issue 1 - Roland Berger
issue 1 - Roland Berger
issue 1 - Roland Berger
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DOSSIER: How companies are able to overcome the limits of growth p. 24<br />
Volume 1 Issue 1<br />
December 2004<br />
think:act<br />
The executive magazine by <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants<br />
1 Louis Schweitzer, CEO, Renault:<br />
“If you want to grow, you have to trust employees and motivate them<br />
to perform at their peak.” [pHow trust drives growth, p. 30 ]<br />
2 David Steiner, adviser to the US government:<br />
“Immorality hurts profits and the stock price. Ethical behavior creates<br />
lasting corporate value.” [pGenerating profit ethically, p. 14 ]<br />
3 Bessie Lee, CEO, Mindshare & Maxus:<br />
“China is targeting Western markets. The high end brings the best<br />
returns, not just financially but also for a company’s image.”<br />
[pChina goes Europe, p. 8 ]<br />
4 Constantinos Markides, London Business School:<br />
“Market leaders have to square the circle. Revolutionary innovations<br />
can in fact be combined with established business models.”<br />
[pWhy Professor Porter is wrong, p. 50 ]
PARIS OFFICE, ROLAND BERGER STRATEGY CONSULTANTS, 16 Avenue George V, 75008 Paris, France,<br />
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<br />
think:act is our magazine for an exclusive<br />
group of decision-makers from business and politics around<br />
the world. It is my pleasure to introduce it to you.<br />
The title think: act reflects our vision of consulting: firstclass<br />
analysis, sophisticated concepts, high quality and the<br />
greatest impact for our clients, as embodied in our value<br />
proposition, “Creative strategies that work.”<br />
<strong>Roland</strong> <strong>Berger</strong> Strategy Consultants applies this philosophy<br />
to support the firm’s clients in Europe, Asia, North America<br />
and South America from 31 offices in 22 countries. Based<br />
on the knowledge and experience of this international<br />
network, we will use this magazine to present to you the<br />
most important strategic challenges and options for their<br />
solution every four months.<br />
Demanding readers have a right to expect that a high<br />
degree of usefulness will be accompanied by a sophisticated<br />
presentation. We have a first-class team to meet those<br />
expectations. Internationally experienced business journalists and management experts have<br />
researched the magazine’s topics and present them in articles, background reports and exclusive<br />
interviews in think: act.<br />
For this inaugural edition, we have placed the topic of growth front and center. Despite determined<br />
restructuring and systematic cost cutting, many companies have still not yet reached their<br />
goals for growth. With that in mind, our dossier presents suitable strategies, appropriate measures,<br />
and examples of success. It demonstrates how to build a company’s ability to grow, along with its<br />
preparedness to grow; that is, how to create both the hard and allegedly soft factors for sustainable<br />
success.<br />
China is our second key topic. We would like to draw your attention to the growing interest that<br />
Chinese entrepreneurs, scientists, students and tourists are showing in Europe.<br />
I hope that you enjoy this first <strong>issue</strong> of think: act.<br />
Sincerely,<br />
Dr. Burkhard Schwenker<br />
CEO <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants<br />
think: act 3
p contents<br />
New high-tech centers with an international impact are emerging in<br />
China’s northeast. Yet in some parts of the country electric lights are still<br />
considered cutting-edge technology.<br />
page 6 page 24<br />
Peter Brabeck-Letmathe, CEO of Nestlé, has found new growth<br />
opportunities for the Swiss food giant in both high-tech nutrition and<br />
designer foods.<br />
Automobile manufacturers are bowing to cost pressures and<br />
increasingly outsourcing development work to their suppliers—a successful<br />
model for both sides.<br />
page 40 page 54<br />
Gérard Depardieu has turned his great passion for wine into a<br />
second career. The fruits of his vineyards are now drawing praise, even<br />
from Robert Parker.<br />
4<br />
think: act
contents f<br />
food for thought<br />
dossier<br />
business culture<br />
6<br />
8<br />
12<br />
14<br />
16<br />
High tech and electric lights<br />
Is China on its way to becoming<br />
a key center for research?<br />
China goes Europe<br />
How the Middle Kingdom is<br />
moving into Western markets.<br />
Technology, talent and tolerance<br />
Political scientist Richard Florida<br />
explains cities’ keys to success.<br />
Generating profit ethically<br />
Transparency and fairness pay<br />
off for companies.<br />
<strong>Roland</strong> <strong>Berger</strong> Interview<br />
Trustworthy behavior opens new<br />
opportunities for growth.<br />
18<br />
24<br />
30<br />
33<br />
34<br />
Head of the class<br />
Six companies that show above<br />
average growth.<br />
Farewell to the “V-curve”<br />
Only a two-track strategy—<br />
increasing revenue and cutting<br />
costs—can ensure growth.<br />
How trust drives growth<br />
Companies that manage to build<br />
a corporate culture of trust will<br />
have an easier time entering<br />
new markets.<br />
Commentary: Seven surefire ways<br />
to run your company into the<br />
ground.<br />
“The time for indulgence is over“<br />
EU Commissioner Joaquín<br />
Almunia calls for more budget<br />
discipline in certain member<br />
states.<br />
50<br />
54<br />
56<br />
regulars<br />
3<br />
58<br />
Why Professor Porter is wrong<br />
Dealing with revolutionary<br />
innovations means conflict, but<br />
they can still be combined with<br />
established businesses.<br />
Good nose for business<br />
How celebrities are earning<br />
millions, well away from stage<br />
and screen.<br />
Completely underestimated<br />
Ten years after it was first<br />
unveiled, Short Message Service<br />
has developed into a multi-billion<br />
business.<br />
First views<br />
Service | Credits<br />
industry report<br />
Dossier<br />
The formula for growth<br />
How companies can overcome<br />
the limits to growth<br />
Beginning on p. 17<br />
38<br />
40<br />
44<br />
47<br />
48<br />
The shape of things to come<br />
Together in the fast lane<br />
Suppliers are taking over<br />
development tasks.<br />
El Dorado in Central Europe<br />
An increasing number of companies<br />
are outsourcing entire business<br />
processes to the new EU member<br />
states.<br />
“Competencies count”<br />
Wolfram Fischer of Hewlett-<br />
Packard recommends concentrating<br />
on a firm’s unique attributes.<br />
The shape of things to come<br />
think: act 5
p food for thought<br />
china – high-tech center<br />
High tech and electric lights<br />
China is developing into a leader in high technology on the back of massive state support.<br />
High levels of investment are aimed at creating globally important industry and research centers.<br />
In rural areas, by contrast, electric lighting is still seen as cutting-edge.<br />
To global leadership in 50 years<br />
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<br />
economic collapse. Beginning in 1949, four phases have shaped China’s return to global economic importance.<br />
Phase 1 Phase 2 Phase 3 Phase 4<br />
1949 – 1965<br />
Mao Zedong: Adoption of the Soviet scientific and<br />
technological model along with a centrally planned<br />
economy; in 1950, signing of the Chinese-Soviet<br />
treaty of friendship and mutual assistance.<br />
Source: Kathleen Walsh, “Foreign High-Tech R&D in China,” 2003<br />
1966 – 1976<br />
Mao’s Cultural Revolution,<br />
closure of universities,<br />
persecution of intellectuals<br />
and scientists.<br />
182,000<br />
patents were filed by Chinese state research<br />
institutes in 2003. That is roughly 30,000 more<br />
than in the states of the European Union.<br />
1977 – 1997<br />
Reforms under Deng Xiaoping; in 1979,<br />
US-China Science & Technology<br />
Agreement; import of science, technology<br />
and know-how from the US and Europe.<br />
1997 – present<br />
Concentration on high-tech<br />
industries; gradual turn away<br />
from economic model based<br />
solely on cheap production.<br />
Vast market for mobile telecommunications<br />
In just one year, roughly 71 million Chinese signed new contracts for mobile<br />
phones, more than double the population of Canada. A total of 315 million mobile<br />
phones make China the largest market in the world. <strong>Roland</strong> <strong>Berger</strong> Strategy<br />
Consultants predicts an additional 35 percent increase in the market in 2005.<br />
325<br />
315.1<br />
Backlog in the population<br />
Outside of China’s larger cities, light bulbs are still a sign of wealth and progress. The number<br />
of lamps and light fittings per households is rising throughout China. But for reasons of<br />
thrift, an average of only three are ever turned on.<br />
300<br />
275<br />
Number of new<br />
mobile phone<br />
contracts,<br />
in millions<br />
*Average number of light bulbs<br />
per household<br />
19<br />
250<br />
244.1<br />
6.5<br />
8.5<br />
225<br />
China<br />
1995*<br />
Source: Horizon Group, 2004<br />
China<br />
2003<br />
USA/Western Europe<br />
2003<br />
200<br />
Aug Sept Oct Nov Jan Feb Mar Apr May June July Aug<br />
2003 2004<br />
Source: National Bureau of Statistics of China, Ministry of Information Industry of China;<br />
“Outwardly Mobile in China,” <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants<br />
6<br />
think: act
315 million chinese have mobile telephones food for thought f<br />
The dragon’s rapid growth<br />
China’s 9 percent GDP growth in 2003 makes it the fastest-growing large economy in the<br />
world. Driving the growth are IT, telecommunications and the auto industry.<br />
9.0<br />
6.5 6.4<br />
4.7<br />
3.1 3.0 2.0 1.1<br />
China Russia India USA UK Japan France Germany<br />
Source: OECD, National Bureau of Statistics of China<br />
Boom in the rust belt<br />
The People’s Republic of China invests roughly 300 billion RMB yuan<br />
(around 36 billion dollars) in public and private research facilities.<br />
Thanks to state financial support, new high-technology centers are<br />
emerging in the declining steel and petrochemical areas of the northeast.<br />
★★<br />
Xinjiang<br />
1.5/6.0<br />
★<br />
★<br />
Tibet<br />
0.1/38<br />
★★<br />
Shaanxi<br />
9.6/5.3<br />
★★<br />
Chongqing<br />
3.6/9.1<br />
★Beijing<br />
39.3/14.6<br />
★<br />
★Liaoning<br />
14.4/46.1<br />
★★<br />
Tianjin<br />
6.5/5.4<br />
★★<br />
★★<br />
★★ ★★<br />
Jiangsu<br />
27.2/21.2<br />
★★<br />
Heilongjiang<br />
5.04/9.6<br />
Sichuan<br />
13.2/17.2<br />
Shandong<br />
19.7/15.5<br />
★★<br />
Zhejinang<br />
13.7/22.7<br />
Shanghai<br />
25.3/13.9<br />
★<br />
★<br />
Spending in 2002<br />
in billions of RMB yuan (1 RMB yuan = 0.12 dollar)<br />
Spending growth since<br />
2001 as a percentage<br />
Source: National Bureau of Statistics of China, Statistical Bulletin on the Input of Science and Technology, October 2003<br />
★★<br />
Guangdong<br />
29.1/13.2<br />
think: act 7
p food for thought<br />
the dragon prepares to leap
the dragon prepares to leap<br />
food for thought f<br />
China goes Europe<br />
Chinese companies have been gearing up for their long march to<br />
the West for quite some time. Their joint ventures with established<br />
brand-name manufacturers and acquisitions of smaller companies<br />
make up for their weaknesses in service and marketing.<br />
:<br />
China is coming. Just ask any of the<br />
happy few with membership at Berlin’s<br />
China Club how close it has really got. The<br />
club has a bar, library and seven private<br />
dining rooms done up in a 1930s Shanghai<br />
Art Deco style with salmon-pink satin walls,<br />
luxuriously intricate 19th century Chinese<br />
art and oil paintings of post-Mao Red<br />
Guards. In the restaurant, head chef Tam<br />
Kok Kong prepares his signature dish—<br />
wasabi prawns.<br />
When she founded this exclusive club in the<br />
Adlon Hotel at Berlin’s Brandenburg Gate,<br />
Anne Maria Jagdfeld drew inspiration from<br />
the China Club in Hong Kong, of which she<br />
has been a member for many years. “I wanted<br />
to create a glamorous, cosmopolitan social<br />
club where members can network at the<br />
highest level,” says Jagdfeld, who also owns<br />
Quartier 206, a posh Berlin department<br />
THE FLOW OF FUNDS IS STILL<br />
HIGHLY IRREGULAR, BUT CHINA’S<br />
INVESTMENTS ARE RAPIDLY GROWING<br />
store. Much of that networking is conducted<br />
with businesspeople from China itself.<br />
The Chinese are coming as students,<br />
tourists, immigrants and investors. According<br />
to Professor Rolf D. Cremer, vice president<br />
of the International Business School<br />
in Shanghai, who has twenty years of professional<br />
experience in Asia, Chinese companies’<br />
global expansion is not just about<br />
their looking for new sales markets. It also<br />
has to do with China’s image of itself as a<br />
world leader. China does not see itself in the<br />
long term as the world’s mass production<br />
center, as merely contributing cheap labor<br />
to the manufacturing sector. Bessie Lee,<br />
CEO of the market research company<br />
Mindshare & Maxus China, confirms this:<br />
“By globalizing, Chinese companies improve<br />
their image.” (See sidebar.)<br />
In 2003, according to the OECD, only<br />
around $600 million in Chinese capital went<br />
abroad, while China itself drew direct investment<br />
to the tune of $53 billion. However,<br />
it can be assumed that in the future,<br />
“Chinese investments abroad will quickly<br />
increase past current levels.” That is the<br />
conclusion of a recent report prepared by<br />
the German embassy in Beijing.<br />
Where is the money going? “North America<br />
remains the developed market of choice,<br />
followed by Western Europe,” says Wei<br />
Zhou, a <strong>Roland</strong> <strong>Berger</strong> consultant in<br />
Shanghai and author of a study entitled<br />
“From Middle Kingdom to global market.”<br />
This study describes the expansion strategies<br />
of China’s top 50 corporate groups.<br />
Fifty-six percent of these companies are<br />
seeking new sales markets overseas because<br />
their internal dynamics are driving them to<br />
expand internationally. Companies that<br />
manufacture PCs, TVs or air conditioners<br />
are finding it necessary to increase their<br />
exports since domestic production capacities<br />
are exceeding local demand.<br />
Market entry seldom takes the form of a<br />
head-on assault. China’s groups “are on the<br />
lookout for segments that market leaders<br />
have already given up or that they are no<br />
„<br />
Why are Chinese companies expanding?<br />
That has a great deal to do with<br />
China’s perception of itself as a great<br />
nation. China compares its economic<br />
importance to that of countries like the US, Japan,<br />
Germany and Great Britain. By globalizing, Chinese<br />
companies are enhancing their prestige. The government<br />
is backing these companies and encouraging<br />
them to become active worldwide. China has a very<br />
different attitude toward competition than other<br />
Asian countries.<br />
Bessie Lee, CEO, Mindshare & Maxus China<br />
»<br />
Self-image counts<br />
Right now, it seems like the high-tech industries are<br />
most aggressive in expanding abroad. Examples<br />
include IT companies such as Lenovo and homeelectronics<br />
manufacturers such as Haier and TCL.<br />
These groups have highly developed products and<br />
abilities. I suspect that such high-end markets guarantee<br />
them a better return from a financial perspective<br />
as well as in terms of image and national prestige.<br />
Chinese companies are most interested in<br />
Europe and the United States simply because of the<br />
size of these markets.<br />
Looking into the future, consider this: Less than 20<br />
years after its markets opened up, already 6 percent<br />
of all Asia’s top 50 companies are<br />
Chinese, which is absolutely impressive.<br />
I expect this figure will double by<br />
2020, and possibly even triple.<br />
»<br />
think: act 9
p food for thought<br />
the dragon prepares to leap<br />
Victor Yuan, Chairman, Horizon Research<br />
»<br />
Using cost advantages<br />
Currently, Chinese companies are primarily<br />
manufacturing low-priced<br />
products for local markets. Their global<br />
partners are encouraging them to<br />
use their cost and price advantages to penetrate<br />
into international markets. This would also boost<br />
their domestic performance. Many Chinese consumers<br />
believe that an international company can<br />
make better products.<br />
In established markets, Chinese companies are<br />
presently pursuing a low-price, low-end strategy.<br />
However, they absolutely have the ability to undertake<br />
a medium-price strategy in developing markets.<br />
For example, it is much more profitable to<br />
develop a bicycle business in Afghanistan than in<br />
the US market.<br />
To date, Chinese companies have concentrated on<br />
the United States and Europe, but I believe they<br />
should focus more on developing markets. Many<br />
Chinese companies are concerned about social<br />
conditions in these types of countries, but some of<br />
them are starting to get interested in big, developing<br />
nations such as India and Brazil. Yet, from an<br />
overall perspective, the growth of Chinese companies<br />
will still be determined by China’s domestic<br />
market. The scale of their multinational<br />
operations is still smaller than the<br />
overseas operations of Taiwanese or<br />
Korean companies.<br />
»<br />
longer interested in because of insufficient<br />
profit margins and sales volumes,” write<br />
Ming Zeng and Peter Williamson, professors<br />
at the INSEAD Business School in Singapore,<br />
in the Harvard Business Review.<br />
Harro von Senger, a professor of Sinology at<br />
the University of Freiburg, Germany, agrees:<br />
“For Chinese companies, global expansion<br />
may initially only mean a partial expansion—into<br />
a foreign market in a specific<br />
region that is particularly well-suited for a<br />
Chinese product.”<br />
A good example of this is Haier. As the<br />
company, which today is the fourth-biggest<br />
manufacturer of refrigerators and washing<br />
machines in the world, expanded into the<br />
American market in 1994, it concentrated<br />
initially on the overlooked niche of small<br />
refrigerators for minibars and student lodgings.<br />
Soon Haier had reached a 50 percent<br />
share of the market.<br />
There are no challenges that Haier balks at.<br />
“We always follow the principle of cracking<br />
the toughest nut first,” says CEO Zhang<br />
Ruimin. And that is not always an easy task.<br />
For instance, Zhang characterizes German<br />
consumers as adamantly stuck on their<br />
national brands. To get around this, the<br />
company has since the mid-1980s been producing<br />
its refrigerators under license from<br />
the German manufacturer Liebherr—even<br />
winning a seal of approval by the German<br />
consumer association Stiftung Warentest.<br />
This award means so much to Ruimin that<br />
he has it on display in Haier’s headquarters<br />
in Qingdao, hanging between a dedication<br />
penned by Premier Wen Jiabao and the document<br />
produced by the American finance<br />
magazine Fortune describing the company<br />
leader as one of the 25 most powerful managers<br />
outside the United States.<br />
With its strategy, Haier is protected from<br />
the Achilles heel that Chinese companies<br />
traditionally possess: the lack of a strong<br />
brand name. “Chinese companies that want<br />
to expand globally need to build up a brand<br />
name,” says Thomas Eichelmann, a member<br />
of <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants’ executive<br />
committee. This is why they are<br />
increasingly seeking manufacturing opportunities<br />
in locations that stand for both high<br />
quality and premium products.<br />
“Over the next few years, we will see<br />
takeovers of very established brand names<br />
for which Chinese companies will be paying<br />
accordingly,” says Eichelmann. One particular<br />
reason for this trend has to do with the<br />
needs of the domestic market, since China’s<br />
emerging middle class favors internationally<br />
recognized brand-name products.<br />
CHINESE COMPANIES SUCCEED<br />
IN SEGMENTS THAT EMPHASIZE BOTH<br />
QUALITY AND LOW COST<br />
IT and consumer electronics are the principal<br />
focus for expanding Chinese companies.<br />
The strategy is simple: The expansion begins<br />
with partnerships or with the acquisition<br />
of brands that are already established<br />
in the target market. Production takes place<br />
either partially or completely in China,<br />
with marketing and sales conducted in the<br />
Western location.<br />
This is the path trodden by Lenovo, China’s<br />
biggest personal computer manufacturer.<br />
The Beijing Morning Post recently reported<br />
that Lenovo will take over US giant IBM’s<br />
production facility for notebooks and<br />
servers in Shenzhen. It’s a perfect springboard:<br />
Lenovo is teaming up with the chip<br />
manufacturer Intel and will supply the<br />
servers and computers for the 2006 Winter<br />
Olympics in Turin, Italy.<br />
Another expanding Chinese company is<br />
TCL. In 2002 the company, originally a huge<br />
cell phone manufacturer, took over Schneider,<br />
the insolvent TV and hi-fi manufacturer<br />
based in Bavaria, Germany, best known for<br />
its “Dual” record player. For two years TCL<br />
kept production in Germany alive; now it<br />
is divesting all but sales, marketing, and<br />
elements of research and development.<br />
10<br />
think: act
89.5 percent of all young chinese want to study abroad food for thought f<br />
“ For Chinese companies, global expansion may initially only<br />
mean a partial expansion into a specific foreign market.”<br />
Professor Harro von Senger<br />
TCL is engaged in a partnership strategy of<br />
global importance with the French group<br />
Thomson. Overnight the joint venture, of<br />
which TCL owns a 67 percent share, became<br />
the biggest manufacturer of consumer electronics<br />
in the world. It is aiming at producing—in<br />
Hong Kong—18 million color<br />
televisions and up to 4 million DVD players,<br />
with the technology originating in France.<br />
It is not only Western brands and Western<br />
technologies that China can build upon. The<br />
Old World’s big cities are vying to serve as<br />
bridgeheads for the future economic superpower.<br />
Hamburg (referred to in Chinese as<br />
Hanbao, “castle of the Chinese”) feels it<br />
stands a good chance of fulfilling this role,<br />
