issue 1 - Roland Berger

DOSSIER: How companies are able to overcome the limits of growth p. 24
Volume 1 Issue 1
December 2004
think:act
The executive magazine by Roland Berger Strategy Consultants
1 Louis Schweitzer, CEO, Renault:
“If you want to grow, you have to trust employees and motivate them
to perform at their peak.” [pHow trust drives growth, p. 30 ]
2 David Steiner, adviser to the US government:
“Immorality hurts profits and the stock price. Ethical behavior creates
lasting corporate value.” [pGenerating profit ethically, p. 14 ]
3 Bessie Lee, CEO, Mindshare & Maxus:
“China is targeting Western markets. The high end brings the best
returns, not just financially but also for a company’s image.”
[pChina goes Europe, p. 8 ]
4 Constantinos Markides, London Business School:
“Market leaders have to square the circle. Revolutionary innovations
can in fact be combined with established business models.”
[pWhy Professor Porter is wrong, p. 50 ]

PARIS OFFICE, ROLAND BERGER STRATEGY CONSULTANTS, 16 Avenue George V, 75008 Paris, France,
Tel: +33 1 53670-320, Fax: +33 1 53670-375, E-Mail: office_paris@rolandberger.com

think: act the executive magazine from roland berger strategy consultants volume 1 december 2004 first views f
think:act is our magazine for an exclusive
group of decision-makers from business and politics around
the world. It is my pleasure to introduce it to you.
The title think: act reflects our vision of consulting: firstclass
analysis, sophisticated concepts, high quality and the
greatest impact for our clients, as embodied in our value
proposition, “Creative strategies that work.”
Roland Berger Strategy Consultants applies this philosophy
to support the firm’s clients in Europe, Asia, North America
and South America from 31 offices in 22 countries. Based
on the knowledge and experience of this international
network, we will use this magazine to present to you the
most important strategic challenges and options for their
solution every four months.
Demanding readers have a right to expect that a high
degree of usefulness will be accompanied by a sophisticated
presentation. We have a first-class team to meet those
expectations. Internationally experienced business journalists and management experts have
researched the magazine’s topics and present them in articles, background reports and exclusive
interviews in think: act.
For this inaugural edition, we have placed the topic of growth front and center. Despite determined
restructuring and systematic cost cutting, many companies have still not yet reached their
goals for growth. With that in mind, our dossier presents suitable strategies, appropriate measures,
and examples of success. It demonstrates how to build a company’s ability to grow, along with its
preparedness to grow; that is, how to create both the hard and allegedly soft factors for sustainable
success.
China is our second key topic. We would like to draw your attention to the growing interest that
Chinese entrepreneurs, scientists, students and tourists are showing in Europe.
I hope that you enjoy this first issue of think: act.
Sincerely,
Dr. Burkhard Schwenker
CEO Roland Berger Strategy Consultants
think: act 3

p contents
New high-tech centers with an international impact are emerging in
China’s northeast. Yet in some parts of the country electric lights are still
considered cutting-edge technology.
page 6 page 24
Peter Brabeck-Letmathe, CEO of Nestlé, has found new growth
opportunities for the Swiss food giant in both high-tech nutrition and
designer foods.
Automobile manufacturers are bowing to cost pressures and
increasingly outsourcing development work to their suppliers—a successful
model for both sides.
page 40 page 54
Gérard Depardieu has turned his great passion for wine into a
second career. The fruits of his vineyards are now drawing praise, even
from Robert Parker.
4
think: act

contents f
food for thought
dossier
business culture
6
8
12
14
16
High tech and electric lights
Is China on its way to becoming
a key center for research?
China goes Europe
How the Middle Kingdom is
moving into Western markets.
Technology, talent and tolerance
Political scientist Richard Florida
explains cities’ keys to success.
Generating profit ethically
Transparency and fairness pay
off for companies.
Roland Berger Interview
Trustworthy behavior opens new
opportunities for growth.
18
24
30
33
34
Head of the class
Six companies that show above
average growth.
Farewell to the “V-curve”
Only a two-track strategy—
increasing revenue and cutting
costs—can ensure growth.
How trust drives growth
Companies that manage to build
a corporate culture of trust will
have an easier time entering
new markets.
Commentary: Seven surefire ways
to run your company into the
ground.
“The time for indulgence is over“
EU Commissioner Joaquín
Almunia calls for more budget
discipline in certain member
states.
50
54
56
regulars
3
58
Why Professor Porter is wrong
Dealing with revolutionary
innovations means conflict, but
they can still be combined with
established businesses.
Good nose for business
How celebrities are earning
millions, well away from stage
and screen.
Completely underestimated
Ten years after it was first
unveiled, Short Message Service
has developed into a multi-billion
business.
First views
Service | Credits
industry report
Dossier
The formula for growth
How companies can overcome
the limits to growth
Beginning on p. 17
38
40
44
47
48
The shape of things to come
Together in the fast lane
Suppliers are taking over
development tasks.
El Dorado in Central Europe
An increasing number of companies
are outsourcing entire business
processes to the new EU member
states.
“Competencies count”
Wolfram Fischer of Hewlett-
Packard recommends concentrating
on a firm’s unique attributes.
The shape of things to come
think: act 5

p food for thought
china – high-tech center
High tech and electric lights
China is developing into a leader in high technology on the back of massive state support.
High levels of investment are aimed at creating globally important industry and research centers.
In rural areas, by contrast, electric lighting is still seen as cutting-edge.
To global leadership in 50 years
From the 18th to the beginning of the 20th century, self-chosen isolation, conflicts with Asian neighbors and colonial powers, and a series of civil wars led to China’s technological and
economic collapse. Beginning in 1949, four phases have shaped China’s return to global economic importance.
Phase 1 Phase 2 Phase 3 Phase 4
1949 – 1965
Mao Zedong: Adoption of the Soviet scientific and
technological model along with a centrally planned
economy; in 1950, signing of the Chinese-Soviet
treaty of friendship and mutual assistance.
Source: Kathleen Walsh, “Foreign High-Tech R&D in China,” 2003
1966 – 1976
Mao’s Cultural Revolution,
closure of universities,
persecution of intellectuals
and scientists.
182,000
patents were filed by Chinese state research
institutes in 2003. That is roughly 30,000 more
than in the states of the European Union.
1977 – 1997
Reforms under Deng Xiaoping; in 1979,
US-China Science & Technology
Agreement; import of science, technology
and know-how from the US and Europe.
1997 – present
Concentration on high-tech
industries; gradual turn away
from economic model based
solely on cheap production.
Vast market for mobile telecommunications
In just one year, roughly 71 million Chinese signed new contracts for mobile
phones, more than double the population of Canada. A total of 315 million mobile
phones make China the largest market in the world. Roland Berger Strategy
Consultants predicts an additional 35 percent increase in the market in 2005.
325
315.1
Backlog in the population
Outside of China’s larger cities, light bulbs are still a sign of wealth and progress. The number
of lamps and light fittings per households is rising throughout China. But for reasons of
thrift, an average of only three are ever turned on.
300
275
Number of new
mobile phone
contracts,
in millions
*Average number of light bulbs
per household
19
250
244.1
6.5
8.5
225
China
1995*
Source: Horizon Group, 2004
China
2003
USA/Western Europe
2003
200
Aug Sept Oct Nov Jan Feb Mar Apr May June July Aug
2003 2004
Source: National Bureau of Statistics of China, Ministry of Information Industry of China;
“Outwardly Mobile in China,” Roland Berger Strategy Consultants
6
think: act

315 million chinese have mobile telephones food for thought f
The dragon’s rapid growth
China’s 9 percent GDP growth in 2003 makes it the fastest-growing large economy in the
world. Driving the growth are IT, telecommunications and the auto industry.
9.0
6.5 6.4
4.7
3.1 3.0 2.0 1.1
China Russia India USA UK Japan France Germany
Source: OECD, National Bureau of Statistics of China
Boom in the rust belt
The People’s Republic of China invests roughly 300 billion RMB yuan
(around 36 billion dollars) in public and private research facilities.
Thanks to state financial support, new high-technology centers are
emerging in the declining steel and petrochemical areas of the northeast.
★★
Xinjiang
1.5/6.0
★
★
Tibet
0.1/38
★★
Shaanxi
9.6/5.3
★★
Chongqing
3.6/9.1
★Beijing
39.3/14.6
★
★Liaoning
14.4/46.1
★★
Tianjin
6.5/5.4
★★
★★
★★ ★★
Jiangsu
27.2/21.2
★★
Heilongjiang
5.04/9.6
Sichuan
13.2/17.2
Shandong
19.7/15.5
★★
Zhejinang
13.7/22.7
Shanghai
25.3/13.9
★
★
Spending in 2002
in billions of RMB yuan (1 RMB yuan = 0.12 dollar)
Spending growth since
2001 as a percentage
Source: National Bureau of Statistics of China, Statistical Bulletin on the Input of Science and Technology, October 2003
★★
Guangdong
29.1/13.2
think: act 7

p food for thought
the dragon prepares to leap

the dragon prepares to leap
food for thought f
China goes Europe
Chinese companies have been gearing up for their long march to
the West for quite some time. Their joint ventures with established
brand-name manufacturers and acquisitions of smaller companies
make up for their weaknesses in service and marketing.
:
China is coming. Just ask any of the
happy few with membership at Berlin’s
China Club how close it has really got. The
club has a bar, library and seven private
dining rooms done up in a 1930s Shanghai
Art Deco style with salmon-pink satin walls,
luxuriously intricate 19th century Chinese
art and oil paintings of post-Mao Red
Guards. In the restaurant, head chef Tam
Kok Kong prepares his signature dish—
wasabi prawns.
When she founded this exclusive club in the
Adlon Hotel at Berlin’s Brandenburg Gate,
Anne Maria Jagdfeld drew inspiration from
the China Club in Hong Kong, of which she
has been a member for many years. “I wanted
to create a glamorous, cosmopolitan social
club where members can network at the
highest level,” says Jagdfeld, who also owns
Quartier 206, a posh Berlin department
THE FLOW OF FUNDS IS STILL
HIGHLY IRREGULAR, BUT CHINA’S
INVESTMENTS ARE RAPIDLY GROWING
store. Much of that networking is conducted
with businesspeople from China itself.
The Chinese are coming as students,
tourists, immigrants and investors. According
to Professor Rolf D. Cremer, vice president
of the International Business School
in Shanghai, who has twenty years of professional
experience in Asia, Chinese companies’
global expansion is not just about
their looking for new sales markets. It also
has to do with China’s image of itself as a
world leader. China does not see itself in the
long term as the world’s mass production
center, as merely contributing cheap labor
to the manufacturing sector. Bessie Lee,
CEO of the market research company
Mindshare & Maxus China, confirms this:
“By globalizing, Chinese companies improve
their image.” (See sidebar.)
In 2003, according to the OECD, only
around $600 million in Chinese capital went
abroad, while China itself drew direct investment
to the tune of $53 billion. However,
it can be assumed that in the future,
“Chinese investments abroad will quickly
increase past current levels.” That is the
conclusion of a recent report prepared by
the German embassy in Beijing.
Where is the money going? “North America
remains the developed market of choice,
followed by Western Europe,” says Wei
Zhou, a Roland Berger consultant in
Shanghai and author of a study entitled
“From Middle Kingdom to global market.”
This study describes the expansion strategies
of China’s top 50 corporate groups.
Fifty-six percent of these companies are
seeking new sales markets overseas because
their internal dynamics are driving them to
expand internationally. Companies that
manufacture PCs, TVs or air conditioners
are finding it necessary to increase their
exports since domestic production capacities
are exceeding local demand.
Market entry seldom takes the form of a
head-on assault. China’s groups “are on the
lookout for segments that market leaders
have already given up or that they are no
„
Why are Chinese companies expanding?
That has a great deal to do with
China’s perception of itself as a great
nation. China compares its economic
importance to that of countries like the US, Japan,
Germany and Great Britain. By globalizing, Chinese
companies are enhancing their prestige. The government
is backing these companies and encouraging
them to become active worldwide. China has a very
different attitude toward competition than other
Asian countries.
Bessie Lee, CEO, Mindshare & Maxus China
»
Self-image counts
Right now, it seems like the high-tech industries are
most aggressive in expanding abroad. Examples
include IT companies such as Lenovo and homeelectronics
manufacturers such as Haier and TCL.
These groups have highly developed products and
abilities. I suspect that such high-end markets guarantee
them a better return from a financial perspective
as well as in terms of image and national prestige.
Chinese companies are most interested in
Europe and the United States simply because of the
size of these markets.
Looking into the future, consider this: Less than 20
years after its markets opened up, already 6 percent
of all Asia’s top 50 companies are
Chinese, which is absolutely impressive.
I expect this figure will double by
2020, and possibly even triple.
»
think: act 9

p food for thought
the dragon prepares to leap
Victor Yuan, Chairman, Horizon Research
»
Using cost advantages
Currently, Chinese companies are primarily
manufacturing low-priced
products for local markets. Their global
partners are encouraging them to
use their cost and price advantages to penetrate
into international markets. This would also boost
their domestic performance. Many Chinese consumers
believe that an international company can
make better products.
In established markets, Chinese companies are
presently pursuing a low-price, low-end strategy.
However, they absolutely have the ability to undertake
a medium-price strategy in developing markets.
For example, it is much more profitable to
develop a bicycle business in Afghanistan than in
the US market.
To date, Chinese companies have concentrated on
the United States and Europe, but I believe they
should focus more on developing markets. Many
Chinese companies are concerned about social
conditions in these types of countries, but some of
them are starting to get interested in big, developing
nations such as India and Brazil. Yet, from an
overall perspective, the growth of Chinese companies
will still be determined by China’s domestic
market. The scale of their multinational
operations is still smaller than the
overseas operations of Taiwanese or
Korean companies.
»
longer interested in because of insufficient
profit margins and sales volumes,” write
Ming Zeng and Peter Williamson, professors
at the INSEAD Business School in Singapore,
in the Harvard Business Review.
Harro von Senger, a professor of Sinology at
the University of Freiburg, Germany, agrees:
“For Chinese companies, global expansion
may initially only mean a partial expansion—into
a foreign market in a specific
region that is particularly well-suited for a
Chinese product.”
A good example of this is Haier. As the
company, which today is the fourth-biggest
manufacturer of refrigerators and washing
machines in the world, expanded into the
American market in 1994, it concentrated
initially on the overlooked niche of small
refrigerators for minibars and student lodgings.
Soon Haier had reached a 50 percent
share of the market.
There are no challenges that Haier balks at.
“We always follow the principle of cracking
the toughest nut first,” says CEO Zhang
Ruimin. And that is not always an easy task.
For instance, Zhang characterizes German
consumers as adamantly stuck on their
national brands. To get around this, the
company has since the mid-1980s been producing
its refrigerators under license from
the German manufacturer Liebherr—even
winning a seal of approval by the German
consumer association Stiftung Warentest.
This award means so much to Ruimin that
he has it on display in Haier’s headquarters
in Qingdao, hanging between a dedication
penned by Premier Wen Jiabao and the document
produced by the American finance
magazine Fortune describing the company
leader as one of the 25 most powerful managers
outside the United States.
With its strategy, Haier is protected from
the Achilles heel that Chinese companies
traditionally possess: the lack of a strong
brand name. “Chinese companies that want
to expand globally need to build up a brand
name,” says Thomas Eichelmann, a member
of Roland Berger Strategy Consultants’ executive
committee. This is why they are
increasingly seeking manufacturing opportunities
in locations that stand for both high
quality and premium products.
“Over the next few years, we will see
takeovers of very established brand names
for which Chinese companies will be paying
accordingly,” says Eichelmann. One particular
reason for this trend has to do with the
needs of the domestic market, since China’s
emerging middle class favors internationally
recognized brand-name products.
CHINESE COMPANIES SUCCEED
IN SEGMENTS THAT EMPHASIZE BOTH
QUALITY AND LOW COST
IT and consumer electronics are the principal
focus for expanding Chinese companies.
The strategy is simple: The expansion begins
with partnerships or with the acquisition
of brands that are already established
in the target market. Production takes place
either partially or completely in China,
with marketing and sales conducted in the
Western location.
This is the path trodden by Lenovo, China’s
biggest personal computer manufacturer.
The Beijing Morning Post recently reported
that Lenovo will take over US giant IBM’s
production facility for notebooks and
servers in Shenzhen. It’s a perfect springboard:
Lenovo is teaming up with the chip
manufacturer Intel and will supply the
servers and computers for the 2006 Winter
Olympics in Turin, Italy.
Another expanding Chinese company is
TCL. In 2002 the company, originally a huge
cell phone manufacturer, took over Schneider,
the insolvent TV and hi-fi manufacturer
based in Bavaria, Germany, best known for
its “Dual” record player. For two years TCL
kept production in Germany alive; now it
is divesting all but sales, marketing, and
elements of research and development.
10
think: act

