill to drive high performing organizations and overall success is “having candid dialogue” (AKA, constant feedback).  The report also indicates that 89% of the organizations have performance ratings, and that 89% link individual ratings to compensation decisions.

Similar to the MERCER report, in a public survey carried out by Deloitte, 58% of executives surveyed “believe that their current performance management approach drives neither employee engagement nor high performance.”

Unfortunately, as it is evidenced, most organizations still consider "the carrot and the stick" approach to be worthwhile as a way to motivate people. These organizations and their management are still injecting life to the dying theory of Performance Management. If only these organizations understood that the way to achieve better results, higher performance and exceptionally value, therefore accomplishing growth and sustainability, is by doing things in a different way. We already tried and, hopefully learned, that the one way not to achieve high performance is by having a ranking-based approach.

“All organizations are perfectly designed to get the results they are now getting. If we want different results, we must change the way we do things.” Tom Northup

As probably most of us know (and have experienced ourselves) individual ratings in a final appraisal are a huge roadblock to unleash the potential of people and keep them motivated. This also goes along with the discussion of intrinsic versus extrinsic motivators.

When I look around, most organizations that I come across with have designed and put in place incentive and reward systems that appeal only to those who are extrinsically motivated. If you get an Excellent, you receive x%, but if you get an “Ok” (of course, they don’t call it that, but “Meet Expectations” or any other fancy name to say that the quality of your work is… “Ok”) you receive a far lower financial incentive.

I believe that the approach of offering purely financial incentives to drive for high performance achieves the opposite effect of what it seeks. It actually encourages and promotes the wrong kind of behaviors. It  sort of forces people to do whatever is needed in order to get that Excellent rating, regardless of the real effect that their work has on the collective entity that is the organization. Not surprisingly, we see organizations sinking very fast, but full of shining individual stars. Keep in mind the case of Enron, whereby individual stars dishonestly tried to make their way up the corporate ladder, while at the same time hiding a reality that soon exploded. As William Shakespeare said:

“His promises were, as he then was, mighty; But his performance, as he is now, nothing.”

Now, in addition to having shining stars in the “Excellent” performance realm, a rewards system that is overly focused on extrinsic motivators also misses the big opportunity to tap in the potential of people who are intrinsically motivated, people who need constant feedback and acknowledgement, as well as Support and Challenge from their leaders.

These individuals (particularly Millennials – who will account for 64% of the workforce by the year 2020 according to the US Bureau of Labor Statistics) get enough energy and motivation when their leaders meet with them on a regular basis, help them overcome the challenges that might be undermining their true capacity for high performance, acknowledge their accomplishments in real time and back them up, and support/challenge them to achieve even higher goals.

For Millennials (but also very much across generations), as has been indicated in a research by The Conference Board, feedback and flexibility are essential incentives (taking for granted, of course, that they are not exploited by their employers, but have a competitive salary). This system is different than one that constantly praises “good” performers. It is rather a system that rewards high performance, tap into the challenges of low performers, at the time that achieves a highly energized organization and teams. The system, however, requires that leaders have the skills and abilities to have real and thorough conversations with their teams.

“Curious that we spend more time congratulating people who have succeeded than encouraging people who have not.” Neil deGrasse Tyson

I was once delivering a workshop on performance and somebody said “even if I get an ‘Excellent’ rating, the monetary compensation is the equivalent of two cups of a coffee a day. I want much more than that”. What does “much more than that” mean? Deloitte and Accenture are acting as trailblazers in this arena by thinking outside the box and experimenting with another methods to incentivize their workers. I believe feedback and opportunities to unleash talents are the two most important ideas behind the “much more than that”.

Constant positive and developmental feedback (not praise!) is one of the components of a bigger, more effective and purposeful approach than a merely rating-financial-compensation approach. Deloitte and Accenture deemed it necessary not only to give an answer to the Performance Management crisis, but they also take into account an updated generational (mostly because the influx of millennials in their workforce) approach in which unleashing the potential and maximizing the opportunities for learning and development are by far more important than a monetary incentive. I should say that having the equivalent in money to two extra cups a coffee a day, for a year, is definitely not a bad thing. Monetary compensation is, indeed, a critical factor..

Now, would someone go the extra mile because they received a monetary compensation as a product of their rating-based performance? is that compensation directly linked to an emergence of creativity and innovation? The answer to both questions is a definite no. Research shows the effects of diminishing marginal returns of monetary compensation for performance. After some point, it doesn’t make a real difference on your performance (your rating might still be the best, not your actual performance, though) to receive an Excellent rating.  

