The Global Human Capital Journal

Real-time Case Study Holds Lessons for G7 Knowledge Economy Transition—”Courage” to the Rats—A New French Realism?

Illinois leaders were addressed by Her Excellency Christine Lagarde, Economy, Industry and Employment Minister, Republic of France at the special luncheon held in her honor by the Executives’ Club of Chicago at the Westin on 23 May 2008. Attending were Chicago Mayor Richard M. and Maggie Daley, a French delegation that included the Ambassador of France to the U.S. Pierre Vimont, the Head of Cabinet Christian Dufour, David Appia, Minister Counselor for Economic and Commercial Affairs, and numerous executives of Chicago Fortune 500 firms.

If one were not listening attentively and willing to question stereotypes, it would have been too easy miss this intriguing story. However, as in all things “2.0,” profound change manifests slowly at first, and I detected a glimmer of disruption in France’s status quo. Having lived in West Berlin surrounded by the concrete reality of a wall that subsequently, unbelievably, came down, I ask myself, “What if France were to vanquish some of the sacred cows and become, gasp, pragmatic and entrepreneurial?” Lagarde’s message was precisely that, and she delivered it with the aplomb that reflected extensive business and policy success at the boardroom table.

Continue reading France 2.0: French Finance Minister Declares French rEvolution in Economic Policy

“Yes,” Says Team of Healthcare Experts, Employer CEOs and Patient Representative at the Executives’ Club of Chicago, “But You Must Change Your Ways”

Honestly Assessing Quality—Engaging Consumer Empowerment—Trading in the Ferrari for a Chevy

The Executives’ Club of Chicago convened its healthcare reform summit at the Hilton Chicago on 20 February 2008, drawing on diverse expertise. Ian Morrison, Ph.D., healthcare futurist, gave the keynote and moderated two panels: first, the healthcare expertise panel with Dean Harrison, CEO Northwestern Memorial Healthcare; William Novelli, CEO AARP; Scott P. Serota, CEO BlueCross BlueShield Association; and second, the business executive panel with Andrew M. Appel, Chairman AON Consulting; John A. Edwardson, CEO, CDW; John B. Menzer, Vice Chairman and Administrative Officer, Wal-Mart Stores. Robert L. Parkinson, CEO, Baxter Healthcare gave an insightful point of view on recommended actions to close the event.

There was broad agreement that the U.S. healthcare system was broken, and speakers offered excellent insights and perspectives about how to fix the system. However, what they didn’t say was as interesting as what they did, and I will address two key issues in Analysis and Conclusions: the pervasive lack of trust among all parties and the emerging consumer empowerment trend: what do Web 2.0-enabled consumers have to bring to the party?

Continue reading The U.S. Healthcare System: Can This Patient Be Saved?

New Global Economic Architecture Presages Economic Realignment—Thinking Beyond the Obvious to Tap Emerging Opportunities

Illinois leaders were addressed by His Excellency Shri Kamal Nath, Minister of Commerce and Industry, Republic of India. True to form, His Excellency struck chords of transformation, partnership, common interests and harmony at the lunch held in his honor at the University Club on 19 February 2008. Attending were Chicago Mayor Richard M. Daley, Mr. Rajinder Bedi, Managing Director of the Illinois Office of Trade and Investment, The Honorable Susan Schwab, U.S. Trade Representative, Craig S. Donohue, Chief Executive Officer, CME Group and John Estey, President & Chief Executive Officer, SC Electric Company.

Reading between the lines, the U.S. and India stand at a significant turning point: India’s impressive economic growth is a significant element of the ongoing redistribution of global economic power—which holds excellent opportunities for U.S. businesses and workers that are looking for it.

Continue reading India Trade Minister Draws Chicago-India Transformation Parallels at Executives’ Club

But Cantankerous Subtext Hints at Possible Monkey Wrench—Democratic Race in Spotlight

The Executives’ Club of Chicago fielded an expert panel to brief Midwest executives on Web 2.0’s current and likely impact on one of the most watched U.S. elections in recent history. Marie Cocco, a renowned political columnist, Peter Greenburger, Director of Google’s Elections & Issue Advocacy Team, and Alan Webber, Senior Analyst of Forrester Research brought to bear diverse perspectives on the question at the event, which took place at The University Club on January 31, 2008.

They produced a logical conclusion, namely that Web 2.0 was a force in the making but that it would probably not be a decisive factor this year. The session was graciously co-hosted by Communications Committee Co-Chairs David Prosperi, Vice President Global Public Relations, AON and David Blake, Publisher of Crain’s Chicago Business.

As usual, I will share my notes of speakers’ remarks before adding my between the lines analysis and conclusions. As an added bonus, I will also share select points of an influential source who, although not in the room, was virtually present through repeated reference.

Net-net: High Volatility and Standard Deviation

Although panelists agreed that statistical analysis clearly showed that social networks and “the Internet” would have a minimal impact of deciding who would win the U.S. presidency this fall, evidence is complex and all over the map. Panelists referenced several instances in which the Internet added dynamism and uncertainty to the mix: key blog posts and videos can emerge from anywhere and can flash across a growing portion of the nation’s consciousness with unprecedented speed. Moreover, the Internet enables people to communicate, mobilize and act with alacrity, and elections are overwhelmingly about communication and decision, so election monkey wrenches cannot be ruled out.

Marie Cocco, Syndicated Columnist, The Washington Post Writers Group

Marie Cocco is the outsider’s insider in Washington. She uses her strength and experience as a reporter to uncover hidden histories that illuminate the present. Her reporting and commentary on cultural and political topics have won prizes from the Associated Press, the Newswomen’s Club of New York, the New York Newspaper Guild, the New York State Publishers’ Association and the New York Press Club. She has been a guest commentator on CNN, the Fox Network, MSNBC, CNBC and C-SPAN as well as national radio shows.

In general, the prospect of “the Internet” having a material impact on the election is minimal because it does not affect how people vote. Traditional media still provides the lion’s share of information to voters, according to a Pew Research Center study that she quoted several times, Internet’s Broader Role in Campaign 2008.

• There are turning points in campaigns, but thus far they have had little to do with the Internet. She referenced Hillary’s gaffe in Philadelphia on the U.S. driver’s license issue as well as the resurrection of John McCain in New Hampshire for his tireless sharing during town meetings. The format was particularly suitable for him, and he generated extensive support. Neither of these had anything to do with the Internet.
• 60% of voters get their campaign information from television (Pew), while only 15% from the Internet—and most of the sites Internet users visit are mainstream media.
• However, it is clear that the Internet can be a potent fundraising weapon—for the same reason that e-commerce is so popular (“it’s easy”)—which is reflected by Ron Paul and Howard Dean efforts. However, it doesn’t move voters.
• It is beginning to show its promise for grassroots organization. Voters and political operatives have extensive email lists. here she referred to Huckabee’s mobilization of voters in Iowa by tapping home schooling, religious and other “special interest” email networks, which enabled him to come out of nowhere to win the primary. Hillary Clinton, before announcing her candidacy, tapped all manner of women’s email lists to leverage gender as an election issue. Barack Obama is using the Internet for fundraising and grassroots organization, and John Kerry’s endorsement will mean leveraging his 3 million name prime email list.
• However, she did admit that the viral video had killed George Allen’s reelection, but she concluded that these things were too isolated to have a defining impact.
• The demographics of the Internet still skew male, educated and wealthy; they do not reflect the electorate. This makes it particularly difficult for the Democrats, whose core constituencies lag in online adoption.
• Hillary Clinton has garnered the lion’s share of negative Internet-produced content, according to Cocco. The liberal blogosphere is dominated by white males.
• Increasingly people are online 24 hours a day. Trust in traditional media is falling, while new offerings of “user-generated content” grow (for one, CNN’s I-Report). What can campaign strategists learn from these developments?
• The Internet is an emerging tool for grassroots organizing, but two-thirds of young Americans do not go to college. Hillary Clinton figured this out, and she focused New Hampshire organization on low-tech devices like flyers in bars and laundromats.
• Social networking doesn’t come close to reflecting the electorate: during the YouTube debates, the Republican debate didn’t address taxes while the Democratic debate didn’t take on healthcare. There will also be privacy issues when people begin to understand that communicating online means loss of privacy. She mentioned high school athletes being kicked off teams when school officials found party pictures of them on Facebook.

Peter D. Greenberger, Director of Google’s Elections & Issue Advocacy Team

Peter joined Google in May 2007 to build and manage a new Elections & Issue Advocacy sales team dedicated to introducing Google solutions to political campaigns, committees, and issue advocacy groups. Previously, he grew the public affairs division of New Media Strategies, a Web 2.0 marketing firm, working with clients such as the Democratic Senatorial Campaign Committee, Discovery Networks, Ford Motor Company, the Granholm for Governor campaign, Merck, Inc., Wachovia, the Washington Redskins, and XM Satellite Radio. Prior to that, Peter spent ten years working on presidential, gubernatorial, U.S. Senate and Congressional campaigns, including a stint as the Clinton White House.