89.5 percent of all young chinese want to study abroad food for thought f
“ For Chinese companies, global expansion may initially only
mean a partial expansion into a specific foreign market.”
Professor Harro von Senger
TCL is engaged in a partnership strategy of
global importance with the French group
Thomson. Overnight the joint venture, of
which TCL owns a 67 percent share, became
the biggest manufacturer of consumer electronics
in the world. It is aiming at producing—in
Hong Kong—18 million color
televisions and up to 4 million DVD players,
with the technology originating in France.
It is not only Western brands and Western
technologies that China can build upon. The
Old World’s big cities are vying to serve as
bridgeheads for the future economic superpower.
Hamburg (referred to in Chinese as
Hanbao, “castle of the Chinese”) feels it
stands a good chance of fulfilling this role,
as it has already provided a branch location
for 320 Chinese companies. “It is our stated
objective to become Europe’s number one
city in doing business with China,” says
Reinhard Stuth, a councilor with the State
Senate’s chancellery.
The Senate has set up a Chinese-language
wing at a city high school for the children of
Hamburg’s 3,000 Chinese residents. And
The Hochschule für Angewandte Wissenschaft,
a university for applied science,
has established an engineering college
jointly with the University of Shanghai. The
university clinic in Epperdorf plans to open
an internationally significant institute for
traditional Chinese medicine.
CHINESE IMMIGRANTS MOVE
AROUND EUROPE AS IF IT WERE A
LARGE CHESSBOARD
Hardly noticed by the public, some European
cities such as Milan in Italy have even
sprouted small Chinatowns. Chinese
leatherworkers and silk-tie salesmen had already
set up shop in the Via Paolo Sarpi district
back in the 1930s. In fact, northern Italy
has had an official Chinese trade and industry
association since 1968. However, most of
Italy’s 16,000-member Chinese community
lives in Prato, a city near Florence built
around the textile industry. Leather-processing
plants in particular have drawn immigrants,
many of them illegal, from Fujian
and Zhejiang provinces. Yet as quickly as
the Chinese community grows, it could also
just as rapidly shrink if economic conditions
were to become unfavorable, as they did in
Prato, where more and more leather companies
are closing.
“Chinese immigrants consider Europe a
kind of chessboard across which they can
move about freely. As a result of their strong
family ties and networks, they have start-up
possibilities all over the continent,” says
Professor Antonaella Ceccagno, head of
Prato’s immigration center.
While Chinese from the lower class try to
make a go of it in leather manufacturing or
in Asian restaurants, the middle class comes
to Europe to study, especially since the
drastic post-9/11 security measures have
scared off enrollees in the United States.
According to the national statistics office in
Beijing, 89.5 percent of all young Chinese
want to study abroad. In 2003, more than
20,000 Chinese students were enrolled in
German universities. And, looking at the issue
optimistically, it is possible that anyone
who has studied at a European university
may return as a vacationer. The numbers
may back that projection. In 2003, 20.2 million
people from China’s fast-growing middle
and upper classes traveled abroad. Of
them 300,000 went to France, Europe’s traditional
travel destination.
Chen Wang, head of the management board
at Caissa Touristic AG, believes that the
Chinese will constitute the fourth largest
tourist group in the world by 2020. Many
perceive the ever-growing stream of Chinese
tourists, students and investors as a
sign that the sleeping giant is awakening.
“China’s broad impact on key indicators in
all international spheres will be comparable
to the global Americanization in the second
half of the 20th century,” says Cremer.
Chinese companies are
pushing into Western
markets because...
p
p
p
p
p
Chinese production of goods is greater than the
purchasing power of Chinese consumers and
their still comparatively low average income.
China cannot absorb all its domestically
produced goods.
The principle “a bigger market is better for
business” also applies to Chinese companies.
Chinese companies can gain commercially
useful business and other types of expertise by
being internationally competitive.
Global competition can help Chinese companies
avoid both the hazard of becoming “inbred” and
the associated inhibitors of development.
Chinese companies earn foreign currency on the
world market with which they can purchase
expertise and technologies.
(Source: Professor Harro von Senger)
china’s direct investment abroad
600 million dollars
500
400
300
200
100
90 97 98 99 00 01 02
Since 1999, government-sponsored direct investment
abroad has increased steadily.
Source: OECD
china’s globalized sectors
16%
8%
16%
20%
40%
Other
Research & Development
Sales/Marketing
Production
Purchasing
As they expand, Chinese companies are using international
partnerships to compensate for their weaknesses, primarily
in sales and marketing.
Source: Roland Berger Strategy Consultants
03
think: act 11

p food for thought
business trends
Technology, talent and tolerance
Star political scientist Richard Florida proposes a radical rethink of regional policies. His research
suggests that creative minds only settle in diverse, metropolitan areas that foster uninhibited human
interaction. This quality may become decisive for companies selecting their business locations.
:
Bestselling author Richard Florida loves
to cause a stir. “A town without rock
bands, gays and tattoo studios will experience
decline sooner or later,” says Florida, a
professor of economic development at
George Mason University, located in Fairfax,
Virginia. In saying this, he stands in marked
opposition to most mayors and urban planners.
They often dismiss people’s creative
potential and focus merely on attracting
companies with strong growth. In Florida’s
view, this is a shortsighted strategy, as evidenced
by the dramatic drop in importance
of Pittsburgh, the “steel city.” The city’s
decision-makers failed to complement its
industrial past with an innovative infrastructure
and lively culture. “The result
is that the creative class there no longer
feels inspired and is moving elsewhere,”
says Florida.
By “creative class” Florida means all the professional
groups in which intelligence,
inspiration and innovation are prerequisites
for success. These include artists, media creatives
and star chefs, as well as architects,
scientists, attorneys and physicians. Florida
places special emphasis on creative
12
think: act

30 percent of all workers in the united states are part of the creative class food for thought f
“ Cities need to develop into appealing places for talented
and creative people. They need to be tolerant, diverse and open.”
Professor Richard Florida
managers who abandon traditional thinking
and continuously reinvent their businesses.
“Besides being highly educated, these individuals
are also united by a great willingness
to move and are forever seeking new
stimuli and inspiring work environments,”
he says. Florida concludes that cities offering
the best living environment for trendsetters
can expect to have the highest level
of prosperity. His reasoning: This group of
individuals guarantees sustained growth
with high added value.
In his many talks, the political scientist has
already referred to the fact that this trend
transcends nations’ borders. That is a brief
first taste of the theme of his next book,
titled The Flight of the Creative Class, which
IT TAKES THE RIGHT MIX OF
MINORITIES TO DEVELOP A
VIBRANT ENVIRONMENT
will be published next spring. In it he discusses
the migration of the US intelligentsia
to more tolerant countries. In contrast to
traditional thinkers, who point to errors in
the system, Florida attributes this migration
to the laws of the free market. His thesis is
that global supply and demand also determine
where creative people settle.
It is therefore no longer enough, he says, to
concentrate solely on good schools and safe
streets. Instead, policy-makers should create
the conditions for a lively urban milieu that
assures a maximum degree of tolerance,
diversity and openness. “That’s the only way
to foster creativity and a fertile intellectual
environment,” he says. Florida claims these
two factors are the key drivers of economic
growth. In other words, emerging, low-wage
markets will not be the first to prosper;
rather, benefits will flow to the regions best
able to tap the creative potential of their
inhabitants and draw talent from around
the world. “Location now determines how
people and job profiles match up, and it will
become the central organizational unit of
the creative age, replacing the company in
that function,” he says.
Florida’s vision of the cities and regions of
the future is based on three pillars: technology,
talent and tolerance. What is important
is a distinctive lifestyle that delivers a rich
cultural existence, best supported by high
investment and the influx of people operating
outside the mainstream.
“In our focus groups we’re always hearing
that people want to move to a place where
they can simply be themselves,” reports
Florida from his consulting experience.
“That’s something particularly important for
inspired, entrepreneurial people.”
Based on these insights, he has drawn up a
map of creative cities in the United States.
The following characteristics were quantified
and compared with one another: the
number of inhabitants belonging to the
creative class, the number of homosexuals,
the economic power of high-tech industries,
and the number of patent applications per
capita. The findings: Apart from some
smaller cities in the Rocky Mountains that
can be counted as creative locations, the
phenomenon is primarily connected with
large cities. Vibrant, inspiring environments
emerge where there is a large concentration
of people who together constitute an
enthralling mix of minorities. Other key factors
are cultural attractions and universities,
RICHARD FLORIDA, 47, was a professor of
economic development at Carnegie Mellon
University in the former steel town of Pittsburgh,
Pennsylvania before moving to George Mason
University in Fairfax, Virginia, in the summer of
2004. Next spring Florida will publish The Flight
of the Creative Class, in which he examines the
worldwide competition for creative talent
between cities and regions. Florida studied at
Rutgers College and earned his PhD at Columbia
University. In addition to his academic career, he
heads two companies that he founded: the communications
company Creativity Group and the
consulting firm Catalytix.
described by Florida as “creativity hubs.”
At the top of the list are West Coast metropolitan
areas such as Seattle, Portland, San
Francisco, and the latter’s neighbor, Silicon
Valley. Ambitious cities such as Minneapolis
and Austin, which first developed a lively
subculture and then began to prosper, also
rank highly. In stark contrast to these are
cities of the Old South such as Memphis and
New Orleans. According to Florida’s criteria,
these are the least creative.
THE UNITED STATES COULD FORFEIT ITS
POSITION AS A LEADING POWER
IN THE CREATIVE SECTOR
Florida rates European cities such as
Dublin, Amsterdam, London and Munich
very highly. They have managed, he argues,
to become clusters for talent and technology.
In these innovative regions live creative
people attracted both by the high degree of
tolerance and by local acceptance of innovative
elites from in-country and abroad. The
pay-offs of such modern life-styles take
years to materialize.
However, success is in the offing thanks to
the energies that are releasing inspiration
and wellbeing. Consider Berlin. “The city is
a creative center with plenty of room for a
tremendously diverse group of people willing
to take risks,” says Florida. Still, the
German capital is seeing competition from
further north. Florida’s Creativity Group
recently expanded its analysis to 14
European countries. The figures suggest
that the epicenter of competition with the
United States is moving from traditional
strongholds such as Great Britain, Germany
and France to Ireland and Scandinavia,
where the creative class has been growing at
a peak annual rate of 7 percent since 1995. In
terms of creativity, Sweden has already overtaken
the United States. And if America fails
to pay attention, Florida concludes, it could
forfeit its position as a leading power in the
creative sector.
think: act 13

p food for thought
ethics and management

the profit-revenue ratio is 18 percent higher at ethically managed companies
food for thought f
Generating profit ethically
Companies that link management and ethics generate greater profits in the long run, according to
findings from US government adviser, David Steiner. He is convinced that Europe is currently poised
to take a leading role in developing a comprehensive model for ethical standards.
:
When David Steiner wants to explain
how transparency is created, his job at
British merchant bank SG Warburg comes
to mind: “It was the first bank to open all
incoming mail centrally and make it available
to all employees in an abbreviated
form.” This rigorous transparency model
left its mark on the American ethicist. “I
learned my first lesson in business ethics at
SG Warburg,” he says.
These days, the Institute for Corporate Cultural
Affairs (ICCA) in Frankfurt, Germany
is profiting from Steiner’s experience. Its job
is to encourage companies to think about
social and environmental issues. The need
for them to do so is pressing: As the influence
of state and religion on society wanes, companies
are being called on to fill the gap.
But instead of chiding companies, the ICCA
plays up the benefits of good corporate citizenship.
“We can prove that compliance
with ethical standards has a positive impact
on performance,” says Steiner.
For example, the Dow Jones Sustainability
Indexes (DJSI), which list sustainably operated
companies, beat the MSCI World Index
by 42 points between December 1993 and
September 2004. Likewise, the powerful US
pension fund CalPERS invested $700 million
in companies committed to protecting the
environment and posted gains for its efforts.
In September, the ICCA met with experts
and executives like Rolf-Ernst Breuer, former
chairman of Germany’s Deutsche Bank,
and Richard Edelman, CEO of Edelman
Public Relations Worldwide, to talk about
the corporate code of conduct. “The first
companies are expected to sign up to the
code of conduct as early as 2005,” he says.
The ICCA is also developing an “Ethics Standard
of Excellence” to define the highest
possible level of social responsibility for
international companies, with a role that
extends beyond their usual areas of operation.
Says Steiner: “This is a process in
which Europe, with the help of the ICCA,
can take a leading role.” The ICCA wants to
serve as a think tank in this context and
channel the ethical efforts of corporate
groups. It also wants to create an award for
ethical corporate governance.
Of course, senior managers may be hesitant
to introduce moral and social standards out
of fear of diluting shareholder value. Steiner
reassures them: “The interests of shareholders
are a priority for us as well. But we want
to prove that companies can both satisfy
DAVID M. STEINER is a professor at Boston
University and department chairman of the School
of Education. On behalf of the Institute for Corporate
Cultural Affairs (ICCA), he is studying issues
relating to ethical corporate leadership and social
responsibility. Steiner, who studied philosophy and
ethics in Oxford, England, and earned his Ph.D. at
Harvard University, is a recognized expert in the
fields of ethics and education. He has been serving
as director of the National Endowment for the Arts
in Washington, DC since June 2004. This government
organization’s purpose is to strengthen the
role of the arts in culture and education.
shareholder expectations and serve the
community at the same time.”
Steiner’s argument is backed by Simone
Webley and Elise More. Working for the Institute
of Business Ethics, in Britain, these
two researchers have discovered that ethically
managed companies generate 18 percent
higher profits than their competitors.
Moreover, these companies present a less
volatile price-to-earnings ratio and are able
to increase their return on capital employed
(ROCE) by approximately 50 percent, while
LACK OF TRANSPARENCY AND
ETHICAL AMBIVALENCE CAN
BE VERY COSTLY
this value actually fell for companies without
a code of conduct.
The equation also works the other way
around, because those who take an active
approach to acknowledging and tackling
mistakes generally suffer no loss in sales.
“Lack of transparency and ethical ambivalence
are more expensive than simply
telling the truth,” says Steiner. The biggest
obstacle to introducing new standards is the
gap between short- and long-term expectations.
Says Steiner, “It’s true that ethical
management involves considerable costs up
front, but these more than balance out in
the long run.”
The code of conduct currently being discussed
by the ICCA forbids fraud and discrimination,
promotes transparency and
cultural diversity, and requires companies
think: act 15

p food for thought
ethics and management
to contribute to their communities and uphold
human rights. The Ethics Standard of
Excellence is intended to ensure that all
employees are provided with comprehensive
training and health care coverage, as
well as a humane work environment, fair
compensation and environmentally sound
operations. “The ICCA wants to express
these principles in terms of balance-sheet
items to show companies the impact of
their behavior,” says Steiner, who since
June has also been advising the United
States government on cultural and ethical
matters. The professor recommends that
companies create an ethics board to introduce
the code of conduct in order to ensure
that employees are qualified and in compliance
with standards.
“Credibility and growth”
Roland Berger, founder and chairman of the supervisory board of Roland Berger Strategy
Consultants, believes that ethical behavior is absolutely essential for companies today.
His advice: The more credible a company’s actions are, the greater its growth opportunities.
THINK: ACT Mr. Berger, when it comes to
corporate decision-making, is it possible
to act in a consistently ethical manner, or
does that conflict with the profitability
principle?
ROLAND BERGER One can act ethically, and
one must do so. Companies today are closely
Roland Berger, consulting company founder
scrutinized in terms of what they do, how
they do it—and often also where they do it.
Issues that relate to subjects such as quality,
product safety, employee relations, corporate
commitment and environmental considerations—anywhere
in the world, as it happens
—are openly discussed and analyzed without
individual companies really having any influence
over the respective evaluation criteria.
The more a company displays ethics and
credibility, the greater its opportunities for
growth are.
So are ethics indispensable?
Absolutely! If customers or employees are not
happy with what they find at a company,
they may very well vote with their feet. Those
consequences will be quickly reflected in the
company’s performance on the stock market.
That’s tremendous leverage.
In your opinion, what are the pillars
of corporate ethics?
First of all, a company needs a set of values
that it stands for and advocates. However,
most corporate visions and mission statements
are market- and not value-related.
Second, it needs a clear statement on how it
plans to achieve its objectives. This statement
will also determine which procedures it will
pursue or exclude. Third, there must be principles
in place that govern internal processes
and their interactions. Fourth, you need
clearly delineated responsibilities. Rules and
individual obligations should be monitored.
Companies often lack this culture of responsibility—meaning
you don’t have to look far to
see why there is a lack of credibility.
Management’s reputation is affected by a
few, highly visible cases. Can ethical management
remedy this type of situation?
In many countries, there have been some very
clear cases of management failure that, in the
public eye, have been more influential than
the proper ethical behavior displayed by the
vast majority of companies out there. It takes
consistently unimpeachable behavior as well
as openness and communication to survive
this type of situation. Ethics is not just about
having values, it’s also about conveying
them, both within the company and to the
public. That way, should a company find
itself dealing with a crisis, it will have a
credible base from which it can believably
defend its actions.
16
think: act

Dossier #01
THE FORMULA
FOR GROWTH
COMPANIES THAT AIM FOR LONG-TERM SUCCESS
MUST BE ABLE TO DO MANY THINGS SIMULTANEOUSLY:
INNOVATE, EXPAND, RESTRUCTURE, MOTIVATE
AND, NOT LEAST, INSPIRE TRUST.