The good news is that, despite the fact that the crisis of Performance Management started a long time ago, the revolution is just beginning, and at a greater scale. Deloitte and Accenture are part of that revolution. Have they come up with the right theory to explain a new reality? Is their newly implemented Performance Management process the best approach? To be honest, I don’t know. We have yet to see.

Nevertheless, the neat thing about Deloitte and Accenture revamping their Performance Management system is that it is bringing to the table an ugly topic. You know, everybody loves to hate performance. And, as it happens very often, people don’t want to talk about what they hate. However, Deloitte and Accenture’s revolutionary approach to Performance is renewing a seemingly dead interest in talking about it, thereby creating a huge amount of dialogue, research, papers and, best of all, organizations questioning their own systems.

In a recent interview with the retiring CEO of Accenture, Pierre Nanterme, in the Washington Post, he said about Performance Management:

“We are not sure that spending all that time on performance management has been yielding a great outcome. And for the millennium generation, it’s not the way they want to be recognized, the way they want to be measured. If you put this new generation in the box of the performance management we’ve used the last 30 years, you lose them. We’re done with the famous annual performance review, where once a year I’m going to share with you what I think about you. That doesn’t make any sense. Performance is an ongoing activity. It’s every day, after any client interaction or business interaction or corporate interaction. It’s much more fluid. People want to know on an ongoing basis, am I doing right? Am I moving in the right direction? Do you think I’m progressing? Nobody’s going to wait for an annual cycle to get that feedback. Now it’s all about instant performance management.”

Even though Mr. Nanterme mentioned Millennials and the risk of losing them with the existing practices in Performance Management, I think organizations are already losing real potential across generations. And I purposefully use the expression “losing potential”. To me, this doesn’t mean that people are necessarily quitting their jobs, more so if they are not too far from retirement, but it means that they might not be using their full capacities to achieve even higher levels of performance, creativity and innovation.

We should be the protagonists of this revolution in the making. In that sense, for all our organizations, talking about the way we measure performance should be of paramount importance. From there, I think that the next steps in the conversation must be how to incentivize the constant formal and informal conversations between leaders and people (showcasing the benefits and results for the organization, the leaders and the people); provide collective incentives to team performance; create mechanisms in which individuals can also provide bottom-up feedback to their bosses and even appeal to the self-interests and ego of the leaders: show them the results that such a culture can have for them. In the words of Laszlo Bock in his book “The Work Rules”:

“Performance improved only when companies implemented programs to empower employees (for example, by taking decision-making authority away from managers and giving it to individuals or teams), provided learning opportunities that were outside what people needed to do their jobs, increased their reliance on teamwork (by giving teams more autonomy and allowing them to self-organize), or a combination of these.”

I keep in perspective that changes might happen bottom-up, top-down, or simply altogether. It only takes courage and leadership from the organization as an entity. Stephen Covey said “management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall.” I know we need to measure performance, but, do we have the ladder on the right wall?

The ugly topic of performance is on the table and we have a big responsibility to shake up our beliefs in older and dying merit-pay systems and open the door to more energizing and refreshing approaches, be it the Deloitte/Accenture approach, or the new approaches not yet created.

Enrique Rubio

HR Professional, Engineer, Writer

Three steps to building a better top team

When a top team fails to function, it can paralyze a whole company. Here’s what CEOs need to watch out for.

byMichiel Kruyt, Judy Malan, and Rachel Tuffield

Few teams function as well as they could. But the stakes get higher with senior-executive teams: dysfunctional ones can slow down, derail, or even paralyze a whole company. In our work with top teams at more than 100 leading multinational companies,¹ including surveys with 600 senior executives at 30 of them, we’ve identified three crucial priorities for constructing and managing effective top teams. Getting these priorities right can help drive better business outcomes in areas ranging from customer satisfaction to worker productivity and many more as well.

1. Get the right people on the team . . . and the wrong ones off

Determining the membership of a top team is the CEO’s responsibility—and frequently the most powerful lever to shape a team’s performance. Many CEOs regret not employing this lever early enough or thoroughly enough. Still others neglect it entirely, assuming instead that factors such as titles, pay grades, or an executive’s position on the org chart are enough to warrant default membership. Little surprise, then, that more than one-third of the executives we surveyed said their top teams did not have the right people and capabilities.