• Peter unsurprisingly saw the Internet’s role in the election as more important than Marie had depicted, citing (Google) research that showed TV and Internet trending toward parity. He postulated that the writers’ strike and the lack of original content was hurting TV.
• Web 2.0 is clearly causing candidates to lose control of their messages because voter/publishers who create content that strikes a chord and gains significant attention can, even if they are trying to help a candidate, do more harm than good. Communication is becoming more chaotic.
• It is very difficult to contain news, and response must be within minutes, not hours. How to engage the community and organize people?
• Google has a “no smear” policy for its advertising. While it is possible to create “negative” ads, they are scrutinized to ensure they are issues-based, not personal. Google does not allow personal attacks.
• The Internet makes it easy for younger people to get involved, but the question is, “When will online begin to persuade offline?
• Mobility will add another wrinkle to politics because devices and the context around the mobile user are somewhat unique (and will require a different approach to communicating). Key groups like Latinos access the Internet via their mobile phones. SMS (texting) is a completely different type of messaging (limit 140 characters).

He briefly reflected on Google’s vision for its role in “the democratic process” and explained tools that were particularly relevant to candidates. Among them:

• Google Trends enables people to track the “popularity” of words and phrases based on Google searches. The example of “Freakonomics” was spiky as a function of mass media acclivity.
• Google News aggregates myriad news sources, giving voters a dashboard to follow their favorite causes. One feature enables anyone named in an article to respond to the topic or issue about which s/he was quoted. This enables candidates to respond to what they may feel is wrong information. This feature is available to everyone (not just candidates).
• The Elections 2008 Gadget enables people to display many types of campaign information as Google maps.
• Google/YouTube’s You Choose is a site whose usage is free to candidates.

Alan Webber, Senior Analyst, Forrester Research

Alan has more than 14 years of experience working with global commercial and government clients on creating positive experiences for customers and citizens. Before joining Forrester, Alan led various strategic planning, performance management, and Web initiative efforts for the US government. He is quoted regularly in numerous business and trade publications, including BusinessWeek, The Washington Post, Government Computer News, Congressional Quarterly, CIO Today, Government Technology, and French CIO Magazine. He began working in political campaigns while a teen.

• Alan prefaced his remarks by saying that politics was “all about marketing” and it was possible to draw many parallels between business and politics. He shared several elements of Forrester’s Framework for early adopters of social technologies and enveloped them in a political context:
  • Creators are most involved because they create original content, followed by Critics (contributed reviews, playlists), Collectors (taggers), Joiners (social networks, to be with friends), and
  • Spectators (read consumer content, blogs, videos) and Inactives (are aware but are not yet involved).
  • Most of the voting electorate is in the Spectator and Inactive categories.
  • More detailed treatment of the Forrester’s “Ladder of Participation,” see Your Customers Are Revolting…
• Only 35% of U.S. adults have read a blog, and few of the few that read ever post comments to blog posts.
• 2012 will be the year in which Web 2.0 will make itself felt because youth leads in Web 2.0 activity, and older voters are largely inactive.
• However, we are starting to see incredible UGC (so called “user-generated content”) like the Hillary Clinton 1984 video, which was created by an individual in three hours.
• Candidates are exploring how to mobilize supporters, but they have to realize that they are treading new ground, and there will be significant mistakes. Having quick and well-planned response processes is critical.
• Mobile communications will not be a factor overall because most Americans aren’t using the Internet browsing part of their phones. For more on this, see Impact of Mobility on B2B and B2C. Alan expects mobility to play an increasing role in five to ten years.
• The Internet does not significantly change the influences of Political Action Committees
• Social Networking will play an increasing role in politics. He mentioned a 65 year old grandmother blogging politics (no name, maybe he didn’t want to overwhelm her with attendees’ attention ,^). Nothing is off-limits, everything will be included.

The Internet’s Broader Role in Campaign 2008

Before Marie mentioned it, I had not seen this study, but its relevance to the discussion makes it notable, so I encourage you to look it up.

• Introductory points:
  • “The internet is living up to its potential as a major source for news about the presidential campaign. Nearly a quarter of Americans (24%) say they regularly learn something about the campaign from the internet, almost double the percentage from a comparable point in the 2004 campaign (13%).
  • “Moreover, the internet has now become a leading source of campaign news for young people and the role of social networking sites such as MySpace and Facebook is a notable part of the story. Fully 42% of those ages 18 to 29 say they regularly learn about the campaign from the internet, the highest percentage for any news source. In January 2004, just 20% of young people said they routinely got campaign news from the internet.
  • “The quadrennial survey by the Pew Research Center for the People & the Press and the Pew Internet & American Life Project on campaign news and political communication, conducted Dec. 19-30 among 1,430 adults, shows that the proportion of Americans who rely on traditional news sources for information about the campaign has remained static or declined slightly since the last presidential campaign. Compared with the 2000 campaign, far fewer Americans now say they regularly learn about the campaign from local TV news (down eight points), nightly network news (down 13 points) and daily newspapers (down nine points). Cable news networks are up modestly since 2000, but have shown no growth since the 2004 campaign.
• Television is steadily slipping as the main source for information about everything, including campaigns, even though it still prevails in 2008.

Analysis and Conclusions

• We are in the early stages of adoption, but trends are quite clear: mass media will cede its influence to the Internet in 2012 (I still think that’s too aggressive, 2016 or 2020 are more likely). People tend to be quite conservative when they vote, and many demographics are experimenting with new tools and ways to pursue their political interests.
• General elections are obviously about hits; they are not long tail phenomena. Therefore, the whole niche dynamic that is so key to the influence of social networks may be less relevant to democratic elections.
• Panelists all mentioned the Internet’s ability to enable fast mobilization of people and action. Communication is near simultaneous, specific and distributed pervasively. Generation Y are active users. One of the most predictable venues for an Internet-produced political disruption would be a Barack Obama victory because his campaign is leveraging the Internet and Gen Y far more than any other campaign. An excellent article on the Obama grass roots campaign is Democrats’ Tactics May Change the Game (23 January 2008, The Wall Street Journal).
• But let’s indulge a different logic for a minute. The panelists were focused on whether the Internet would influence a large number of votes, and they all made convincing cases that it would not. However, I believe that is the wrong question to determine the true influence of social networks and the Internet. Some interesting alternative questions:
  • How does the Internet influence who runs? This is certainly a year of “non-traditional” candidates. For more on the election’s impact on the U.S. economy, including interesting election insights, see the Economic Outlook for 2008.
  • How do social networks affect the agenda that candidates must address to get votes? How does the online “conversation” bleed over and influence more mainstream issues?
  • How does the Internet detract from intimacy and make politicians more inhuman? (due to the increased consequences of saying something that “can and will be used against you” on tape, which will cause them to say less and less and voters’ decreased ability to relate to them as people) Increasingly everyone will carry a video camera in their pocket (mobile phone), so everything will be video taped all the time.
  • Why is the prospect of Internet-driven change such an attractive prospect (the Pew study attitude, for one)? Why are people losing trust in mainstream media? It serves less and less because it is widely perceived to be less authentic: people’s expectations of authenticity are changing due to the increased (unsanitized) voices of other people. How do candidates balance authenticity with the grave consequences that insure with gaffes that can be magnified so poignantly?
• Were I doing strategy for any of the campaigns, I would be focused on “tipping point” opportunities to use Web 2.0 tactics to sway influential minorities in tight situations. The last elections have been close, so the influence of strategic minorities could well become a deciding factor, especially considering the Internet’s ability to mobilize people quickly. It often comes down to a state.
• Although Peter and Alan agreed in principle to the unlikely prospect of the Internet’s having a “tipping point” impact on the election (such as the Hillary 1984 video coming out just before the election), they both said that such a possibility was very unlikely and difficult to predict. Alan pointed out that the impact of the “Macaca incident” caught on video in George Allen’s campaign was due to the combination of the video and the opponent’s effective (and/or lucky) response as well as to fortunate timing (just enough for the word to propagate to non-Internet users and not too much to be forgotten). It is even likely that George Allen, the incumbent, lost the close election due to the controversy, which was video taped and published on YouTube.
• Mass media, including television, will always have a place in peoples’ viewing habits, but in general, popular culture is shifting from a push to a pull pattern. People are increasingly accustomed to finding and accessing information on demand to support decision making.
• People are losing trust in organizations and established interests, and this trend holds true in politics in spades. People are overwhelmingly likely to trust “someone like me” over an expert or organization representative in many situations. How does that translate in terms of a campaign? By the increased importance of “grass roots” organization.
• The Democratic race best reflects “old vs. new” methods of campaigning. As I write, The Obama campaign is still the challenger, it has less established Democratic support and it is forced to depend on the Internet more: yes, Hillary Clinton is our first female candidate with a serious shot, but at the end of the day, she still represents the reelection of the same wife/husband team, even though the roles would ostensibly change.
• December 2008 follow-up story: Web 2.0 Case Study: Barack Obama’s Use of Social Media

U.S. Economy Due for Sideways Year—Special Effects by Presidential Election—Uncomfortable Long-term Questions Waiting in Wings

The Executives' Club of Chicago assembled an all-star panel to give Midwest business leaders their guidance for various aspects of the U.S. economy in 2008. Diane Swonk, Chief Economist of Mesirow Financial and Robert “Bob” Froehlich, Chairman of the Investment Strategy Committee, Deutsche Asset Management returned, and the mystery panelist was Jack Ablin, Chief Investment Officer, Harris Private Bank. They broke out their respective crystal balls for 2008, along with comedic effects. The session was brilliantly moderated by Terry Savage, Financial Columnist of the Chicago Sun-Times who didn't miss a beat and extracted specific predictions from panelists.