DOSSIER #01 The formula for growth
[Hennes & Mauritz]
40%
FASHION FROM MORE THAN 1000 STORES
more shops were opened by Hennes & Mauritz
between 2001 and 2003. In the summer of 2004, the
1000th was opened in Boulogne-sur-Mer, France;
another 65 around the globe were planned for the
fourth quarter. The strategy of boosting sales space
has paid off for the world’s largest fashion chain: From
2001 to 2003, the Swedish company’s profits (EBITA)
grew an average of 29.76 percent annually.
10-year
Source: Roland Berger Strategy Consultants; H&M Annual Report 2003, Chart: Wallstreet Online
STOCK CHART
H&M / DOW JONES
25000%
20000%
15000%
10000%
5000%
0%
1995 96 97 98 99 00 01 02 03 04
comparison against the Dow Jones Index
18
think: act

The formula for growth DOSSIER #01
[Canon]
1992
LEADING PATENT FACTORY
STOCK CHART
Canon / DOW JONES
American patents were awarded to Canon in 2003,
450%
ranking the firm second among the top five research
350%
companies in the United States. International
research facilities are part of the photo and office
250%
equipment maker’s growth strategy. Seventy-three
150%
percent of Canon’s sales come from outside of
0%
Japan. Average annual growth in profits (EBITA)
1995 96 97 98 99 00 01 02 03 04
between 1993 and 2003 was 11.87 percent.
10-year comparison against the Dow Jones Index
Source: Roland Berger Strategy Consultants; Canon Factbook 2004/2005, Chart: Wallstreet Online
think: act 19

DOSSIER #01 The formula for growth
[Home Depot]
54.7
CONTINUOUS MODERNIZATION
dollars were spent by the average Home Depot
customer in the second quarter of 2004. That is the
highest second-quarter number ever for the world’s
largest home improvement chain. Home Depot
constantly invests in modernizing its stores and in
training its employees. Over the last 10 years, the
company has produced average annual profit growth
of 24.99 percent (EBITA, 1993–2003).
STOCK CHART
Home Depot / DOW JONES
1995 96 97 98 99 00 01 02 03 04
10-year comparison against the Dow Jones Index
800%
600%
400%
200%
0%
Source: Roland Berger Strategy Consultants; Chart: Wallstreet Online
20 think: act

The formula for growth DOSSIER #01
[Continental]
30%
UNTOUCHED BY THE SECTOR’S PROBLEMS
STOCK CHART
Continental / DOW JONES
increase was shown by Continental’s stock price from
500%
January to November 2004. The automotive supplier and
400%
tire manufacturer has been growing faster than the sector
300%
as a whole. The strategic foundation for this growth was
200%
provided by the tire replacement business, which
100%
decoupled Continental from new car sales, by consistent
0%
relocation of production to low-cost locales and by the
1995 96 97 98 99 00 01 02 03 04
company’s overall balanced product portfolio.
10-year comparison against the Dow Jones Index
Source: Roland Berger Strategy Consultants; Chart: Wallstreet Online
think: act 21

DOSSIER #01 The formula for growth
[Microsoft]
65
SUCCESS FROM MONOPOLY AND MARKETING
billion dollars (rounded) were held in cash reserves by Microsoft at the
end of November 2004. In recent years, the world’s largest software
company has seldom been the first to take advantage of new technologies
to open up a market, such as the Internet or new standard business
software. Nevertheless, strong marketing and a dominant
position in PC operating systems brought the company annual
average profit growth (EBITA) of 26.18 percent in the years between
1993 and 2003.
10-year
Sources: Roland Berger Strategy Consultants, Barron’s; Chart: Wallstreet Online
STOCK CHART
Microsoft / DOW JONES
2000%
1500%
1000%
500%
0%
1995 96 97 98 99 00 01 02 03 04
comparison against the Dow Jones Index
22
think: act

The formula for growth DOSSIER #01
[Porsche]
82%
LEAVING THE ECONOMY BEHIND
STOCK CHART
Porsche / DOW JONES
was Porsche’s average annual level of profit growth
2000%
(EBITA) from 1994 to 2003. The Stuttgart, Germanybased
sports car maker bucked the sector’s downward
1500%
slide with a combination of a strong brand, technical
1000%
excellence and a nose for trends. The Cayenne SUV came
500%
at the right time, helping the company top its goals in
0%
the 2003/04 business year. Porsche sold 39,913 of the
1995 96 97 98 99 00 01 02 03 04
luxury SUVs, beating its target of 30,000.
10-year comparison against the Dow Jones Index
Source: Roland Berger Strategy Consultants; Chart: Wallstreet Online
think: act 23

DOSSIER #01 The formula for growth
nSANOFI-AVENTIS
The merger with Aventis in 2004 made
Sanofi-Synthélabo the third largest
pharmaceutical group in the world and
the market leader in Europe.
33% In the
year 2003 alone,
Sanofi boosted US
sales by one-third.
SOURCE: SANOFI-SYNTHÉLABO ANNUAL REPORT
»We want to grow in
the generic-drug
business—possibly
through making
acquisitions.«
JEAN-FRANÇOIS DEHECQ, CEO, SANOFI-AVENTIS
OPERATING PROFITS (in $ billion)
1.417
1.817
CAGR: 33 %
2.335
3.321
2000 2001 2002 2003
Between 2000 and 2003, Sanofi-
Synthélabo increased its midyear
operating result (CAGR—compound
annual growth rate) by 33 percent,
a figure achieved by a series of salesand-margin-strengthening
bestsellers
that the group developed in-house.
Farewell to the »V-curve«
GROWTH OR RESTRUCTURING? FOR TOP INTERNATIONAL COMPANIES, THIS IS NO LONGER
AN EITHER-OR QUESTION. SUSTAINED SUCCESS REQUIRES A TWO-PRONGED STRATEGY, ONE THAT
BOOSTS SALES WHILE SIGNIFICANTLY REDUCING COSTS AT THE SAME TIME.
s
SPEED IS WHAT DETERMINES the success of Canon,
the Japanese manufacturer of business machines and
cameras—at least when it comes to printer or copier
output, or to the shutter speeds of digital cameras.
However, at his upper-management meetings at 8
o’clock every morning, company president and CEO
Fujio Mitarai likes to slow things down. Half an hour
before official office hours, the Canon directors meet for
their daily session on the 17th floor of the Tokyo head
office, located on the banks of the Tama River. Over cups
of green tea, they talk about current issues not always
related to the world of big business. Mitarai says of his
seemingly outmoded leadership style, one that cultivates
easy conviviality and informal contacts, “Management
works only through communication. If you neglect
it, you can run the danger of losing touch with reality.”
AS AFFABLE AS MITARAI may appear in the tightestknit
of management circles, he shows himself to be all
the more unrelenting when he deals with the task
at hand. “The most important thing at Canon is profitability,”
is the 69 year-old’s credo. Accordingly, Mitarai
did not shy away from an iron-fisted management style
when he took up his present position in 1995. Within
five years, the new boss let go of the company’s seven
biggest money-losers, including the typewriter, personal
computer and LCD monitor businesses. “If a corporate
group wants to achieve stable growth, it has to carefully
select the business branches that are potentially
profitable, and focus all resources on those,” explains
Mitarai. Nevertheless his strategy was not limited to the
streamlining process. At the same time, he restructured
manufacturing processes and relieved overwhelmed
production assembly lines by making groups
responsible for their own work, an approach known
around Canon as “cell manufacturing.” The restructuring
not only increased employee motivation, it also
reduced operating costs by one-third. The result is that
fewer people now deliver a higher output, and they do
so with a lower rate of error.
THE RESULTS SPEAK for themselves. Over the past
decade Canon was among the companies around the
globe with the strongest growth in value. Between
1993 and 2003, the manufacturer of optoelectronic
devices and office equipment increased its earnings
before interest, taxes and amortizations (EBITA) by an
average of almost 12 percent annually. The secret of
this success is the company’s unconventional mixture
of goal orientation with a trust-based culture. For years
Mitarai traveled from one location to the next to explain
to employees the importance of entrepreneurial thinking
and acting at all levels of the company’s hierarchy.
These appeals would not have availed, however, had it
not been for an aspect of Canon’s corporate culture
called “kyosei.” This term roughly translates as “living
and working together for the common good.” The concept
also includes the company’s social obligations
and lifelong employment relationships, as well as the
personal commitment and continuous training of individual
employees. With this approach, Canon is achieving
what would have been considered unthinkable five
years ago: Pursuing the dreams of growth, without losing
sight of a strict earnings-oriented attitude. Mitarai
intends to continue in this direction. For 2005, the
head of Canon has assigned his people the objective of
achieving or defending market leadership in all core
business areas, and to continue unflinchingly along
the course of reducing costs.
FEW GROUPS HAVE BEEN ABLE to master the art of
combining steady growth with high profitability.
According to an analysis conducted by Roland Berger
Strategy Consultants, only one-quarter of the 1,700
largest companies in Asia, Europe and North America
were able to increase their profits more than their sales
24
think: act

The formula for growth DOSSIER #01
between 1991 and 2003. These “profitable growers”
(see diagrams beginning p.18) have achieved the business
equivalent of squaring the circle. They exploit
economies of scale and scope without having to cope
with the disadvantages that often threaten large organizations.
Among these disadvantages are:
p At the administrative level: complexity and the
creation of hierarchies;
p At the technical level: incompatible processes,
systems and structures;
p At the cultural level: disintegration tendencies.
To complicate matters, the era of global competition
does not allow any time for consolidation periods anymore.
“The game has changed: The classic V-curve—
first trimming down, then growing—is outdated,” warns
Burkhard Schwenker, CEO of Roland Berger Strategy
Consultants. Schwenker says that some formulas have
proven successful in avoiding the risk of growth and
link-up disadvantages. This includes decentralization of
rapidly grown organizations as well as creating clearly
defined areas of responsibility and flat hierarchies.
Also, Schwenker considers a modular and flexible infrastructure
in equipment and IT a key factor so businesses
can quickly react to changed conditions. Finally, the
employees in all areas must be encouraged to be
proactively committed to the company.
COMPANIES HAVE NO CHOICE other than to grow
because margins shrink in saturated markets and, if revenues
remain constant, profits shrink along as well.
Thus, increased earnings require growth in sales. It is a
situation that forces a company’s hand but also opens
up new opportunities. For profitable growth produces its
own momentum, continuously generating new growth.
The generation of free cash flow is a prerequisite. “Such a
flow is created when a corporate group intelligently
improves its cost base and establishes competitive
structures without damaging its core,” write the authors
of a study titled “Finding the formula for growth,” by
Roland Berger Strategy Consultants. Funds released can
flow into the expansion of business activities. This creates
new scale advantages, which, to close the circle, lead to
exceptional operating performance and new cash flows.
SO HOW IS IT FEASIBLE to initiate that kind of a
growth algorithm? Companies wanting to increase their
value continuously according to this formula need to
make a series of simultaneous adjustments. Besides an
ability to grow, the willingness to do so is also fundamental.
Companies capable of growth are those that
have sufficient liquidity as well as suitable products and
structures with which to set out along and successfully
manage an expansion-oriented course. The willingness
to grow brings softer factors into play, such as attitudes,
corporate culture, acceptance of change and a
desire to innovate—or, in other words, trust and confidence
in one’s own capabilities. Put this way, growth
becomes a management function.
BOTH PREREQUISITES, the capability and the willingness
to grow, are exhibited by Nestlé. With 250,000
employees and $74 billion in sales, the world’s largest
food company is fully focused on new markets. It’s an
absolute necessity for Nestlé since the core business is
increasingly coming up against growth ceilings. While
the Swiss company still earns 90 percent of its revenue
from foodstuffs and water, profit margins are stagnating—not
least because of the collective purchasing
power of discount stores. “It was clear that items like
tomato sauce and noodles would not produce any new
value in the long term,” says Nestlé CEO Peter Brabeck-
Letmathe about the interim result of the company’s
strategic reorientation. “I had to identify business sectors
that could create new growth.” The small but highend
pharmaceutical products unit was significantly
expanded, for example. With an EBIT margin of more
than 30 percent, the business unit has outstanding
earning power. It is supported primarily by the US subsidiary
Alcon, purchased in 1977, that specializes in contact
lens care and eye medication.
NESTLÉ IS PINNING even higher hopes on the nutrition-based
business sector that is developing healthenhancing
foodstuffs. One prototype is the LC1 yogurt
that is designed to strengthen the immune system.
Consumers knowledgeable about nutrition are willing to
pay up to 40 percent more for such products. It should
think: act 25

DOSSIER #01 The formula for growth
nSYMANTEC
The US manufacturer of security software
is the global market leader and manages
its sales via excellent relations with over
600 international corporate groups.
32.5%
Symantec increased
its profit margin from
20.3 to 32.5 percent.
SOURCE: SPEAR SECURITY INDUSTRY ANALYST NEWS
»We intend to achieve
massive growth by
visibly outperforming
the market.«
JOHN W. THOMPSON,
CEO, SYMANTEC
OPERATING PROFITS (in $ million)
136
32
CAGR: 58 %
357
532
2000 2001 2002 2003
Symantec handled the 2001 slump
well. Despite the setback of 2000 to
2003, its midyear operating (CAGR)
results increased by 58 percent. The
reason: continuous acquisitions and a
consistent brand-name strategy.
be noted, however, that five years of intensive research
went into the designer food. It is therefore not surprising
that Nestlé is looking for strong joint-venture partners
to help shoulder the load. Jointly with the French
cosmetics group L’Oréal, in which Nestlé holds a 26.4
percent stake, it is developing beauty tablets that slow
down the visible effect of aging on skin, hair and nails.
The financing for such research projects comes from
the “Life Ventures” risk capital fund.
IN ADDITION, Brabeck-Letmathe is counting on
specific purchases to reap increasing economies of
scale and scope in the core businesses. In June 2003
Nestlé acquired Dreyer’s, the second largest US ice
cream producer, for $2.8 billion. Just a short time earlier,
Nestlé had purchased the German company Schöller
Group and the Swiss ice cream brand Mövenpick. For
Brabeck-Letmathe, who very early in his career delivered
ice cream by truck, expansion is by no means an
end in itself. “We’re not looking to be the largest company,
rather the most competitive one.” His personal
motto expresses the desire both to grow and to improve
margins. “The art of good management consists of
achieving both simultaneously,” emphasizes the Nestlé
CEO. Keeping these in balance sometimes also necessitates
that Brabeck-Letmathe repeatedly divest parts of
the company. Although 29 new plants were opened in
2003 alone, 26 existing ones were also sold or closed,
always with the overall objective of optimizing the
group’s portfolio in a value-oriented manner.
THE FACT THAT THE GROWTH curve looks different
for various sectors also holds true for different regions,
as exemplified by the electronics giant Siemens. While
the figures for Germany’s domestic market in the
slumping sectors of communications and transportation
systems point to consolidation, Siemens is on an
expansion course in the United States with its “Siemens
One” program. The growth strategy was conceived by
the designated chairman of the board, Klaus Kleinfeld,
who headed the company’s US operations and will
replace Heinrich v. Pierer as chairman in January 2005.
Kleinfeld’s successor, George Nolen, now can reap the
fruitful outcome of this endeavor. By 2006, he is
expecting additional business of at least €2 billion
from established accounts alone. His cross-selling
strategy aims to provide large-scale customers such as
hospitals, sports arenas and rail companies with complete,
one-stop infrastructure solutions. Siemens just
received a contract worth up to $1.37 billion to install
high-tech explosives-detection systems at all commercial
airports in the United States. “We won the bid
because we have the necessary experience in airport
logistics, building security, baggage handling and X-ray
scanning,” emphasizes Nolen.
THE COMPANY ALSO has an advantage in that
Siemens is increasingly perceived as a domestic entity
in the United States. After all, the company employs
70,000 people there, almost all of them Americans.
Siemens is pursuing its decentralization strategy also
for another reason. In a monolithic organization, mental
barriers and cultural differences can end up inhibiting
growth. “In the past, we did not always understand the
needs of our customers,” notes Nolen. In order to minimize
such conflicts, Siemens depends almost exclusively
on “locals” in all countries, who usually better
understand the regional market and its particular customer
requirements. For v. Pierer, Siemens is, as a
result, “a German company in Germany, a US company
in the US and a Chinese company in China.”
THE SIGNIFICANCE OF “soft” growth factors, especially
during periods of change situations, can hardly be
overestimated. Subcultures often crop up, especially
after mergers and larger-scale organizational change
projects. These can influence employees more than the
actual corporate culture, and can cause divisions to
insulate themselves from one another or even prevent
their integration after a merger. Open communications,
a willingness to discuss matters and corporate management’s
competence to make decisions with the
employees’ backing prevent this type of drift. Successful
growth companies find their identities less in their
products, but in their group-wide set of values. Even if
the wording is similar in many companies, the important
thing is that values are openly agreed upon and
actually put into practice on a daily level. Siemens CEO
v. Pierer considers the integrity of both its business
policies and its responsible employees the core value of
the company. From this he derives principles such as
decency, honesty, sincerity, openness and tolerance.
26
think: act

