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Choosing how to compete
Strategy is about setting yourself apart from the competition. It’s not just a matter of being better at what you do - it’s a matter of being different at what you do. Increasingly, market leaders will be those companies that don’t just optimize within an industry, but actually transform it.
This requires executives to think differently about their business and to devise and stake out a unique and valuable strategic position involving a competitively differentiated set of activities that integrate and compound to create a value proposition that is difficult, if not impossible, to imitate. A comprehensive, coherent, integrative and evolving portfolio of initiatives is then required to drive value and long-term performance. This includes a balance of adapting the core business to meet future challenges, shaping the portfolio in an ongoing way to respond to a changing environment, and building the next generation of business growth.
The production of high-tech goods has moved steadily from the United States to Asia over the last decade. The reasons are familiar: lower wages, a stable global economy, and rapidly growing local markets. These factors combined to make nations such as China and Malaysia favored manufacturing locations. In the last two years, however, the favorable economic winds that carried offshoring forward have turned turbulent.
For executives managing global supply networks, the question now is whether or not conditions are moving toward a tipping point. Is this the moment to consider sharply scaling back offshore production plans and bringing manufacturing back or close to the United States? Is there a more measured response that better suits the new circumstances? Before executives change their strategies, however, they must determine the total landed cost of each product produced offshore and better understand the shifting trade-offs between cost savings from offshoring (such as lower wages) and rising logistics charges.
To develop a clearer picture of the changing environment, consulting firm McKinsey analyzed a number of products manufactured for the US market and mapped the optimal region to manufacture them by straightforwardly comparing the wage savings from offshoring with the cost of logistics. In its report McKinsey shows the optimal regions for products with a range of different unit manufacturing costs (all related to the transformation of raw materials into one unit of finished goods in US dollars) and various product weights (which affect logistics costs).
The analysis shows that products that were once profitably made in areas where the local costs were lowest are moving optimally into a near-shoring zone or in some cases may now be suitable for production in the United States.
As an illustration, consider the total landed cost for a midrange server, comparing scenarios in Asia and the United States. Five years ago, in 2003, manufacturing this product in Asia rather than the United States provided a 60 percent savings in labor costs. When total landed costs were calculated, however, 36 percent of those labor savings were offset by freight, shipping-related charges, inventory, product returns, and other hidden costs. That gave Asian production a $64 landed-cost advantage. Today, economic conditions have reversed it. After factoring in the higher labor and freight costs, the former offshore savings have turned negative—a burden of an extra $16. The labor savings, $100 in 2003, are now only $45 because of wage inflation. In addition, freight costs have risen by $21 and product returns by an additional $4 because of higher oil prices.
As this example suggests, changing economic conditions may have undermined supply chain advantage and now may be an appropriate moment to reevaluate the location of manufacturing facilities. Take the total landed-cost analysis to the next level of detail and determine if bringing some production back home or to near-shore locations will help counterbalance the higher costs of shipping and freight. At the same time, consider the long-term geographic distribution of demand for products. In rethinking global supply chain, carefully evaluate the importance of speed, the availability of skilled talent, the potential for further productivity gains in Asia, one-time transition costs, the local import and tax implications, and organizational interfaces. Source: The McKinsey Quarterly; September 2008
A Sharp focus on manufacturing
In an old seaport city near its Osaka headquarters, Sharp Corp. is building a $9 billion factory complex the size of 32 baseball stadiums to make liquid-crystal-display panels and solar panels. The complex will be the world's largest LCD and next-generation solar panel plant.
Sharp is making a huge bet that keeping manufacturing of LCD and solar panels in-house will give it a big competitive advantage. There are big risks. Prices for LCD panels have been steady so far, but several companies are planning new plants that will significantly increase global supplies, which could lead to price declines. What's more, some rivals like Sony Corp. also are developing next-generation technologies like the organic light-emitting diode, or OLED, which could eventually make LCD technology obsolete.
Still, if Sharp continues to be successful, the focused-manufacturing strategy could be a model for other Japanese electronics makers, which find the alternative outsourcing model a turnoff and are still trying to figure out a way to remain a manufacturer while growing its profit in an industry that is rapidly commoditizing.
The new plant, is designed for both LCDs and solar panels, which share a similar manufacturing process, and will include factories for its major suppliers including Asahi Glass Co. and Corning Inc., which makes the glass for the panels. Even the gas and electric companies will have facilities on the premises. Source: The Wall Street Journal; 07/09/08
Innovation's effect on firm value and risk
Many executives hold an unwavering belief in innovation as a strategic imperative, counting on innovation to spur growth and yield positive financial returns. However, profitable innovation remains an elusive goal. Chief executive officers such as Sun Microsystems’ Jonathan Schwartz, recognize innovation as “the key to survival,” but they are still wondering how to get innovation to pay off.
A Boston Consulting Group study concurs; whereas 74% of 940 executives surveyed expected to spend more on innovation than in previous years, more than half the respondents were dissatisfied with the returns on their investments. Indeed, executives who have chosen to focus on quantity find themselves lamenting their decision: “There’s actually an innovation glut. The real shortage is profits” reports innovation guru Peter Schrage. Moreover, some commentators decry the riskiness of innovation and even caution managers that going after breakthrough innovations may be glamorous, but mounting evidence suggests that’s the last growth strategy you should try.
Researchers from Texas A&M and the University of Illinois at Chicago examined how breakthrough and incremental innovations affect three different facets of firm performance: normal profits, economic rents, and total firm risk. They concluded that each of these metrics is of independent interest to shareholders and managers but that examining one without the others results in an incomplete picture of the true financial value of innovation.
Using data on more than 20,000 new products from consumer packaged goods industries, the researchers found that breakthrough innovation is associated with increases in both normal profits and economic rents and that, on average, each breakthrough innovation in the sample is associated with an increase in firm value of $4.2 million. Breakthrough innovation is also associated with increases in the risk of the innovating firm, but this higher risk is offset by above-normal stock returns. In contrast, incremental innovation is associated with increases in normal profits only and has no impact on economic rents or firm risk. Source: Journal of Marketing Vol. 72 (March 2008)
Drugs firms are searching for new business models
Drugs firms, once rich and the favorites of investors, are urgently seeking cures to a variety of ailments.
One is the erosion of patent protection. Not only are the copy-cat manufacturers of cheaper generic drugs becoming emboldened by cost-conscious politicians and legal rulings in their favor, but big pharmaceutical companies are also facing an unprecedented wave of patent expirations over the next five years. Pfizer alone will lose some $13 billion in revenue a year when Lipitor, its blockbuster cholesterol drug, goes off-patent as early as 2010.
The industry's best hope lies in innovation, its traditional strength. But it is finding it extremely difficult to come up with new blockbusters. The global industry saw 24 new drugs approved by the US Food and Drug Administration in 1998 on the back of $27 billion spent on R&D. Last year, the industry spent $64 billion, but only 13 new drugs were approved by the regulator. Drugs firms are needing to come up with new business models that go beyond the industry's traditional and largely vertically integrated approach to developing, manufacturing and selling drugs.
A sign of this happening is a recent move towards outsourcing. When times were good, drugs firms refused to outsource manufacturing because doing so, they argued, would result in quality problems and risk giving away trade secrets. That strategy is being rethought. AstraZeneca, a big British drugs firm, recently announced that it will start shifting manufacturing operations to Asia as part of a cost-cutting drive.
Firms are not only changing how they make drugs, but how they market them—especially in America. On one estimate, big drugs firms spend less than a fifth of their revenues in America on R&D, but over a third peddling pills.
Lots of big drugs firms are moving into biotechnology to fill their product pipelines. Earlier this year Astra Zeneca bought MedImmune, an American biotechnology firm, for about $16 billion. A takeover battle may soon erupt over Biogen Idec, another large American biotech firm.
Roche, another Swiss firm, has made a hostile bid for Ventana, a medical-diagnostics company in Arizona, and other firms are moving in on makers of medical devices and non-prescription drugs.
Such deals go herald a dramatic new convergence of drugs, devices and diagnostics which could lead to innovation and new opportunities for growth. This would be good news indeed for an industry sorely in need of rejuvenation. Source: The Economist; 10/25/07
Why strategic integration and fit drives sustainable results
The concept of strategic integration and fit is a vital one to understand and apply in business today for companies to achieve sustainable competitive advantage. Too often we find that companies are not bound together with a common cause, or that energies are channeled to one particular effort to the detriment of other interdependent aspects of their business. This leads to dysfunctional operations, mixed messages, inefficient processes, waste, bureaucracy and poor results.
Strategy is about setting yourself apart from the competition. It’s not just a matter of being better at what you do - it’s a matter of being different at what you do. Increasingly, the companies that will be the true leaders will be those that don’t just optimize within an industry, but that actually transform their industry. The fundamental truth about strategy is that a company simply cannot be all things to all people and do a very good job of it.
We recently co-authored a report for The Conference Board that examined the likely impact of the recent SEC policy reversal on CEO succession planning. In an early review, The Wall Street Transcript called it, “a must read for anyone interested in CEO succession and its implications for corporate governance and corporate performance.
In its release the SEC reframes CEO succession as a risk management (and policy) issue and places its responsibility firmly in the boardroom. No longer can boards let management run CEO succession planning without tight oversight, including setting more specific standards and requirements, taking responsibility for results, and exercising discernable independence in the process. The policy change heralds a new wave of corporate governance scrutiny, as regulators and shareholders increasingly focus on CEO succession practices.
We invite you to download a complimentary copy and learn how to prepare for the inevitable governance and activist scrutiny ahead. We analyze the practical impact of the new SEC guidance, explain what shareholders need to know and why, and provide a straightforward guide on how to set up and manage CEO succession practices that satisfy stakeholder needs.
We hope that you find the paper of interest and value. Should you, or your colleagues, have an interest in discussing this subject further we'd be delighted to hear from you. As the governance landscape shifts on CEO succession planning, we advise Boards of Directors and company management how to best structure succession practices that mitigate risk, satisfy shareholder disclosure needs and prepare for planned and emergency CEO transition.
Breakthrough - Thinking Revolutionizes the Sales Training Industry
This is a story of business disruption and an executive brave enough to cannibalize a successful business because he felt there was a better way.
Just two years ago PLAYER MAP – a sales performance advisory firm – was celebrating two decades of helping sales organizations improve their win rates on large, complex sales projects on a worldwide basis. Clients included large high technology and engineering firms employing hundreds of field sales personnel in over 60 countries. Client sales personnel were responsible for many millions of dollars of revenue generation in highly competitive industry sectors.
SEC issues new guidance on CEO Succession Planning
During the past two proxy seasons, the SEC received a number of no-action requests from companies seeking to exclude proposals relating to CEO succession planning in reliance on Rule 14a-8(i)(7). These proposals generally requested that the companies adopt and disclose written and detailed CEO succession planning policies with specified features, including that the board develop criteria for the CEO position, identify and develop internal candidates, and use a formal assessment process to evaluate candidates. The SEC judged that these proposals could be excluded in reliance on Rule 14a-8(i)(7) because the proposals related to the termination, hiring or promotion of employees.
The Commission had stated in a 1998 Release that proposals involving "the management of the workforce, such as the hiring, promotion, and termination of employees" relate to ordinary business matters. Its position to date with respect to CEO succession planning proposals was based on this guidance and the historical approach to proposals relating to employee hiring and promotion.
In an October 26th 2009 Release however it changed its position. Reiterating that one of the board's key functions is to provide for succession planning so that the company is not adversely affected due to a vacancy in leadership, the Release read, “Recent events have underscored the importance of this board function to the governance of the corporation. We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce. As such, we have reviewed our position on CEO succession planning proposals and have determined to modify our treatment of such proposals. Going forward, we will take the view that a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning.
This change in position will most likely bring issues of CEO succession more prominently to the shareholder relations’ agenda and cause companies to more rigorously and transparently develop Succession Plans of consequence.
What's in store for 2009 in executive compensation?
To get a sense of likely 2009 trends in executive compensation, Executive Compensation consultants Towers Perrin examined the Compensation Discussion and Analysis disclosures filed by the compensation committees of 135 Fortune 500 companies. They report:
44% are freezing executive salaries.
10% are reducing executive salaries, with the most common approach a 10% reduction below 2008 levels.
16% saw executives forgo — or compensation committees reduce — payouts of earned incentive awards in 2008.
14% announced that 2009 annual or Long Term Incentive awards will be reduced or eliminated.
It is increasingly clear that the current downturn is fundamentally different from recessions of recent decades. We are experiencing not merely another turn of the business cycle, but a restructuring of the economic order.
For some organizations, near-term survival is the only agenda item. Others are peering through the fog of uncertainty, thinking about how to position themselves once the crisis has passed and things return to normal. The question is, “What will normal look like? While no one can say how long the crisis will last, what we find on the other side will not look like the normal of recent years. The new normal will be shaped by a confluence of powerful forces—some arising directly from the financial crisis and some that were at work long before it began.
Obviously, there will be significantly less financial leverage in the system. But it is important to realize that the rise in leverage leading up to the crisis had two sources. The first was a legitimate increase in debt due to financial innovation—new instruments and ways of doing business that reduced risk and added value to the economy. The second was a credit bubble fueled by misaligned incentives, irresponsible risk taking, lax oversight, and fraud. Where the former ends and the latter begins is the multitrillion dollar question, but it is clear that the future will reveal significantly lower levels of leverage (and higher prices for risk) than we had come to expect. Business models that rely on high leverage will suffer reduced returns. Companies that boost returns to equity the old fashioned way—through real productivity gains—will be rewarded.
Another defining feature of the new normal will be an expanded role for government. In the 1930s, during the Great Depression, the Roosevelt administration permanently redefined the role of government in the US financial system. All signs point to an equally significant regulatory restructuring to come. Some will welcome this, on the grounds that modernization of the regulatory system was clearly overdue. Others will view the changes as unwanted political interference. Either way, the reality is that around the world governments will be calling the shots in sectors (such as debt insurance) that were once only lightly regulated. They will also be demanding new levels of transparency and disclosure for investment vehicles such as hedge funds and getting involved in decisions that were once the sole province of corporate boards, including executive compensation.
While the financial-services industry will be most directly affected, the impact of government’s increased role will be widespread: there is a risk of a new era of financial protectionism. A good outcome of the crisis would be greater global financial coordination and transparency. A bad outcome would be protectionist policies that make it harder for companies to move capital to the most productive places and that dampen economic growth, particularly in the developing world. Companies need to prepare for such an eventuality—even as they work to avert it.
These two forces—less leverage and more government—arise directly from the financial crisis, but there are others that were already at work and that have been strengthened by recent events. For example, it was clear before the crisis began that US consumption could not continue to be the engine for global growth. Consumption depends on income growth, and US income growth since 1985 had been boosted by a series of one-time factors—such as the entry of women into the workforce, an increase in the number of college graduates—that have now played themselves out. Moreover, although the peak spending years of the baby boom generation helped boost consumption in the ’80s and ’90s, as boomers age and begin to live off of retirement savings that were too small even before housing and stock market wealth evaporated, consumption levels will fall.
This much is certain: when we finally enter into the post-crisis period, the business and economic context will not have returned to its pre-crisis state. Executives preparing their organizations to succeed in the new normal must focus on what has changed and what remains basically the same for their customers, companies, and industries. The result will be an environment that, while different from the past, is no less rich in possibilities for those who are prepared. Source: McKinsey & Company; March 2009
Changing the way we change
Quiet cynics will derail your change program unless you bring them onboard or leave them with nowhere to hide.
We’ve all read the statistics - 41% of change projects fail and of the 59% that “succeed” only half meet the expectations of senior management. But we don’t need studies to tell us this. We have the scar-tissue. We know how hard it is to mobilize an organization to take a different path.
We believe that the answer to sustainable change is looking at the entire process of change differently.
Carlos Ghosn discusses the current and future state of the global auto industry
Renault and Nissan’s CEO Carlos Ghosn was the guest speaker at Motor Press Guilds breakfast at the LA Auto Show on December 1, 2008 and shared his views on the current and future state of the global auto industry (see video).
Winds of change taking place in the drugs industry
Big drugs firms report that growth is slowing in the all-important US market. Drugs were supposed to be recession-proof, but it seems that financially squeezed patients without insurance, or with big co-payments, are cutting back even on their medicines. Many drugs firms have responded by reducing spending on sales and marketing by 10-20%; this week Merck said it had made deep cuts in these areas without hurting sales. The firm has also made a big push into emerging markets. It thinks its revenues there may exceed its target of $2 billion in 2010.
The second transformative force is the pending reform of America’s health-care industry. When Hillary Clinton tried to push through a plan for government-run health care in the 1990s, the drugs industry spent huge sums to help kill the initiative. This time the industry wants comprehensive reform and even has “a seat at the table.” Perhaps surprisingly, PhRMA (Pharmaceutical Research and Manufacturers of America) now supports most aspects of health-care reform being mooted, from universal coverage to restructuring the insurance market.
However, this acceptance of change goes only so far. Push Pharmaceutical executives on the prospects for drug-price controls, and their unflinching answer is that they are “completely opposed” to such European-style “rationing” of care. The industry makes much of its profit in the unfettered American market, and price controls threaten that flow of cash. It argues that if limits are imposed on drug prices in America, there will be less to invest in innovation and everyone will suffer, since the rest of the world free-rides on American spending.
That argument is correct, in that businesses need the prospect of profit in order to invest. In practice, though, America is unlikely to impose draconian price controls. The more likely outcome is that government health schemes will start demanding discounts from drugs firms, and will buy more generics. Crunch the numbers and this need not lead to disaster. A 20% cut in drugs prices paid by Medicare, America’s health-care system for the old and disabled, will shave profits at the biggest drugs firms by a mere 5%. Source: The Economist 12/11/08
Executives shift to survival mode
Business executives are shuffling their priorities, as concerns about confidence and risk-management supplant work-force issues.
The Conference Board last month again surveyed the chief executives, chairmen and company presidents who were asked in July and August to list their top concerns. The differing results reflect the impact of the credit crunch, which deepened in September, and the slowing global economy.
Among the 190 executives who responded to both surveys, execution of business strategy remained the top priority. But nearly twice as many - 47% of respondents, up from 25% in late summer -- said they were especially concerned about "speed, flexibility [and] adaptability to change." Global economic performance and financial risk were the fourth- and fifth-most-pressing concerns. Neither were among executives' top-10 priorities in the earlier poll.
At the same time, worries about growth and finding and grooming workers declined in importance; concern fell for issues such as succession planning, diversity and labor relations. Among work-force-related issues in the survey, only efficiency and health-care costs gained in importance.
The Conference Board, a New York research group, distributed surveys to member and non-member executives. The results aren't necessarily a scientific representation of the global business community.
Business leaders are grappling with an "unprecedented scope of change," said Conference Board Chief Executive Jon Spector. "The people-management issues...have moved off the front burner." Source: The Wall Street Journal; 11/20/08
Emerging markets are producing examples of capitalism at its best
Safaricom may not be a household name in the rest of the world, but in Kenya it is famous. On June 9th the country’s most popular mobile-phone company, with 10.5m customers, listed its shares on the Nairobi stock exchange, raising over $800m in the biggest initial public offering yet in sub-Saharan Africa. The offering was nearly five times oversubscribed, and Safaricom’s share price quickly rose by 60%.
Even sub-Saharan Africa is feeling its way towards the emerging-markets bandwagon. In January Goldman Sachs published its first bullish report on the continent, “Africa Rising”, noting at the time that sub-Saharan stockmarkets in 15 countries (excluding mighty South Africa) listed around 500 companies with a market capitalisation of nearly $100 billion.
Seven years after Goldman Sachs invented the BRICs acronym, the performance of the emerging stockmarkets is running well ahead of the bank’s high expectations. Even after recent falls, at the start of this month Brazilian shares were up by 345% since November 2001, India’s by 390%, Russia’s by 639% and China’s, depending on whether you go by the mainland or the Hong Kong exchange, by 26% or 500%. In 2001 Goldman Sachs had predicted that by the end of the decade the BRIC economies would account for 10% of global GDP at purchasing-power parity (PPP); by 2007 their share was already 14%. The investment bank now expects China’s GDP to surpass America’s before 2030.
Yet the emerging markets are not merely generating economic growth. They are also producing companies that are worth investing in, and that are even starting to take on and beat the best of the developed world’s multinationals. As well as Lenovo, the new champions listed by Antoine van Agtmael in his book “The Emerging Markets Century” include Haier, a Chinese white-goods firm; Cemex, a Mexican cement company; Embraer, a Brazilian aircraft-maker; Infosys, an Indian software giant; and Ranbaxy, an Indian drug company. The list of emerging firms in “Globality” that are said to be “changing the game in every industry” also includes firms such as Goodbaby, which has an 80% share of the market for baby buggies in China and a 28% share in America, and the Tata Group, an Indian conglomerate that spans cars and steel, software and tea. Source: The Economist; 09/18/08
Executive pay under fire amid market turmoil
Executive compensation has garnered intense attention recently, with a particular focus on the pay packages due to failed Wall Street executives. Martin Sullivan, the former CEO of American International Group (AIG) who was ousted in June 2008, was promised a severance package worth $47 million, while his successor Robert Willumstad, who was asked to step down last week, was expecting a $22 million package. Over the weekend, Willumstad informed Edward Liddy, AIG's new CEO, that he won't accept his severance package because it wouldn't be fair to AIG shareholders and employees.
The details of the Government’s $700 billion bailout package are still being worked out in Washington, but Congress is moving toward including executive compensation limits in the legislation. Early drafts of the legislation focus on three approaches: 1) limiting executives' severance packages; 2) giving shareholders an advisory vote on executive pay, often referred to as "say on pay"; and 3) including a clawback provision that would allow companies to recover executives' bonuses if they are later found to be based on inaccurate financial results. All three approaches would apply only to executives at companies that receive government aid through the bailout plan. Source: The Wall Street Journal; 09/22/08 and 09/26/08
Retailers reprogram workers in efficiency push
To improve productivity and cut payroll costs, many retailers across the U.S. are installing computer systems that decide when certain employees should work, and for how long. Vendors claim the systems can increase productivity by 15% or more and decrease labor costs by 5% or more. The systems calculate each employee's performance metrics, which include average sales per hour, number of units sold, and dollars per transaction. Using these metrics, the systems schedule the most productive employees during peak hours. The retail industry ranks as the country's third largest private-sector employer, employing some 15 million workers. Most employees are less than thrilled with the new scheduling systems. Many have been scheduled to work shorter shifts and are having difficulties arranging their lives around their new work hours. In addition, competition on retail floors has spiked, with employees trying to steal sales from others to improve their own performance metrics. One retailer has seen success with its computer system, with 76% of its store managers viewing it as an improvement. Source: The Wall Street Journal; 09/10/08
Healthcare costs create rising strain
Several surveys released recently indicate that increasing numbers of Americans are struggling to pay their medical expenses, even those with health insurance coverage through their employers. According to a Kaiser Family Foundation survey, the average health insurance premium increased 5% in 2008. Other surveys project that premiums will rise between 6% and 6.4% in 2009. The annual cost of family health coverage has more than doubled since 1999, with employees paying an average of $3,354 for it in 2008. Employees also are dealing with rising deductibles. About 18% are facing deductibles of at least $1,000, which is up 6% from 2007. The Kaiser study noted that rising health costs are most troubling for those employees working at companies with fewer than 200 employees. Source: The New York Times; 09/25/08
Websites that encourage business networking are thriving
Among the few firms benefiting from the upheaval in the financial markets are professional social networks—websites that help with business networking and job-hunting. On LinkedIn, the market leader, members have been updating their profiles in record numbers in recent weeks, apparently to position themselves in case they lose their jobs. The two most popular sites, LinkedIn and Xing, have been growing at breakneck speed and boast 29m and 6.5m members respectively. And, in contrast to mass-market social networks such as Facebook and MySpace, both firms have worked out how to make money.
LinkedIn and Xing are similar in many ways. Both cater to youngish professionals with above-average income, and allow people to connect, keep track of each other’s activities and create groups of common interest. Both are also profitable: since they help members find jobs or build their businesses, many users are willing to pay.
Yet the firms come from very different worlds. LinkedIn, a typical Silicon Valley start-up, was founded in 2002 by Reid Hoffman, a serial entrepreneur, to manage his own network of business contacts. Funded by venture capitalists, it recently secured $53m of funding in a deal that gave it a valuation of over $1 billion. Xing, for its part, hails from Hamburg, in Germany, and was founded in 2003 by Lars Hinrichs, another serial entrepreneur. It has relied on subscription fees since its launch, and it went public in 2006.
LinkedIn is culturally American, not just because English is the dominant language (there is also a Spanish version), but because it is still chiefly about advancing its members’ careers, even if many other things get a look in. The company does not release numbers, but a big chunk of its estimated annual revenues of $100m in 2008 is said to come from headhunters and companies, which pay to search LinkedIn’s database and contact its members.
Xing, by contrast, has a distinctly Germanic feel, despite being available in 16 languages, including Mandarin. Although recruiting also plays an important role, the site is more about networking. Members often meet offline. They also generate 80% of the firm’s revenue, which amounted to €16m ($24m) in the first half of this year. Half a million users pay a monthly fee of €6 ($9) to use the site: Xing’s profit margin was 37% in the most recent quarter.
LinkedIn is well on its way to becoming the networking site of choice for English-speaking businesspeople with global connections. But this does not mean that Xing will get squeezed out. If it plays its cards right, it could become the European alternative that takes more account of cultural differences in the way business is done.
Things could change, however, if Facebook grows up and becomes a place to do serious business, says Jeremiah Owyang of Forrester Research, a market-research firm. There are other potential rivals, too. American newspapers such as the New York Times and the Wall Street Journal are adding networking features to their websites. These are mainly meant to get readers to stick around, but they could grow into alternatives to professional social networks. And then there are the professional associations for which moving online would be only natural, but which have been a surprising no-show in social networking so far, according to a recent study by Outsell, another market-research firm.
Whatever the outcome, it seems certain that professional social networks are here to stay as independent entities—something that cannot be said of their mass-market counterparts. As Mr Hoffman, LinkedIn’s founder, puts it: “Most users of social networks have a lot of disposable time, but not much disposable income. With professionals it is the other way around.” Source: The Economist; 09/25/08
Outlook darker as jobs are lost and wages stall
The nation's jobs outlook is not a pretty picture. Employers eliminated 62,000 jobs last month, 438,000 since January. Fewer teenagers and new college graduates have found work. The percentage of unemployed adult workers, age 25 and older, went up for the second month in a row in June.
The number of workers unemployed for six months or more jumped to 1.6 million -- up 37% in the past year. Put another way, more than 18% of the unemployed have been looking for work for more than half a year. To add to the misery, average weekly wages were up only 2.8% for the 12 months through June, while the CPI was up more than 4%. Source: The Bureau of Labor Statistics; 07/05/08
Governing in a recession
Boards today have specially tough decisions to make. Here are some tips for revisiting your corporate strategy in light of current threats.
As board members wade through today's grim business headlines of massive layoffs, tumbling stock prices, and chief executive officer terminations, many are asking themselves what they should do differently. Are there critical items that need to be on the next boardroom agenda? Should they be rolling up their sleeves and really digging in to help the company weather the storm? If financial results have them rattled, should they follow the lead of AIG in firing the captain and having someone from the board try to steer the ship? Here are four critical things boards must consider in responding to today's tough business environment.
Revisit Your Corporate Strategy If your corporate strategy was set six months ago or earlier, you should look at whether it's best to stay the course or make some critical changes to respond to the tough new economic environment. Take the time to examine to the underpinnings of the strategy. What are some of the new threats that weren't present at the time the strategy was developed? Does the change in the economic environment actually create any opportunities for the company? How is the business positioned relative to competitors to withstand these threats or respond to these opportunities?
Identify Your Risks
Specifically look at your risks. Focus on five major risks facing the company. How might they have changed in view of the current economic environment? What is the potential impact of these risks? How are they being managed? Should they be managed differently from six months ago? Engage key business-unit leaders with responsibilities for managing these top risks—be they financial, environmental, customer-related or whatever—to in the dialog. This enables the board to talk directly with the executives who have responsibility for these key risks and to get a sense of whether these folks are really on top of the situation.
Keep Those Sleeves Down
It's only human nature when a company hits a really rough patch, as many find themselves in now, that board members will want to help. To some, "help" means rolling up their sleeves and getting into detailed cost-cutting discussions or designing an organizational restructuring. Unless the CEO has specifically invited the board, or individual directors, to get involved in this way, it's really not that helpful. It's micro-management. And it tends to add to the CEO's burden in an already challenging business climate. As board members, you must ask yourselves: Do we have confidence in the CEO and the management team to lead the company through this tough economic situation? If the answer is no, then it's time to pull an AIG. If the answer is yes, then it's important to let the CEO manage and keep the board members governing.
Pulling the Plug
When losses mount and big investors rattle their sabers, boards always feel pressured to fire the CEO. Whether you should take the plunge goes back to the earlier question: Does the board still have confidence in him or her? If the answer is no, the board must consider the timing and ramifications of pulling the plug. AIG's board had a viable backup plan for then-CEO Martin Sullivan the minute Robert Willumstad joined the board as chairman in 2006. In Willumstad, AIG had a director with the requisite background and experience to take the helm if they needed him.
Few boards are so well positioned. Most have one or two retired CEOs who might be able to fill in for a short period while they search for a permanent replacement. Other key executives often respond by jumping ship—just when you need them most—and the whole organization loses focus, wondering about the future and typing up their own CVs at a time when the company desperately needs all hands on deck.