Panelists agreed that the U.S. economy would struggle in 2008, but it would move mostly sideways, probably eking out a 1-2% gain for the year after an unsatisfying first half. All panelists predicted that the Dow would touch 14,000 sometime during the year. Froehlich again emphasized the importance of looking beyond the U.S. for investments. Swonk and Ablin were less outspoken but had high non-U.S. allocations in their recommended investments for 2008.

After reportage on the panelists conversation, I will add my analysis and points to ponder, about the economy, opportunities and the election.

I covered last year's 2007 Forecast, with this summary of panelists Swonk, Murray and Froehlich: “The consensus was that the U.S. economy would have a relatively benign year in 2007. All panelists predicted a higher Dow. Little of import will happen on the political front, the U.S. economy will grow at a slower pace, and investment returns will be generally highest outside the U.S.”

Terry Savage set the context with tongue very much in cheek, summarizing 2007's panelists' predictions and the aftermath: “We began the year with too much liquidity, and mostly wrote it off as a subprime year.” The U.S. now lives on the kindness of strangers, with Citi, Merrill and JP Morgan having accepted ~$37 billion in capital injections to shore up their capital bases after writing down the value of their subprime tainted holdings. After the 2001 tech wreck, U.S. investors sought refuge in their homes. A little too much so, in my opinion.

Diane Swonk, Chief Economist, Mesirow Financial

Diane is a widely quoted economist who serves on committees to the Federal Reserve Board and the (U.S.) Congressional Budget Office, among others. In introducing her, Terry quoted her metaphorical comment on Bernanke's performance as Fed Chairman, which had been printed in the Wall Street Journal that morning: “If he were an Olympic skater, his technical score would be close to a 9 or 9.5, because we have gotten a lot of stimulus in monetary policy in recent months. His artistic score, or the execution of those moves, however, are (sic) closer to a 3.5 or a 4, which would knock him out of medal territory. There is no performance without passion and conviction,” Swonk had said. that made for a few awkward moments, as two members of the Chicago Fed were sitting at the head table, but she acknowledged it and recovered gracefully.

• Asked if a recession were in the cards, Diane said that it was the wrong question. More interesting would be why do things seem so bad, and why are people so concerned? Overall, she is not bearish on 2008. Historically, recessions require (exogenous) shocks; they do not usually happen solely due to internal factors.
• As she had last year, Diane brought up the widening disparity of the composition of growth: the top 1% earned 23% of U.S. wealth in 2007, with the bottom 50% earning 12%. People have jobs, but they don't feel wealthy as income isn't growing and housing prices are falling. Companies are not giving raises, and corporate profits remain high.
• Moreover, the consumer led the U.S. through the tech bust that had rung in the 21st century, while business investment and trade had been restrained. The opposite is happening now, and one of the results is that people do not feel as good.
• Diane referenced (threats) by a group of investment bankers that are suing over low/nonexistent bonuses this year. “Since when did Wall Street become socialist?” she barbed. “They sound more like the UAW.”
• She expects the U.S. economy to struggle, and perhaps contract somewhat (but probably not) during Q1 and Q2. The second half should see the economy coming back solidly.
• On the Fed's actions, Diane reminded the audience that it always required six-twelve months for the full impact of monetary policy to be felt. In a significant change of approach (“coming out of the shadows”), Bernanke virtually disclosed a further .5 percent cut at the next Federal Open Market Committee meeting. We may well have to worry about overstimulating the economy.
• Turning to politics, she predicted that Congress would cut taxes because it's virtually undisputable that lower taxes have stimulated the economy. However, disparity of income brings the risks of populism and setbacks for free trade. China is the scapegoat, but she reminded the audience that China was largely responsible for convincing North Korea to back down from its nuclear weapons program, having cut off energy for months. China's intervention with Iran is also helping, not to mention trade.
• The U.S. immigration policy is misguided, as the U.S. sends most of the best and brightest foreign students back to their homelands to make their fortunes there, when U.S. companies cannot find enough knowledge workers here.
• Issues abound for the next president, and his/her chances of reelection are slim because it will undoubtedly be a difficult term. Boomer retirement and concomitant deficits will kick in, and Iraq will continue in some form or other.
• Diane flatly stated that she did not want anyone “controlling” the economy, but she sought to emphasize the importance of leadership during a time of difficulty.
• We will not “relive the 1970s” stagflation due to global deregulation (and liberalization of trade); however, she is concerned about protectionism as well as inflation, but the latter not until the end of 2008. Productivity is not so great.
• Predictions for January 2009: the Dow will revisit 14,000 this year. We'll see a 3.5% Fed Funds rate and 2.5% growth for the U.S. economy in 2008. Tellingly, she is much more worried about the four-five year horizon.
• If I had an extra $100,000 to invest: 30% in financial services, 30% in export-focused industrial equipment (i.e. John Deere) and 40% in global ETFs; Brazil especially strong as well as Asia.

Jack Ablin, Chief Investment Officer, Harris Private Bank

Jack Ablin is a “Top 100 Wealth Advisor” with $55 billion under investment. As the “mystery panelist,” he gave an investor's perspective on the economy.

• Jack opened by pointing out that, historically, economists only manage to predict 38% of the recessions that we actually have, and they usually over-predict recessions. In other words, all the recession predicting quoted in myriad newspapers will likely end up being false.
• He anticipates softness in the U.S. economy in 2008, but the likelihood is that we will have a “touch and go” recession.
• The U.S. currently has a housing-centric economy, but historically, residential investment is “coincidental” with recessions; it is not a cause.
• He is not worried about inflation. Typically, the PPI (Producer Price Index) rises first, and producers pass price increases on to consumers, boosting the CPI (Consumer Price Index). Currently the PPI is not rising but CPI is. There is weakness in discretionary stocks and retail. Weakening housing prices add a deflationary energy to the economy, and unemployment is increasing which will also serve to dampen inflation.
• Wages as a percent of GDP are at a 40-year low; corporations are taking profits; there are no raises.
• The credit crunch is easing in commercial paper, as rates moving toward the Fed Funds rate.
• The S&P 500 is overvalued by 5-8%.
• Predictions for January 2009: the Dow will drop below 12,000 during 2008, but it will rally in Q3 and Q4. Fed Funds rate will be 2.75%.
• If I had an extra $100,000 to invest: as you might suspect, Jack over-achieved in the investment advice part of the panel: 10% ETF TWM (ultra-short Russell 2000) because it's overvalued by 30%, but take that trade off in May 2008; 90% in commodities, DLS international small caps, emerging markets.

Dr. Robert “Bob” Froehlich, Chairman, Investment Strategy Committee, Deutsche Asset Management

Widely quoted in myriad venues as “Dr. Bob,” Bob Froehlich was as entertaining as he was insightful. I especially appreciated his insights on the impact of the U.S. presidential election. Terry congratulated his on predicting a 14,000+ Dow and for the call on Chinese stocks; however, he missed the housing bubble last year, having said that there was no “U.S. housing market” (housing markets were local). Moreover, he predicted a bumper year for investment banks due to extraordinary M&A activity.