The formula for growth DOSSIER #01
According to v. Pierer, this type of code of conduct creates
trust and a sense of confidence among both
employees and customers.
TRUST-BUILDING MEASURES designed to reinforce
its own identity are also used by Tchibo Holding, based
in Hamburg, Germany. Founded as a coffee roaster in
1949, the retailer’s everyday goods and services division
has experienced double-digit growth in the last
four years. This division is currently responsible for 60
percent of sales and 95 percent of earnings. This
change could be seen as a cultural revolution that
ended up presenting fundamental questions about the
company’s purpose. Nonfood board member Stefan
Swinka answered these questions after consulting
closely with employees, whose expectations and feedback
influenced the new mission statement. “You can
no longer run a large company on authority alone,” says
an obviously convinced Swinka. Instead, he explains,
he relies on credibility, authenticity and openness—a
sentiment with which the experts at Roland Berger
Strategy Consultants could not be in greater agreement.
They discovered that companies that are strong on
communications and have flat hierarchies are the most
successful. These types of structures increase individual
responsibility, permit faster decision-making and
create more flexibility. In managing innovation and
creativity, three- to five-year objectives are the most
likely to lead to success. They should be ambitious
because only then will they create the necessary pressure.
At the same time, an incentive system in the form
of salary scales, success-based bonuses or similar
types of compensation should be put in place to demonstrate
to employees that good performance is indeed
worth the extra effort.
THESE TYPES OF MECHANISMS also guard against
some common, negative aspects of success, such as
satiation, sluggishness and complacency. A prime
example of a company almost strangled by its own
growth is IBM. The undisputed market leader in mainframe
computers in the 1980s, Big Blue almost missed
the PC trend and was only saved by the smart turnaround
management of its CEO Lou Gerstner, who took
the helm in 1993. Developers had retreated into a realm
of technological insider knowledge while failing to come
up with marketable products. “A lot of people confuse
invention with innovation,” warns Michael Zisman,
»A model European company«
A MARKET LEADERS’ RENDEZVOUS: ROLAND BERGER STRATEGY CONSULTANTS AWARDS
PRIZES TO EIGHT GROWING FRENCH COMPANIES PURSUING EUROPE-WIDE EXPANSION.
Bernard Bourigeaud, CEO, Atos Origin
Atos Origin, France’s leading IT service
provider, was created from the merger of
Atos and Origin. Today, the group is a major
European player, achieving sales of more
than €5 billion, with 45,000 employees in
50 countries.
One of the most sought-after corporate awards in
France, the Prix de l’Entreprise Européenne, was
awarded in September. The competition was judged
by Roland Berger Strategy Consultants, the HEC
Management School and the economic magazine
Enjeux-Les Echos and was subdivided into eight categories.
“We want to promote what characterizes a
European company and highlight the background of
its market success,” explained Vincent Mercier, head
of the Paris office and a member of Roland Berger
Strategy Consultants’ Executive Committee.
Atos Origin, an IT service provider, won the grand
prize in the “More than €3 billion in sales” category.
The jury lauded the company for having
smoothly sailed through the turmoil affecting the
industry sector. Eurofins Scientific, a life science
group, also received a grand prize, this one in the
“Less than €3 billion in sales” category. The company
was acknowledged for its rapid development
from start-up to global player.
Air France received the prize for best merger for
its fusion with KLM, while steel giant Arcelor was
awarded a prize for its fight against cheaply made
goods (B2B). Food giant Danone stood out for its
worldwide sales expansion (B2C), as did Air Liquide,
an industrial gas supplier, for its international sitelocation
strategy, and EADS, the aviation group, for
best research and development. ST Microelectronics,
a semiconductor group, was deemed to have the
best corporate governance.
think: act 27

DOSSIER #01 The formula for growth
nSAMSUNG ELECTRONICS
The South Korean manufacturer of
mobile phones and TFT displays
shines with a strong brand name and
continuous innovation.
31% Between
2001 and 2003, operational
profits rose
31 percent annually.
SOURCE: BLOOMBERG
»Our margins are
visibly better since
we began relying on
high-end products.«
YUN JONG-YONG, CEO, SAMSUNG ELECTRONICS
STOCK MARKET PERFORMANCE
Samsung Electronics
170
132
212
133
303
Kospi
171
307
187
2001 2002 2003 Oct. 04
Between 2001 and 2004, shares in
Samsung Electronics performed better
than the Korean Kospi index, despite the
fact that the group had to struggle with
fluctuating results figures. Samsung’s
strong position in China is one of the
reasons for its high market valuation.
IBM’s vice president of corporate strategy, adding,
“Innovation is the application of an invention for a concrete
problem.” IBM therefore continuously sends its
developers out of their labs to interact with users.
IN THE AIRPLANE INDUSTRY, on the other hand, a
young challenger beat the defending champion: In
2003, Airbus replaced its US competitor Boeing in the
past year as market leader in the civil-aircraft sector
and is now heading for the stars. Under CEO Noel
Forgeard’s leadership, Airbus delivered a total of 161
airplanes in the first half of 2004—12 more than in the
same time period of the previous year. Behind this success
story is an innovative product range, with highlights
such as the successful long-distance model
A330-200. The most recent example of European engineering
might is the new super-sized A380 that from
2006 on will carry 555 passengers over a distance of
14,800 km on one fuel-load. The company already has
150 orders for this plane. At the same time the EADS
subsidiary, which delivers two-thirds of the group’s
sales, is also driving process innovation forward.
Accordingly, an increasing number of tasks are to be
outsourced, including some core ones, such as
research and development. To meet the demands of a
“risk partner,” the company plans to reduce the number
of suppliers to 400, according to Gustav Humbert, head
of production at Airbus. This way, the pressure will be
kept on Airbus’s own subsidiary companies that serve
as suppliers. Through the tough selection process,
Airbus is hoping not only to generate more innovation
power but also to achieve cost savings of €1.5 billion
by 2006.
COST CUTTING ALWAYS carries the danger of saving
cost at the wrong place. For political reasons, often cuts
are made across the board, instead of identifying
money-losers and sparing profitable growth drivers
from the cost-reducing measures. The consequences
can be devastating. “If a company’s source of innovation
is shut down, the source of growth is also lost,”
warns management guru Gary Hamel. Without doubt,
sustained, negative balance sheet figures for individual
divisions should be a sign that core competencies are
overextended or overloaded and that desired reciprocal
relationships with other business units do not exist.
Companies gain a better understanding of this issue
through using a “balanced scorecard of scale and
scope,” with which they can steer and control growth.
The scorecard reveals not only the positive but also the
negative effects of scale and scope. The analysis takes
into account finance-based reference figures measuring
process efficiency and effectiveness, as well as
customer opinions and employee perspectives. If all
key performance indicators are turning up negative, the
consequence is usually to let go of the corresponding
business sector. The strategy of “profitable trimming”
pursued by 18 percent of the companies analyzed by
Roland Berger Strategy Consultants does promise a
positive outcome in times of crisis. However, sometimes
the elation is only short-lived. When thrift turns to
stinginess and restructuring turns to random clipping,
and when there is no money left for research, innovation
or acquisitions, the result is a hollowed-out company
that can’t survive in the long term. If a business sector
fails to attain the size needed, rather than shedding
it, suitable acquisitions could also provide a solution.
AN EXAMPLE OF A COMPANY that is following a consistent
acquisition strategy is Amgen, which, on taking
over its competitor Immunex in July 2002, became the
world’s largest biotech company. Back then, Amgen
wanted to gain access to the new arthritis drug Enbrel,
which combats joint inflammation through regulating
immunological processes. “The merger will strengthen
our financial power, increase the diversification of our
product portfolio and accelerate our long-term growth,”
said CEO Kevin Sharer in justification of the $10 billion
deal. The financial markets shared this assessment. In
terms of market capitalization, Amgen has already overtaken
pharmaceutical giants like Eli Lilly and Bristol-
Myers Squibb. With the high market value in its pocket
as acquisition equity, the company is continuing with
its buying spree. In early 2004 it absorbed Tularik, a
company that is experimenting with promising medications
that could be used in the treatment of cancer, diabetes,
obesity and heart disease. Sharer knows of only
one barrier to growth: human resources. “Not everyone
can or wants to increase their capabilities and commitment
to the degree required by the company’s expansion.”
Perhaps he should have as much faith in his
employees as does Canon CEO Mitarai.
28
think: act

The formula for growth DOSSIER #01
Ways to achieve growth
COMPANIES HAVE A CHOICE: EITHER THEY EXPAND IN A SELF-PROPELLED FASHION, BY MEANS OF ACQUISITION, OR THROUGH FLEXIBLE
PARTNERSHIPS AND ALLIANCES. PICKING THE RIGHT STRATEGY DEPENDS ON RESOURCES AND THE CURRENT MARKET SITUATION.
[INTERNAL GROWTH] While companies that
decide to approach expansion by their own
muscle avoid the risks of a merger or building
networks, they can rarely benefit from exceptionally
large growth spurts. It is therefore
especially imperative to increase operating efficiency
in all business activities. Only this way
provides the generation of free cash flow that
can finance investments and new growth.
[EXTERNAL GROWTH] Size can be bought, even
if it is only at the price of greater risk most of
the time. Companies do experience a growth
spurt through acquisitions and can undertake
globalization projects faster, tap new markets
or adjust to established ones. However, experience
shows that integration expenses are usually
underestimated: 50 to 70 percent of all
mergers are considered failures.
[GROWTH THROUGH NETWORKS] Virtual size
helps balance out growth limitations while
avoiding the unknowns associated with mergers.
Companies that organize into networks
and partnerships profit from the improving
opportunities to steer the agreed-upon distribution
of functions through IT system capabilities.
In the past decade’s fast-growing markets, network
development was a primary growth driver.
The six basic growth strategies
THE “V-CURVE” IS NO MORE: TO BE SUCCESSFUL, MODERN COMPANIES MUST REORGANIZE AND GROW AT THE SAME TIME.
ALL SIX GROWTH STRATEGIES POINT TO THE PARALLEL BETWEEN EXPANSION AND INCREASING EFFICIENCY.
[GLOBALIZATION] [MARKET SHAKEOUT] [OUTSOURCING] [NETWORK BUILDING] [CUSTOMER ORIENTATION] [INNOVATION]
New
markets
Factor
cost
advantages
Marketshare
gains
Economies
of scale
Focus on
core
competencies
Fixed-costs
reduction
Access
to new
markets
Adjustment
of size
disadvantages
Service
and
retention
Savings
in gaining
customers
Differentiation,
edge
Process
innovation
[STRATEGY] With every basic strategy, the goal is to initiate growth and at the same time establish competitive cost structures. For this purpose,
management should consider three fundamental rules: First, leadership must define the goal and position the company in comparison with the
competition. Then, the relevant business drivers of every sector must be identified. Finally, by using an opportunities-and-risks assessment, it
must be determined which goals can reached how and within what time period. The splitting-up of these rules into a concrete time-and-measures
plan is a great challenge for most companies, according to surveys conducted by Roland Berger Strategy Consultants.
think: act 29

DOSSIER #01 Trust
30
think: act

Trust DOSSIER #01
How trust drives growth
CONTROL IS OUT, TRUST IS IN. COMPANIES THAT INVEST IN TRANSPARENCY, DELEGATE RESPONSIBILITY AND RESPECTFULLY
COMMUNICATE WITH THEIR EMPLOYEES HAVE AN EASIER TIME OPENING UP NEW AREAS OF GROWTH. A PREREQUISITE FOR THE
TRANSFORMATION INTO A TRUST-BASED ORGANIZATION IS TOP MANAGEMENT’S COMMITMENT TO MAKING IT HAPPEN.
s
WHEN THE FRENCH car manufacturer Renault
acquired a 36.8 percent stake in its rival Nissan for
€5 billion in the spring of 1999, the industry
looked at the Japanese company’s $17.7 billion
debt position and shook its head. Five years later,
Renault CEO Louis Schweitzer can pat himself on
the back. The former economic basket case has
transformed itself into a money-making machine
and generated almost €1.7 billion, or two-thirds, of
the French group’s €2.5 billion in earnings in the
past year. “Nissan was a good company with a
management problem,” says Schweitzer of the situation
before Renault came aboard. When asked
about the reasons for the partnership’s success,
the CEO takes care to emphasize psychological
factors, “To emerge from a crisis it’s extremely
important to demonstrate trust and confidence in
people’s abilities and good will and to give them an
opportunity to come up with the solutions themselves.”
Renault, says Schweitzer, respected the
interests and know-how of the Japanese from the
very beginning.
THE STORY ABOUT THIS “merger without merging”
(Euro Business) shows that intangible values
such as respect, transparency and confidence are
gaining even greater significance in a globalized
economy with its multinational groups and worldwide
networks. Ultimately it’s about making the
most of entrepreneurial opportunities, as happened
within a relatively short period with the
Renault-Nissan alliance. The joint platform strategy
halved the partners’ development costs while doubling
expertise. The company’s combined purchasing
power saves $500 million in costs annually. The
potential of such improvements in operating performance,
no matter how beneficial they might be
for the balance sheet, can only be fully realized if
both partners have developed a common objective
for the future of their companies and can thereby
avoid conflict and inefficiency.
SUPPOSEDLY SOFT FACTORS, such as a willingness
to change and a respectful communication
style, play key roles in implementing a parallel
strategy of both continuous restructuring and
expansion, according to the “Growth through trust”
study by Roland Berger Strategy Consultants. A
company cannot be successful if it is not prepared
to grow, explains Burkhard Schwenker, CEO of the
consulting firm. “The willingness to contribute to
high growth is created in a cultural environment
that considers performance a value and demands
outstanding personnel management,” he says.
Sought-after qualities include ambition, a thirst for
competitive endeavor, and commitment. “A company
must encourage its employees to pro-actively
pursue ambitious goals,” he adds.
ROLAND BERGER Strategy Consultants identified
transparency, quality awareness, low transaction
costs, and a culture of permanent innovation as
the basic elements of such a trust-based organization.
In its analysis of various international outperformers,
the consultancy discovered that companies
that transparently communicate values, objectives,
requirements and feedback make it easier for their
employees to identify with the company. The quality
of work and products, a major criterion for a company’s
market success, is often a direct consequence
of management’s trust in the employees’ ability to
perform. Quality control methods alone do not kick
off quality improvements. It is the comparatively
higher levels of engagement in a trust-based organization
that lower transaction costs, because they
render formal control mechanisms and monitoring
tasks unnecessary. This approach also unleashes
more creativity in a working environment where
employees feel they can try out new ideas and freely
discuss them without having to worry about having
the fruit of their labors taken from them. “A company’s
success can be increased only when employees
are ready and able to contribute their individual
expertise,” says the US innovations expert and MIT
senior lecturer Peter Senge. It is of great importance
that all involved develop a shared goal, if the joint
efforts are to succeed.
IT IS ESPECIALLY IMPORTANT to proceed in an
open and honest manner during restructuring
phases, when employees and customers will be
worrying about jobs and fulfillment of orders. “In
uncertain times, trust can only be created if management
is able to communicate hard truths while
also standing by its announcements and keeping
its promises,” says Thorsten Grenz, CEO of Mobilcom,
a German mobile communications provider.
Measures serving to create trust also include a
joint sense of accomplishment in achieving milestones.
“Once we were profitable again in the
mobile communications business we had a party
and hung a big, fat zero on the wall,” remembers
Grenz about the renewed sense of togetherness in
the company. In the meantime, Mobilcom is back
on track, growing faster than the market as a whole
and putting the squeeze on the top dogs with its
innovative mobile services.
COMPANIES THAT ARE seriously looking to create
a trust-based organization face a key issue: how
to begin? “Our discussions with management executives
have shown that the positive elements of a
growth-oriented, trust-based culture are familiar to
most companies. However, there tends to be something
missing in the execution,” says the CEO of
Roland Berger, Burkhard Schwenker. He recommends
that the transformation to a trust-based
think: act 31

DOSSIER #01 Trust
Hilti Chairman Michael Hilti (left),
Renault CEO Louis Schweitzer: “It’s extremely
important to demonstrate trust and
confidence in the abilities of employees.”
organization should be executed as if it were a
change management process, with responsibilities
assigned and plenty of freedom given to employees.
Schwenker believes that the following six
action areas are central to this:
p
excellent leadership,
joint formulation of strategy,
transparent corporate governance,
decentralized organizational structure,
trust-enhancing personnel work, and
fair performance evaluations.
SKEPTICS, WHO CONSIDER the hard work
involved in dealing with soft factors a complete
waste of time and money, might rethink their position
after taking a look at the small Alpine state of
Liechtenstein. The biggest company in the principality,
the international construction supplier Hilti AG,
has been working on its corporate culture for the
last 20 years. “The fact that we have always paid
attention to people and corporate culture has nothing
to do with philanthropy, but instead is one of
the big secrets of our success,” says Michael Hilti,
company chairman and the son of the company’s
founder Martin Hilti.
TODAY HILTI HAS A REPUTATION across the major
construction sites of the world as a leader in innovation
in demolition technologies and constructionrelated
fastening systems. This can be attributed to
the unusual creativity and above-average motivation
of the company’s 14,500 employees. It is also a
result, adds Michael Hilti, of the full commitment of
his top management. Even the four board members
invest ten working days every year in culture training,
as the three-day sessions are called at Hilti, in
which each division worldwide discusses values
and determines how it is intending to accomplish
both its own and the corporate objectives. Michael
Hilti warns against the view that investing in a trustbased
culture is a one-time endeavor. “Corporate
culture is not a project with a set time frame like
reengineering, but rather an integral component of
everyday business.” Regular surveys of employees
and customers enable the group to measure its corporate
culture-related progress. The most profitable
units are indeed those in which employees work
with the highest degree of commitment. The reason:
Customers are more satisfied there.
THE RULE SEEMS almost too simple, but it
works, says Michael Hilti. Value-oriented management
raises employee satisfaction and work morale,
which in turn increases customer satisfaction and
loyalty. “That’s how we set a cycle in motion that
generates sustained, profitable growth.”
32
think: act

Commentary DOSSIER #01
Seven surefire ways
to run your company
into the ground
REGARDLESS OF WHETHER YOU RUN AN INTERNATIONAL CORPORATE GROUP OR
A MOM-AND-POP STORE: WIRTSCHAFTSWOCHE AUTHOR FRIEDRICH THELEN HAS
DISCOVERED RULES OF FAILURE APPLICABLE TO ALL ENTERPRISES.
RULE 1: GET THE WHOLE FAMILY INVOLVED!
If you are a family business, do what Napoleon did.
The emperor placed blood relatives on thrones in
countries he had conquered throughout Europe.
Your Napoleon-like conviction that those family ties
in high places will last forever will surely let you
outsmart all well-intentioned non-family advisors.
The historic outcome is well known, as well as the
demise of many family-run companies—which did
not get to retire on St. Helena, however.
RULE 2: BELIEVE IN PROPAGANDA!
Allow your confidence to be shaken by the success
stories of your competition. After all, they are also
active in the same market as you are. Experts
working for your rivals would never spread
untruths, now would they? All you need to do is
invest in these “guaranteed success” technologies.
Better yet, go right to your finance director and ask
about the next line of credit or capital increase; just
don’t worry anymore about the
likelihood of your new business
ideas being implemented. The situation
gets even clearer when
one of your competitors runs into
difficulties. All you have to do
now is hold on to his shirttails. There’s no faster
way to fail than by perfectly duplicating someone
else’s mistake.
RULE 3: STOKE THE COMPETITION!
The end is in sight when all of your employees are
more focused on polishing their own spotlights and
dimming those of supervisors and colleagues than
enhancing the competitiveness and profitability
of your business. So just add a little more gasoline
to the fire in order to really heat up internal power
»Consistently avoid
the boring meetings
with financial experts
and controllers.«
struggles. In-house battles between colleagues
won’t increase your company’s operating results,
but will give you a head start on achieving disaster
quicker. And whenever you learn about a senior
manager hoarding knowledge as a weapon, reward
that person. This manager has what it takes to
pound another nail into your corporate coffin.
RULE 4: BLOW OFF ANALYSES!
What good are statistics, reports or even centralized
data exchanges? Don’t slow yourself down
with reporting that would only highlight the weaknesses
of your company and consistently avoid
the boring meetings with financial experts and
accountants. This will keep your head free for big
goals and will ensure that you drown much faster in
red ink than you had ever hoped possible.
RULE 5: TRUST YOUR FEELINGS!
Success is the result of gut feeling. Therefore blindly
trust your instincts and don’t
let so-called experts tell you
otherwise. Avoid all contact to
your in the know people and
don’t obtain advice from external
sources. You’ll be saving
irritation and money, and be assured to keep
repeating the tried-and-true mistakes.
RULE 6: GET IN OVER YOUR HEAD!
Ensuring business success requires that you not
shy away from any effort. Initiate as many projects
at the same time as possible and forgo any quantitative
goal-setting methods. Customize all projects
according to your taste, stick your nose into everything
and use nightly phone calls to put your team
into a state of constant stress. This way you ensure
FRIEDRICH THELEN, 63, heads the office
of Wirtschaftswoche, the most successful German
business magazine, in the country’s capital Berlin.
A former guest fellow at the John F. Kennedy
School for Government at Harvard University, the
journalist with a doctorate in law is a much sought
after and popular TV commentator and author on
economic and sociopolitical matters.
that the entire company admires your dedication,
that your projects die on your desk and no room for
important tasks remains. A lack of capacity and a
very noticeable deficit in expertise are sure signs of
coming bankruptcy, especially in times of extreme
expansion measures.
RULE 7: PUT ALL YOUR EGGS IN ONE BASKET!
Relying on just one major customer is indeed
tempting—and for good reason. Why in the world
should you bother to go the extra mile looking for
suitable customers out of hundreds of companies,
when your earnings are already pouring in? Why
bother driving yourself crazy meeting the piddling
requirements of small-account customers, when
the prize hen already resides in your coop? Don’t
listen to the worrywarts undoubtedly present on
your board of directors. They will want to persuade
you that the prize hen too will eventually fall off its
perch, due to old age.

