Writing

https://webspace.utexas.edu/cherwitz/www/ie/b_flowers.html
https://www.mtholyoke.edu/acad/intrel/orwell46.htm

What China’s five-year plan means for business

  McKinsey analyzed the potential impact on 33 industries. Two dimensions stood out: the plan’s effect on profit pools and on the competitive landscape.

China’s recently announced 12th five-year plan aims to transform the world’s second-largest economy from an investment-driven dynamo into a global powerhouse with a steadier and more stable trajectory. The plan affects domestic and foreign companies in all industries. To help senior managers decode and understand its provisions, we analyzed the potential impact on 33 industries. Two dimensions stood out: the effect on their profit pools and competitive landscapes. (For a detailed look at this analysis, see the interactive exhibit, “The economic impact of China’s 12th five-year plan.”)
The plan’s likely impact on profit pools was categorized as either favorable (for example, sensitive to an increase in domestic demand or specifically targeted for special treatment), unfavorable (subject to restrictive policies), or neutral. For the effect on the competitive landscape, we looked at the intensity of regulation.
Five groups emerged from the analysis. New strategic industries are singled out for global leadership. Domestic-consumption engines drive consumer growth in the homeland. Restructurers are under government mandate to change. Reinventors are mature industries that must innovate and reinvest to close the gap with global leaders. Social utilities are large state-owned enterprises managing significant components of the national infrastructure.

New strategic industries

The plan characterizes a handful of industries as emerging battlegrounds where countries will be competing for technological leadership during the next wave of development. These industries, including new energy sources and biotechnology, are distinguished by their high profit growth potential and moderate state oversight. In these areas, the government has dedicated itself to incubating national and global champions by helping them gain leading technologies and expanding their commercial capabilities.
China’s government aspires to increase the share of GDP these industries contribute from about 1 percent today to 8 percent by 2015 and to 15 percent by 2020, presenting a huge market potential for domestic and foreign businesses alike. Although significant uncertainties remain in such young markets, companies that compete in them should focus on building core competitiveness in technological and commercial capabilities, as well as on gaining recognition as local innovators. Domestic players should concentrate on acquiring leading technologies and building relationships with local governments. Foreign companies must bring advanced technology and be seen as trusted partners for local innovation.
Competition, its texture defined largely by regulatory decisions, will be fierce. The central government could further shape the competitive landscape by specifically identifying technology paths, industry standards, market entry criteria, and partnership models. Given the fragmented markets that developed around early favorites such as wind and solar power, the government will become increasingly selective in its policies, looking for avenues to expedite consolidation and to identify national champions quickly.

Domestic-consumption engines

The industries that will benefit most from the government’s efforts to retool the Chinese economy and to boost domestic consumption are consumer-facing ones such as airlines, fast-moving consumer goods, food, pharmaceuticals, shipping, and tourism. These domestic-consumption engines, which have a favorable environment for profit growth and reasonably free markets, also benefit from the government’s attention to social harmony and “green” development.
To capture the greatest growth opportunities, companies must increase their market penetration and offer tailored products for core customer segments. They should also closely monitor the development of specific consumption-enhancing government policies, such as encouraging urbanization, optimizing the investment structure, strengthening the social safety net, increasing household income, and developing the retail infrastructure. Opportunities in newly urbanized areas and the countryside should be explored vigorously. In addition, the government’s push to assure higher product safety and quality and to encourage environmentally friendly consumption habits will present further openings for quick movers.
While government efforts to increase household incomes and wages will help spur private spending, they also present companies with the challenge of keeping expenses at bay amid rising labor costs. The plan targets a 13 percent increase in minimum wages each year, along with a more modest annual increase in household income (about 7 percent). Construction, consumer electronics, logistics, retailing, and other industries will feel the pinch. Further, costs will probably increase as a result of new policies for pricing energy, raw materials, and water; tighter environmental regulations; and enhanced consumer protection. Intense concern over inflation means that the government is unlikely to favor moves fully passing these cost increases on to consumers.
The government is also shaping the competitive environment in other ways. Industries such as education, financial services, health care, and logistics are being deregulated, further opening the market to foreign companies. Increased attention to food and drug safety and to quality gives companies with a solid reputation for high standards an opportunity.