• Bob opened flamboyantly, gesticulating away Terry's question about a possible recession. “I don't care whether there's a recession. What does it matter?” Sure, the U.S. economy will have a lackluster year in 2008 and probably grow 1-2%, but, echoing Diane, he pointed out that knowing why was more important than whether we would have two consecutive quarters of negative growth this year.
• More serious now, he owned up to having missed the subprime mess completely in his comments last year. However, he was in good company, and he reminded the audience of the real issues:
  1. The magnitude of the problem was difficult to discern: due to the innovation and creativity involved in structured finance, investors no longer could see the connection between reward and risk; effectively they became decoupled.
  2. Intellectual Property (regarding structured finance) is not distributed evenly, and regulators and investors did not understand these sophisticated products. Investment bankers, their attorneys and accountants knew of the risks, but no one else appreciated them. The problem was, further, that the former parties did not go out of their way to point it out to the latter. Rating agencies were asleep at the wheel.
  3. People have a funny attitude toward disclosure. Defending the industry (he's in investment banking), he reminded the audience that investors never like disclosure when times are good, but they grouse when things are going south. But the industry has to be more proactive and consistent with disclosure, whether investors want it or not.
• Subprime will weigh down the U.S. economy in 2008, as will high oil prices. Let's not forget that crude was at $60 a barrel last year, and it hit the 40s during 2007. Those are tremendous swings (and they aren't based on its value but probably on widely varying perceptions of risk).
• Monetary policy affects markets more directly than the economy. Let's not forget that.
• The big story was the election. You can't talk about politics with clients because it's such a divisive issue in the U.S. (but that's too bad because the impact on the market will be palpable). It will be the most divisive and bitter election in modern history, not because of the issues but because of who's running and what they represent personally. Bob's a master of being serious while joking, and I can't come close to capturing the humor channel.
  • Republicans: the three front runners have strong religious components to their lives, a very divisive characteristic: Romney, a wealthy Mormon; Huckabee, a Baptist minister; Giuliani, a Catholic who has been divorced several times.
  • Democrats: it already looks like a two-headed race. Obama, an African American, is a strong contender for white house, running against Clinton, the first woman with serious contention for the post. “I know a lot of people who would have a lot of problems with that,” he added. However, he would like to see Hillary win, if only to confer on Bill the title of “First Gentleman” ,^) lol
  • When it comes to business interests, people are comfortable with elections in which policies and rational discussions take center stage, not elections about messy issues like religion, gender and race. He foresees a significant outflow of foreign capital, which will add difficulty to a laboring U.S. economy.
• We are in the fifth year of a long commodity retrenching cycle (in which prices will remain high), and he expects ten more years. In China, there is a huge disparity in disposable income between urban and agricultural populations.
• We will not “relive the 1970s” because the technology-driven productivity revolution is ongoing. We're only in the second inning.
• Bob shared the investment banker's version of the old litmus test of bad times (if your neighbor is out of a job, there's a recession; if you are jobless, there's a depression ,^): why all the gnashing of teeth? “We lose money and lay people off all the time. But when the CEO loses his job, that's a crisis.” (referring to Citi's Prince, Merrill's O'Neal and Bear's Cayne).
• But all of this need not prevent you from making money this year. “There are always ways to make money.” Here are some of his tips:
  • “Feed the world.” The earth gains 75 million people every year, and two billion will come out of poverty (in emerging markets; I didn't get the time frame). When people emerge from poverty, they first improve the food they eat (and shelter). Generally transportation is of secondary importance and entertainment third. Soft commodities (food) should be strong for some time.
  • “Be the world.” Go global with investments. The global GDP in 2008 will be 6% and the U.S. will be 1-2%. China's immense demand for commodities drives up prices, and countries with raw materials benefit (Africa, Latin America, Asia). This points to sustainable demand for commodities.
• Predictions for January 2009: the Dow will go over 14,000 (again), and inflation will hold steady; we'll skate by, avoiding a recession with about 1% GDP growth.
• If I had an extra $100,000 to invest: 12.5% each in Monsanto, ADM, China Mobile and China Petroleum; 50% in the best managed company (in the U.S.), the CME.

Analysis and Conclusions

So, the U.S. economy will have a sideways year and an exciting election. Put more of your money abroad, specifically in Asia.

As a humorous aside, last year's panelist Alan Murray of the Wall Street Journal recommended, for the second consecutive year, to dump Apple's stock because the company was so overvalued (stock price ~82). It finished 2007 at 199.83. As I wrote in my conclusion, I would have followed his advice had I believed Apple to be a computer or a software company. Instead, I perceive it as a life experience company that offers connecting with friends, immense hipness and individuality. Harley-Davidson is not a motorcycle company, either. It offers the open road, and I believe its fastest growing segment is women. They are both “manufacturers” that almost perished, but they subsequently transformed themselves into knowledge companies by explicitly focusing on experience. For more on this, see The Knowledge Economy: The Ultimate Context for Understanding the Future.

Now for some insights into strategic issues regarding the U.S. economy.

A Building Self-Made U.S. Economic Crisis Can Still Be Avoided but Decisive Action Required

• During the discussion, the words of Caterpillar's James Owens were constantly ringing in my ears. Also an economist by training, Owens had implored the Executives' Club audience in October to reawaken the courage to compete. He saw the U.S. as being at a turning point: either we recognize and honor our emerging competitors and meet them on the global stage, or we retreat into ourselves, raise trade barriers, maintain or worsen our misguided immigration policy and snipe at countries who out-hustle us. These remarks are coming from the helm of one of companies represented in Diane's recommended investments. Owens clearly sees danger ahead for the company he leads, and the danger is from a lack of courage—and from a widespread sense of entitlement (Wall Street guaranteed bonuses, Detroit healthcare and full pay for not working largesse, homeowners who can't pay their mortgages want a federal bailout, etc.).
• Connected with this, Bob's statements about U.S. GDP (1-2%) and global GDP (6%) could indicate a profound structural limitation unless the U.S. fundamentally changes its attitude toward the world and its place in it. Time was short for questions, but I will ask Diane about her concerns about the U.S. economy 4-5 years hence at my earliest opportunity.
• At events I covered in 2007, executives constantly referenced the U.S. shortage of students in engineering, math and science. Xerox's Anne Mulcahy, for one, pointedly remarked that she was worried because we won't feel the gap until boomer scientists retire; at that point there will be no recourse because we will have no one to take their places. Due to Diane's time frame, I conjecture that she was referring to this as well.
• A related problem is that the global economy requires more knowledge and imagination to understand, and U.S. voters and Congressmen do not understand it (according to the E.U.'s Jonathan Evans, 70% of Congressmen do not even have passports). In the Industrial Economy, enterprises created value through efficiency and distribution (workers could keep heads down, do their jobs and create value). In the Knowledge Economy, efficiency is understood, and companies will have to innovate to create differentiating value. To innovate, workers will have to collaborate with people all over the world, and customers are increasingly all over the world. This change of affairs is a grave threat to the U.S., which is a huge market unto itself and is relatively inward-looking.
• Having been several times a marketing executive myself, I have found that it is a good practice to constantly ask yourself where your customers are—and where are they moving. Did you know that China is already the third largest market in the world for luxury goods? Did you know that India already has the ninth largest population of millionaires (PPP) in the world? My point is, rapidly growing markets for almost any product you can name are in places that few Americans can find on a map. How are U.S. companies going to compete to develop offers for these markets? The irony is, they will be hurt less than the U.S. population because they will go to where the workers are.
• Sam Palmisano spoke persuasively on a new vision for the global enterprise in 2007; for his insights, see my coverage, “Leadership, Trust and the Globally Integrated Enterprise.”
• Although I'm no economist, I believe that globalization 2.0 is also serving to dampen inflation (companies can go to where the workers are, which enables them to give fewer automatic raises). Also, China's being the shop floor for the world, including the U.S., adds a deflationary element to the U.S. economy because we get cheaper products. In a sense, the world has cheaper and more knowledgeable production and knowledge workers that companies can invoke in a global delivery model, and that capacity is growing. True, workers abroad raise their expectations and wages as they gain experience, but other countries (i.e. Botswana for call centres) are coming online all the time. My point is that most economic models with which I'm familiar treat the U.S. as a relatively closed system, so they have an uneven sense of what is happening. This is a long-term, fundamental trend.
• Seen from this perspective, I can't overemphasize my appreciation for Bob's advice. Global is the default now, and the sooner you recognize it and act on it, the better off you will be.

The U.S. Presidential Election

• In my mind, this election will add extensive uncertainty to the economy in 2008 because it offers so much uncharted territory, which can be fortunate or not. Business investors want to understand risk and reward, which will be more difficult this year. Bob's context around this election resonated with me, all the more because I consult on emerging trends regarding social networks and Web 2.0 technologies. It smacks of disruption from many perspectives. Try these on for size:
• In the 2004 election, Howard Dean's campaign was one of the first to show some of the potential of Web 2.0, and the 2008 campaign may see some surprises in terms of tactics. Obama is one of the most active in using social networking to help his supporters to find each other and organize. In addition, fundraising via the Internet has extensive untapped potential.
• Having had several conversations with friends in Mumbai this week, I appreciate that the very fact that Obama is serious contender has not gone unnoticed abroad. During the Bush years especially, the U.S. has lost enormous prestige and credibility abroad due to our government's lone wolf approach to foreign policy. In many quarters, we have lost respect as leaders of democracy. Already, the presidential race is signaling that things might be changing, and people are more than ready for it. This is very meaningful for democracies looking for inspiration.
• According to Wikipedia, 2008 is the first election without incumbents in the primaries since 1928. Although literally true, Hillary's candidacy raises interesting questions, with husband Bill having been a two-term president. How much influence would he have, especially since Ms. Clinton would undoubtedly call on many members of the old crew, whose context was set with Bill as president? This dynamic could produce some unwarranted special effects should she win the office.
• Many political leaders have been risk averse in recent years, and they need to press to educate voters about the stakes of globalization. Education is absolutely critical: every individual is now global because Web 2.0 makes global actionable at the P2P (peer to peer) level. This means that the bedrock of all economies, small and medium sized businesses, can go global. But their leaders usually do not appreciate the opportunity or have the knowledge to make it a reality. They need leadership, examples and mentoring.
• As if these uncertainties were not enough, the U.S. has many structural issues to address, like global warming, terrorism, and boomer entitlements. I hope they will not get as short a shrift as Bob predicted because delay increases consequences. To quote Diane's rendition of Walter Cronkite's admonition to the generation in power at her 1984 commencement address, “We screwed up, it's your job to fix it.” We all want to avoid this, but it means making immediate term sacrifices for long-term gains. The sooner we sign up, the better!