DOSSIER #01 Interview
>>The time for indulgence is over

Interview DOSSIER #01
»The stability pact will not be
undermined. It is not to be viewed
as merely a list of invalidating
circumstances. It is and remains
the EU directive.«
merous attractive markets in these new EU states,
such as communications and mobility.
In other words, you’re saying that highly skilled
workers and consumers with purchasing power have
been added.
That’s right, and even the biggest skeptics have by
now noticed this. For example, Polish farmers, who
for a long time had been against the idea of EU membership,
have benefited most from this move. This
has become evident within a mere six months. Naturally,
there are tremendous differences among the
potential growth dynamics of the individual countries.
But wasn’t that also the case in the early
stages of the European Community and European
Union? Just think of Ireland.
High on the agenda at the Lisbon summit in the
spring of 2000 was economic, social and environmental
reform of the EU by 2010. The main goals
were economic growth, full employment and sustainable
development. Four years later, in April 2004,
Romano Prodi, the predecessor of the European
Commission’s current president, José Barroso, criticized
the EU member states for failing to take on the
responsibility required to achieve these goals. An indication
of this failure is that hundreds of thousands
of people in the eurozone lost their jobs in 2003.
Still, there is no reason to throw out the directionsetting
ideas of Lisbon simply on account of inaction,
for which member states have rightly been reprimanded.
The Lisbon agenda clearly indicates
which factors have a key impact on national structures.
These are the factors we must increasingly
focus on following enlargement. In the first instance,
we must increase our investments in education and
knowledge acquisition. It will be crucial also to expand
networks, raise the competitiveness of industry
and the service sector, and reform health care
systems in accordance with the demographic structures
of member states. After all, what is the EU? It is
the realization of the idea of partnership between
governments, employers, workers, trade unions and
other associations. They are all involved in transnational
governance, and their challenge is to structure
it in a way that benefits all members.
Are the 10 new EU member states facing tasks similar
to those of the 15 countries of the old European
Union?
They certainly are. The structural challenges the
new members have to come to grips with are those
the old member states themselves had to master
when they were the newcomers. The member states
have to implement a macroeconomic policy oriented
toward growth and stability while pressing ahead
with economic reforms aimed at boosting growth
across Europe. In addition, they have to improve sustainability.
In the economic sphere this means making
adjustments in line with the aging of their
populations; for social policy it means creating and
preserving jobs; and in terms of ecology, from a
European perspective, it primarily means investing
in the transportation and energy sectors.
And what are the major differences between these
two groups of member states?
For one thing, the unemployment rates and budget
deficits of the new members are about twice as high
as those of the EU-15. Also, the per capita income of
the people living in those countries is less than onehalf
the income of their counterparts in the old member
states. However, even as we look at these
figures, I should warn against thinking only in terms
of the arithmetic average. If we compare the new
member states with one another directly, we see
considerable differences among their rates of inflation,
unemployment figures, hourly wages, education
levels, consumer behavior, health care systems
and many other parameters.
Can the new member states deal with all these
challenges without outside help?
The answer to that question differs depending on
which country you’re looking at. We must be very
careful not to underestimate the challenges. That’s
why country-specific recommendations must take
into account the respective country’s particular circumstances.
For example, we may in some cases
have to extend the adjustment period. If so, however,
we must always be mindful of the fact that our
ultimate goal is the sustainable stabilization of the
European Union as a whole.
The new member states are now subject—as indeed
the old ones are—to strict monitoring of their economic
and budgetary policies. This includes an
assessment of their fiscal situation. We already
know that Cyprus, the Czech Republic, Hungary,
Malta, Poland and Slovakia have all failed to cap
their fiscal deficits at 3 percent of GDP, and that
Cyprus and Malta each has a national debt that
exceeds 60 percent of GDP. What conclusions has the
Commission drawn from this state of affairs?
Well, it is not immediately going to start monitoring
their fiscal policies more closely or imposing sanctions.
These measures will be applicable only once
these countries have been incorporated into the
eurozone. This differentiates them from Greece and
the other countries that have already introduced the
euro as their currency. However, this approach does
not mean that we are not carefully studying the
medium-term budgetary plans of the new member
states, or that we are turning our back entirely on
making recommendations. After all, these member
states are to be incorporated into the eurozone in the
foreseeable future. We shall therefore be indicating
to them at a later date how they might gradually set
about eliminating their budget deficits and fulfilling
the convergence criteria. The case of Greece has
shown that we must proceed in a truly thorough and
transparent manner if we wish to avoid the unhinging
of the EU as a whole. Insecurity in no way constitutes
a basis for healthy growth across the new
European Union.
Hans Eichel, Germany’s finance minister, estimates
that his country’s deficit in 2004 will again exceed 3
percent—its second violation of the stability pact in a
row. The European Commission has communicated
its understanding both for Germany and for France,
which also has a deficit in excess of the limit. This
attitude might be very welcome to certain finance
ministers. Financial authorities such as Edgar
Meister, a board member of the German Bundesbank,
and Jean-Claude Trichet, president of the European
Central Bank, on the other hand, take the
contrary position and are indeed extremely worried
about this. They view this policy of understanding as
a danger to the euro.
think: act 35

DOSSIER #01 Interview
are either experiencing or facing the possibility of
ongoing recession. Other states have had to deal
with—or are now dealing with—unforeseen events
that have led to their running up a budgetary deficit
within a very short period. In this situation, it’s not
enough simply to insist on the terms of the treaty.
We need to find ways and means for our member
countries to lift themselves out of these crises by
themselves. The consensus is that the key parameters
of the stability pact will not be altered. However,
we must find new instruments that will help us react
more flexibly to the economic difficulties of any
member state
»We must find new
instruments that will help
us react more flexibly to
the economic difficulties
of any member state.«
The stability pact has an important function. It is
an EU directive, making it a mandatory reference
parameter for the national budgets of the member
states. Among its fixed requirements are a maximum
deficit of 3 percent and a maximum public debt
of 60 percent—with both figures calculated as a
share of GDP. But we must also firmly bear in mind
what the initial situation was when this stability pact
was concluded. Only then can we design a monetary
and economic policy that is realistic both for today
and for the future. Now that the EU has enlarged
from 15 to 25 countries, this consideration is becoming
even more important.
When you talk about the initial situation, do you
mean the Maastricht Treaty of 1993?
Yes, exactly. Back then, a little over a decade ago,
there were only 12 member states. At that time a
growth rate of 3 percent didn’t seem unduly optimistic.
But since then we have had to face up to
some additional facts, such as that many countries
This sounds almost too good to be true: The Commission
is displaying leniency and understanding, even
though many suspect member states may have
been presenting false statistics for years to gain the
financial benefits of European Union membership.
That’s not the case at all. We at the Commission will
never get to the point where we overlook wrongdoing
with a wink and a smile, and politely ask the culprits
to do better in future. No, all the facts that have
recently come to light indicate just one thing: Every
country has its own individual history when it comes
to financial policy. This is why for me it is a question
of monitoring and analyzing all these complex circumstances,
so that we can pursue a sustainable
financial policy. After all, how did things look in
Germany back when its economy was still going
strong? Did anyone seriously entertain the notion
that lean years might be just around the corner? No,
of course they didn’t. And that is an example of why
self-criticism is the principle means of immunization
against repeating past mistakes.
How does the Commission intend to ensure that
there will be no future violations of the stability pact?
The precautionary principle is not simply a romantic
relic from the era of the agricultural subsistence
economy. For the member states it is the only possible
means of reacting to economic fluctuations without
outside help and of maintaining a balanced
budget regardless of the perturbations of the economic
cycle. The Commission will be steadfast in
pushing for the implementation of this principle.
36
think: act

Interview DOSSIER #01
What does that mean in plain language?
It means that the total debt ratio will be much more
strictly observed and monitored in the future than it
has been in the past, especially during periods of
economic prosperity. We are convinced that the willingness
to enact reforms should not take a back
seat to any policies motivated by pressing shortterm
needs. Warning countries of impending economic
problems is much more effective than
complaining about them once they’ve become manifest.
But to be in a position to issue these warnings,
we have to receive, verify and analyze national
budgetary information and the long-term economic
and business plans well ahead of time. Only then can
we issue corrective recommendations.
How do you intend to ensure compliance?
Rest assured, we shall see to it that our recommendations
are implemented. The time for leniency and
understanding is over. The stability pact will not be
undermined. It is not to be viewed as merely a list
of invalidating circumstances. It is and remains the
EU directive.
But none of this will help if the figures submitted by
member states are incorrect, or if warnings are
ignored. After all, national governments ultimately
decide their own labor market policy, shape their
social system as they see fit, and set their country’s
level of taxation, and they do this entirely independently
of Brussels.
Naturally, the case of Greece came as quite a shock,
despite the fact that in 2000 the Luxembourg-based
statistical office, Eurostat, had already begun to
audit the data it had received from Athens. Nevertheless,
the size of the discrepancies is very much a
cause for concern. But what sense would it make to
ignore our constructive recommendations? Twothirds
of the total trade volume of the expanded
Union takes place within Europe. Does it not therefore
seem entirely sensible to take heed of our
reform proposals? Of course, I should add that we
too must exercise self-criticism as we go about our
work. We need to implement internal reforms and
publicize our proposals and successes to the European
public more broadly and transparently.
JOAQUÍN ALMUNIA, 56, is the EU commissioner
for economic and monetary affairs. He was
born in Bilbao in the Basque region of Spain. After
studying law and economics at the University of
Deusto (Bilbao) and in Paris, he lectured on labor
law at the University of Alcalá de Henares in
Madrid, and participated in the Harvard “Senior
Managers in Government” program. Almunia entered
politics in 1974 as a member of the UGT trade
union, which has close links with the Socialist
Labor Party of Spain. He became a member of the
Spanish Parliament in 1979. During the premiership
of Felipe Gonzales, Almunia took on greater
responsibility, initially as the minister of employment
and social security from 1982 to 1986, then
as minister of public administration until 1991.
Almunia has a reputation for being dialog-oriented
and open to compromise. He has already begun to
deal with the hottest issue of them all: reform of
the European stability pact.
The penalty for exceeding the 3 percent maximum
can amount to as much as 0.5 percent of a country’s
GDP. The EU budget could make good use of those
additional funds, couldn’t it?
In my opinion it simply isn’t advisable to impose
an additional debt burden on countries in this way,
thereby further constraining entire national
economies. The question once again is, What is the
best course to take if the growth rate is very low and
national debt can’t be kept below a certain limit? We
have to take such phases of stagnation into account
in the interests of the entire community of states.
Isn’t there a risk that member states, especially the
new ones, will note the bad examples, and that budget
discipline within the EU will weaken across the board?
I’m hoping for the opposite. After all, the states exchange
information and can learn from each other’s
mistakes. Naturally, much more can still be learned.
But in many cases the actual situation within the EU
is more complicated than it seems. We have to find
ways to set a realistic and future-oriented agenda,
preserve what is tried and tested, critically analyze
what we currently have, and be open to change. We
need to start rethinking what we know.
How do you envision this rethinking process?
It makes little sense always merely to be rushing
around repairing the mistakes of yesterday. Our strategy
is about avoiding mistakes in the first place. For
this the individual economic policies of the EU member
states need to be more effectively coordinated.
What new procedures does the Commission have up
its sleeve for bringing this about?
Careful observation of national budgets and more
transparency about problems and possible negative
developments, without losing sight of the overall
goal of creating an economically stable EU. This kind
of constructive partnership has been practiced far
too little in the past. In many cases, our recommendations
were down on paper but never implemented.
But pressure and sanctions from the top will go only
so far in bringing about the necessary change in the
way member states go about looking at the issues.
According to reform proposals, more attention needs
to be paid to the quality of national expenditure.
Moreover, expenditure on education and research, it
is suggested, should be removed from the calculation
of national deficits. It's an interesting fact that
the new member states have on average invested
more in education than have the old member states.
Would allowing the deduction of spending on education
be a sensible signal?
That needs to be examined carefully and discussed,
bearing in mind that the goals of the stability pact
are unchanged. We also have to make sure no obstacles
stand in the way of structural development.
think: act 37

p industry report
trends and sectors
The shape of things to come
Gas to liquids, T-rays, public transportation and polytronics: current trends,
analyses and research reports shed light on the markets of the future.
gas to liquids
Liquid fuel from natural gas, or “gas to liquid”
(GTL) as it is known in the industry, is becoming a
real alternative to “black gold.” The reasons: In a
time of rising crude oil prices, GTL helps conserve
oil reserves and limits the amount of harmful emissions
when burned. The GTL process is based on
the Fischer-Tropsch method, developed in Germany
in 1920. It transforms natural gas and unusable
companion gases into synthetic oil. A field test by
Shell and Volkswagen showed that GTL reduces
the emission of unburned hydrocarbons by 63
percent, of carbon monoxide by 91 percent and
of carbon dioxide by 4 percent. According to
DaimlerChrysler, by 2010, GTL will be irreplaceable
at the pump.
In addition, GTL can help fully exploit isolated
natural gas reserves, a market that could well be
worth hundreds of billions of barrels of GTL. Just
these resources would be sufficient to cover global
energy needs for 25 years, according to Roland
Berger Strategy Consultants. The large oil companies
are already in the GTL business. For example, Shell
has been producing GTL since 1993 in Malaysia
(below) and is currently building a new facility in
Qatar that is expected to produce 3 million tons of
GTL annually.
t-rays
Ubiquitous and yet barely detectable, mysterious T-
rays are currently objects of developers’ desire, as
they try to wring useful market-ready products from
them. Terahertz waves lie between microwaves and
infrared light, and are considered one of the last
unexplored parts of the electromagnetic spectrum.
T-rays draw great interest because of their qualities.
For example, without the side effects of X-rays, they
can penetrate clothing and packaging, or even illuminate
teeth in the search for cavities (see photo).
Researchers consider T-rays revolutionary for biomedicine.
Because cancer cells grow faster than normal
tissue, they contain more blood and water. These
attributes mean cancer can be made visible by T-rays
at a stage that could not otherwise be diagnosed. The
British firm Teraview, a spinoff from Toshiba Research,
is already selling machines for cancer diagnosis.
T-ray scanners can also recognize dangerous biological
or chemical compounds when scanning packages.
British manufacturer Qinetiq is testing machines that
can identify ceramic knives and plastic explosives
during security checks. T-rays themselves are also
causing new security needs: Privacy advocates see a
danger for the confidentiality of mail, with every
letter now legible through its envelope.
38
think: act