So here's a key strategic discussion for your next executive session: If your board did lose confidence in your CEO — or if another board decides to poach your CEO to fill its leadership gap — who could step into the breach? How credible would this person's leadership be to the company and to Wall Street? What key executives would it be critical to retain — and how would this be accomplished? If they left, how strong is the bench? Are there implications from this discussion for director recruitment, executive development, or executive compensation?
Tough times call for some tough boardroom discussions. Make sure your board steps up to them in the right way — your shareholders deserve nothing less. Source: BusinessWeek; 07/03/08
What consumers want in healthcare
Consumers are confused, concerned, and uncertain about their health insurance and financing needs. Companies should listen to them.
In the quickly changing health care financing sector, decision-making power and financial responsibility increasingly fall to individuals instead of companies. But many consumers aren’t accustomed to shopping for health insurance, so they are not prepared for this additional responsibility. Feeling confused, concerned, and unprepared, they want personalized support to help them make and manage complex decisions—in particular, more relevant, understandable, and accessible options. This portrait emerges from a 2007 McKinsey survey, which questioned some 3,000 people — who have the option of choosing a health insurer — about their health care concerns, perceptions, and purchasing behavior.
The results reveal substantial opportunities in the health care financing sector for many current and potential players, including incumbent payers, financial-services providers, technology “infomediaries,” and health care providers. Retail health consumers constitute a market worth hundreds of billions of dollars annually, where revenue growth and profit margins are 2.5 and 1.5 times higher, respectively, than those of the more traditional group-sponsored health insurance markets. Currently, 116 million consumers have a choice of health insurance, and that number is expected to reach 151 million by 2011. To win the business of these consumers, players in the health care financing sector will have to listen carefully to them and provide better support.
And the demand is very much real. Among consumer concerns, the cost of health care is paramount. Indeed, respondents are more concerned about the financial repercussions of injury or illness than about injury or illness itself. But this state of mind has done little to help them prepare financially for health problems. Of those who are concerned, 48 percent report being prepared for common medical problems but only 15 percent for more disruptive medical scenarios, such as becoming impaired and requiring long-term care. Notable differences in concerns appear across age groups. Young people (ages 18 to 34) are more concerned about their dental needs (44 percent) and protecting themselves from the consequences of major accidents (38 percent). Seniors tend to be much more concerned about managing major medical events (49 percent) or the requirements of long-term care (47 percent).
Companies that pay careful attention to the needs, desires, and habits of these consumers stand to gain a significant advantage over the competition in this quickly burgeoning market. Clearing away the confusion among consumers will be a critically important step in transforming their anxiety and latent demand into sales. A focus on educating consumers will help them better understand the nature and magnitude of the risks they face. Building a trusted brand is also essential, since many consumers consider only two options when choosing insurers. A brand should be strong enough to be among the first names consumers consider when they shop. Source: McKinsey Quarterly; June 2008
Wall Street's insecurity
The securities industry is taking its lumps. Citigroup has announced it is getting rid of more than 6,000 workers. Bank of America has announced cuts of 3,650 workers. Lehman Brothers is laying off 1,425 workers. As many as half of Bear Sterns' 14,000 workers could lose their jobs in the takeover by J.P. Morgan Chase & Co. The downsizing has people on edge. Some are bitter and are suing their former employers. Bonuses traditionally make up a big part of pay (75%) on Wall Street. Employees work incredible hours for those bonuses. This year some downsized employees were offered bonuses of only 5% of their previous year's bonus plus 20 weeks of severance. To many that meant they were barely paid and they are fighting back. Source: The Wall Street Journal; 04/12/08
Whom do compensation consultants work for?
The House Committee on Oversight and Government Reform held a hearing on executive compensation on Friday, March 7. On the hot seat, were E. Stanley O'Neal, former CEO of Merrill Lynch, Charles O. Prince III, former CEO of Citigroup, Angelo Mozilo, founder and CEO of Countrywide Financial, and the chairmen of the compensation committees of all three companies. Angelo Mozilo was the brunt of many of those exchanges.
Separately, Towers Perrin tried to clarify its position and answer criticism of its role as a consultant at Countrywide Financial. The committee has evidence (board meeting minutes, internal e-mails, etc.) that two consulting firms hired by Countrywide said Mozilo's compensation was inflated. They recommended cutting back. After Mozilo objected, a third consultant was hired. The third consultant created a more lucrative compensation package for Mozilo and, according to some, appeared to be serving as a "personal adviser" to Mozilo rather than consultant to the board. Source: The Wall Street Journal 03/08/08
The rich fail differently from the rest of us
In the executive fall-out from the subprime mortgage mess, E. Stanley O’Neal, CEO of Merryl Lynch walked away with a severance package worth about $161 million. Citigroup’s Charles O. Prince III gets some $68 million, with a cash bonus of at least $12.5 million, an office, a car and a driver for the next five years.
Mr. O’Neal lost his job at Merrill Lynch on Oct. 30, six days after the firm announced a record $8.4 billion in quarterly write-downs tied to subprime-mortgage-related securities and bad loans; Mr. Prince was shown the door at Citigroup, which also took a beating and has lost $64 billion in market value over the last four years. To paraphrase F. Scott Fitzgerald, the rich fail differently than you and I. Source: The New York Times; 01/13/08
US employment statistics
Private-sector jobs fell by 101,000 in February. The private-sector loss, however, was offset by a gain of 38,000 jobs in government. Ergo, the economy suffered a net loss of 63,000 jobs, the worst job loss in five years. The manufacturing and construction sectors took the biggest hits. The unemployment rate edged down from 4.9% in January to 4.8% in February, but only because some job seekers quit looking for work. Source: The Washington Post, 03/09/08
Registered nurses will be the No. 1 in-demand job through 2016. The Bureau of Labor Statistics projects almost 600,000 new openings over the next decade. Nurses' aides, orderlies, home health aides, and personal care aides will add another 600,000 jobs. Other in-demand jobs include customer service representatives, retail sales staffers, food service personnel, college-level faculty, and janitors. Source: The Bureau of Labor Statistics; 01/04/08
More people pushed into the part-time work force
More people are being pushed into part-time jobs in place of full-time work for economic reasons. The number rose by more than 100,000 in February alone. According to the Bureau of Labor Statistics, 4.79 million people are working part-time, the highest number since 1993. The nature of part-time work is changing and getting tougher. More people are holding multiple part-time jobs out of economic need. Also, many part-timers' work schedules are tied to customer traffic, which means schedules are changing constantly. Add in lower pay (10% to 20% less than comparable full-time work), few if any benefits, and little job security. Source: The Wall Street Journal, 03/09/08
Excellence of execution is top concern for CEOs worldwide
Execution is taking precedence over profit and top-line growth as a focus for CEOs around the world, according to a global survey of chief executives released today by The Conference Board.
In a survey of 769 global CEOs from 40 countries, chief executives chose excellence of execution as their top challenge and keeping consistent execution of strategy by top management as their third greatest concern. Sustained and steady top-line growth, which led the pack last year, now ranks second, with profit growth fourth, and finding qualified managerial talent fifth.
Finding qualified managerial talent (sixth place) and top management succession (seventh place) have become the dominant people issues for U.S. CEOs, replacing last year's top HR concern, healthcare costs. The two concerns are closely intertwined because competition for talented managers will become even fiercer as many baby boomers depart the "top of the house" to move into "third-stage careers" and retirement.
After ranking seventh last year, the challenge of employee healthcare benefit costs slipped out of the U.S. top 10 in 2007. Its lower ranking as a greatest concern is most likely due to the downward movement of average annual rises in employee premiums for employer-sponsored health coverage, illustrating successful implementation of cost containment innovations. Source: The Conference Board; 10/04/2007
CEO confidence declines
The Conference Board measure of chief executive officer confidence, which had declined to 45 in the second quarter of 2007, edged down to 44 in the third quarter; a reading of more than 50 points reflects more positive than negative responses.
The survey Includes about 100 business leaders in a wide range of industries. CEOs' assessment of current economic conditions was less favorable, with 14% claiming economic conditions had improved, down from 23% last quarter. In assessing their own industries, business leaders were also less optimistic.
Approximately 17% claim conditions are better, down from approximately 23% in the first quarter, CEOs, however, are moderately more optimistic about the short-term outlook than last quarter. Now, approximately 20% of business leaders expect economic conditions to improve in the next six months, up from 17% last quarter. Expectations for their own industries are also more upbeat, with 27% anticipating an improvement, up from 17% last quarter.
Some 24% of business executives report increases in their companies' capital spending plans since January of this year. while 13% have scaled plans back, based on a supplementary question asked each year in the third quarter. This is a moderate change from the 2006 survey, when 28% of respondents had increased their capital spending plans and 9% had made cuts. Source: The Conference Board; 10/05/07
The smart use of business intelligence tools and algorithms
In his new book Competing on Analytics, Thomas Davenport asserts that competitive advantage can come from sophisticated exploitation of business intelligence and predictive analytics. Online video rental company Netflix, for example, has used its algorithm-driven movie recommendation engine to blossom into a $1 billion business that competes with brick-and-mortar operations like Blockbuster Inc.
Davenport defines an analytical competitor as an organization that uses analytics extensively and systematically to out-think and out-execute the competition. The analytics are in support of a strategic distinctive competency and they argue, persuasively, that without a distinctive capability you cannot be an analytic competitor.
The book outlines four pillars of analytical competition - a distinctive capability, enterprise-wide analytics, senior management commitment and large scale ambition. It lays out 5 stages of analytic competition from "analytically impaired" to "analytic competitor". The importance of experimentation is made clear and the book repeatedly emphasizes the need for companies and executives to be willing to run the business "by the numbers".
11 signs that you are doing it right
Analysts have direct, nearly instantaneous access to data.
Information workers spend their time analyzing data and understanding its implications rather than collecting and formatting data.
Managers focus on improving processes and business performance, not culling data from laptops, reports and transaction systems.
Managers never argue over whose numbers are accurate.
Data is managed from an enterprise-wide perspective throughout its life cycle, from its initial creation to archiving or destruction.
A hypothesis can be quickly analyzed and tested without a lot of manual behind-the-scenes preparation beforehand.
Both the supply and demand sides of the business rely on forecasts that are aligned and have been developed using a consistent set of data.
High-volume, mission-critical decision-making processes are highly automated and integrated.
Data is routinely and automatically shared between the company and its customers and suppliers.
Reports and analyses seamlessly integrate and synthesize information from many sources.
Rather than having data warehouse or business intelligence initiatives, companies manage data as a strategic corporate resource in all business initiatives.
Source: Competing on Analytics: The New Science of Winning by Thomas H. Davenport; Harvard Business School Press, 03/06/07
Global law practice trends
Law firms are now going Public. Australian class action law firm Slater & Gordon was listed on the Australian Stock Exchange earlier this year, making it the first law firm in the world to go public. The prospectus warns investors that they are third on its list of priorities behind duties to clients and the courts.
Law firms in the US have hit the $1000 billable hour mark.
Entry level Associates in top New York firms earn about $160,000 per annum and the forecast is that it may be $250,000 in 5 years time.
Partner productivity is now a main item on the agenda. Firms are becoming less tolerant of underperforming partners; stripping Partners of their equity is now a growing trend. Chicago's Mayer, Brown, Rowe & Maw earlier this year announced a major restructuring calling for the termination -- or "de-equitization" -- of 45 of its partners, around 10 percent of its total. This 1,500-lawyer firm said it was restructuring its partnership despite strong financial results in 2006, with revenue up 11 percent to $1.1 billion and profits per partner over $1 million for the first time. It said the move was "designed to enhance the firm's position among the world's leading law firms," noting that other firms that had taken similar steps in the past "have achieved significantly improved health and competitive position."
Offshoring legal services is now in vogue. Outsourcing commodity type legal work to people in other countries is one way companies (and law firms) cut costs these days. India alone has become a major provider for offshore legal services with over 100 third party legal services providers operating out of India alone. So many in-house counsel or top law firms hire a team to do certain work that paralegals can handle in other countries for rates as low as between $10 - $90 USD per hour. Companies like Cisco, Dupont and General Electric now run their in-house legal departments in India. Source: Africa News Service; 10/16/07
Scholars link success of firms to personal lives of CEOs
Should shareholders in a company care if the chief executive's child dies? What if the mother-in-law passes away?
Such things don't normally figure in investment decisions. But maybe they should, according to a recent study by three finance professors. Mining a trove of Danish government data on thousands of businesses, they were able to track links between CEO-family deaths and the companies' profitability over a decade.
It slid by about one-fifth, on average, in the two years after the death of a CEO's child, and by about 15% after the death of a spouse. As for an executive's mother-in-law, the old jokes seem to hold: The researchers found that profitability, on average, rose slightly after her demise.
The study is part of an emerging -- and controversial -- area of financial research that delves into the lives and personalities of executives in search of links to stock prices and corporate performance. The trend is an outgrowth of the tendency to lionize CEOs as critical to the businesses they lead. If their performance is so vital, the researchers say, investors should want to know anything that could affect it.
Other academics have found underperformance, in both profits and stock prices, at companies led by executives who received awards such as best-manager kudos from the business press. The theory: Once they become stars, some CEOs may pay more attention to writing memoirs and sitting on outside boards and a little less to running their companies.
Two Penn State professors recently attempted to rate CEOs of technology companies on their degree of narcissism. They looked at things like the size of executives' photos in annual reports and how often they use the first person singular in press interviews. The authors concluded that narcissistic executives tended to take greater risks, leading to bigger swings in profitability of their companies. The study, called "It's All About Me," is to be published in Administrative Science Quarterly. Source: The Wall Street Journal; 09/05/07
Social networking goes professional
Social networking, popularized by teens sharing information with their friends online on Web sites such as Facebook is now blooming in the business world, thanks to new social networks that enable professionals and executives in industries such as advertising and finance to rub virtual elbows with colleagues.
Millions of professionals already turn to broad-based networking sites like LinkedIn to swap job details and contact information, often for recruiting purposes. Business executives also have turned to online forums, email lists and message boards to sound off on information related to their industries. Now, online services are trying to promote a more personal type of business networking.
Unlike relatively simple message boards that are open to all, these new sites -- including Sermo.com for doctors and INmobile.org for the wireless industry - have features such as profile pages showing professional credentials; personal blogs that function like a kind of online diary; links to "friends" online; electronic invitations to real or online events; and instant-messaging.
Social networking is just one of many consumer technologies, including blogs, wikis and virtual worlds, to cross over into the corporate world. It is happening as social networking is moving more into the mainstream. Leading consumer social-networking sites attracted more than 110 million unique monthly U.S. visitors in July, up more than 40% from the previous July, according to comScore Inc.
For a variety of reasons, social networking has been slower to take off in the business world. Employees are wary of disclosing too much to potential competitors, and loose-lipped executives can easily embarrass themselves and their companies online. Policing these services' memberships to weed out impostors can be difficult, and the sites are still in the early stages of turning their networks into sustainable businesses. Also, business users typically have less time to devote to socializing online and are willing to do so only if they believe they are getting a unique benefit from the site. Source; The Wall Street Journal; 08/28/07
A critical shortage of nurses
The U.S. is facing a severe nursing shortage. Already, an estimated 8.5% of the nursing positions in the U.S. are unfilled - and some expect that number to triple by 2020 as 80 million baby boomers retire and expand the ranks of those needing care. Hospital administrators and nurses' advocates have declared a staffing crisis as the nursing shortage hits its 10th year, the longest stretch in 50 years.
So why aren't nurses paid more? Wages for registered nurses rose just 1.34% from 2006 to 2007, trailing well behind inflation. The answer is complicated, influenced by factors from hospital cost controls to insurance company reimbursement policies. But another factor is often overlooked: Huge numbers of nurses are brought into the U.S. from abroad every year. In recent years nearly a third of the RNs joining the U.S. workforce were born in other countries.
Critics say this is a short-term solution that could create long-term problems. The influx of non-U.S. nurses allows hospitals to fill positions at the low salaries they prefer to pay. But it prevents the sharp wage hike that would encourage Americans to enter the field, which could solve the nursing shortage in the years ahead. Source: Business Week; 08/28/07
A patent improvement?
Patent examiners, who scrutinize applications for patents and determine whether they ought to be granted or not, are used to poring over diagrams of complicated contraptions. But now the patent system itself, just as complex in its own way, is under increasing scrutiny.
The number of applications has soared in recent years, but patent offices have been unable to keep up—resulting in huge backlogs and lengthy delays. Standards have slipped and in America the number of lawsuits over contested patents has shot up. In an attempt to fix these problems, the United States Patent and Trademark Office (USPTO), Britain's Intellectual Property Office (IPO) and the European Patent Office are evaluating a radical change: opening the process up to internet-based collaboration.
The scheme, known as “Peer to Patent”, was created by Beth Simone Noveck, a professor at New York Law School. It applies an unusual form of peer review to a process which traditionally involves only a patent applicant and an examiner. Anybody who is interested may comment on a patent application via the internet. The scheme was launched as a one-year pilot program in the US on June 15th. Source: The Economist; 09/07/07
The real Pepsi challenge
The Inspirational Story of Breaking the Color Barrier in American Business
In America's long march toward racial equality, small acts of courage by men and women whose names we don't recall have contributed mightily to the nation's struggle to achieve its own ideals. This moving book details the story of one such little-noted chapter. In the late 1940s and early 1950s, as Jackie Robinson changed the face of baseball, a group of African-American businessmen - twelve at its peak - changed the face of American business by being among the first black Americans to work at professional jobs in Corporate America and to target black consumers as a distinct market.
The corporation was Pepsi-Cola, led by the charismatic and socially progressive Walter Mack, a visionary business leader. Though Mack was a guarded idealist, his consent for a campaign aimed at black consumers was primarily motivated by the pursuit of profits -- and the campaign succeeded, boosting Pepsi's earnings and market share. But America succeeded as well, as longstanding stereotypes were chipped away and African- Americans were recognized as both talented employees and valued customers. It was a significant step in our becoming a more inclusive society. Wall Street Journal Books/Free Press; New York, 2007; ISBN-10: 0743265718
Chief executives grew even richer last year
The median salary and bonus for corporate commanders advanced 7.1% to $2,598,284, concludes Mercer Human Resource Consulting’s proxy analysis of 350 big U.S. corporations. The upturn in cash compensation matched the 7.1% increase a year earlier to a median of $2,408,665.
Median base pay for chiefs in 2006 grew 4.1%, compared with 3.6% in 2005. Raises for the No. 1 boss outpaced those bestowed on their white-collar associates. Paychecks of nonunion employees climbed 3.7%, their fastest clip since 2002 and following a year in which they rose 3.6%. (Overall U.S. wages and benefits rose 3.3% last year, slightly ahead of the 3.2% seen in 2005). Thanks to a 14.4% jump in company profits, surveyed chief executives enjoyed an 8.1% boost in their bonuses to a median of $1,553,200. In 2005, bonuses expanded 8.4% to a median of $1,437,150.
Total direct compensation for those covered by the Mercer analysis climbed 8.9% last year to a median of $6,548,805. That figure now covers salaries, bonuses, other annual incentives as well as the value of restricted stock, stock options and other long-term incentive awards at the time they were granted. Based on this revised definition, the median equaled $6,008,368 in 2005; the precise size of the gain was unavailable.
Total direct compensation for those leading the five companies with the highest shareholder returns zoomed 42.8% to a median of $5,278,755, Mercer found. The heads of the five companies with the poorest returns saw a modest 6.5% climb, but achieved a higher total direct compensation of $12,442,773. The median total shareholder return, or TSR, which equals the stock-price change plus reinvested dividends, equaled 15.1% for surveyed businesses, compared with 6.8% in 2005.
Last year, 185 chief executives cashed in options for a median gain of $3,299,193. In 2005, 192 did so for a median gain of $3,493,440. Sizable increases in profitability and the stock market helped expand these rewards. The number of corporate leaders getting options slipped to 246 from 265 in 2005. Source: The Wall Street Journal; 04/09/07
The employee benefits' burden
45 million people in the US are not covered by health insurance and 40 percent of US companies do not offer health care coverage to their workers. The issue of healthcare continues to be at center-stage of political, policy and competitiveness debate.
Wal-Mart and GM illustrate that employee benefits is not just a human resource issue but a core competitiveness one. The world’s larger retailer currently faces the grim reality that unabated, benefits costs could consume an incremental 12 percent of total profits in 2011, equal to $30 billion to $35 billion in market capitalization. GM struggles with a per-car medical expense burden five times that of Toyota, and projects a future pension obligation of $89 billion, default of which could cripple the Pension Benefit Guaranty Corporation.
Why is Facebook attempting to patent the idea of crowdsourced translations for social networks?
Facebook submitted a patent in December 2008 to the U.S. Patent & Trademark Office for its "Translations" application that allowed it to go from 0 localized versions to 16 in less than 6 months. It's now up to 60 and counting.
The efficiency of what the Facebook team created is obvious. And with a user population that is larger than some countries (over 250 million and still growing), and with 70% of that population coming from outside of the U.S., this capability will have a huge impact once they eventually really monetize what they have created.
It makes sense for Facebook to try to protect the capability that has allowed them to localize so quickly, but there are other social networking sites (Hi5 and Meebo, for example) that were already using crowdsourcing to produce their own localized sites as far back as 2006. Now it's up to the U.S. Patent & Trademark Office to decide whether the Facebook application has merit.
Over the past month, LISA has been researching the business and technical aspects of crowdsourcing and its impact on the globalization business. It has done in-depth interviews with about 30 high-tech companies that are either implementing crowdsourcing vis-a-vis their globalization function, or seriously researching how to do so.
Here is what is surprising in the preliminary findings:
Companies are definitely not implementing crowdsourcing to reduce their costs.Rather, they're doing it principally for one or more of the following 3 reasons:
To reach totally new markets
To better serve markets that are currently under-served
To increase the value of their global brand by further engaging their users
What Facebook and Second Life have done are just one "flavor" of applying the power of the crowd to reach more international customers... and probably just the tip of the iceberg, according to almost everyone interviewed.
Language service providers don't view crowdsourcing as competition at all. Language service providers are busily working in the background to help educate their customers on how to apply crowdsourcing, at the same time that they're trying to figure out a business model to support their own support of the crowd. In other words, the smart providers aren't viewing crowdsourcing as a competitor, but rather as just one more service they can provide to customers on down the line.
It's a moral imperative to free content from its linguistic prison. There is a moral imperative that is seen by some businesspeople in all of this. They believe that we are way overdue in freeing content from its linguistic prison. Not providing critical (however you define it) content to as many people as possible in their local language keeps people in poverty and denies them opportunities that other communities take for granted.
Building local language content through crowdsourcing may be more important in the long run than localization.
Several of the companies interviewed also see crowdsourcing as a way to build more local language content, and that to them, is more important in the long run to engaging their customers, providing better support, etc. than applying crowdsourcing to the localization process.
The biggest challenge that everyone sees? Engaging, recruiting, motivating and rewarding the crowd for the long haul.
Source: LISA (The Localization Industry Standards Association); September 2009
CEO firings on the rise as downturn gains steam
William Watkins, ousted Monday at Seagate Technology LLC, is the sixth CEO of a publicly held company to be replaced in just the last eight days. His exit follows the departures last week of CEOs at Tyson Foods Inc., Borders Group Inc., Orbitz Worldwide Inc., Chico's FAS Inc. and Bebe Stores Inc.
Many experts view the changes as harbingers of significantly more turmoil in executive suites this year. Like other companies, these six corporations have been grappling with poor financial results, slumping stock prices and, in some cases, investor criticism.
CEO turnover "doubles in bad times," said Dirk Jenter, an assistant finance professor at Stanford University's business school, who recently analyzed 1,627 CEO changes between 1993 and 2001. Mr. Jenter found that CEOs are most vulnerable in a downturn when their employers' shareholder returns lag rivals.
Last year, 61 companies in the Standard & Poor's 500-stock index changed CEOs, up from 56 a year earlier, according to executive search firm Spencer Stuart. The number of such switches may increase this year, Mr. Jenter predicted. Boards typically oust CEOs a year or two after relative shareholder returns start to slip, he said. Source: Wall Street Journal; 01/13/09
Fannie, Freddie executives new of risks
Executives at Fannie Mae and Freddie Mac clashed over the adequacy of risk controls for several years as the two giant mortgage companies increased their purchases of dicey loans, according to emails released Tuesday at a congressional hearing.
The emails show that the two government-backed mortgage companies were aware they were taking on more risk as the housing bubble peaked. But the companies pressed ahead with efforts to regain market share they had lost to Wall Street investment banks. They did so by buying loans and securities that increased their exposure to subprime mortgages, for people with weak credit records, and Alt-A mortgages, which typically spare borrowers from having to document their income and assets.
Former Fannie Mae and Freddie Mac executives testified Tuesday on the companies' roles in the financial crisis. Fannie "has one of the weakest control processes I ever witness (sic) in my career," Enrico Dallavecchia, then chief risk officer of the company, wrote in a July 2007 email to Michael Williams, chief operating officer. Mr. Dallavecchia, who joined Fannie Mae in 2006, previously had worked for J.P. Morgan Chase & Co. as a risk officer.
The House Committee on Oversight also released emails sent in 2004 by David Andrukonis, a former Freddie risk officer, opposing the company's practice of buying so-called no-income/no-asset, or NINA, mortgages, which allowed borrowers to get loans without stating or verifying their incomes or assets. He called these loans "dangerous" and subject to fraud.
The committee also released a March 2005 memo from Adolfo Marzol, Mr. Dallavecchia's predecessor as chief risk officer at Fannie, warning about the risks of the company's investments in securities backed by subprime and Alt-A loans. "Many of the loans...would be susceptible to loss" if home prices declined, he wrote, and there was "concern that the rating agencies may not be properly assessing the risk."
Four former chief executives of Fannie and Freddie appeared before the committee to answer questions about their financial woes. They generally dodged demands by committee members that they accept the blame for those problems. Source: Wall Street Journal; 12/10/08
Emerging markets are the car industrys big hope. But it wont be an easy ride.
There has rarely been a tougher time to be a carmaker. Squeezed by the credit crunch, rocked by the seesawing price of oil and now faced with a nasty recession as the banking crisis infects the real economy, the traditional markets of North America, western Europe and Japan, already sluggish for several years, have all but packed up. In America car sales are running at about 16% below last year’s level. Detroit’s struggling big three—General Motors, Ford and Chrysler—are in dire straits. They have wrung a $25 billion bail-out from Congress and are now looking for much more. In Europe the market is also collapsing. Sales in Japan this year are expected to be the lowest since 1974.
However, not all is doom and gloom. Mature vehicle markets may be close to saturation, but there is huge unsatisfied demand in the big emerging car markets of Brazil, Russia, India and China (the so-called BRICs). Although not immune from the rich countries’ troubles, they are likely to suffer much less. For one thing, levels of personal debt are far lower and a smaller proportion of cars are bought on credit. For another, the BRIC economies have been expanding so fast that even a slowdown should still leave them with growth rates that look respectable to Western eyes.
One measure of the BRIC countries’ new importance to the car industry is that, recession or not, global car sales in 2008 may still hit an all-time record of about 59m. For the first time passenger-vehicle sales in the BRICs, at around 14m, are likely to overtake those in America, which are expected to be the worst since 1992. As recently as 2005 America outsold them by over 10m. By the end of this decade China, already the world’s second-biggest market, will probably overtake America’s sales of 16m-17m in a “normal” year. In Brazil sales have increased by nearly 30% in each of the past two years. Russia is likely to overtake Germany as Europe’s biggest market within the next two years, with sales of around 3.5m. Meanwhile, Tata’s $2,500 Nano, due to be launched in early 2009, is designed to do for India what the Model T Ford did for America 90 years ago.
It is the irresistible combination of rapid economic growth, favorable demographics and social change in the BRICs that is coming to the carmakers’ rescue and that is likely to account for nearly all their growth for the foreseeable future. America has more than 900 cars (including light trucks) for every 1,000 people of driving age. In the big western European countries and Japan, where public transport is better and population is denser, the figure is a little over 600. But in Russia it is below 200, in Brazil about 130, in China around 30 and in India less than ten.
When times are hard, an American family that already has two or three cars will simply postpone buying a new one. But a potential customer in an emerging market who has been saving for years to buy his first car will still want to go ahead. Source: The Economist; 11/13/08
Detroit under threat
General Motors reported another huge quarterly loss Friday. But in remarkably frank language, the auto maker also said cash balances could fall below the minimum necessary to keep the business going early next year.
Since GM is negotiating for a federal bailout, it is easy to dismiss this as a scare tactic.
GM saw its October vehicle sales drop 45%.
But this doesn't look like a bluff. Together, GM and rival Ford Motor, which also reported earnings Friday, burned through 26% of their cash and equivalents last quarter.
Moreover, the economy is deteriorating rapidly. October's payroll data, released Friday, showing 240,000 job losses, was bad enough. Worse was the revision to the prior two months' data, adding 179,000 to the ranks of the unemployed.
Average duration of unemployment is rising, as is the proportion of Americans in part-time work. And this all comes heading into a recession, not coming out of it, as in 2001.
Until now, a saving grace for auto makers was that while Americans might hand in the keys to a submerged property, they needed their cars to get to work. The rising jobless total will add pressure for Washington to speed to Detroit's rescue -- while also ensuring other sectors call for aid. Source: Wall Street Journal; 11/08/08
The Ranbaxy-Daiichi deal
Indian investors and pharmaceutical industry leaders were astounded by the June 11 announcement that Ranbaxy's CEO and managing director, Malvinder Mohan Singh had sold his family's 34.8% stake in Ranbaxy Laboratories to Japanese pharmaceutical firm Daiichi Sankyo. To be sure, the markets were aware that something was afoot between Ranbaxy, India's largest pharmaceutical company, and Daiichi Sankyo, Japan's second largest, but investors were expecting no more than a sale of a strategic stake of about 10% or so to shore up an alliance between the two companies. The sale of the Singh family's entire stake came as quite a shock. Asked one journalist after the announcement: "Haven't you sold the family silver?"