as it has already provided a branch location<br />
for 320 Chinese companies. “It is our stated<br />
objective to become Europe’s number one<br />
city in doing business with China,” says<br />
Reinhard Stuth, a councilor with the State<br />
Senate’s chancellery.<br />
The Senate has set up a Chinese-language<br />
wing at a city high school for the children of<br />
Hamburg’s 3,000 Chinese residents. And<br />
The Hochschule für Angewandte Wissenschaft,<br />
a university for applied science,<br />
has established an engineering college<br />
jointly with the University of Shanghai. The<br />
university clinic in Epperdorf plans to open<br />
an internationally significant institute for<br />
traditional Chinese medicine.<br />
CHINESE IMMIGRANTS MOVE<br />
AROUND EUROPE AS IF IT WERE A<br />
LARGE CHESSBOARD<br />
Hardly noticed by the public, some European<br />
cities such as Milan in Italy have even<br />
sprouted small Chinatowns. Chinese<br />
leatherworkers and silk-tie salesmen had already<br />
set up shop in the Via Paolo Sarpi district<br />
back in the 1930s. In fact, northern Italy<br />
has had an official Chinese trade and industry<br />
association since 1968. However, most of<br />
Italy’s 16,000-member Chinese community<br />
lives in Prato, a city near Florence built<br />
around the textile industry. Leather-processing<br />
plants in particular have drawn immigrants,<br />
many of them illegal, from Fujian<br />
and Zhejiang provinces. Yet as quickly as<br />
the Chinese community grows, it could also<br />
just as rapidly shrink if economic conditions<br />
were to become unfavorable, as they did in<br />
Prato, where more and more leather companies<br />
are closing.<br />
“Chinese immigrants consider Europe a<br />
kind of chessboard across which they can<br />
move about freely. As a result of their strong<br />
family ties and networks, they have start-up<br />
possibilities all over the continent,” says<br />
Professor Antonaella Ceccagno, head of<br />
Prato’s immigration center.<br />
While Chinese from the lower class try to<br />
make a go of it in leather manufacturing or<br />
in Asian restaurants, the middle class comes<br />
to Europe to study, especially since the<br />
drastic post-9/11 security measures have<br />
scared off enrollees in the United States.<br />
According to the national statistics office in<br />
Beijing, 89.5 percent of all young Chinese<br />
want to study abroad. In 2003, more than<br />
20,000 Chinese students were enrolled in<br />
German universities. And, looking at the <strong>issue</strong><br />
optimistically, it is possible that anyone<br />
who has studied at a European university<br />
may return as a vacationer. The numbers<br />
may back that projection. In 2003, 20.2 million<br />
people from China’s fast-growing middle<br />
and upper classes traveled abroad. Of<br />
them 300,000 went to France, Europe’s traditional<br />
travel destination.<br />
Chen Wang, head of the management board<br />
at Caissa Touristic AG, believes that the<br />
Chinese will constitute the fourth largest<br />
tourist group in the world by 2020. Many<br />
perceive the ever-growing stream of Chinese<br />
tourists, students and investors as a<br />
sign that the sleeping giant is awakening.<br />
“China’s broad impact on key indicators in<br />
all international spheres will be comparable<br />
to the global Americanization in the second<br />
half of the 20th century,” says Cremer.<br />
Chinese companies are<br />
pushing into Western<br />
markets because...<br />
p<br />
p<br />
p<br />
p<br />
p<br />
Chinese production of goods is greater than the<br />
purchasing power of Chinese consumers and<br />
their still comparatively low average income.<br />
China cannot absorb all its domestically<br />
produced goods.<br />
The principle “a bigger market is better for<br />
business” also applies to Chinese companies.<br />
Chinese companies can gain commercially<br />
useful business and other types of expertise by<br />
being internationally competitive.<br />
Global competition can help Chinese companies<br />
avoid both the hazard of becoming “inbred” and<br />
the associated inhibitors of development.<br />
Chinese companies earn foreign currency on the<br />
world market with which they can purchase<br />
expertise and technologies.<br />
(Source: Professor Harro von Senger)<br />
china’s direct investment abroad<br />
600 million dollars<br />
500<br />
400<br />
300<br />
200<br />
100<br />
90 97 98 99 00 01 02<br />
Since 1999, government-sponsored direct investment<br />
abroad has increased steadily.<br />
Source: OECD<br />
china’s globalized sectors<br />
16%<br />
8%<br />
16%<br />
20%<br />
40%<br />
Other<br />
Research & Development<br />
Sales/Marketing<br />
Production<br />
Purchasing<br />
As they expand, Chinese companies are using international<br />
partnerships to compensate for their weaknesses, primarily<br />
in sales and marketing.<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants<br />
03<br />
think: act 11
p food for thought<br />
business trends<br />
Technology, talent and tolerance<br />
Star political scientist Richard Florida proposes a radical rethink of regional policies. His research<br />
suggests that creative minds only settle in diverse, metropolitan areas that foster uninhibited human<br />
interaction. This quality may become decisive for companies selecting their business locations.<br />
:<br />
Bestselling author Richard Florida loves<br />
to cause a stir. “A town without rock<br />
bands, gays and tattoo studios will experience<br />
decline sooner or later,” says Florida, a<br />
professor of economic development at<br />
George Mason University, located in Fairfax,<br />
Virginia. In saying this, he stands in marked<br />
opposition to most mayors and urban planners.<br />
They often dismiss people’s creative<br />
potential and focus merely on attracting<br />
companies with strong growth. In Florida’s<br />
view, this is a shortsighted strategy, as evidenced<br />
by the dramatic drop in importance<br />
of Pittsburgh, the “steel city.” The city’s<br />
decision-makers failed to complement its<br />
industrial past with an innovative infrastructure<br />
and lively culture. “The result<br />
is that the creative class there no longer<br />
feels inspired and is moving elsewhere,”<br />
says Florida.<br />
By “creative class” Florida means all the professional<br />
groups in which intelligence,<br />
inspiration and innovation are prerequisites<br />
for success. These include artists, media creatives<br />
and star chefs, as well as architects,<br />
scientists, attorneys and physicians. Florida<br />
places special emphasis on creative<br />
12<br />
think: act
30 percent of all workers in the united states are part of the creative class food for thought f<br />
“ Cities need to develop into appealing places for talented<br />
and creative people. They need to be tolerant, diverse and open.”<br />
Professor Richard Florida<br />
managers who abandon traditional thinking<br />
and continuously reinvent their businesses.<br />
“Besides being highly educated, these individuals<br />
are also united by a great willingness<br />
to move and are forever seeking new<br />
stimuli and inspiring work environments,”<br />
he says. Florida concludes that cities offering<br />
the best living environment for trendsetters<br />
can expect to have the highest level<br />
of prosperity. His reasoning: This group of<br />
individuals guarantees sustained growth<br />
with high added value.<br />
In his many talks, the political scientist has<br />
already referred to the fact that this trend<br />
transcends nations’ borders. That is a brief<br />
first taste of the theme of his next book,<br />
titled The Flight of the Creative Class, which<br />
IT TAKES THE RIGHT MIX OF<br />
MINORITIES TO DEVELOP A<br />
VIBRANT ENVIRONMENT<br />
will be published next spring. In it he discusses<br />
the migration of the US intelligentsia<br />
to more tolerant countries. In contrast to<br />
traditional thinkers, who point to errors in<br />
the system, Florida attributes this migration<br />
to the laws of the free market. His thesis is<br />
that global supply and demand also determine<br />
where creative people settle.<br />
It is therefore no longer enough, he says, to<br />
concentrate solely on good schools and safe<br />
streets. Instead, policy-makers should create<br />
the conditions for a lively urban milieu that<br />
assures a maximum degree of tolerance,<br />
diversity and openness. “That’s the only way<br />
to foster creativity and a fertile intellectual<br />
environment,” he says. Florida claims these<br />
two factors are the key drivers of economic<br />
growth. In other words, emerging, low-wage<br />
markets will not be the first to prosper;<br />
rather, benefits will flow to the regions best<br />
able to tap the creative potential of their<br />
inhabitants and draw talent from around<br />
the world. “Location now determines how<br />
people and job profiles match up, and it will<br />
become the central organizational unit of<br />
the creative age, replacing the company in<br />
that function,” he says.<br />
Florida’s vision of the cities and regions of<br />
the future is based on three pillars: technology,<br />
talent and tolerance. What is important<br />
is a distinctive lifestyle that delivers a rich<br />
cultural existence, best supported by high<br />
investment and the influx of people operating<br />
outside the mainstream.<br />
“In our focus groups we’re always hearing<br />
that people want to move to a place where<br />
they can simply be themselves,” reports<br />
Florida from his consulting experience.<br />
“That’s something particularly important for<br />
inspired, entrepreneurial people.”<br />
Based on these insights, he has drawn up a<br />
map of creative cities in the United States.<br />
The following characteristics were quantified<br />
and compared with one another: the<br />
number of inhabitants belonging to the<br />
creative class, the number of homosexuals,<br />
the economic power of high-tech industries,<br />
and the number of patent applications per<br />
capita. The findings: Apart from some<br />
smaller cities in the Rocky Mountains that<br />
can be counted as creative locations, the<br />
phenomenon is primarily connected with<br />
large cities. Vibrant, inspiring environments<br />
emerge where there is a large concentration<br />
of people who together constitute an<br />
enthralling mix of minorities. Other key factors<br />
are cultural attractions and universities,<br />
RICHARD FLORIDA, 47, was a professor of<br />
economic development at Carnegie Mellon<br />
University in the former steel town of Pittsburgh,<br />
Pennsylvania before moving to George Mason<br />
University in Fairfax, Virginia, in the summer of<br />
2004. Next spring Florida will publish The Flight<br />
of the Creative Class, in which he examines the<br />
worldwide competition for creative talent<br />
between cities and regions. Florida studied at<br />
Rutgers College and earned his PhD at Columbia<br />
University. In addition to his academic career, he<br />
heads two companies that he founded: the communications<br />
company Creativity Group and the<br />
consulting firm Catalytix.<br />
described by Florida as “creativity hubs.”<br />
At the top of the list are West Coast metropolitan<br />
areas such as Seattle, Portland, San<br />
Francisco, and the latter’s neighbor, Silicon<br />
Valley. Ambitious cities such as Minneapolis<br />
and Austin, which first developed a lively<br />
subculture and then began to prosper, also<br />
rank highly. In stark contrast to these are<br />
cities of the Old South such as Memphis and<br />
New Orleans. According to Florida’s criteria,<br />
these are the least creative.<br />
THE UNITED STATES COULD FORFEIT ITS<br />
POSITION AS A LEADING POWER<br />
IN THE CREATIVE SECTOR<br />
Florida rates European cities such as<br />
Dublin, Amsterdam, London and Munich<br />
very highly. They have managed, he argues,<br />
to become clusters for talent and technology.<br />
In these innovative regions live creative<br />
people attracted both by the high degree of<br />
tolerance and by local acceptance of innovative<br />
elites from in-country and abroad. The<br />
pay-offs of such modern life-styles take<br />
years to materialize.<br />
However, success is in the offing thanks to<br />
the energies that are releasing inspiration<br />
and wellbeing. Consider Berlin. “The city is<br />
a creative center with plenty of room for a<br />
tremendously diverse group of people willing<br />
to take risks,” says Florida. Still, the<br />
German capital is seeing competition from<br />
further north. Florida’s Creativity Group<br />
recently expanded its analysis to 14<br />
European countries. The figures suggest<br />
that the epicenter of competition with the<br />
United States is moving from traditional<br />
strongholds such as Great Britain, Germany<br />
and France to Ireland and Scandinavia,<br />
where the creative class has been growing at<br />
a peak annual rate of 7 percent since 1995. In<br />
terms of creativity, Sweden has already overtaken<br />
the United States. And if America fails<br />
to pay attention, Florida concludes, it could<br />
forfeit its position as a leading power in the<br />
creative sector.<br />
think: act 13
p food for thought<br />
ethics and management
the profit-revenue ratio is 18 percent higher at ethically managed companies<br />
food for thought f<br />
Generating profit ethically<br />
Companies that link management and ethics generate greater profits in the long run, according to<br />
findings from US government adviser, David Steiner. He is convinced that Europe is currently poised<br />
to take a leading role in developing a comprehensive model for ethical standards.<br />
:<br />
When David Steiner wants to explain<br />
how transparency is created, his job at<br />
British merchant bank SG Warburg comes<br />
to mind: “It was the first bank to open all<br />
incoming mail centrally and make it available<br />
to all employees in an abbreviated<br />
form.” This rigorous transparency model<br />
left its mark on the American ethicist. “I<br />
learned my first lesson in business ethics at<br />
SG Warburg,” he says.<br />
These days, the Institute for Corporate Cultural<br />
Affairs (ICCA) in Frankfurt, Germany<br />
is profiting from Steiner’s experience. Its job<br />
is to encourage companies to think about<br />
social and environmental <strong>issue</strong>s. The need<br />
for them to do so is pressing: As the influence<br />
of state and religion on society wanes, companies<br />
are being called on to fill the gap.<br />
But instead of chiding companies, the ICCA<br />
plays up the benefits of good corporate citizenship.<br />
“We can prove that compliance<br />
with ethical standards has a positive impact<br />
on performance,” says Steiner.<br />
For example, the Dow Jones Sustainability<br />
Indexes (DJSI), which list sustainably operated<br />
companies, beat the MSCI World Index<br />
by 42 points between December 1993 and<br />
September 2004. Likewise, the powerful US<br />
pension fund CalPERS invested $700 million<br />
in companies committed to protecting the<br />
environment and posted gains for its efforts.<br />
In September, the ICCA met with experts<br />
and executives like Rolf-Ernst Breuer, former<br />
chairman of Germany’s Deutsche Bank,<br />
and Richard Edelman, CEO of Edelman<br />
Public Relations Worldwide, to talk about<br />
the corporate code of conduct. “The first<br />
companies are expected to sign up to the<br />
code of conduct as early as 2005,” he says.<br />
The ICCA is also developing an “Ethics Standard<br />
of Excellence” to define the highest<br />
possible level of social responsibility for<br />
international companies, with a role that<br />
extends beyond their usual areas of operation.<br />
Says Steiner: “This is a process in<br />
which Europe, with the help of the ICCA,<br />
can take a leading role.” The ICCA wants to<br />
serve as a think tank in this context and<br />
channel the ethical efforts of corporate<br />
groups. It also wants to create an award for<br />
ethical corporate governance.<br />
Of course, senior managers may be hesitant<br />
to introduce moral and social standards out<br />
of fear of diluting shareholder value. Steiner<br />
reassures them: “The interests of shareholders<br />
are a priority for us as well. But we want<br />
to prove that companies can both satisfy<br />
DAVID M. STEINER is a professor at Boston<br />
University and department chairman of the School<br />
of Education. On behalf of the Institute for Corporate<br />
Cultural Affairs (ICCA), he is studying <strong>issue</strong>s<br />
relating to ethical corporate leadership and social<br />
responsibility. Steiner, who studied philosophy and<br />
ethics in Oxford, England, and earned his Ph.D. at<br />
Harvard University, is a recognized expert in the<br />
fields of ethics and education. He has been serving<br />
as director of the National Endowment for the Arts<br />
in Washington, DC since June 2004. This government<br />
organization’s purpose is to strengthen the<br />
role of the arts in culture and education.<br />
shareholder expectations and serve the<br />
community at the same time.”<br />
Steiner’s argument is backed by Simone<br />
Webley and Elise More. Working for the Institute<br />
of Business Ethics, in Britain, these<br />
two researchers have discovered that ethically<br />
managed companies generate 18 percent<br />
higher profits than their competitors.<br />
Moreover, these companies present a less<br />
volatile price-to-earnings ratio and are able<br />
to increase their return on capital employed<br />
(ROCE) by approximately 50 percent, while<br />
LACK OF TRANSPARENCY AND<br />
ETHICAL AMBIVALENCE CAN<br />
BE VERY COSTLY<br />
this value actually fell for companies without<br />
a code of conduct.<br />
The equation also works the other way<br />
around, because those who take an active<br />
approach to acknowledging and tackling<br />
mistakes generally suffer no loss in sales.<br />
“Lack of transparency and ethical ambivalence<br />
are more expensive than simply<br />
telling the truth,” says Steiner. The biggest<br />
obstacle to introducing new standards is the<br />
gap between short- and long-term expectations.<br />
Says Steiner, “It’s true that ethical<br />
management involves considerable costs up<br />
front, but these more than balance out in<br />
the long run.”<br />
The code of conduct currently being discussed<br />
by the ICCA forbids fraud and discrimination,<br />
promotes transparency and<br />
cultural diversity, and requires companies<br />
think: act 15
p food for thought<br />
ethics and management<br />
to contribute to their communities and uphold<br />
human rights. The Ethics Standard of<br />
Excellence is intended to ensure that all<br />
employees are provided with comprehensive<br />
training and health care coverage, as<br />
well as a humane work environment, fair<br />
compensation and environmentally sound<br />
operations. “The ICCA wants to express<br />
these principles in terms of balance-sheet<br />
items to show companies the impact of<br />
their behavior,” says Steiner, who since<br />
June has also been advising the United<br />
States government on cultural and ethical<br />
matters. The professor recommends that<br />
companies create an ethics board to introduce<br />
the code of conduct in order to ensure<br />
that employees are qualified and in compliance<br />
with standards.<br />
“Credibility and growth”<br />
<strong>Roland</strong> <strong>Berger</strong>, founder and chairman of the supervisory board of <strong>Roland</strong> <strong>Berger</strong> Strategy<br />
Consultants, believes that ethical behavior is absolutely essential for companies today.<br />
His advice: The more credible a company’s actions are, the greater its growth opportunities.<br />
THINK: ACT Mr. <strong>Berger</strong>, when it comes to<br />
corporate decision-making, is it possible<br />
to act in a consistently ethical manner, or<br />
does that conflict with the profitability<br />
principle?<br />
ROLAND BERGER One can act ethically, and<br />
one must do so. Companies today are closely<br />
<strong>Roland</strong> <strong>Berger</strong>, consulting company founder<br />
scrutinized in terms of what they do, how<br />
they do it—and often also where they do it.<br />
Issues that relate to subjects such as quality,<br />
product safety, employee relations, corporate<br />
commitment and environmental considerations—anywhere<br />
in the world, as it happens<br />
—are openly discussed and analyzed without<br />
individual companies really having any influence<br />
over the respective evaluation criteria.<br />
The more a company displays ethics and<br />
credibility, the greater its opportunities for<br />
growth are.<br />
So are ethics indispensable?<br />
Absolutely! If customers or employees are not<br />
happy with what they find at a company,<br />
they may very well vote with their feet. Those<br />
consequences will be quickly reflected in the<br />
company’s performance on the stock market.<br />
That’s tremendous leverage.<br />
In your opinion, what are the pillars<br />
of corporate ethics?<br />
First of all, a company needs a set of values<br />
that it stands for and advocates. However,<br />
most corporate visions and mission statements<br />
are market- and not value-related.<br />
Second, it needs a clear statement on how it<br />
plans to achieve its objectives. This statement<br />
will also determine which procedures it will<br />
pursue or exclude. Third, there must be principles<br />
in place that govern internal processes<br />
and their interactions. Fourth, you need<br />
clearly delineated responsibilities. Rules and<br />
individual obligations should be monitored.<br />
Companies often lack this culture of responsibility—meaning<br />
you don’t have to look far to<br />
see why there is a lack of credibility.<br />
Management’s reputation is affected by a<br />
few, highly visible cases. Can ethical management<br />
remedy this type of situation?<br />
In many countries, there have been some very<br />
clear cases of management failure that, in the<br />
public eye, have been more influential than<br />
the proper ethical behavior displayed by the<br />
vast majority of companies out there. It takes<br />
consistently unimpeachable behavior as well<br />
as openness and communication to survive<br />
this type of situation. Ethics is not just about<br />
having values, it’s also about conveying<br />
them, both within the company and to the<br />
public. That way, should a company find<br />
itself dealing with a crisis, it will have a<br />
credible base from which it can believably<br />
defend its actions.<br />
16<br />
think: act
Dossier #01<br />
THE FORMULA<br />
FOR GROWTH<br />
COMPANIES THAT AIM FOR LONG-TERM SUCCESS<br />
MUST BE ABLE TO DO MANY THINGS SIMULTANEOUSLY:<br />
INNOVATE, EXPAND, RESTRUCTURE, MOTIVATE<br />
AND, NOT LEAST, INSPIRE TRUST.