ireland’s public transportation is the most efficient in europe
industry report f
public transportation
In Western Europe, local public transportation was long
seen as something provided by the state. However, local
and national governments’ diminishing spending power
has pushed transport companies to do without their
previous levels of subsidy and to rely on riders paying
more of the bills. The result is not necessarily worse
service, but rather increased efficiency, as an analysis by
Roland Strategy Consultants shows. For example, transport
companies in the UK offer noticeably more services,
measured in kilometers traveled per vehicle, than
companies with comparable budgets in France. A comparison
of Sweden and Germany reveals a similar picture.
On the other hand, it would be wrong to conclude
that subsidies should be eliminated entirely. Systematic
incentives and open competition for contracts are more
sensible means of increasing the pressure on transport
companies to become more efficient.
Ireland’s public transportation is far and away the most
efficient, while simultaneously having the lowest level
of state subsidy. Belgium displays the exact opposite
tendency, with a 75 percent level of subsidy.
efficiency and subsidies in public transport
Efficiency – supply as a share of
total budget (in vehicle-km)
Ireland
UK
Switzerland
USA
Sweden
Germany
Austria
France
Belgium
Subsidy share – public funds as proportion of total budget
Source: Roland Berger Strategy Consultants
polytronics
Microchips do not have to be made of expensive silicon.
Conductive polymers—polytronics—are opening up completely
new possibilities for the mass production of electronic
components. For example, the Institute for Print
and Media Technology at the Technical University of
Chemnitz (Germany) has developed polymer transistors
that can be printed in large numbers in a very short
space of time (see photo). The process is particularly
well suited for simple and short-lived electronic parts,
such as inventory stickers, luggage labels or packaging
equipped with mini-chips. Companies including
Siemens, Merck and MAN-Roland have all played a role
in developing the polytronics. In the manufacturing
process, plastic molecules are printed in extremely fine
layers on top of one another. They are not yet direct
competition for silicon, however: Their computing
power is smaller by a factor of 100.
Polytronics are practically perfect for hyper-thin and
flexible objects. As a multi-functional foil, they could
simultaneously contain a chip, an antenna, a sensor, a
small display and a battery.
think: act 39

p industry report
automotive

automotive
industry report f
Together in the fast lane
To alleviate pressure generated by rising costs and the need to innovate, automobile
manufacturers are increasingly transferring development and production tasks to their suppliers.
With the right cooperation strategy, productivity and quality can show double-digit increases.
:
Wendelin Wiedeking, Porsche’s CEO,
was worried. In June 2004—and for the
second time in just four months—the
Stuttgart, Germany-based car manufacturer
had to recall its Cayenne model. After experiencing
problems with the cable harness in
February, the car now had defective seatbelts.
Another warning signal surfaced in
the malfunction rankings compiled by
ADAC, a German automobile club. Porsche
had recently dropped a few places because
its new cars broke down up to three times
more frequently than those of its German
competitors. The company’s solid reputation
was at stake, and Wiedeking placed the
blame firmly on the company’s suppliers.
He accused them of modifying production
processes to cut costs without coordinating
the changes with car builders. “At some
point I’ll reveal the names of the suppliers,”
Wiedeking said angrily in June.
Despite the company’s sustained success, the
Porsche CEO had now been acquainted with
the downside of growth. At Porsche’s new
plant in Leipzig, Germany, where the
Cayenne is assembled, suppliers were
responsible for almost all aspects of production.
Porsche, in turn, had kept less than 10
percent of the production process in-house,
putting it well below the industry average.
For example, the engine of the six-cylinder
Cayenne V6 does not even come from the
original equipment manufacturer (OEM).
Volkswagen delivers the engine block, and
the Porsche engineers have only reworked
the motor management. Nevertheless,
Porsche’s fate does not depend on its suppliers,
says Wiedeking, as long as the company
has a handle on all of the processes in its
value chain. “The traditional role of OEMs
is changing,” says Professor Ferdinand
Dudenhoeffer, head of the Center for Automotive
Research (CAR) in Gelsenkirchen,
Germany, outlining the consequences of this
development. “They need to become more
like conductors who don’t play instruments
AUTO MANUFACTURERS HAVE LESS
AND LESS TIME TO READY NEW
DEVELOPMENTS FOR THE MARKET
themselves but can draw the best out of
their musicians.”
The importance of the interplay between
car manufacturers and suppliers is also
highlighted in a study titled “Automotive
Engineering 2010” by Roland Berger Strategy
Consultants. According to this study, US auto
manufacturers have less and less time to develop
a market-ready product once the design
is established. From 1994 to the
present, this development period has been
cut in half to around 18 months. The global
rollout of production models is also accelerating.
In the early 1990s, Volkswagen took
more than five years to get the Jetta, already
introduced in Germany, trimmed out to suit
the tastes of Chinese buyers. In comparison,
with its Sunny, Nissan recently took less
than six months to do the same.
However, research and development budgets
are not keeping up with this accelerated
process. On average, a mere 4 percent of total
revenue has in recent years been made
available to engineers for new developments.
“That won’t change anytime soon,”
note the study’s authors, Mahesh Lunani
and Wim van Acker. “The OEMs need to
develop more with fewer funds, and to do
this they need the expertise of suppliers.”
Researchers at the Fraunhofer Institute for
Production Engineering and Automation in
Stuttgart believe that to meet these challenges,
the OEMs will be forced to continue
reducing the proportion of production they
keep in-house. This is forecast to drop from
35 percent today down to as little as 20 percent
by 2015.
That’s just one of the reasons why many
CEOs in the auto industry are adopting a
cooperative tone when dealing with their
suppliers. “We rely on close cooperation
between the development division and suppliers,
starting with the first pencil sketch,”
says Martin Winterkorn, chairman of the
board at Audi. Tony Brown, head of purchasing
at Ford, wants to reduce purchase
prices by 15 percent and is taking pains to
maintain good working relationships. He
says, “The pharaohs got bricks from the
SUCCESSFUL MANUFACTURERS
ARE DISTINGUISHED BY AN ABOVE-AVERAGE
WILLINGNESS TO COOPERATE
Israelites by the ton, but I doubt they were
getting top quality.” His credo is, “Both sides
need to feel good about what they’re doing.”
An above-average willingness to cooperate
with suppliers does indeed appear to be a
key criterion for success. This was substantiated
in a study of Toyota Motor Corporation
conducted by Jeffrey Dyer and Nile Hatch
at Brigham Young University’s Marriott
School of Management in Provo, Utah. The
two professors were trying to discover why
think: act 41

p industry report oems will reduce in-house production from 35 percent today to 20 percent in 2015
(From left to right) Tony Brown (Ford), Wendelin Wiedeking
(Porsche), and Bill Fluharty (Johnson Controls):
“The traditional role of car manufacturers is changing.”
Toyota’s US branch chalked up higher profits
than General Motors, Ford and Daimler-
Chrysler (its three biggest competitors)
combined, despite the fact that Toyota
builds fewer cars in the US than its domestic
competitors. According to Dyer and
Hatch, the key to the company’s success has
been a consistent exchange of knowledge
between the group and its suppliers. “Toyota
provides its US partners with a tremendous
amount of expertise and technology geared
toward increasing productivity, particularly
with respect to manufacturing processes
specific to the production of its own vehicles,”
concluded the researchers.
Alliances with suppliers and learning teams
are the two pillars on which Toyota’s prominence
rests. In particular, Toyota is more
physically present than its competitors. For
example, the company sent its in-house consultants
to suppliers an average of 13 days a
year during the research period, which
spanned 1990 to 1996. In this way not only
did the various parties reduce the number
of production errors by a seventh, but
they also decreased the inventory level of
COMPARED WITH ITS COMPETITORS,
TOYOTA IS CONSIDERABLY MORE
PRESENT AT ITS SUPPLIERS’ FACILITIES
Toyota-specific parts by a third. At the same
time, supplier productivity in the manufacture
of these components increased by a
hefty 36 percent.
In comparison, General Motors, Ford and
DaimlerChrysler each invested only six
consultant-days per year and performed
worse in all key areas, even though their
parts are manufactured in the same plants
as Toyota’s. “We would not be where we
are today if we had not collaborated with
Toyota,” says George Hommel, former chairman
of Continental Metal Specialty Inc., a
supplier based in Stanton, Kentucky. He
adds, “We owe 75 to 80 percent of the insight
we gained from our customers to Toyota.”
This observation is all the more surprising
because most top managers still preach that
it takes a strong negotiating position to
achieve low unit prices. For example, Bernd
Bohr, head of motor vehicle engineering at
Robert Bosch GmbH, which, like Porsche, is
also based in Stuttgart, cannot echo Hommel’s
praise. “Although car manufacturers
worldwide are touting partner relations
with suppliers, the proposition varies widely
depending on region and brand.” Guenter
Baumann, chief operating officer of
J. Eberspaecher GmbH & Co. KG in
Esslingen, Germany, is even more critical.
He believes that because of sinking margins,
the increased load ultimately needs to be
fairly remunerated. However, auto industry
42
think: act

automotive
industry report f
Tremendous potential savings
Changes in the automobile industry’s structure continue. According to a study by
Roland Berger Strategy Consultants titled “Automotive Engineering 2010,” only
manufacturers who optimize research and development will remain competitive.
researcher Dudenhoeffer does not consider
these types of complaints constructive.
“Growth under the constraints of cost
pressure requires intelligent concepts, and
only those suppliers who create real customer
benefits will be the champions of
tomorrow,” he says.
That process is impressively demonstrated
by Johnson Controls Inc., an automobile
supplier based in Milwaukee, Wisconsin. Its
managers knew from publicly available
studies that people increasingly pay attention
to “inner values” when purchasing a
car. They also knew that the number of
older car buyers is on the rise, and that they
have different requirements from younger
drivers in terms of both equipment and
functions. Yet many questions remained
unanswered. What are the concrete needs
of the various target groups? Are they
dreaming of unconventional interiors? Do
they love the newest technology? Are they
demanding more space for their luggage
and sports equipment?
Bill Fluharty, vice president of industrial
design and market research at Johnson
Controls, North America, surveyed more
than 7,500 people online. The study’s results
showed that above all people want nice,
user-friendly products. “This information
helped us to develop, together with the car
manufacturers, innovative solutions that exactly
satisfied the specific preferences of
their customers,” he says.
This strategy enabled the interior-equipment
company to climb to number seven on the
list of the leading 50 US manufacturing
companies. According to the trade magazine
Industrial Week, no other company in the
industry performs better. Even its competitors
praise its strategy. In July, Visteon
Corporation, which is based in Dearborn,
Michigan, even went so far as to appoint
Fluharty’s former colleague Michael F.
Johnston as CEO to steer the former Ford
subsidiary to new shores.
F
A
Efficiency and innovation in
automotive engineering
E
A 0ptimizing the global r&d network
International auto manufacturers are increasingly moving their research facilities to
regional expertise centers and utilizing resources worldwide as required.
B use of modular concepts
If OEMs were to increase to 10 percent the proportion of parts that could be installed in
multiple models, development costs would drop by around 5 percent.
C technology and electronics development
The standardization of electronic systems has substantial cost advantages. Currently,
50 percent of all warranty costs are caused by defective software and electronics. That is
reason enough to increase expertise in electronics development.
Product
strategy
Optimizing
the global R&D
network
Personnel
planning and
training
Concept
development
Design Prototype Pilot
E integrating suppliers
Suppliers are playing an increasingly significant
role in the auto industry. By 2015, their
share of value relating to development will
have far surpassed that of the car manufacturers
(see chart at right).
Use of modular
concepts
Integrating
suppliers
F personnel planning
30%
OEMs should strengthen their manpower
capabilities, especially in the areas of electronics
research and development.
70%
Beginning 2010–2015, a shortage of qualified
engineers will become apparent. 1990
30
B
Launch/
production
Planning of vehicle platform
Planning of vehicle types within the platform
Computer-aided engineering
Integration of vehicle and platform
Integration of suppliers
Simulation of production
Production setup
Accelerated testing
Changeover mgmt.
Launch mgmt.
Value proposition in
billion US dollars/
percentage increase
+4.6%
+7.2%
+3.1%
Technology
and electronics
development
D
C
D optimization/
product planning
Manufacturers
who use the
best process tools
currently available
for their
planning and
development save
10 to 20 percent
in related costs.
55
40%
60%
Optimization
of product
development
75
+2.5% Supplier
value
creation
+4.8%
+0.5%
55%
Manufacturer
value
creation
45%
2002
2015
Source: Roland Berger Strategy Consultants

p industry report
nearshoring
El Dorado in Central Europe
With the European Union’s enlargement, the IT service industry has now discovered a nearshoring
El Dorado in Central Europe. While India has served as an economically attractive software supplier,
entire business processes are currently being relocated to Budapest, Krakow and Tallinn.
:
Dirk Taubner can see shortcuts from
a long way off. As head of human
resources at software design & management
(sd&m), an IT consultancy based in Munich,
Germany, Taubner arranged for Polish IT
specialists to gain experience in Germany
for a year. Once the new employees had
become sufficiently acquainted with the
German mentality and the latest technology,
Taubner decided to take a step
across the border. Since July, 20 employees
have been working in Wroclaw, Poland, in a
newly created “nearshore center” for
German customers. Another 80 specialists
will soon be added to their ranks. “The only
thing that counts is quality,” says Taubner.
But lately, customers have also been making
frequent demands for additional production
capacity. If the past was about offshoring
or outsourcing IT-supported services to
low-wage countries, especially in the areas
of programming and routine tasks, companies
are now increasingly looking for service
providers to assume the responsibility
for entire business processes. “Business
process outsourcing” (BPO) is extending into
activities such as financial accounting,
invoicing and procurement,” says Rebecca
Scholl, an analyst with Gartner, the IT market
research company. Central Europe is
becoming more appealing in this regard all
the time. “Many service providers are
building capacity in Prague, Krakow and
Budapest,” says Scholl. These business locations
are all in competition with offshore
providers in India.
44
think: act

nearshoring industry report f
However, the South Asian subcontinent is
still the offshore location of choice for all
kinds of services, an enduring consequence
of India’s successful economic run over
the past several years. Of the companies
surveyed in a study titled “Service Offshoring,”
37 percent had awarded outsourcing
projects to India. However, 22 percent of
all projects are commissioned specifically to
Central Europe. The study was conducted
across Europe in spring 2004 by Roland
Berger Strategy Consultants together with
the United Nations Conference on Trade
and Development (UNCTAD). In more than
100 interviews, executive boards and upper
management from a select group of Europe’s
top 500 companies reported on their
challenges and experiences.
Central European companies reap benefits
from the outsourcing of business processes
to countries such as Poland, Hungary, the
Czech Republic or the Baltic states—a procedure
known as “nearshoring.” The Central
Europeans score points with their geographic
proximity, same or nearly same
time zone, similar culture, highly qualified
employees, good infrastructure and EU subsidies.
Plus, their personnel costs are lower.
In a study of wages worldwide, personnel
“SOME PEOPLE COULD HARDLY
BELIEVE THAT VIENNA IS CLOSER TO
KRAKOW THAN TO INNSBRUCK.”
consultants from Watson Wyatt estimated
that programmers in Central Europe earn
up to 75 percent less than their US or
German counterparts. According to the
UNCTAD study, 70 percent lower labor costs
are a driving factor in considering the offshoring
of operations. Hansjoerg Siber, vice
president of Capgemini Systems, an IT
service provider, is one of those who have
established a foothold in Central Europe for
offshoring projects. “Not too long ago, Austrian
business partners, for example, could
hardly believe that Vienna is closer to
Krakow, Poland, than to Innsbruck,” says
Siber. Taking over the BPO center of International
Paper (the world’s largest paper
manufacturer) in Krakow was a smart move
to convince Capgemini customers this is in
fact the case. Alongside this came a multiyear
contract to supply financial and accounting
services to the paper group. Siber
says that after just one year, his IT consultants
have extended their reach and are working
for numerous international companies.
In May 2004, EDS, a Texas-based IT service
giant—and Capgemini rival—that had
already taken its first steps into Central
Europe invested almost $8.5 million in a
new BPO center in the Hungarian capital of
Budapest. The reason was that the 110
think: act 45

p industry report
70 percent of traditional business processes will be outsourced in the future
employees working in the original center in
the provincial town of Vasvár had reached
their production capacity limit. Now, in
4,500 square meters of office space, 300 IT
specialists handle primarily financial tasks
for customers from 17 countries. One of the
best-known customers is Infineon. The
Munich-based semiconductor manufacturer
has signed a 10-year contract with EDS.
From its Hungarian facilities, EDS handles
the administrative aspects of Infineon’s
recruitment, trainee support, and payroll
operations for its 20,000 German and
Austrian employees. For László Szakál, an
EDS manager in the country, this is merely
the beginning. Other large-scale contracts
from international companies will cause the
center’s number of employees to climb
quickly to 1,000.
Back-office processes such as finance,
human resources and accounting still make
up the lion’s share of offshore projects. They
constitute “about 60 percent of the ongoing
or planned projects,” says Karl Sauvant,
the offshoring study’s author and director
of UNCTAD’s investment division. However,
one-quarter of the surveyed large-scale
enterprises also outsource front-office
services or, in other words, services with
direct customer contact. According to
CENTRAL EUROPE HAS A NUMBER OF
ADVANTAGES COMPARED WITH
ASIAN OFF-SHORE LOCATIONS
another study, conducted by Datamonitor,
call centers have the highest growth rates.
The study claims the number of call center
positions in Central Europe will increase
from 4,400 currently to 13,700 in 2008.
Language barriers are few. Central European
call center agents learn foreign
languages almost perfectly, usually thanks
to study visits abroad. Companies such as
British Telecom are taking advantage of
these skills. In 2004, BT opened a branch in
Warsaw, Poland, to offer “contact center outsourcing”
in addition to providing its entire
range of communications services.
To top this all off, employees in the Baltic
countries have a handle on Nordic
languages. After taking over the Swedish
hotel chain Scandic in 2001, managers of
the Hilton hotel chain were pleased to
discover that many Estonians also speak
Swedish or Finnish. Today, 120 phone
agents in a Hilton call center in the Estonian
capital of Tallinn take reservations
from their Scandinavian guests in the
guests’ languages.
Michael Corbett, initiator of the annual
European Outsourcing Summit, is positive
that offshoring will continue to grow. He
predicts, “Seventy percent of the traditional
business processes will be outsourced in the
future.” Why should one rely on this type of
strategy? According to the UNCTAD study,
more than 80 percent of the surveyed companies
realized cost savings of between 20
and 40 percent through offshoring.
Tallinn, Estonia: “Foreign languages pose few difficulties in the Baltic states.”