Singh contends that this is just what the doctor ordered. "[This] puts us on a new and much stronger platform to harness our capabilities in drug development, manufacturing and global reach," he said. "Together with our pool of scientific, technical and managerial resources and talent, we will enter a new orbit to chart a higher trajectory of sustainable growth ... in the developed and emerging markets, organically and inorganically. This is a significant milestone in our mission of becoming a research-based international pharmaceutical company." The combined company will be worth about $30 billion. The acquisition will help Daiichi Sankyo to jump from number 22 in the global pharmaceutical sector to number 15.
The combination has significant benefits for the Japanese company. It gets a stake in a major player in generics, an area that is becoming increasingly important in Japan. According to the 2008 Japanese Pharmaceuticals & Healthcare Report, the country's pharmaceutical market is currently valued at $74.4 billion and is the most mature in the Asia-Pacific region. By 2012, the market will grow to $82 billion. The country's generics sector is one of the most promising. "In an effort to control ballooning healthcare costs, the ministry of health plans to raise the volume share of generics within the total prescription market to at least 30% by 2012," says the report. "The current value of the sector is $5.5 billion, which equates to 7.3% of total medicines sales. Changes to prescribing procedures and the influx of foreign firms with low-cost goods will provide a stimulus to the generic drug sector." The comparative figures of volume share of generics for the U.S. and the UK are 13% and 26%, so there is some way to go.
Ranbaxy will gain easier access to the much-coveted Japanese market by operating from within the Daiichi Sankyo fold. Ranbaxy could bypass a lot of European and U.S. companies that are finding it difficult to enter the Japanese market, where safety and testing requirements are a lot higher.
For Daiichi Sankyo, there are huge benefits in getting access to Indian research capabilities; it is banking not just on the cost advantage Ranbaxy would bring, but also its intellectual capital depth. Japanese companies don't have enough scientists and India has them in abundant supply right now and many are shifting a lot of their R&D to India. Source: India Knowledge@Wharton; 06/12/08
Wealth mismanagement - a candid account of what went wrong
How did UBS, a Swiss bank whose core business is the staid one of wealth management, manage to lose $38 billion betting on American mortgage-backed assets, battering its core capital and share price in the process? Shareholders, out in force at the bank’s annual meeting on Wednesday April 23rd in Basel, asked just that question.
The mystery is being resolved. On Monday the bank released a summary of an internal investigation into the causes of the write-downs that had been demanded by the Swiss Federal Banking Commission. The 400-page report is now being chewed over by the regulator. Rivals should read it too. The report gives three broad explanations for the bank’s woes. The investment-banking arm’s preoccupation with growth, the reliance of the control team on flawed measures of risk and the culture of the bank. Source: The Economist; 04/23/08
Microsoft has made a $42 billion bid to buy Yahoo. There have been calls to raise the bid. Microsoft has resisted. "Flight insurance" may be the reason it has resisted. Yahoo has about 14,000 employees. Many of them enormously talented. Microsoft will want to keep the employees on board, and that means some sort of broad-based employee retention program. That could cost billions of dollars. For example, last May Microsoft bought Tellme Networks for $800 million. It put another $100 million in an employee retention program. Tellme had 330 employees. The money set aside amounted to more than $300,000 for each worker. Source: The New York Times; 04/17/08
Home Depot restructures human resources' delivery
Home Depot is restructuring its human resources department. After the changes, there will no longer be a human resources manager in each store. Human resources supervisor positions at US stores also will be eliminated. About 2,200 employees will be affected by the changes. About 1,000 jobs will be cut. Home Depot will create 230 new district HR teams that will have a manager and three full-time people reporting to that person. In addition, about 200 people will be hired for a new HR service center in the Atlanta area that will handle most store-level HR needs by telephone. This new structure is intended to cut costs and put more workers on the sales floor. Source: The Wall Street Journal; 04/07/08
Siemens - one of the biggest corporate clean-ups in history
Peter Löscher, the tall Austrian brought in as chief executive of Siemens last July, has a big job on his hands. His goal, and the hope of 400,000 employees at Siemens, is that the steady flow of allegations about bribery and corruption will soon dry up—and with them the damaging investigations. Since November 2006, when police raided the group's offices across Germany, hardly a week has gone by without new allegations of wrongdoing by company officials in places from Botswana to Beijing. Siemensianers, as employees were once proud to call themselves, are fed up with being the butt of jokes about slush funds and secret accounts in Liechtenstein. Mr Löscher's job is to purge the company from top to bottom, so that Siemens can put the scandal behind it and enjoy its position as one of the world's leading companies, and one of globalization’s great winners. Most recently, on March 1st, he appointed legal officers to each of the sprawling engineering group's divisions. He wanted to emphasize that obeying the law is a vital aspect of every operational decision.
Investigators allege that there was a culture at Siemens, endorsed by senior managers, to use bribes and slush funds to win contracts, especially in its communications and power-generation divisions. Last year Klaus Kleinfeld, then chief executive, and Heinrich von Pierer, his chairman and predecessor, resigned under pressure from shareholders. (Both have denied knowledge of any corruption.) One former board member is being investigated, and others are expected to share his fate. And because of its New York listing, Siemens is being investigated by the much-feared Securities & Exchange Commission, which can impose much heavier sanctions than the €660m in penalties Siemens has paid in Europe so far.
Appointing Mr Löscher, an untainted outsider, was an effort to draw a line under the scandal. He had previously headed divisions at GE, Siemens's great rival, and Merck, a pharmaceuticals giant. Over Christmas he warned top managers in a letter that ignorance and loyalty were no excuse for having broken the law. Managers were offered an amnesty until January 31st—later extended by a month—to encourage them to spill the beans. And they have been doing so: 110 came forward, giving investigators dozens of new leads.
None of this seems to have dented Siemens's ability to make money and win new contracts—so far, at least. Most of its units met their target operating margins in the most recent quarter, and order books are fuller than they were a year ago.
Siemens shareholders are generally pragmatic: they have been more concerned about streamlining the business than the corruption scandal. The share price has responded favorably to news of a share buy-back program, and the announcement in January that Mr Löscher had spent €4m of his own money buying Siemens shares. His fellow board members promptly bought €1.5m-worth of shares themselves, suggesting that they too are confident in his ability to stop the rot.
A European automotive titan is on its way
Ferdinand Piëch is two steps closer to realizing his dream: the creation of a new European automotive giant. On March 3rd he and his colleagues on the supervisory board of Porsche Automobil Holding gave the go-ahead for Porsche, a maker of sports cars, to buy another 20% of Volkswagen (VW), Europe's biggest carmaker. Porsche already owns 31% of VW, so this will give it a controlling majority. A few hours earlier VW itself, of which Mr Piëch is chairman, announced a takeover of Scania, a Swedish truckmaker, paying €2.9 billion ($4.4 billion) to increase its stake from 31% to 68.6%.
The resulting concern, under the umbrella of Porsche Holding, will have sales of around €120 billion and will sell 6.7m vehicles a year. Its biggest markets will be Europe, Asia and South America; cracking North America may be a job for the 70-year-old Mr Piëch's successor. MAN, a truckmaker in which VW owns a 29.9% stake, may be rolled in later. Source: The Economist 03/07/08
Tata unveils the world's cheapest car
It's called the Nano, for its high technology and small size. It's cute, compact, and contemporary. It's a complete four-door car with a 623-cc gas engine, gets 50 miles to the gallon, and seats up to five. It meets domestic emissions norms and will soon comply with European standards. It's 8% smaller in outer length than its closest rival, Suzuki's Maruti 800, but has 21% more volume inside. And at $2,500 before taxes (value-added taxes increase the price by about $300), it is the most inexpensive car in the world. Starting this fall, the Nano will roll off the assembly lines at a Tata Motors plant in Singur, Bengal, and navigate India's potholed roads.
The Nano has broken ground on many different levels—in price, in size, in distribution, and technology. By using lighter steel, a smaller engine, and having longer-term sourcing agreements with parts suppliers, Tata was able to keep the price of the Nano down. Its length of 3.1 meters, width of 1.5 meters, and height of 1.6 meters, with wheels at the outer corners and engine, gears, and transmission in the rear, creates space inside the car.
Finally, the distribution of the car will also be an innovation. Just like a bicycle, it will be sold in kits that are distributed and serviced by the entrepreneurs who will assemble it for the consumer. Tata won't elaborate, and will only say "the distribution system will be a variant from the norm. It will remove some of the layers in distribution and service." Source: Business Week; 01/10/08
GM sees end to bleak era
General Motors Corp. Chief Executive Rick Wagoner said the auto maker could see "significant" profit increases in two to three years, a rare bright outlook in an industry grappling with soft sales and economic concerns. Mr. Wagoner, whose three-year-old plan hasn't yet brought GM back to profitability, asked investors for more patience despite the company's sliding share price and worsening economic expectations. He told Wall Street analysts yesterday that the improved results in coming years would result from a new labor contract and growth in overseas sales.
Mr. Wagoner said the company expects to cut labor costs by as much as $5 billion by 2011 thanks to the UAW deal. The contract is buttressed by clauses that allow GM to hand over its enormous hourly health-care liability to the UAW and replace workers with hires who earn lower wages and benefits.
An attrition plan will be offered to 46,000 workers next month. By 2012, GM expects fixed structural costs to represent 23% of revenue. It also expects to arrest the punishing inflation in material costs.
Much of GM's hope hinges on a rebound in the U.S. market. Even though the company argues its liquidity and financing are in good enough shape to weather a significant downturn in the U.S., its chances of finding black ink in a smaller U.S. auto industry are bleak. Source: The Wall Street Journal; 01/18/08
Is Facebook worth $15 billion?
Well, it depends who's paying. Put yourself in the position of Microsoft. For all that power and money, your company looks, frankly, old hat compared to the world of social networking. So what do you do? Buy a piece of the action - without fretting too much about the pricetag. Which is exactly what Microsoft did this week, taking a 1.6% stake in Facebook for pounds 117m. At that rate, the entire company is worth $15 billion.
That doesn't mean Mark Zuckerberg (the 23-year-old who created Facebook) is about to sell his baby. Nor is Microsoft going to buy it up - not yet, anyway. But its chief executive is on a shopping spree: a few days ago, Steve Ballmer declared Microsoft would buy 20 start-ups each year, for the next five years. In the internet's new gold rush, this is a form of prospecting. Google is doing something similar - as is Yahoo, which last year offered to buy Facebook for around $1bn. Cheapskates.
As these giant firms have money to burn, how much should they pay for Facebook? Well, $15bn is way too high, being 500 times its estimated earnings for this year. These prices smack of the 90s dotcom bubble - and we know how that ended up. But of the social networking websites, Facebook certainly looks a good prospect. It already has more than 50m users and adds another 200,000 daily. That is far stronger growth than its arch-rival MySpace (which Rupert Murdoch bought two years ago). But what really marks Facebook out are its moves to compile users' profiles into an online directory, a kind of phone book of the web. Enthusiasts believe that will lead to lucrative advertising; cynics mutter about a new age of junk mail. Source: The Guardian; 10/27/07
Severance could total $54 million for departed Sprint CEO
Former Sprint Nextel CEO Gary Forsee could collect a severance package worth more than $54 million after stepping down under pressure on Monday. The company declined to discuss Forsee's severance package but said it would be based on terms spelled out in the company's last proxy statement. It could include accelerated vesting of stock options worth about $42 million. It is unclear whether Forsee will receive a $2.5 million bonus for integrating Sprint and Nextel and whether he is eligible for a $2.5 million award for meeting performance targets. He will receive medical benefits and some other perks for two years but will not have access to the company plane. Source: The Washington Post; 10/10/07
Merrill's $5 billion bath bares deeper divide
Merrill Lynch & Co.'s announcement Friday that it would take a $5.5 billion hit to third-quarter earnings is exposing the weak oversight exercised by top Merrill executives as it became a big force in the mortgage-securities business.
Wall Street has been reeling from the recent credit crunch tied to questionable home mortgages, with several companies taking multibillion-dollar write-downs. But Merrill is taking the biggest charge and is the only major U.S. firm so far that has said it will report a loss for the third quarter.
The announcement gave a boost to Merrill's shares, which rose $1.89, or 2.5%, to $76.67 in 4 p.m. trading Friday on the New York Stock Exchange. That reflected investors' relief that Merrill is trying to put the problems behind it. The broader stock market was also higher, with the S&P 500 index hitting an all-time high. The Dow Jones Industrial Average gained 91.70 to 14066.01, just shy of a record.
Merrill Lynch, best known for its symbol of the bull and its "herd" of 16,000 brokers pitching stocks to retail investors, had become deeply involved in the mortgage business by this year. That was despite an assurance to investors just three months ago that its exposure was "limited" and "contained." At one point, Merrill had amassed a portfolio of at least $25 billion in risky assets, people familiar with the situation say.
The ballooning exposure to these assets, which fell in value amid spreading defaults by homeowners, prompted the firm on Wednesday to oust two of its top credit-market executives, Osman Semerci and Dale Lattanzio. The executives believed the crunch was "just a hiccup," but Merrill Chief Executive Stan O'Neal concluded that their estimates of the assets' value were overly optimistic, people familiar with the firm said.
The actual losses are even greater because they have been reported after fees, offsetting hedges and gains recorded by the financial firms due to declines in the value of their own debt. At Merrill, the bulk of the $5.5 billion hit was a $4.5 billion write-down, after offsetting hedges, on collateralized debt obligations and subprime mortgages. The remaining $967 million, which was reduced to $463 million by offsetting fees, reflected losses on loan commitments for buyouts. Source: The Wall Street Journal; 10/06/07
The Big Mac turns 40
Normally, a 40-year-old sandwich would be something to be avoided.
Unless you're one of millions who flock to McDonald's each year to chow down on a Big Mac. The triple-decker burger, which helped breed America's super-size culture and restaurants' ever-expanding jumbo meals, is turning 40. For some fast-food junkies, that's cause for celebration.
The Big Mac was first introduced in 1967 by Jim Delligatti, a McDonald's franchise owner in Uniontown, Pa. A year later, it became a staple of McDonald's menus nationwide.
McDonald's estimates 550 million Big Macs are sold each year in the U.S. alone. Do the math and that's about 17 per second. Weighing in at nearly a half-pound, with 540 calories and 29 grams of fat each, that's enough to make nutritionists cringe. Source: The Associated Press; 08/24/07
Toyota's new U.S. plan: stop building factories
Toyota has decided to slow down its US expansion and factory building program. The company has a number of concerns, including rising labor costs. Toyota has matched UAW wages for tens of thousands of its workers. In Georgetown, KY, for example, the average wage is $26 an hour. That is only a bit less than UAW workers get at GM and Ford. But bonuses that Toyota doles out twice a year more than make up the difference. Generous pension and health benefits are what puts the Big Three at a competitive disadvantage. As part of its effort to rein in rising labor costs, Toyota plans to align hourly wages for new hires more closely to prevailing manufacturing pay in regions where its plants are located. New hires will be paid no more than 50% over the prevailing manufacturing wage in the area. In Tupelo, MS manufacturing wages pay about $14 an hour. So, wages at a new Toyota plant will be in the $20 an hour range. Source: The Wall Street Journal, 06/20/07
A move as much about Dubai as Halliburton
Halliburton is relocating its headquarters from Houston to the Persian Gulf, a move that seems much more a reflection of geographic shifts in the petroleum industry writes the Wall Street Journal.
Halliburton's plans caught the energy world, the city of Houston and members of Congress by surprise, the Houston Chronicle reports; it is the No. 2 oil-services company in the world with more than 38% of its $13 billion oil-field services revenue in 2006 coming from the East, where 16,000 of its 45,000 employees are based.
Halliburton's move is a new chapter in the evolution of Dubai as a center for trade, regional investment and oil-industry deals; another sign of what The Wall Street Journal calls shifting alignments in the global oil order. Dubai puts the company's leadership closer to the region's national oil firms, which more and more prefer dealing directly with oil-services contractors rather than going through the multinational petro-giants, the Times of London notes. Dubai has prospered by making itself a place where business executives from any part of the world can work comfortably. And Halliburton, by focusing on Dubai, is expressing a need "to make up ground lost in recent years to Western rivals and increasingly ambitious Chinese oil-field service companies," the Journal says. Source: Wall Street Journal; 03/12/07
Spilling the beans?
Starbucks it was once said is more in the business of community than coffee. But now with 13,000 stores globally, Chairman Howard Schultz is pondering whether the associated commoditization of the brand has damaged the experience. Has Starbucks essentially sold its soul he rhetorically asks CEO Jim Donald in a recent internal memo now widely availably on the Internet?
Schultz laments the loss of “romance and theater” with the transition to the more efficient automatic espresso machines, the sensory void created by aroma-less flavor locked packaging and neighborhood ambience being increasingly superseded by chain-store outlet designs. “We desperately need to look into the mirror and realize it's time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience” he implores in advance of the Companies upcoming strategic planning cycle.
In strategy one need to find competitive uniqueness and then build your business around this. As businesses grow, competition intensifies or discontinuity hits straddling of position often occurs. This is a downward spiral to mediocrity or worse. Schultz is correct to surface the issues; ignoring it would only cause the straddling to perpetuate. It would have been more prudent though not to have done so in writing and expose the company to public disclosure of internal debate.
Water has become a booming $500 billion industry, by some estimates. Economists and investors call it "the new oil" and "blue gold."
Texas oilman T. Boone Pickens, who has bought water rights for a chunk of the Ogallala aquifer in Texas and owns more water than any individual in the United States, has said the natural resource should be treated like any other commodity -- bought and sold for a profit. In the U.S., companies such as Nestlé, which owns Poland Spring, extract hundreds of millions of gallons of groundwater a year. The companies often pay little to nothing for the water that they bottle and sell.
But where some see profits, others see peril. The world is running out of fresh H20, which accounts for just 3% of the earth's water. Recent moves by multinational corporations to privatize water sources could spell disaster for poor countries and residents with no means to pay.
In Bolivia, price spikes following water privatization led to riots in 2000; eventually, Bolivia expelled Bechtel, the engineering company that the government had contracted to take over management of the municipal water supply in the city of Cochabamba. Similar clashes over privatization and price hikes have broken out in Argentina, Uruguay, South Africa and Mali.
Geopolitical experts warn that water scarcity poses not just a public health risk, but a threat to global security. Currently, some 1.1 billion people, one-sixth of the world population, lack safe drinking water. Global water consumption is growing at unsustainable rates, doubling every 20 years, according to a March 2008 report by Goldman Sachs. A study by International Alert, a London-based conflict-resolution group, listed 46 countries with a combined population of 2.7 billion that have a "high risk" for violent conflict over water in the next two decades. Source: Wall Street Journal; 11/08/08
Baby Boomers delay retirement
Wall Street's recent financial turmoil may bring a new reality for those U.S. workers on the cusp of retirement. Due to dwindling nest eggs, housing prices that continue to drop, and increased concerns about their financial footing, many baby boomers are halting or postponing their plans to leave the office. Financial planners say that most people underestimate the savings they need for retirement. Only 23% of workers age 55 and older have savings and investments totaling $250,000 or more, and about 60% have less than $100,000, according to an April 2008 Employee Benefit Research Institute study. Many workers also don't realize the financial advantages that come with working longer. While the average worker retires at age 63 in the U.S., a 62-year-old with a $100,000 salary and a $500,000 nest egg stands to gain a 6% increase in annual retirement income for each additional year he or she works past retirement. The financial troubles plaguing Wall Street have also affected retirees across the country. Many are returning to the workforce, and some are changing their plans to look for full-time work instead of part-time work. Source: The Wall Street Journal; 09/22/08
Tapping the power of social networking
Mini USA, the American branch of BMW's Mini Cooper line, tracks everything being said about its brand everywhere on line - in blogs, discussion groups, forums, MySpace pages and much more - then uses what it learns to guide advertising campaigns.
At Hewlett-Packard, 50 executives log into their individual blogs each morning to join the ongoing online conversation about each of their product lines, immediately responding to customer problems and concerns.
Ernst & Young recruits many of the 3,500 college graduates it hires every year using a career group on Facebook, where it not only posts job information but also answers individual questions from prospective employees. And Del Monte Pet Foods uses a private online community to regularly "chat" with 400 pet lovers whose opinions help shape new products.
These are all examples of companies savvy enough to participate in the groundswell of social networking; a social trend in which people use technologies to get the things they need from each other, rather than from traditional institutions like corporations.
The more you know and understand the individuals who make up the groundswell around your brand and your company, the more you can use the new social networking phenomenon to your advantage. Such understanding comes from going well beyond traditional user surveys, however. Too few companies study how people actually interact with the web and utilize online collaborative tools, yet much of today's Internet revolves around individual users, the content they create, the communities they form and the transactions they choose. Looking more carefully at people's behavior on the Internet can can uncover surprises, sometimes calling into question basic assumptions.
To help companies target their Internet strategies, technology consulting firm Forrester utilizes a "social technology ladder," which classifies consumers based on their participation in various types of social networking. At the lowest rung of the ladder are the "inactives," some 44% of all U.S. American adults who were online in 2007. Higher up are the "joiners," the 25% who visit social networking sites like MySpace; collectors, an elite 15% who collect and aggregate information; and critics, those who post ratings and reviews as well as contribute to blogs and forums. Only 18% of all online Americans actually create content, publishing an article or a blog at least once a month, maintaining a web page or uploading content to sites like YouTube.
The power of such a classification lies in giving organizations a clear understanding of how consumers are behaving online. Any successful strategy to tap into the groundswell has to begin with assessing customers' social activities. Then you can decide what you want to accomplish, plan for how your relationship with your customers will change, and finally decide what social technology to use. Source: Knowledge@Wharton; 07/09/08
Food and energy prices push inflation to its highest rate since 2001
The rise in inflation across the world is a big worry for central bankers and policymakers. This week the OECD announced that consumer prices for all items in its 30 member countries increased by 3.9% in May compared with a year earlier, the highest rate since 2001. Energy and food prices are the main contributors, rising by 14.6% and 6.1% respectively in May. If these are excluded, the rise in prices is a far more moderate 2.1%. Source: OECD; 07/01/08
Business strategies for climate change
Climate change has become a business reality, and executives should get ready for a major shift in the economy. The value at stake is huge.
Some companies will be winners and others losers in the gradual transition to a global low-carbon economy—a transition driven by regulation and structurally higher energy prices. A drive to reduce greenhouse gas emissions in existing infrastructure and products, coupled with the emergence of new low-carbon business models and value chains, will provide many opportunities for business.
A shift to a low-carbon economy is already under way and business must get ready for it, especially in energy, transport, and heavy industry - the heart of today’s carbon-intensive economy - and in many other industries as well. If current climate science holds true (and there is considerable uncertainty in the estimates) global greenhouse gas emissions should ideally decrease from today’s levels by 90 percent as of 2050 in order to contain global warming below two degrees centigrade. To reach this ambitious goal, taking economic growth into account, the global economy’s carbon productivity would have to increase by 5 to 7 percent a year, compared with a historic rate of just 1 percent, in the days when carbon emissions were not an issue.
During the past five years, society at large has awakened to the climate issue. Climate change and the environment are higher on the minds of consumers around the world than any other sociopolitical question. Executives across a broad range of sectors have started to recognize that this mind-set is a business reality - whether they believe in the science or not.
Although there is great uncertainty about how the shift to a low-carbon economy will play out, the value at stake over the next two decades and beyond is going to be enormous. Some companies will be clear winners, others clear losers - in fact, the outcome may be as unambiguous as it was when the industrial revolution shifted business from manual labor to energy-intensive factories. To help companies benefit from the coming transition, their managers should carefully begin to reposition them for a low-carbon landscape. Three related developments provide the starting point for this analysis and for any strategic response.
First, there will be efforts to optimize the carbon efficiency of existing assets and products: infrastructure (buildings, power stations, data centers, factories), supply chains, and finished goods (automobiles, flat-screen TVs, PCs). This optimization will involve measures to improve energy efficiency, as well as a shift to less carbon-intensive sources of power, such as nuclear, wind, solar, and geothermal.
Second, demand is growing for new low-carbon solutions that can meet the need for sustained, drastic emission reductions. Value chains that disrupt existing industries and create new ones will spring up - industries based, for instance, on the large-scale supply of biomass to power plants and on second-generation biofuels. New business models that reward suppliers and end users in the power and transport sectors for consuming less energy will be as important as new technologies.
Third, public policy and the widespread belief that higher energy prices are here to stay are driving both of these developments. The coming economy-wide discontinuity may be the first one driven largely by regulation. Source: McKinsey Quarterly; April 2008
Healthcare costs: a primer
Healthcare accounts for a remarkably large slice of the U.S. economic pie. Each year health-related spending grows, often outpacing spending on other goods and services, meaning that the size of that slice also increases.
These cost increases have a significant effect on the way households, businesses, and government agencies conduct their affairs. Among other things, health inflation puts pressure on businesses who offer insurance coverage to their employees, inhibits individuals from purchasing their own coverage, can be a major financial burden to families, and takes an increasing share of government budgets and taxpayer dollars. Key statistics include:
In 2005, the U.S. spent $2 trillion on health care, which is 16 percent of GDP and $6,697 per person.
Health care costs have grown on average 2.5 percentage points faster than U.S. gross domestic product since 1970.
Almost half of health care spending is used to treat just 5 percent of the population.
Prescription drug spending is 10 percent of total health spending, but contributes to14 percent of the growth in spending.
While about 26 percent of the poor spent more than10 percent of their income on health in1996, the number increased to 33 percent by 2003.
Many policy experts believe new technologies and the spread of existing ones account for a large portion of medical spending and its growth.
Source: The Henry J. Kaiser Family Foundation; 08/08/07. Full Report available at www.kff.org
Participating in the social networking mega-trend
Social Networking has been described as “a social structure in which technology puts power in communities, not institutions”. These technologies have seen a rapid adoption – 22% of adults now read blogs at least monthly, and 19% are members of a social networking community. Even more amazingly, almost one third of all youth publishes a blog at least weekly, and 41% of youth visit a social networking site daily.
Forrester categorizes Social Computing behaviors into a ladder with six levels of “Social Technographics” participation – Creators (13% of US adult online consumers who publish web pages, publish or maintain a blog and/or upload video to sites like YouTube), Critics (19%; comment on blogs, post ratings and reviews), Collectors (15%; use RSS, tag web sites), Joiners (19%; use social networking sites), Spectators (33%; read blogs, watch peer-generated video, listen to podcasts, and Inactives (52%; none of above).
But while growing numbers are interesting, they don’t give companies an idea of which technologies, if any, they should use for marketing purposes. Many companies approach Social Computing as a list of technologies to be deployed as needed — a blog here, a podcast there — to achieve a marketing goal. But a more coherent approach is to start with your target audience and determine what kind of relationship you want to build with them, based on what they are ready for.
Rather than pursue social computing based on fashion, companies need to think about how they want to engage with their prospects – and create content, features and functionally that create a path for participation. Source: Forrester; 04/19/07
Hunting the "cultivated consumer"
Adieu, conspicuous consumption. Meet the new cultivated consumer.
A shift in consumer preferences is one of the premises of a new study that aims to define this increasingly powerful subset of affluent Americans, and to examine its behavior and lifestyle preferences.
A new study commissioned by the magazine Vanity Fair sought to define and track what Women's Wear Daily describes as the increasingly powerful subset of affluent Americans known as the "cultivated consumer."
The study found that 28 percent of American citizens between the ages of 21 and 54, and with a household income of over $100,000, fit into the cultivated consumer category. That translates into 9,199,680 people, with disposable income and eclectic interests, a thirst for exclusive knowledge, a preference for an authentic experience, social responsibility and the need to surround themselves with a network of experts.
According to the study, "The Cultivated Consumer is a significant, emerging segment of the affluent population. Culture is not something to be just observed and experienced — instead the cultivated consumer creates their own personal culture. They cultivate a highly refined personal sensibility — a 'critical eye' that they apply to how they consume media, goods and experiences. The path to their wallet is through this filter." Source: Women's Wear Daily; 05/30/07
Survey finds 43.6 million uninsured in U.S.
The number of uninsured Americans reached 43.6 million, or 14.8% of the population, in 2006, according to the US Centers for Disease Control and Prevention. Almost all of the increase occurred in the nonelderly adult population as employers cut back on coverage. Texas had the largest percentage of people without health insurance, Michigan the lowest. The CDC is one of three federal agencies that estimate the number of Americans without health insurance. The Census Bureau puts out what is perhaps the best-known number. That number is due to be released in August. Source: The New York Times; 06/27/07
The Futurist magazines top 10 forecasts
Each year since 1985, the editors of THE FUTURIST have selected the most thought-provoking ideas and forecasts appearing in the magazine. Over the years, these forecasts have spotlighted the emergence of such epochal developments as the Internet, virtual reality, and the end of the Cold War. The current top 10 forecasts are:
Generation Y will migrate heavily overseas.
Dwindling supplies of water in China will impact the global economy.
Workers will increasingly choose more time over more money.
Outlook for Asia: China for the short term, India for the long term.
Children's "nature deficit disorder" will grow as a health threat.
We’ll incorporate wireless technology into our thought processing by 2030.