Restructurers

Real estate and commercial banking, two industries fundamental to the country’s economic and social well-being, face significant structural risks and follow shaky business models. The government has given these structural reformists a clear mandate to clean up their act.
China’s real-estate industry has enjoyed rapid growth during the past five years, contributing strongly to overall GDP and local-government budgets. But the overheated market has raised fears of speculative bubbles and social instability linked to rising housing costs. In the plan, the government sets a target of 36 million affordable living units and promises strict oversight of housing loans and the residential market.
For fundamental reform, however, the industry must create a profitable and sustainable business model—for instance, in real estate for retailing or affordable-housing projects. Meantime, the central government must find new income sources for municipalities that have used the proceeds from lucrative property sales to finance local-industry development projects, as well as establish alternative investment channels.
Commercial banks also expanded rapidly in the wake of the surging real-estate market, primarily by lending to developers, and face their own obligation to reform. To maintain profit growth rates, banks must identify the plan’s new revenue streams—for example, in support for small- and medium-sized businesses, digital banking, and wealth management—and build capabilities in managing risk and talent and in other value-added roles. They must also become adept at interpreting and balancing contradictory government policies, such as the drive to control inflation while at the same time financing small- and medium-sized enterprises and stimulating private consumption.
After much-needed reform, Chinese banks would be free to offer more sophisticated and diversified services, and the broader industry may enter a new era of competition. These developments will require know-how, talent, well-structured processes, and management. At present, Chinese banks suffer from a capability gap, opening opportunities for leading foreign institutions. Of course, the size of the opportunity depends on the direction and depth of reform. Foreign banks might also be able to give regulators assistance in defining that direction.

Reinventors

Many mature manufacturers lag behind their global competitors in technology and suffer from overcapacity, low efficiency, and high pollution. These companies account for most of the reinventors. The government aims to transform their industries through innovation and upgrades.
This group generally benefits from the drive to stimulate domestic demand. The plan reserves the best opportunities for producers that use advanced technology, add greater value, boast higher energy efficiency, and offer more protection for the environment. Fiscal and tax policies, as well capacity and export regulations, collectively encourage these players to improve their businesses and consolidate. The plan encourages local innovation to develop domestic brand equity and intellectual property.
China’s mature industries are particularly vulnerable to the new focus on green development: that policy will probably drive up costs related to environmental protection, energy conservation, reduced pollution, and even raw materials, in addition to pressures linked to rising labor costs. Energy efficiency and carbon dioxide–emission targets, for example, will add to the demands on industries such as nonferrous metals, power, and steel. Success will rest on a company’s ability to maintain a healthy margin while accumulating green equity.
For this group, the government is taking a direct approach to shaping industry landscapes. In a drive to create national champions, it has set clear guidelines encouraging accelerated industry consolidation, especially in automotive, industrial machinery (such as construction equipment), nonferrous metals, and steel. Prominent domestic players can use the plan’s support for M&A to acquire high-quality assets, strengthen leadership positions, and build credentials as national champions. Foreign companies can also take advantage of this drive by completing strategic mergers and acquisitions and becoming more competitive in the local market. Domestic and foreign players alike must watch developments on policies to push innovation, which will probably further define the country’s aspirations in technology, product portfolios, and partnership models.

Social utilities

State-owned enterprises that manage national infrastructure networks—including the power grid, railways, and telecommunications—will grow steadily thanks to urbanization and strong support from the government. With no real competition, the main responsibility of these social utilities will be to use their scale and procurement power to deliver successful planned domestic projects at global standards of quality and cost.
Improved infrastructure is critical to the country’s urban-development program, and the central government has laid out clear plans for expanding the penetration and capacity of China’s rail, power, and communications networks. These expansion plans will enjoy significant government investment, ensuring that state-owned enterprises and their suppliers (in industries such as construction, equipment, and steel) have secure revenue streams.
However, China’s natural monopolies must work to contain rising construction and operational costs stemming from new energy and environmental regulations and from rising wages. State-owned enterprises will also feel pressure to innovate with and improve their business models for the sake of profitability and high quality. Because these companies have enormous procurement power, they can expect to receive help in their efforts from global technology leaders and, ultimately, to set worldwide industry standards. Foreign companies are quite interested in selling to the national infrastructure networks, which clearly offer big opportunities as their expansion continues.
China’s ambitious 12th five-year plan builds on decades of unprecedented economic growth. It seeks to transform the economy from an investment-led powerhouse focused exclusively on GDP growth to a sustainable model that balances growth with social harmony, and innovation with environmental protection. Whether or not the full slate of aspirations can be achieved, the direction in which China’s leaders hope to move the country is clear. Domestic and foreign companies need to understand the plan’s implications for their industries so they can identify the opportunities and risks ahead.
https://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/What_Chinas_five-year_plan_means_for_business_2832

Is Groupon Ruining Retailing?