“Competencies count”
Companies should concentrate on factors that distinguish
them from the competition, says HP director Wolfram Fischer.
For everything else, there’s offshoring.
THINK: ACT What is offshoring all about? Is it
just a lot of hot air as with the new economy,
or is it really the “third revolution in
added value?”
WOLFRAM FISCHER In our intensely competitive,
service-oriented society, it’s not enough to
offer standard products at an average price.
Especially in the solutions business, every component
needs to be cost-effective while also
high quality. Offshoring presents the opportunity
of obtaining more service for less money.
That’s a necessity for international companies—and
a huge future market for providers.
What experience have you personally
gained in low-wage countries?
HP’s global delivery model relies on resources
across the world. In Bangalore (India), Bratislava
(Slovakia) and Warsaw (Poland) we employ
highly motivated, well-trained people
with excellent language skills. Alongside inexpensive
wage and operating costs, they constitute
optimal production factors. Offshoring
also offers advantages as regards flexibility,
process speed and customer orientation. Only
by using these do we create added value according
to the principle of “high-tech, low cost.”
Which branches of industry are particularly
benefiting from offshoring?
In the manufacturing industry the whole issue
has been done and dusted. Nowadays the textile
industry produces almost exclusively in China,
Vietnam, Thailand and Malaysia. With
computers, it’s similar. More than two thirds of
all notebooks come out of Taiwan. Financial
service providers are going to initiate the next
wave. They keep outsourcing more and more
business processes that until recently were still
considered core competencies—not only IT, but
also everything from administration to personnel
management.
Is there anything that shouldn’t
be outsourced?
You should not outsource the core competencies
that make you stand out from the competition,
since there are fewer and fewer of these. Core
elements include all processes that directly add
value, especially product development and customer
interfaces. A company can stand out in
these areas and avoid being seen as a “me too”
player. However, outsourcing is a strong option
in all areas where processes can be defined and
standardized. Already there are companies
that have outsourced all operating activities,
restricting themselves to brand management.
Nike, which has its products manufactured
by 900 partner companies worldwide, springs
to mind.
Are you not understating the hurdles?
Obviously, it’s necessary to have a practice
phase, the length of which is often underestimated.
But any problems are going to be absolutely
manageable and no different from the
issues presented by any new project.
Is offshoring to India not failing on account
of cultural differences?
Not at all. In just a few years, thanks to exceptionally
well-trained IT specialists, the country
has been able to manufacture first-class software
components with significantly lower
costs. Obviously, one has to manage cultural
differences as well, but that hardly presents
WOLFRAM FISCHER is managing director of
Hewlett Packard GmbH. As vice president of the
Technology Solutions Group Germany, one of his
responsibilities is outsourcing. His experience as a
sales manager in the Asia-Pacific region made him
one of the best experts on its IT service market.
Fischer has a bachelor’s degree in business administration
and computer science.
any problems these days, since the Asian
region is increasingly opening up to the
Western world. Even at our locations in China,
most of the workers are locals whose integration
into the company is considered business as
usual. Offshoring gets difficult when physical
and logistical problems are added in. But that’s
no longer an issue with digital products.
Is quality still optimum?
With consumer goods today, price plays a larger
role than top quality. Does a 20 euro running
shoe really need to last me 10 years, or
should I just buy a new pair every year? There
are even countless IT services that have been
standardized for a long time now.
Is outsourcing solely a question of economic
necessity? According to one study, managers
who outsource processes and slash jobs are
making very good money.
It’s wrong to think there’s a direct causal relationship
there. Outsourcing results in cost and
price advantages of up to 40 percent, leading to
improved earnings. Obviously, managers who
are compensated on a success-dependent basis
benefit from that. So what’s wrong with managers
trying to find the most cost-effective solution?
That’s their job, after all.
think: act 47

p industry report
trends and sectors
The shape of things to come
LEDs, Triple Play, medical tourism and customized miniature power sources:
current trends, analyses and research reports shed light on the markets of the future.
led
Light emitting diodes (LEDs) are turning the traditional
lighting industry upside down. Incandescent bulbs and
neon tubes are increasingly being replaced by luminous
semiconductors, which offer lighting designers and
product developers a whole new range of design possibilities.
One example of an application that is already in
widespread use is traffic lights that draw 80 percent
less electricity and last 10 times as long as standard
models. According to experts, widespread use of LEDs
will save billions of dollars in energy costs.
LED lamps are already making inroads into households
and offices. For example, the Hong Kong company
Traxon produces mood lights that create a variety of
lighting effects in an entire rooms at the flip of a
switch. And the new “organic” LEDs (OLEDs) could
soon help do everything, from creating millimeter-scale
displays to illuminating entire buildings. It is estimated
that the advertising and entertainment industries alone
present a 15 to 20 billion-dollar global market for LEDs.
The automotive lighting specialists Hella and Bosch are
currently developing front headlights, with light diodes
already having made an appearance in cars’ and trucks’
brake and rear lights.
triple play
Telephoning by cable, television via the Internet, Web
surfing with your TV—Triple Play could soon make all
this possible. Broadband transmission of video, Internet
data and speech may be new territory for the telecommunications
industry, but with package services they
will have to lock in customers and increase their sales.
Former European monopolies such as France Télécom,
Swisscom, Germany’s Deutsche Telekom and Spain’s
Telefónica are already investing in new services. They
are preparing for competition from alternative telcos,
mobile phone companies and especially cable network
companies. For example, the Norwegian company Lyse
Tele already services close to half of all potential customers
in its territory, 85 percent of them with Triple
Play. Infrastructure costs are considerable. Swisscom
alone has invested 1 billion francs in making new video
products available via telephone cable.
Growth in the broadband
market will probably not
be achieved without a
comprehensive entertainment
offering.
Games, e-commerce,
and e-mail had
previously been
viewed more as
add-ons.
Data
Internet
access,
e-mail,
Web storage,
anti-virus, spam
protection, services
(e.g. dating, music)
Free
TV, video
on demand,
pay TV,
electronic program
guide, gaming,
interactive TV
Triple
Play
Video
Voice
over IP,
SMS, MMS,
unified
messaging box
Voice
Source: Roland Berger Strategy Consultants
48
think: act

in india a heart operation costs one-eighth as much as in the united states
industry report f
medicine
Long known for its
sophisticated programmers,
India is
becoming a destination
of choice for
Western medical
patients. Britons in
particular are avoiding
the unpredictability
of their
health-care system
and are traveling to
the subcontinent for
treatment. They benefit
from the fact that
the know-how in the
best Indian clinics—for example, the Apollo chain—is
state-of-the-art, and from surgery costs that are only
one-fourth to one-eighth of what they are in the
United Kingdom or the United States.
Indian doctors are particularly competent in the
areas of cardiology, oncology, minimally invasive
surgery and joint surgery. The Indian government
estimates that “medical tourism” will develop into a
$2 billion-per-year industry by 2012, and is supporting
it with tax breaks.
The pharmaceutical industry also sees new opportunities.
Pfizer Inc., of New York, as well as Eli Lilly and
Co., of Indianapolis, Indiana, are already testing clinical
drugs in India and having X-rays analyzed there.
The British government is currently considering having
all blood and urine samples collected by its
National Health Service tested there too.
They calculate that the cost of shipping the samples
is more than made up for by the low personnel costs
in Indian laboratories. In addition, the laboratories
are in operation around the clock, seven day a week.
Savings of 20 to 30 percent are expected, especially
for more complex tests.
fuel cells
Rechargeable batteries that run for days are the
dream of every notebook user whose batteries are
running down far from an electrical socket. Advances
in fuel-cell technology may soon make this dream a
reality. Global companies such as Japan’s Toshiba
and South Korea’s LG, or German startups such as
SFC Smart Fuel Cell and Masterflex have developed
prototypes that can power a notebook for up to 35
hours—10 times longer than traditional rechargeables.
Up to now, these cells have been too large to
be built into portable computers. That should change
in the coming year, according to the manufacturers.
Thanks to the variety of potential applications—in
printers, LCD projectors, laptops and cell phones—
experts foresee the development of a market that
could significantly surpass the markets for rechargeable
and disposable batteries.
Fuel cells are seen as a clean alternative to batteries
because they burn hydrogen or methanol “cold,”
transforming them into power efficiently and with
few emissions. In addition, the technology is flexible
and allows for customized solutions. In the automotive
industry—in the Ford Focus (see photo), for
example—fuel cells have already proved their suitability
for everyday use.
think: act 49

p business culture
constantinos markides
Constantinos Markides, London Business School
“Strategic innovation
means developing
something new,
something big.”
50
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constantinos markides
business culture f
Why Professor Porter is wrong
Pure academic theory claims that established companies do not stand a chance when it
comes to integrating disruptive innovations into proven business models. Think again. In fact,
the old and the new can be combined—and can even deliver a great degree of success.
:
It takes a lot of searching to find big,
established corporate groups that are
dealing seriously with disruptive, strategic
innovations. Research suggests that the
majority of strategic innovations are introduced
by market newcomers. Market leaders’
responses are often unsuccessful.
Established companies have no problem
excelling in product or technological innovation.
Why then do they have such a tough
time with strategic innovation?
First of all, what is strategic innovation?
My definition is that a strategic innovation
is the discovery of a new strategic position
that permits a company to develop not
SWEEPING INNOVATIONS
USUALLY START OUT AS SMALL AND
LOW-MARGIN BUSINESSES
only something new but also something
big—something that will allow it to gain a
significant share of a market segment.
A few years ago, the PC business had its
traditional players like IBM, Compaq and
HP. Then, out of the blue, Dell came along
and started selling its computers directly
and not through distributors. And everyone
looked at it and said, “Wow, what an innovative
company!” Now, we can argue whether
Dell’s positioning actually was something
new. There is no precise answer to that. The
only important thing is that Dell had a
niche, broke rules and played the game in a
fundamentally different way from everyone
else. Strategic innovation happens in the
absence of technological innovation; it is
different from technological innovation.
Strategic innovators do not discover a new
product or a new technology; they just find
new ways of playing the game in the existing
market (see diagram p. 53 for how companies
find these new approaches).
Exactly what marks out strategic innovation
and how it manifests itself are things social
scientists still do not know. According to
the prevailing view, certain characteristics
of strategic innovations make them particularly
unattractive to established companies.
First, strategic innovators tend to emphasize
different product or service attributes
from those emphasized by traditional
competitors. Disruptive innovations target
new markets, new applications, new
products and new customer groups. Products
from innovators do not appeal to
customers who value mainstream offerings.
These customers are not prepared to use
disruptive innovations—not to begin with,
at least. For this reason, established companies
that want to keep their customers
happy initially see no point in investing in
these innovations.
Second, all revolutionary innovations start
out as small and low-margin businesses.
That is why these innovations rarely emanate
from established companies. It is generally
an entrepreneur or new market
entrant who introduces these disruptive innovations
in an existing market.
Third, it does not take long for serious competitors
to emerge. This emergence always
follows a similar pattern: Once the disruptive
innovations become established in
their new markets, a series of improvements
over time raises the performance of
the new products or services along the
dimensions that mainstream customers
value. In fact, this process advances at
such a rapid pace that the developers of
a disruptive innovation soon gain a firm
foothold. Inevitably, the growth of the
disruptive innovation attracts the attention
THERE COMES A POINT AT WHICH ESTABLISHED
PLAYERS CAN NO LONGER AFFORD TO
IGNORE THE NEW WAY OF DOING BUSINESS
of established players. As growing numbers
of customers come to embrace the strategic
innovation, the new business receives increasing
attention from both the media and
the established players. There comes a
point at which established players can no
longer afford to ignore the new way of
doing business.
At this stage of deciding how to respond,
established firms have to confront the
changed market situation. Reacting to
strategic innovations requires a different
combination of tailored activities on the
part of the firm. These new activities are
incompatible with the company’s existing
set of activities, since the two ways of doing
business are mutually damaging.
The academic elite, including the Harvard
professor Michael Porter, traditionally
concludes—incorrectly from my point of
view—that a company should not try to be
in two places at the same time. Anyone who
goes ahead and does it anyway is doomed
to failure. Companies would have huge
additional costs to bear, running the risk of
jeopardizing the existing business. Porter
mentions Continental Airlines as an example.
Continental was being put under
think: act 51

p business culture
constantinos markides
“ Despite the potential conflicts, opposing business models
can be combined to counter strategic innovations.”
Constantinos Markides
pressure by Southwest Airlines, which was
playing a totally different game—the game
of low cost, point-to-point, direct flights. In
response, Continental created a new subsidiary,
Continental Lite, which ultimately
PORTER IS MISTAKEN—STRATEGIC
INNOVATORS NEED TO BE IN TWO
PLACES AT THE SAME TIME
failed, since the internal conflicts could not
be resolved. What are these conflicts that
Porter talks about? One such conflict is the
risk of mutual cannibalization between parent
and subsidiary. There are problems of
overlapping distribution. And there are organizational
conflicts. Established companies
have a culture and structure that have
been built up over a long period of time. But
companies that implement strategic innovations
need an entirely different type of corporate
culture and organization.
My own position is that Porter is wrong in
advising companies not to play two different
games. I agree with him that playing
two games is very difficult given all these
conflicts. But it is not impossible. Companies
have four strategies available using
two business models—one conventional,
one unconventional (see matrix p. 53).
Separation is the preferred strategy when
the new market is not only strategically
different from the existing business but also
when the two markets face serious tradeoffs
and conflicts. The Swiss food company
Nestlé experienced this first scenario when
it set up a separate unit called Nespresso in
the early 1990s. Nespresso, an exclusive
brand for young urban professionals,
actually had an adverse impact on its traditional
instant coffee sales. For this reason,
Nestlé moved the new unit to a different
town, assigning it full autonomy. Nespresso
is now one of the most profitable units
within Nestlé.
Separation is unnecessary if the new market
is very similar to the existing business
area and holds little prospect of conflict. In
this second category, it is better to integrate
business models into the existing structure.
Merrill Lynch, for example, created an
online-trading niche within its existing
business. Old and new customers alike
could make their own decisions about the
type of advice and trading they wanted.
A third scenario emerges when the new
market is strategically similar to the existing
business but the two face serious conflicts.
In such a case it might be better to
keep the concepts separate for a period of
time and then slowly merge them. When
the Danish bank Lan & Spar decided to set
CONSTANTINOS MARKIDES is a management
professor at the London Business School (LBS). Born
in Cyprus, Markides studied economics at Boston University
and received an MBA and doctorate degree
(DBA) from Harvard. Before teaching at LBS, he
worked for the Cyprus Development Bank and Harvard
Business School. Markides has published numerous
articles in major magazines, including the Harvard
Business Review and the Sloan Management Review.
up a direct bank alongside its branch
network, it kept the two concepts separate
for three years before merging them into
one. It then carefully completed the
transition.
The challenge the firm faces here is to keep
the new business model protected from the
mindsets and policies of the existing business,
while at the same time exploiting
synergies between the two businesses and
preparing them for the eventual marriage.
The fourth scenario arises when the new
market is fundamentally different from the
existing business but the two do not conflict
seriously. In such a case, it might be better
to first build the new business inside the
organization so as to leverage the firm’s
existing assets and experience and learn
about the dynamics of the new market, then
separate it into an independent unit.
This is exactly how Tesco, the UK’s biggest
supermarket chain, approached its online
spinoff, Tesco.com. The company started a
home delivery service in the mid-1990s
under the name Tesco Direct. The first
trials involved making small deliveries to
pensioners. Later, customers ordered from
a paper catalog, then from a CD-ROM, and
eventually through the company’s
Web site. By 2001, Tesco Direct was reorganized
as a full subsidiary of Tesco and was
renamed Tesco.com—the first step in the divorce
proceedings. In 2003, Tesco’s executive
board announced that Tesco.com would
be spun off. The online arm had become
a different business and had to be given
the freedom and autonomy to develop as
it saw fit.
The decision about when to separate and
when to keep a strategic innovation inside
the organization is obviously important,
but it is equally important to appreciate
that this is only part of the solution. Having
decided which of these strategies a firm
will adopt, the key question that must be
addressed is this: “How can I manage the
52
think: act