The key to getting a top team’s composition right is deciding what contributions the team as a whole, and its members as individuals, must make to achieve an organization’s performance aspirations and then making the necessary changes in the team. This sounds straight-forward, but it typically requires conscious attention and courage from the CEO; otherwise, the top team can underdeliver for an extended period of time.

That was certainly the case at a technology services company that had a struggling top team: fewer than one in five of its members thought it was highly respected or shared a common vision for the future, and only one in three thought it made a valuable contribution to corporate performance. The company’s customers were very dissatisfied—they rated its cost, quality, and service delivery at only 2.3 on a 7-point scale—and the team couldn’t even agree on the root causes.

A new CEO reorganized the company, creating a new strategy group and moving from a geography-based structure to one based on two customer-focused business units—for wholesale and for retail. He adapted the composition of his top team, making the difficult decision to remove two influential regional executives who had strongly resisted cross-organizational collaboration and adding the executive leading the strategy group and the two executives leading the retail and the wholesale businesses, respectively. The CEO then used a series of workshops to build trust and a spirit of collaboration among the members of his new team and to eliminate the old regional silo mentality. The team also changed its own performance metrics, adding customer service and satisfaction performance indicators to the traditional short-term sales ones.

Customers rated the company’s service at 4.3 a year later and at 5.4 two years later. Meanwhile, the top team, buoyed by these results, was now confident that it was better prepared to improve the company’s performance. In the words of one team member, “I wouldn’t have believed we could have come this far in just one year.”

2. Make sure the top team does just the work only it can do

Many top teams struggle to find purpose and focus. Only 38 percent of the executives we surveyed said their teams focused on work that truly benefited from a top-team perspective. Only 35 percent said their top teams allocated the right amounts of time among the various topics they considered important, such as strategy and people.

What are they doing instead? Everything else. Too often, top teams fail to set or enforce priorities and instead try to cover the waterfront. In other cases, they fail to distinguish between topics they must act on collectively and those they should merely monitor. These shortcomings create jam-packed agendas that no top team can manage properly. Often, the result is energy-sapping meetings that drag on far too long and don’t engage the team, leaving members wondering when they can get back to “real work.” CEOs typically need to respond when such dysfunctions arise; it’s unlikely that the senior team’s members—who have their own business unit goals and personal career incentives—will be able to sort out a coherent set of collective top-team priorities without a concerted effort.

The CEO and the top team at a European consumer goods company rationalized their priorities by creating a long list of potential topics they could address. Then they asked which of these had a high value to the business, given where they wanted to take it, and would allow them, as a group, to add extraordinary value. While narrowing the list down to ten items, team members spent considerable time challenging each other about which topics individual team members could handle or delegate. They concluded, for example, that projects requiring no cross-functional or cross-regional work, such as addressing lagging performance in a single region, did not require the top team’s collective attention even when these projects were the responsibility of an individual team member. For delegated responsibilities, they created a transparent and consistent set of performance indicators to help them monitor progress.

This change gave the top team breathing room to do more valuable work. For the first time, it could focus enough effort on setting and dynamically adapting cross-category and cross-geography priorities and resource allocations and on deploying the top 50 leaders across regional and functional boundaries, thus building a more effective extended leadership group for the company. This, in turn, proved crucial as the team led a turnaround that took the company from a declining to a growing market share. The team’s tighter focus also helped boost morale and performance at the company’s lower levels, where employees now had more delegated responsibility. Employee satisfaction scores improved to 79 percent, from 54 percent, in just one year.

3. Address team dynamics and processes

A final area demanding unrelenting attention from CEOs is effective team dynamics, whose absence is a frequent problem: among the top teams we studied, members reported that only about 30 percent of their time was spent in “productive collaboration”—a figure that dropped even more when teams dealt with high-stakes topics where members had differing, entrenched interests. Here are three examples of how poor dynamics depress performance:

The top team at a large mining company formed two camps with opposing views on how to address an important strategic challenge. The discussions on this topic hijacked the team’s agenda for an extended period, yet no decisions were made.

The top team at a Latin American insurance company was completely demoralized when it began losing money after government reforms opened up the country to new competition. The team wandered, with little sense of direction or accountability, and blamed its situation on the government’s actions. As unproductive discussions prevented the top team from taking meaningful action, other employees became dissatisfied and costs got out of control.

The top team at a North American financial-services firm was not aligned effectively for a critical company-wide operational-improvement effort. As a result, different departments were taking counterproductive and sometimes contradictory actions. One group, for example, tried to increase cross-selling, while another refused to share relevant information about customers because it wanted to “own” relationships with them.