Three CIOs Share Vision and Techniques for Creating the Networked Enterprise—Facebook and Tagging Creep In

After James Owens’ luncheon address, the Executives’ Club of Chicago’s 2007-08 Technology Conference series opened with the CIO of the Year Award and a sneak preview of the 2008 Chicago Technology Outlook Survey.

Then a diverse panel of executives took the stage to discuss the role of the CIO in the “networked economy 2.0.” Bahman Koohestani, Senior Vice President & Chief Information Officer, Orbitz Worldwide, Paul Mankiewich, Chief Technology Officer, Alcatel-Lucent and Karenann Terrell, Chief Information Officer, Baxter International, shared their visions for the evolving role of the CIO and IT. John Gentry, Partner and Managing Director, CSC Consulting, moderated the panel discussion with aplomb. The Club’s quarterly Technology Conference took place October 16 at the Chicago Hilton.

Although the panel represented such diverse businesses as pharmaceutical giant Baxter, global network equipment provider Alcatel-Lucent and travel sensation Orbitz, all were very focused on how CIOs needed to enable a new level of innovation by fostering a new level of trust and adopting a networked model—for everything. That means shared risk taking and trusting people.

Although their remarks had an appropriate enterprise focus, in Analysis and Conclusions, I will take the argument into the customer arena: only by extending their trust to customers will enterprises realize sustainable innovation in the long term.

Continue reading Innovation Defines New CIO Role at Executives’ Club “Networked Economy 2.0″ Technology Conference

U.S. at Turning Point with Global Economy in the Balance—A Lack of Courage?

James W. Owens, Chairman & Chief Executive Officer of Caterpillar Inc., beseeched U.S. business and government leaders to find the courage to save free trade. The speaker at the Executives’ Club of Chicago’s Global Leaders Series, Owens addressed a packed house at the Hilton Chicago on 16 October 2007. His speech was immediately followed by the Club’s Technology Conference at which CIOs advised their peers on the emerging role of the CIO in the “networked economy 2.0.”

A Ph.D. economist with extensive global management experience, Owens made a very convincing argument that the U.S. and the global economy are at a turning point. It is time for the U.S. to lead by example to assure the continuance of the free trade juggernaut that has produced so much wealth in the world. If it fails, the world stands before the prospect of sharply curtailed trade.

Following a summary of his remarks, I will offer conclusions and analysis of related market developments. Although he limited his remarks to business leadership, I will also argue that the U.S.’s lack of resolve and leadership is multidimensional, notably with respect to the environment. Moreover, economic and social forces are going to confront the definition of the sovereignty of the nation state due to the collective destiny of all nations due to trade and the environment. In other words, Owens’ remarks may be far more applicable than he suggested.

Continue reading Caterpillar CEO Pitches Free Trade Gauntlet to Business Leaders at Executives’ Club

The Innovation Imperative: A Play in Two Acts, Starring the Consumer

Irene B. Rosenfeld, Chairman & Chief Executive Officer of Kraft Foods, outlined her vision for relaunching Kraft at the Executives’ Club of Chicago’s Chicago CEO Breakfast on May 30, 2007 at the Mid-America Club. She was enthusiastic about the company’s second lease on life: having spun off of Altria this spring, the company is newly independent, and she was eager to share her plan to drive growth by addressing the “eye of the consumer.”

Kraft Foods is the second largest food company in the world and the largest in North America. It has seven brands that produce revenue of over $1 billion and fifty that bring in over $100 million each. Central to her strategy is leveraging Kraft’s formidable brand portfolio and other economies of scale. Rosenfeld “came home to Kraft” about a year ago, having had highly visible leadership roles at the company in the past and the top job at Frito-Lay immediately prior.

From our perspective, Kraft is exhibiting post-Industrial Economy malaise, which afflicts product-focused companies that are trapped in legacy production and distribution paradigms. The classic symptom is chronic product commoditization and lackluster growth. However, Kraft is doing the right thing by focusing on innovation. After our summary of Rosenfeld’s remarks, we will discuss the CPG predicament and offer some ideas for transitioning to the Knowledge Economy through customer-led innovation.

2007 Strategy: Rewiring Kraft for Growth

Like many other consumer packaged goods (CPG) food companies, Kraft has been buffeted by the Knowledge Economy’s crosswinds, namely the splintering of mass audiences in favor of niches and long tails. In food products, as well as in other “middle market” offerings, the market is bifurcating: consumers tend to shop low price in many categories while treating themselves to select high priced items. Consequently, companies in the middle are struggling—with what some term “the death of the middle” syndrome. This is also reflected by the consistent underperformance of department stores in the face of strong showings by discounters and luxury retailers.

“We’ve been forgotten by consumers, and many of our brands are perceived as boring. We will comtemporize our brands by making investments in quality. By making truly delicious products and supporting them with marketing investments to communicate the value, we will once again become a relevant part of consumers’ daily lives.” — Irene B. Rosenfeld

Kraft intends to accomplish this by pursuing these goals, the first two of which she discussed in some detail:

• Reframe categories to increase relevance
• Leverage scale to exploit sales ability
• Shift emphasis from cost containment to innovation and growth
• Continue to improve efficiency without impacting quality

Reframe Categories

The company’s strategists are focused on four “axes of value,” the ensemble of which forms Kraft’s “Growth Diamond”: consumer experience, health and wellness, convenience and simplification. Kraft product development and brand management teams try to enhance products according to all four points of the diamond. Foods should tend toward health, convenience and simplicity, and they should provide superlative consumer experience. However, product design seems to focus on one or two of the points, which was reflected on Rosenfeld’s categorization of the revenue Kraft earns from its brands:

• $8 billion from health/wellness,
• $7 billion from quick meals (convenience, simplicity),
• $7 billion from snacks (simplicity, convenience),
• $1 billion from premium brands. Of the latter, Rosenfeld specifically mentioned Starbucks, California Pizza Kitchen and Tassimo, on-demand premium coffee. (Kraft manages Starbucks’ and CPK’s retail businesses, and it produces more revenue than CPK’s restaurant chain.)

Kraft is very focused on consumer trends. For example, in North America, the 50+ age population is growing at three times the rate of the base population. Kraft can address these shifts with product and packaging changes. For example:

• Kraft has added fruit pieces to Jell-O and has introduced several fiber-rich and probiotic foods such as LiveActive.
• It has updated such staples as Macaroni & Cheese as Kraft Bistro Deluxe meals that will appeal to adults.
• Kraft Fresh Creations are ready-made salads that may contain fresh lettuce, meats, cheeses and salad dressings. In effect, they bundle several Kraft products together.
• Cakesters are individually wrapped soft cookies. They are an example of reinventing categories like snack cookies to broaden the frame of reference and increase relevance.
• Oscar Mayer is broadening its offerings with shaved meats. Oscar Mayer Deli Creations are sandwiches that can be microwaved.
• The South Beach Diet brand caters to active lifestyles.
• DiGiorno Ultimate Pizza is designed to rival local pizzeria fare, not frozen pizza. It is also notable because it went from concept to market introduction in fewer than 100 days. Speed will be a hallmark of the new Kraft, as responsiveness is key to competitive advantage.
• Here is an official news release that positions the portfolio.

Exploit Global Selling Capability

Philip Morris acquired Nabisco in 2000 and combined it with Kraft Foods. With the acquisition, Kraft began changing its selling approach. Kraft representatives had traditionally called on grocery stores once in several weeks, while Nabisco had had a direct sales model in which representatives stocked the shelves and were in the stores constantly. Consequently, Nabisco products consistently had excellent shelf space, while Kraft products were disadvantaged. Nabisco’s approach was closer to the vendor managed inventory model that is increasingly preferred by retailers, notably Wal-Mart. Today, Kraft is adopting this system more widely: with its immense brand portfolio, Kraft attains greater economies of scale with the direct sales approach. Kraft has implemented the direct sales model in 30% of North America, and Rosenfeld promised that it would be 100% soon.

Developing markets represent special challenges because a large portion of food products is bought in stalls or in very small stores. Kraft needs to learn how to sell in these environments. For example, Russia and Ukraine saw 50% revenue growth last year, and Mexico and Brazil also saw strong growth.