Recently, a 30-year-old woman came into my custom framing business with a designer purse and a question, “What kind of coupons do you have out there?”
It is indeed a new world. Thanks mostly to Groupon, which is based about two miles from my framing business, this social coupon craze has become a big thing. For retailers, the question is whether it’s a good thing or bad thing. The coupons can drive an awful lot of people into your store, but not every store is prepared for the onslaught. And there’s another issue, one that has gotten less attention: the daily-deal sites are also training people to expect that they can get a coupon for almost anything.
Groupon didn’t invent this problem. There have been coupons all over the Internet for years, but it’s getting worse. As Jessica Bruder wrote in The Times last week, there are hundreds of companies chasing Groupon, many hoping to create a regional niche or a product niche. I suspect there will soon be a shakeout among these Groupon clones, but for now, the upshot is that most small businesses that sell a product or service are getting deluged with offers to partner with one or more of the coupon sites. Those offers are producing a lot of confusion and anxiety for businesses. To deal or not to deal, that is the question.
In a previous post, I emphasized that Groupon is advertising and while you don’t pay anything up front, it can be very expensive advertising. I went through the math that I suggest small businesses use to try to figure out whether social coupons make sense for them. There are many variables, including whether a customer spends more than the face value of the coupon, how many  existing customers purchase a coupon, what percentage of the discount customers become regular customers, how many coupons are sold to each customer and the true cost of delivering the additional sales driven by the coupons.
The difficulty is in determining — or in some cases guessing — what these numbers will be. It’s been two years since I used Groupon at my frame shop. Few of the sales have turned into repeat customers, which is not typical of my business — we have a percentage of repeat customers. And that’s one reason I am concerned about the potential damage a daily deal can do to a company’s brand. The deals are a threat to what I call price integrity.
When you charge some customers full price and others half price, you make some happy and others unhappy. Worst of all, you make the wrong customers happy! The regulars are unhappy because they feel they overpaid; the discount customers are happy — but they’re probably not coming back because they’re used to shopping at half price. When you decide to do a daily deal, you are training your existing customers to wait for the next coupon. Does that sound like a recipe for success?
It has been noted that this kind of promotion works best for a business that has big fixed costs but low, if any, variable costs — a yoga class, for example. Whether there are 5 people in a class, or 20, the cost of delivering the service is basically the same. There is, however, a potential for conversion. You risk converting an existing customer into a coupon customer. Or, you may even replace a full-price customer with a coupon customer because you have exceeded capacity.
Let’s do the math on a simple example. A yoga class charges $20 per person and can take 20 students. The class has been averaging 14 people at $20 each, or $280 per class. The owner decides to run a daily deal to fill the class and attract new customers. It works splendidly.
The class is now filled. There are now 10 people paying $20 each (two regulars bought coupons and two regulars signed up too late and got bounced). Ten people pay $10 each, revenue that is split 50/50 with the deal site. That means the total for the class is $200 from the full-price customers plus $50 from the coupon customers, which equals $250. The studio is busier, the parking is lot is full, but the cash drawer holds fewer dollars — 30 fewer in fact. That might not sound like a lot but that’s 10 percent of sales, which might represent the company’s entire profit. What’s good for the customer could prove fatal to the business.
The scary thing about this scenario is that it’s something of a best-case scenario. The coupon sales didn’t generate additional expense for the yoga business (the way they would for, say, a restaurant); the numbers could be far worse for a business that is selling a product or service. Busier does not necessarily mean more profitable.
Of course, the deal could still pay off if the new customers turn into repeat customers. Will they? Maybe. But a typical new customer is gained because a business is near the customer’s home or office, or because the customer heard something good about the business, or because the customer needed the product or service. These sales were generated because of a deal. Maybe the customers will move on to the next yoga studio that offers a coupon deal — or maybe they will decide not to try yoga again, especially not at full price. And how many existing customers did the yoga studio lose by doing the deal?
I recently spoke to about 150 retailers at a trade convention. One of the board members of the trade association asked the retailers if they had used Groupon. One person in the audience said he had used a competitor and was satisfied with the results. No one in the room asked the important follow-up question, so I asked it: “What was your average sale to the coupon customers?” He said it was a good bit higher than the face value of the coupon, which is probably why he came out O.K. on the deal. But how many times can he do it without damaging his brand?
The board member then asked the crowd, “Who thinks that Groupon will be out of business in three years?” Almost every hand went up. They are wrong. Groupon is here to stay. Daily deal coupons are here to stay. I’m sure they work for some businesses. Lots of businesses will try them at least once — and there are lots of businesses out there. But all of us, even those of us who never try a daily deal, will have to accept that we are training customers to believe that the next discount coupon is always an e-mail away.
Over time, I think the competition from all of the Groupon clones may force the deal sites to let the retailers keep a higher percentage of the coupon split. Perhaps the discount to the customers will go down, as well. And then maybe daily deal sites will work for more businesses as well as for the customers and the coupon sites.