The robotic workforce will change how bosses value employees.
The costs of global-warming-related disasters will reach $150 billion per year.
Companies will see the age range of their workers span four generations.
A rise of disabled Americans will strain public transportation systems.
US economy challenged by the realities of educational pipeline
Employers are paying the typical four-year college graduate 75% more than they pay high-school grads. Twenty-five years ago, they were paying 40% more.
Employers insist on ever better-educated, skilled workers. So this is partly a story about demand. But it is also about supply. The stock of educated workers isn't increasing fast enough to keep up with rising demand.
One in five American 18-year-olds hasn't graduated from high school. About two-thirds of new high-school graduates are in college the following fall, but many drop out before completing even a two-year degree or a certificate. The 2000 U.S. Census shows that 43% of those between ages 22 and 34 who report any college attendance didn't get any degree; 13% didn't even finish a single year of college. Source: Wall Street Journal 4/19/07
10 things you may not know about baby boomers
The number of baby boomers in America is estimated at 78.2 million.
Approximately 7,918 Americans turn 60 each day. That’s about 330 every hour or more than four million a year in 2006.
Within 20 years, the age profile of America will match that of Florida – about one in five Americans will be older than 65.
Boomers who reach age 65 in 2011 can expect to live, on average, at least another 18 years.
Four out of 10 boomers have less than $10,000 in retirement savings.
One-third of boomer households today have at least $100,000 in investable assets.
About one-third of baby boomers think they will have enough money to live comfortably once they retire.
Four out of five boomers intend to keep working and earning in retirement. Half of boomers plan to launch into an entirely new job or career in retirement.
Only one in seven baby boomers say they plan to collect Social Security benefits at age 62.
The unpredictable cost of illness and healthcare is by far boomers' biggest fear. They are three times more worried about a major illness (48%), their ability to pay for healthcare (53%) or winding up in a nursing home (48%), than about dying (17%).
Source: “The Boomer Century: 1946-2046” by Richard Croker, Springboard Press (April 30, 2007)
U.S. businesses not prepared for aging workforce, survey shows
More than a quarter of U.S. businesses have failed to plan for the effects of the aging American workforce, according to the results of a new national survey.
Despite reports that the U.S. faces a shortage of millions of workers within the coming decade as baby boomers retire—taking with them years of experience, talent and expertise and leaving fewer new workers available to take their place—The National Study of Business Strategy and Workforce Development, conducted by the Boston College Center on Aging and Work, found that many U.S. businesses are unprepared for changing workforce demographics.
Key findings include:
Only 37% of employers had adopted strategies to encourage late career workers to stay past the traditional retirement age, despite the fact that late career employees "have high levels of skills and strong professional and client networks, a strong work ethic, low turnover and are loyal and reliable."
60% of the employers indicated that recruiting competent job applicants is a significant HR challenge.
40% indicated that management skills are in short supply in their organizations.
Only 33% of employers reported that their organization had made projections about retirement rates of their workers to either a moderate (24.1 percent) or great (9.7 percent) extent. The researchers stress that flexibility resonates particularly with older workers.
The full report/summary report can be found online at www.bc.edu/agingandwork.
Climate change 2007: the physical science basis
Global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values determined from ice cores spanning many thousands of years. The global increases in carbon dioxide concentration are due primarily to fossil fuel use and land-use change, while those of methane and nitrous oxide are primarily due to agriculture.
Warming of the climate system is unequivocal, concludes scientific research sponsored by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) citing evidence from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global mean sea level.
The Wall Street Journal reported growing labor discontent in India, at times leading to bloodshed.
"Battle lines are being drawn in labor actions across India. Factory managers, amid the global economic downturn, want to pare labor costs and remove defiant workers. Unions are attempting to stop them, with slowdowns and strikes that have led at times to bloodshed.
The disputes are fueled by the discontent of workers, many of whom say they haven't partaken of the past decade's prosperity. Their passions are being whipped up, companies say, by labor leaders who want to add members to their unions and win votes for left-leaning political parties. Adding to the tensions are the country's decades-old labor codes, which workers and companies alike say require an overhaul.
The country's manufacturing sector, after growing about 7% annually for the past 16 years, logged 2.4% growth in the 12 months that ended in March. That has pressed manufacturers to make some unpopular cutbacks -- spurring labor actions that have slowed production further and suppressed growth.
For India to grow faster, economists say, manufacturing must grow more than GDP. Instead it now lags. Strikes at India's manufacturing and service companies rose 48% in 2008 from the year before, India's Ministry of Labor says. This year, labor actions have hit manufacturers from Indian automaker Mahindra & Mahindra Ltd. to Finland's Nokia Corp. and Swiss food giant Nestle SA.
Indian manufacturers are governed by two old labor laws. The country's Industrial Disputes Act of 1947 requires companies to gain government permission before dismissing workers. The Contract Labor Law of 1970, meanwhile, prohibits employers from using temporary workers for long-term jobs. Both aim to encourage companies to protect workers by making them permanent.
Manufacturers have long complained that it can take years to dismiss their permanent employees, leading to bloated work forces and hampering companies' ability to respond quickly to changing business conditions. Executives and industry groups say relaxing the labor laws would allow companies to hire more workers and would attract more manufacturers to India, ultimately underpinning a rise in wages. Source: Wall Street Journal
What is a transnational organization?
Think global, act local has long been the mantra of the transnational.
True transnational capability requires:
Exploiting the global integration
Assuring local acuity, responsiveness and flexibility
The transnational corporation simultaneously pursues global efficiency, national responsiveness and knowledge development and exploitation on a worldwide basis.
The most successful global corporations have found a way to manage these dynamics successfully, interdependently and interchangeably.
Absent this balance companies typically operate internationally either as multi-domestics – providing a high degree of strategic freedom and organizational autonomy to subsidiaries or as mega-nationals – retaining tight control of strategic decisions and information at the global hub (worldwide facilities typically centralized in the parent country, products standardized, and overseas operations considered delivery pipelines to access international markets).
The importance of local culture in this era of Globality
"Culture is the means by which a people expresses itself, through language, traditional wisdom, politics, religion, architecture, music, tools, greetings, symbols, festivals, ethics, values and collective identity. Whether written or oral, the political, historical and spiritual heritage of a community forms its cultural record, passed from one generation to another, with each generation building upon the experience of a previous one.
Culture gives people self-identity and character. It allows them to be in harmony with their physical and spiritual environment, to form the basis for their sense of fulfillment and personal peace. It enhances their ability to guide themselves, make their own decisions, and protect their interests.
It is their reference point to the past and their antenna to the future.
Wangari Maathai, The Challenge for Africa (2009)
The Africa Competitiveness Report 2009
African businesses can become far more competitive, but African governments and their international partners will need to improve access to finance, resist pressure to erect trade barriers, upgrade infrastructure, improve healthcare and educational systems, and strengthen institutions.
The conclusions, released today at the launch of a major new report, The Africa Competitiveness Report 2009, reflect research efforts of three institutions – the World Economic Forum, the African Development Bank and the World Bank. Limited access to financial services remains a major obstacle for African enterprises, but underdeveloped infrastructure, limited healthcare and educational services, and poor institutional frameworks also make African countries less competitive in the global marketplace. The report also points to a number of success stories in the region that highlight steps countries can take to improve the business environment.
The report highlights two short-term and three longer term policy themes for improving the competitiveness of African economies.
The two short-term themes are:
1) Increasing access to finance through market-enabling policies.
2) Keeping markets open to trade.
The three longer term themes are:
1) Infrastructure remains one of the top constraints to businesses in Africa.
2) Inefficient basic education and healthcare systems constrain Africa’s productive potential.
3) More examples of good governance and strong and visionary leadership are needed.
This book is one of the first academic contributions analyzing the factors pushing Chinese firms to internationalize their activities. (1) The authors define and assess the factors that compel Chinese firms to go global, including internal ones, such as the acquisition of managerial, organizational, and technological skills, and external ones – relations with central and provincial governments, the degree of competition, competitive advantage, and the role of institutions.
The work brings together 15 contributions grouped into four sections. The first section analyses the corporate capacity and the dynamics of China’s external investments; the second focuses on institutional aspects of the firms’ globalization; the third examines this process through the experience of companies in Asia; and the last presents case studies of specific strategies followed by Chinese firms.
The book’s contributors are mainly scholars from (or working in) the United States or China, and most are specialists in international business. The Chinese contributions are welcome for their ability to conceptualize internationalization in terms of contemporary Chinese managerial thinking, often through the use of picturesque formulas (“dancing with wolves). The contributors make their observations and analyses in line with a rigorous and homogeneous theoretical framework relevant to their discipline. This provides coherence but fails to prevent redundancies – several contributors start by repeating the conceptual framework of their studies. The analytical key, at once methodological and synthetic, is developed in Chapter 4 by Ilan Alon, Theodore Herbert, and Mark Munoz. They consider organizational aspects (infra microeconomic, internal to the firm) as well as strategic and institutional factors behind the success (and sometimes failure) of Chinese firms in the globalization process.
The Chinese economy is emerging in the framework of a far from complete institutional transition, as Shaomin Li underlines in the preface. The trajectory of China’s internationalization follows that of its Asian predecessors (Japan, South Korea), but in a different manner, notably in access the skills required to build competitive advantage. Japan and South Korea underwent a process of endogenisation of technology (“reverse engineering). China’s case has required technology import through the influx of foreign capital, and then a difficult assimilation and mastering of the technology (2) before the firms, state-owned or private, proceed to carve up foreign markets. Editors: Ilan Alon and John R. McIntyre; Publishers: Palgrave Macmillan; Review: Xavier Richet; Translation N. Jayaram; Source: French Centre for Research on Contemporary China
Why aid is hurting Africa
Money from rich countries has trapped many African nations in a cycle of corruption, slower economic growth and poverty. Cutting off the flow would be far more beneficial, says Dambisa Moyo, a former economist at Goldman Sachs, is the author of "Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa."
Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population -- over 350 million people -- live on less than a dollar a day, a figure that has nearly doubled in two decades.
Even after the very aggressive debt-relief campaigns in the 1990s, African countries still pay close to $20 billion in debt repayments per annum, a stark reminder that aid is not free. In order to keep the system going, debt is repaid at the expense of African education and health care. Well-meaning calls to cancel debt mean little when the cancellation is met with the fresh infusion of aid, and the vicious cycle starts up once again.
The most obvious criticism of aid is its links to rampant corruption. Aid flows destined to help the average African end up supporting bloated bureaucracies in the form of the poor-country governments and donor-funded non-governmental organizations.
As recently as 2002, the African Union, an organization of African nations, estimated that corruption was costing the continent $150 billion a year, as international donors were apparently turning a blind eye to the simple fact that aid money was inadvertently fueling graft. With few or no strings attached, it has been all too easy for the funds to be used for anything, save the developmental purpose for which they were intended.
A nascent economy needs a transparent and accountable government and an efficient civil service to help meet social needs. Its people need jobs and a belief in their country's future. A surfeit of aid has been shown to be unable to help achieve these goals.
A constant stream of "free" money is a perfect way to keep an inefficient or simply bad government in power. As aid flows in, there is nothing more for the government to do -- it doesn't need to raise taxes, and as long as it pays the army, it doesn't have to take account of its disgruntled citizens. No matter that its citizens are disenfranchised (as with no taxation there can be no representation). All the government really needs to do is to court and cater to its foreign donors to stay in power.
Stuck in an aid world of no incentives, there is no reason for governments to seek other, better, more transparent ways of raising development finance (such as accessing the bond market, despite how hard that might be). The aid system encourages poor-country governments to pick up the phone and ask the donor agencies for next capital infusion. It is no wonder that across Africa, over 70% of the public purse comes from foreign aid.
The good news is we know what works; what delivers growth and reduces poverty. We know that economies that rely on open-ended commitments of aid almost universally fail, and those that do not depend on aid succeed. The latter is true for economically successful countries such as China and India, and even closer to home, in South Africa and Botswana. Their strategy of development finance emphasizes the important role of entrepreneurship and markets over a staid aid-system of development that preaches hand-outs.
Governments need to attract more foreign direct investment by creating attractive tax structures and reducing the red tape and complex regulations for businesses. African nations should also focus on increasing trade; China is one promising partner. And Western countries can help by cutting off the cycle of giving something for nothing. It's time for a change. Source: Wall Street Journal; 03/21/09
The Africa that CNN doesnt mention
Nigerian custom furniture mogul Ibukun Awosika has a few words of advice for investors leery of putting assets in Africa: "Don't listen to CNN." The news media, she asserted during Wharton's recent Africa Business Forum, are highly selective in highlighting trouble spots, such as violence in the Democratic Republic of Congo or the tumultuous reign of Zimbabwean president Robert Mugabe. Rarely, she said, do Westerners hear of Africa's triumphs, such as galloping economic growth (that showed little sign of slowing until a recent collapse in commodity prices).
"Africa ... is highly diverse. It is [not] one country. It is 52 different countries." She takes to task anyone who still clings to the Western business stereotypes that dog the continent. Not checking out business opportunities in such a vast and underdeveloped market is costing those people money, she and others argued at the forum. "Those markets that CNN tells you are not the good markets are actually the hidden secret," said Awosika, general manager and CEO of The Sokoa Chair Centre, a privately held furniture manufacturer with several million dollars a year in revenue. The former chemist's implication: Her enterprise serves as an example of the lucrative deals in African countries that savvy outside investors can encounter, if they know where to look.
After centuries of colonialism, and despite bloody civil wars and turmoil in some of its nations, Africa has the potential to be counted among the emerging markets poised to offer outsized returns for foreign investment, according to investors and entrepreneurs at Wharton's recent Africa Business Forum. Still, they caution, transitional or ill-defined regulatory frameworks pose significant downside risk to doing business there.
According to Judith McHale, managing partner of the Global Environment Fund/Africa Growth Fund and a former Discovery Communications chief executive, the reality of the risk diminishes with the application of due diligence and thorough market research. "All the dynamics for us showed an incredible opportunity," McHale said. Micro-lending programs, of the sort popularized through the research of Nobel Prize-winning economist Muhammad Yunus, already address, if not completely satisfy, the low end of the lending market. Sovereign wealth funds and other large investments are active at the other end of the spectrum. But, McHale added, there is a critical shortage of investment players in what she called the "critical middle" -- the small and medium-sized businesses that form the stout foundation of national economies. "We saw an emerging consumer class wanting quality goods and services. Our model for this is what happened in the United States in the 1950s."
African business people are quick to point out that the uninitiated can soon find themselves in over their heads because they lack the ability to respond quickly to change. Uncertainty is almost a given, they said, although infrastructure and institutions are becoming more reliable through steady development and reform.
In the developed world power outages can cripple Awosika’s production facilities and threaten business, so she keeps back-up generators on standby at her factory in Nigeria. "I have to think about power every day." Infrastructure issues aren't the only hurdle. Changes in government policy, which can happen quickly and with very little notice, can instantly invalidate a business plan, she said.
Shoreline Energy International, an energy holding company, has created a successful business model of buying the struggling operations of foreign firms in sub-Saharan Africa and "re-starting those businesses," said Toks Abimbola, a partner in the company. He and the other panelists suggested that cultural differences make Africans better suited than Europeans, Asians or Americans to navigate the complexities of doing business with locals. "We know how to manage our people and we know how to manage our customers."
Abimbola acknowledged a perception that African nations are rife with corruption, which in turn adds significant inefficiencies to commerce. "Nigerian businessmen have a reputation for being less than honest," but such assertions are "not true." Nevertheless, he cautioned potential investors to check out the track record of would-be partners before making a big commitment. Shoreline Energy, he asserted, is proof that prudent investment partners can be found in Africa: "You don't get into [deals] with Goldman [Sachs] if you're dodgy," he said, suggesting that a relationship with a major Western financial player amounts to a seal of approval. Transparency International, a corruption watchdog group, observed that at least one form of corruption across Africa has decreased between 2006 and 2007. According to the group's Global Corruption Report 2007, petty bribery decreased from 47% to 42%. In other words, 42% of respondents reported having had to pay a bribe to receive a service.
Hand-in-hand with corruption are bureaucratic delays that hinder trade. A business magazine, The Africa Report, noted in its August-September issue that "the bureaucracy of filing in reams of paper-based documents slows exporters and leaves them open to requests for money from overzealous or corrupt customs officials." Citing the International Finance Corp., the magazine noted that it takes the filing of an average 8.1 paper documents to export a shipment from a typical Sub-Saharan African nation, compared to an average 4.5 documents required in Organisation for Economic Cooperation and Development member countries.
Just as the African continent has enjoyed proportionally little of the global development that has ignited the economies of other developing regions in recent decades, it has also been slower to suffer the debilitating effects of the world financial crisis -- so far. The leap in commodity prices earlier in the year helped the economies of the resource-rich continent. But those prices have more recently been sinking as worldwide demand for everything from oil to South African platinum has plummeted. From Africa, McHale and her partners at GEF/Africa Growth Fund see the rest of the world's economic crisis as "a cloud on the horizon that we're still assessing," as she puts it. "I personally remain very optimistic." Source: Knowledge@Wharton; 12/10/08
The global slumpometer
Rich countries face their deepest recession since the 1930s. For poorer nations it could still be relatively mild.
Many economists are now predicting the worst global recession since the 1930s. Such grim warnings discourage spending by households and businesses, depressing output even more. It is unfortunate, therefore, that there is so much confusion about what pundits mean when they talk about a “global recession”.
America, Britain, the euro area and Japan are almost certainly already in recession according to the popular rule of thumb of two successive quarters of falling GDP. But is the R-word really justified for the world as a whole? In an updated World Economic Outlook, published on November 6th, the IMF predicted that world GDP growth would fall to 2.2% in 2009, based on purchasing-power parity (PPP) weights, from 5% in 2007 and 3.7% in 2008. In the past, the IMF has said that global growth of less than 3% implied a world recession, so its latest forecasts would push the world over the edge. Some forecasts by private-sector firms are even gloomier, with several now predicting global GDP growth of no more than 1.5% in 2009.
But why does the IMF think that a world economy growing by less than 3% a year is in recession? To many people, growth of 2.9%, say, sounds pretty robust. Surely a drop in output is required? The trouble is that there is no agreed definition of a global recession. The popular benchmark used in developed economies—two successive quarters of decline—is not helpful when looking at the world as a whole, because many emerging economies do not report seasonally adjusted quarterly GDP figures. Also, downturns are rarely perfectly synchronized across countries, so even if most countries contract at some stage during a two-year period, global GDP growth may not turn negative. Indeed, global GDP has never fallen in any year since the 1930s Depression. Its worst years since then were 1982 and 1991, with growth of 0.9% and 1.5% respectively.
World growth also needs to be adjusted for rising world population. The IMF suggests that a sufficient (although not necessary) condition for a global recession is any year in which world GDP per head declines. In each of the downturns in 1975, 1982 and 1991, growth in world GDP per head turned negative. By contrast, in 2001, despite much talk of “the mother of all recessions”, global GDP per head expanded by around 1%. The annual growth rate in world population has now slowed to 1.2%, so recent GDP forecasts would still allow average world income per head to rise.
When tracking such diverse economies, it does make much more sense to define a global recession not as an absolute fall in GDP, but as when growth falls significantly below its potential rate. This can cause anomalies, however. Using the IMF’s definition (ie, growth below 3%), the world economy has been in recession for no fewer than 11 out of the past 28 years. This sits oddly with the fact that America, the world’s biggest economy, has been in recession for only 38 months during that time, according to the National Bureau of Economic Research (the country’s official arbiter of recessions), which defines a recession as a decline in economic activity. It is confusing to have different definitions of recession in rich and poor economies.
Before proclaiming global recession, it is also important to consider the extent to which a downturn has spread around the world. As stockmarkets and currencies have slumped in emerging economies and some governments have had to knock on the IMF’s door, it might appear as if these economies are being hit harder than rich countries. Even in China, growth seems to be slowing sharply, prompting the government to lift its quotas on bank lending at the start of this month. Yet most emerging economies are still widely expected to hold up much better than in previous global downturns.
It is only really the developed world that faces severe recession. The IMF’s revised November figures now forecast that the advanced economies will shrink by 0.3% in 2009, which would be the first annual contraction since the war. The IMF has become markedly more bearish on emerging economies since October, revising its forecasts downward by an average of a percentage point. But emerging economies are still tipped to grow by around 5%. This is a sharp slowdown from recent growth of 7-8%, but still above their average growth rate over the past three decades and considerably higher than their typical growth in previous global downturns.
These numbers could of course, be revised down still further. But if broadly correct, this could be a relatively mild downturn for emerging economies. Real income per head is still expected to increase next year in countries that account for well over half of the world’s population. Indeed, if the developed world as a whole suffers an absolute decline in 2009, next year is set to be the first year on record when emerging economies account for more than 100% of world growth. Source: The Economist; 11/06/08
China tells businesses to unionize
Global corporations are facing intense pressure from the Chinese government to unionize their Chinese plants and offices by September 30, 2008. Those companies that do not comply risk being blacklisted by the All China Federation of Trade Unions, the only state-approved union, and may possibly face government penalties. Lower manufacturing costs and a nonunion workforce drew many corporations to China. Now, with the push to unionize, they worry that their costs will be driven up and that their operations will be disrupted. Analysts say that union demands could significantly change the way business is conducted by foreign companies in China. Potentially, lower-level employees could have the ability to bargain over many issues, including pay raises and the location of Chinese headquarters. Hundreds of global corporations have already agreed to set up unions in their Chinese plants, but, according to union officials, some nonmanufacturing companies are still resisting union efforts. Source: The New York Times; 09/12/08
Germany set for wage clash
Tough wage talks are expected in Germany, with its industrial union IG Metall demanding a 7% to 8% pay increase for its members. In terms of percentage, the union's pay demand is the highest in 16 years. The union, which represents about 3.6 million workers in the engineering, auto manufacturing, and other industries, wants to compensate members for the wage restraints they've experienced in recent years, as well as for rising food and energy prices. Employers are worried about a recession and have warned that excessive pay raises could affect employment. Source: The Wall Street Journal; 09/09/08
How to address China's growing talent shortage
The growing need for talented managers in China represents the biggest management challenge facing multinationals and locally owned businesses alike, surveys show. Demand for skilled managers will grow more quickly than the supply of qualified candidates.
In a recent AmCham Shanghai survey of US-owned enterprises there, for example, 37 percent of the companies responding said that recruiting talent was their biggest operational problem—more than the number who cited regulatory concerns, a lack of transparency, bureaucracy, or the infringement of intellectual-property rights. Separately, 44 percent of the executives at Chinese companies surveyed by consulting firm McKinsey reported that insufficient talent was the biggest barrier to their global ambitions.
Continued strong economic growth in China over the next several years will further fuel demand for good people. On the supply side, the gap is widening at all levels in China. For entry-level corporate positions, there is an ongoing mismatch between the sort of graduates most Chinese universities turn out and the type of candidate who would interest local and regional companies, to say nothing of multinationals. People who prove themselves effective will have increasingly high expectations of their current employers, and if those expectations aren’t met they may easily be tempted by lucrative rival offers. The market for experienced hires is even more challenging, especially when international experience beyond China and Asia is required.
Local companies and multinationals therefore increasingly fish in the same small pond of high-potential graduates and experienced managers with the right functional capabilities, leadership potential, and language skills. Many local companies are willing to match or exceed the multinationals’ compensation packages.
Companies that are successfully addressing the talent challenge in China stand out in a number of ways, including their ability to localize techniques that have worked in other parts of the world. The most effective companies have a clear strategic view of their talent needs four to five years out, identify gaps at all levels of the organization, and segment their executives carefully. They develop and operate both a sophisticated external-recruiting machine and an internal-development and -training program adapted to the local Chinese environment. Companies that get the solution right will create a real source of competitive advantage. Source: The McKinsey Quarterly; July 2008
Retailing in a global marketplace to achieve high performance
Success in a global marketplace requires a fine balance of two essential capabilities — a global approach to the business and a local view of the customer.
Leading retailers know and understand their customers exceptionally well. But when it comes to global retailing, the sheer diversity of customers can confuse the best of brands. Success in a global marketplace requires a fine balance of two essential capabilities — a global approach to the business and a local view of the customer.
Winning companies view their organization as a single worldwide entity. They build standardized, integrated back-office operations to secure the economies of scale that can handle the complexities of selling in multiple markets. Even more importantly in such a customer facing industry, they take a view of the customer that leverages the core brand and offering in each local marketplace.
It may not be the right strategy for every retailer. Nor does successful globalization require a presence everywhere. Each new market presents different tax, labor and real estate environments and regulations. Heavily regulated retail sectors may actually be barred from entering some countries. And restrictions on foreign owners can be so onerous that setting up in certain geographies just isn’t worthwhile. Even when it is, compliance issues associated with operating internationally pose huge challenges; US firms must comply as well with SOX, GAAP and other international standards.
It’s also important not to over estimate the growth potential of rapidly emerging markets, however enticing they may look. Recent independent research suggests, for instance, that the actual value of retail sales in China may be only about half official estimates. Equally, companies should avoid under estimating the enormous effort involved in approaching new markets successfully.
Despite these caveats, the case for globalization is compelling. Accenture research on high performance businesses reveals that international expansion is integral to the “relentless growth agenda” that distinguishes high performance in the retail industry. Successful globalization can significantly boost retail revenues and eventually profitability as well. It can also help repel unwanted suitors. An international expansion strategy originally designed to prevent a Wal-Mart takeover, has became key to Tesco’s remarkable growth, for instance. The UK retailer is now active in 13 European and Asian markets and recently opened in the United States. Source: Accenture Outlook; 07/09/08
The new global middle class: potentially profitable - but also unpredictable
A new global middle class is rising up from poverty in emerging economies around the world, providing competition for labor and resources, but also enormous promise for multinationals that tailor products and services to the burgeoning ranks of first-time consumers.
Coca-Cola's newly appointed chief executive Muhtar Kent sees this market as critical to his company's future and describes the scale of the opportunity as equivalent to adding a city the size of New York to the world every three months. The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.15 billion in 2030.
A look at the geographic distribution is striking. In 2000, developing countries were home to 56% of the global middle class, but by 2030 that figure is expected to reach 93%. China and India alone will account for two-thirds of the expansion, with China contributing 52% of the increase and India 12%, World Bank research shows.
As a result, multinationals that have so far viewed developing nations largely as a cheap source of labor, are now poised to benefit again as many of the workers they paid to build their products are increasingly able to afford Western consumer goods.
Bill Amelio, CEO of Lenovo, the Chinese firm that merged with IBM's personal computer business, notes that China is now the world's largest market for television sets and cell phones and the second-largest market for automobiles and personal computers.
The McKinsey Global Institute, the consulting firm's independent economic research arm, projects India's middle class will grow from 50 million to 583 million people in the next two decades. At the same time, the country will advance from the world's 12th largest consumer market to the fifth.
Meanwhile, China is expected to become the world's third-largest consumer market by 2025 as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute projects China's middle class will grow to 612 million by 2025, up from 43% of the population to 76%.
Clearly this broad expansion of a middle class with discretionary income to buy more than life's necessities presents a remarkable opportunity for multinational corporations. For example, Coca-Cola has a layered strategy for China in which Coke is sold in urban areas at only a slightly lower price than in Western markets. As a result, Coke is established as a brand to which new consumers aspire. At the same time, Coke is sold in the countryside for less, but consumers must drink their beverage on the spot and return the bottle to the vendor - a strategy that saves costs and drives down the price. In addition, bottles are smaller than those in the West.
Distribution is an important consideration for companies hoping to reach the emerging middle classes. Roads and airports are underdeveloped, particularly in India, a situation that presents a significant challenge -- and opportunity -- for companies that want to create innovative distribution systems.
While the growth of the global middle class is predicted to continue at a rapid pace, forces exist that could derail the process of global expansion for Western multinationals. One factor to consider is the differences in income distribution between countries and within nations. What is interesting is the dynamic character of social class, certainly not stable on a global basis and quite variable on a country-by- country or region-by-region basis. While statistically speaking, there is an emerging global middle class, we need to look carefully at the various indicators on a more fine-grained basis in order not to miss the variability.
This includes the caution against making assumptions that the world's new middle class will act exactly as prior generations of middle-class consumers have around the world. This is important, because we tend to assume all middle-class people have certain values. The common assertion is that people rising into the middle class will press for democracy, but that does not seem to be happening in China where people may be willing to accept more autocratic regimes in return for stability and middle-class lifestyle. An assumption that there's a link between capitalism and democracy, and that as incomes rise and people become educated, they will increase pressure for democracy and freedom and civil liberties may or may not be true. Source: Knowledge@Wharton; 07/09/08
India's organized retail explosion
Retail is one of the fastest growing and evolving sectors in India. With a market size of over $336 billion in 2007 and a year on year growth of 30-35%, it is no surprise that this sunrise industry is envisaged to grow to a market size of over $590 billion by 2012. The sector which has hitherto been characterized by unorganized and fragmented retailing is now witnessing tremendous growth in organized Retail.
Organized retail which is just about 4% of the Indian market today, as against an average of 50% to 85% in more developed economies, is poised to grow to more than 12% by 2012. In terms of sheer size however, traditional retail will continue to dominate the market with a market size of $493 billion as against organized/modern retail with a market size of $97 billion.
There are several factors that are contributing to this phenomenal growth. Economic reforms of the last decade, rising incomes, changing consumer attitudes, cross border and cross cultural influences, changing demographics and new born consumer confidence is driving the buoyant growth of organized retailing in India.