CEOs can take several steps to remedy problems with team dynamics. The first is to work with the team to develop a common, objective understanding of why its members aren’t collaborating effectively. There are several tools available for the purpose, including top-team surveys, interviews with team members, and 360-degree evaluations of individual leaders. The CEO of the Latin American insurance company used these methods to discover that the members of his top team needed to address building relationships and trust with one another and with the organization even before they agreed on a new corporate strategy and on the cultural changes necessary to meet its goals (for more on building trust, see “Dispatches from the front lines of management innovation”). One of the important cultural changes for this top team was that its members needed to take ownership of the changes in the company’s performance and culture and to hold one another accountable for living up to this commitment.

Correcting dysfunctional dynamics requires focused attention and interventions, preferably as soon as an ineffective pattern shows up. At the mining company, the CEO learned, during a board meeting focused on the team’s dynamics, that his approach—letting the unresolved discussion go on in hopes of gaining consensus and commitment from the team—wasn’t working and that his team expected him to step in. Once this became clear, the CEO brokered a decision and had the team jump-start its implementation.

Often more than a single intervention is needed. Once the CEO at the financial-services firm understood how poorly his team was aligned, for example, he held a series of top-team off-site meetings aimed specifically at generating greater agreement on strategy. One result: the team made aligning the organization part of its collective agenda, and its members committed themselves to communicating and checking in regularly with leaders at lower levels of the organization to ensure that they too were working consistently and collaboratively on the new strategy. One year later, the top team was much more unified around the aims of the operational-improvement initiative—the proportion of executives who said the team had clarity of direction doubled, to 70 percent, and the team was no longer working at cross-purposes. Meanwhile, operational improvements were gaining steam: costs came down by 20 percent over the same period, and the proportion of work completed on time rose by 8 percent, to 96.3 percent.

Finally, most teams need to change their support systems or processes to catalyze and embed change. At the insurer, for example, the CEO saw to it that each top-team member’s performance indicators in areas such as cost containment and employee satisfaction were aligned and pushed the team’s members to share their divisional performance data. The new approach allowed these executives to hold each other accountable for performance and made it impossible to continue avoiding tough conversations about lagging performance and cross-organizational issues. Within two years, the team’s dynamics had improved, along with the company’s financials—to a return on invested capital (ROIC) of 16.6 percent, from –8.8 percent, largely because the team collectively executed its roles more effectively and ensured that the company met its cost control and growth goals.

Each top team is unique, and every CEO will need to address a unique combination of challenges. As the earlier examples show, developing a highly effective top team typically requires good diagnostics, followed by a series of workshops and field work to address the dynamics of the team while it attends to hard business issues. When a CEO gets serious about making sure that her top team’s members are willing and able to help meet the company’s strategic goals, about ensuring that the team always focuses on the right topics, and about managing dynamics, she’s likely to get results. The best top teams will begin to take collective responsibility and to develop the ability to maintain and improve their own effectiveness, creating a lasting performance edge.

About the authors

Michiel Kruyt is an associate principal in McKinsey’s Amsterdam office, Judy Malan is a principal in the Johannesburg office, and Rachel Tuffield is an alumnus of the Sydney office.

The authors wish to acknowledge the contributions of Carolyn Aiken, a principal in McKinsey’s Toronto office, and Scott Keller, a director in the Chicago office.

What Managers Expect from Entry Level Employees

There is a significant disparity between what managers say entry level employees need to succeed, and how man new hires actually have those skills in the managers’ opinions.

When it comes to hiring entry level employees, managers place a premium on attributes over skills, with a higher emphasis on finding and hiring individuals with skills that are difficult or impossible to be taught. When hiring:

• 85% reported work ethic was the most important attribute for employee success.
• 79% reported a candidate’s prestigious schooling was the least important consideration to make.
• Only 4% of managers said how well a candidate performed during interview was the most important consideration to make when hiring.

Elliott Wave Principle

The idea of wave personality is a substantial expansion of the Wave Principle. It has the advantages of bringing human behavior more personally into the equation and even more important, of enhancing the utility of standard technical analysis.

The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure. The personality of each wave type is usually manifest whether the wave is of Grand Supercycle degree or Subminuette. These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one's present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations. As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that a knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern. The following discussions relate to an underlying bull market picture, as illustrated in Figures 2-14 and 2-15. These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

Figure 2-14

Wave Personality


1) First waves — As a rough estimate, about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other fifty percent of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced.