http://boss.blogs.nytimes.com/2011/03/16/is-groupon-ruining-retailing/?partner=rss&emc=rss

Business and art: how they work together

ARTISTS routinely deride businesspeople as money-obsessed bores. Or worse. Every time Hollywood depicts an industry, it depicts a conspiracy of knaves. Think of “Wall Street” (which damned finance), “The Constant Gardener” (drug firms), “Super Size Me” (fast food), “The Social Network” (Facebook) or “The Player” (Hollywood itself). Artistic critiques of business are sometimes precise and well-targeted, as in Lucy Prebble’s play “Enron”. But often they are not, as those who endured Michael Moore’s “Capitalism: A Love Story” can attest.
Many businesspeople, for their part, assume that artists are a bunch of pretentious wastrels. Bosses may stick a few modernist daubs on their boardroom walls. They may go on corporate jollies to the opera. They may even write the odd cheque to support their wives’ bearded friends. But they seldom take the arts seriously as a source of inspiration.
The bias starts at business school, where “hard” things such as numbers and case studies rule. It is reinforced by everyday experience. Bosses constantly remind their underlings that if you can’t count it, it doesn’t count. Quarterly results impress the stockmarket; little else does.
Managers’ reading habits often reflect this no-nonsense attitude. Few read deeply about art. “The Art of the Deal” by Donald Trump does not count; nor does Sun Tzu’s “The Art of War”. Some popular business books rejoice in their barbarism: consider Wess Robert’s “Leadership Secrets of Attila the Hun” (“The principles are timeless,” says Ross Perot) or Rob Adams’s “A Good Hard Kick in the Ass: the Real Rules for Business”.
But lately there are welcome signs of a thaw on the business side of the great cultural divide. Business presses are publishing a series of luvvie-hugging books such as “The Fine Art of Success”, by Jamie Anderson, Jörg Reckhenrich and Martin Kupp, and “Artistry Unleashed” by Hilary Austen. Business schools such as the Rotman School of Management at the University of Toronto are trying to learn from the arts. New consultancies teach businesses how to profit from the arts. Ms Austen, for example, runs one named after her book.
All this unleashing naturally produces some nonsense. Madonna has already received too much attention without being hailed as a prophet of “organisational renewal”. Bosses have enough on their plates without being told that they need to unleash their inner Laurence Oliviers. But businesspeople nevertheless have a lot to learn by taking the arts more seriously.
Mr Anderson & co point out that many artists have also been superb entrepreneurs. Tintoretto upended a Venetian arts establishment that was completely controlled by Titian. He did this by identifying a new set of customers (people who were less grand than the grandees who supported Titian) and by changing the way that art was produced (working much faster than other artists and painting frescoes and furniture as well as portraits). Damien Hirst was even more audacious. He not only realised that nouveau-riche collectors would pay extraordinary sums for dead cows and jewel-encrusted skulls. He upturned the art world by selling his work directly through Sotheby’s, an auction house. Whatever they think of his work, businesspeople cannot help admiring a man who parted art-lovers from £70.5m ($126.5m) on the day that Lehman Brothers collapsed.
Studying the arts can help businesspeople communicate more eloquently. Most bosses spend a huge amount of time “messaging” and “reaching out”, yet few are much good at it. Their prose is larded with clichés and garbled with gobbledegook. Half an hour with George Orwell’s “Why I Write” would work wonders. Many of the world’s most successful businesses are triumphs of story-telling more than anything else. Marlboro and Jack Daniels have tapped into the myth of the frontier. Ben & Jerry’s, an ice-cream maker, wraps itself in the tie-dyed robes of the counter-culture. But business schools devote far more energy to teaching people how to produce and position their products rather than how to infuse them with meaning.
Studying the arts can also help companies learn how to manage bright people. Rob Goffee and Gareth Jones of the London Business School point out that today’s most productive companies are dominated by what they call “clevers”, who are the devil to manage. They hate being told what to do by managers, whom they regard as dullards. They refuse to submit to performance reviews. In short, they are prima donnas. The arts world has centuries of experience in managing such difficult people. Publishers coax books out of tardy authors. Directors persuade actresses to lock lips with actors they hate. Their tips might be worth hearing.
Corporations chasing inspiration
Studying the art world might even hold out the biggest prize of all—helping business become more innovative. Companies are scouring the world for new ideas (Procter and Gamble, for example, uses “crowdsourcing” to collect ideas from the general public). They are also trying to encourage their workers to become less risk averse (unless they are banks, of course). In their quest for creativity, they surely have something to learn from the creative industries. Look at how modern artists adapted to the arrival of photography, a technology that could have made them redundant, or how William Golding (the author of “Lord of the Flies”) and J.K. Rowling (the creator of Harry Potter) kept trying even when publishers rejected their novels.
If businesspeople should take art more seriously, artists too should take business more seriously. Commerce is a central part of the human experience. More prosaically, it is what billions of people do all day. As such, it deserves a more subtle examination on the page and the screen than it currently receives.
http://www.economist.com/node/18175675?story_id=18175675&fsrc=rss