A large youthful population – more than 50% of India population is below 25 years - and growing affluence among the working youth is also contributing to the growth of the retail sector. The country is also witnessing the emergence of the New Consumer in India. A discerning consumer who is not shy about spending, consuming and investing in his or her mental or physical comfort, who values lifestyle who wants complete information before making a decision.
It is without a doubt that with so many factors driving India’s growth, rapid transformation is bound to happen in the consumer market as various areas/segments in retail would grow with changing preferences and tastes of consumers.
The buoyancy in the markets and the potential for growth is attracting more and more investments in the sector. Over the next 5 years investments of over 30 billion US dollars are projected in the sector. With such high growth rates and market sizes, investment in supply chain and logistics, the retail backbone, has become imperative.
The major investment areas in retail supply chains lie in the area of sourcing, distribution centers warehouse, cold storage), transportation networks, inventory (both store level and warehouse), supply chain information systems such as warehouse management systems, planning, forecasting, inventory management, etc.
Retail chains can choose to own or outsource one or more areas in the back end starting from inbound transportation, distribution centers, or even further upstream, value adding operations. Currently, some of the retail chains like Subhiksha have outsourced most of their back end, while some, such as Reliance, are investing heavily in the supply chain network.
Others are positioned in between owning part of the activities in the back end. Outsourcing is done mostly in inbound transportation to independent trucking companies, or to 3PLs (third party logistics companies), who may also provide other services as warehousing.
Currently the retail sector employs over 50 million people in India. The additional new investments in organized retail alone are expected to generate additional requirement of 500 million sq. ft of space. At a most conservative estimate it is anticipated that over 2 million new jobs will be created in the organized retail sector in the next 5 years - new jobs will also be created in the unorganized sector. Source: Technopak; 2008
When Wall Streeters pack their bags For Dubai or Shanghai...
The financial industry has become more global just as the manufacturing sector has become more global. Deals take place all over the world. So, what can Wall Streeters expect when they pack their bags for Dubai, Shanghai, or Moscow? They can expect generous packages, often tailored to their destinations. In Shanghai, a car and chauffeur are standard. In Hong Kong, packages often include maids and a club membership. In Colombia and some Middle East locations, personal security, a bulletproof car, and insurance against kidnapping are standard. Other benefits can include a nanny, the payment of private school fees, language lessons for the family, cultural training, etc. Needless to say, relocating employees is an "expensive procedure." Source: The New York Times; 04/02/08
Is one global model of corporate governance likely?
In Germany, labor unions traditionally have had seats on corporate boards. At Japanese firms, dozens of loyal managers cap off careers with a stint in the boardroom. Founding families hold sway on Indian corporate boards. And in China, Communist Party officials are corporate board fixtures.
Just as different nations have developed languages, foods and local customs, they also have adapted their own forms of corporate governance and board structures. Now, as business continues to globalize, new pressure from international capital pools and government regulators may diminish the local and national flavor of corporate boards.
Companies around the world are increasingly converging on a model developed largely in the United States in response to the growing power of global capital investors. As a result of new technology and liberalization of government controls on capital flows, massive pools of investment can move in and out of countries more freely than ever before. Companies that globalize operations or ownership know that adoption of internationally accepted governance standards would help them compete against other firms.
Perhaps the central focus of corporate governance is the structure of the corporate board. In general firms are moving to create boards that are more independent from management, populated by non-executive members and organized around committees overseeing management, compensation and auditing. All these factors point to good governance and thus the company becomes more attractive to investors and legitimate in the eyes of suppliers and customers. An investment manager anywhere in the world looking to put cash in the stock of a company in Lithuania or Italy will come at the company with an eye to whether it is following good practices.
Another force driving convergence is regulation. Following the passage of the Sarbanes-Oxley Act of 2002 in the United States, other countries enacted similar regulatory provisions that also focus on some of the key elements of board structure and overall governance. For example, the United Kingdom's Combined Code on Corporate Governance, adopted in 2003, sets out standards for good practices. The Code does not demand compliance in the way Sarbanes-Oxley does, but it requires companies to disclose how they conform to the Code's standards and where they differ.
The international investment community is the force that will drive convergence if it happens. Companies that want that money will have to play by their rules. So the question will be: How much commonality will they want across systems of governance? Most likely they want the same outcome around the world, which is transparency with respect to finances. As long as they get that, exactly how it occurs is less important. Different national practices can still exist if they provide acceptable levels of transparency.
It is not so much the path to transparency that matters, but that companies and countries protect shareholders and generate higher returns over time. Even small steps that lead to marginal improvement could have an important impact on the global economy. Over millions and millions of shares, that can make a difference. If hundreds of thousands of companies become just a little better governed and a little higher performing, the world would be a better place. Source: Knowledge@Wharton; 01/09/08
Indias healthcare challenge
Over the past four years of historic economic growth, leaders in India have come to realize that to emerge as a global economic superpower, the country must invest in its social fabric - in particular, education and health care. These investments are all the more necessary, as India is expected to become the world’s most populous country by 2035. It is already the youngest: home to 20 percent of the world’s people under 24 years of age.
A scan of the provider landscape reveals a chronic shortfall: the country has only 1.5 beds per 1,000 people, for instance. That is much lower than the average - three to four beds per 1,000 people - in developing economies such as Brazil, China, South Africa, and Thailand and far behind developed areas (like the United States and Western Europe), which have four to eight beds per 1,000 people. Moreover, with 0.6 doctors and 0.08 nurses per thousand people, India has significantly fewer of them than the world average: 1.2 doctors and 2.6 nurses per 1,000 people, according to a recent World Health Organization report.
In a country where 70 percent of the population lives in rural areas and the poor rely on the public system for preventive and inpatient care, such shortages pose a significant challenge: public institutions handle 93 percent of immunizations, 74 percent of prenatal care, 66 percent of inpatient bed days, and 63 percent of delivery-related inpatient bed days. Such challenges are worrisome because, according to current estimates, government spending on hospital infrastructure will probably increase at a rate of only 2 percent a year over the next decade - lagging far behind society’s needs. Source: The McKinsey Quarterly; January 2008
Healthcare tops the list of concerns in China
Medical issues are the No. 1 concern of most Chinese citizens, according to a survey of over 101,000 households by the National Bureau of Statistics. People are concerned about the cost of medical care, about an antiquated system that has failed to keep up with demand, and about inequalities in care between rich and poor patients and urban versus rural patients. Health officials have vowed to do better and remove all inequalities to basic health care by 2020. Last year, the Chinese government spent $8.7 billion on health care, a 277% increase over 2006. Source: The Washington Post; 01/10/08
Building workplace trust in some cultures blurs the line between professional and personal life
In China and Turkey, the separation between work and personal life is not so clear cut as compared with western societies, according to a joint study by Singapore Management University and Sabanci University in Turkey.
The research involved semi-structured interviews with 30 Turkish and 30 Chinese employees working for a variety of large-scale organizations. The interpersonal trust relationships are examined from three perspectives – horizontally between peers, and in vertical relationships both upwards and downwards between seniors and subordinates.
In the study, Turkish and Chinese employees were asked to define trust and identify a supervisor, a peer and a subordinate with whom they had developed a strong relationship. They were asked what factors affected their trust development and how these influenced their work relationships. The respondents were also asked to narrate an incident marking a milestone in the building of trust.
Common to both Chinese and Turkish cultures was a blurring of the line between personal and professional lives. Their collectivistic cultures facilitated the spillover effect from professional to personal, such as the sharing of personal information, time and space which served to bond employees in their professional domains.
The study found that trust in supervisors was formed or reinforced predominantly in a professional context. For both countries, benevolence was the most significant attribute in both personal and professional contexts. The Turkish sample viewed benevolence in a variety of ways. In the professional context, it took the form of career guidance, showing understanding, being forgiving of subordinates' mistakes or being unselfish -- for example, encouraging the respondent to take a better job offer. Chinese respondents did not view benevolence as the only condition for building trust, but also included attributes such as delegation and reciprocity, highlighting the importance of mutual obligations and reliability of team members in achieving work deliverables within a collectivistic culture.
The major findings in this study are that benevolent motivations drive most trust building efforts especially for trust between peers and, to a lesser extent, for trust in supervisors where notions of justice and fairness also matter. With respect to subordinates, predictability and ability drive trust building efforts for supervisors. Source: China Knowledge@Wharton; 01/02/08
Tracking the growth of Indias middle class
Over the next 20 years, India will likely grow to become the world’s fifth-largest consumer economy.
A study by the McKinsey Global Institute suggests that if India can achieve 7.3 percent annual growth—a reasonable assumption if economic reforms continue—consumer spending will quadruple, from about 17 trillion Indian rupees ($372 billion) in 2005 to 70 trillion rupees in 2025. The dramatic growth in India’s middle class, from 50 million to 583 million people, will power this surge.
Spending patterns will shift dramatically as expenditures grow rapidly on discretionary items ranging from personal products to consumer electronics. Incumbents will have to fight to retain their market dominance, while attackers could find lucrative ways to exploit the evolving tastes of India’s massive new middle class.
With such growth on the horizon, it is unclear which companies will win in most product categories. Opportunities will blossom as millions of first-time buyers step up to cash registers and as the bulk of consumer spending moves from scattered, hard-to-reach rural areas to more concentrated, accessible urban markets. Indian consumer spending will shift substantially from the informal economy, with its individual traders, to the more efficient formal economy of organized businesses. That transition will lower prices and further boost demand.
But neither incumbents nor attackers will have an easy time. Bureaucratic hurdles and well-recognized infrastructure shortcomings will frustrate many strategies. In addition, while aggregate spending will rise tremendously, it will be spread across hundreds of millions of households, many with very modest incomes (by the standards of developed countries) and high sensitivity to price and value. Finally, in many consumer markets both Indian and multinational companies already compete intensely for customers. While the opportunities will be enormous, the challenges will force companies to be more dynamic by adapting their products, services, and business models to the rapidly changing needs and incomes of Indian consumers. Source: The McKinsey Quarterly, 2007, Number 3.
Expat life gets less cushy
It used to be a cushy ride. Companies thought they had to "bribe" employees to leave all that was familiar and comfortable and take assignments in foreign countries. There are all manner of perks and life was good, very good. But that has changed. Corporate cost cutting, changes in the tax codes, and the falling dollar have eroded the lifestyles of executives and their families overseas. The Weekend Journal looked at living costs in eight cities that are home to lots of expats. In Mumbai, high-end homes rent for $6,400 a month, a Toyota Camry costs about $60,000, and a glass of Bombay Sapphire gin and tonic about $20. In London, a two-bedroom flat in Chelsea starts at more than $1,600 a week, a Camry costs $32,500 to $46,000, and dinner for two at a nice restaurant (no wine) will set you back $160 to $250. In Sao Paulo, a two bedroom apartment rents for about $1,200 to $2,000 a month, a Camry retails for $80,000, and a short-sleeve Ralph Lauren shirt goes for $85. The other profiled cities are Moscow, Hong Kong, Dubai, Tokyo, and Beijing. Source: The Wall Street Journal; 10/26/07
Behind London's boom, billionaires from abroad
The United Kingdom is home to 17% of Europe's high net-worth individuals, defined as anyone with more than $1 million in financial assets, such as private-equity holdings, stocks and bonds, according to a survey by Merrill Lynch and Capgemini. The group is growing. Last year, the number of high net-worth people in the U.K. surged 8.1% to 484,580, faster than Germany or France.
Of the U.K.'s 10 richest people, just three are originally from there, according to the Sunday Times newspaper's annual list. The country's two wealthiest individuals are the Indian-born chief executive of ArcelorMittal, Lakshmi Mittal, who paid $141 million for his London mansion, and Russian oil magnate Roman Abramovich. About 65% of houses sold in central London for $8 million or more last year were purchased by people born outside the U.K., estimates British real-estate company Savills PLC.
Behind the surge of money pouring into London is the globalization of wealth. As new multimillionaires are minted in Russia, India, the Middle East and Europe, many are coming to London, drawn by a combination of low taxes, historical ties and a geographical location that makes the city attractive for people doing business in Eastern Europe, Asia and the Middle East.
The U.K. taxes foreigners who claim their true home, or "domicile," is elsewhere only on the money they earn in, or bring into, Britain. All assets elsewhere aren't taxed. The U.S., by contrast, taxes residents on their world-wide income. Many rich foreigners settle in London because of the ease of doing business in both U.S. and Asian time zones, a key consideration as developing markets gain in economic importance.
London now rivals New York as a center of international finance. In a nod to London's success, the Partnership for New York City, a nonprofit group that promotes New York as a financial center, recently hired a Briton to run a new office dedicated to maintaining New York's competitiveness in financial services.
Some people question whether the bubble in London is starting to show signs of cracks. British consumers are taking on more debt and interest rates are rising. Financial and business services account for a third of London's jobs. There are some signs that the boom is slowing down. Some bankers say the current turmoil on financial markets is making them brace for layoffs and low bonus payments in the year to come. Last month, the Royal Institution of Chartered Surveyors reported the first drop in British housing prices in 22 months, and said there was a 20% chance of a 10% drop in London house prices over the next year.
Still, London's wealth has a range of sources -- from Russian oligarchs and Indian billionaires, to American and European financiers as well as Arab oil sheiks -- which could help cushion any downturn, observers say. London's property market cooled after the financial crashes in Asia and Russia in 1998 and after September 11, 2001, but recovered quickly in both cases. Source: The Wall Street Journal; 10/05/07
Self-insured businessman Larry Shaw found out he needed heart surgery - blocked arteries. His first call was to find out was how much it would cost. The surgeon would cost $1,500 to $2,000. But the angioplasty plus one night in the hospital would cost $47,000, not including anesthesia. Larry's next calls were to Thailand and India. A few weeks later, Larry had a successful angioplasty in Bangkok's private Bumrungrad International Hospital. Cost: $6,400. Thus, Larry joined the ranks of medical tourists. In 2005, medical tourists made an estimated 19 million trips and spent $20 billion. That number is expected to double by 2010. People are looking for reasonable prices, treatments that are not yet available at home or widely practiced at home, and personalized service. As a side benefit, to countries like Thailand and India, medical tourists also tend to stay on for an extra few days to a week to truly be tourists. Source: The Washington Post; 09/09/07
Wages are on the rise in China as young workers grow scarce
Chinese wages are on the rise. There are no reliable government figures. But factory owners and other experts say businesses are having a hard time finding able-bodied workers and have to pay the workers they can find more money. For example, Zhang Jingming now makes the equivalent of $263 a month working at a bicycle factory. As recently as last February he was making just $197. The increases will lead to higher prices. In fact, some companies are already passing along their higher costs. The whys and wherefores.... Parts of China are experiencing labor shortages. Employers are struggling to hire and retain workers. Higher wages are the price employers must pay. In a land of many, labor shortages seem odd. But factory owners do not like to hire workers over age 35 or 40. And China's one-child policy has reduced the number of workers in the 20-to-24 year old range. Source: The New York Times; 08/29/07
Why Brazil has become one of the top four investment destinations in the world
Along with China, India and Russia, Brazil is a country overflowing with opportunities to attract foreign capital. Brazil is the leading the way in Latin America’s economic development. In 2006, it was the third-largest economy in the western hemisphere and the 11th largest in the world. The economy has stabilized, the legislative reforms of the Lula Da Silva government are boosting cooperation between the public and private sectors, imbalances are improving, and the high valuation of markets is attracting the attention of foreign investors. As a result, the Brazilian currency, the real, as well as the country’s stock market are both at all-time highs.
One of the keys to Brazil’s international success is the political stability of its government. The reform programs being carried out have been a success, enabling the country to lessen its vulnerability. The huge size of the market, the successful privatization program, the remarkable diversification of its manufacturing and export sectors, and its strong political democracy have become the pillars of Brazil’s dynamic economy and society.
For more than 20 years, Brazilian capital markets were characterized by protectionism and underdevelopment. Following the improvement in the economy, capital markets began to modernize. Lately, Brazil has been benefiting from a favorable external environment. On a global level, it has significant liquidity. In a broad range of financial markets, prices have risen at a brisk pace and the country has growing economic ties with developed economies. Internally, its monetary policies have enabled it to control inflation, now between 3% and 4%. As a result, interest rates are trending downward. Economists anticipate that rates will drop to 9.5% by 2009 from their current level of 12%. Currently Brazil has an annual inflation rate of 3%; from 1980 until 2005, the Brazilian economy grew at rates of 2.8%, 2.9% and 2.3%. It never went above 3%. In 2006, it broke that barrier, reaching 3.7%. In 2007, it has reached 4.4%. Source: Universia Knowledge@Wharton; 07/27/07
A tiger by the tail
With all the business press attention on India, and its increasing importance on the world stage, this issue of Executive Insight’s Thought Leader seeks to deepen our collective understanding of this vast democracy with 1.1 billion people, GDP growth in the 9% range, and a depth of highly educated, English speaking professionals. A richly diverse land with a rapidly burgeoning and globalizing middle-class conflicted with pervasive poverty, widening income differentials and frustrating governmental bureaucracy.
In Holland, some see model for U.S. health-care system
A new health care system implemented in the Netherlands last year looks promising. It is expected to curb annual growth in health care spending from 4.5% in 2006 to 3% in 2007, adjusted for inflation. The system, which follows a version of a "managed competition" model proposed by Prof. Alain Enthoven at Stanford University three decades ago, requires all adults to buy health insurance and insurers to offer policies to anyone—no matter how sick they are. The government assists individuals who cannot pay the premiums through taxes on high-income individuals and also provides a "risk-equalization" payment to insurers for taking on higher risk patients. The system promotes private insurer competition and preventive health care.
Consumers choose the level of coverage they need, which, if applied in the U.S., could reduce the inefficiencies and costs of employers choosing plans for their employees without knowing their exact health care needs. In addition, the "risk-equalization" payment to insurers could help prevent U.S. insurers from competing to find the lowest-risk, healthiest customers. Still, while the Netherlands system has been an overall success, more work needs to be done to provide incentives to hospitals to lower costs and improve quality of care. Source: The Wall Street Journal; 09/06/07
India top retail investment hot spot
As consumer tastes veer towards western-style luxury goods and retail concepts, three nations — India, China and Russia — have emerged as the most attractive markets for retail investment. Furthermore, retailers are now marching into smaller cities after testing the larger ones, as per global consulting firm AT Kearney’s annual Global Retail Development Index (GRDI), a study of retail investment attractiveness among 30 emerging markets.
India and Russia continue to occupy the top two slots of this retail development through 2007 as they have since the last three years. “India, being at the top of retail development, validates the level of activity and enthusiasm we have seen in the marketplace. We anticipate seeing another year of major investments and new retail concepts changing the rapidly evolving organized retail landscape in India, projecting deeper penetration in the Tier 2 and 3 cities,” says Hemant Kalbag, principal, consumer industries and retail practice, AT Kearney India.
This was revealed by the findings of the sixth annual GRDI. The GRDI focuses on opportunities for mass merchant and food retailers, which are typically the bellwether for modern retailing concepts in a country. According to the study, modern retail formats have grown by 25%-30% in India and by 13% in both China and Russia over the last year. Until recently, such rapid growth was confined to the largest cities in each country. However, increased competition within those cities is forcing domestic and global retailers to expand into smaller second and third-tier cities.
Take the case of Prozone, a shopping centre developer. Now Prozone is eyeing the semi-suburban pie in anticipation of growing demand there. Experts say that building a presence in these markets ahead of the competition remains the key to long-term survival. According to them, smaller cities can be a window of opportunity for retailers, if the latter find skilled labor in place.
Based on a set of 25 variables, including economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth, GRDI helps retailers prioritize their global development strategies. Source: The Economic Times; 06/22/07
Latin America confronts the strength of its currencies
Latin American currencies have appreciated a great deal since the beginning of this year because of a strong influx of U.S. dollars into the region. The currencies that have performed the best this year are the Colombian peso -- which has risen 17% relative to the dollar -- and the Brazilian real, which has risen 10%. This hurts the region because products lose their competitiveness in the world market. The Mexican peso is the one exception: Its currency is losing strength due to the decline in remittances sent home by Mexican immigrants.
All of this is taking place in a global context where the U.S. dollar has generally weakened against other currencies, starting with the euro and the pound sterling. There are only a few countries where the dollar has strengthened and local currencies have weakened. This list includes the Sri Lankan rupee, the Taiwanese dollar, the Nicaraguan cordoba, the Argentine peso, the Mexican peso and the Japanese yen.
This pattern is having an especially negative effect on the economies of countries whose currencies have strengthened the most. In the case of Colombia, “You can say that it has lost competitiveness against some neighboring countries, especially Chile, Peru, Argentina and Ecuador, where local currencies have not gone up as much, or may even have lost value, as in the case of Argentina and Ecuador, which is the most dollarized economy,” says Cesar César Cañola, professor of economics at the University of Medellín in Colombia.
The situation in Mexico is very different. The Mexican peso has strengthened by only 0.2% this year, reaching 10.7847 to the dollar. This makes it the second-worst performer among the major currencies of the region. The only Latin American currency that has performed more poorly this year is the Argentine peso, which has dropped by 0.8% because of the daily purchases of dollars made by that country’s central bank.
The remittances that Mexican emigrants send home are the second-greatest source of dollars for Mexico, after exports of petroleum. These payments are being limited by the crisis taking place in the U.S. housing sector. The construction industry is the greatest source of employment for Mexicans in the United States, representing 20% of all jobs, according to Mexico’s central bank. Source: knowledge@wharton; 06/27/07
Polution worries increase in China
Concern about the toll of China's polluted air is growing. Based on data from a report by the World Bank and China's State Environmental Protection Agency, it is estimated that approximately 394,000 deaths occurred in 2003 from outdoor air pollution in China. The report said the approximate monetary cost of "excess deaths" from such air pollution was 394 billion yuan, or nearly $52 billion, and the authors assigned a value to a "statistical life" of one million yuan.
Each day, Beijing adds 1,000 vehicles to its roads as the city's upwardly mobile purchase cars, which have become the latest must-have for China's growing middle class. In a city poorly served by public transportation, cars are crossing the line from a luxury of the rich to a commuting necessity for the middle class. All those new cars have contributed to Beijing's pall. Levels of nitrogen dioxide in the city exceed the World Health Organization's clean-air guidelines by at least 78%. Source: The Wall Street Journal; 07/04/07
Labor markets in the BRICs (Brazil, The Russian Federation, India and China)
One of the most important recent developments in the world economy is the increasing economic integration of large non-OECD countries, in particular Brazil, China, India and the Russian Federation – the so-called BRICs. Already, the BRICs represent over one fourth of world GDP, up from 17% in 1990. And this is likely to rise further in coming years, if the ongoing strong economic performance currently enjoyed by most of these countries continues, as many commentators expect.
Increased prosperity in the BRICs is a major achievement for these countries, while also creating new growth opportunities for OECD economies. Indeed, the BRICs have become much more open to international trade and investment. Total trade in goods and services represented in 2004 two thirds of GDP in China, 56% in the Russian Federation, 40% in India and 31% in Brazil – compared with 42%, on average, in the OECD. The BRICs also absorb a significant share of OECD foreign direct investment outflows.
Therefore, it has become crucial for OECD economies that the BRICs maintain a sustained growth path. Sound labor markets are of paramount importance in this respect. Economic growth depends to a large extent on the functioning of the labor market, as well as improvements in job quality and productivity. But the labor markets in the BRICs have a number of distinguishing features from those of the OECD countries as well as significant differences between them.
It is notoriously difficult to assess the international comparability of employment data in the BRICs. Nevertheless, comparable employment data have been estimated on the basis of both national and international sources, then a consideration of key qualitative aspects of employment – notably the incidence of employment informality and social security coverage – as well as trends in wages and incomes finds:
That the rapid recent economic expansion in the BRICs has led to significant employment gains in these countries. Over the 2000-05 period, the four countries taken together created over 21 million net new jobs, on average, per year. As a result, employment rates have risen in Brazil, India and the Russian Federation and remained high in China. Estimated employment rates in China, at 78%, are higher than in all OECD countries except Iceland and Switzerland. Estimated employment rates in Brazil and the Russian Federation are close to the OECD average, while they are below that average in India. These estimates are very similar to the employment rates estimated by either the World Bank or ILO, with the exception of China. For the latter country, the estimated employment rate is derived from the population census and is lower than the World Bank and ILO estimates – these are based on registration data, which reduces the scope for international comparability.
Despite these achievements, there is still significant under-employment in all four countries.
First, unemployment rates, at 8-9%, are relatively high in Brazil and the Russian Federation. In the absence of a benefit system for most jobseekers in China and India, the unemployment figures for these two countries are of limited relevance to assess the degree of labor market slack. Second, there is significant under-employment among women in Brazil and India and among older workers in the Russian Federation. Third, in the case of China, the rural sector is characterized by excess labor and remains large: despite significant rural-urban migration, almost two-thirds of Chinese workers are employed in rural areas. Also many laid-off workers from state enterprises are seeking jobs and should be counted as unemployed, although they not registered as such in Chinese statistics.
Another major employment challenge in the BRICs lies in the significant incidence of employment informality in most of these countries. Employment in the informal sector represents about half of total employment in Brazil and China, and over 90% in India. Importantly, despite faster economic growth, the incidence of employment in the informal sector is on the rise in the three countries, which shows that the phenomenon reflects pervasive structural barriers to transitions to formal employment (defined as declared employment, which contributes to social security). Available estimates suggest that informal employment in the Russian Federation is much lower than in Brazil, China and India, coming closer to values observed in OECD Central and Eastern European countries.
High employment growth has gone hand-in-hand with wider wage inequalities over the past decade in China and India and persistently high wage inequalities in Brazil and the Russian Federation. This suggests that, in contrast with predictions from standard trade theory, the international integration of Brazil, China and India (unskilled-labor abundant countries) has not been associated with higher relative wages of unskilled workers in these countries.
Looking at medium-term challenges, the BRICs will undergo significant population ageing over the next two decades, reflecting both lower fertility rates and improved longevity. Over the next 15 years, and on the assumption of constant participation rates, labour force growth will slow somewhat in India. In Brazil, labor force growth over the next 15 years will be cut by half compared with the past 15 years. In China, it will practically stagnate and in the Russian Federation, the size of the labor force could even contract in the near future.
Another key medium-term trend is the significant improvement in educational attainment in the BRICs. At present, workers in Brazil, China and India have much lower educational attainment than in the majority of OECD countries – while the opposite holds true in the Russian Federation, a country where educated labor is more abundant than in the average OECD country. However, educational attainment is improving rapidly in all three countries, especially in China. Source: OECD working party on employment; 03/30/07
Training future competitors; sound globalization strategy or short-term expedient?
GM’s early entry to China, through a 50-50 joint venture in 1997 with Shanghai Automotive Industry Corp has served them well. The venture is now the largest car maker by volume in the world’s second biggest automobile market, bringing the otherwise troubled GM hundreds of millions of dollars a year in profit. Know-how was exchanged for market entry and position and both sides seem satisfied with the outcomes of the venture, reports The Wall Street Journal.
But Shanghai Automotive, owned by the Shanghai city government is emerging as an increasing competitor to GM in China and has global aspirations. It also has a second joint-venture with GM arch-rival Volkswagen AG.
China’s car market grew 35% last year, as demand increases from its burgeoning middle-class; within 3 years China may surpass the US as the world’s largest market. The Chinese government both restricts foreign car makers to joint-venture participation in the Chinese market, with ownership capped at 50%, and is also pressing local car makers to develop their brands in its desire to build local core competency off the backs of their foreign partners. Toyota wouldn’t play ball. GM, Ford and Volkswagen did; technologies were transferred and capabilities built.
Today, performance standards at Chinese car factories match the best of GM’s US plants; the average car takes about 15 hours to build; Japanese-made robots put windshields in place; German machines marry the cars' chassis to their bodies; adjustable conveyors keep the cars within easy reach of workers in bright blue coveralls. All the foundations of a formidable global competitor are now in place.
GM decided it was better to participate in China than to pass. Time will tell if the strategy will bring long-term benefit. Source: Wall Street Journal; 04/20/07
Comparative labor policies
Americans and Europeans have long cast a skeptical eye at one another's labor policies. From the European point of view, American employers have a relatively free hand to hire and fire, with meager and short-lived unemployment benefits.
On the other hand, Americans see European employers as saddled with rules on everything from wages to layoffs and high unemployment benefits that discourage a return to work. But globalization is moving Americans and Europeans closer together. US legislators are working to increase the minimum wage and are considering a plan to extend unemployment insurance coverage. In Europe, legislators are scaling back on unemployment programs.
To provide a little perspective about how far apart we are on the "safety net" scene, consider the following statistics. In the US, the share of wages replaced by unemployment benefits is 14%. In Germany, it is 29%, in Italy 34%, in France 39%, in Denmark 50%, and in the Netherlands 53%. Source: The New York Times; 04/01/07
Building the optimal global footprint
Few business strategies attract as much debate and media coverage as sending business functions to a new location. Even after several years of a steady stream of stories touting its advantages and decrying its shortcomings, the fascination continues. Indeed, executives have been so enthralled by the potential opportunities of lower-cost locations that establishing a global footprint is becoming de rigeur for companies of all sizes.
After years of increased activity, the image of pioneers paving the way has clearly faded. While sending a call center to India may no longer be the risky proposition it once was, many decision-makers feel increasingly bewildered by the range of choices before them. What functions can safely be performed in remote locations? Which countries offer the best combination of skills, costs and attractive business conditions? How important is proximity to customers and to corporate leadership? What about language differences? Cultural barriers? Transaction costs?