DOSSIER #01 The formula for growth<br />
[Hennes & Mauritz]<br />
40%<br />
FASHION FROM MORE THAN 1000 STORES<br />
more shops were opened by Hennes & Mauritz<br />
between 2001 and 2003. In the summer of 2004, the<br />
1000th was opened in Boulogne-sur-Mer, France;<br />
another 65 around the globe were planned for the<br />
fourth quarter. The strategy of boosting sales space<br />
has paid off for the world’s largest fashion chain: From<br />
2001 to 2003, the Swedish company’s profits (EBITA)<br />
grew an average of 29.76 percent annually.<br />
10-year<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants; H&M Annual Report 2003, Chart: Wallstreet Online<br />
STOCK CHART<br />
H&M / DOW JONES<br />
25000%<br />
20000%<br />
15000%<br />
10000%<br />
5000%<br />
0%<br />
1995 96 97 98 99 00 01 02 03 04<br />
comparison against the Dow Jones Index<br />
18<br />
think: act
The formula for growth DOSSIER #01<br />
[Canon]<br />
1992<br />
LEADING PATENT FACTORY<br />
STOCK CHART<br />
Canon / DOW JONES<br />
American patents were awarded to Canon in 2003,<br />
450%<br />
ranking the firm second among the top five research<br />
350%<br />
companies in the United States. International<br />
research facilities are part of the photo and office<br />
250%<br />
equipment maker’s growth strategy. Seventy-three<br />
150%<br />
percent of Canon’s sales come from outside of<br />
0%<br />
Japan. Average annual growth in profits (EBITA)<br />
1995 96 97 98 99 00 01 02 03 04<br />
between 1993 and 2003 was 11.87 percent.<br />
10-year comparison against the Dow Jones Index<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants; Canon Factbook 2004/2005, Chart: Wallstreet Online<br />
think: act 19
DOSSIER #01 The formula for growth<br />
[Home Depot]<br />
54.7<br />
CONTINUOUS MODERNIZATION<br />
dollars were spent by the average Home Depot<br />
customer in the second quarter of 2004. That is the<br />
highest second-quarter number ever for the world’s<br />
largest home improvement chain. Home Depot<br />
constantly invests in modernizing its stores and in<br />
training its employees. Over the last 10 years, the<br />
company has produced average annual profit growth<br />
of 24.99 percent (EBITA, 1993–2003).<br />
STOCK CHART<br />
Home Depot / DOW JONES<br />
1995 96 97 98 99 00 01 02 03 04<br />
10-year comparison against the Dow Jones Index<br />
800%<br />
600%<br />
400%<br />
200%<br />
0%<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants; Chart: Wallstreet Online<br />
20 think: act
The formula for growth DOSSIER #01<br />
[Continental]<br />
30%<br />
UNTOUCHED BY THE SECTOR’S PROBLEMS<br />
STOCK CHART<br />
Continental / DOW JONES<br />
increase was shown by Continental’s stock price from<br />
500%<br />
January to November 2004. The automotive supplier and<br />
400%<br />
tire manufacturer has been growing faster than the sector<br />
300%<br />
as a whole. The strategic foundation for this growth was<br />
200%<br />
provided by the tire replacement business, which<br />
100%<br />
decoupled Continental from new car sales, by consistent<br />
0%<br />
relocation of production to low-cost locales and by the<br />
1995 96 97 98 99 00 01 02 03 04<br />
company’s overall balanced product portfolio.<br />
10-year comparison against the Dow Jones Index<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants; Chart: Wallstreet Online<br />
think: act 21
DOSSIER #01 The formula for growth<br />
[Microsoft]<br />
65<br />
SUCCESS FROM MONOPOLY AND MARKETING<br />
billion dollars (rounded) were held in cash reserves by Microsoft at the<br />
end of November 2004. In recent years, the world’s largest software<br />
company has seldom been the first to take advantage of new technologies<br />
to open up a market, such as the Internet or new standard business<br />
software. Nevertheless, strong marketing and a dominant<br />
position in PC operating systems brought the company annual<br />
average profit growth (EBITA) of 26.18 percent in the years between<br />
1993 and 2003.<br />
10-year<br />
Sources: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants, Barron’s; Chart: Wallstreet Online<br />
STOCK CHART<br />
Microsoft / DOW JONES<br />
2000%<br />
1500%<br />
1000%<br />
500%<br />
0%<br />
1995 96 97 98 99 00 01 02 03 04<br />
comparison against the Dow Jones Index<br />
22<br />
think: act
The formula for growth DOSSIER #01<br />
[Porsche]<br />
82%<br />
LEAVING THE ECONOMY BEHIND<br />
STOCK CHART<br />
Porsche / DOW JONES<br />
was Porsche’s average annual level of profit growth<br />
2000%<br />
(EBITA) from 1994 to 2003. The Stuttgart, Germanybased<br />
sports car maker bucked the sector’s downward<br />
1500%<br />
slide with a combination of a strong brand, technical<br />
1000%<br />
excellence and a nose for trends. The Cayenne SUV came<br />
500%<br />
at the right time, helping the company top its goals in<br />
0%<br />
the 2003/04 business year. Porsche sold 39,913 of the<br />
1995 96 97 98 99 00 01 02 03 04<br />
luxury SUVs, beating its target of 30,000.<br />
10-year comparison against the Dow Jones Index<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants; Chart: Wallstreet Online<br />
think: act 23
DOSSIER #01 The formula for growth<br />
nSANOFI-AVENTIS<br />
The merger with Aventis in 2004 made<br />
Sanofi-Synthélabo the third largest<br />
pharmaceutical group in the world and<br />
the market leader in Europe.<br />
33% In the<br />
year 2003 alone,<br />
Sanofi boosted US<br />
sales by one-third.<br />
SOURCE: SANOFI-SYNTHÉLABO ANNUAL REPORT<br />
»We want to grow in<br />
the generic-drug<br />
business—possibly<br />
through making<br />
acquisitions.«<br />
JEAN-FRANÇOIS DEHECQ, CEO, SANOFI-AVENTIS<br />
OPERATING PROFITS (in $ billion)<br />
1.417<br />
1.817<br />
CAGR: 33 %<br />
2.335<br />
3.321<br />
2000 2001 2002 2003<br />
Between 2000 and 2003, Sanofi-<br />
Synthélabo increased its midyear<br />
operating result (CAGR—compound<br />
annual growth rate) by 33 percent,<br />
a figure achieved by a series of salesand-margin-strengthening<br />
bestsellers<br />
that the group developed in-house.<br />
Farewell to the »V-curve«<br />
GROWTH OR RESTRUCTURING? FOR TOP INTERNATIONAL COMPANIES, THIS IS NO LONGER<br />
AN EITHER-OR QUESTION. SUSTAINED SUCCESS REQUIRES A TWO-PRONGED STRATEGY, ONE THAT<br />
BOOSTS SALES WHILE SIGNIFICANTLY REDUCING COSTS AT THE SAME TIME.<br />
s<br />
SPEED IS WHAT DETERMINES the success of Canon,<br />
the Japanese manufacturer of business machines and<br />
cameras—at least when it comes to printer or copier<br />
output, or to the shutter speeds of digital cameras.<br />
However, at his upper-management meetings at 8<br />
o’clock every morning, company president and CEO<br />
Fujio Mitarai likes to slow things down. Half an hour<br />
before official office hours, the Canon directors meet for<br />
their daily session on the 17th floor of the Tokyo head<br />
office, located on the banks of the Tama River. Over cups<br />
of green tea, they talk about current <strong>issue</strong>s not always<br />
related to the world of big business. Mitarai says of his<br />
seemingly outmoded leadership style, one that cultivates<br />
easy conviviality and informal contacts, “Management<br />
works only through communication. If you neglect<br />
it, you can run the danger of losing touch with reality.”<br />
AS AFFABLE AS MITARAI may appear in the tightestknit<br />
of management circles, he shows himself to be all<br />
the more unrelenting when he deals with the task<br />
at hand. “The most important thing at Canon is profitability,”<br />
is the 69 year-old’s credo. Accordingly, Mitarai<br />
did not shy away from an iron-fisted management style<br />
when he took up his present position in 1995. Within<br />
five years, the new boss let go of the company’s seven<br />
biggest money-losers, including the typewriter, personal<br />
computer and LCD monitor businesses. “If a corporate<br />
group wants to achieve stable growth, it has to carefully<br />
select the business branches that are potentially<br />
profitable, and focus all resources on those,” explains<br />
Mitarai. Nevertheless his strategy was not limited to the<br />
streamlining process. At the same time, he restructured<br />
manufacturing processes and relieved overwhelmed<br />
production assembly lines by making groups<br />
responsible for their own work, an approach known<br />
around Canon as “cell manufacturing.” The restructuring<br />
not only increased employee motivation, it also<br />
reduced operating costs by one-third. The result is that<br />
fewer people now deliver a higher output, and they do<br />
so with a lower rate of error.<br />
THE RESULTS SPEAK for themselves. Over the past<br />
decade Canon was among the companies around the<br />
globe with the strongest growth in value. Between<br />
1993 and 2003, the manufacturer of optoelectronic<br />
devices and office equipment increased its earnings<br />
before interest, taxes and amortizations (EBITA) by an<br />
average of almost 12 percent annually. The secret of<br />
this success is the company’s unconventional mixture<br />
of goal orientation with a trust-based culture. For years<br />
Mitarai traveled from one location to the next to explain<br />
to employees the importance of entrepreneurial thinking<br />
and acting at all levels of the company’s hierarchy.<br />
These appeals would not have availed, however, had it<br />
not been for an aspect of Canon’s corporate culture<br />
called “kyosei.” This term roughly translates as “living<br />
and working together for the common good.” The concept<br />
also includes the company’s social obligations<br />
and lifelong employment relationships, as well as the<br />
personal commitment and continuous training of individual<br />
employees. With this approach, Canon is achieving<br />
what would have been considered unthinkable five<br />
years ago: Pursuing the dreams of growth, without losing<br />
sight of a strict earnings-oriented attitude. Mitarai<br />
intends to continue in this direction. For 2005, the<br />
head of Canon has assigned his people the objective of<br />
achieving or defending market leadership in all core<br />
business areas, and to continue unflinchingly along<br />
the course of reducing costs.<br />
FEW GROUPS HAVE BEEN ABLE to master the art of<br />
combining steady growth with high profitability.<br />
According to an analysis conducted by <strong>Roland</strong> <strong>Berger</strong><br />
Strategy Consultants, only one-quarter of the 1,700<br />
largest companies in Asia, Europe and North America<br />
were able to increase their profits more than their sales<br />
24<br />
think: act
The formula for growth DOSSIER #01<br />
between 1991 and 2003. These “profitable growers”<br />
(see diagrams beginning p.18) have achieved the business<br />
equivalent of squaring the circle. They exploit<br />
economies of scale and scope without having to cope<br />
with the disadvantages that often threaten large organizations.<br />
Among these disadvantages are:<br />
p At the administrative level: complexity and the<br />
creation of hierarchies;<br />
p At the technical level: incompatible processes,<br />
systems and structures;<br />
p At the cultural level: disintegration tendencies.<br />
To complicate matters, the era of global competition<br />
does not allow any time for consolidation periods anymore.<br />
“The game has changed: The classic V-curve—<br />
first trimming down, then growing—is outdated,” warns<br />
Burkhard Schwenker, CEO of <strong>Roland</strong> <strong>Berger</strong> Strategy<br />
Consultants. Schwenker says that some formulas have<br />
proven successful in avoiding the risk of growth and<br />
link-up disadvantages. This includes decentralization of<br />
rapidly grown organizations as well as creating clearly<br />
defined areas of responsibility and flat hierarchies.<br />
Also, Schwenker considers a modular and flexible infrastructure<br />
in equipment and IT a key factor so businesses<br />
can quickly react to changed conditions. Finally, the<br />
employees in all areas must be encouraged to be<br />
proactively committed to the company.<br />
COMPANIES HAVE NO CHOICE other than to grow<br />
because margins shrink in saturated markets and, if revenues<br />
remain constant, profits shrink along as well.<br />
Thus, increased earnings require growth in sales. It is a<br />
situation that forces a company’s hand but also opens<br />
up new opportunities. For profitable growth produces its<br />
own momentum, continuously generating new growth.<br />
The generation of free cash flow is a prerequisite. “Such a<br />
flow is created when a corporate group intelligently<br />
improves its cost base and establishes competitive<br />
structures without damaging its core,” write the authors<br />
of a study titled “Finding the formula for growth,” by<br />
<strong>Roland</strong> <strong>Berger</strong> Strategy Consultants. Funds released can<br />
flow into the expansion of business activities. This creates<br />
new scale advantages, which, to close the circle, lead to<br />
exceptional operating performance and new cash flows.<br />
SO HOW IS IT FEASIBLE to initiate that kind of a<br />
growth algorithm? Companies wanting to increase their<br />
value continuously according to this formula need to<br />
make a series of simultaneous adjustments. Besides an<br />
ability to grow, the willingness to do so is also fundamental.<br />
Companies capable of growth are those that<br />
have sufficient liquidity as well as suitable products and<br />
structures with which to set out along and successfully<br />
manage an expansion-oriented course. The willingness<br />
to grow brings softer factors into play, such as attitudes,<br />
corporate culture, acceptance of change and a<br />
desire to innovate—or, in other words, trust and confidence<br />
in one’s own capabilities. Put this way, growth<br />
becomes a management function.<br />
BOTH PREREQUISITES, the capability and the willingness<br />
to grow, are exhibited by Nestlé. With 250,000<br />
employees and $74 billion in sales, the world’s largest<br />
food company is fully focused on new markets. It’s an<br />
absolute necessity for Nestlé since the core business is<br />
increasingly coming up against growth ceilings. While<br />
the Swiss company still earns 90 percent of its revenue<br />
from foodstuffs and water, profit margins are stagnating—not<br />
least because of the collective purchasing<br />
power of discount stores. “It was clear that items like<br />
tomato sauce and noodles would not produce any new<br />
value in the long term,” says Nestlé CEO Peter Brabeck-<br />
Letmathe about the interim result of the company’s<br />
strategic reorientation. “I had to identify business sectors<br />
that could create new growth.” The small but highend<br />
pharmaceutical products unit was significantly<br />
expanded, for example. With an EBIT margin of more<br />
than 30 percent, the business unit has outstanding<br />
earning power. It is supported primarily by the US subsidiary<br />
Alcon, purchased in 1977, that specializes in contact<br />
lens care and eye medication.<br />
NESTLÉ IS PINNING even higher hopes on the nutrition-based<br />
business sector that is developing healthenhancing<br />
foodstuffs. One prototype is the LC1 yogurt<br />
that is designed to strengthen the immune system.<br />
Consumers knowledgeable about nutrition are willing to<br />
pay up to 40 percent more for such products. It should<br />
think: act 25
DOSSIER #01 The formula for growth<br />
nSYMANTEC<br />
The US manufacturer of security software<br />
is the global market leader and manages<br />
its sales via excellent relations with over<br />
600 international corporate groups.<br />
32.5%<br />
Symantec increased<br />
its profit margin from<br />
20.3 to 32.5 percent.<br />
SOURCE: SPEAR SECURITY INDUSTRY ANALYST NEWS<br />
»We intend to achieve<br />
massive growth by<br />
visibly outperforming<br />
the market.«<br />
JOHN W. THOMPSON,<br />
CEO, SYMANTEC<br />
OPERATING PROFITS (in $ million)<br />
136<br />
32<br />
CAGR: 58 %<br />
357<br />
532<br />
2000 2001 2002 2003<br />
Symantec handled the 2001 slump<br />
well. Despite the setback of 2000 to<br />
2003, its midyear operating (CAGR)<br />
results increased by 58 percent. The<br />
reason: continuous acquisitions and a<br />
consistent brand-name strategy.<br />
be noted, however, that five years of intensive research<br />
went into the designer food. It is therefore not surprising<br />
that Nestlé is looking for strong joint-venture partners<br />
to help shoulder the load. Jointly with the French<br />
cosmetics group L’Oréal, in which Nestlé holds a 26.4<br />
percent stake, it is developing beauty tablets that slow<br />
down the visible effect of aging on skin, hair and nails.<br />
The financing for such research projects comes from<br />
the “Life Ventures” risk capital fund.<br />
IN ADDITION, Brabeck-Letmathe is counting on<br />
specific purchases to reap increasing economies of<br />
scale and scope in the core businesses. In June 2003<br />
Nestlé acquired Dreyer’s, the second largest US ice<br />
cream producer, for $2.8 billion. Just a short time earlier,<br />
Nestlé had purchased the German company Schöller<br />
Group and the Swiss ice cream brand Mövenpick. For<br />
Brabeck-Letmathe, who very early in his career delivered<br />
ice cream by truck, expansion is by no means an<br />
end in itself. “We’re not looking to be the largest company,<br />
rather the most competitive one.” His personal<br />
motto expresses the desire both to grow and to improve<br />
margins. “The art of good management consists of<br />
achieving both simultaneously,” emphasizes the Nestlé<br />
CEO. Keeping these in balance sometimes also necessitates<br />
that Brabeck-Letmathe repeatedly divest parts of<br />
the company. Although 29 new plants were opened in<br />
2003 alone, 26 existing ones were also sold or closed,<br />
always with the overall objective of optimizing the<br />
group’s portfolio in a value-oriented manner.<br />
THE FACT THAT THE GROWTH curve looks different<br />
for various sectors also holds true for different regions,<br />
as exemplified by the electronics giant Siemens. While<br />
the figures for Germany’s domestic market in the<br />
slumping sectors of communications and transportation<br />
systems point to consolidation, Siemens is on an<br />
expansion course in the United States with its “Siemens<br />
One” program. The growth strategy was conceived by<br />
the designated chairman of the board, Klaus Kleinfeld,<br />
who headed the company’s US operations and will<br />
replace Heinrich v. Pierer as chairman in January 2005.<br />
Kleinfeld’s successor, George Nolen, now can reap the<br />
fruitful outcome of this endeavor. By 2006, he is<br />
expecting additional business of at least €2 billion<br />
from established accounts alone. His cross-selling<br />
strategy aims to provide large-scale customers such as<br />
hospitals, sports arenas and rail companies with complete,<br />
one-stop infrastructure solutions. Siemens just<br />
received a contract worth up to $1.37 billion to install<br />
high-tech explosives-detection systems at all commercial<br />
airports in the United States. “We won the bid<br />
because we have the necessary experience in airport<br />
logistics, building security, baggage handling and X-ray<br />
scanning,” emphasizes Nolen.<br />
THE COMPANY ALSO has an advantage in that<br />
Siemens is increasingly perceived as a domestic entity<br />
in the United States. After all, the company employs<br />
70,000 people there, almost all of them Americans.<br />
Siemens is pursuing its decentralization strategy also<br />
for another reason. In a monolithic organization, mental<br />
barriers and cultural differences can end up inhibiting<br />
growth. “In the past, we did not always understand the<br />
needs of our customers,” notes Nolen. In order to minimize<br />
such conflicts, Siemens depends almost exclusively<br />
on “locals” in all countries, who usually better<br />
understand the regional market and its particular customer<br />
requirements. For v. Pierer, Siemens is, as a<br />
result, “a German company in Germany, a US company<br />
in the US and a Chinese company in China.”<br />
THE SIGNIFICANCE OF “soft” growth factors, especially<br />
during periods of change situations, can hardly be<br />
overestimated. Subcultures often crop up, especially<br />
after mergers and larger-scale organizational change<br />
projects. These can influence employees more than the<br />
actual corporate culture, and can cause divisions to<br />
insulate themselves from one another or even prevent<br />
their integration after a merger. Open communications,<br />
a willingness to discuss matters and corporate management’s<br />
competence to make decisions with the<br />
employees’ backing prevent this type of drift. Successful<br />
growth companies find their identities less in their<br />
products, but in their group-wide set of values. Even if<br />
the wording is similar in many companies, the important<br />
thing is that values are openly agreed upon and<br />
actually put into practice on a daily level. Siemens CEO<br />
v. Pierer considers the integrity of both its business<br />
policies and its responsible employees the core value of<br />
the company. From this he derives principles such as<br />
decency, honesty, sincerity, openness and tolerance.<br />
26<br />
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The formula for growth DOSSIER #01<br />
According to v. Pierer, this type of code of conduct creates<br />
trust and a sense of confidence among both<br />
employees and customers.<br />
TRUST-BUILDING MEASURES designed to reinforce<br />
its own identity are also used by Tchibo Holding, based<br />
in Hamburg, Germany. Founded as a coffee roaster in<br />
1949, the retailer’s everyday goods and services division<br />
has experienced double-digit growth in the last<br />
four years. This division is currently responsible for 60<br />
percent of sales and 95 percent of earnings. This<br />
change could be seen as a cultural revolution that<br />
ended up presenting fundamental questions about the<br />
company’s purpose. Nonfood board member Stefan<br />
Swinka answered these questions after consulting<br />
closely with employees, whose expectations and feedback<br />
influenced the new mission statement. “You can<br />
no longer run a large company on authority alone,” says<br />
an obviously convinced Swinka. Instead, he explains,<br />
he relies on credibility, authenticity and openness—a<br />
sentiment with which the experts at <strong>Roland</strong> <strong>Berger</strong><br />
Strategy Consultants could not be in greater agreement.<br />
They discovered that companies that are strong on<br />
communications and have flat hierarchies are the most<br />
successful. These types of structures increase individual<br />
responsibility, permit faster decision-making and<br />
create more flexibility. In managing innovation and<br />
creativity, three- to five-year objectives are the most<br />
likely to lead to success. They should be ambitious<br />
because only then will they create the necessary pressure.<br />
At the same time, an incentive system in the form<br />
of salary scales, success-based bonuses or similar<br />
types of compensation should be put in place to demonstrate<br />
to employees that good performance is indeed<br />
worth the extra effort.<br />
THESE TYPES OF MECHANISMS also guard against<br />
some common, negative aspects of success, such as<br />
satiation, sluggishness and complacency. A prime<br />
example of a company almost strangled by its own<br />
growth is IBM. The undisputed market leader in mainframe<br />
computers in the 1980s, Big Blue almost missed<br />
the PC trend and was only saved by the smart turnaround<br />
management of its CEO Lou Gerstner, who took<br />
the helm in 1993. Developers had retreated into a realm<br />
of technological insider knowledge while failing to come<br />
up with marketable products. “A lot of people confuse<br />
invention with innovation,” warns Michael Zisman,<br />
»A model European company«<br />
A MARKET LEADERS’ RENDEZVOUS: ROLAND BERGER STRATEGY CONSULTANTS AWARDS<br />
PRIZES TO EIGHT GROWING FRENCH COMPANIES PURSUING EUROPE-WIDE EXPANSION.<br />
Bernard Bourigeaud, CEO, Atos Origin<br />
Atos Origin, France’s leading IT service<br />
provider, was created from the merger of<br />
Atos and Origin. Today, the group is a major<br />
European player, achieving sales of more<br />
than €5 billion, with 45,000 employees in<br />
50 countries.<br />
One of the most sought-after corporate awards in<br />
France, the Prix de l’Entreprise Européenne, was<br />
awarded in September. The competition was judged<br />
by <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants, the HEC<br />
Management School and the economic magazine<br />
Enjeux-Les Echos and was subdivided into eight categories.<br />
“We want to promote what characterizes a<br />
European company and highlight the background of<br />