The Middle Blingdom

MANY Chinese people still remember the days when luxury meant a short queue for the toilet at the end of the street, or a bus conductor who wasn’t excessively rude. Before the economy opened up, a chic suit meant one with the label of a state-owned factory sewn ostentatiously on the sleeve. How times change.
Sales of luxury goods are exploding, despite a hefty tax on importing them. A new report by CLSA, a broker, forecasts that overall consumption in China (including boring everyday items) will rise by 11% annually over the next five years. That is very fast. But sales of luxury goods will grow more than twice as quickly, reckons CLSA: by 25% a year. No other category comes close. Even spending on education, a Chinese obsession, is projected to grow by “only” 16% annually.
China is already the largest market for Louis Vuitton, a maker of surprisingly expensive handbags, accounting for 15% of its global sales. Within three years, reckons Aaron Fischer, the report’s author, China’s domestic market for bling will be bigger than Japan’s. By 2020 it will account for 19% of global demand for luxuries (see chart). And that is only half the story.

For the most ostentatious Chinese consumers like to shop abroad. CLSA estimates that 55% of the luxury goods bought by Chinese people are bought outside mainland China. This is partly because of those high tariffs, which can top 30%. But it is also because counterfeiting is rife. Ask a well-heeled Chinese lady about her new handbag and she is quite likely to point out that she bought it in Paris. This tells you not only that she is rich enough to travel, but also that the bag is genuine.
If you include the baubles Chinese people buy outside China, the nation’s share of the global luxury market will triple, to 44%, by 2020, predicts CLSA. The wealth of China’s upper-middle class has reached an inflection point, reckons Mr Fischer. They have everything they need. Now they want a load of stuff they don’t need, too.
In Hong Kong’s Tsim Sha Tsui shopping district, queues of bling-hungry mainlanders stretch into the streets outside stores carrying the best-known brands. Sales of jewellery in Hong Kong rose by 29% in the year to December; sales of high-end footwear and clothing shot up by 31%. Companies that cater to show-offs have much to boast about. Richemont, the world’s biggest jeweller, registered a 57% increase in Asian sales in the fourth quarter. Strip out Japan, the region’s sputtering ex-star, and sales probably doubled. Hermès, a maker of fancy accessories, saw its sales in Asia climb by 45%. Burberry China was up by 30%; LVMH Asia soared by 30% outside Japan. Luxury sales in December were “spectacular”, says Mr Fischer, and growth is accelerating.
In some ways the Chinese market is much like everywhere else. The same brands are popular, besides a few companies that are perceived in China to be Western but are in fact almost entirely geared toward China, such as Ports Design, a seller of posh clothes.
There are, however, substantial differences. The average Chinese millionaire is only 39, which is 15 years younger than the average elsewhere. Prosperous Chinese are less shy about flaunting their wealth than people in other countries. On the contrary, many believe they must show off to be taken seriously.
Whereas the market for luxury goods in other countries is typically dominated by women, in China the men fill the tills with nearly equal abandon. They buy both for themselves and for other men, since gifts lubricate business in China. They are often willing to pay a large premium over the list price for desired items—many believe, for some reason, that the more something costs, the better it is.
China’s growing taste for bling is a good thing not only for makers of luxury goods but also for Chinese consumers. It is a symptom of the fact that they have more to spend, that necessities no longer gobble up every spare yuan and that they can afford to add a little colour to their lives. Mao Zedong would not have approved, but his former serfs ignore his frowns and merrily fritter away the banknotes that still depict his face.