Again, thanks to the ongoing media focus, executives are increasingly aware of the risks associated with offshoring. Are the cost savings really sustainable? Are wage inflation and attrition in the most popular locations undermining the potential advantages? Is it possible to maintain required levels of security and customer service quality in remote foreign locations? And in a year dominated by news of tsunamis, floods, hurricanes, wars and pandemics, how can executives ensure continuity of critical business functions?
To help decision-makers answer these questions, A.T. Kearney developed the Global Services Location Index TM (GSLI). The Index evaluates 40 countries as potential locations for the most common remote services, including IT services and support, contact centers, back-office support. Each country’s score is comprised of a weighted combination of relative scores on 40 individual metrics, which are grouped into three categories: financial attractiveness, people skills and availability, and business environment.
India and China: Complementary Countries
With their huge populations, increasingly strong educational output and low labor costs, India and China are clearly top of mind as remote services locations. However, they occupy different positions in the global services supply market. India has been developing this sector for almost 20 years and offers a complete range of services, from IT and contact centers to back-office processes, R&D and analytics. The concept of China as a services location has only evolved in the past five years, and the scale of its sector is tiny by comparison. But China is playing to its strengths: It emphasizes niches, such as contact centers and back-office processing, which cater to fast-growing East Asian markets, and R&D, which supports its huge manufacturing base. Despite relatively weaker English skills, China is increasingly selected as a complement to India for global services provision, mainly in less English-dependent IT and basic back-office processes. In fact, many Indian vendors are establishing centers in China to tap into its complementary skill-base and offer their customers a risk-diversified platform.
India. India continues to be the AT Kearney Index’s undisputed leader, combining low costs with a vast pool of talented workers whose breadth and depth of experience improves with each year. From its humble start in the 1980s, India has gradually moved from providing simple code remediation and data entry to offering sophisticated IT solutions and IT-enabled business process management. Increasingly, local vendors and global multinationals are locating high-end research and analytics, content and design, and product development activities in India. Today, it is difficult to find functions that India cannot provide.
China. In contrast to India’s array of offerings, China is still nascent but is developing strengths in a few select areas. Most of China’s service centers cater to domestic or regional customers that require geographic proximity and local language capabilities. Its vast internal market, along with the Chinese-speaking customer markets in Hong Kong, Taiwan and Southeast Asia, as well as pockets of workers who speak Japanese and Korean, make China the natural choice for service hubs to support the fast-growing markets of East Asia.
Although China remains primarily a regional hub, new capabilities are quickly transforming the country into a global service provider. As local and international demand grows, service centers are moving up the value chain from low-end processing and programming functions to advanced IT applications and financial services. Knowledge of English is also spreading fast. Some schools in China are teaching mathematics and science courses in English, and IT colleges include English-language training in their curricula. Spurred on by India’s success and by the prospects of the 2008 Beijing Olympics, national and regional governments have launched ambitious programs to improve language and IT skills. To address a shortage of management talent, Chinese companies are recruiting experienced managers from countries such as Singapore, the Philippines and India. \
Weaknesses remain, however. While intellectual property (IP) protection will continue to improve with World Trade Organization accession, companies continue to report that enforcement is not as stringent as it could be. Longer-term economic and political stability remain a concern. Companies are caught between rapidly rising costs and turnover rates in the major coastal centers around Shanghai, Beijing and Guangdong, and inland cities such as Chengdu and Xian, where costs are lower, but talent with relevant experience is scarce. Source: AT Kearney Global Services Location Index
China gives big boost to military spending
On the eve of the annual National People's Congress, China announced yesterday that it will augment military spending by 17.8% this year, the largest increase in more than 10 years and one that increased anxiety among some of the country's neighbors and strategic rivals, as the Guardian reports. China's defense budget for this year will amount to nearly $45 billion, The Wall Street Journal adds - compared with some $600 billion in U.S. military spending. And a spokesman for the yearly parliamentary gathering, which opens today and is set to approve the government's budget this week, said the added money will go toward improving military technology as well as boosting soldiers' pay. Source: The Wall Street Journal; 03/05/07
Labor markets in Central and South Eastern Europe
Positive trends, persisting problems and new challenges
A new International Labor Organization study says that economic growth has accelerated in Central and South Eastern Europe after 2000, but it has not adequately translated into employment creation. The positive economic trend also coincided with a relative worsening of youth unemployment and decreasing protection at the workplace. The study argues that an approach combining flexibility and security is the most relevant for the region and suggests appropriate reforms of economic, labor market and social policies. Source: ILO Online; 03/09/07
Stricter law fails to diminish the demand for child laborers in India
India has no outright ban on child labor and had long allowed the employment of children under 14 in all but what are deemed “hazardous” occupations. But last October a stricter law took effect; it prohibits the employment of children under 14 in hotels and restaurants, and as domestic servants. Five months later, children’s rights advocates say, the law has had little effect. Under-age children, mostly girls, are as in demand as ever to be maids and nannies. “Because of the booming economy and the spread of the nuclear family, we’ve seen a rise in demand for domestic help at a time when it’s becoming more expensive to employ people,” said Surina Rajan of the International Labor Organization. “So families are looking for a cheaper option.”
The Indian government estimates that 12 million children under 14 are employed; children’s advocates say the figure could be closer to 60 million. It is unclear how many of these children work as maids. Children’s rights advocates fault the government for not cracking down hard enough on the recruiters of children and not helping parents to keep their children at home. They have called for more educational and job opportunities in the struggling countryside of West Bengal and the neighboring states of Bihar and Jharkhand, the source of most of the children in domestic service. Source: The New York Times; 03/04/07
Doing business in China
China is an increasingly important player in the world economy. However, nearly 40 percent of executives in Asia say their companies do no business in China today, according to a McKinsey survey, and a third say that even if the country’s growth rate fell to zero their company’s revenue would not be affected.
Executives also see significant threats to China’s continued growth; these include a shortage of talent and weak enforcement of commercial laws and regulations. But many respondents say that the country can address its challenges sufficiently. They indicate that economic and social issues are far more important than environmental ones. For instance, though 63 percent of respondents cite pollution as a threat to growth, when asked to weigh it against economic and social issues, 80 percent choose a threat other than pollution as the most significant.
When respondents are asked to consider how quickly China should respond to the threats to its continued growth, more than 80 percent say China must address those threats within five years. The majority (60 percent) say China is likely to be able to do so, although only 12 percent see it as “very likely”. Respondents in China are the least likely to be optimistic; less than half say the country is very or somewhat likely to be able to address the problems sufficiently. Executives whose companies are currently generating revenue in China but whose offices are located elsewhere are somewhat more optimistic: 69 percent see it as very or somewhat likely that China will sufficiently address the threats it faces. Source: McKinsey & Co.; 03/03/07
Ending impunity for violence against women and girls
While manifestations of violence against women and girls vary across social, economic, cultural and historical contexts, it is clear that violence against women and girls remains a devastating reality in all parts of the world. Existing research, data and testimonials from women and girls world-wide provide chilling evidence. It is a pervasive violation of human rights and a major impediment to achieving gender equality, development and peace. Source: The United Nations Department of Public Information; 03/07
HIV/AIDS is a matter of growing concern across Europe as a whole, and in particular Eastern and Central Europe and Central Asia. On 12-13 March, Ministers of Health from the European Union (EU), along with representatives of international agencies, multinational companies and civil society meet at the Conference "Responsibility and Partnership – together against HIV/AIDS" in Bremen to consider new initiatives for fighting AIDS in the European context. Significantly, German Chancellor Angela Merkel will address the conference. Source: ILO Online; 03/12/07
“Leadership”, answered the President of one of India’s largest business conglomerates recently. “Do we have the right skills and capabilities to pull our strategy off,” reported a Global 500 CEO. “I worry that the current management team will not be able to take us where we need to go to next,” answered a third corporate leader.
Most CEO’s are satisfied with their strategies. Many are less satisfied with their performance. This Executive Insight Thought Leader centers on the imperative of leadership capability development as a business priority.
We recently co-authored a report for The Conference Board that examined the likely impact of the recent SEC policy reversal on CEO succession planning. In an early review, The Wall Street Transcript called it, “a must read for anyone interested in CEO succession and its implications for corporate governance and corporate performance.
In its release the SEC reframes CEO succession as a risk management (and policy) issue and places its responsibility firmly in the boardroom. No longer can boards let management run CEO succession planning without tight oversight, including setting more specific standards and requirements, taking responsibility for results, and exercising discernable independence in the process. The policy change heralds a new wave of corporate governance scrutiny, as regulators and shareholders increasingly focus on CEO succession practices.
We invite you to download a complimentary copy and learn how to prepare for the inevitable governance and activist scrutiny ahead. We analyze the practical impact of the new SEC guidance, explain what shareholders need to know and why, and provide a straightforward guide on how to set up and manage CEO succession practices that satisfy stakeholder needs.
We hope that you find the paper of interest and value. Should you, or your colleagues, have an interest in discussing this subject further we'd be delighted to hear from you. As the governance landscape shifts on CEO succession planning, we advise Boards of Directors and company management how to best structure succession practices that mitigate risk, satisfy shareholder disclosure needs and prepare for planned and emergency CEO transition.
A lack of leadership: a survey of corporate directors
Only half of board members say their boards have responded effectively to the global economic turmoil. However, many corporate boards have adjusted their practices, and more want to do so.
Many boards of directors are not providing the leadership demanded by the global economic crisis, according to a McKinsey survey on the board’s role in the current economic environment. While half of board members describe their boards as effective in managing the crisis, just over a third say their boards have not been effective; 14 percent aren’t sure how to rate their boards’ effectiveness. At the personal level, roughly half of corporate directors say their boards’ chairs haven’t met the demands of the crisis, and a nearly equal percentage of board chairs believe the same about their board members. Though most boards have implemented various changes to their procedures in response to the crisis, 62 percent say their boards need to change even more.
The survey asked directors what areas of business their boards have been effective at addressing, what procedural changes their boards have instituted since the global economic turmoil began, whether demands for leadership have been met, and what changes are still needed for managing the crisis more effectively.
Innovative strategies are the key when corporate directors evaluate their boards’ responses. Among the group who say their boards have been effective in responding to the crisis, 60 percent credit the development of new strategies to manage risk and take advantage of new opportunities. That same area of management is most frequently cited as lacking among respondents at companies with ineffective boards. Other areas that have been addressed by many effective boards are financing and operational needs; at unsuccessful companies, respondents say their boards have been particularly ineffective at tackling talent management and restructuring.
Most boards have responded to the crisis by making some procedural changes, such as openly and thoroughly discussing how the crisis affects fundamental strategic assumptions and ensuring that a wider range of detailed information about the company is presented at meetings. Further, among directors at companies that have already changed their procedures in some way, 62 percent say their boards will continue to change to become more effective in managing the turmoil. The results indicate that directors are willing to shake up board procedures by inviting new participants—including outsiders—to participate in meetings or by increasing board members’ firsthand experience of the crisis—for example, with visits to customers or distributors.
This survey may seem to deliver good news: half of the board members think their boards are doing a good job of tackling today’s challenges. However, switching from a glass-half-full to a glass-half-empty mentality, it is clear that most boards need to do more. Because human judgments are heavily influenced by past experiences and previous decisions, we need to disrupt our normal thought processes or jolt ourselves with new experiences if we are to challenge our presumptions fully and make wise decisions in today’s conditions. Another meeting with the same people in the same room won’t suffice.
One of this survey’s implications is that boards need to focus on innovation. In terms of creative thinking, this is sound advice. But organizations should also reconnect with their core mission and core capabilities. In uncertain times, going back to the core is often wise. Source: McKinsey Quarterly; March 2009
Advice to new CEOs in tough times
When times are tough, becoming a new CEO from outside the organization is both a blessing and a curse. The good news is that the world's not going to immediately blame you for the company's problems. The recession has lowered performance expectations. And the board has confidence in you. The bad news is that the company does have serious problems you need to fix. And the economy may get worse before it gets better, inhibiting your chances for an effective turnaround.
Here are some suggestions for a new CEO entering into a difficult situation:
Don't trash your predecessor. Whatever happened in the past happened. You cannot change that. Do whatever you can to learn from your predecessor; go out of your way to build a positive transition.
Respect the history and tradition of your organization.
Write off whatever you can – now! You need a brutally honest assessment of the problems faced by your company. Turn over every rock! Let your executives know that they will not be punished for disclosing concerns now – but that they will be fired if you find out later that they did not tell you the truth about what is really happening.
Be a role model for humility and continuous learning. Ultimately for a company to change, individual leaders need to change. By being a positive example of learning, agility and personal development, you can inspire your leadership team to do the same.
If you are a new CEO in a tough situation, these suggestions may not ensure your success, but they will improve your odds in turning around a tough situation. Source: Marshall Goldsmith, Wall Street Journal; 01/0109
Before the bust, CEOs earned substantial fortunes
The credit bubble has burst. The economy is tanking. Investors in the U.S. stock market have lost more than $9 trillion since its peak a year ago.
But in industries at the center of the crisis, plenty of top officials managed to emerge with substantial fortunes.
Fifteen corporate chieftains of large home-building and financial-services firms each reaped more than $100 million in cash compensation and proceeds from stock sales during the past five years, according to a Wall Street Journal analysis. Four of those executives, including the heads of Lehman Brothers Holdings Inc. and Bear Stearns Cos., ran companies that have filed for bankruptcy protection or seen their share prices fall more than 90% from their peak.
A study, which examined filings at 120 public companies in such sectors as banking, mortgage finance, student lending, stock brokerage and home building, shows that top executives and directors of the firms cashed out a total of more than $21 billion during the period.
The issue of compensation and other rewards for corporate executives is front-and-center in the wake of the financial meltdown. Congress has held several hearings attacking Wall Street chieftains and others for perceived excesses given the state of their companies and the economy. America's boardrooms also are wrestling with the issue, trying to formulate pay plans that give proper long-term incentives.
Some experts say huge paydays inevitably coincide with economic booms. In the tech bubble of the late 1990s, more than 50 individuals each made more than $100 million from selling shares just prior to the crash. Many had just founded companies that had never turned a profit.
"The system tends to reward people for participating in bubbles," says Roy C. Smith, a finance professor at New York University's business school. Mr. Smith, a former partner of Goldman Sachs Group Inc., says that almost nobody anticipated the recent collapse. Source: The Wall Street Journal; 11/20/08
Opinion: Greed reflects a failure of leadership
Hardly a day goes by without yet another twist or turn in the credit crisis that has engulfed the U.S. financial system for more than a year. Bear Stearns, one of the country's largest underwriters of mortgage bonds, has been swallowed up. Venerable institutions such as AIG, Wachovia, Lehman Brothers, Merrill Lynch and Citigroup have brought new CEOs on board. Media reports suggest that the world's biggest financial institutions have absorbed more than $300 billion in asset write-downs and credit losses even as home foreclosures are at record high levels and Wall Street has laid off thousands of employees. While much of the discussion about the crisis has focused on its causes and the need for regulatory reform, former Wharton dean Russell Palmer, author of a new book, Ultimate Leadership, writes in this opinion piece that the situation offers an opportunity to learn crucial lessons about leadership.
What caused the crisis? In Palmer’s view, greed was the underlying factor. Wall Street hedge funds and others are looking for any financial machination that they can find to hype their financial returns. The whole mortgage fiasco is just the latest example. The dot-com bubble of the late 1990s was another instance. Anyone with any sense knew that during the dot-com mania, you couldn't sustain high prices for stocks on companies that had no current earnings, only losses. It was a bubble, just like the Tulip Mania that investors lived through during the 17th century. With the present subprime crisis, the people originating the mortgages had to know that the higher the risk on the mortgage terms, the greater exposure there was to the mortgage going to foreclosure. So did the people who bought the mortgages, securitized the mortgages, and so on.
Not everyone kept playing the game until the roof fell in. T. Rowe Price, early on, got out of the market because of the high risk level, as did others on Wall Street who bet against this Ponzi scheme. Greed reflects a failure of leadership; turning your head to ignore the high risk because you are making big earnings today certainly shows a lack of leadership. How many people on Wall Street have been subject to less than robust oversight by their organization because they were producing such big contributions to the firm's earnings? Allowing your organization to be a party to contributing to this scheme -- even if you know that you will not be directly affected -- is not a mark of leadership, it is a sign of greed maintains Palmer. Source: Knowledge@Wharton; 07/20/08
A new CEO is rarely a quick fix
Dozens of companies have replaced their CEOs in recent years. Shareholders and boards are restive. But many companies are finding out that ousting a CEO is rarely the cure-all for corporate ills. American International Group (AIG) just ousted CEO Martin Sullivan because he could not steer the company through the troubled waters left by his predecessor. A Wall Street Journal survey of 30 companies on the S&P 500 index that removed CEOs between January 2005 and June 2007 revealed that shares of those companies have declined more often than they have increased. The survey does not include financial service CEOs who lost their jobs amid the credit crisis.
A Wall Street Journal survey of 30 companies in the Standard & Poor's 500-stock index that removed CEOs between January 2005 and June 2007 reveals that the shares of those companies have declined far more often than they have increased. The decliners include Eastman Kodak Co., Newell Rubbermaid Inc., UnitedHealth Group Inc. and Home Depot Inc. The survey doesn't include the financial-services CEOs who have lost jobs amid the credit crisis.
Some new CEOs are big heroes. Mark Hurd has boosted revenue and profit at Hewlett-Packard Co. since succeeding Carly Fiorina in 2005; H-P shares have more than doubled. Walt Disney Co. shares have risen under Robert Iger.
Some new CEOs are waylaid by unexpected problems. At Newell Rubbermaid, CEO Mark Ketchum has had to cope with higher prices for oil and plastic resins since taking over for the ousted Joseph Galli in 2005. Mr. Ketchum also concluded that Newell's problems were deeper than he first thought, and has been pushing to reduce costs, narrow the brand portfolio and shift to consumer-focused marketing. Source: The Wall Street Journal; 06/17/08
Speed is key question as new CEOs remake team
A new CEO has come aboard. One of his/her first decisions is determining when to replace key decision-making managers. Timing is critical. Move too fast and the company may be losing valuable institutional memory. Move too slow, and much needed changes are delayed. It is a fine line the CEO is walking. How fast, how slow, how many executives must go? Can some executives stay on a little longer while others must be shoved out the door immediately. Some general rules of thumb: Move as quickly as possible. Ensure executives' skills fit the new direction. Beware of holdovers who may undermine or bad-mouth you. Hire only people you know and trust. Source: The Wall Street Journal, 03/10/08
Integrating executive coaching into your leadership development process
Executive coaching is not an extra-curricula opportunity to “bounce ideas off” somebody else; it’s a highly discipline regiment of self-discovery, concerted action and capability development that is pursued with rigor over an accelerated timeframe. The objective of the investment is to achieve tangible improvements — in executive capability and performance, and in business impact and results.
Why, at a time when organizations are spending millions on assessments, talent management, succession planning, and leadership development, are so many good executives failing? Recent research by the Hay Group confirms that leadership roles come in a variety of shapes and sizes requiring different skills and behaviors. Hay concludes that organizations often fail to fully grasp a job’s content and the implications for selection and development - and essentially - often put square pegs in round holes.
The Hay study of the roles and competencies of 600 top-performing senior executives from some of the world’s most successful organizations, shines new light on leadership roles and the individuals who fill them, and expose some common misconceptions, including the belief that most top executive roles are similar in terms of the leadership skills, behaviors, and experience they require. Among the study’s key findings:
Rapid growth; the flattening and thinning of management ranks; shifting business strategies; and the growing popularity of more dynamic, matrix-structured organizations have dramatically re-sculpted the topography of today’s management and executive roles. Despite similarities, there are a variety of significant differences depending on the shape of the role, its proximity to business results, and the level of operational or strategic focus.
There are at least three distinct types or “families” of executive roles, each requiring its own unique set of leadership skills and behaviors. Moving a leader from one type of role to another, or from operational to strategic focus, is, without the proper development, risky for both the executive and the organization. One role, that of the collaborative leader, is rapidly emerging as a mainstay in today’s flatter, matrixed organization. Such roles, which lack the direct authority of operational positions but are accountable for key business results, can be extremely challenging for those who have risen through the more traditional executive ranks.
These findings raise serious questions about traditional assessment methods, especially those that overemphasize the qualities of the person and pay too little attention to the critical job requirements. They also make a strong case for rethinking how organizations select, develop, and promote their leaders. Source: The Hay Group; Building successful leaders by more effectively aligning people and roles.
Lessons from fallen leaders
Is it possible to rescue your career and restore your reputation after a major professional setback? In an age rife with press accounts of disgraced CEOs, politicians and celebrities – as well as courageous but beleaguered whistle-blowers and victims of rivalries or envious colleagues and bosses – this question has grown more important than ever.
Research shows about 40 percent of failed CEOs disappear from the workforce. Why are some leaders unable to move beyond failure? The research discovered four main reasons failure is so hard to manage, and all relate to the emotional impact of losing a job. First is the stigma of job loss and the shame associated with it – both for leaders and those associated with them. Some leaders feel rage about the circumstances of their job loss, and others are in denial. When a leader is sucked into this emotional whirlpool, it is sometimes impossible to get out. A key step, then, is to confront and acknowledge failure – even if that failure simply involved an underestimation of others’ Machiavellian politics.
A common thread is the idea of resilience and reputation saving. Reputation, the research found, is everything. When leaders see their success spiral smacking into a wall of failure, they should step back, catch their breath, and then embrace the obstacle itself as a fresh opportunity to overcome challenges. At the same time, they must recognize this new mission cannot be achieved alone. They need to draw upon the reservoir of their early career experiences and personal and professional networks. The worst misstep they can make is to allow other people to tell their story and therefore design their future.
In their book Firing Back:How Great Leaders Rebound after Career Disasters (Harvard Business School Press, 2007) professors Jeffrey Sonnenfeld and Andrew Ward answer the "can they recover?" question with a resounding “yes.” Interviews with some 300 derailed CEOs and other prominent figures brought to light five key steps for rebounding from career disaster. Anyone trying to recover from a catastrophic career setback can use these steps to match, or even exceed, their past accomplishments…
Lessons in leadership; Tony Blair's resignation speech
Tony Blair, Britain’s Prime Minister for the last 10 years announced his resignation on May 10. The speech is an interesting reflection on leadership, duty, choices and legacy.
Our business environment is shifting rapidly to one that is globalized and digitized; comprised of networks of alliances, partnerships, and outsourcers; increasingly staffed by combinations of employees with free agent mindsets, other people’s employees and free agents themselves.
Line-of-sight is replaced by more virtual realities, position-power by mutual-reciprocity and relationships, economic dependence by more risk and wealth sharing. Learning to lead in this context requires different mindsets and skill sets, and the development and application of new business, accountability and interaction practices.
Sixty four percent of new executives hired from the outside won’t make it in their current jobs. So says one recent study of executive transition. Forty percent will fail within the first 18 months, reports another. What seems to be causing the derailment of these leaders? Are there patterns? Why should your organization care? And, more importantly, what can it do to ensure the success of the newest members of its leadership team?
Throughout history leaders have used rhetoric to inspire and move others. Richard Johnson described rhetoric as “the art of framing an argument so that it can be appreciated by an audience." Plato called it “the art of enchanting the soul." In essence rhetoric is speech designed to persuade.
Website www.americanrhetoric.com has compiled a list of the 100 most significant American political speeches of the 20th century; most of these seminal addresses can be found at the site in both text and audio. It’s a fascinating journey from Martin Luther King’s “I have a dream” to Eleanor Roosevelt adaptation speech for the Declaration of Human Rights. Along the way you can drop in on John Fitzgerald Kennedy, Clarence Darrow, William Jennings Bryan, Malcolm X and Elie Wiesel. The list was compiled by Stephen E. Lucas (University of Wisconsin-Madison) and Martin J. Medhurst (Baylor University).
We can learn a lot from this cadre of leaders who took a stand on issues, provoked thought and action and helped shape the advancement our society along the way.
Executive onboarding - a secret weapon in the war for talent
After an extensive (and costly) search, your company is delighted to welcome a new executive – a talented, visionary leader. You are confident that you have chosen well, and that this heavy-hitter will help the organization attain critically important goals.
You have brought this new leader on board expressly to bring about organizational change. He (or she) has an extensive record of career success, including a stint at a top competitor known for its innovation and marketplace agility. This new executive is a sure bet to get that accomplished, right?
Nailing it: how to cement your success in a new leadership role
So you’re starting a new job soon. It seems like a great opportunity – a good fit between your skills, goals, and the organization’s needs. That alone should increase the likelihood of your success, right?
Perhaps. For new leaders, the stakes are very high.
“The profession of HR is a very young function”, Peter Senge proclaimed recently to an audience of some 200 human resources professionals, adding “and it may not have a long future”
A rapidly changing global marketplace, accelerating technology and shifts in customer needs and expectations are forcing companies to rethink business focus, operation, structure and human resources strategy. Many are seeing threats to existing business, fresh opportunities to leverage core competencies, or the need to reinvent themselves to ensure a sustainable future.
Rebuilding for growth - change is a painful process
The factory is impressive. Freshly painted, well landscaped and plenty of parking. A contrast to what’s happening on the inside.
It’s a month into the assignment and the real work is about to begin. A customer survey and internal survey have been completed. I’m about to roll out a program on self awareness, learning and knowledge to all staff. As I enter the factory, I run into the Managing Director who’s on his way out. “Hi Liz. It starts today, does it? I wish you luck. You can’t change people you know.” I was speechless. He was gone before I made a remark. Only five days before he’d been espousing the necessity for change. The warning lights were there but I didn’t have time to address them.
The call came in at 8:15 a.m. on a Monday morning. I thought it strange; there must be some urgency here. “Dominick, would you be able to get down here in the next day or so to talk to one of our sales people? Chris has a fine sales record and is up for promotion to sales manager but most of senior management is hesitant about his ability to lead. He has been though most of our leadership courses and he knows the concepts, but he just doesn’t seem to “take charge”. It’s difficult to imagine putting him in command of a major corporate initiative or even have him be our lead representative at a trade show.
The role of the board in turbulent times: avoiding shareholder activism
This paper is the fourth in a series of papers from The Conference Board and Hedge Fund Solutions on the oversight role of the board of directors in the current economic crisis. It provides board members with a checklist of issues they should consider addressing in their relations with shareholders and, in particular, how to avoid a costly and disruptive battle with an activist investor.
With corporate valuation declining and an economic and political environment favorable to change, the 2009 proxy season is witnessing a new wave of investor demands. In particular, due to the liquidity problems facing many corporations, there is a clear shift from the financial-oriented activism campaign aiming at cash extractions to new initiatives pursuing strategic, operational, and governance-related corrections.
The economic downturn has created extraordinary upheavals across global markets and severely penalized stock prices. Today, financial markets supply a number of undervalued companies and investment opportunities, as many businesses maintain relatively strong balance sheets and healthy long-term earnings potentials. The paper argues that it is in the interest of corporate boards to act proactively, understand shareholder intentions, and correct vulnerabilities so as to avoid becoming the target of activists. It also offers practical suggestions on how to design an action plan and respond to negative publicity campaigns mounted by disgruntled investors. Several current examples as well as a detailed table of cases from the 2009 proxy season are included. Click here to download the full article.
Study shows good corporate governance improves value
A forthcoming paper published this month in The Review of Financial Studies from an academic and an advocate for improved corporate governance serves to add empirical evidence to the intuition that better governance leads to more value. Lucian Bebchuk of Harvard Law School and two colleagues construct a measure of executive entrenchment, and conclude that more entrenched management reduces equity returns by as much as 7% per year. The paper builds on previous work that addresses a critical question: investors have long thought - that "good governance" is linked to superior returns.
Bebchuk and his colleagues list 24 governance provisions that others have connected to equity returns. They narrow this down to six that appear to have the most impact: classified or staggered boards, golden parachutes, poison pills, and supermajority voting requirements on mergers, charter amendments, and bylaw amendments. While some of the other 24 provisions also protect management, these six "appear to provide incumbents at least nominally with protection from removal or the consequences of removal," which they call entrenchment. They construct a simple index of entrenchment, called the "E index", and companies that adopt more of these provisions have a higher score; numerous regression analyses control a range of other factors and they conclude that companies with the highest score (most entrenched) deliver equity returns around 7% lower annually than firms with the lowest score. Source: The Review of Financial Studies; March 2009
10 reasons why 2009 will bring more shareholder activism
With the market's tumultuous last few months driving down the price of equities, activist investors around the world have seen their stock investments take major hits.
Carl Icahn has watched the value of his Yahoo! stake drop in half since May;
Ralph Whitworth of Relational Investors recently resigned from the board of Sprint Nextel but kept his stake in the company, even as shares have dropped 80% this year;
The Children's Investment Fund exited its J-Power position at a loss earlier this year, after calls for change were beaten back by the Japanese utility.
Some market-watchers suggest that after 10 to 12 years of growth as a strategy, investor activism is dead. Why? Poor returns, they say, and because the freezing-up of the credit markets prevents activist shareholders from calling on companies to lever up with debt to fund stock-buyback plans or increase dividends.
However, 2009 could very well prove one of the busiest years for activist investors in the last decade. Eric Jackson of Ironfire Capital explains why:
Obama will look favorably on pro-shareholder measures.
The new SEC chair will sponsor several new shareholder-friendly measures.
Valuations are on the floor.
A flight to quality in hedge funds will benefit activist investors.
Management and corporate boards will not want to be viewed as anti-shareholder.
There will be a wave of industry consolidation.
Activists have the longest lock-up periods of any hedge fund class, so they can put fresh capital to work.
Limits on short-selling will benefit activists.