its market success,” explained Vincent Mercier, head<br />
of the Paris office and a member of <strong>Roland</strong> <strong>Berger</strong><br />
Strategy Consultants’ Executive Committee.<br />
Atos Origin, an IT service provider, won the grand<br />
prize in the “More than €3 billion in sales” category.<br />
The jury lauded the company for having<br />
smoothly sailed through the turmoil affecting the<br />
industry sector. Eurofins Scientific, a life science<br />
group, also received a grand prize, this one in the<br />
“Less than €3 billion in sales” category. The company<br />
was acknowledged for its rapid development<br />
from start-up to global player.<br />
Air France received the prize for best merger for<br />
its fusion with KLM, while steel giant Arcelor was<br />
awarded a prize for its fight against cheaply made<br />
goods (B2B). Food giant Danone stood out for its<br />
worldwide sales expansion (B2C), as did Air Liquide,<br />
an industrial gas supplier, for its international sitelocation<br />
strategy, and EADS, the aviation group, for<br />
best research and development. ST Microelectronics,<br />
a semiconductor group, was deemed to have the<br />
best corporate governance.<br />
think: act 27
DOSSIER #01 The formula for growth<br />
nSAMSUNG ELECTRONICS<br />
The South Korean manufacturer of<br />
mobile phones and TFT displays<br />
shines with a strong brand name and<br />
continuous innovation.<br />
31% Between<br />
2001 and 2003, operational<br />
profits rose<br />
31 percent annually.<br />
SOURCE: BLOOMBERG<br />
»Our margins are<br />
visibly better since<br />
we began relying on<br />
high-end products.«<br />
YUN JONG-YONG, CEO, SAMSUNG ELECTRONICS<br />
STOCK MARKET PERFORMANCE<br />
Samsung Electronics<br />
170<br />
132<br />
212<br />
133<br />
303<br />
Kospi<br />
171<br />
307<br />
187<br />
2001 2002 2003 Oct. 04<br />
Between 2001 and 2004, shares in<br />
Samsung Electronics performed better<br />
than the Korean Kospi index, despite the<br />
fact that the group had to struggle with<br />
fluctuating results figures. Samsung’s<br />
strong position in China is one of the<br />
reasons for its high market valuation.<br />
IBM’s vice president of corporate strategy, adding,<br />
“Innovation is the application of an invention for a concrete<br />
problem.” IBM therefore continuously sends its<br />
developers out of their labs to interact with users.<br />
IN THE AIRPLANE INDUSTRY, on the other hand, a<br />
young challenger beat the defending champion: In<br />
2003, Airbus replaced its US competitor Boeing in the<br />
past year as market leader in the civil-aircraft sector<br />
and is now heading for the stars. Under CEO Noel<br />
Forgeard’s leadership, Airbus delivered a total of 161<br />
airplanes in the first half of 2004—12 more than in the<br />
same time period of the previous year. Behind this success<br />
story is an innovative product range, with highlights<br />
such as the successful long-distance model<br />
A330-200. The most recent example of European engineering<br />
might is the new super-sized A380 that from<br />
2006 on will carry 555 passengers over a distance of<br />
14,800 km on one fuel-load. The company already has<br />
150 orders for this plane. At the same time the EADS<br />
subsidiary, which delivers two-thirds of the group’s<br />
sales, is also driving process innovation forward.<br />
Accordingly, an increasing number of tasks are to be<br />
outsourced, including some core ones, such as<br />
research and development. To meet the demands of a<br />
“risk partner,” the company plans to reduce the number<br />
of suppliers to 400, according to Gustav Humbert, head<br />
of production at Airbus. This way, the pressure will be<br />
kept on Airbus’s own subsidiary companies that serve<br />
as suppliers. Through the tough selection process,<br />
Airbus is hoping not only to generate more innovation<br />
power but also to achieve cost savings of €1.5 billion<br />
by 2006.<br />
COST CUTTING ALWAYS carries the danger of saving<br />
cost at the wrong place. For political reasons, often cuts<br />
are made across the board, instead of identifying<br />
money-losers and sparing profitable growth drivers<br />
from the cost-reducing measures. The consequences<br />
can be devastating. “If a company’s source of innovation<br />
is shut down, the source of growth is also lost,”<br />
warns management guru Gary Hamel. Without doubt,<br />
sustained, negative balance sheet figures for individual<br />
divisions should be a sign that core competencies are<br />
overextended or overloaded and that desired reciprocal<br />
relationships with other business units do not exist.<br />
Companies gain a better understanding of this <strong>issue</strong><br />
through using a “balanced scorecard of scale and<br />
scope,” with which they can steer and control growth.<br />
The scorecard reveals not only the positive but also the<br />
negative effects of scale and scope. The analysis takes<br />
into account finance-based reference figures measuring<br />
process efficiency and effectiveness, as well as<br />
customer opinions and employee perspectives. If all<br />
key performance indicators are turning up negative, the<br />
consequence is usually to let go of the corresponding<br />
business sector. The strategy of “profitable trimming”<br />
pursued by 18 percent of the companies analyzed by<br />
<strong>Roland</strong> <strong>Berger</strong> Strategy Consultants does promise a<br />
positive outcome in times of crisis. However, sometimes<br />
the elation is only short-lived. When thrift turns to<br />
stinginess and restructuring turns to random clipping,<br />
and when there is no money left for research, innovation<br />
or acquisitions, the result is a hollowed-out company<br />
that can’t survive in the long term. If a business sector<br />
fails to attain the size needed, rather than shedding<br />
it, suitable acquisitions could also provide a solution.<br />
AN EXAMPLE OF A COMPANY that is following a consistent<br />
acquisition strategy is Amgen, which, on taking<br />
over its competitor Immunex in July 2002, became the<br />
world’s largest biotech company. Back then, Amgen<br />
wanted to gain access to the new arthritis drug Enbrel,<br />
which combats joint inflammation through regulating<br />
immunological processes. “The merger will strengthen<br />
our financial power, increase the diversification of our<br />
product portfolio and accelerate our long-term growth,”<br />
said CEO Kevin Sharer in justification of the $10 billion<br />
deal. The financial markets shared this assessment. In<br />
terms of market capitalization, Amgen has already overtaken<br />
pharmaceutical giants like Eli Lilly and Bristol-<br />
Myers Squibb. With the high market value in its pocket<br />
as acquisition equity, the company is continuing with<br />
its buying spree. In early 2004 it absorbed Tularik, a<br />
company that is experimenting with promising medications<br />
that could be used in the treatment of cancer, diabetes,<br />
obesity and heart disease. Sharer knows of only<br />
one barrier to growth: human resources. “Not everyone<br />
can or wants to increase their capabilities and commitment<br />
to the degree required by the company’s expansion.”<br />
Perhaps he should have as much faith in his<br />
employees as does Canon CEO Mitarai.<br />
28<br />
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The formula for growth DOSSIER #01<br />
Ways to achieve growth<br />
COMPANIES HAVE A CHOICE: EITHER THEY EXPAND IN A SELF-PROPELLED FASHION, BY MEANS OF ACQUISITION, OR THROUGH FLEXIBLE<br />
PARTNERSHIPS AND ALLIANCES. PICKING THE RIGHT STRATEGY DEPENDS ON RESOURCES AND THE CURRENT MARKET SITUATION.<br />
[INTERNAL GROWTH] While companies that<br />
decide to approach expansion by their own<br />
muscle avoid the risks of a merger or building<br />
networks, they can rarely benefit from exceptionally<br />
large growth spurts. It is therefore<br />
especially imperative to increase operating efficiency<br />
in all business activities. Only this way<br />
provides the generation of free cash flow that<br />
can finance investments and new growth.<br />
[EXTERNAL GROWTH] Size can be bought, even<br />
if it is only at the price of greater risk most of<br />
the time. Companies do experience a growth<br />
spurt through acquisitions and can undertake<br />
globalization projects faster, tap new markets<br />
or adjust to established ones. However, experience<br />
shows that integration expenses are usually<br />
underestimated: 50 to 70 percent of all<br />
mergers are considered failures.<br />
[GROWTH THROUGH NETWORKS] Virtual size<br />
helps balance out growth limitations while<br />
avoiding the unknowns associated with mergers.<br />
Companies that organize into networks<br />
and partnerships profit from the improving<br />
opportunities to steer the agreed-upon distribution<br />
of functions through IT system capabilities.<br />
In the past decade’s fast-growing markets, network<br />
development was a primary growth driver.<br />
The six basic growth strategies<br />
THE “V-CURVE” IS NO MORE: TO BE SUCCESSFUL, MODERN COMPANIES MUST REORGANIZE AND GROW AT THE SAME TIME.<br />
ALL SIX GROWTH STRATEGIES POINT TO THE PARALLEL BETWEEN EXPANSION AND INCREASING EFFICIENCY.<br />
[GLOBALIZATION] [MARKET SHAKEOUT] [OUTSOURCING] [NETWORK BUILDING] [CUSTOMER ORIENTATION] [INNOVATION]<br />
New<br />
markets<br />
Factor<br />
cost<br />
advantages<br />
Marketshare<br />
gains<br />
Economies<br />
of scale<br />
Focus on<br />
core<br />
competencies<br />
Fixed-costs<br />
reduction<br />
Access<br />
to new<br />
markets<br />
Adjustment<br />
of size<br />
disadvantages<br />
Service<br />
and<br />
retention<br />
Savings<br />
in gaining<br />
customers<br />
Differentiation,<br />
edge<br />
Process<br />
innovation<br />
[STRATEGY] With every basic strategy, the goal is to initiate growth and at the same time establish competitive cost structures. For this purpose,<br />
management should consider three fundamental rules: First, leadership must define the goal and position the company in comparison with the<br />
competition. Then, the relevant business drivers of every sector must be identified. Finally, by using an opportunities-and-risks assessment, it<br />
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<br />
plan is a great challenge for most companies, according to surveys conducted by <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants.<br />
think: act 29
DOSSIER #01 Trust<br />
30<br />
think: act
Trust DOSSIER #01<br />
How trust drives growth<br />
CONTROL IS OUT, TRUST IS IN. COMPANIES THAT INVEST IN TRANSPARENCY, DELEGATE RESPONSIBILITY AND RESPECTFULLY<br />
COMMUNICATE WITH THEIR EMPLOYEES HAVE AN EASIER TIME OPENING UP NEW AREAS OF GROWTH. A PREREQUISITE FOR THE<br />
TRANSFORMATION INTO A TRUST-BASED ORGANIZATION IS TOP MANAGEMENT’S COMMITMENT TO MAKING IT HAPPEN.<br />
s<br />
WHEN THE FRENCH car manufacturer Renault<br />
acquired a 36.8 percent stake in its rival Nissan for<br />
€5 billion in the spring of 1999, the industry<br />
looked at the Japanese company’s $17.7 billion<br />
debt position and shook its head. Five years later,<br />
Renault CEO Louis Schweitzer can pat himself on<br />
the back. The former economic basket case has<br />
transformed itself into a money-making machine<br />
and generated almost €1.7 billion, or two-thirds, of<br />
the French group’s €2.5 billion in earnings in the<br />
past year. “Nissan was a good company with a<br />
management problem,” says Schweitzer of the situation<br />
before Renault came aboard. When asked<br />
about the reasons for the partnership’s success,<br />
the CEO takes care to emphasize psychological<br />
factors, “To emerge from a crisis it’s extremely<br />
important to demonstrate trust and confidence in<br />
people’s abilities and good will and to give them an<br />
opportunity to come up with the solutions themselves.”<br />
Renault, says Schweitzer, respected the<br />
interests and know-how of the Japanese from the<br />
very beginning.<br />
THE STORY ABOUT THIS “merger without merging”<br />
(Euro Business) shows that intangible values<br />
such as respect, transparency and confidence are<br />
gaining even greater significance in a globalized<br />
economy with its multinational groups and worldwide<br />
networks. Ultimately it’s about making the<br />
most of entrepreneurial opportunities, as happened<br />
within a relatively short period with the<br />
Renault-Nissan alliance. The joint platform strategy<br />
halved the partners’ development costs while doubling<br />
expertise. The company’s combined purchasing<br />
power saves $500 million in costs annually. The<br />
potential of such improvements in operating performance,<br />
no matter how beneficial they might be<br />
for the balance sheet, can only be fully realized if<br />
both partners have developed a common objective<br />
for the future of their companies and can thereby<br />
avoid conflict and inefficiency.<br />
SUPPOSEDLY SOFT FACTORS, such as a willingness<br />
to change and a respectful communication<br />
style, play key roles in implementing a parallel<br />
strategy of both continuous restructuring and<br />
expansion, according to the “Growth through trust”<br />
study by <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants. A<br />
company cannot be successful if it is not prepared<br />
to grow, explains Burkhard Schwenker, CEO of the<br />
consulting firm. “The willingness to contribute to<br />
high growth is created in a cultural environment<br />
that considers performance a value and demands<br />
outstanding personnel management,” he says.<br />
Sought-after qualities include ambition, a thirst for<br />
competitive endeavor, and commitment. “A company<br />
must encourage its employees to pro-actively<br />
pursue ambitious goals,” he adds.<br />
ROLAND BERGER Strategy Consultants identified<br />
transparency, quality awareness, low transaction<br />
costs, and a culture of permanent innovation as<br />
the basic elements of such a trust-based organization.<br />
In its analysis of various international outperformers,<br />
the consultancy discovered that companies<br />
that transparently communicate values, objectives,<br />
requirements and feedback make it easier for their<br />
employees to identify with the company. The quality<br />
of work and products, a major criterion for a company’s<br />
market success, is often a direct consequence<br />
of management’s trust in the employees’ ability to<br />
perform. Quality control methods alone do not kick<br />
off quality improvements. It is the comparatively<br />
higher levels of engagement in a trust-based organization<br />
that lower transaction costs, because they<br />
render formal control mechanisms and monitoring<br />
tasks unnecessary. This approach also unleashes<br />
more creativity in a working environment where<br />
employees feel they can try out new ideas and freely<br />
discuss them without having to worry about having<br />
the fruit of their labors taken from them. “A company’s<br />
success can be increased only when employees<br />
are ready and able to contribute their individual<br />
expertise,” says the US innovations expert and MIT<br />
senior lecturer Peter Senge. It is of great importance<br />
that all involved develop a shared goal, if the joint<br />
efforts are to succeed.<br />
IT IS ESPECIALLY IMPORTANT to proceed in an<br />
open and honest manner during restructuring<br />
phases, when employees and customers will be<br />
worrying about jobs and fulfillment of orders. “In<br />
uncertain times, trust can only be created if management<br />
is able to communicate hard truths while<br />
also standing by its announcements and keeping<br />
its promises,” says Thorsten Grenz, CEO of Mobilcom,<br />
a German mobile communications provider.<br />
Measures serving to create trust also include a<br />
joint sense of accomplishment in achieving milestones.<br />
“Once we were profitable again in the<br />
mobile communications business we had a party<br />
and hung a big, fat zero on the wall,” remembers<br />
Grenz about the renewed sense of togetherness in<br />
the company. In the meantime, Mobilcom is back<br />
on track, growing faster than the market as a whole<br />
and putting the squeeze on the top dogs with its<br />
innovative mobile services.<br />
COMPANIES THAT ARE seriously looking to create<br />
a trust-based organization face a key <strong>issue</strong>: how<br />
to begin? “Our discussions with management executives<br />
have shown that the positive elements of a<br />
growth-oriented, trust-based culture are familiar to<br />
most companies. However, there tends to be something<br />
missing in the execution,” says the CEO of<br />
<strong>Roland</strong> <strong>Berger</strong>, Burkhard Schwenker. He recommends<br />
that the transformation to a trust-based<br />
think: act 31
DOSSIER #01 Trust<br />
Hilti Chairman Michael Hilti (left),<br />
Renault CEO Louis Schweitzer: “It’s extremely<br />
important to demonstrate trust and<br />
confidence in the abilities of employees.”<br />
organization should be executed as if it were a<br />
change management process, with responsibilities<br />
assigned and plenty of freedom given to employees.<br />
Schwenker believes that the following six<br />
action areas are central to this:<br />
p<br />
excellent leadership,<br />
joint formulation of strategy,<br />
transparent corporate governance,<br />
decentralized organizational structure,<br />
trust-enhancing personnel work, and<br />
fair performance evaluations.<br />
SKEPTICS, WHO CONSIDER the hard work<br />
involved in dealing with soft factors a complete<br />
waste of time and money, might rethink their position<br />
after taking a look at the small Alpine state of<br />
Liechtenstein. The biggest company in the principality,<br />
the international construction supplier Hilti AG,<br />
has been working on its corporate culture for the<br />
last 20 years. “The fact that we have always paid<br />
attention to people and corporate culture has nothing<br />
to do with philanthropy, but instead is one of<br />
the big secrets of our success,” says Michael Hilti,<br />
company chairman and the son of the company’s<br />
founder Martin Hilti.<br />
TODAY HILTI HAS A REPUTATION across the major<br />
construction sites of the world as a leader in innovation<br />
in demolition technologies and constructionrelated<br />
fastening systems. This can be attributed to<br />
the unusual creativity and above-average motivation<br />
of the company’s 14,500 employees. It is also a<br />
result, adds Michael Hilti, of the full commitment of<br />
his top management. Even the four board members<br />
invest ten working days every year in culture training,<br />
as the three-day sessions are called at Hilti, in<br />
which each division worldwide discusses values<br />
and determines how it is intending to accomplish<br />
both its own and the corporate objectives. Michael<br />
Hilti warns against the view that investing in a trustbased<br />
culture is a one-time endeavor. “Corporate<br />
culture is not a project with a set time frame like<br />
reengineering, but rather an integral component of<br />
everyday business.” Regular surveys of employees<br />
and customers enable the group to measure its corporate<br />
culture-related progress. The most profitable<br />
units are indeed those in which employees work<br />
with the highest degree of commitment. The reason:<br />
Customers are more satisfied there.<br />
THE RULE SEEMS almost too simple, but it<br />
works, says Michael Hilti. Value-oriented management<br />
raises employee satisfaction and work morale,<br />
which in turn increases customer satisfaction and<br />
loyalty. “That’s how we set a cycle in motion that<br />
generates sustained, profitable growth.”<br />
32<br />
think: act
Commentary DOSSIER #01<br />
Seven surefire ways<br />
to run your company<br />
into the ground<br />
REGARDLESS OF WHETHER YOU RUN AN INTERNATIONAL CORPORATE GROUP OR<br />
A MOM-AND-POP STORE: WIRTSCHAFTSWOCHE AUTHOR FRIEDRICH THELEN HAS<br />
DISCOVERED RULES OF FAILURE APPLICABLE TO ALL ENTERPRISES.<br />
RULE 1: GET THE WHOLE FAMILY INVOLVED!<br />
If you are a family business, do what Napoleon did.<br />
The emperor placed blood relatives on thrones in<br />
countries he had conquered throughout Europe.<br />
Your Napoleon-like conviction that those family ties<br />
in high places will last forever will surely let you<br />
outsmart all well-intentioned non-family advisors.<br />
The historic outcome is well known, as well as the<br />
demise of many family-run companies—which did<br />
not get to retire on St. Helena, however.<br />
RULE 2: BELIEVE IN PROPAGANDA!<br />
Allow your confidence to be shaken by the success<br />
stories of your competition. After all, they are also<br />
active in the same market as you are. Experts<br />
working for your rivals would never spread<br />
untruths, now would they? All you need to do is<br />
invest in these “guaranteed success” technologies.<br />
Better yet, go right to your finance director and ask<br />
about the next line of credit or capital increase; just<br />
don’t worry anymore about the<br />
likelihood of your new business<br />
ideas being implemented. The situation<br />
gets even clearer when<br />
one of your competitors runs into<br />
difficulties. All you have to do<br />
now is hold on to his shirttails. There’s no faster<br />
way to fail than by perfectly duplicating someone<br />
else’s mistake.<br />
RULE 3: STOKE THE COMPETITION!<br />
The end is in sight when all of your employees are<br />
more focused on polishing their own spotlights and<br />
dimming those of supervisors and colleagues than<br />
enhancing the competitiveness and profitability<br />
of your business. So just add a little more gasoline<br />
to the fire in order to really heat up internal power<br />
»Consistently avoid<br />
the boring meetings<br />
with financial experts<br />
and controllers.«<br />
struggles. In-house battles between colleagues<br />
won’t increase your company’s operating results,<br />
but will give you a head start on achieving disaster<br />
quicker. And whenever you learn about a senior<br />
manager hoarding knowledge as a weapon, reward<br />
that person. This manager has what it takes to<br />
pound another nail into your corporate coffin.<br />
RULE 4: BLOW OFF ANALYSES!<br />
What good are statistics, reports or even centralized<br />
data exchanges? Don’t slow yourself down<br />
with reporting that would only highlight the weaknesses<br />
of your company and consistently avoid<br />
the boring meetings with financial experts and<br />
accountants. This will keep your head free for big<br />
goals and will ensure that you drown much faster in<br />
red ink than you had ever hoped possible.<br />
RULE 5: TRUST YOUR FEELINGS!<br />
Success is the result of gut feeling. Therefore blindly<br />
trust your instincts and don’t<br />
let so-called experts tell you<br />
otherwise. Avoid all contact to<br />
your in the know people and<br />
don’t obtain advice from external<br />
sources. You’ll be saving<br />
irritation and money, and be assured to keep<br />
repeating the tried-and-true mistakes.<br />
RULE 6: GET IN OVER YOUR HEAD!<br />
Ensuring business success requires that you not<br />
shy away from any effort. Initiate as many projects<br />
at the same time as possible and forgo any quantitative<br />
goal-setting methods. Customize all projects<br />
according to your taste, stick your nose into everything<br />
and use nightly phone calls to put your team<br />
into a state of constant stress. This way you ensure<br />
FRIEDRICH THELEN, 63, heads the office<br />
of Wirtschaftswoche, the most successful German<br />
business magazine, in the country’s capital Berlin.<br />
A former guest fellow at the John F. Kennedy<br />
School for Government at Harvard University, the<br />
journalist with a doctorate in law is a much sought<br />
after and popular TV commentator and author on<br />
economic and sociopolitical matters.<br />
that the entire company admires your dedication,<br />
that your projects die on your desk and no room for<br />
important tasks remains. A lack of capacity and a<br />
very noticeable deficit in expertise are sure signs of<br />
coming bankruptcy, especially in times of extreme<br />
expansion measures.<br />
RULE 7: PUT ALL YOUR EGGS IN ONE BASKET!<br />
Relying on just one major customer is indeed<br />
tempting—and for good reason. Why in the world<br />
should you bother to go the extra mile looking for<br />
suitable customers out of hundreds of companies,<br />
when your earnings are already pouring in? Why<br />
bother driving yourself crazy meeting the piddling<br />
requirements of small-account customers, when<br />
the prize hen already resides in your coop? Don’t<br />
listen to the worrywarts undoubtedly present on<br />
your board of directors. They will want to persuade<br />
you that the prize hen too will eventually fall off its<br />
perch, due to old age.