http://www.economist.com/node/18184466?story_id=18184466&fsrc=rss

Japanese bosses: From Walkman to hollow men

Japan’s lack of bold business leaders

Nov 4th 2010 | TOKYO

The pre-iPod generation

THE Walkman changed the way people listened to music, especially on the go. Introduced by Sony in 1979, the portable cassette-tape player is finally being discontinued in the Japanese market. The device will remain in production in China and sold in some other places, although Sony will not say how many it still sells or why it bothers to make Walkmans at all in the age of the iPod and smartphone.
Whoever buys them, the numbers are unlikely to add much to the more than 220m Walkman cassette-players already sold. Yet this pioneering product was almost never made in the first place. Sony’s co-founder, Akio Morita, had to battle with his own engineers and executives who argued that a tape-player without a recording function would never work. “Everybody gave me a hard time,” Morita wrote in his memoirs in 1986. In the end, though, the boss had his way.
Such determination from a business leader is unlikely in today’s Japan. Founder-presidents like Morita, who died in 1999, hold immense power. But their successors, called salaryman-shacho (or “hired-hand presidents”), do not. This makes it difficult for Japanese bosses to be leaders rather than just figureheads.
“The salaryman-shacho is one of the biggest reasons why the Japanese economy went down. They don’t take responsibility,” thunders Tadashi Yanai, the founder and boss of Fast Retailing, Japan’s largest clothing retailer and operator of the Uniqlo chain of stores. Mr Yanai, who is reckoned to be Japan’s richest man, worth around $9 billion, is not alone in his view. Japanese managers lack “assertiveness, vigour, energy and resolve”, says Kazuo Inamori, the 78-year-old founder of Kyocera, one of the country’s biggest producers of electronics parts.
One problem is that in a consensus-based culture—with the ideal of lifetime employment, and promotions and compensation based more on seniority than performance—few bosses have a free hand, or even an interest, in forging a brash path. Such bosses are implicitly expected to keep things as they are and owe their position to so many internal colleagues that thorough corporate overhauls are almost impossible. Hence, when Toyota needed to take radical steps to rejuvenate the company in 2009, it named the founder’s grandson as president, hoping it would put a bold pair of hands on the steering wheel.
The leadership deficit translates into poor corporate performance. Japanese firms’ return on equity has long been less than half that of American and European companies. Since 1996 the number of Japanese companies among the world’s leading 50 firms by sales in sectors like manufacturing, retail, banking and health care has fallen by half or more. If the leaders of Japanese firms were able to make just basic improvements—increasing average sales growth from 2% to 5%, lifting earnings from 4.5% to 7% and boosting capital efficiency by 10%—the capitalisation of Japan’s sickly stockmarket could triple from its current level, says Bain, a consultancy, in a recent study.
Yet bold leadership is rarely appreciated. In June Naoto Kan, Japan’s prime minister, scolded Carlos Ghosn, the boss of the Renault-Nissan alliance, for firing workers—even though Mr Ghosn rescued Nissan from bankruptcy and transformed the company. It also took an outsider to push through change at Sony, where Sir Howard Stringer, a British-born businessman, became boss in 2005. It has taken him years to shoulder stodgy executives aside. This year Sony returned to making money and in the three months to September 30th reported net profits of ¥31.1 billion ($385m), having made a net loss of ¥26.3 billion a year earlier. Sony needed shaking up. Despite creating the market for portable music with the Walkman, it largely missed the shift to digital music-players.

http://www.economist.com/node/17420349?story_id=17420349&fsrc=rss

Yes, You’re Smart, but Can You Make Money?

This interview with Kenneth Feld, chairman and C.E.O. of Feld Entertainment, was conducted and condensed by Adam Bryant. Feld Entertainment’s operations include Ringling Brothers and Barnum & Bailey circus and Disney on Ice.