Concluding Remarks

• Rosenfeld is optimistic but cautions that there will be no overnight fix for Kraft. Since 2002, operating income has decreased from $6 billion in 2002 to $4.5 billion last year. 2007 will be “an investment year,” and shareholders will only begin to see the impact in 2008, when the company will make its next tranche of investments. Rosenfeld expects to see 4% growth within the next few years.
• It is difficult to make “healthy” foods that consumers want. All food companies have tried to reduce salt, fat and sugar, but consumers usually do not like the taste, and the products disappoint. Kraft is adding fruits and vegetables to its packaged foods.
• In addition, Kraft strives to make its products more accessible through vending machines and selling at airports.
• Kraft is trying to address the C2C (consumer to consumer) conversations through virtual shopping tours and participating in online forums. One example is the company’s space in Phil’s Supermarket in Second Life, which debuted in conjunction with the Food Marketing Institute’s convention in Chicago, May 6-8, 2007 in Chicago. More information on the launch.
• Rosenfeld’s message to Kraft’s 90,000 global employees is, “It’s your ship.” She sees her job to share her passion for the company, to understand what employees need and to give it to them. The company is also focused on hiring more Hispanic and Asian employees, as these demographics are growing quickly in North America. The company still realizes 75% of its total revenue from North America.
• Kraft derives $4 billion in revenue from emerging markets. It faces significant challenges in Asia because its core products, meat and cheese, are not part of the traditional Asian diet. Biscuits are among its best-selling products right now. They have a beachhead.

Long-Term Solutions: Customer-Led Innovation

Success Story

One of Kraft’s brightest successes in recent years has been Nabisco’s 100 Calorie Packs, which incorporate portion control into many of the company’s products. But 100 Calorie Packs were not dreamed up by researchers or dieticians; the idea surfaced during one of the company’s consumer community pilots in which Kraft engaged several hundred consumers in online conversations about their experience with food. Kraft learned that consumers did not want to think about “diet foods,” but they were interested in portion control:

“We immediately saw the benefit of having consumers talking with us and with each other around the clock. It enabled us to stay in almost constant touch with our consumers. While Kraft certainly benefits from getting their reactions to new product ideas and the like, the true benefit is developing deeper relationships and the dialogs that result. Our consumers were no longer demographic statistics—they became real people with strong opinions, deep feelings and daily challenges that they were willing to share with us. Knowing our consumers at this level is invaluable in helping us deliver the best possible products and programs to meet their needs.” — Gretchen Waitley, senior consumer insight manager|manager of The Kraft Consumer Channel. (For more information, read the case study.)

It is precisely this type of initiative that holds the most promise for CPG companies: they can collaborate with consumers to create value through innovation. However, before CPG companies can fully benefit from co-innovation, they must evolve their legacy structures.

The Innovation Challenge

Large CPG companies grew during the Industrial Economy, which was marked by material scarcity and the encapsulation of human work within products (for example, packaged, prepared foods replace the home cook’s work by substituting mechanized factory work for it). People around the world delighted in the convenience of packaged foods which arguably enabled more women to work by reducing the need for home cooking time. In the Knowledge Economy, however, customer attention is what is scarce, not material things. Rich economies enjoy unprecedented wealth of material things, and convenience is simply expected; it rarely offers sustainable differentiation. In addition, Web 2.0 communications between consumers mean that product-centric differentiation is consumed quickly.

Consumers communicate their collective and individual experiences with products and services, competitors copy features very quickly, and chronic pervasive commoditization is the result. Novelty “fatigues” fast.

Industrial Economy companies, with few exceptions, have been lackluster innovators because their core competencies revolved around efficiency of operations, the hallmark of the industrial age. Innovation by default involves some kind of discontinuous change, the anathema of ultra-efficient producers.

Knowledge Economy CPG

As an increasing portion of consumers interact with Web 2.0 tools, CPG companies can engage them in conversations about their experience, not necessarily about products and services. Often, the most useful types of conversations take place among consumers, not between consumers and companies, because consumers are customer experience-focused. In many product categories, Kraft could combine its world-class prowess in food science, distribution and marketing with consumer insights to produce consumer-designed products. The value migrates to customer participation and co-ownership, which is far more durable than product features, which are easily duplicated by competitors.

Consider Samuel Adams’ Longshot contest: consumers submit their recipes, which are brewed and judged. Winners have their beers brewed and distributed nationally. In effect, this creates a vibrant community around the beer, the contest and that year’s offerings. It generates extensive publicity, it educates consumers about the nuances of how beer is made, and it grows the population of consumers that appreciate quality (and higher prices). In a controlled way, it puts the means of production and distribution at the disposal of consumers.

CPG companies must evolve their structures to significantly increase their adaptiveness. One interesting viewpoint is the “Food Factory of the Future.” Proponents argue that food will follow in the steel industry’s footsteps by replacing huge monolithic plants with smaller, more flexible factories located by customers. These plants will deliver profitability with much smaller runs, and their locations will reduce distribution costs as well. Proximity would undoubtedly lead to different products and features due to the shorter time between production and sale (short shelf life). By evolving to such a structure, CPG companies could align themselves more easily with customer-led innovation. Currently, their monolithic structures are designed for long shelf life and high volume, which causes the companies to keep production running even if demand changes due to high opportunity cost of not producing anything. They can cause companies to be unaligned with consumer wants.

Having consumers actively engaged in co-developing products could add to CPG competitiveness in several ways:

• Companies can better understand customer experience when consumers converse among themselves. When companies direct the conversation, they unwittingly elicit a product-centric discussion. Industrial Economy DNA is efficiency, line extensions and amortizing past investments, not customer experience.
• Consumers become emotionally invested in the offering that they help launch. C2C marketing and promotion is often the result.
• For Web 2.0-enabled consumers, an increasing portion of customer experience will be collaborating with companies to plan, develop and launch offerings. It’s not only important that the beer tastes good: it’s the fact that someone like me can create a beer that millions of other consumers enjoy. The exhilaration of participation will be important in many product categories.

Analysis and Conclusions

Innovation

• Kraft’s growth strategy is founded on solid principles, namely focusing on the consumer and leveraging Kraft’s selling ability and economies of scale.
• However, CPG companies have consistently had difficulties with true innovation. For example, Kraft’s most recent “organic growth” hit brand was DiGiorno, which the company launched about ten years ago.
• The problem with traditional “product innovation” is that companies usually ask the wrong questions. Industrial Economy companies are wired to make products, so they ask consumers about product concepts and desired features. Consumers are experience-focused, and although products and services can play a powerful role in creating experience, they are the means to an end. Consumers try to imagine what kinds of products would help them, but the communication most often fails, especially when the conversation is consumer to company.
• Companies can change this dynamic by supplementing traditional discovery processes with participation in consumer conversations, which are about experience. Companies that focus on experience and create products that facilitate desired experiences will succeed much more often.
• One way to look at Web 2.0 is that individuals now hold the means of production and distribution for written, recorded, video and graphical content. This is unleashing extensive creativity and experimentation which will not stop at digital content. Consumers will be highly motivated to help companies create pasta sauces, nail polish and many other products. Threadless is an apparel company whose customers design and select its products.

Renovation

• But customer-driven innovation is only half of the equation. To produce sustainable, breakaway results, CPGs need to begin building new infrastructures to enable them to profit from smaller runs and shorter product life cycles. As they are currently structured, catering to consumer whims is a win-lose proposition unless the product becomes high volume. They are out of synch with splintering demographics and shortening life cycles.
• Although Rosenfeld did not have the time to address Kraft’s global strategy, it bodes well for the company that she is focused on it. Kraft has extensive room to grow, as 75% of its revenues currently come from North America.
• One of the best ways to enter emerging markets is to engage customers in online forums. Here again, the company must throw itself deeply into customer experience. Looking for the easy answers that amortize existing investments will succeed less often than customer focus without compromise.
• Kraft’s culture and decentralized structure can make it possible to evolve a new infrastructure, brand by brand. In addition, the company can regard its growing experience in emerging markets as an opportunity to experiment with new ways of production and distribution. It could import new methods to North America and Europe.

IBM’s CEO Articulates Prescient Vision for the Enterprise—Adapting to the Knowledge Economy

Samuel J. Palmisano, Chairman, President and Chief Executive Officer of IBM Corporation, outlined a new version of the enterprise at a lunch honoring him with the Executives’ Club of Chicago’s Thirteenth Annual International Executive of the Year Award April 12, 2007 at the Chicago Hilton. Entitled “Leadership, Trust and the Globally Integrated Enterprise,” his speech emphasized key points from his Summer 2006 article of the same name in Foreign Affairs. He was especially interesting to hear due to his experience with leading one of the world’s foremost global enterprises as well as his insight from serving global enterprises in every industry.

Yesterday’s model for the global enterprise, the multinational corporation (MNC), looks increasingly outdated due to widespread adoption of standards-based technology, increasingly standardized work processes and a liberalizing regulatory environment. Today, knowledge-based resources are available globally, and the enterprise’s means to create value is choosing how and where to tap the resources to best execute business processes. Moreover, the shift to the globally integrated enterprise means a profound culture shift and outlook, which we will address here.

In addition, although Palmisano didn’t reference IBM’s visionary Component Business Modeling (CBM) in either his presentation or article, I clearly heard it in the background. Transitioning to the globally integrated enterprise model requires a completely new way of thinking about business structures and operations. I will illustrate this through brief comments about Component Business Modeling as well as Transourcing, an approach I developed in 2006.