DOSSIER #01 Interview<br />
>>The time for indulgence is over
Interview DOSSIER #01<br />
»The stability pact will not be<br />
undermined. It is not to be viewed<br />
as merely a list of invalidating<br />
circumstances. It is and remains<br />
the EU directive.«<br />
merous attractive markets in these new EU states,<br />
such as communications and mobility.<br />
In other words, you’re saying that highly skilled<br />
workers and consumers with purchasing power have<br />
been added.<br />
That’s right, and even the biggest skeptics have by<br />
now noticed this. For example, Polish farmers, who<br />
for a long time had been against the idea of EU membership,<br />
have benefited most from this move. This<br />
has become evident within a mere six months. Naturally,<br />
there are tremendous differences among the<br />
potential growth dynamics of the individual countries.<br />
But wasn’t that also the case in the early<br />
stages of the European Community and European<br />
Union? Just think of Ireland.<br />
High on the agenda at the Lisbon summit in the<br />
spring of 2000 was economic, social and environmental<br />
reform of the EU by 2010. The main goals<br />
were economic growth, full employment and sustainable<br />
development. Four years later, in April 2004,<br />
Romano Prodi, the predecessor of the European<br />
Commission’s current president, José Barroso, criticized<br />
the EU member states for failing to take on the<br />
responsibility required to achieve these goals. An indication<br />
of this failure is that hundreds of thousands<br />
of people in the eurozone lost their jobs in 2003.<br />
Still, there is no reason to throw out the directionsetting<br />
ideas of Lisbon simply on account of inaction,<br />
for which member states have rightly been reprimanded.<br />
The Lisbon agenda clearly indicates<br />
which factors have a key impact on national structures.<br />
These are the factors we must increasingly<br />
focus on following enlargement. In the first instance,<br />
we must increase our investments in education and<br />
knowledge acquisition. It will be crucial also to expand<br />
networks, raise the competitiveness of industry<br />
and the service sector, and reform health care<br />
systems in accordance with the demographic structures<br />
of member states. After all, what is the EU? It is<br />
the realization of the idea of partnership between<br />
governments, employers, workers, trade unions and<br />
other associations. They are all involved in transnational<br />
governance, and their challenge is to structure<br />
it in a way that benefits all members.<br />
Are the 10 new EU member states facing tasks similar<br />
to those of the 15 countries of the old European<br />
Union?<br />
They certainly are. The structural challenges the<br />
new members have to come to grips with are those<br />
the old member states themselves had to master<br />
when they were the newcomers. The member states<br />
have to implement a macroeconomic policy oriented<br />
toward growth and stability while pressing ahead<br />
with economic reforms aimed at boosting growth<br />
across Europe. In addition, they have to improve sustainability.<br />
In the economic sphere this means making<br />
adjustments in line with the aging of their<br />
populations; for social policy it means creating and<br />
preserving jobs; and in terms of ecology, from a<br />
European perspective, it primarily means investing<br />
in the transportation and energy sectors.<br />
And what are the major differences between these<br />
two groups of member states?<br />
For one thing, the unemployment rates and budget<br />
deficits of the new members are about twice as high<br />
as those of the EU-15. Also, the per capita income of<br />
the people living in those countries is less than onehalf<br />
the income of their counterparts in the old member<br />
states. However, even as we look at these<br />
figures, I should warn against thinking only in terms<br />
of the arithmetic average. If we compare the new<br />
member states with one another directly, we see<br />
considerable differences among their rates of inflation,<br />
unemployment figures, hourly wages, education<br />
levels, consumer behavior, health care systems<br />
and many other parameters.<br />
Can the new member states deal with all these<br />
challenges without outside help?<br />
The answer to that question differs depending on<br />
which country you’re looking at. We must be very<br />
careful not to underestimate the challenges. That’s<br />
why country-specific recommendations must take<br />
into account the respective country’s particular circumstances.<br />
For example, we may in some cases<br />
have to extend the adjustment period. If so, however,<br />
we must always be mindful of the fact that our<br />
ultimate goal is the sustainable stabilization of the<br />
European Union as a whole.<br />
The new member states are now subject—as indeed<br />
the old ones are—to strict monitoring of their economic<br />
and budgetary policies. This includes an<br />
assessment of their fiscal situation. We already<br />
know that Cyprus, the Czech Republic, Hungary,<br />
Malta, Poland and Slovakia have all failed to cap<br />
their fiscal deficits at 3 percent of GDP, and that<br />
Cyprus and Malta each has a national debt that<br />
exceeds 60 percent of GDP. What conclusions has the<br />
Commission drawn from this state of affairs?<br />
Well, it is not immediately going to start monitoring<br />
their fiscal policies more closely or imposing sanctions.<br />
These measures will be applicable only once<br />
these countries have been incorporated into the<br />
eurozone. This differentiates them from Greece and<br />
the other countries that have already introduced the<br />
euro as their currency. However, this approach does<br />
not mean that we are not carefully studying the<br />
medium-term budgetary plans of the new member<br />
states, or that we are turning our back entirely on<br />
making recommendations. After all, these member<br />
states are to be incorporated into the eurozone in the<br />
foreseeable future. We shall therefore be indicating<br />
to them at a later date how they might gradually set<br />
about eliminating their budget deficits and fulfilling<br />
the convergence criteria. The case of Greece has<br />
shown that we must proceed in a truly thorough and<br />
transparent manner if we wish to avoid the unhinging<br />
of the EU as a whole. Insecurity in no way constitutes<br />
a basis for healthy growth across the new<br />
European Union.<br />
Hans Eichel, Germany’s finance minister, estimates<br />
that his country’s deficit in 2004 will again exceed 3<br />
percent—its second violation of the stability pact in a<br />
row. The European Commission has communicated<br />
its understanding both for Germany and for France,<br />
which also has a deficit in excess of the limit. This<br />
attitude might be very welcome to certain finance<br />
ministers. Financial authorities such as Edgar<br />
Meister, a board member of the German Bundesbank,<br />
and Jean-Claude Trichet, president of the European<br />
Central Bank, on the other hand, take the<br />
contrary position and are indeed extremely worried<br />
about this. They view this policy of understanding as<br />
a danger to the euro.<br />
think: act 35
DOSSIER #01 Interview<br />
are either experiencing or facing the possibility of<br />
ongoing recession. Other states have had to deal<br />
with—or are now dealing with—unforeseen events<br />
that have led to their running up a budgetary deficit<br />
within a very short period. In this situation, it’s not<br />
enough simply to insist on the terms of the treaty.<br />
We need to find ways and means for our member<br />
countries to lift themselves out of these crises by<br />
themselves. The consensus is that the key parameters<br />
of the stability pact will not be altered. However,<br />
we must find new instruments that will help us react<br />
more flexibly to the economic difficulties of any<br />
member state<br />
»We must find new<br />
instruments that will help<br />
us react more flexibly to<br />
the economic difficulties<br />
of any member state.«<br />
The stability pact has an important function. It is<br />
an EU directive, making it a mandatory reference<br />
parameter for the national budgets of the member<br />
states. Among its fixed requirements are a maximum<br />
deficit of 3 percent and a maximum public debt<br />
of 60 percent—with both figures calculated as a<br />
share of GDP. But we must also firmly bear in mind<br />
what the initial situation was when this stability pact<br />
was concluded. Only then can we design a monetary<br />
and economic policy that is realistic both for today<br />
and for the future. Now that the EU has enlarged<br />
from 15 to 25 countries, this consideration is becoming<br />
even more important.<br />
When you talk about the initial situation, do you<br />
mean the Maastricht Treaty of 1993?<br />
Yes, exactly. Back then, a little over a decade ago,<br />
there were only 12 member states. At that time a<br />
growth rate of 3 percent didn’t seem unduly optimistic.<br />
But since then we have had to face up to<br />
some additional facts, such as that many countries<br />
This sounds almost too good to be true: The Commission<br />
is displaying leniency and understanding, even<br />
though many suspect member states may have<br />
been presenting false statistics for years to gain the<br />
financial benefits of European Union membership.<br />
That’s not the case at all. We at the Commission will<br />
never get to the point where we overlook wrongdoing<br />
with a wink and a smile, and politely ask the culprits<br />
to do better in future. No, all the facts that have<br />
recently come to light indicate just one thing: Every<br />
country has its own individual history when it comes<br />
to financial policy. This is why for me it is a question<br />
of monitoring and analyzing all these complex circumstances,<br />
so that we can pursue a sustainable<br />
financial policy. After all, how did things look in<br />
Germany back when its economy was still going<br />
strong? Did anyone seriously entertain the notion<br />
that lean years might be just around the corner? No,<br />
of course they didn’t. And that is an example of why<br />
self-criticism is the principle means of immunization<br />
against repeating past mistakes.<br />
How does the Commission intend to ensure that<br />
there will be no future violations of the stability pact?<br />
The precautionary principle is not simply a romantic<br />
relic from the era of the agricultural subsistence<br />
economy. For the member states it is the only possible<br />
means of reacting to economic fluctuations without<br />
outside help and of maintaining a balanced<br />
budget regardless of the perturbations of the economic<br />
cycle. The Commission will be steadfast in<br />
pushing for the implementation of this principle.<br />
36<br />
think: act
Interview DOSSIER #01<br />
What does that mean in plain language?<br />
It means that the total debt ratio will be much more<br />
strictly observed and monitored in the future than it<br />
has been in the past, especially during periods of<br />
economic prosperity. We are convinced that the willingness<br />
to enact reforms should not take a back<br />
seat to any policies motivated by pressing shortterm<br />
needs. Warning countries of impending economic<br />
problems is much more effective than<br />
complaining about them once they’ve become manifest.<br />
But to be in a position to <strong>issue</strong> these warnings,<br />
we have to receive, verify and analyze national<br />
budgetary information and the long-term economic<br />
and business plans well ahead of time. Only then can<br />
we <strong>issue</strong> corrective recommendations.<br />
How do you intend to ensure compliance?<br />
Rest assured, we shall see to it that our recommendations<br />
are implemented. The time for leniency and<br />
understanding is over. The stability pact will not be<br />
undermined. It is not to be viewed as merely a list<br />
of invalidating circumstances. It is and remains the<br />
EU directive.<br />
But none of this will help if the figures submitted by<br />
member states are incorrect, or if warnings are<br />
ignored. After all, national governments ultimately<br />
decide their own labor market policy, shape their<br />
social system as they see fit, and set their country’s<br />
level of taxation, and they do this entirely independently<br />
of Brussels.<br />
Naturally, the case of Greece came as quite a shock,<br />
despite the fact that in 2000 the Luxembourg-based<br />
statistical office, Eurostat, had already begun to<br />
audit the data it had received from Athens. Nevertheless,<br />
the size of the discrepancies is very much a<br />
cause for concern. But what sense would it make to<br />
ignore our constructive recommendations? Twothirds<br />
of the total trade volume of the expanded<br />
Union takes place within Europe. Does it not therefore<br />
seem entirely sensible to take heed of our<br />
reform proposals? Of course, I should add that we<br />
too must exercise self-criticism as we go about our<br />
work. We need to implement internal reforms and<br />
publicize our proposals and successes to the European<br />
public more broadly and transparently.<br />
JOAQUÍN ALMUNIA, 56, is the EU commissioner<br />
for economic and monetary affairs. He was<br />
born in Bilbao in the Basque region of Spain. After<br />
studying law and economics at the University of<br />
Deusto (Bilbao) and in Paris, he lectured on labor<br />
law at the University of Alcalá de Henares in<br />
Madrid, and participated in the Harvard “Senior<br />
Managers in Government” program. Almunia entered<br />
politics in 1974 as a member of the UGT trade<br />
union, which has close links with the Socialist<br />
Labor Party of Spain. He became a member of the<br />
Spanish Parliament in 1979. During the premiership<br />
of Felipe Gonzales, Almunia took on greater<br />
responsibility, initially as the minister of employment<br />
and social security from 1982 to 1986, then<br />
as minister of public administration until 1991.<br />
Almunia has a reputation for being dialog-oriented<br />
and open to compromise. He has already begun to<br />
deal with the hottest <strong>issue</strong> of them all: reform of<br />
the European stability pact.<br />
The penalty for exceeding the 3 percent maximum<br />
can amount to as much as 0.5 percent of a country’s<br />
GDP. The EU budget could make good use of those<br />
additional funds, couldn’t it?<br />
In my opinion it simply isn’t advisable to impose<br />
an additional debt burden on countries in this way,<br />
thereby further constraining entire national<br />
economies. The question once again is, What is the<br />
best course to take if the growth rate is very low and<br />
national debt can’t be kept below a certain limit? We<br />
have to take such phases of stagnation into account<br />
in the interests of the entire community of states.<br />
Isn’t there a risk that member states, especially the<br />
new ones, will note the bad examples, and that budget<br />
discipline within the EU will weaken across the board?<br />
I’m hoping for the opposite. After all, the states exchange<br />
information and can learn from each other’s<br />
mistakes. Naturally, much more can still be learned.<br />
But in many cases the actual situation within the EU<br />
is more complicated than it seems. We have to find<br />
ways to set a realistic and future-oriented agenda,<br />
preserve what is tried and tested, critically analyze<br />
what we currently have, and be open to change. We<br />
need to start rethinking what we know.<br />
How do you envision this rethinking process?<br />
It makes little sense always merely to be rushing<br />
around repairing the mistakes of yesterday. Our strategy<br />
is about avoiding mistakes in the first place. For<br />
this the individual economic policies of the EU member<br />
states need to be more effectively coordinated.<br />
What new procedures does the Commission have up<br />
its sleeve for bringing this about?<br />
Careful observation of national budgets and more<br />
transparency about problems and possible negative<br />
developments, without losing sight of the overall<br />
goal of creating an economically stable EU. This kind<br />
of constructive partnership has been practiced far<br />
too little in the past. In many cases, our recommendations<br />
were down on paper but never implemented.<br />
But pressure and sanctions from the top will go only<br />
so far in bringing about the necessary change in the<br />
way member states go about looking at the <strong>issue</strong>s.<br />
According to reform proposals, more attention needs<br />
to be paid to the quality of national expenditure.<br />
Moreover, expenditure on education and research, it<br />
is suggested, should be removed from the calculation<br />
of national deficits. It's an interesting fact that<br />
the new member states have on average invested<br />
more in education than have the old member states.<br />
Would allowing the deduction of spending on education<br />
be a sensible signal?<br />
That needs to be examined carefully and discussed,<br />
bearing in mind that the goals of the stability pact<br />
are unchanged. We also have to make sure no obstacles<br />
stand in the way of structural development.<br />
think: act 37
p industry report<br />
trends and sectors<br />
The shape of things to come<br />
Gas to liquids, T-rays, public transportation and polytronics: current trends,<br />
analyses and research reports shed light on the markets of the future.<br />
gas to liquids<br />
Liquid fuel from natural gas, or “gas to liquid”<br />
(GTL) as it is known in the industry, is becoming a<br />
real alternative to “black gold.” The reasons: In a<br />
time of rising crude oil prices, GTL helps conserve<br />
oil reserves and limits the amount of harmful emissions<br />
when burned. The GTL process is based on<br />
the Fischer-Tropsch method, developed in Germany<br />
in 1920. It transforms natural gas and unusable<br />
companion gases into synthetic oil. A field test by<br />
Shell and Volkswagen showed that GTL reduces<br />
the emission of unburned hydrocarbons by 63<br />
percent, of carbon monoxide by 91 percent and<br />
of carbon dioxide by 4 percent. According to<br />
DaimlerChrysler, by 2010, GTL will be irreplaceable<br />
at the pump.<br />
In addition, GTL can help fully exploit isolated<br />
natural gas reserves, a market that could well be<br />
worth hundreds of billions of barrels of GTL. Just<br />
these resources would be sufficient to cover global<br />
energy needs for 25 years, according to <strong>Roland</strong><br />
<strong>Berger</strong> Strategy Consultants. The large oil companies<br />
are already in the GTL business. For example, Shell<br />
has been producing GTL since 1993 in Malaysia<br />
(below) and is currently building a new facility in<br />
Qatar that is expected to produce 3 million tons of<br />
GTL annually.<br />
t-rays<br />
Ubiquitous and yet barely detectable, mysterious T-<br />
rays are currently objects of developers’ desire, as<br />
they try to wring useful market-ready products from<br />
them. Terahertz waves lie between microwaves and<br />
infrared light, and are considered one of the last<br />
unexplored parts of the electromagnetic spectrum.<br />
T-rays draw great interest because of their qualities.<br />
For example, without the side effects of X-rays, they<br />
can penetrate clothing and packaging, or even illuminate<br />
teeth in the search for cavities (see photo).<br />
Researchers consider T-rays revolutionary for biomedicine.<br />
Because cancer cells grow faster than normal<br />
t<strong>issue</strong>, they contain more blood and water. These<br />
attributes mean cancer can be made visible by T-rays<br />
at a stage that could not otherwise be diagnosed. The<br />
British firm Teraview, a spinoff from Toshiba Research,<br />
is already selling machines for cancer diagnosis.<br />
T-ray scanners can also recognize dangerous biological<br />
or chemical compounds when scanning packages.<br />
British manufacturer Qinetiq is testing machines that<br />
can identify ceramic knives and plastic explosives<br />
during security checks. T-rays themselves are also<br />
causing new security needs: Privacy advocates see a<br />
danger for the confidentiality of mail, with every<br />
letter now legible through its envelope.<br />
38<br />
think: act
ireland’s public transportation is the most efficient in europe<br />
industry report f<br />
public transportation<br />
In Western Europe, local public transportation was long<br />
seen as something provided by the state. However, local<br />
and national governments’ diminishing spending power<br />
has pushed transport companies to do without their<br />
previous levels of subsidy and to rely on riders paying<br />
more of the bills. The result is not necessarily worse<br />
service, but rather increased efficiency, as an analysis by<br />
<strong>Roland</strong> Strategy Consultants shows. For example, transport<br />
companies in the UK offer noticeably more services,<br />
measured in kilometers traveled per vehicle, than<br />
companies with comparable budgets in France. A comparison<br />
of Sweden and Germany reveals a similar picture.<br />
On the other hand, it would be wrong to conclude<br />
that subsidies should be eliminated entirely. Systematic<br />
incentives and open competition for contracts are more<br />
sensible means of increasing the pressure on transport<br />
companies to become more efficient.<br />
Ireland’s public transportation is far and away the most<br />
efficient, while simultaneously having the lowest level<br />
of state subsidy. Belgium displays the exact opposite<br />
tendency, with a 75 percent level of subsidy.<br />
efficiency and subsidies in public transport<br />
Efficiency – supply as a share of<br />
total budget (in vehicle-km)<br />
Ireland<br />
UK<br />
Switzerland<br />
USA<br />
Sweden<br />
Germany<br />
Austria<br />
France<br />
Belgium<br />
Subsidy share – public funds as proportion of total budget<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants<br />
polytronics<br />
Microchips do not have to be made of expensive silicon.<br />
Conductive polymers—polytronics—are opening up completely<br />
new possibilities for the mass production of electronic<br />
components. For example, the Institute for Print<br />
and Media Technology at the Technical University of<br />
Chemnitz (Germany) has developed polymer transistors<br />
that can be printed in large numbers in a very short<br />
space of time (see photo). The process is particularly<br />