2) Second waves — Second waves often retrace so much of wave one that most of the advancement up to that time is eroded away by the time it ends. This is especially true of call option purchases, as premiums sink drastically in the environment of fear during second waves. At this point, investors are thoroughly convinced that the bear market is back to stay. Second waves often produce downside non-confirmations and Dow Theory "buy spots," when low volume and volatility indicate a drying up of selling pressure.

3) Third waves — Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. Increasingly favorable fundamentals enter the picture as confidence returns. Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence. Such points invariably produce breakouts, "continuation" gaps, volume expansions, exceptional breadth, major Dow Theory trend confirmations and runaway price movement, creating large hourly, daily, weekly, monthly or yearly gains in the market, depending on the degree of the wave. Virtually all stocks participate in third waves. Besides the personality of "B" waves, that of third waves produces the most valuable clues to the wave count as it unfolds.

4) Fourth waves — Fourth waves are predictable in both depth (see Lesson 11) and form, because by alternation they should differ from the previous second wave of the same degree. 
More often than not they trend sideways, building the base for the final fifth wave move. Lagging stocks build their tops and begin declining during this wave, since only the strength of a third wave was able to generate any motion in them in the first place. This initial deterioration in the market sets the stage for non-confirmations and subtle signs of weakness during the fifth wave.

5) Fifth waves — Fifth waves in stocks are always less dynamic than third waves in terms of breadth. They usually display a slower maximum speed of price change as well, although if a fifth wave is an extension, speed of price change in the third of the fifth can exceed that of the third wave. Similarly, while it is common for volume to increase through successive impulse waves at Cycle degree or larger, it usually happens below Primary degree only if the fifth wave extends. Otherwise, look for lesser volume as a rule in a fifth wave as opposed to the third. Market dabblers sometimes call for "blowoffs" at the end of long trends, but the stock market has no history of reaching maximum acceleration at a peak. Even if a fifth wave extends, the fifth of the fifth will lack the dynamism of what preceded it. During fifth advancing waves, optimism runs extremely high, despite a narrowing of breadth. Nevertheless, market action does improve relative to prior corrective wave rallies. For example, the year-end rally in 1976 was unexciting in the Dow, but it was nevertheless a motive wave as opposed to the preceding corrective wave advances in April, July and September, which, by contrast, had even less influence on the secondary indexes and the cumulative advance-decline line. As a monument to the optimism that fifth waves can produce, the market forecasting services polled two weeks after the conclusion of that rally turned in the lowest percentage of "bears," 4.5%, in the history of the recorded figures despite that fifth wave's failure to make a new high!

Figure 2-15

6) "A" waves — During "A" waves of bear markets, the investment world is generally convinced that this reaction is just a pullback pursuant to the next leg of advance. The public surges to the buy side despite the first really technically damaging cracks in individual stock patterns. The "A" wave sets the tone for the "B" wave to follow. A five-wave A indicates a zigzag for wave B, while a three-wave A indicates a flat or triangle.

7) "B" waves — "B" waves are phonies. They are sucker plays, bull traps, speculators' paradise, orgies of odd-lotter mentality or expressions of dumb institutional complacency (or both). They often involve a focus on a narrow list of stocks, are often "unconfirmed" (Dow Theory is covered in Lesson 28) by other averages, are rarely technically strong, and are virtually always doomed to complete retracement by wave C. If the analyst can easily say to himself, "There is something wrong with this market," chances are it's a "B" wave. "X" waves and "D" waves in expanding triangles, both of which are corrective wave advances,
have the same characteristics. Several examples will suffice to illustrate the point.

— The upward correction of 1930 was wave B within the 1929-1932 A-B-C zigzag decline. Robert Rhea describes the emotional climate well in his opus, The Story of the Averages (1934):

...many observers took it to be a bull market signal. I can remember having shorted stocks early in December, 1929, after having completed a satisfactory short position in October. When the slow but steady advance of January and February carried above [the previous high], I became panicky and covered at considerable loss. ...I forgot that the rally might normally be expected to retrace possibly 66 percent or more of the 1929 downswing. Nearly everyone was proclaiming a new bull market. Services were extremely bullish, and the upside volume was running higher than at the peak in 1929.

— The 1961-1962 rise was wave (b) in an (a)-(b)-(c) expanded flat correction. At the top in early 1962, stocks were selling at unheard of price/earnings multiples that had not been seen up to that time and have not been seen since. Cumulative breadth had already peaked along with the top of the third wave in 1959.