Activists will become more balanced on the long and short sides.
There's more to get "active" about than ever.
Read the full article at Eric’s blog. Source: TheStreet.com; 12/11/08
The new deal: M&A game shifts
M&A is all but dead. Last month, just 397 deals were announced in the U.S., the lowest monthly tally since September 2001, according to Thomson Reuters. The combined value of those deals was $15.5 billion, the lowest since January 2002, when adjusting for inflation.
That total also was less than the value of deals that fell apart.
The biggest deal of the month -- AT&T's $937 million acquisition of Centennial Communications Corp. -- wouldn't have even ranked in the top 100 deals of 2007. Mergers-and-acquisitions is a cyclical business. But the severity of the current downturn and the disappearance of credit is changing how Wall Street puts deals together.
Fear, not opportunity, is moving markets. And with growth unclear, buyers are more focused on what companies are earning now than what they may earn in the future. In Wall Street's deal-making circles, that means buyers will have the edge in negotiations, after years of sellers calling the shots. This could be particularly true in industries such as health care and natural resources, where companies such as Johnson & Johnson and Exxon Mobil Corp. are sitting on piles of cash and can take advantage of weaker rivals.
Most companies with cash are hoarding it. Industrials in the S&P 500 alone are sitting on nearly $650 billion in cash, a record. The conventional wisdom is that in such a skittish environment, buyers will turn to stock-for-stock deals, in a way that minimizes their cash outlays. But these deals are proving difficult to pull off because a corporate sale often triggers covenants in the seller's credit agreements, forcing debt repayments. Under normal circumstances, the buyer would refinance the debt. That has become a tough task with the high-yield debt and investment-grade markets largely shut to new issues.
One form of financing expected to be a factor in many deals is the so-called PIPE, or private investment in public equity. In such deals private investors put money into public companies, often in return for preferred stock. But a PIPE can come at a steep price. Investors usually demand a rich dividend in return for their money and often get board representation.
For companies concerned about liquidity, however, a PIPE can be the easiest way to secure capital quickly. Last month, for example, Whole Foods Market Inc. received a $425 million investment from Leonard Green & Partners L.P. in return for preferred shares representing about a 17% stake in the company. Whole Foods agreed to pay a dividend of 8% on the preferred shares for three years and gave Green two board seats.
Another structure expected to see a resurgence is the "earnout." Under this arrangement, often used in smaller deals, the seller gets a portion of the purchase price up front with the rest contingent upon the company's future operating performance. With so many companies forced to sell under duress, seller premiums -- or the price they demand above where their stock trades -- are also coming down. Premiums of some 20% or more above a 52-week high are unrealistic, say bankers.
Consider Johnson & Johnson's recent agreement to acquire Mentor Corp. for $1.07 billion. J&J appeared to have paid a hefty premium -- 92% over Mentor's closing price before the deal was announced. But J&J's $31-per-share offer was also 23% below another traditional measure used in negotiations to calculate a company's value -- the target's 52-week high.
Not all companies are as flush with cash as J&J, however. In fact, only 44% of U.S. companies are well capitalized and performing at what they consider "successful levels," according to an Ernst & Young poll of 500 respondents that will be released Thursday. Half those polled described their current operating levels as "stressed or distressed."
Many of these companies should be easy targets. Bankers say that once credit markets improve many buyers will risk deals with troubled competitors, hoping the extra scale will allow them to weather a deep recession.
For companies that do pass these hurdles, there's another problem -- closing. Following the high-profile failure of several buyouts over the past year, sellers are resisting provisions that permit a buyer to walk away under certain conditions, simply by paying a fee. But buyers, who face their own challenges in securing commitments from banks to fund deals, are pushing back. When King Pharmaceuticals Inc. bought Alpharma Inc. for $1.6 billion the deal included what are known as "financing outs." A common element in private equity deals, the provisions make a merger agreement contingent on banks providing funding for the transaction. Source: Wall Street Journal; 12/11/08
A billion here, a trillion there: calculating the cost of Wall Street's rescue
Consider the numbers: $29 billion for the Bear Stearns mess; $700 billion to buy spoiled assets; $200 billion to buy stock in Fannie Mae and Freddie Mac; an $85 billion loan to AIG insurance; another $37.8 billion for AIG; and $250 billion for bank stocks. Hundreds of billions in guarantees to back up money market funds and to guarantee bank deposits. And who knows what expenses are still to come.
How will the U.S. pay for it all? Answer: by borrowing -- raising worries about how the country's ballooning annual budget deficits and aggregating debt will affect the economy and financial markets. Some guidelines, such as interest rates and the ratio of debt and deficits to gross domestic product, suggest the new debt will be digested easily. But some experts think those guidelines are misleading, warning that obligations are piling up like tinder on a forest floor.
But many experts are not as concerned about the current deficit and debt as about the long-term obligations that include monumental sums for Social Security, Medicare and Medicaid as baby boomers age.
What will the financial rescues cost? A tally can't be figured by simply adding the sums for each response. Many of the figures, such as the $700 billion Troubled Assets Relief Program to buy illiquid mortgage-backed securities from financial firms, are upper limits set by lawmakers or regulators who hope that less will be spent. Some figures overlap. The $250 billion bank investment is to come out of the TARP fund, for example.
And much of the spending is to purchase assets that could eventually be sold, offsetting all or part of the cost and perhaps even turning a profit. That includes mortgage-backed securities and derivatives for TARP as well as ownership stakes in banks and Fannie and Freddie. Some funds, like the money for AIG, are for loans the government expects to be repaid, with interest -- unless the borrower defaults. Others are guarantees that will be tapped only in an emergency -- the $29 billion for Bear Stearns and hundreds of billions to raise confidence in the safety of money markets and bank savings. Source: Knowledge@Wharton; 10/29/08
What Wall Streets woes reveal about European and American views of markets
The world needs to rebuild financial capitalism, and that means more regulation, says France’s Nicolas Sarkozy. It is time to make capitalism “moral” by directing it to its proper function: serving economic development and the forces of “production”, not “speculation”. Mr Sarkozy’s rebuke was mild by some standards. Immense power, amounting to a “despotic economic dictatorship” has fallen into “the hands of a few”, thundered another leader. He added that the over-mighty few are often not “owners” of assets “but only the trustees and managing directors of invested funds.” A fallacy had spread: that the market does not need any “public authority” to restrain it, because “self-direction” will do the job better.
There is no faulting Europeans for consistency when it comes to distrusting financiers, liking businesses that make things you can touch and looking to regulators to keep markets in good moral order. Mr Sarkozy was speaking on September 23rd at the United Nations. The second leader cited was Pope Pius XI, speaking after the Wall Street crash of 1929. The quotes come from a 1931 encyclical calling for economic governance by guild-like “corporations” of industrialists, workers and the like, overseen by a “special magistracy” of high-minded officials.
Europe’s long squeamishness about finance is more than a historical curiosity. It is also as good a guide as any to future policy responses that will appeal to European voters. And questions of instinct and theory matter for another reason: they show a big divide between Europeans and Americans. Capitalism is actually practiced in similar ways on both sides of the Atlantic. But in much of Europe, it is still easy to win applause with speeches about America being run by “the law of the jungle”.
In truth the American economy is both heavily regulated and irrigated by torrents of public money. Count the lobbyists in Washington, DC: you don’t need lobbyists in a jungle. America also spends a lot on public goods such as education and health, albeit differently. A new French government paper on the European social model notes that, once you add in company health insurance, American net “social spending” lies in the same range as many EU countries, at about a quarter of GDP.
Globalization is divisive in both America and Europe. In a 2007 survey of global attitudes by America’s Pew Foundation, almost identical numbers of American and French respondents called foreign companies good for their country (just under half liked them). In Spain, Sweden, Britain and the ex-communist block, enthusiasm for foreign investors left America trailing. Nor are pinko Europeans cheering at the spectacle of America nationalizing banks. Europe is a capitalist place. True, there has been some Schadenfreude about the humbling of the “Anglo-Saxon” or “ultra-liberal” model. But there is also much unease about the taxpayer paying billions to take control of wayward businesses. In the words of Joaquín Almunia, the European economics commissioner, action must be taken to prevent systemic risks, but “Socialists like me are against financial socialism.” Source: The Economist; 09/25/08
Almost everything that could is going wrong for world stockmarkets
The American stockmarket had its worst month since 2002 in June and is now down more than 20% from its peak, the definition of a bear market. It is not alone. According to Standard & Poor’s, a rating agency, the value of global stockmarkets fell by $3 trillion during the month, thanks in particular to a 10% decline in emerging markets.
Share prices are suffering because of the outlook for four forces that impel stockmarkets: economic growth, profits growth, interest rates and inflation. At the moment, the first two seem to be slowing while the last two are rising. That is the worst possible combination.
Soaring oil and food prices are stoking inflation. Oil closed at another peak of $144.14 a barrel on July 2nd, because of disappointing data on American crude reserves, and lingering fears that sabre-rattling between Israel and Iran might lead to conflict in the Persian Gulf. High commodity prices have also acted as a terms-of-trade shock for consuming countries—the things they buy from abroad cost more compared with the things they export. That has made them poorer.
All this has been made worse by the credit crunch. True, the rescue of Bear Stearns seemed to avert the implosion of the financial system. Credit spreads, which measure the excess interest rate paid by riskier borrowers, have fallen from their March peaks, although they have recently been rising again.
The problem for financial markets is that the virtuous circle which pushed asset prices higher in the middle of this decade may be turning vicious. Banks lend money against the collateral of assets, most notably in the form of housing. As house prices increase, the collateral rises in value and the banks are willing to lend more. That enables buyers to bid up prices even further.
So the market’s sorrows have come in battalions, not single spies. Investors might have coped with the credit crunch if it were not for the high commodity prices, and vice versa. They do not know whether to fear inflation or recession more, but they know that both at once will be unpleasant.
It looks like a lengthy period of gloom is in store for the stockmarkets. Meanwhile, the best investors can do is hope, Micawber-like, that something will turn up. Source: The Economist; 07/03/08
In finance, as in Greek tragedy, one of the commonest pairings is between hubris and sheer, toe-curling folly. In the boom years of 2006-07 nothing, it seemed, could constrain the leveraged buy-out (LBO) industry. In 24 months it pulled off deals with an enterprise value of $1.4 trillion, the equivalent, after adjusting for inflation, of about a third of all the buy-outs ever done. Thanks to the credit crunch, buy-outs have since become scarce: so far this year only $131 billion of deals have been announced. Yet those expecting private-equity executives to be cowering in fear of retribution will be disappointed. The mood remains one of almost hypnotic confidence.
The Economist examined ten of the biggest completed LBOs that were announced in 2006-07, accounting for a fifth of the total by value. Two are already home and dry. Blackstone, a private-equity firm, profitably sold on most of the property assets of Equity Office Properties within months of buying it. On June 5th buy-out funds run by TPG and Goldman Sachs sold Alltel, an American cellular operator to Verizon Wireless at a slight premium. But the condition of the eight others is less reassuring. In the latest quarter three of them suffered year-on-year declines in sales or underlying operating profits or both, mirroring the broader pressures on company profits. Under such conditions, the ability to make money for investors is one question; whether the biggest deals can survive with such huge debts is another.
The eight mega-deals that are still in the hands of their original acquirers have balance-sheets that by any reasonable standard leave no margin for error. On a weighted-average basis, after allowing for capital expenditure, cashflow only just covers interest payments. Listed companies, even after excluding those in the booming energy and mining industries, have interest cover nearer to ten times, according to UBS’s World Inc database. If public firms are equipped to withstand a storm, LBO balance-sheets, it would seem, could barely cope with a summer shower.
Investors in private-equity funds are typically locked in for at least five years and no one plans to sell now. Most of the mega-deals involved companies with high market shares and good brands: exactly the sort of businesses that can prosper in a downturn. What is more, it is argued, if mark-to-market losses do exist, they may not have to be recognized. Indeed, although notionally subject to accounting rules that require investments to be carried at fair value, private-equity firms seem to enjoy a degree of latitude that most bank executives would kill for. The disclosure remains hazy, but it appears that Freescale is the only one of the top-ten deals in which the carrying value has been written down much below cost. Source: The Economist: 07/03/08
Communicating with the right investors
Many executives spend too much time and energy communicating with investors they could easily ignore. The most important investors ground their investment decisions in a deep understanding of a company and its strategy, believe that it can create long-term value, and are more likely than other investors to support management through periods of short-term volatility.
A better understanding of the investors’ strategy helps a company to focus its messages on its most important investors, to interpret feedback from all investors in the right context, and to control the amount of time it devotes to investor relations activities.
The reason, in part, is that too many companies segment investors using traditional methods that yield only a shallow understanding of their motives and behavior; for example, investor relations groups often try to position investors as growth or value investors - mirroring the classic approach that investors use to segment companies. The expectation is that growth investors will pay more, so if a company can persuade them to buy its stock, its share price will rise. That expectation is false: many growth investors buy after an increase in share prices. More important, traditional segmentation approaches reveal little about the way investors decide to buy and sell shares. How long does an investor typically hold onto a position, for example? How concentrated is the investor’s portfolio? Which financial and operational data are most helpful for the investor? The answers to these and similar questions provide better insights for classifying investors.
Once a company segments investors along the right lines, it can quickly identify those who matter most. These important investors, “intrinsic” investors, base their decisions on a deep understanding of a company’s strategy, its current performance, and its potential to create long-term value. They are also more likely than other investors to support management through short-term volatility. Executives who reach out to intrinsic investors, leaving others to the investor relations department, will devote less time to investor relations and communicate a clearer, more focused message. The result should be a better alignment between a company’s intrinsic value and its market value. Source: McKinsey Quarterly; April 2008
Trader made billions on subprime
On Wall Street, the losers in the collapse of the housing market are legion. The biggest winner looks to be John Paulson, a little-known hedge fund manager who smelled trouble two years ago.
Funds he runs were up $15 billion in 2007 on a spectacularly successful bet against the housing market. Mr. Paulson has reaped an estimated $3 billion to $4 billion for himself - believed to be the largest one-year payday in Wall Street history.
Now, in another twist in financial history, Mr. Paulson is retaining as an adviser a man some blame for helping feed the housing-market bubble by keeping interest rates so low: former Federal Reserve Chairman Alan Greenspan.
"Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond," Mr. Paulson says. "Mortgage experts were too caught up" in the housing boom.
Mr. Paulson didn't turn bearish too early. Some close students of the housing market did just that, investing for a downturn years ago - only to suffer such painful losses waiting for a collapse that they finally unwound their bearish bets. Mr. Paulson, whose investment specialty lay elsewhere, turned his attention to the housing market more recently, and got bearish at just about the right time.
He decided to launch a hedge fund solely to bet against risky mortgages. Skeptical investors told him that others with more experience in the field remained upbeat and that he was straying from his area of expertise. Mr. Paulson raised about $150 million for the new fund, largely from European investors. It opened in mid-2006.
Housing remained strong, and the fund lost money. Someone from more of a trading background would have blown the trade out and cut his losses, but if anything, the losses made Paulson more determined. A concerned friend called, asking Mr. Paulson if he was going to cut his losses. No, "I'm adding" to the bet, he responded, according to the investor. He told his wife "it's just a matter of waiting". By year end, the new Paulson Credit Opportunities Fund was up about 20%. Mr. Paulson started a second such fund.
The upshot: The older Paulson credit funds rose 590% last year and the newer one 350%. Mr. Paulson has tried to keep a low profile, saying he's reluctant to celebrate while housing causes others pain. He has told friends he'll increase his charitable giving. In October, he gave $15 million to the Center for Responsible Lending to fund legal assistance to families facing foreclosure. The center lobbies for a law that would let bankruptcy judges restructure some mortgages. Source: The Wall Street Journal; 01/15/08
Business under pressure over CEO pay
US companies are facing fresh pressure from regulators and shareholders to rein in excessive executive pay as research shows chief executives have been paid up to 10 times more than their top lieutenants. The average total compensation for a S&P 500 chief executive was about twice as much as the second most highly paid executive last year, according to a study conducted for the Financial Times by the research group, Salary.com.
However, at SLM, the student loan group known as Sallie Mae, the pay of Thomas Fitzpatrick, chief executive, who resigned in May, was more than 10 times that of June McCormack, his executive vice-president. At more than 30 other companies, the gap ranged from four times to seven times.
The Securities and Exchange Commission is believed to have asked a number of companies to explain the reason for large pay gaps between top executives, as part of a review of corporate pay. Source: The Financial Times; 10/07/07
Understanding activist hedge funds
Although no one really knows for sure, it is estimated that there are over 10,000 hedge funds now managing close to $2.0 trillion in assets. Fueled by investment flexibility, little SEC oversight, diversified returns not correlated with market movements and enormous amounts of capital continuing to flow their way, hedge funds are increasingly a major force in today’s equity and debt markets and, as a result, continue to create anxiety in boardrooms throughout the world.
Not surprisingly, chief among board concerns are the powerful, demanding and relentless activist hedge fund. These are the funds loaded with cash, often hunting in packs and using aggressive tactics such as proxy contests to drive out the leadership in targeted underperforming companies. Even in today’s shaky credit markets - and maybe even now more than ever, activist hedge funds are seeking to use their power to demand instant rewards and fundamental changes in corporate policy.
The SarbOx: The high cost of financial restatements
More than 10% of U.S. public companies restated their prior financial results last year, according to proxy advisory service Glass Lewis. Depending on where you sit, that’s either a sign that Sarbanes-Oxley and the increased focus on internal controls is working, or another indication that the post-SarbOx compliance environment is out of control.
While the number of restatements has declined so far this year, critics in the business community contend that there are still far too many. Treasury Secretary Henry Paulson seems to agree. “Restatements pose significant costs on our capital markets,” he wrote in May. “They have the potential to confuse investors and erode public confidence in financial reporting. Some of these restatements might not be material to investors, and others may simply reflect new accounting standards and interpretations.” Either way, he wants the advisory committee headed by Robert Pozen, chairman of MFS Investments, to study the matter and make recommendations to help reduce the number of restatements by U.S. companies.
The costs of such restatements—1,522 of which were made last year—are substantial. “At that level, it’s very much an issue,” said Henry Keizer, global head of the audit practice at KPMG. Along with the time and effort required of corporate management, restatements also require extra work from lawyers, accountants and printers. And if a company is in the midst of raising capital or negotiating a merger, the impact can be far more serious. “You can’t fast-forward through restatements,” said Mr. Keizer.
The Glass Lewis data shows that restatements for all public companies are declining this year. Large-company restatements peaked at 691 in 2005 and are down again this year, while those made by small companies (less than $75 million in market cap) now account for nearly 60% of all restatements. There remains the question of what to do when errors—particularly small mistakes made complying with increasingly complex accounting rules—are found. In the absence of clear materiality guidelines from the Securities and Exchange Commission, companies and their auditors appear to be taking the conservative route and restating.
The more sensible approach, said Mr. Keizer, would be to exercise some judgment. In cases where there was no intent to manipulate the numbers and where the errors don’t impact cash flow or investor’s valuation of the stock, the more appropriate action may be to disclose the mistake and reflect it in current financial statements. “Accounting needs to stop chasing the illusion of precision and find ways to deal with the inherent uncertainty of financial statements,” said Mr. Keizer. That would certainly make corporate controllers’ lives a lot easier.
SEC asks firms to detail top executives' pay
The SEC has sent out nearly 300 letters (with more to come) to the CEOs of companies critiquing the executive compensation disclosures in their year's proxy statement and demanding more information.
The letters have caused a great deal of consternation. CEOs are not used to getting letters from the SEC. Companies have been given until September 21 to respond to the demand for more information or provide reasons why they cannot. The letters will be made public.
What types of things does the SEC want to know? The SEC wants to know: More about the benchmarks or targets used to tie pay to performance; Why some companies claim the benchmarks or targets are so confidential they should be excluded from disclosure; The names of competitors used to create industry benchmarks for pay; More about the work performed by independent pay consultants at some companies; How board compensation committees use "tally sheets" of compensation data; The role of the CEO in setting his/her own compensation of that of others; etc. More than a few board compensation committees will likely be holding emergency meetings. Source: The Wall Street Journal; 08/31/07
Worth the investment?
Last month, Institutional Investor's Alpha magazine released its list of highest paid hedge fund managers. Jaws dropped and mouths gaped at the numbers.
James Simon, the man at the top of the list, earned $1.7 billion in 2006. That is more than the federal government spent running the national park system or more than the entire output of Sierra Leone. Today, Alpha magazine will release another list trying to answer the question--are these billionaire hedge fund managers worth it? The lightly regulated hedge fund industry has a fee structure that makes one drool.
The typical fund charges a 2% management fee - it keeps 2 cents of every dollar under management regardless of performance. In addition, the typical fund takes a big cut of any profit - usually 20% - over a predetermined benchmark. Mr. Simon, numero uno on the money list, charges a 5% management fee and takes 44% of the profits. Mr. Simon's funds have done very well for investors over the past 20 years. Other funds have produced only so-so returns. Ergo, are these billionaire hedge fund managers worth it? Go to the Alpha article for more insight. Source: The New York Times; 05/23/07
Will the SEC embrace a softer Sarbanes-Oxley?
When the Sarbanes-Oxley (SOX) Act was passed by Congress and signed into law in 2002, its goal was to protect investors through increased disclosure and stiffened internal controls. The law was passed following accounting frauds at Enron, WorldCom and other U.S. companies.
But on April 4, 2007, the Securities and Exchange Commission announced it will revisit some of SOX's rules. The primary focus will be the heavy financial costs of Section 404, which requires auditors of most publicly listed companies to verify the effectiveness of the company's internal controls and procedures for financial reporting.
The Financial Executives Institute (FEI), an advocacy group that represents financial executives, surveyed 274 public companies and reported the average cost for Section 404 compliance, though down from previous years, was $3.8 million during fiscal year 2005.
In fact, the SEC's decision to revisit Section 404 appears to be a tacit acknowledgement that the high costs of complying with Section 404 may actually deprive some investors of information, as a growing number of smaller companies exit from the major stock exchanges to go private or list with services like the "Pink Sheets," an electronic quotation medium that is not subject to SOX disclosure requirements. Consequently, instead of providing more information to investors, these companies provide none.
Some groups, however, are firmly in favor of SOX. "Since its passage, the [Sarbanes-Oxley] Act has helped enhance the integrity of the capital markets and restore investor confidence," notes a February 16, 2007, letter sent to the SEC by the Center for Audit Quality, an accounting industry organization that works closely with the American Institute of Certified Public Accountants. "We strongly believe that any regulatory changes must not erode that foundation. As the Securities and Exchange Commission (SEC) advances its proposals in this area, we strongly believe that change should flow primarily from the desire to reinforce the significant benefits of effective internal controls over financial reporting, rather than a drive to cut costs."
The SEC expects to receive new standards from the Public Company Accounting Oversight Board (PCAOB), a private sector corporation enabled under SOX to oversee the auditors of public companies, by the end of May or early June, in time for the 2007 financial statement audits.
It's the kind of issue that defies easy categorization, with few people coming down firmly either for a revamping of SOX or against it. At the same time, however, commentators suggest that any move to soften SOX should be thoroughly considered so that the investor benefits of the legislation are not lost.
Finding the right mix of cutting costs while protecting investors may not be simple. Notes Wharton management professor Martin Conyon, "Sarbanes-Oxley was enacted at a time of extreme distrust regarding corporations. The demand for tightened standards was rather high. If that demand has scaled back, perhaps it is time for the level of regulations to change. But the focus on costs should not exclude the benefits delivered by Sarbanes-Oxley. And investors may be willing to absorb [higher] costs in order to gain a greater level of confidence in the [financial reporting] system." Source: knowledge@wharton; 04/18/07
Hedge Funds escape regulation: should investors be worried?
When the Lilliputians came upon the sleeping Gulliver, they didn't know if he was friendly or hostile, but he was so big it seemed prudent to tie him down. Should the 9,000 hedge funds - the secretive investment pools controlling $1.4 trillion in assets - be treated the same way?
The President's Working Group on Financial Markets doesn't think so. In a late-February report, the group, chaired by Treasury Secretary Henry M. Paulson, urged vigilance but concluded that new regulations are not needed. The freewheeling world of hedge funds and their cousins, private equity and venture capital, have for now escaped the tightened oversight imposed on publicly traded companies after Enron and WorldCom.
Was this the right decision? For the most part, it was, say several Wharton professors who have studied hedge funds and other so-called private pools of capital. Source: knowledge@wharton; 03/07/07
Top performing companies successfully leverage their organization more effectively than rivals and derive over 64% more profit per employee than next-tier performers.
Few companies though look at their organization as strategically and holistically as they might - which is surprising considering the extent to which organization capabilities and performance drive business value today.
We contend that absent such consideration and definition, gaps and misalignment will frustrate business strategy and desired performance objectives will not be met. It’s as simple as that.
Developed and implemented effectively organizational strategy enables companies to convert strategic intent into sustainable and high performance results.
Effective organizational strategy enables a company to develop an organization capable of delivering its strategy.
At a time when business leaders increasingly recognize the importance of organizational leverage and its connection to enterprise value, ironically and disappointingly organization priorities are most often relegated to the operating agenda.
So while most companies develop their business strategy in some formalized, purposeful way that typically translates into strategic plans on market positioning, investment, growth and major initiatives to pursue, the same degree of rigor is rarely applied to the organizational implications of strategy.
This is a mistake, particularly as strategies frequently stall in implementation - not because they are flawed in design, but because the organization is under-equipped to be able to deliver on the strategy.
Simply put, organizational strategy is a clear definition of how the organization needs to change – over time - in order to be able to deliver the strategy of the enterprise and an actionable plan of how to make the transformation. This requires both the thinking and analysis to compare current state to desired state and define the gap, and the execution capabilities to make the requisite changes happen.
In the preceding articles in this series we have argued that few companies look at their organization as strategically as they could and should, and suggest that this is surprising considering the extent to which organizational capabilities and performance now drive business value.
This third article centers on how to best formulate and effectively implement organizational strategy so that strategic intent is converted into differentiating results.
Despite the challenges of the current economy, taking the long view has never been so vital for business leaders; tomorrow’s competitive advantage will only be achieved and sustained if your organization is good enough; effective organizational strategy provides the framework and the means to build the requisite organizational capabilities.
Organizations need to change constantly, for all kinds of reasons, but achieving a true step change in performance is rare. Indeed, in a recent McKinsey survey of executives from around the world, only a third says that their organizations succeeded in doing so.
The survey results highlight several important tactics that organizations use to transform themselves successfully. Setting clear and high aspirations for change is the most significant. A second tactic is engaging the whole company in the change effort through a wide variety of means; a highly involved and visible CEO is important, but successful companies also use various other communication and accountability methods to keep people involved - far more methods than unsuccessful companies use. Also notable: successful companies are far likelier to communicate the need for change in a positive way, encouraging employees to build on success rather than focusing exclusively on fixing problems.
The survey shows that, if organizational transformations are to succeed, change can’t be thought of as a single, standardized process. One implication is that companies should use a range of tactics in conjunction to engage their employees as early as possible. They ought to base their tactics on the type of transformation they are planning and the methods to which their employees will respond best.
In addition, companies are investing an average of six months in planning their transformations yet still aren’t managing to set clear, aspirational goals. A company that spends its planning time thinking through the goal appropriate for its situation seems likelier to transform itself successfully. Source: The McKinsey Quarterly; August 2008.
Organizational strategy podcast interview
Charlesmore Partner's Edward Ferris was interviewed recently by Better Process Podcasts, an industry forum for small and medium-sized US manufacturing companies on the subject of organizational strategy. Hear the Podcast.
Leadership demographics portend significant business threat
The baby boomer generation is about to retire en masse. Some 75 million workers in the US will retire in the next 5 to 10 years and with them 50 per cent of the CEOs of major organizations. The available talent to replace them will need to be picked from the next generation of just 45 million.
Does it matter that there are going to be 30 million less workers in the US – and a similar drop in Europe – from which to draw the next generation of leaders? After all, we are only talking about a handful of CEOs. Surely there must be enough great leaders in those millions?
Unfortunately the pool of talent is shrinking proportionally with the overall loss of workforce – making it hard to find quality. The Corporate Leadership Council reports that 97 per cent of organizations own up to significant leadership gaps and 40 per cent of them say that the gaps are acute.
The National College of School Leaders has announced that the UK is running out of head teachers. The American Medical Association is concerned that 60 per cent of the CEOs of America’s largest healthcare systems may retire in five years. In the US a total of 50–75 per cent of senior management is eligible for retirement by 2010. Organizational strategy, talent management, leadership development and succession planning must become urgent executive priorities. Source: The Hay Group: The war for leaders; 2007
Human Resources caught in a tactical agenda
A recent survey of senior business and human resources executives, conducted by Deloitte Touche Tohmatsu and the Economist Intelligence Unit, revealed that the Human Resources function is overloaded by the enormous demands placed on it by day-today activities while more strategic organizational considerations move rapidly to the forefront of executive leadership agendas.
85% of executive participants believe people are vital to all aspects of their organization's performance; the number increases to 90% when they were asked to look three to fives years ahead;
Only 3% of respondents describe their current organization as "world-class" in people management and Human Resources functions;
Only 23% believe Human Resources currently plays a crucial role in strategy formulation and operational results; and
52% of respondents still don't have a chief human resources officer, or a comparable C-level executive dedicated to people issues. Source: PRNewswire; 06/04/07
The rise of the knowledge economy - a view from Europe
Advanced industrial economies are moving to a position whereby knowledge-based industries and organizations will soon generate more than half of total gross domestic product (GDP) and total employment.