well suited for simple and short-lived electronic parts,<br />
such as inventory stickers, luggage labels or packaging<br />
equipped with mini-chips. Companies including<br />
Siemens, Merck and MAN-<strong>Roland</strong> have all played a role<br />
in developing the polytronics. In the manufacturing<br />
process, plastic molecules are printed in extremely fine<br />
layers on top of one another. They are not yet direct<br />
competition for silicon, however: Their computing<br />
power is smaller by a factor of 100.<br />
Polytronics are practically perfect for hyper-thin and<br />
flexible objects. As a multi-functional foil, they could<br />
simultaneously contain a chip, an antenna, a sensor, a<br />
small display and a battery.<br />
think: act 39
p industry report<br />
automotive
automotive<br />
industry report f<br />
Together in the fast lane<br />
To alleviate pressure generated by rising costs and the need to innovate, automobile<br />
manufacturers are increasingly transferring development and production tasks to their suppliers.<br />
With the right cooperation strategy, productivity and quality can show double-digit increases.<br />
:<br />
Wendelin Wiedeking, Porsche’s CEO,<br />
was worried. In June 2004—and for the<br />
second time in just four months—the<br />
Stuttgart, Germany-based car manufacturer<br />
had to recall its Cayenne model. After experiencing<br />
problems with the cable harness in<br />
February, the car now had defective seatbelts.<br />
Another warning signal surfaced in<br />
the malfunction rankings compiled by<br />
ADAC, a German automobile club. Porsche<br />
had recently dropped a few places because<br />
its new cars broke down up to three times<br />
more frequently than those of its German<br />
competitors. The company’s solid reputation<br />
was at stake, and Wiedeking placed the<br />
blame firmly on the company’s suppliers.<br />
He accused them of modifying production<br />
processes to cut costs without coordinating<br />
the changes with car builders. “At some<br />
point I’ll reveal the names of the suppliers,”<br />
Wiedeking said angrily in June.<br />
Despite the company’s sustained success, the<br />
Porsche CEO had now been acquainted with<br />
the downside of growth. At Porsche’s new<br />
plant in Leipzig, Germany, where the<br />
Cayenne is assembled, suppliers were<br />
responsible for almost all aspects of production.<br />
Porsche, in turn, had kept less than 10<br />
percent of the production process in-house,<br />
putting it well below the industry average.<br />
For example, the engine of the six-cylinder<br />
Cayenne V6 does not even come from the<br />
original equipment manufacturer (OEM).<br />
Volkswagen delivers the engine block, and<br />
the Porsche engineers have only reworked<br />
the motor management. Nevertheless,<br />
Porsche’s fate does not depend on its suppliers,<br />
says Wiedeking, as long as the company<br />
has a handle on all of the processes in its<br />
value chain. “The traditional role of OEMs<br />
is changing,” says Professor Ferdinand<br />
Dudenhoeffer, head of the Center for Automotive<br />
Research (CAR) in Gelsenkirchen,<br />
Germany, outlining the consequences of this<br />
development. “They need to become more<br />
like conductors who don’t play instruments<br />
AUTO MANUFACTURERS HAVE LESS<br />
AND LESS TIME TO READY NEW<br />
DEVELOPMENTS FOR THE MARKET<br />
themselves but can draw the best out of<br />
their musicians.”<br />
The importance of the interplay between<br />
car manufacturers and suppliers is also<br />
highlighted in a study titled “Automotive<br />
Engineering 2010” by <strong>Roland</strong> <strong>Berger</strong> Strategy<br />
Consultants. According to this study, US auto<br />
manufacturers have less and less time to develop<br />
a market-ready product once the design<br />
is established. From 1994 to the<br />
present, this development period has been<br />
cut in half to around 18 months. The global<br />
rollout of production models is also accelerating.<br />
In the early 1990s, Volkswagen took<br />
more than five years to get the Jetta, already<br />
introduced in Germany, trimmed out to suit<br />
the tastes of Chinese buyers. In comparison,<br />
with its Sunny, Nissan recently took less<br />
than six months to do the same.<br />
However, research and development budgets<br />
are not keeping up with this accelerated<br />
process. On average, a mere 4 percent of total<br />
revenue has in recent years been made<br />
available to engineers for new developments.<br />
“That won’t change anytime soon,”<br />
note the study’s authors, Mahesh Lunani<br />
and Wim van Acker. “The OEMs need to<br />
develop more with fewer funds, and to do<br />
this they need the expertise of suppliers.”<br />
Researchers at the Fraunhofer Institute for<br />
Production Engineering and Automation in<br />
Stuttgart believe that to meet these challenges,<br />
the OEMs will be forced to continue<br />
reducing the proportion of production they<br />
keep in-house. This is forecast to drop from<br />
35 percent today down to as little as 20 percent<br />
by 2015.<br />
That’s just one of the reasons why many<br />
CEOs in the auto industry are adopting a<br />
cooperative tone when dealing with their<br />
suppliers. “We rely on close cooperation<br />
between the development division and suppliers,<br />
starting with the first pencil sketch,”<br />
says Martin Winterkorn, chairman of the<br />
board at Audi. Tony Brown, head of purchasing<br />
at Ford, wants to reduce purchase<br />
prices by 15 percent and is taking pains to<br />
maintain good working relationships. He<br />
says, “The pharaohs got bricks from the<br />
SUCCESSFUL MANUFACTURERS<br />
ARE DISTINGUISHED BY AN ABOVE-AVERAGE<br />
WILLINGNESS TO COOPERATE<br />
Israelites by the ton, but I doubt they were<br />
getting top quality.” His credo is, “Both sides<br />
need to feel good about what they’re doing.”<br />
An above-average willingness to cooperate<br />
with suppliers does indeed appear to be a<br />
key criterion for success. This was substantiated<br />
in a study of Toyota Motor Corporation<br />
conducted by Jeffrey Dyer and Nile Hatch<br />
at Brigham Young University’s Marriott<br />
School of Management in Provo, Utah. The<br />
two professors were trying to discover why<br />
think: act 41
p industry report oems will reduce in-house production from 35 percent today to 20 percent in 2015<br />
(From left to right) Tony Brown (Ford), Wendelin Wiedeking<br />
(Porsche), and Bill Fluharty (Johnson Controls):<br />
“The traditional role of car manufacturers is changing.”<br />
Toyota’s US branch chalked up higher profits<br />
than General Motors, Ford and Daimler-<br />
Chrysler (its three biggest competitors)<br />
combined, despite the fact that Toyota<br />
builds fewer cars in the US than its domestic<br />
competitors. According to Dyer and<br />
Hatch, the key to the company’s success has<br />
been a consistent exchange of knowledge<br />
between the group and its suppliers. “Toyota<br />
provides its US partners with a tremendous<br />
amount of expertise and technology geared<br />
toward increasing productivity, particularly<br />
with respect to manufacturing processes<br />
specific to the production of its own vehicles,”<br />
concluded the researchers.<br />
Alliances with suppliers and learning teams<br />
are the two pillars on which Toyota’s prominence<br />
rests. In particular, Toyota is more<br />
physically present than its competitors. For<br />
example, the company sent its in-house consultants<br />
to suppliers an average of 13 days a<br />
year during the research period, which<br />
spanned 1990 to 1996. In this way not only<br />
did the various parties reduce the number<br />
of production errors by a seventh, but<br />
they also decreased the inventory level of<br />
COMPARED WITH ITS COMPETITORS,<br />
TOYOTA IS CONSIDERABLY MORE<br />
PRESENT AT ITS SUPPLIERS’ FACILITIES<br />
Toyota-specific parts by a third. At the same<br />
time, supplier productivity in the manufacture<br />
of these components increased by a<br />
hefty 36 percent.<br />
In comparison, General Motors, Ford and<br />
DaimlerChrysler each invested only six<br />
consultant-days per year and performed<br />
worse in all key areas, even though their<br />
parts are manufactured in the same plants<br />
as Toyota’s. “We would not be where we<br />
are today if we had not collaborated with<br />
Toyota,” says George Hommel, former chairman<br />
of Continental Metal Specialty Inc., a<br />
supplier based in Stanton, Kentucky. He<br />
adds, “We owe 75 to 80 percent of the insight<br />
we gained from our customers to Toyota.”<br />
This observation is all the more surprising<br />
because most top managers still preach that<br />
it takes a strong negotiating position to<br />
achieve low unit prices. For example, Bernd<br />
Bohr, head of motor vehicle engineering at<br />
Robert Bosch GmbH, which, like Porsche, is<br />
also based in Stuttgart, cannot echo Hommel’s<br />
praise. “Although car manufacturers<br />
worldwide are touting partner relations<br />
with suppliers, the proposition varies widely<br />
depending on region and brand.” Guenter<br />
Baumann, chief operating officer of<br />
J. Eberspaecher GmbH & Co. KG in<br />
Esslingen, Germany, is even more critical.<br />
He believes that because of sinking margins,<br />
the increased load ultimately needs to be<br />
fairly remunerated. However, auto industry<br />
42<br />
think: act
automotive<br />
industry report f<br />
Tremendous potential savings<br />
Changes in the automobile industry’s structure continue. According to a study by<br />
<strong>Roland</strong> <strong>Berger</strong> Strategy Consultants titled “Automotive Engineering 2010,” only<br />
manufacturers who optimize research and development will remain competitive.<br />
researcher Dudenhoeffer does not consider<br />
these types of complaints constructive.<br />
“Growth under the constraints of cost<br />
pressure requires intelligent concepts, and<br />
only those suppliers who create real customer<br />
benefits will be the champions of<br />
tomorrow,” he says.<br />
That process is impressively demonstrated<br />
by Johnson Controls Inc., an automobile<br />
supplier based in Milwaukee, Wisconsin. Its<br />
managers knew from publicly available<br />
studies that people increasingly pay attention<br />
to “inner values” when purchasing a<br />
car. They also knew that the number of<br />
older car buyers is on the rise, and that they<br />
have different requirements from younger<br />
drivers in terms of both equipment and<br />
functions. Yet many questions remained<br />
unanswered. What are the concrete needs<br />
of the various target groups? Are they<br />
dreaming of unconventional interiors? Do<br />
they love the newest technology? Are they<br />
demanding more space for their luggage<br />
and sports equipment?<br />
Bill Fluharty, vice president of industrial<br />
design and market research at Johnson<br />
Controls, North America, surveyed more<br />
than 7,500 people online. The study’s results<br />
showed that above all people want nice,<br />
user-friendly products. “This information<br />
helped us to develop, together with the car<br />
manufacturers, innovative solutions that exactly<br />
satisfied the specific preferences of<br />
their customers,” he says.<br />
This strategy enabled the interior-equipment<br />
company to climb to number seven on the<br />
list of the leading 50 US manufacturing<br />
companies. According to the trade magazine<br />
Industrial Week, no other company in the<br />
industry performs better. Even its competitors<br />
praise its strategy. In July, Visteon<br />
Corporation, which is based in Dearborn,<br />
Michigan, even went so far as to appoint<br />
Fluharty’s former colleague Michael F.<br />
Johnston as CEO to steer the former Ford<br />
subsidiary to new shores.<br />
F<br />
A<br />
Efficiency and innovation in<br />
automotive engineering<br />
E<br />
A 0ptimizing the global r&d network<br />
International auto manufacturers are increasingly moving their research facilities to<br />
regional expertise centers and utilizing resources worldwide as required.<br />
B use of modular concepts<br />
If OEMs were to increase to 10 percent the proportion of parts that could be installed in<br />
multiple models, development costs would drop by around 5 percent.<br />
C technology and electronics development<br />
The standardization of electronic systems has substantial cost advantages. Currently,<br />
50 percent of all warranty costs are caused by defective software and electronics. That is<br />
reason enough to increase expertise in electronics development.<br />
Product<br />
strategy<br />
Optimizing<br />
the global R&D<br />
network<br />
Personnel<br />
planning and<br />
training<br />
Concept<br />
development<br />
Design Prototype Pilot<br />
E integrating suppliers<br />
Suppliers are playing an increasingly significant<br />
role in the auto industry. By 2015, their<br />
share of value relating to development will<br />
have far surpassed that of the car manufacturers<br />
(see chart at right).<br />
Use of modular<br />
concepts<br />
Integrating<br />
suppliers<br />
F personnel planning<br />
30%<br />
OEMs should strengthen their manpower<br />
capabilities, especially in the areas of electronics<br />
research and development.<br />
70%<br />
Beginning 2010–2015, a shortage of qualified<br />
engineers will become apparent. 1990<br />
30<br />
B<br />
Launch/<br />
production<br />
Planning of vehicle platform<br />
Planning of vehicle types within the platform<br />
Computer-aided engineering<br />
Integration of vehicle and platform<br />
Integration of suppliers<br />
Simulation of production<br />
Production setup<br />
Accelerated testing<br />
Changeover mgmt.<br />
Launch mgmt.<br />
Value proposition in<br />
billion US dollars/<br />
percentage increase<br />
+4.6%<br />
+7.2%<br />
+3.1%<br />
Technology<br />
and electronics<br />
development<br />
D<br />
C<br />
D optimization/<br />
product planning<br />
Manufacturers<br />
who use the<br />
best process tools<br />
currently available<br />
for their<br />
planning and<br />
development save<br />
10 to 20 percent<br />
in related costs.<br />
55<br />
40%<br />
60%<br />
Optimization<br />
of product<br />
development<br />
75<br />
+2.5% Supplier<br />
value<br />
creation<br />
+4.8%<br />
+0.5%<br />
55%<br />
Manufacturer<br />
value<br />
creation<br />
45%<br />
2002<br />
2015<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants
p industry report<br />
nearshoring<br />
El Dorado in Central Europe<br />
With the European Union’s enlargement, the IT service industry has now discovered a nearshoring<br />
El Dorado in Central Europe. While India has served as an economically attractive software supplier,<br />
entire business processes are currently being relocated to Budapest, Krakow and Tallinn.<br />
:<br />
Dirk Taubner can see shortcuts from<br />
a long way off. As head of human<br />
resources at software design & management<br />
(sd&m), an IT consultancy based in Munich,<br />
Germany, Taubner arranged for Polish IT<br />
specialists to gain experience in Germany<br />
for a year. Once the new employees had<br />
become sufficiently acquainted with the<br />
German mentality and the latest technology,<br />
Taubner decided to take a step<br />
across the border. Since July, 20 employees<br />
have been working in Wroclaw, Poland, in a<br />
newly created “nearshore center” for<br />
German customers. Another 80 specialists<br />
will soon be added to their ranks. “The only<br />
thing that counts is quality,” says Taubner.<br />
But lately, customers have also been making<br />
frequent demands for additional production<br />
capacity. If the past was about offshoring<br />
or outsourcing IT-supported services to<br />
low-wage countries, especially in the areas<br />
of programming and routine tasks, companies<br />
are now increasingly looking for service<br />
providers to assume the responsibility<br />
for entire business processes. “Business<br />
process outsourcing” (BPO) is extending into<br />
activities such as financial accounting,<br />
invoicing and procurement,” says Rebecca<br />
Scholl, an analyst with Gartner, the IT market<br />
research company. Central Europe is<br />
becoming more appealing in this regard all<br />
the time. “Many service providers are<br />
building capacity in Prague, Krakow and<br />
Budapest,” says Scholl. These business locations<br />
are all in competition with offshore<br />
providers in India.<br />
44<br />
think: act
nearshoring industry report f<br />
However, the South Asian subcontinent is<br />
still the offshore location of choice for all<br />
kinds of services, an enduring consequence<br />
of India’s successful economic run over<br />
the past several years. Of the companies<br />
surveyed in a study titled “Service Offshoring,”<br />
37 percent had awarded outsourcing<br />
projects to India. However, 22 percent of<br />
all projects are commissioned specifically to<br />
Central Europe. The study was conducted<br />
across Europe in spring 2004 by <strong>Roland</strong><br />
<strong>Berger</strong> Strategy Consultants together with<br />
the United Nations Conference on Trade<br />
and Development (UNCTAD). In more than<br />
100 interviews, executive boards and upper<br />
management from a select group of Europe’s<br />
top 500 companies reported on their<br />
challenges and experiences.<br />
Central European companies reap benefits<br />
from the outsourcing of business processes<br />
to countries such as Poland, Hungary, the<br />
Czech Republic or the Baltic states—a procedure<br />
known as “nearshoring.” The Central<br />
Europeans score points with their geographic<br />
proximity, same or nearly same<br />
time zone, similar culture, highly qualified<br />
employees, good infrastructure and EU subsidies.<br />
Plus, their personnel costs are lower.<br />
In a study of wages worldwide, personnel<br />
“SOME PEOPLE COULD HARDLY<br />
BELIEVE THAT VIENNA IS CLOSER TO<br />
KRAKOW THAN TO INNSBRUCK.”<br />
consultants from Watson Wyatt estimated<br />
that programmers in Central Europe earn<br />
up to 75 percent less than their US or<br />
German counterparts. According to the<br />
UNCTAD study, 70 percent lower labor costs<br />
are a driving factor in considering the offshoring<br />
of operations. Hansjoerg Siber, vice<br />
president of Capgemini Systems, an IT<br />
service provider, is one of those who have<br />
established a foothold in Central Europe for<br />
offshoring projects. “Not too long ago, Austrian<br />
business partners, for example, could<br />
hardly believe that Vienna is closer to<br />
Krakow, Poland, than to Innsbruck,” says<br />
Siber. Taking over the BPO center of International<br />
Paper (the world’s largest paper<br />
manufacturer) in Krakow was a smart move<br />
to convince Capgemini customers this is in<br />
fact the case. Alongside this came a multiyear<br />
contract to supply financial and accounting<br />
services to the paper group. Siber<br />
says that after just one year, his IT consultants<br />
have extended their reach and are working<br />
for numerous international companies.<br />
In May 2004, EDS, a Texas-based IT service<br />
giant—and Capgemini rival—that had<br />
already taken its first steps into Central<br />
Europe invested almost $8.5 million in a<br />
new BPO center in the Hungarian capital of<br />
Budapest. The reason was that the 110<br />
think: act 45
p industry report<br />
70 percent of traditional business processes will be outsourced in the future<br />
employees working in the original center in<br />
the provincial town of Vasvár had reached<br />
their production capacity limit. Now, in<br />
4,500 square meters of office space, 300 IT<br />
specialists handle primarily financial tasks<br />
for customers from 17 countries. One of the<br />
best-known customers is Infineon. The<br />
Munich-based semiconductor manufacturer<br />
has signed a 10-year contract with EDS.<br />
From its Hungarian facilities, EDS handles<br />
the administrative aspects of Infineon’s<br />
recruitment, trainee support, and payroll<br />
operations for its 20,000 German and<br />
Austrian employees. For László Szakál, an<br />
EDS manager in the country, this is merely<br />
the beginning. Other large-scale contracts<br />
from international companies will cause the<br />
center’s number of employees to climb<br />
quickly to 1,000.<br />
Back-office processes such as finance,<br />
human resources and accounting still make<br />
up the lion’s share of offshore projects. They<br />
constitute “about 60 percent of the ongoing<br />
or planned projects,” says Karl Sauvant,<br />
the offshoring study’s author and director<br />
of UNCTAD’s investment division. However,<br />
one-quarter of the surveyed large-scale<br />
enterprises also outsource front-office<br />
services or, in other words, services with<br />
direct customer contact. According to<br />
CENTRAL EUROPE HAS A NUMBER OF<br />
ADVANTAGES COMPARED WITH<br />
ASIAN OFF-SHORE LOCATIONS<br />
another study, conducted by Datamonitor,<br />
call centers have the highest growth rates.<br />
The study claims the number of call center<br />
positions in Central Europe will increase<br />
from 4,400 currently to 13,700 in 2008.<br />
Language barriers are few. Central European<br />
call center agents learn foreign<br />
languages almost perfectly, usually thanks<br />
to study visits abroad. Companies such as<br />
British Telecom are taking advantage of<br />
these skills. In 2004, BT opened a branch in<br />
Warsaw, Poland, to offer “contact center outsourcing”<br />
in addition to providing its entire<br />
range of communications services.<br />
To top this all off, employees in the Baltic<br />
countries have a handle on Nordic<br />
languages. After taking over the Swedish<br />
hotel chain Scandic in 2001, managers of<br />
the Hilton hotel chain were pleased to<br />
discover that many Estonians also speak<br />
Swedish or Finnish. Today, 120 phone<br />
agents in a Hilton call center in the Estonian<br />
capital of Tallinn take reservations<br />
from their Scandinavian guests in the<br />
guests’ languages.<br />
Michael Corbett, initiator of the annual<br />
European Outsourcing Summit, is positive<br />
that offshoring will continue to grow. He<br />
predicts, “Seventy percent of the traditional<br />
business processes will be outsourced in the<br />
future.” Why should one rely on this type of<br />
strategy? According to the UNCTAD study,<br />
more than 80 percent of the surveyed companies<br />
realized cost savings of between 20<br />
and 40 percent through offshoring.<br />
Tallinn, Estonia: “Foreign languages pose few difficulties in the Baltic states.”