Q. How did you get started in your family’s business?
A. In the summers I always worked with my father, and I think my motivation for getting in the business was to work with my dad, because we had an extraordinary relationship. I was fortunate that he was in a business that I loved and had a passion for.
He acquired Ringling Brothers in November 1967. I was in college, so my summer jobs for the summer of ’68 and the summer of ’69 were going all over the world, primarily Eastern Europe, hiring circus talent.
That was an extraordinary education because, at the time, there were still communist countries, and I spent most of three months in Bulgaria, Hungary, Romania, Poland, East Germany. I would deal with the ministries in those countries because the circus was sort of their art form for the masses. So that was my first exposure to something pretty exotic and unusual.
Q. Can you talk about what you learned from your father?
A. It’s been an interesting road. In 1971 we sold the circus to Mattel. So we operated and worked for Mattel for about 11 years. And then in 1982, my father and I repurchased the circus from Mattel and it became a privately owned business. And it’s been that way ever since. He passed away in ’84, and I was 34 years old and all of a sudden I have this whole company. We had been extremely close. I always say he taught me everything I know and then everyone else taught me everything I didn’t know. What I mean by that is I sort of learned on the job at dinner.
We’d be traveling four or five days a week, and he would rehash the whole day over a three-hour dinner. And he would smoke two or three cigars and have a Cognac and literally go sentence by sentence about what happened in the day, and what did I think, and here’s why he did what he did. And he would always listen to me, and that was a learning experience.
So when he died, because I had no outside experience, it took me a while to figure out who I was, and that I couldn’t think, “Oh, this is what my father would have done.” I had to take a different path and also create a stronger management team. And I knew what I knew and what my skills were, and I had to bring people in who had skill sets that I didn’t have.
Q. And what were those?
A. My strengths are really in the creative side, coming up with big ideas, knowing how to get them done. But the day-to-day and the administration are something that I wasn’t good at, because I didn’t have the interest. I started restructuring the company around ’94, and I found out that you never stop. And I now have an outside president and chief operating officer who take care of all of the day-to-day, and we have constant communications and meetings. But I don’t get involved in the detail the way I used to.
As a result of that, I’ve been able to become a lot more objective in looking at the business — what’s happening today, but more importantly, what do I think is going to happen next year and in the next five years.
Q. What else did you learn from your father about leadership and management?
A. I learned, more than anything, to listen. From the time I was a kid he would ask me a question and he would listen to my opinion. I’ve always tried to listen to everyone who works in the company. I think that’s more important than talking.
Q. What else?
A. Another big thing was: make decisions. He said: “You’re a smart guy. You’ll be right 90 percent of the time. But if you don’t make the decision, no one will ever know.”
Q. And now your children work for you.
A. Yes, I have three daughters and they’re all in the business. My role has changed a lot since they’ve come in. It’s shifted from doing to more of a mentor role. So it’s listening. I can offer the experience, but instead of saying, “Why don’t you do this?” I tend to frame advice in the form of questions because it then stimulates thinking, versus, “This is what I want,” because people are going to do what the boss wants. So I’ll throw out three or four alternatives and then let them think about it.
Q. Anything different about the way you work with them, compared with how your father worked with you?

A. Before they joined the company, they had to work elsewhere for two years. I worked for Feld Entertainment my whole career, so the perspective that I had was what I learned inside the company. They’ve all worked different places, so they were able to bring to the company something, a real contribution because they were good at what they did. 


Also, for their own self-confidence, they knew they could go out and make a living and survive and they didn’t need the company. It’s also helped them with the other associates. There’s a different level of respect.
And I made them write papers to tell me: “Why do you want to come into the company? What do you think you can contribute? Where are your strengths and what is your passion — and it can’t be about a paycheck.” And they all had very, very different ideas of what they wanted to do.
They report to the president and chief operating officer. He negotiates their salary. They will talk to me about creative decisions and we co-produce a lot of the shows together. It’s almost like I’m used as an encyclopedia, which is great because I have 40 years of experience.
Q. Running a circus must be pretty complicated.
A. It is the most complex entity on the planet. Each show may have people from 14 different cultures. We’re their employer but we’re also the landlord. We know the best and worst about everyone because they’re living on our milelong train. I think that understanding people allows you to understand everything, because you can always learn process. The only way you learn about people is to spend time with them and you have to show everyone respect.
Here’s an example: Every year when we do a new show, we bring down to Florida 130 performers who never, for the most part, knew each other beforehand. About 10 days into our rehearsal period, we have Act Night, where everybody performs their act uncut, untouched by us, for every other performer.
That is the true test of respect. No matter what anyone thought of a person, if they’re doing an act that is so unbelievable and death-defying, the respect level goes way up. You have earned the respect strictly by what you have done — it’s very pure. It is an absolute lesson in earning respect. Respect does not come from a title. It comes from what you do, and how you do it, and how you work with people, and I think that’s a difficult thing for people to understand.
I may say, “You’re hired in such and such a position and you have this title,” but that means nothing. You can be the smartest person in the world and it means nothing if you don’t earn the respect of the people you have to interact with. I’ve tried to teach that to people — that if you come in and act like you know everything, it doesn’t matter how smart you are, people aren’t going to hear your good ideas.
Q. How do you hire for a position at the corporate office, a direct report?
A. I’ll give you the example of when I hired Mike Shannon, who’s president and chief operating officer. I had been looking for probably 10 months and I walked into the search firm’s office and the guy was sitting there. He was in transition from one position and they said, “Oh, why don’t you talk to this guy?”
So I sat down and talked to him. He said to me, “I don’t know anything about putting on a circus.” I said, “I wouldn’t expect that you would.”
He said: “I don’t know anything about the entertainment business. I’ve never been in the entertainment business before. What I can tell you is, I love people. I love to mentor people. I love to get the most out of people and I’ll never lie to you. You’ll get the good, the bad, and the ugly.” And about a week later, I hired him and that was it.
There’s a trust I have with him that is the same kind of trust that I had with my father and that I have with my daughters, and I think that’s the hardest thing to find — people you can absolutely trust. I don’t need people to give me good news. I mean they’re waiting in line to give you good news. I want people who can deliver the unvarnished truth to me so that I can make proper decisions. There’s no good way to deliver bad news, that’s for sure, so you just want somebody that’s straight out — “Here’s what this situation is.”
Q. What about other people where it’s more of a traditional interview?
A. For executives, as opposed to directors and creative people, I’ll read their résumé, and then I’ll say to them: “You’re really smart, but do you know how to make money? Tell me some things about how you made money.” And then they have to really think because the party line doesn’t work. It gets beyond just the typical corporate stuff. That’s really a key thing because you want people to really think like that. It’s hard to find today.