Over the last decade, growth in employment in European knowledge-based industries has significantly outstripped growth in other industries. Today, intangible assets (such as knowledge and skills) account for around 70 percent of the total value of companies in the S&P 500. This trend is having a fundamental impact on both new and existing business models as well as the skills required by those businesses.
The shift to a knowledge economy brings with it the following implications for individuals and skills profiles - more interaction with information and technology, increased demand for skills that complement information and communications technologies (ICT) and offer comparative advantage beyond routine tasks and a higher premium attached to the ability to learn new skills.
In these ways, the knowledge economy places new demands on individuals. Increasingly, employees need to develop skills on two levels – enabling or competence-based, such as the ability to understand and use information, team-working and problem solving – as well as specific i.e. particular fields of science and engineering or ICT.
However, there is already evidence to suggest that Europe is failing to keep up with the demand for skills driven by the knowledge economy.
For example, it is estimated that the actual number of people needed to fill the advanced network technology skills gap in Europe was around 160,000 in 2005 and will rise to 500,000 in 2008.8 This represents skills gaps as a percentage of total demand of 8.1 percent in 2005 and 15.8 percent in 2008. Source: Skills for the Future by Accenture and The Lisbon Council; 2007.
Global local human resources activities
In a global organization what makes most sense?
We are often asked about the best way to structure human resource’ functionality globally; the real answer is “it depends”. It depends on many contextual factors relating to the business, its strategy and positioning and organizing choices. The following is a starting point for discussion, prepared for clients that we thought we’d share with the clear caveat that the preceding organizational design and purpose dialogue really frames the choices to be made.
Vision, opportunity and tenacity - a case study in transformational change
One of the challenges that many organizations face today is the prospect of orchestrating major transformational change in order to equip themselves to face the challenges and leverage the opportunities of the new millennium.
“It’s all very well”, express many executives, “to read about the organization of the future, and all of the characteristics that should be in place — but how to we get there? How do we transition from the conceptual to the practical and make change happen?”
We all know that we’ve entered a new epoch in business. One that is globalized and digitized, where customer expectations stretch our limits relentlessly and new competitors spring up at every juncture. And we know that our people, more than ever, will be the source of future competitive advantage. So much is clear.
What we’re less clear on is how to effectively respond to, and leverage, these challenges. Particularly the people ones.
Vision is the ability to see something that does not yet exist. For centuries, people have used vision to frame their goals, hopes and aspirations, and to put plans and actions in place to pursue their dreams. So it is with organizations. Unless we have clarity about our direction, the actions we take and the decisions we make may be incongruent with our intent.
“Leadership, answered the President of one of India’s largest business conglomerates recently. “Do we have the right skills and capabilities to pull our strategy off, reported a Global 500 CEO. “I worry that the current management team will not be able to take us where we need to go to next, answered a third corporate leader.
Most CEO’s are satisfied with their strategies. Many are less satisfied with their performance. This Executive Insight Thought Leader centers on the imperative of leadership capability development as a business priority.
Quiet cynics will derail your change program unless you bring them onboard or leave them with nowhere to hide.
We’ve all read the statistics - 41% of change projects fail and of the 59% that “succeed only half meet the expectations of senior management. But we don’t need studies to tell us this. We have the scar-tissue. We know how hard it is to mobilize an organization to take a different path.
We believe that the answer to sustainable change is looking at the entire process of change differently.
In the highly competitive world of high value, complex, B2B selling companies waste training dollars and sales reps sell to the wrong people. Ironically, return on investment is low when the stakes are at their highest. High performers sell 289% more than average sales people. That’s huge. Our clients report double the close rate on “must win sales using PLAYER MAP™. Read how we build high performing sales teams.
Leaders in new roles are expected to rapidly, and effectively, size up their operations – and are typically given little guidance in doing so. They are increasingly being hired to have significant impact in complex situations, with an expectation of near-immediate results. As they enter new roles, they rarely have the same understanding of the operation and the role as their peers, their subordinates, or even as their boss.
These gaps in understanding, if not exposed and addressed, will contribute to poor performance and leader derailment – costly, disruptive failure. It is well know that some 64% of new leaders hired from the outside don’t make it in their jobs and 40% fail within the first 18 months.
A new culture assessment tool – Culture Snapshot – provides newly-placed leaders with a comprehensive, easy to understand assessment of their new operation’s performance climate. Culture Snapshot is a turnkey solution specifically developed for leaders transitioning into new roles. It provides data and tools for root cause analysis, and identifies potential levers for change, helping new leaders convert information into meaningful action.
Culture Snapshot revolutionizes leader transition by rapidly and explicitly identifying operational performance issues, as well as gaps in understanding and expectations. It brings together the perspectives of those who know the operation best – who depend on the operation for their own success. And it builds a deeper understanding of the operation’s performance climate to enable the new leader to focus on high-impact action.
Culture Snapshot provides much more than a report – it is a guide that offers an integrative, user-friendly and concise view of the operation’s strengths and weaknesses, while exploring root causes and high-impact levers for needed change, supported by certified, highly-skilled facilitators deliver findings in a way that focuses transitioning leaders to take the right action, at the right time, and in the right way.
Charlesmore Partners offers Culture Snapshot as part of its suite of organizational effectiveness tools to support the onboarding of client leaders and the development of high performance organizations. Please contact us for more information; we’d be pleased to explain how Culture Snapshot works and how we help support the successful onboarding of new leaders.
From lean to lasting: making operational improvements stick
By focusing on the “soft” side of lean and Six Sigma initiatives, leading global companies gain substantial, scalable, and sustainable advantages.
For companies seeking large-scale operational improvements, all roads lead to Toyota. Each year, thousands of executives tour its facilities to learn how lean production—the operational and organizational innovations the automaker pioneered—might help their own companies. During the past 20 years, lean has become, along with Six Sigma, one of two kinds of prominent performance-improvement programs adopted by global manufacturing and, more recently, service companies. Recently, organizations as diverse as steelmakers, insurance companies, and public-sector agencies have benefited from “leaning” their operations with Toyota’s now-classic approach: eliminating waste, variability, and inflexibility.
Yet organizations overlook up to half of the potential savings when they implement or expand operational-improvement programs inspired by lean, Six Sigma, or both. Some companies set their sights too low; others falter by implementing lean and other performance-enhancing tools without recognizing how existing performance-management systems or employee mind-sets might undermine them. Still others underestimate the level of senior-management involvement required; for example, they delegate responsibility for change programs to their lean experts or Six Sigma black belts—practitioners who are technically skilled but often lack the authority, capabilities, or numbers to make change stick.
The broader challenge underlying such problems is integrating the better-known “hard” operational tools and approaches—such as just-in-time production—with the “soft” side, including the development of leaders who can help teams to continuously identify and make efficiency improvements, link and align the boardroom with the shop floor, and build the technical and interpersonal skills that make efficiency benefits real. Mastering lean’s softer side is difficult because it forces all employees to commit themselves to new ways of thinking and working. Toyota remains the exemplar: while many companies can replicate its lean technology, success on the softer side often eludes them.
To get the most from large operational-improvement programs, companies need to look beyond the technical aspects of lean and Six Sigma and embrace the softer side. Complementing the development of technical skills with a focus on the organizational capabilities that make efficiency benefits real can help companies to achieve more substantial, sustainable, and scalable results. Source: McKinsey Quarterly; November 2008
New sales development process breaks from the workshop model
PLAYER MAP and Charlesmore Partners announce a breakthrough professional development process for Business-to-Business (B2B) sales people competing in complex, high-value selling environments.
FOR IMMEDIATE RELEASE
Milwaukee, WI and Forest Grove, PA - May 30, 2012 - PLAYER MAP, Inc., an industry leader in strategic sales planning, sales process management and sales performance coaching and Charlesmore Partners International LLC (Charlesmore Partners), a global provider of organizational development consulting services today announced the launch of a sales certification process that provides a systematic and sustaining route to competitive sales excellence for sales professionals and sales teams.
Stick with the job you know, more employees are saying
A growing number of professionals are saying "no, thanks" to prospective employers asking them to change jobs.
Spooked by the shaky economy, 46% of U.S. middle managers polled in mid-September said switching employers in the current environment is risky, according to a survey by Accenture. Just 13% of respondents said they were actively looking for a new job, down from 30% the last time Accenture conducted a similar survey in 2005.
The findings are echoed by search-firm recruiters, who say they are having to work harder just to get professionals to hear out job opportunities they have to offer. And dire tales of people losing their jobs shortly after being hired, although rare, are helping to spread caution among workers.
Many employees are hesitant to join new companies because "there's a level of uncertainty," says David Smith, a managing director at Accenture. It's unclear whether a different employer will be able to provide sufficient job security, training, advancement opportunities and other benefits. By contrast, they know what's available to them where they work now, he says. Source: The Wall Street Journal; 11/13/08
Top small workplaces, 2008
Small businesses, 25 million strong in the United States, remain the backbone of our nation’s economy. According to the Small Business Administration, they account for 50 percent of the country’s private gross national product, create between 60 and 80 percent of the net new jobs and are 14 times more innovative per employee than large firms.
Yet, too often, small organizations are overlooked and under-reported. For the past two years, Winning Workplaces and The Wall Street Journal have collaborated to identify and honor exceptional small organizations, regardless of whether they are private, nonprofit or publicly held; following a rigorous judging process, 15 of the best were selected, 14 privately held organizations, one non-profit.
What stands out about the 15 Top Small Workplaces?
For all of these organizations, employees are critical to the success of the business, and that assumption is built into the business model. To sustain their competitive advantage and take on the “giants” in their industries, these small companies have wisely invested in developing their staff and intentionally built supportive and flexible workplaces. They actively involve employees in issues that affect the success of the business and their work lives.
There are a handful of themes and practices that consistently emerged when considering these organizations. Some are specific practices, but they go far beyond an individual program or policy. These companies have found a way to institutionalize and integrate many of these critical practices so they become a part of the companies’ culture and operation and enable them to thrive, even in difficult economic times:
1: These companies take a long view of their business
2: It’s not just about profits…these firms intend to change society
3: Open communication helps weather the good times and the bad
4: Teamwork – it’s how the work gets done
5: Employee development assures quality execution
6: Workspace matters
7: Employees share in the risks and rewards
8: A focus on well-being, prevention and health builds endurance
9: Committed, able staff help these firms compete on quality and service, less on price
These firms are growing and profitable because they have clearly defined market niches and provide extraordinary quality and value to their customers. Whether it’s a high level of customer service or partnering with clients to achieve innovative solutions, these firms focus first on service excellence in order to satisfy clients’ needs.
This customer-centered focus differentiates their businesses, and it is directly tied to their highly engaged, committed workforces. Their employees act like owners – and many of them are. They have a deeper understanding of the business, are invested in its success and know that every interaction they have with a customer can impact their bottom line. The full report is available at Winning Workplaces. Source: Wall Street Journal; 10/13/08
Global private pension systems hit hard by markets collapse
Falling stock markets around the world have hit private pension systems hard according to the latest edition of OECD’s “Pension markets in Focus” newsletter. By October 2008, the total assets of private pension plans in OECD countries had declined by about USD 5 trillion, or nearly 20% of their value compared to December 2007 when their assets stood at USD 28 trillion. Two thirds of the losses (USD 3.3 trillion) are estimated to be in the United States alone, with the United Kingdom, Australia, Canada, the Netherlands, and Japan accounting on aggregate for a further USD 1.2 trillion drop in asset values.
Pension funds, which account for most private pension assets, have been hit hardest in OECD countries where equities make up over a third of total assets invested. Irish pension funds experienced the worst investment performance, losing just over 30% of their value in nominal terms (33% in real terms).
OECD also presents the historical trends to help understand the impact of the crisis and the responses to it. Source: OECD; 12/11/08 .
Not your fathers labor market
The younger baby boomers – those born between 1957 and 1964 - have worked for plenty of employers. By age 42, they have held an average of 10.8 jobs, not counting stints as high school lifeguards or shop clerks. Two-thirds of the 10.8 jobs came and went from ages 18 to 27. Men without high school degrees held the most jobs from ages 18 to 42, at 12.5. College-educated women came in second with 11.0 jobs. Source: The Washington Post; 07/08/08
Rethinking retention: If you want your best executives to stay, equip them to leave
Rather than guaranteeing employment security, many firms now claim to provide opportunities for employees to accumulate skills and experiences that both improve company performance and enhance employees' employability in the labor market. This “employability approach” encourages and often expects individuals to take greater personal responsibility for their careers.
Since many believe that the employability approach allows, and even invites, the loss of talent, organizations are often hesitant to invest to make their employees more marketable. According to this argument, any investments in employees’ general skills and marketable competencies will increase people’s value in the external labor market and presumably their likelihood of leaving.
Recent research by Accenture prompts the opposite conclusion. In a global study of managers and executives, they found that organizations can strengthen their executives’ intentions to stay by equipping them to leave. Their counterintuitive conclusion: the best way to ensure that critical talent doesn’t leave is by providing experiences and opportunities that truly enhance their value and employability in the external labor market.
What do executives value most?
In the survey respondents rated the personal importance of 15 indicators of two models of managerial employment – six of them representing the employment security approach (such as job security, seniority, title and status), six representing the employability approach (such as marketable skills, diverse competencies and professional networks), and three that are likely important in both approaches (such as compensation). Among the executives surveyed, work experiences that offer ample opportunities for responsibility and challenge are valued above all else (the mean score for each was 4.5 on a five-point importance scale). Ninety-eight percent of executives said that taking on new responsibilities was of high or very high importance, and 95 percent said that working on challenging tasks was of high or very high importance. Virtually all executives place great value on stretch experiences that not only keep them interested and engaged in their work, but also develop their capabilities and enhance their marketability.
Three other elements of the employability approach were also valued (4.2 on the importance scale) by most executives: developing diverse competencies was considered important by 89 percent of respondents; building a professional reputation, by 85 percent; and accumulating marketable skills, by 83 percent. The executives in this study valued opportunities to expand their skills sets and to establish themselves as significant contributors. Source: Accenture Research Report; June 2008
Designing incentive plans for your salesforce can be an art — but too often it’s turned into a science — a science full of algorithms that neither your sales people understand, nor can your company administer. It doesn’t have to be that way.
There has been much wailing and gnashing of teeth lately, especially in America, about the harm globalization causes to workers, who are increasingly worried that their hard-learned skills will become obsolete as their jobs are shipped overseas.
But globalization is also proving an exciting opportunity for a growing number of workers who are seizing the chance to work abroad. This is not confined to the stereotypical blue-collar migrant worker; it includes a rapidly increasing number of highly-educated “knowledge workers” too.
The extent to which human capital is voting for globalization with its feet is made clear by two surveys published by Manpower, a global employment-services firm. The first, “Relocating for Work,” polled over 31,000 workers; the second, “Borderless Workforce,” surveyed 28,000 employers, each in 27 countries.
Some 78% of the workers surveyed (most of whom have professional skills or qualifications) said they would consider moving to get a good job—some 40.5% would move permanently. While many of them would only relocate within their home country, others were open to moving to countries nearby, and some 36.9% said they would consider going anywhere in the world.
Educated workers are more willing to relocate. Of those surveyed who had less than a high-school education, 62.2% were open to moving for a job, and 28.4% had actually done so. Among those with an undergraduate degree, that rose to 85% and 46.5%, and for those with a masters degree, to 87.4% and 60.7%. Their motivation? Better pay, obviously, cited by 81.8%, and career advancement (73.6%), but also the opportunity to experience a different culture (51.4%) and learn another language (47.4%). Source: Manpower Inc; 06/24/08
Why multinationals struggle to manage talent
A survey shows a strong correlation between financial performance and best practices for managing talent globally.
Managing talent in a global organization is more complex and demanding than it is in a national business—and few major worldwide corporations have risen to the challenge.
A McKinsey survey of managers at some of the world’s best-known multinationals covered a range of sectors and all the main geographies. Findings suggest that the movement of employees between countries is still surprisingly limited and that many people tempted to relocate fear that doing so will damage their career prospects. Yet companies that can satisfy their global talent needs and overcome cultural and other silo-based barriers tend to outperform those that don’t.
Certainly global corporations grapple with a more difficult talent agenda than their domestic counterparts — partly because they need to share resources and knowledge across a number of business units and countries, partly because of the especially demanding nature of global leadership.
Despite the value companies claim to place on international management experience, senior managers had made, on average, only 1.5 cross-border moves during their careers, as against an average of 2 for managers at the top-performing companies. Interestingly, the respondents had also moved, on average, 1.7 times between different divisions within the same geography but only 1.3 times between different functions - another sign that movement from silo to silo is still limited.
Participants cited several personal disincentives to global mobility, but one of the most significant was the expectation that employees would be demoted after repatriation to their home location. “Overseas experience is not taken seriously and not taken advantage of,” commented one senior manager. “Much valuable experience dissipates” because companies have a habit of “ignoring input from returnees, and many leave.” The quality of the support for mobility a company provides (for instance, assistance with housing and the logistical aspects of a move) also plays a decisive role in determining how positive or challenging an overseas assignment is for expatriates.
Perhaps the most provocative finding from the research was the relationship between financial performance, as measured by profit per employee, and ten dimensions of global talent management. Companies scoring in the top third of the survey (when all ten dimensions were combined) earned significantly higher profit per employee than those in the bottom third. The correlations were particularly striking in three areas: the creation of globally consistent talent evaluation processes, the management of cultural diversity, and the mobility of global leaders. Companies achieving scores in the top third in any of these three areas had a 70 percent chance of achieving top-third financial performance.
Companies scoring in the bottom third of the survey in these three areas had a significantly lower probability of being top performers, particularly if the company had inconsistent global talent processes. Although providing no evidence of true causality and lacking a longitudinal perspective, the strong associations between company financial performance and these global-talent-management practices strengthens a belief that these are important areas on which businesses and HR leaders should focus their attention. Source: McKInsey Quarterly; May 2008
Starting with a clean sheet
An ambitious investment in people, facilities and technologies is transforming one of the world's oldest providers of water and wastewater treatment technologies into a model for "customer-friendly" service and new business practices.
In this "factory of the future," customer service is fully automated and customer support is very personal. The people who design and assemble products are available to discuss problems, work out solutions — and take, check or even make changes to orders — by phone or online over the Internet.
How much would it take for you to jump ship and join a competitor? One-third of workers surveyed said 8% to 15% more would do it, another third said it would take a 16% to 30% raise and one in six said it would take 31% to 50%. Interestingly, most employers are on the low side, thinking 15% or less will lure away talent. Half of the employers surveyed said they sometimes make counteroffers, but a third said they never do. The average counteroffer - 7%. The survey was conducted by Salary.com. Source: The Washington Post; 04/10/08
Retirement worries increase
The sagging economy and worries about soaring medical and long-term care costs have dented workers' confidence that they can retire comfortably, according to a survey released by the Employee Benefit Research Institute. The number of workers who feel confident they can retire with enough money to live comfortably fell from 27% last year to 18% in January. That is the biggest one-year drop in the 18-year history of the survey. And, the number of workers who are worried about having enough money jumped from 29% last year to 37% this year. Health care is a big worry. Forty-three percent (43%) of workers say they are not confident they can cover medical expenses in retirement, up 11% in one year. Over half of all workers are worried about long-term care costs. Workers also are postponing retirement in hopes of adding a little more padding to their nest eggs. Source: The Wall Street Journal; 04/09/08
Pay scales divide factory floors
Goodyear Tire & Rubber employs about 1,500 workers at a plant in Gadsden, AL. There was a time when jobs at Goodyear were coveted. Skilled workers could earn more than $20 an hour with great benefits. That is slipping away. Under Goodyear's contract with the United Steelworkers, new workers earn just $13 an hour with fewer benefits in the first three years.
Goodyear is not the first company to implement a two-tier pay system, and it will not be the last. General Motors, Ford, and Chrysler all have negotiated deals to pay newly hired workers less than veterans. Even thriving companies, like Caterpillar, have two-tiered pay systems. The lower pay scales have brought hope that some manufacturing jobs will stay in the states, but at the same time the different pay scales have brought dissension. Source: The Wall Street Journal; 04/09/08
For class of '08, a scramble for jobs
Last year was a good year for graduating college seniors. Colleges and employers reported robust hiring in numerous fields. This year is different. The picture is bleak. Companies have been revising hiring plans in response to economic conditions. Many are scaling back on hiring. Others say hiring is flat. There are some bright spots, however. Government hiring is robust. Health care, information technology, and the nonprofit sectors are also hiring. From the graduate perspective, students are not being picky. Many are accepting the first job they are offered. This is not the year for shopping around. Salary offers are up, but not significantly. Engineering grads are being offered the highest average starting salaries -$49,707, followed by computer programming - $46,775. Art and philosophy graduates bring up the rear at $28,479 and $28,234 respectively. Source: The Wall Street Journal; 04/08/08
Developing high potential leaders
The companies with the best quality leadership are those that are concentrating on developing their own talent. In particular the top 20 are focusing their efforts on identifying and managing the talents of high potential candidates – the population on whose shoulders much organizational leadership is going to fall. With fewer “high potentials” to go round they are going to be a very valuable asset indeed.
The top 20 are no different than other large companies when it comes to the frequency of practices they provide for mid-level and senior-level managers. However where they differ is in the amount of effort they concentrate on the high potential individuals they have identified. In actively managing their high potentials the top 20 companies are more likely to:
Have a formal process in place for identifying individuals who are likely to assume leadership roles in the future
Provide career tracks for high potential professionals or individual contributors that are separate from those for high potential leaders
Provide formal programs that are designed to accelerate the leadership development of high potentials – the provision of stretch assignments – developmental job rotations which take them out of their comfort zone
Include marketing as an organizational function from which they get their high potentials
Fill mid-level positions with internal candidates
Fill senior positions with internal candidates
Promote CEOs from within
Source: The Hay Group: The war for leaders; 2007
Good people are great for business
The search for talent is indeed a major strategic imperative in all companies. Having the right skills sets in place when you need them is vital for business performance.
Over the last few years it has become increasingly clear that skill needs will increase, while the competition for talent will intensify. 62% of senior human resource managers worry about company-wide talent shortages and 75% say attracting and retaining talent is #1 priority.
Yet few companies invest in those effective talent acquisition and selection practices necessary to most expeditiously secure the organizational capabilities their businesses need.
Another meeting? Perhaps the lady (or gentleman) doth protest too much...
Ask anyone what they think of meetings? Chances are pretty good they will tell you they hate them. Pure drudgery. Uninspiring. Boring. What a waste. People lie. According to research at the University of North Carolina, 69% of people rated meetings at least "good." Fifty percent (50%) said they complained about meetings but they really didn't mind them much or rather enjoyed them. When push comes to shove, people who hate meetings actually love meetings. Meetings are better than work. They may be a waste of time, but they give people a chance to interact , to be seen and heard. Meetings can be productive downtime. Just to be invited to a meeting is an ego booster for some cubicle denizens. Just keep complaining about all those meetings and keep going to all those meetings. Don't mess up a good thing. Source: The Wall Street Journal 03/11/08
Going to the company elders for help
John Toppel is a retired Hewlett-Packard sales manager. But he occasionally spends some of his leisure time at a local Circuit City extolling the virtues of HP laptops. He is one of thousands of HP volunteer cheerleaders, good-will ambassadors, and volunteer sales people. They do not get paid. They do it because of their affection and loyalty to the company. HP is not the only company making use of retirees as part-time or temporary workers. Companies are taking advantage of all the knowledge and expertise dying to be tapped by former employees dying to stay involved. IBM, Lockheed, Intel, SRI International, and Xerox Palo Alto Research Center are other organizations that have loyal retiree groups. Source: The New York Times 03/10/08
Web delivers noontime video, revitalizing lunch at the desk
It is the lunch hour or half hour. In cubicles across the country, employees are clicking away - not on spreadsheets but on YouTube, or CNN.com, or FunnyOrDie.com, etc. "Video snacking" is a new growth business. News and media outlets are developing new products. For example, video snackers seem to gravitate to sites with stories or new wrap-ups of a certain length - three minutes. Advertising is also changing and adapting to the new video snacking reality. NBC estimates 25% of employees are snacking on nonwork-related web sites. Source: The New York Times; 01/05/08
What makes a company a great place to work today
Tis the season for the best places to work lists: 100 best places to work, best places for working mothers, best places to work for postdoctoral researchers, best places to launch a career, etc. So, what is hot? Flexibility is hot. Employees want more flexibility in work practices. Employees want family-friendly benefits to extend beyond women to cover men. Enviro-perks are all the rage among the young. And vacation time is high on the list. What is not so hot? Rigid policies and top-down because I said so-type policies are out. Concierge services that perform family tasks for employees so they can spend more time at the office have lost some of their luster. The outlook on child care is mixed. Child care can be a power retention tool. But the number of on-site child care centers has stagnated. Source: The Wall Street Journal; 10/04/07
Smashing the time clock
At most companies, going AWOL during daylight hours would be grounds for a pink slip. Not at Best Buy. The nation's leading electronics retailer has embarked on a radical - if risky - experiment to transform a culture once known for killer hours and herd-riding bosses. The endeavor, called ROWE, for "results-only work environment," seeks to demolish decades-old business dogma that equates physical presence with productivity.
The goal at Best Buy is to judge performance on output instead of hours. Hence workers pulling into the company's amenity-packed headquarters at 2 p.m. aren't considered late. Nor are those pulling out at 2 p.m. seen as leaving early. There are no schedules. No mandatory meetings. No impression-management hustles. Work is no longer a place where you go, but something you do.
The official policy for this post-face-time, location-agnostic way of working is that people are free to work wherever they want, whenever they want, as long as they get their work done. Another thing about this experiment: It wasn't imposed from the top down. It began as a covert guerrilla action that spread virally and eventually became a revolution. So secret was the operation that Chief Executive Brad Anderson only learned the details two years after it began transforming his company. Such bottom-up, stealth innovation is exactly the kind of thing Anderson encourages. The Best Buy chief aims to keep innovating even when something is ostensibly working. So bullish are Anderson and his team on the idea that they have formed a subsidiary called CultureRx, set up to help other companies go clock-less.
The hope was that ROWE, by freeing employees to make their own work-life decisions, could boost morale and productivity and keep the service initiative on track. It seems to be working. Since the program's implementation, average voluntary turnover has fallen drastically and productivity is up an average 35% in departments that have switched to ROWE. Source: Business Week; 12/11/06
Talent management survey findings
Talent management tends to be poorly defined and poorly executed reported The Institute for Corporate Productivity recently. Only about one-third of surveyed organizations rated their companies as good (30%) or excellent (5%) at managing talent. And only one-quarter said their organizations have an agreed-on definition for talent management.
However, for those that manage it well, talent management is associated with performance benefits: Companies that define it are more likely to see themselves as being good at talent management. These are the organizations that are significantly more likely to be high-market performers.
In another recent study The Aberdeen Group reported that companies that implement, integrate, and communicate a talent-acquisition strategy are up to five times more likely to see a lower cost per hire and sixty percent of the organizations report that "future workforce planning" was a top factor driving their company to focus resources on talent acquisition. Best-in-class companies are more than twice as likely to have a talent acquisition strategy that is integrated with the company's overall strategic plan. Source: The Institute of Management & Administration; 09/07
Can't get no satisfaction
Less than half of US workers are satisfied with their current jobs, according to a Conference Board Report. Satisfaction has declined over the last 20 years from 61% in 1987 to 47% today. Only 38% of those under 25 and 44% of those ages 45 to 54 are happy in their work. People who earn the most are the most satisfied, although their positive feelings are also slipping. High tech gizmos are getting some of the blame. They are playing a big part in blurring the lines between work and family. Source: The Washington Post; 03/02/07
Mission critical: aligning employee contribution, commitment and careers
A peek inside the average corporation reveals organizational systems (pay, performance management, employee development, career management) that have not changed in any fundamental way for years.
In our era of changing employment relationships, employee expectations and workforce balance of power, it is increasingly incumbent on organizational strategists to correct this situation and design new systems to meet the ever-shifting organizational context.
Bonuses blossom in senior executives' compensation
Bonuses have become a key part of their annual compensation for the 6,130 career senior executives who manage the day-to-day operations of the federal government. Pay-for-performance is what it is all about. There are no more guaranteed annual raises or locality adjustments. In fiscal 2006, the average bonus was $14,290, or 9.3% of salary. On a government-wide basis, 67% of federal executives received a bonus. But the numbers varied greatly by agency. Ninety percent (90%) of the executives at Defense, Labor, and HUD received bonuses, compared to 41.5% in the White House budget office and 53% at the State Department. Overall, 99% of federal executives were rated "fully successful" or higher. Close to half were deemed "outstanding," the highest rating. Source: The Washington Post; 06/26/07
Time for change: today's pay practices won't get you there
A recent study of 750 companies by Towers Perrin found 58% of corporate respondents, “engaged in comprehensive strategic reappraisal (of pay systems) and concluded “ that traditional compensation infrastructure and practices are still the rule at most of our respondent companies”. “There is a lot of searching going on”, they added.
Four years later the same consultants, in a subsequent study, found that “many companies’ rewards strategies are not aligned to address...key business goals” and add, ”a lot of companies pay lip service to the notion of alignment, but few take the necessary steps to ensure that their rewards strategy is linked to business goals”.
A woman walks up to a Customer Service Desk in a Department Store and the person behind the desk is proclaiming loudly, “I hate this weather. I hate my dog. I hate this chair. I hate being stuck in Customer Service. Now what do you want?” It’s an old joke but regretfully, a joke with some bitter elements of truth framing its humor.