— The rise from 1966 to 1968 was wave [B]* in a corrective pattern of Cycle degree. Emotionalism had gripped the public and "cheapies" were skyrocketing in the speculative fever, unlike the orderly and usually fundamentally justifiable participation of the secondaries within first and third waves. The Dow Industrials struggled unconvincingly higher throughout the advance and finally refused to confirm the phenomenal new highs in the secondary indexes.

— In 1977, the Dow Jones Transportation Average climbed to new highs in a "B" wave, miserably unconfirmed by the Industrials. Airlines and truckers were sluggish. Only the coal-carrying rails were participating as part of the energy play. Thus, breadth within the index was conspicuously lacking, confirming again that good breadth is generally a property of impulse waves, not corrections.

As a general observation, "B" waves of Intermediate degree and lower usually show a diminution of volume, while "B" waves of Primary degree and greater can display volume heavier than that which accompanied the preceding bull market, usually indicating wide public participation.

8) "C" waves — Declining "C" waves are usually devastating in their destruction. They are third waves and have most of the properties of third waves. It is during this decline that there is virtually no place to hide except cash. The illusions held throughout waves A and B tend to evaporate and fear takes over. "C" waves are persistent and broad. 1930-1932 was a "C" wave. 1962 was a "C" wave. 1969-1970 and 1973-1974 can be classified as "C" waves. Advancing "C" waves within upward corrections in larger bear markets are just as dynamic and can be mistaken for the start of a new upswing, especially since they unfold in five waves. The October 1973 rally (see Figure 1-37), for instance, was a "C" wave in an inverted expanded flat correction.

9) "D" waves — "D" waves in all but expanding triangles are often accompanied by increased volume. This is true probably because "D" waves in non-expanding triangles are hybrids, part corrective, yet having some characteristics of first waves since they follow "C" waves and are not fully retraced. "D" waves, being advances within corrective waves, are as phony as "B" waves. The rise from 1970 to 1973 was wave [D] within the large wave IV of Cycle degree. The "one-decision" complacency that characterized the attitude of the average institutional fund manager at the time is well documented. The area of participation again was narrow, this time the "nifty fifty" growth and glamour issues. Breadth, as well as the Transportation Average, topped early, in 1972, and refused to confirm the extremely high multiples bestowed upon the favorite fifty. Washington was inflating at full steam to sustain the illusory prosperity during the entire advance in preparation for the election. As with the preceding wave [B], "phony" was an apt description.

10) "E" waves — "E" waves in triangles appear to most market observers to be the dramatic kickoff of a new downtrend after a top has been built. They almost always are accompanied by strongly supportive news. That, in conjunction with the tendency of "E" waves to stage a false breakdown through the triangle boundary line, intensifies the bearish conviction of market participants at precisely the time that they should be preparing for a substantial move in the opposite direction. Thus, "E" waves, being ending waves, are attended by a psychology as emotional as that of fifth waves.

Wave Tendencies

Because the tendencies discussed here are not inevitable, they are stated not as rules, but as guidelines. Their lack of inevitability nevertheless detracts little from their utility. For example, take a look at Figure 2-16, an hourly chart showing the first four Minor waves in the DJIA rally off the March 1, 1978 low. The waves are textbook Elliott from beginning to end, from the length of waves to the volume pattern (not shown) to the trend channels to the guideline of equality to the retracement by the "a" wave following the extension to the expected low for the fourth wave to the perfect internal counts to alternation to the Fibonacci time sequences to the Fibonacci ratio relationships embodied within. It might be worth noting that 914 would be a reasonable target in that it would mark a .618 retracement of the 1976-1978 decline.

Figure 2-16 

There are exceptions to guidelines, but without those, market analysis would be a science of exactitude, not one of probability. Nevertheless, with a thorough knowledge of the guide lines of wave structure, you can be quite confident of your wave count. In effect, you can use the market action to confirm the wave count as well as use the wave count to predict market action.

Notice also that Elliott Wave guidelines cover most aspects of traditional technical analysis, such as market momentum and investor sentiment. The result is that traditional technical analysis now has a greatly increased value in that it serves to aid the identification of the market's exact position in the Elliott Wave structure. To that end, using such tools is by all means encouraged.