A Global Market: From the Future’s Point of View

Individuals worldwide are adopting technology and the Internet, thereby coalescing into a global market of knowledge workers. In many emerging countries, the wages and and standards of living are growing rapidly for those citizens who have the ability to get the education needed to present themselves as knowledge workers. Companies of all sizes increasingly tap thousands of highly trained and educated people around the world—for their level of education as well as for their lower cost.

The Global Human Capital Journal covers this topic from several angles, and I was impressed by Palmisano’s concise, relevant explanation of how the enterprise must evolve to address the globalizing economy and work force.

Global Business Structures and Knowledge Workers

Palmisano began by highlighting some key elements of the emerging global world. Standards-based information technology is providing a communications infrastructure and knowledge-based work to new regions of the world, which can join the global economy. We have a truly global market of people and expertise. Knowledge jobs are raising employment and standards of living in emerging economies. One billion people access the Internet today, but this will double by 2011. The Internet is increasingly inculcated into cultures around the world. A generation of people does not know life without it. The Web interface is increasingly easy to use and broadband adoption is accelerating.

Regions of the world are striving to develop competitive advantage though differentiated skills, services and knowledge. This trend is extremely relevant to individuals, governments and companies throughout the world. According to Palmisano, enterprises, countries and individuals should be asking themselves, “How do I develop and grow my expertise and ability to create value?” and “How do I attract work to me?” How can I create sustainable differentiation?

He followed this with a brief history of the corporation:

• The International Corporation (IC)—Circa 1850, entrepreneurial joint-stock companies, which were organized in hub and spoke networks to control trade routes, began emerging in larger numbers (the British East India Company was one of the earliest progenitors). The IC operated where the company had been founded and traded raw materials and finished goods internationally.
• The Multinational Corporation (MNC)—The model shifted to the MNC during World War I and the years of trade strife that followed during the 1920s and 1930s. Trade wars made it desirable to produce within major markets around the world to avoid and excessive tariffs, so MNCs focused on producing locally, within national boundaries.
• The Globally Integrated Enterprise (GIE)—The GIE is emerging as today’s model, due to the liberalization of trade, the globalization of capital and the pervasive adoption of standards-based information technology such as Internet-based computing.

The globalization of finance, liberalization of legislation and standardization of IT have greatly reduced transaction costs, so more people can communicate more easily than at any point in human history. Therefore, the GIE is focused on aligning its production with skills and other advantages, globally. Moreover, the global communications infrastructure makes it possible to split processes into parts and execute each part where the optimal human capital resources are. Where the MNC produced products in France to be sold there, the GIE produces and services its offerings globally for customers globally. In other words, a call center is built in the Philippines due to the local skills base, and it serves customers globally. The GIE is “global to global,” and its operations ebb and flow based on the existence of optimal nodes of expertise and other advantages (e.g. government incentives, legal base, intellectual property protection, language, time zone, the list is long).

Issues and Strategy

The GIE is difficult for many people to understand because it requires a fairly sophisticated understanding of business processes and global capabilities, but most people have very limited exposure to global cultures and perspectives.

• Economics—People around the world are uncertain about the dynamic flow of work because it appears that “the jobs are leaving.” In fact, some jobs are leaving while many new jobs are created. The latter are usually of a different type and often require new learning and skills.
• Expertise—Many high value jobs are based on knowledge and information, rather than physical labor, so education and individual initiative are critical to success.
• Openness—In order for global prosperity to continue to increase, people must support openness, which enables work to ebb and flow. The people who are most motivated, educated, collaborative and enact favorable laws will attract GIEs.

In this environment, people and leaders of government, universities and business need to communicate openly about the nature of these changes so that people can work together to understand and respond. To prosper, each country or state needs to rethink how it can differentiate itself and act to create competitive advantage. What can it do better than any other? Answering this question and acting to strengthen competitive advantage will be critical to thriving, to attracting the flow of work. Each needs a business strategy.

For example, Palmisano participates in the U.S. President’s Council on Competitiveness, and its consensus is that to increase competitiveness, the U.S. needs to focus on significantly increasing education in mathematics and science. It also needs to create a system of portable benefits so that people maintain their security as they ebb and flow in the employment market. Countries that want to increase their competitiveness must provide people with the tools to innovate and take risks, which means education and benefits.

SMBs (small and medium businesses) companies have even more to gain from globalization than large enterprises, and this potential has barely been tapped thus far. Small companies are far more flexible, and responsiveness is a tremendous advantage in this environment. Large companies have been global for many years and have enjoyed the advantages. Technologies and global knowledge workers now give SMBs the ability to go global for very low cost. As more knowledge workers go online, they are accessible, and communications make it possible to collaborate with them far more easily than most people appreciate. As an anecdotal example, Palmisano mentioned his son’s high tech company, which has partners in several countries.

Organizational Culture Shift and the Importance of Trust

These changes engender a major shift in attitude and style of working, for companies and individuals. The command/control style of management and interaction is waning in many areas, and collaboration is the new style. It requires more openness, flexibility, communication and trust. The GIE executes its processes with many partners that are distinct business entities, and people have a wide range of “employment” arrangements. They are collaborating to execute high value processes, so how does the GIE delegate and sustain trust among its distributed network of partners and people? How does it build trust at the global social level? One way is to abandon the attitude that has prevailed for that last three centuries: cultural imperialism.

A vital part of trust is a global set of standards for intellectual property protection because innovators’ advantage is greatly diminished when ideas are misappropriated.

The GIE and its proxies must also recognize that they have a completely different employment contract with people. Organizations must strive to develop a new humility. “Employee benefits” and corporate paternalism are waning, and this is leading to a major culture shift of all types of organizations. However, if GIEs do not consider employees or customers sufficiently, additional regulation will result. GIEs must truly serve society.

IBM has been in the throes of transformation since the 1990s, when it began shifting its focus to services. More recently it has transitioned from a MNC to a GIE. Both transformations meant that it had to become much more flat and collaborative, which meant paring layers of management. In Europe, for example, IBM went from 5,000 “above country” management to 400. This worked because IBM rewarded delegation, risk-taking and collaboration.

Collaboration also means openly engaging employees in strategic issues. Palmisano referenced IBM’s use of the Internet to share the company’s challenges and ask for solutions. 150,000 employees and their spouses responded to surveys. Today, IBM US has 135,000 employees, but they are complemented with partners, which brings the total to around 700,000.

On Leadership

Palmisano offered his personal definition of leadership. Recall that, when he assumed leadership of IBM in 2003, he was filling big shoes, as predecessor Lou Gerstner had led the company through a dramatic turnaround:

• “At first, you think you have to have all the answers. I quickly learned that it’s far more important to get strong teams to come together.”
• “Cross-boundary initiatives are critical. Encourage cross-boundary ventures and activities, and let go of control. Take risks and delegate, yet hold people accountable.”
• “Command and control is an outdated management style. At IBM, we went from 407,000 employees to 212,000 from 2001-2005. In 2006, we had record earnings and margins. You have to get the best people, encourage collaboration and uphold standards.”

Palmisano spends 60-70% of his time with clients. Gone are the days spent in endless finance meetings: IBM’s global financial systems make it possible for everyone to access information real-time, globally, so executives are no longer required to spend time meeting to exchange and explain information. He spends one week per month in meetings and is on the road the rest of the time, and this adds far more value to clients.

Whether or not business or government leaders realize it, they are betting their destiny on human capital. Knowledge workers will ultimately determine success or failure, so getting collaboration right is of paramount importance.

New Ways to Model, Build and Operate the Extended Enterprise

Chief executives of global enterprises in all industries are worried about time to market, efficiency and innovation, but their organizations’ processes are far too commingled to “hive off” easily, which prevents them from collaborating with partners. This inflexibility means high cost when entering or exiting partner relationships, which makes their processes more costly and less innovative. It is imperative to solve this problem in order to leverage the exploding global market of innovative service providers.

The Globally Integrated Enterprise is more difficult to conceptualize than were its predecessors because its structures are networked, flexible and complex, where the MNCs are composed of articulated hierarchies that are more impervious to change. As IBM’s experience shows, partners execute an increasing portion of its business processes, which is in part reflected by the U.S. employee ratio cited by Palmisano (IBM 135,000:565,000 partners). Working with partners to execute discrete parts of business processes requires a new way of conceptualizing and operating the enterprise. Increasingly, boundaries between enterprise and partners are blurring.

By defining business processes as interconnected discrete subprocesses, executives can source “providers” to execute subprocesses far more easily, whether they are a part of the enterprise or “external” partners. A new “operations architecture” is critical to achieving the state Palmisano described as “executing processes when, where and by whom it makes sense.” This situation is analogous to creating enterprise architecture to improve the interoperability of discrete, interconnected “parts of functionality” within information systems.

IBM Component Business Modeling

IBM’s Component Business Modeling is a methodology to to redefine processes, compare them to industry standards and break them up into discrete components. I highly recommend it as a way to begin changing your thinking about organization. It includes a process to define processes are differentiating or not, thereby identifying candidates for external partner execution. Also see Unlocking the value of account opening with component business modeling.