“Competencies count”<br />
Companies should concentrate on factors that distinguish<br />
them from the competition, says HP director Wolfram Fischer.<br />
For everything else, there’s offshoring.<br />
THINK: ACT What is offshoring all about? Is it<br />
just a lot of hot air as with the new economy,<br />
or is it really the “third revolution in<br />
added value?”<br />
WOLFRAM FISCHER In our intensely competitive,<br />
service-oriented society, it’s not enough to<br />
offer standard products at an average price.<br />
Especially in the solutions business, every component<br />
needs to be cost-effective while also<br />
high quality. Offshoring presents the opportunity<br />
of obtaining more service for less money.<br />
That’s a necessity for international companies—and<br />
a huge future market for providers.<br />
What experience have you personally<br />
gained in low-wage countries?<br />
HP’s global delivery model relies on resources<br />
across the world. In Bangalore (India), Bratislava<br />
(Slovakia) and Warsaw (Poland) we employ<br />
highly motivated, well-trained people<br />
with excellent language skills. Alongside inexpensive<br />
wage and operating costs, they constitute<br />
optimal production factors. Offshoring<br />
also offers advantages as regards flexibility,<br />
process speed and customer orientation. Only<br />
by using these do we create added value according<br />
to the principle of “high-tech, low cost.”<br />
Which branches of industry are particularly<br />
benefiting from offshoring?<br />
In the manufacturing industry the whole <strong>issue</strong><br />
has been done and dusted. Nowadays the textile<br />
industry produces almost exclusively in China,<br />
Vietnam, Thailand and Malaysia. With<br />
computers, it’s similar. More than two thirds of<br />
all notebooks come out of Taiwan. Financial<br />
service providers are going to initiate the next<br />
wave. They keep outsourcing more and more<br />
business processes that until recently were still<br />
considered core competencies—not only IT, but<br />
also everything from administration to personnel<br />
management.<br />
Is there anything that shouldn’t<br />
be outsourced?<br />
You should not outsource the core competencies<br />
that make you stand out from the competition,<br />
since there are fewer and fewer of these. Core<br />
elements include all processes that directly add<br />
value, especially product development and customer<br />
interfaces. A company can stand out in<br />
these areas and avoid being seen as a “me too”<br />
player. However, outsourcing is a strong option<br />
in all areas where processes can be defined and<br />
standardized. Already there are companies<br />
that have outsourced all operating activities,<br />
restricting themselves to brand management.<br />
Nike, which has its products manufactured<br />
by 900 partner companies worldwide, springs<br />
to mind.<br />
Are you not understating the hurdles?<br />
Obviously, it’s necessary to have a practice<br />
phase, the length of which is often underestimated.<br />
But any problems are going to be absolutely<br />
manageable and no different from the<br />
<strong>issue</strong>s presented by any new project.<br />
Is offshoring to India not failing on account<br />
of cultural differences?<br />
Not at all. In just a few years, thanks to exceptionally<br />
well-trained IT specialists, the country<br />
has been able to manufacture first-class software<br />
components with significantly lower<br />
costs. Obviously, one has to manage cultural<br />
differences as well, but that hardly presents<br />
WOLFRAM FISCHER is managing director of<br />
Hewlett Packard GmbH. As vice president of the<br />
Technology Solutions Group Germany, one of his<br />
responsibilities is outsourcing. His experience as a<br />
sales manager in the Asia-Pacific region made him<br />
one of the best experts on its IT service market.<br />
Fischer has a bachelor’s degree in business administration<br />
and computer science.<br />
any problems these days, since the Asian<br />
region is increasingly opening up to the<br />
Western world. Even at our locations in China,<br />
most of the workers are locals whose integration<br />
into the company is considered business as<br />
usual. Offshoring gets difficult when physical<br />
and logistical problems are added in. But that’s<br />
no longer an <strong>issue</strong> with digital products.<br />
Is quality still optimum?<br />
With consumer goods today, price plays a larger<br />
role than top quality. Does a 20 euro running<br />
shoe really need to last me 10 years, or<br />
should I just buy a new pair every year? There<br />
are even countless IT services that have been<br />
standardized for a long time now.<br />
Is outsourcing solely a question of economic<br />
necessity? According to one study, managers<br />
who outsource processes and slash jobs are<br />
making very good money.<br />
It’s wrong to think there’s a direct causal relationship<br />
there. Outsourcing results in cost and<br />
price advantages of up to 40 percent, leading to<br />
improved earnings. Obviously, managers who<br />
are compensated on a success-dependent basis<br />
benefit from that. So what’s wrong with managers<br />
trying to find the most cost-effective solution?<br />
That’s their job, after all.<br />
think: act 47
p industry report<br />
trends and sectors<br />
The shape of things to come<br />
LEDs, Triple Play, medical tourism and customized miniature power sources:<br />
current trends, analyses and research reports shed light on the markets of the future.<br />
led<br />
Light emitting diodes (LEDs) are turning the traditional<br />
lighting industry upside down. Incandescent bulbs and<br />
neon tubes are increasingly being replaced by luminous<br />
semiconductors, which offer lighting designers and<br />
product developers a whole new range of design possibilities.<br />
One example of an application that is already in<br />
widespread use is traffic lights that draw 80 percent<br />
less electricity and last 10 times as long as standard<br />
models. According to experts, widespread use of LEDs<br />
will save billions of dollars in energy costs.<br />
LED lamps are already making inroads into households<br />
and offices. For example, the Hong Kong company<br />
Traxon produces mood lights that create a variety of<br />
lighting effects in an entire rooms at the flip of a<br />
switch. And the new “organic” LEDs (OLEDs) could<br />
soon help do everything, from creating millimeter-scale<br />
displays to illuminating entire buildings. It is estimated<br />
that the advertising and entertainment industries alone<br />
present a 15 to 20 billion-dollar global market for LEDs.<br />
The automotive lighting specialists Hella and Bosch are<br />
currently developing front headlights, with light diodes<br />
already having made an appearance in cars’ and trucks’<br />
brake and rear lights.<br />
triple play<br />
Telephoning by cable, television via the Internet, Web<br />
surfing with your TV—Triple Play could soon make all<br />
this possible. Broadband transmission of video, Internet<br />
data and speech may be new territory for the telecommunications<br />
industry, but with package services they<br />
will have to lock in customers and increase their sales.<br />
Former European monopolies such as France Télécom,<br />
Swisscom, Germany’s Deutsche Telekom and Spain’s<br />
Telefónica are already investing in new services. They<br />
are preparing for competition from alternative telcos,<br />
mobile phone companies and especially cable network<br />
companies. For example, the Norwegian company Lyse<br />
Tele already services close to half of all potential customers<br />
in its territory, 85 percent of them with Triple<br />
Play. Infrastructure costs are considerable. Swisscom<br />
alone has invested 1 billion francs in making new video<br />
products available via telephone cable.<br />
Growth in the broadband<br />
market will probably not<br />
be achieved without a<br />
comprehensive entertainment<br />
offering.<br />
Games, e-commerce,<br />
and e-mail had<br />
previously been<br />
viewed more as<br />
add-ons.<br />
Data<br />
Internet<br />
access,<br />
e-mail,<br />
Web storage,<br />
anti-virus, spam<br />
protection, services<br />
(e.g. dating, music)<br />
Free<br />
TV, video<br />
on demand,<br />
pay TV,<br />
electronic program<br />
guide, gaming,<br />
interactive TV<br />
Triple<br />
Play<br />
Video<br />
Voice<br />
over IP,<br />
SMS, MMS,<br />
unified<br />
messaging box<br />
Voice<br />
Source: <strong>Roland</strong> <strong>Berger</strong> Strategy Consultants<br />
48<br />
think: act
in india a heart operation costs one-eighth as much as in the united states<br />
industry report f<br />
medicine<br />
Long known for its<br />
sophisticated programmers,<br />
India is<br />
becoming a destination<br />
of choice for<br />
Western medical<br />
patients. Britons in<br />
particular are avoiding<br />
the unpredictability<br />
of their<br />
health-care system<br />
and are traveling to<br />
the subcontinent for<br />
treatment. They benefit<br />
from the fact that<br />
the know-how in the<br />
best Indian clinics—for example, the Apollo chain—is<br />
state-of-the-art, and from surgery costs that are only<br />
one-fourth to one-eighth of what they are in the<br />
United Kingdom or the United States.<br />
Indian doctors are particularly competent in the<br />
areas of cardiology, oncology, minimally invasive<br />
surgery and joint surgery. The Indian government<br />
estimates that “medical tourism” will develop into a<br />
$2 billion-per-year industry by 2012, and is supporting<br />
it with tax breaks.<br />
The pharmaceutical industry also sees new opportunities.<br />
Pfizer Inc., of New York, as well as Eli Lilly and<br />
Co., of Indianapolis, Indiana, are already testing clinical<br />
drugs in India and having X-rays analyzed there.<br />
The British government is currently considering having<br />
all blood and urine samples collected by its<br />
National Health Service tested there too.<br />
They calculate that the cost of shipping the samples<br />
is more than made up for by the low personnel costs<br />
in Indian laboratories. In addition, the laboratories<br />
are in operation around the clock, seven day a week.<br />
Savings of 20 to 30 percent are expected, especially<br />
for more complex tests.<br />
fuel cells<br />
Rechargeable batteries that run for days are the<br />
dream of every notebook user whose batteries are<br />
running down far from an electrical socket. Advances<br />
in fuel-cell technology may soon make this dream a<br />
reality. Global companies such as Japan’s Toshiba<br />
and South Korea’s LG, or German startups such as<br />
SFC Smart Fuel Cell and Masterflex have developed<br />
prototypes that can power a notebook for up to 35<br />
hours—10 times longer than traditional rechargeables.<br />
Up to now, these cells have been too large to<br />
be built into portable computers. That should change<br />
in the coming year, according to the manufacturers.<br />
Thanks to the variety of potential applications—in<br />
printers, LCD projectors, laptops and cell phones—<br />
experts foresee the development of a market that<br />
could significantly surpass the markets for rechargeable<br />
and disposable batteries.<br />
Fuel cells are seen as a clean alternative to batteries<br />
because they burn hydrogen or methanol “cold,”<br />
transforming them into power efficiently and with<br />
few emissions. In addition, the technology is flexible<br />
and allows for customized solutions. In the automotive<br />
industry—in the Ford Focus (see photo), for<br />
example—fuel cells have already proved their suitability<br />
for everyday use.<br />
think: act 49
p business culture<br />
constantinos markides<br />
Constantinos Markides, London Business School<br />
“Strategic innovation<br />
means developing<br />
something new,<br />
something big.”<br />
50<br />
think: act
constantinos markides<br />
business culture f<br />
Why Professor Porter is wrong<br />
Pure academic theory claims that established companies do not stand a chance when it<br />
comes to integrating disruptive innovations into proven business models. Think again. In fact,<br />
the old and the new can be combined—and can even deliver a great degree of success.<br />
:<br />
It takes a lot of searching to find big,<br />
established corporate groups that are<br />
dealing seriously with disruptive, strategic<br />
innovations. Research suggests that the<br />
majority of strategic innovations are introduced<br />
by market newcomers. Market leaders’<br />
responses are often unsuccessful.<br />
Established companies have no problem<br />
excelling in product or technological innovation.<br />
Why then do they have such a tough<br />
time with strategic innovation?<br />
First of all, what is strategic innovation?<br />
My definition is that a strategic innovation<br />
is the discovery of a new strategic position<br />
that permits a company to develop not<br />
SWEEPING INNOVATIONS<br />
USUALLY START OUT AS SMALL AND<br />
LOW-MARGIN BUSINESSES<br />
only something new but also something<br />
big—something that will allow it to gain a<br />
significant share of a market segment.<br />
A few years ago, the PC business had its<br />
traditional players like IBM, Compaq and<br />
HP. Then, out of the blue, Dell came along<br />
and started selling its computers directly<br />
and not through distributors. And everyone<br />
looked at it and said, “Wow, what an innovative<br />
company!” Now, we can argue whether<br />
Dell’s positioning actually was something<br />
new. There is no precise answer to that. The<br />
only important thing is that Dell had a<br />
niche, broke rules and played the game in a<br />
fundamentally different way from everyone<br />
else. Strategic innovation happens in the<br />
absence of technological innovation; it is<br />
different from technological innovation.<br />
Strategic innovators do not discover a new<br />
product or a new technology; they just find<br />
new ways of playing the game in the existing<br />
market (see diagram p. 53 for how companies<br />
find these new approaches).<br />
Exactly what marks out strategic innovation<br />
and how it manifests itself are things social<br />
scientists still do not know. According to<br />
the prevailing view, certain characteristics<br />
of strategic innovations make them particularly<br />
unattractive to established companies.<br />
First, strategic innovators tend to emphasize<br />
different product or service attributes<br />
from those emphasized by traditional<br />
competitors. Disruptive innovations target<br />
new markets, new applications, new<br />
products and new customer groups. Products<br />
from innovators do not appeal to<br />
customers who value mainstream offerings.<br />
These customers are not prepared to use<br />
disruptive innovations—not to begin with,<br />
at least. For this reason, established companies<br />
that want to keep their customers<br />
happy initially see no point in investing in<br />
these innovations.<br />
Second, all revolutionary innovations start<br />
out as small and low-margin businesses.<br />
That is why these innovations rarely emanate<br />
from established companies. It is generally<br />
an entrepreneur or new market<br />
entrant who introduces these disruptive innovations<br />
in an existing market.<br />
Third, it does not take long for serious competitors<br />
to emerge. This emergence always<br />
follows a similar pattern: Once the disruptive<br />
innovations become established in<br />
their new markets, a series of improvements<br />
over time raises the performance of<br />
the new products or services along the<br />
dimensions that mainstream customers<br />
value. In fact, this process advances at<br />
such a rapid pace that the developers of<br />
a disruptive innovation soon gain a firm<br />
foothold. Inevitably, the growth of the<br />
disruptive innovation attracts the attention<br />
THERE COMES A POINT AT WHICH ESTABLISHED<br />
PLAYERS CAN NO LONGER AFFORD TO<br />
IGNORE THE NEW WAY OF DOING BUSINESS<br />
of established players. As growing numbers<br />
of customers come to embrace the strategic<br />
innovation, the new business receives increasing<br />
attention from both the media and<br />
the established players. There comes a<br />
point at which established players can no<br />
longer afford to ignore the new way of<br />
doing business.<br />
At this stage of deciding how to respond,<br />
established firms have to confront the<br />
changed market situation. Reacting to<br />
strategic innovations requires a different<br />
combination of tailored activities on the<br />
part of the firm. These new activities are<br />
incompatible with the company’s existing<br />
set of activities, since the two ways of doing<br />
business are mutually damaging.<br />
The academic elite, including the Harvard<br />
professor Michael Porter, traditionally<br />
concludes—incorrectly from my point of<br />
view—that a company should not try to be<br />
in two places at the same time. Anyone who<br />
goes ahead and does it anyway is doomed<br />
to failure. Companies would have huge<br />
additional costs to bear, running the risk of<br />
jeopardizing the existing business. Porter<br />
mentions Continental Airlines as an example.<br />
Continental was being put under<br />
think: act 51
p business culture<br />
constantinos markides<br />
“ Despite the potential conflicts, opposing business models<br />
can be combined to counter strategic innovations.”<br />
Constantinos Markides<br />
pressure by Southwest Airlines, which was<br />
playing a totally different game—the game<br />
of low cost, point-to-point, direct flights. In<br />
response, Continental created a new subsidiary,<br />
Continental Lite, which ultimately<br />
PORTER IS MISTAKEN—STRATEGIC<br />
INNOVATORS NEED TO BE IN TWO<br />
PLACES AT THE SAME TIME<br />
failed, since the internal conflicts could not<br />
be resolved. What are these conflicts that<br />
Porter talks about? One such conflict is the<br />
risk of mutual cannibalization between parent<br />
and subsidiary. There are problems of<br />
overlapping distribution. And there are organizational<br />
conflicts. Established companies<br />
have a culture and structure that have<br />
been built up over a long period of time. But<br />
companies that implement strategic innovations<br />
need an entirely different type of corporate<br />
culture and organization.<br />
My own position is that Porter is wrong in<br />
advising companies not to play two different<br />
games. I agree with him that playing<br />
two games is very difficult given all these<br />
conflicts. But it is not impossible. Companies<br />
have four strategies available using<br />
two business models—one conventional,<br />
one unconventional (see matrix p. 53).<br />
Separation is the preferred strategy when<br />
the new market is not only strategically<br />
different from the existing business but also<br />
when the two markets face serious tradeoffs<br />
and conflicts. The Swiss food company<br />
Nestlé experienced this first scenario when<br />
it set up a separate unit called Nespresso in<br />
the early 1990s. Nespresso, an exclusive<br />
brand for young urban professionals,<br />
actually had an adverse impact on its traditional<br />
instant coffee sales. For this reason,<br />
Nestlé moved the new unit to a different<br />
town, assigning it full autonomy. Nespresso<br />
is now one of the most profitable units<br />
within Nestlé.<br />
Separation is unnecessary if the new market<br />
is very similar to the existing business<br />
area and holds little prospect of conflict. In<br />
this second category, it is better to integrate<br />
business models into the existing structure.<br />
Merrill Lynch, for example, created an<br />
online-trading niche within its existing<br />
business. Old and new customers alike<br />
could make their own decisions about the<br />
type of advice and trading they wanted.<br />
A third scenario emerges when the new<br />
market is strategically similar to the existing<br />
business but the two face serious conflicts.<br />
In such a case it might be better to<br />
keep the concepts separate for a period of<br />
time and then slowly merge them. When<br />
the Danish bank Lan & Spar decided to set<br />
CONSTANTINOS MARKIDES is a management<br />
professor at the London Business School (LBS). Born<br />
in Cyprus, Markides studied economics at Boston University<br />
and received an MBA and doctorate degree<br />
(DBA) from Harvard. Before teaching at LBS, he<br />
worked for the Cyprus Development Bank and Harvard<br />
Business School. Markides has published numerous<br />
articles in major magazines, including the Harvard<br />
Business Review and the Sloan Management Review.<br />
up a direct bank alongside its branch<br />
network, it kept the two concepts separate<br />
for three years before merging them into<br />
one. It then carefully completed the<br />
transition.<br />
The challenge the firm faces here is to keep<br />
the new business model protected from the<br />
mindsets and policies of the existing business,<br />
while at the same time exploiting<br />
synergies between the two businesses and<br />
preparing them for the eventual marriage.<br />
The fourth scenario arises when the new<br />
market is fundamentally different from the<br />
existing business but the two do not conflict<br />
seriously. In such a case, it might be better<br />
to first build the new business inside the<br />
organization so as to leverage the firm’s<br />
existing assets and experience and learn<br />
about the dynamics of the new market, then<br />
separate it into an independent unit.<br />
This is exactly how Tesco, the UK’s biggest<br />
supermarket chain, approached its online<br />
spinoff, Tesco.com. The company started a<br />
home delivery service in the mid-1990s<br />
under the name Tesco Direct. The first<br />
trials involved making small deliveries to<br />
pensioners. Later, customers ordered from<br />
a paper catalog, then from a CD-ROM, and<br />
eventually through the company’s<br />
Web site. By 2001, Tesco Direct was reorganized<br />
as a full subsidiary of Tesco and was<br />
renamed Tesco.com—the first step in the divorce<br />
proceedings. In 2003, Tesco’s executive<br />
board announced that Tesco.com would<br />
be spun off. The online arm had become<br />
a different business and had to be given<br />
the freedom and autonomy to develop as<br />
it saw fit.<br />
The decision about when to separate and<br />
when to keep a strategic innovation inside<br />
the organization is obviously important,<br />
but it is equally important to appreciate<br />
that this is only part of the solution. Having<br />
decided which of these strategies a firm<br />
will adopt, the key question that must be<br />
addressed is this: “How can I manage the<br />
52<br />
think: act
creating a credible enemy is part of the solution<br />
business culture f<br />
Strategic innovations: new objectives and a new way of thinking<br />
Five rules for how companies can find ways to compete that others have missed<br />
strategic innovation so as to ensure its<br />
successful implementation?”<br />
What can upper management do? I believe<br />
it has to take the organization through a<br />
four-step process. The first is to sell the new<br />
strategy to employees and generate some<br />
passion. But knowledge does not create<br />
passion. So the next step must be to explain<br />
why it is so important both for the employees<br />
and for the organization. The first reaction<br />
will be, “This is impossible.” Therefore<br />
the third step is to make it believable. One<br />
IN THE LAST, DECISIVE STEP,<br />
MANAGERS NEED TO WIN THE HEARTS<br />
OF THEIR EMPLOYEES<br />
way to do this is through early victories.<br />
Success will slowly turn people around and<br />
will have them thinking, “Maybe, after all,<br />
we can do this!” And the final and most important<br />