Learning the Basics

With a knowledge of the tools in Lessons 1 through 15, any dedicated student can perform expert Elliott Wave analysis. People who neglect to study the subject thoroughly or to apply the tools rigorously have given up before really trying. The best learning procedure is to keep an hourly chart and try to fit all the wiggles into Elliott Wave patterns, while keeping an open mind for all the possibilities. Slowly the scales should drop from your eyes, and you will continually be amazed at what you see.

It is important to remember that while investment tactics always must go with the most valid wave count, knowledge of alternative possibilities can be extremely helpful in adjusting to unexpected events, putting them immediately into perspective, and adapting to the changing market framework. While the rigidities of the rules of wave formation are of great value in choosing entry and exit points, the flexibilities in the admissible patterns eliminate cries that whatever the market is doing now is "impossible."

"When you have eliminated the impossible, whatever remains, however improbable, must be the truth." Thus eloquently spoke Sherlock Holmes to his constant companion, Dr. Watson, in Arthur Conan Doyle's The Sign of Four. This one sentence is a capsule summary of what one needs to know to be successful with Elliott. The best approach is deductive reasoning. By knowing what Elliott rules will not allow, one can deduce that whatever remains must be the most likely course for the market. Applying all the rules of extensions, alternation, overlapping, channeling, volume and the rest, the analyst has a much more formidable arsenal than one might imagine at first glance. Unfortunately for many, the approach requires thought and work and rarely provides a mechanical signal. However, this kind of thinking, basically an elimination process, squeezes the best out of what Elliott has to offer and besides, it's fun!

As an example of such deductive reasoning, take another look at Figure 1-14, reproduced below:

Figure 1-14

Cover up the price action from November 17, 1976 forward. Without the wave labels and boundary lines, the market would appear as formless. But with the Wave Principle as a guide, the meaning of the structures becomes clear. Now ask yourself, how would you go about predicting the next movement? Here is Robert Prechter's analysis from that date, from a personal letter to A.J. Frost, summarizing a report he issued for Merrill Lynch the previous day:

Enclosed you will find my current opinion outlined on a recent Trendline chart, although I use only hourly point charts to arrive at these conclusions. My argument is that the third Primary wave, begun in October of 1975, has not completed its course as yet, and that the fifth Intermediate wave of that Primary is now underway. First and most important, I am convinced that October 1975 to March 1976 was so far a three-wave affair, not a five, and that only the possibility of a failure on May 11th could complete that wave as a five. However, the construction following that possible "failure" does not satisfy me as correct, since the first downleg to 956.45 would be of five waves and the entire ensuing construction is obviously a flat. Therefore, I think that we have been in a fourth corrective wave since March 24th. This corrective wave satisfies completely the requirements for an expanding triangle formation, which of course can only be a fourth wave. The trendlines concerned are uncannily accurate, as is the downside objective, obtained by multiplying the first important length of decline (March 24th to June 7th, 55.51 points) by 1.618 to obtain 89.82 points. 89.82 points from the orthodox high of the third Intermediate wave at 1011.96 gives a downside target of 922, which was hit last week (actual hourly low 920.62) on November 11th. This would suggest now a fifth Intermediate back to new highs, completing the third Primary wave. The only problem I can see with this interpretation is that Elliott suggests that fourth wave declines usually hold above the previous fourth wave decline of lesser degree, in this case 950.57 on February 17th, which of course has been broken on the downside. I have found, however, that this rule is not steadfast. The reverse symmetrical triangle formation should be followed by a rally only approximating the width of the widest part of the triangle. Such a rally would suggest 1020-1030 and fall far short of the trendline target of 1090-1100. Also, within third waves, the first and fifth subwaves tend toward equality in time and magnitude. Since the first wave (Oct. 75-Dec.75) was a 10% move in two months, this fifth should cover about 100 points (1020-1030) and peak in January 1977, again short of the trendline mark.

Now uncover the rest of the chart to see how all these guidelines helped in assessing the market's likely path.

Christopher Morley once said, "Dancing is a wonderful training for girls. It is the first way they learn to guess what a man is going to do before he does it." In the same way, the Wave Principle trains the analyst to discern what the market is likely to do before it does it.

After you have acquired an Elliott "touch," it will be forever with you, just as a child who learns to ride a bicycle never forgets. At that point, catching a turn becomes a fairly common experience and not really too difficult. Most important, in giving you a feeling of confidence as to where you are in the progress of the market, a knowledge of Elliott can prepare you psychologically for the inevitable fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today's trends linearly into the future.