Transourcing

Transourcing™ is an evolutionary approach to redefining processes and restructuring the enterprise in order to increase efficiency and innovation. I developed this approach last year. Companies usually approach it in three phases:

• Phase One: Develop enterprise good practices for sourcing and outsourcing, maximizing efficiency and cost savings while codifying what is working and what isn’t. Most sourcing projects are currently managed in isolation from each other, which leads to tremendous duplication, waste and multiple errors. Phase one is analogous to developing a centralized enterprise architecture team to gather and share good software architecture practices throughout the enterprise.
• Phase Two: Reuse good practices to source innovation partners and proactively create robust partner networks. Develop and pilot transformation approaches.
• Phase Three: apply transformation approaches more widely to significantly increase adaptiveness and innovation.

Analysis and Conclusions

Palmisano offered an insightful, compelling argument for the GIE as the emerging model for the enterprise. He clearly defined the GIE and contrasted it with the MNC. Here are some additional thoughts on the GIE, the Knowledge Economy and business strategy:

A World Economy, a Global Enterprise

• The GIE is by no means an all or nothing proposition due to the nature of networks. Palmisano’s succinct history of the corporation shows that executives evolve business structures to best take advantage of the circumstances. The GIE will prevail where circumstances allow, but it will coexist with MNC and IC models.
• The global Knowledge Economy will the most dynamic economy in history. Change means a higher scale and scope of opportunities and threats for individuals, governments and enterprises. Palmisano reflected the right attitude when he said, “Think about how you can attract work to you” because, as transaction costs fall, work flows to where it can be accomplished best.
• The sentiment that the Knowledge Economy is “taking all the jobs going away” is understandable; however, it is more accurate to say that it replaces the known with the unknown, and this will be a good thing for most people. The IT revolution taught us that, although many “paper pushing” jobs vanished due to automation, these were more than replaced by new, higher paying IT jobs. There will clearly be disruption, but people and communities that accept it and adapt will thrive even more. For some interesting analysis on this, see Pas de Panique/Don’t Panic!
• People and governmental jurisdictions (city, state, nation) that understand the new dynamism will create more wealth and choice for how they work and create value than those that do not. Motivation will play a key role: critical success factors are embracing change, avidly pursuing continuous learning and creating creating collaborative work cultures. In this environment of portable work and pervasive communication, value migrates quickly, and competition is high. Here is one view of Chicago’s economic development and another.
• Palmisano mentioned some of the multidimensional aspects of the issue of trust, which is a profound issue. As individuals can communicate their experiences to millions of others for free through their text, audio, graphical and video content, transparency continues to increase, and truth is the only option. However, different people and cultures have different interpretations of what trust means and different norms. How can the GIE maintain trust among its extended networks of partners? How does it create and uphold trust with increasingly local communities and customers globally? Explicitly seeking the answers to these questions is extremely important to your ability to collaborate.

Cultural Considerations

• The global P2P (peer to peer) world will dramatically increase direct interactions between people of different cultures. The desire to share is of paramount importance to effective collaboration, which can be defined as voluntary cooperation between equal people with shared commitment to the outcome. Moreover, trust is critical to the willingness to share. Further, mutual respect based on cultural appreciation is crucial to developing trust. All of these benefits are greatly compromised when cultural appreciation is absent.
• There is a huge shortage of programs that promote cross-cultural understanding, and this is a tremendous opportunity. We must profoundly change how people and workers are educated about global cultures and customs. Traditionally, when people have direct contact with people in foreign lands, they are on vacation, and the superficial contact does not require collaboration. Business contact is often through client/supplier relationships, which are often command/control. Most people have not even had the opportunity for any direct contact.
• The performance of individuals and groups will increasingly depend on their ability to collaborate effectively. Interdependency is rising, and individuals in various parts of the world will increasingly find that the work of other people materially affects them. Individually, aggressively seek out opportunities for direct, collaborative activities with people of diverse cultures.
• People and communities will succeed more often when they change their thinking and plans for education and learning. Existing education traditions are based on assumptions that are decreasingly valid. Within a career context, learning has been “front end loaded”: education has traditionally been an investment for getting a good job, but it has largely stopped with the entry into the work world. In the Knowledge Economy, learning must be continuous because new conditions and knowledge constantly emerge. Also see Knowledge Economy Learning.
• Consider the organizational structures of the MNC and the GIE. The Industrial Economy MNC is an amalgamation of tightly coupled business processes, which makes it inflexible. Command/control and inflexibility are mutually reinforcing, which is one reason why they are difficult to change. Networked organizations offer relatively high choice of information and workflow. In knowledge work, people create value by exchanging human beings’ most precious asset, thought. But success is predicated on the freedom to execute on a (relatively) wide range of possibilities. Collaboration, trust and networked organizations are also mutually reinforcing.
• Palmisano’s remarks on leadership resonated with Ray Spencer’s comments about decentralizing decision making. Both understand that leaders’ most important role is to engender collaboration among talented people, rather than having all the answers and directing (commanding) people.
• Palmisano was clear about the importance of trust in creating economic value through GIEs and the global Knowledge Economy. To create and maintain trust, it is necessary to consider partners’ well-being as of equal importance to your own.
• Concomitant with collaboration for business will be the imperative to partner to collectively manage human beings’ impact on the Earth and our use of its resources. Although it is a cliché that the world is getting smaller, this fact will increasingly confront us with its reality. In the Industrial Economy, leaders often had an exploitative attitude toward resources. Exploitation is most relevant when resources are abundant. Cooperation will be increasingly required as resources become more limited and waste more intolerable.

Ramifications for Business Strategy

• Strategy becomes useful when one is trying to resonate with developing or future market conditions. It increases in value with the complexity and size of the action. Cities, nations and enterprises benefit more from it than individuals because they must coordinate large scale actions when the individual can perceive conditions and respond more quickly. Strategy also becomes more useful when market conditions are more dynamic because the range of possibility is greater as well as the risk that your entity will not resonate with conditions.
• Consider that he world is transforming itself from a collection of geographically-based local societies to interest-based local societies. Among some groups, interest based on geography is giving way to interest based on online interactions. Overall, this will be a gradual process, but pockets of the world will change relatively quickly. Surprise and disruption will be the rule, but they also bring unprecedented opportunity.
• Global strategy is increasingly the default for enterprises and government, and this is new, especially for government and people, who have largely been “geographically local” and isolated from the world:
  • It is imperative to understand competitive advantage and barriers to entry for global competitors. Increasingly, competitors will emerge that play by different rules because their “inputs” are not constrained in the same ways as traditional competitors’. For more on this, see The Transformation Imperative.
  • Most business leaders and traditional advisors are ignorant of emerging pockets of expertise, so numerous surprises will occur.
  • Partnering with offshore players pays handsome dividends: offshore partners often provide excellent expertise and services at a lower cost, but it also gives your people the opportunity to gain experience with collaborating with global teams. Whether company or government, a key element to your success will be your ability to partner with expertise wherever it emerges. In addition, offshore partners naturally think differently and can add considerably to your ability to innovate. Pursue multicultural collaboration as a strategic imperative. The experience will build resident knowledge of the capabilities of various regions of the world and, therefore, you will also get a richer vision for your competitive advantage. You will be able to create and maintain better strategy.
  • Due to market volatility and increased complexity (i.e. global), strategy should be developed as a core competency by most organizations, and it should be widely practiced, collaboratively. Leaders can increase peripheral vision by involving many levels of their organizations, partners and customers. Palmisano’s anecdote about IBM’s outreach to employees and their spouses is an excellent example.
• Web 2.0 and social networks are beginning to produce profound change in the market (see “consumer empowerment“).
  • Customers are becoming more accessible due to their increasing activities online. They are addressing increasing scope of topics by collectively interaction and cooperation. they are building collaborative skills and becoming viable innovation partners for GIEs.
  • Most of the accessible customers for GIEs in emerging markets are knowledge workers, and they are online by default. Your company has the opportunity to understand these new customers far more quickly and profoundly by interacting with them online.
  • As Palmisano stated, SMBs have yet to tap these possibilities, and they have extensive potential in this area. One way to get started is reaching out to local universities to tap foreign students for internships. Consider starting an offshore, virtual internship program.

Visions for Technology Leadership

After Gary Forsee’s luncheon address, a diverse panel of executives took the stage to discuss global technology leadership. Hardik Bhatt, CIO of the City of Chicago, Steve Goldman, Director of Architecture, the Chicago Mercantile Exchange, Raymond Spencer, CEO of Kanbay International, and David Weick, Global CIO of McDonald’s, shared their visions for Chicago’s global role in the world. Janet Kennedy, Midwest General Manager of Microsoft, gracefully moderated the panel discussion. The Executives’ Club of Chicago’s quarterly Technology Conference took place March 8 at the Chicago Hilton.

“Getting global” can mean many things, and panelists hit the issue from many directions. I’ll venture that, more than anything, it means changing one’s mindset, focus and approach, all of which are difficult to measure. All panelists represented organizations that had had international operations for decades, so how is global different?

Continue reading Technology Conference: Getting Global From Chicago – and Back