creating a credible enemy is part of the solution
business culture f
Strategic innovations: new objectives and a new way of thinking
Five rules for how companies can find ways to compete that others have missed
strategic innovation so as to ensure its
successful implementation?”
What can upper management do? I believe
it has to take the organization through a
four-step process. The first is to sell the new
strategy to employees and generate some
passion. But knowledge does not create
passion. So the next step must be to explain
why it is so important both for the employees
and for the organization. The first reaction
will be, “This is impossible.” Therefore
the third step is to make it believable. One
IN THE LAST, DECISIVE STEP,
MANAGERS NEED TO WIN THE HEARTS
OF THEIR EMPLOYEES
way to do this is through early victories.
Success will slowly turn people around and
will have them thinking, “Maybe, after all,
we can do this!” And the final and most important
step is to transform it from a rational
to an emotional process. The first three
steps involve showing employees what the
strategy is and convincing them that it is
important and achievable. Now management
has to win over their hearts too. Managers
have various ways at their disposal to
gain this emotional commitment:
make the employees feel special;
p reinforce that feeling of uniqueness by
being very selective about who is invited
into the team;
p instill the feeling of being part of a special
team by creating team symbols;
p allow them to participate in the setting
of the objectives;
p empower them to go out and do things
toward achieving these objectives; and
p create a credible enemy for them.
These are all tactics that will help teams
and entire companies come together in trying
to achieve very ambitious objectives.
They are tactics that help management
seize upon strategic innovations effectively,
enabling them to practically be in two
places at once.
1) Redefine the business:
A company should constantly ask itself what business it believes it is in. Companies have
traditionally defined themselves by product (car companies), by customer function (transportation)
or as a portfolio of core competencies. Most importantly, a company should go through
a four-step procedure in defining itself: it should list all possible definitions; evaluate each
in terms of customers, competitors and market barriers, etc.; choose one; and ask how competitors
are redefining their businesses.
2) Redefine the who:
A company should constantly ask itself, “Who is my customer?” Companies can identify
customers who are good for the business and those who are bad. And they can identify customer
priorities, which can change more often than needs. But, to be successful, a company
must choose a niche that eventually grows to become the mass market, and the company’s
way of playing the game becomes the new game in town.
3) Redefine the what:
A company should first decide strategically what products or services it should be selling
to its customers. Then it can determine whom to target. To become a strategic innovator,
a company has to be the first to identify new or changing customer needs and priorities and
then find better ways of satisfying them.
4) Redefine the how:
A company can build on its existing core competencies to create a totally new product or way
of doing business. It can share competencies across business units, reuse a competence from
one unit to create a new business and expand competencies as it learns new skills.
5) Start the thinking process at different points:
In thinking of new ideas and ways of doing things, managers need to broaden their perspective
and change their angle of focus. If a company usually thinks first of the customer, it
should start thinking first about its unique capabilities or about what needs it could serve.
Success matrix for the management of strategic innovations
Companies can select among four strategies using two business models.
Serious
Type of conflicts
between established
companies
and disruptive
innovations
Minor
A
Separation
D
Phased separation
B
Phased integration
C
Integration
Low (different markets)
High (similar markets)
Similarities between established companies
and disruptive innovations
think: act 53

p business culture
vip entrepreneurs
CLINT EASTWOOD, born in 1930, worked as a lumberjack
and piano player before being discovered for a role in
a TV series. With the earnings from his first movies, he founded
the Malpaso film production company. Eastwood, known
for tightly sticking to schedules and film budgets, has no difficulties
finding business partners—for golf apparel brands,
golf courses, hotels and spa resorts.
GÉRARD DEPARDIEU is a symbol of French cinema and recipient of
numerous international awards, including a Golden Globe for “Green Card,”
which co-starred Andie MacDowell. Born in 1948, the Frenchman is not
only a wine connoisseur, but is also becoming a large-scale winemaker.
Today, Depardieu owns and manages vineyards all over the world.
ERIC CLAPTON, 59, is considered one of the best blues
guitarists in the world. The eight-time Grammy Award winner
was inducted into the Rock and Roll Hall of Fame no less than
three times: with The Yardbirds in 1992, with Cream in 1994
and as a solo artist in 2000. Since he refused to buy his shirts
anywhere else, he saved the English menswear store Cordings
from bankruptcy.
Good nose for business
Stars have achieved everything on stage and screen, and now business is luring them in.
A well-known name is no guarantee for success, however. Instincts must go hand in hand with
good business sense, as in the case of Clint Eastwood, Eric Clapton and Gérard Depardieu.
:
He holds a golf club more often than a
revolver. Clint Eastwood, the 74-yearold
veteran of Western movies, has been
driving golf balls down fairways for more
than 50 years and has a 10 handicap. Golf
is more than a recreational activity for the
Oscar winner (“Unforgiven”). Together
with fashion designer Nancy Hale, he
founded golf apparel brand Tehama in
1997, which is one of the most successful
clothing brand names in the United States
today. Designed in the spirit of the 1940s,
Tehama sportswear brings in $30 million
for Eastwood and for two years in a row
the lifestyle magazine Robb Report voted
54
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paul newman’s sauces have earned more than $150 million
business culture f
Tehama one of the top five brands in the
“Best of Men’s Activewear” category.
Like Eastwood, an increasing number of
actors, star athletes and music celebrities
are trying their hands as entrepreneurs.
US punk singer Gwen Stefani is backing
the handbag label LeSportsac, that allows
buyers to custom-design the bags over the
Internet. Latina pop star Jennifer Lopez
has invested some of the millions she has
earned on stage and in movies in her own
perfume and clothing collection, as has
her ex-boyfriend, rapper P. Diddy. Tennis
starlet Anna Kournikova also likes fragrant
ARNOLD SCHWARZENEGGER OVERESTIMATED
HIMSELF, AND BRYAN ADAMS’
MAGAZINE WAS DISCONTINUED
scents and is pitching a perfume brand
bearing her name as “shamelessly sensual.”
Boxing chanpion Henry Maske, on the
other hand, prefers hefty and calorieladen;
he is currently the owner of four
McDonald’s franchises.
Stars can’t always be sure of hitting the
jackpot, however. Wimbledon winner
Boris Becker sunk millions into setting up
a sports portal on the Internet, which
flopped just as did his investments in fashion
and nutrition. Canadian rock star
Bryan Adams unsuccessfully tried his
hand as publisher of a German lifestyle
quarterly called Zoo, launched in October
2003. And Hollywood action heros Arnold
Schwarzenegger, Sylvester Stallone and
Bruce Willis, along with comedienne
Whoopi Goldberg, completely overestimated
the business potential of their
movie-themed restaurant Planet Hollywood.
The restaurant chain opened in 1996
and went bankrupt three years later, as
not enough patrons wanted to eat their
burgers and french fries amidst original
movie costumes.
So what distinguishes the celebrities who
succeed as entrepreneurs? It takes more
“ I just wanted to make sure that I could keep buying
my clothes at Cordings.”
Eric Clapton
than the right accountant and attorney to
evaluate a business model’s chances of
success. It takes a mix of business savvy, a
healthy assessment of one’s own market
value, and occasionally a heartfelt story.
Antonio Banderas, 44, for example, comes
off as patriotic when he says, “A man without
roots is nothing,” —and lives by it. Born
in Málaga, Spain, the Hollywood star of
“Desperado” and “Evita” invested the millions
from his movies exclusively in Spanish
brand names: restaurants, movie
theatre chains and olive oil.
Guitar legend Eric Clapton, 59, reveals a
sense of tradition and typical British understatement
when he says, “I just wanted
to make sure I could keep buying my
clothes at Cordings.” Mister Slowhand reacted
quickly and took a 50 percent stake
in the menswear store dating back to 1839
when it was threatened with closure in
late 2003. Now this traditional company,
located on Piccadilly in London, radiates a
new look and will soon be launching its
first collection for women.
A personal story links 79-year-old Oscar
winner Paul Newman with his commercial
success. When he transformed a family
Christmas tradition into a giant business
in 1982 by founding “Newman’s Own,” the
actor decided that he would donate all
profits to charitable organizations—among
others the foundation he created in the
wake of his son’s drug-related death. Many
Based on the family recipe used by the
Newmans every year on Christmas Eve,
the salad dressing became very popular
with many Americans. In the first year of
business, Newman and his partner made a
million dollars. Since then, he has raked in
about $150 million for good causes with his
variety of high-end dressings, soft drinks,
sauces and more. “It got out of control in a
good way,” is Newman’s comment about
his culinary adventure.
Top director Francis Ford Coppola (“The
Godfather” ) and his colleague and friend
George Lucas (“Star Wars”) have demonstrated
how to transform a high-profile
name into a brand. Over the last 12 years,
Coppola has worked as a distinguished
winemaker. In 2002 he and Lucas brought
out a Merlot called “Viandante del Cielo”—
Italian for “Skywalker,” and a reference to
the main character in the science fiction
saga “Star Wars.”
“Cyrano” is also both brand name and allusion:
The French actor Gérard Depardieu
has 100,000 bottles of wine with the “Cyrano”
label produced every year. In a muchlauded
performance, Depardieu played the
big-nosed poet and fencing master Cyrano
SUCCESS IS LIKELY WHEN
A BRAND, FAME AND A GOOD
STORY ALL WORK TOGETHER
de Bergerac in a 1990s movie. Ever since
Depardieu, an avowed bon vivant, purchased
the Château de Tigné vineyard in
Anjou, France, he has become a bona fide
collector. In addition to his French vineyards
in Bordeaux and Languedoc-Roussillon,
he now also owns others in Italy, Spain,
Algeria, Morocco and Ukraine. Depardieu
wines such as the 2003 “Ma Vérité” and
“Confiance”, received the highest praise
from the famous wine critic Robert M. Parker,
Jr. The 55-year-old actor shows that he
not only has a distinctive nose for character
roles but also a good sense for business.
think: act 55

p business culture
10 years after
Completely underestimated
Short Message Service (SMS) was developed 10 years ago and has become—almost by
accident—a multi-billion-dollar business. Even though new SMS services are
cropping up weekly for kids and teens, the medium still has unrealized potential.
:
Think back: Nelson Mandela became the
first black president of South Africa;
Israel’s Prime Minister Yitzhak Rabin and
Palestinian leader Yasser Arafat signed an
autonomy agreement in Cairo and received
the Nobel Peace Prize for it; between
Norway’s North Cape and Sicily, the European
Economic Area was created; and in
Uruguay agreement was reached on the
creation of the World Trade Organization.
In 1994 concepts like flexibility and mobility
were leaving their mark on an already globalized
economy. And it was not just highspeed
trains like the British-French
Eurostar—traveling through the newly
opened Channel Tunnel—that were connecting
people more quickly. For digital communications
were also gearing up for a giant
AT THE 1994 CEBIT, THE REAL
SENSATION WAS ALMOST ENTIRELY OVERLOOKED
BY EXPERTS AND VISITORS
leap forward. In the United States the World
Wide Web, with help from the revolutionary
Netscape Navigator browser, was starting
along its path to success, and in Germany
ISDN was beginning to take off.
Around the world, the telecommunications
and entertainment industries were becoming
interlinked. It was no longer a question
of whether we wanted an information society,
rather of what it should look like. While at
Harvard, Cambridge and MIT the traditional
field of computer science was starting to get
to grips with the new discipline of “mobile
communications,” Mannesmann Mobilfunk
GmbH of Germany was establishing the
world’s first professorship in it at the University
of Dresden. And at CeBIT, the world’s
largest computer trade fair, a few companies
were already speaking of limitless mobility—
and much more importantly, of the huge
margins that would be available for
businesses offering continuous connectivity.
The reason for all the optimism was that, in
1994, the cell phone was standing at the
threshold of its worldwide breakthrough.
Among all the hype, the real sensation of the
1994 CeBIT went almost entirely unnoticed:
the D1 Alpha Service by DeTeMobil. With
pagers looking like the technology of the future,
experts paid little attention to this first
commercial precursor of the Short Message
Service (SMS) technology of today. Even
56
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a global average of 30 billion sms messages are sent every month
business culture f
DeTeMobil, which evolved into T-Mobile,
failed to take its own development seriously.
During the test phase the service was offered
free of charge for almost a year. That is hard
to believe when one considers that today
mobile communications providers make billions
from SMS—with the trend rising.
In only 10 years, cell phones and SMS have
dramatically changed business communications.
Among business associates and partners,
giving someone your cell phone
number is a sign of trust, of “I’ll be there
when you need me.” The cell phone—and
with it SMS messaging—have become essential
management tools. Whether important
documents relating to a contract need to be
forwarded, a phone conference coordinated
or a small gift sent to a customer, today all it
takes is a short message and everything is
taken care of.
Cell phones are also becoming more and
more important for intra-company communications.
Now service and sales employees are
almost exclusively connected to their head
office via mobile phones. Teams can be managed
via SMS and can be fed all the available
information on a client. SMS enables users to
solve technical problems, request sales aids
or order replacement parts on-site, significantly
reducing response times and increasing
customer satisfaction. They present
potential for optimization that far too few
companies are currently taking advantage of.
An innovation developed by Roland Berger
Strategy Consultants demonstrates what a
modern employee communications tool can
look like. The consulting company updates
its consultants via a mobile news channel
every two weeks on company-related information.
Employees get a subject overview
via SMS together with a telephone number
they can use to retrieve the news. All they
have to do is make the call, get authorization
and listen to the report.
Just as fundamental as the changes in the
business world are those taking place in the
private sphere. People who cannot be
reached or have turned off their cell phone
are cut off from their friends and associates.
Communication has also changed. Stressful,
awkward phone conversations are often
bypassed with an SMS, the dialog reduced to
brief, telegram-like phrases. BBC Online
recently asked whether SMS shorthand has
become mightier than the written word.
People responded from around the world
with literary quotations, such as “w8ing 4 go.”
(“Waiting for Godot”) and “2b/-2b” (“to be or
not to be”), shortened hymns, such as “Gd $ th
Qun” (“God save the Queen”), and lines of
prayer, such as “dad@hvn” (“Our Father who
art in heaven”). Teenagers have a particular
fondness for communicating cryptically via
SMS. While philologists have been speculating
on the likely consequences of this, the
advertising industry has long recognized it as
an opportunity. With 14 to 30 year-olds so difficult
to reach via traditional print and
advertising media, the cell phone has proven
a powerful marketing tool and sales channel.
SMS—three letters that changed the world. The
massive hit with teens is also a valuable business
communications tool. Machines, too, are starting
to communicate via SMS, a phenomenon heralded by
the soda machines at the 2000 Expo, which could
send updates on their contents and refill status.
Coca-Cola in Belgium, for example, increased
sales of its 200 milliliter bottles in cafés by
8 percent during a 2003 SMS campaign. Even
Gossard, the women’s underwear manufacturer,
received 75,000 euros worth of orders
via SMS when it introduced a new range in
Great Britain—those interested had merely
to send in the code word “G4me.”
Thanks to the international acceptance of
GSM technology and numerous roaming
agreements, users can send SMS messages
and make mobile calls in more than 40 countries
spread over all continents. Market penetration
figures offer confirmation of the huge
growth potential still to be tapped. Penetration
has visibly increased since 1997, but is
still only 24 percent worldwide. Western
Europe is at the top, with 83 percent and
400 million registered cell phone numbers,
ahead of North America with 60 percent and
200 million connections. In terms of sheer
quantity, the Asia-Pacific region has the
greatest number of cell phones. Put another
way, 500 million customers there represent a
market penetration of only 30 percent.
Experts estimate that in 2004, 1.4 billion cell
phones will send more than 360 billion SMS
messages. Interestingly, Sweden already has
more cell phones than inhabitants, with 8.8
million people owning 9.1 million phones.
With technology having paved the way for
even niftier features, no end to the boom is in
sight. Users can now send photos between
cell phones via the Multimedia Messaging
Service (MMS). And the arrival of new messages
is increasingly announced with a few
seconds of a pop hit or famous piece of classical
music, with customers over the past year
spending $3.5 billion worldwide on customized
ringtones. However, there is one
thing that has not changed in mobile communications
over the past decade: whether
your mobile phone rings with a chirp or the
first few bars of Beethoven’s Ninth, there are
times when it would be great to be able to
just switch the thing off.
think: act 57

p service
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Deepen your
understanding
All of our interview partners and experts
are sought-after authors. Current books and
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a great deal more on the subjects addressed
in this magazine. Extensive background
analysis and strategic options can be found
in studies by Roland Berger Strategy
Consultants on the topics: “From Middle
Kingdom to global market” (China) or
“Finding the formula for growth” and
“Growth through trust” (Growth).
CONSTANTINOS C.
MARKIDES, PAUL A.
GEROSKI:
Fast Second
DAVID M. STEINER
(et al.): Educating
for Democracy
RICHARD FLORIDA,
IRENE TINAGLI:
Europe in the
Creative Age
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Strategy Consultants?
Write to us at service@think-act.org
STUDY:
From Middle
Kingdom to global
market
STUDY:
Finding the
formula for
growth
STUDY:
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through
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CREDITS
PUBLISHER
Dr. Burkhard Schwenker, CEO
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EDITORIAL ADVISORY BOARD
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ART DIRECTION
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EDITORIAL
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AUTHORS
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Matthias Hochstaetter, Bessie Lee
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Kai Oppel, Dirk Rheker (Florida),
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PHOTO EDITORS
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PHOTO CREDITS
Cover: Alessandro della Valle/
Keystone, Bernd Roselieb, PR,
Andreas Sterzing; p. 2 Andreas
Sterzing; p. 3 Hans-Bernhard
Huber/laif; p. 4 Puppe (1), Nestlé (1),
gettyimages (1), Claudio Porcarelli/
focus (1); p. 8 corbis; p. 9 Mindshare
& Maxus; p. 10 Hezi/imagechina;
p. 12 Richard Florida PR; p. 14 Bernd
Roselieb; p. 16 Andreas Pohlmann/
Stock4B; p. 18 corbis/Dan Lament;
p. 19 Randy Olaon/National Geographic;
p. 20 INDEX Stock/Avenue
Images; p. 21 Creatas; p. 22 Jonny le
Fortune/Gerd George; p. 23 Erwin
Wodicka; p. 24 dpa; p. 26 Symanec;
p. 28 Samsung; p. 30 Hans-Christian
Schink/Punctum; p. 32 dpa (1),
actionpress (1); p. 34 Landor/intertopics;
p. 36 Contrasto/focus; p. 37
actionpress; p. 38 Shell AG (1), teraview
(1); p. 39 dpa; p. 40 REA/laif; p. 42 Ford (1),
Futh/laif (1), PR (1); p. 44–46 6-wegeprojekt/laif;
S. 47 Darius Ramazani; p. 48
James Bell/focus; p. 49 Hahn/laif (1), Das
Fotoarchiv (1); p. 50–52 Andreas Sterzing;
p. 54 gettyimages (1), actionpress (1),
musicpictures (1); p. 56–57 photodisc; p. 59
Andreas Sterzing
PRINTER
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think: act 59