Practical Application

The Wave Principle is unparalleled in providing an overall perspective on the position of the market most of the time. Most important to individuals, portfolio managers and investment corporations is that the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.
Despite the fact that many analysts do not treat it as such, the Wave Principle is by all means an objective study, or as Collins put it, "a disciplined form of technical analysis." Bolton used to say that one of the hardest things he had to learn was to believe what he saw. If the analyst does not believe what he sees, he is likely to read into his analysis what he thinks should be there for some other reason. At this point, his count becomes subjective. Subjective analysis is dangerous and destroys the value of any market approach.

What the Wave Principle provides is an objective means of assessing the relative probabilities of possible future paths for the market. At any time, two or more valid wave interpretations are usually acceptable by the rules of the Wave Principle. The rules are highly specific and keep the number of valid alternatives to a minimum. Among the valid alternatives, the analyst will generally regard as preferred the interpretation that satisfies the largest number of guidelines, and so on. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Let no one assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances does the analyst ever know exactly what the market is going to do. One must understand and accept that even an approach that can identify high odds for a fairly specific outcome will be wrong some of the time. Of course, such a result is a far better performance than any other approach to market forecasting provides.

Using Elliott, it is often possible to make money even when you are in error. For instance, after a minor low that you erroneously consider of major importance, you may recognize at a higher level that the market is vulnerable again to new lows. A clear-cut three-wave rally following the minor low rather than the necessary five gives the signal, since a three-wave rally is the sign of an upward correction. Thus, what happens after the turning point often helps confirm or refute the assumed status of the low or high, well in advance of danger.

Even if the market allows no such graceful exit, the Wave Principle still offers exceptional value. Most other approaches to market analysis, whether fundamental, technical or cyclical, have no good way of forcing a change of opinion if you are wrong. The Wave Principle, in contrast, provides a built-in objective method for changing your mind. Since Elliott Wave analysis is based upon price patterns, a pattern identified as having been completed is either over or it isn't. If the market changes direction, the analyst has caught the turn. If the market moves beyond what the apparently completed pattern allows, the conclusion is wrong, and any funds at risk can be reclaimed immediately. Investors using the Wave Principle can prepare themselves psychologically for such outcomes through the continual updating of the second best interpretation, sometimes called the "alternate count." Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of investing with it. In the event that the market violates the expected scenario, the alternate count immediately becomes the investor's new preferred count. If you're thrown by your horse, it's useful to land right atop another.

Of course, there are often times when, despite a rigorous analysis, the question may arise as to how a developing move is to be counted, or perhaps classified as to degree. When there is no clearly preferred interpretation, the analyst must wait until 
the count resolves itself, in other words, to "sweep it under the rug until the air clears," as Bolton suggested. Almost always, subsequent moves will clarify the status of previous waves by revealing their position in the pattern of the next higher degree. When subsequent waves clarify the picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%.

Practical Application

The ability to identify junctures is remarkable enough, but the Wave Principle is the only method of analysis which also provides guidelines for forecasting, as outlined in Lessons 10 through 15 and 20 through 25 of this course. Many of these guidelines are specific and can occasionally yield results of stunning precision. If indeed markets are patterned, and if those patterns have a recognizable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, real world experience shows that they do.

It is our practice to try to determine in advance where the next move will likely take the market. One advantage of setting a target is that it gives a sort of backdrop against which to monitor the market's actual path. This way, you are alerted quickly when something is wrong and can shift your interpretation to a more appropriate one if the market does not do what is expected. If you then learn the reasons for your mistakes, the market will be less likely to mislead you in the future.

Still, no matter what your convictions, it pays never to take your eye off what is happening in the wave structure in real time. Although prediction of target levels well in advance can be done surprisingly often, such predictions are not required in order to make money in the stock market. Ultimately, the market is the message, and a change in behavior can dictate a change in outlook. All one really needs to know at the time is whether to be bullish, bearish or neutral, a decision that can sometimes be made with a swift glance at a chart.

Of the many approaches to stock market analysis, the Elliott Wave Principle, in our view, offers the best tool for identifying market turns as they are approached. If you keep an hourly chart, the fifth of the fifth of the fifth in a primary trend alerts you within hours of a major change in direction by the market. It is a thrilling experience to pinpoint a turn, and the Wave Principle is the only approach that can occasionally provide the opportunity to do so. Elliott may not be the perfect formulation since the stock market is part of life and no formula can enclose it or express it completely. However, the Wave Principle is without a doubt the single most comprehensive approach to market analysis and, viewed in its proper light, delivers everything it promises.


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