step is to transform it from a rational<br />
to an emotional process. The first three<br />
steps involve showing employees what the<br />
strategy is and convincing them that it is<br />
important and achievable. Now management<br />
has to win over their hearts too. Managers<br />
have various ways at their disposal to<br />
gain this emotional commitment:<br />
make the employees feel special;<br />
p reinforce that feeling of uniqueness by<br />
being very selective about who is invited<br />
into the team;<br />
p instill the feeling of being part of a special<br />
team by creating team symbols;<br />
p allow them to participate in the setting<br />
of the objectives;<br />
p empower them to go out and do things<br />
toward achieving these objectives; and<br />
p create a credible enemy for them.<br />
These are all tactics that will help teams<br />
and entire companies come together in trying<br />
to achieve very ambitious objectives.<br />
They are tactics that help management<br />
seize upon strategic innovations effectively,<br />
enabling them to practically be in two<br />
places at once.<br />
1) Redefine the business:<br />
A company should constantly ask itself what business it believes it is in. Companies have<br />
traditionally defined themselves by product (car companies), by customer function (transportation)<br />
or as a portfolio of core competencies. Most importantly, a company should go through<br />
a four-step procedure in defining itself: it should list all possible definitions; evaluate each<br />
in terms of customers, competitors and market barriers, etc.; choose one; and ask how competitors<br />
are redefining their businesses.<br />
2) Redefine the who:<br />
A company should constantly ask itself, “Who is my customer?” Companies can identify<br />
customers who are good for the business and those who are bad. And they can identify customer<br />
priorities, which can change more often than needs. But, to be successful, a company<br />
must choose a niche that eventually grows to become the mass market, and the company’s<br />
way of playing the game becomes the new game in town.<br />
3) Redefine the what:<br />
A company should first decide strategically what products or services it should be selling<br />
to its customers. Then it can determine whom to target. To become a strategic innovator,<br />
a company has to be the first to identify new or changing customer needs and priorities and<br />
then find better ways of satisfying them.<br />
4) Redefine the how:<br />
A company can build on its existing core competencies to create a totally new product or way<br />
of doing business. It can share competencies across business units, reuse a competence from<br />
one unit to create a new business and expand competencies as it learns new skills.<br />
5) Start the thinking process at different points:<br />
In thinking of new ideas and ways of doing things, managers need to broaden their perspective<br />
and change their angle of focus. If a company usually thinks first of the customer, it<br />
should start thinking first about its unique capabilities or about what needs it could serve.<br />
Success matrix for the management of strategic innovations<br />
Companies can select among four strategies using two business models.<br />
Serious<br />
Type of conflicts<br />
between established<br />
companies<br />
and disruptive<br />
innovations<br />
Minor<br />
A<br />
Separation<br />
D<br />
Phased separation<br />
B<br />
Phased integration<br />
C<br />
Integration<br />
Low (different markets)<br />
High (similar markets)<br />
Similarities between established companies<br />
and disruptive innovations<br />
think: act 53
p business culture<br />
vip entrepreneurs<br />
CLINT EASTWOOD, born in 1930, worked as a lumberjack<br />
and piano player before being discovered for a role in<br />
a TV series. With the earnings from his first movies, he founded<br />
the Malpaso film production company. Eastwood, known<br />
for tightly sticking to schedules and film budgets, has no difficulties<br />
finding business partners—for golf apparel brands,<br />
golf courses, hotels and spa resorts.<br />
GÉRARD DEPARDIEU is a symbol of French cinema and recipient of<br />
numerous international awards, including a Golden Globe for “Green Card,”<br />
which co-starred Andie MacDowell. Born in 1948, the Frenchman is not<br />
only a wine connoisseur, but is also becoming a large-scale winemaker.<br />
Today, Depardieu owns and manages vineyards all over the world.<br />
ERIC CLAPTON, 59, is considered one of the best blues<br />
guitarists in the world. The eight-time Grammy Award winner<br />
was inducted into the Rock and Roll Hall of Fame no less than<br />
three times: with The Yardbirds in 1992, with Cream in 1994<br />
and as a solo artist in 2000. Since he refused to buy his shirts<br />
anywhere else, he saved the English menswear store Cordings<br />
from bankruptcy.<br />
Good nose for business<br />
Stars have achieved everything on stage and screen, and now business is luring them in.<br />
A well-known name is no guarantee for success, however. Instincts must go hand in hand with<br />
good business sense, as in the case of Clint Eastwood, Eric Clapton and Gérard Depardieu.<br />
:<br />
He holds a golf club more often than a<br />
revolver. Clint Eastwood, the 74-yearold<br />
veteran of Western movies, has been<br />
driving golf balls down fairways for more<br />
than 50 years and has a 10 handicap. Golf<br />
is more than a recreational activity for the<br />
Oscar winner (“Unforgiven”). Together<br />
with fashion designer Nancy Hale, he<br />
founded golf apparel brand Tehama in<br />
1997, which is one of the most successful<br />
clothing brand names in the United States<br />
today. Designed in the spirit of the 1940s,<br />
Tehama sportswear brings in $30 million<br />
for Eastwood and for two years in a row<br />
the lifestyle magazine Robb Report voted<br />
54<br />
think: act
paul newman’s sauces have earned more than $150 million<br />
business culture f<br />
Tehama one of the top five brands in the<br />
“Best of Men’s Activewear” category.<br />
Like Eastwood, an increasing number of<br />
actors, star athletes and music celebrities<br />
are trying their hands as entrepreneurs.<br />
US punk singer Gwen Stefani is backing<br />
the handbag label LeSportsac, that allows<br />
buyers to custom-design the bags over the<br />
Internet. Latina pop star Jennifer Lopez<br />
has invested some of the millions she has<br />
earned on stage and in movies in her own<br />
perfume and clothing collection, as has<br />
her ex-boyfriend, rapper P. Diddy. Tennis<br />
starlet Anna Kournikova also likes fragrant<br />
ARNOLD SCHWARZENEGGER OVERESTIMATED<br />
HIMSELF, AND BRYAN ADAMS’<br />
MAGAZINE WAS DISCONTINUED<br />
scents and is pitching a perfume brand<br />
bearing her name as “shamelessly sensual.”<br />
Boxing chanpion Henry Maske, on the<br />
other hand, prefers hefty and calorieladen;<br />
he is currently the owner of four<br />
McDonald’s franchises.<br />
Stars can’t always be sure of hitting the<br />
jackpot, however. Wimbledon winner<br />
Boris Becker sunk millions into setting up<br />
a sports portal on the Internet, which<br />
flopped just as did his investments in fashion<br />
and nutrition. Canadian rock star<br />
Bryan Adams unsuccessfully tried his<br />
hand as publisher of a German lifestyle<br />
quarterly called Zoo, launched in October<br />
2003. And Hollywood action heros Arnold<br />
Schwarzenegger, Sylvester Stallone and<br />
Bruce Willis, along with comedienne<br />
Whoopi Goldberg, completely overestimated<br />
the business potential of their<br />
movie-themed restaurant Planet Hollywood.<br />
The restaurant chain opened in 1996<br />
and went bankrupt three years later, as<br />
not enough patrons wanted to eat their<br />
burgers and french fries amidst original<br />
movie costumes.<br />
So what distinguishes the celebrities who<br />
succeed as entrepreneurs? It takes more<br />
“ I just wanted to make sure that I could keep buying<br />
my clothes at Cordings.”<br />
Eric Clapton<br />
than the right accountant and attorney to<br />
evaluate a business model’s chances of<br />
success. It takes a mix of business savvy, a<br />
healthy assessment of one’s own market<br />
value, and occasionally a heartfelt story.<br />
Antonio Banderas, 44, for example, comes<br />
off as patriotic when he says, “A man without<br />
roots is nothing,” —and lives by it. Born<br />
in Málaga, Spain, the Hollywood star of<br />
“Desperado” and “Evita” invested the millions<br />
from his movies exclusively in Spanish<br />
brand names: restaurants, movie<br />
theatre chains and olive oil.<br />
Guitar legend Eric Clapton, 59, reveals a<br />
sense of tradition and typical British understatement<br />
when he says, “I just wanted<br />
to make sure I could keep buying my<br />
clothes at Cordings.” Mister Slowhand reacted<br />
quickly and took a 50 percent stake<br />
in the menswear store dating back to 1839<br />
when it was threatened with closure in<br />
late 2003. Now this traditional company,<br />
located on Piccadilly in London, radiates a<br />
new look and will soon be launching its<br />
first collection for women.<br />
A personal story links 79-year-old Oscar<br />
winner Paul Newman with his commercial<br />
success. When he transformed a family<br />
Christmas tradition into a giant business<br />
in 1982 by founding “Newman’s Own,” the<br />
actor decided that he would donate all<br />
profits to charitable organizations—among<br />
others the foundation he created in the<br />
wake of his son’s drug-related death. Many<br />
Based on the family recipe used by the<br />
Newmans every year on Christmas Eve,<br />
the salad dressing became very popular<br />
with many Americans. In the first year of<br />
business, Newman and his partner made a<br />
million dollars. Since then, he has raked in<br />
about $150 million for good causes with his<br />
variety of high-end dressings, soft drinks,<br />
sauces and more. “It got out of control in a<br />
good way,” is Newman’s comment about<br />
his culinary adventure.<br />
Top director Francis Ford Coppola (“The<br />
Godfather” ) and his colleague and friend<br />
George Lucas (“Star Wars”) have demonstrated<br />
how to transform a high-profile<br />
name into a brand. Over the last 12 years,<br />
Coppola has worked as a distinguished<br />
winemaker. In 2002 he and Lucas brought<br />
out a Merlot called “Viandante del Cielo”—<br />
Italian for “Skywalker,” and a reference to<br />
the main character in the science fiction<br />
saga “Star Wars.”<br />
“Cyrano” is also both brand name and allusion:<br />
The French actor Gérard Depardieu<br />
has 100,000 bottles of wine with the “Cyrano”<br />
label produced every year. In a muchlauded<br />
performance, Depardieu played the<br />
big-nosed poet and fencing master Cyrano<br />
SUCCESS IS LIKELY WHEN<br />
A BRAND, FAME AND A GOOD<br />
STORY ALL WORK TOGETHER<br />
de <strong>Berger</strong>ac in a 1990s movie. Ever since<br />
Depardieu, an avowed bon vivant, purchased<br />
the Château de Tigné vineyard in<br />
Anjou, France, he has become a bona fide<br />
collector. In addition to his French vineyards<br />
in Bordeaux and Languedoc-Roussillon,<br />
he now also owns others in Italy, Spain,<br />
Algeria, Morocco and Ukraine. Depardieu<br />
wines such as the 2003 “Ma Vérité” and<br />
“Confiance”, received the highest praise<br />
from the famous wine critic Robert M. Parker,<br />
Jr. The 55-year-old actor shows that he<br />
not only has a distinctive nose for character<br />
roles but also a good sense for business.<br />
think: act 55
p business culture<br />
10 years after<br />
Completely underestimated<br />
Short Message Service (SMS) was developed 10 years ago and has become—almost by<br />
accident—a multi-billion-dollar business. Even though new SMS services are<br />
cropping up weekly for kids and teens, the medium still has unrealized potential.<br />
:<br />
Think back: Nelson Mandela became the<br />
first black president of South Africa;<br />
Israel’s Prime Minister Yitzhak Rabin and<br />
Palestinian leader Yasser Arafat signed an<br />
autonomy agreement in Cairo and received<br />
the Nobel Peace Prize for it; between<br />
Norway’s North Cape and Sicily, the European<br />
Economic Area was created; and in<br />
Uruguay agreement was reached on the<br />
creation of the World Trade Organization.<br />
In 1994 concepts like flexibility and mobility<br />
were leaving their mark on an already globalized<br />
economy. And it was not just highspeed<br />
trains like the British-French<br />
Eurostar—traveling through the newly<br />
opened Channel Tunnel—that were connecting<br />
people more quickly. For digital communications<br />
were also gearing up for a giant<br />
AT THE 1994 CEBIT, THE REAL<br />
SENSATION WAS ALMOST ENTIRELY OVERLOOKED<br />
BY EXPERTS AND VISITORS<br />
leap forward. In the United States the World<br />
Wide Web, with help from the revolutionary<br />
Netscape Navigator browser, was starting<br />
along its path to success, and in Germany<br />
ISDN was beginning to take off.<br />
Around the world, the telecommunications<br />
and entertainment industries were becoming<br />
interlinked. It was no longer a question<br />
of whether we wanted an information society,<br />
rather of what it should look like. While at<br />
Harvard, Cambridge and MIT the traditional<br />
field of computer science was starting to get<br />
to grips with the new discipline of “mobile<br />
communications,” Mannesmann Mobilfunk<br />
GmbH of Germany was establishing the<br />
world’s first professorship in it at the University<br />
of Dresden. And at CeBIT, the world’s<br />
largest computer trade fair, a few companies<br />
were already speaking of limitless mobility—<br />
and much more importantly, of the huge<br />
margins that would be available for<br />
businesses offering continuous connectivity.<br />
The reason for all the optimism was that, in<br />
1994, the cell phone was standing at the<br />
threshold of its worldwide breakthrough.<br />
Among all the hype, the real sensation of the<br />
1994 CeBIT went almost entirely unnoticed:<br />
the D1 Alpha Service by DeTeMobil. With<br />
pagers looking like the technology of the future,<br />
experts paid little attention to this first<br />
commercial precursor of the Short Message<br />
Service (SMS) technology of today. Even<br />
56<br />
think: act
a global average of 30 billion sms messages are sent every month<br />
business culture f<br />
DeTeMobil, which evolved into T-Mobile,<br />
failed to take its own development seriously.<br />
During the test phase the service was offered<br />
free of charge for almost a year. That is hard<br />
to believe when one considers that today<br />
mobile communications providers make billions<br />
from SMS—with the trend rising.<br />
In only 10 years, cell phones and SMS have<br />
dramatically changed business communications.<br />
Among business associates and partners,<br />
giving someone your cell phone<br />
number is a sign of trust, of “I’ll be there<br />
when you need me.” The cell phone—and<br />
with it SMS messaging—have become essential<br />
management tools. Whether important<br />
documents relating to a contract need to be<br />
forwarded, a phone conference coordinated<br />
or a small gift sent to a customer, today all it<br />
takes is a short message and everything is<br />
taken care of.<br />
Cell phones are also becoming more and<br />
more important for intra-company communications.<br />
Now service and sales employees are<br />
almost exclusively connected to their head<br />
office via mobile phones. Teams can be managed<br />
via SMS and can be fed all the available<br />
information on a client. SMS enables users to<br />
solve technical problems, request sales aids<br />
or order replacement parts on-site, significantly<br />
reducing response times and increasing<br />
customer satisfaction. They present<br />
potential for optimization that far too few<br />
companies are currently taking advantage of.<br />
An innovation developed by <strong>Roland</strong> <strong>Berger</strong><br />
Strategy Consultants demonstrates what a<br />
modern employee communications tool can<br />
look like. The consulting company updates<br />
its consultants via a mobile news channel<br />
every two weeks on company-related information.<br />
Employees get a subject overview<br />
via SMS together with a telephone number<br />
they can use to retrieve the news. All they<br />
have to do is make the call, get authorization<br />
and listen to the report.<br />
Just as fundamental as the changes in the<br />
business world are those taking place in the<br />
private sphere. People who cannot be<br />
reached or have turned off their cell phone<br />
are cut off from their friends and associates.<br />
Communication has also changed. Stressful,<br />
awkward phone conversations are often<br />
bypassed with an SMS, the dialog reduced to<br />
brief, telegram-like phrases. BBC Online<br />
recently asked whether SMS shorthand has<br />
become mightier than the written word.<br />
People responded from around the world<br />
with literary quotations, such as “w8ing 4 go.”<br />
(“Waiting for Godot”) and “2b/-2b” (“to be or<br />
not to be”), shortened hymns, such as “Gd $ th<br />
Qun” (“God save the Queen”), and lines of<br />
prayer, such as “dad@hvn” (“Our Father who<br />
art in heaven”). Teenagers have a particular<br />
fondness for communicating cryptically via<br />
SMS. While philologists have been speculating<br />
on the likely consequences of this, the<br />
advertising industry has long recognized it as<br />
an opportunity. With 14 to 30 year-olds so difficult<br />
to reach via traditional print and<br />
advertising media, the cell phone has proven<br />
a powerful marketing tool and sales channel.<br />
SMS—three letters that changed the world. The<br />
massive hit with teens is also a valuable business<br />
communications tool. Machines, too, are starting<br />
to communicate via SMS, a phenomenon heralded by<br />
the soda machines at the 2000 Expo, which could<br />
send updates on their contents and refill status.<br />
Coca-Cola in Belgium, for example, increased<br />
sales of its 200 milliliter bottles in cafés by<br />
8 percent during a 2003 SMS campaign. Even<br />
Gossard, the women’s underwear manufacturer,<br />
received 75,000 euros worth of orders<br />
via SMS when it introduced a new range in<br />
Great Britain—those interested had merely<br />
to send in the code word “G4me.”<br />
Thanks to the international acceptance of<br />
GSM technology and numerous roaming<br />
agreements, users can send SMS messages<br />
and make mobile calls in more than 40 countries<br />
spread over all continents. Market penetration<br />
figures offer confirmation of the huge<br />
growth potential still to be tapped. Penetration<br />
has visibly increased since 1997, but is<br />
still only 24 percent worldwide. Western<br />
Europe is at the top, with 83 percent and<br />
400 million registered cell phone numbers,<br />
ahead of North America with 60 percent and<br />
200 million connections. In terms of sheer<br />
quantity, the Asia-Pacific region has the<br />
greatest number of cell phones. Put another<br />
way, 500 million customers there represent a<br />
market penetration of only 30 percent.<br />
Experts estimate that in 2004, 1.4 billion cell<br />
phones will send more than 360 billion SMS<br />
messages. Interestingly, Sweden already has<br />
more cell phones than inhabitants, with 8.8<br />
million people owning 9.1 million phones.<br />
With technology having paved the way for<br />
even niftier features, no end to the boom is in<br />
sight. Users can now send photos between<br />
cell phones via the Multimedia Messaging<br />
Service (MMS). And the arrival of new messages<br />
is increasingly announced with a few<br />
seconds of a pop hit or famous piece of classical<br />
music, with customers over the past year<br />
spending $3.5 billion worldwide on customized<br />
ringtones. However, there is one<br />
thing that has not changed in mobile communications<br />
over the past decade: whether<br />
your mobile phone rings with a chirp or the<br />
first few bars of Beethoven’s Ninth, there are<br />
times when it would be great to be able to<br />
just switch the thing off.<br />
think: act 57
p service<br />
credits<br />
Deepen your<br />
understanding<br />
All of our interview partners and experts<br />
are sought-after authors. Current books and<br />
analyses by Constantinos Markides, David<br />
Steiner and Richard Florida offer readers<br />
a great deal more on the subjects addressed<br />
in this magazine. Extensive background<br />
analysis and strategic options can be found<br />
in studies by <strong>Roland</strong> <strong>Berger</strong> Strategy<br />
Consultants on the topics: “From Middle<br />
Kingdom to global market” (China) or<br />
“Finding the formula for growth” and<br />
“Growth through trust” (Growth).<br />
CONSTANTINOS C.<br />
MARKIDES, PAUL A.<br />
GEROSKI:<br />
Fast Second<br />
DAVID M. STEINER<br />
(et al.): Educating<br />
for Democracy<br />
RICHARD FLORIDA,<br />
IRENE TINAGLI:<br />
Europe in the<br />
Creative Age<br />
service@think-act.org<br />
Do you have questions for the publisher<br />
or editorial team? Would you like to<br />
order a study from <strong>Roland</strong> <strong>Berger</strong><br />
Strategy Consultants?<br />
Write to us at service@think-act.org<br />
STUDY:<br />
From Middle<br />
Kingdom to global<br />
market<br />
STUDY:<br />
Finding the<br />
formula for<br />
growth<br />
STUDY:<br />
Growth<br />
through<br />
trust<br />
CREDITS<br />
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ART DIRECTION<br />
Blasius Thaetter<br />
EDITORIAL<br />
Markus Czeslik, Michael Kuhli,<br />
Andreas Lang, Michael Schmitz,<br />
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AUTHORS<br />
Andreas Gries, Frank Gruenberg,<br />
Matthias Hochstaetter, Bessie Lee<br />
(Shanghai), Professor Constantinos<br />
Markides (London), Wolfgang Mulke,<br />
Kai Oppel, Dirk Rheker (Florida),<br />
Dr. Friedrich Thelen, Peter Paul<br />
Weiler, Dr. Victor Yuan (Beijing)<br />
ENGLISH EDITION<br />
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GRAPHIC DESIGN<br />
Caroline Pfleiderer, Olaf Puppe<br />
PRODUCTION<br />
Wolfram Goetz (Director), Ruediger<br />
Hergerdt, Franz Kantner, Silvana<br />
Mayrthaler, Cornelia Sauer<br />
PHOTO EDITORS<br />
Beate Blank (Director), Silvia Erhard,<br />
Thomas Walter, Liz Wighton<br />
PHOTO CREDITS<br />
Cover: Alessandro della Valle/<br />
Keystone, Bernd Roselieb, PR,<br />
Andreas Sterzing; p. 2 Andreas<br />
Sterzing; p. 3 Hans-Bernhard<br />
Huber/laif; p. 4 Puppe (1), Nestlé (1),<br />
gettyimages (1), Claudio Porcarelli/<br />
focus (1); p. 8 corbis; p. 9 Mindshare<br />
& Maxus; p. 10 Hezi/imagechina;<br />
p. 12 Richard Florida PR; p. 14 Bernd<br />
Roselieb; p. 16 Andreas Pohlmann/<br />
Stock4B; p. 18 corbis/Dan Lament;<br />
p. 19 Randy Olaon/National Geographic;<br />
p. 20 INDEX Stock/Avenue<br />
Images; p. 21 Creatas; p. 22 Jonny le<br />
Fortune/Gerd George; p. 23 Erwin<br />
Wodicka; p. 24 dpa; p. 26 Symanec;<br />
p. 28 Samsung; p. 30 Hans-Christian<br />
Schink/Punctum; p. 32 dpa (1),<br />
actionpress (1); p. 34 Landor/intertopics;<br />
p. 36 Contrasto/focus; p. 37<br />
actionpress; p. 38 Shell AG (1), teraview<br />
(1); p. 39 dpa; p. 40 REA/laif; p. 42 Ford (1),<br />
Futh/laif (1), PR (1); p. 44–46 6-wegeprojekt/laif;<br />
S. 47 Darius Ramazani; p. 48<br />
James Bell/focus; p. 49 Hahn/laif (1), Das<br />
Fotoarchiv (1); p. 50–52 Andreas Sterzing;<br />
p. 54 gettyimages (1), actionpress (1),<br />
musicpictures (1); p. 56–57 photodisc; p. 59<br />
Andreas Sterzing<br />
PRINTER<br />
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NOTICE<br />
The opinions expressed in the articles in<br />
this magazine do not necessarily reflect<br />
the views of the publisher.<br />
58<br />
think: act
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think: act 59