Q. Do some people have trouble answering?
A. Let me tell you, nothing kills an interview like that. So they have to stop and think. “What do you mean?” And I’ll say: “Like when you were a kid growing up, did you have a lemonade stand? What have you done?” And then I try to take them through their career, because I need them to understand that if they’re going to come to work for our company, it’s great that you have all this knowledge, but how can you translate that into something that is absolutely going to make money for us? Can they think unconventionally? Can they think outside the box?
Q. What quality are you testing for with this question of, “Tell me how you’ve made money.”?
A. It’s a drive I’m looking for. I don’t need to hire college professors in my business. We’re grinding it out and I need to know that the people that we have involved in the business are focused on sales, on the bottom line.
How do you make money? How do you take this crazy idea that somebody has and how can you monetize it? And if you’ve done that before in a couple of situations, then there’s a good chance you’re going to be very successful in our company because we’re demanding. We’re out there day in and day out.
Q. If you could ask somebody only two or three questions to know whether you might hire them, what would they be?
A. It depends, obviously, on the position. But one is: “What is your style of working with people who report to you? How do you work with them? What do you do on a daily basis?” That’s important because you can put the wrong person in a job, and you can take a great department and just decimate it in no time with the wrong person.

http://www.nytimes.com/2010/10/24/business/24corner.html?pagewanted=3&_r=1&partner=rss&emc=rss
 

Riding Asia’s digital tiger

Asia is the world’s hottest area of Internet growth, but the dynamics on the ground vary widely by nation.

Asia’s emerging markets are poised for explosive digital growth. The region’s two largest economies—China and India—already boast some 500 million Internet users, and we forecast nearly 700 million more will be added by 2015 (Exhibit 1). Other emerging Asian nations have the potential to grow at a similarly torrid pace. We estimate that within five years, this billion-plus user market may generate revenues of more than $80 billion in Internet commerce, access fees, device sales, and so forth (Exhibit 2).
To better understand the consumers, growth prospects, and problems, we surveyed more than 13,000 individuals across China, India, and Malaysia—countries at very different stages of their digital evolution.¹ The key finding? While there were some notable differences in the types of content consumers favor and the devices they use, significant demand is waiting to be unlocked in all three nations. That could lead to growing markets for digital content and services and to new opportunities around digital marketing, including efforts to reach consumers via Internet sales channels.

Malaysia

Of the three markets we researched, Malaysia is the most advanced. While the country has only around 15 million–plus Internet users, that’s close to 55 percent of the total population, and mobile Internet penetration is close to 30 percent of it. Given the Malaysian government’s push to expand high-speed broadband, we forecast that the country will have up to 25 million Internet users by 2015, or close to 80 percent of the population. As both fixed and wireless broadband grow, we project that more than 50 percent of all users will choose to have both personal-computer and mobile-device options for getting online.
Malaysians consume 35 percent more digital media than Internet users in China and 150 percent more than users in India, particularly on social-networking sites and instant messaging. That may, for example, give handset manufacturers opportunities to build social-network access into their devices. We also found that Malaysians like to multitask across both digital and traditional media. For advertisers, that’s problematic, since viewers are paying less attention to traditional media content—and thus advertising.

China

China leads the world in sheer numbers of Internet users—more than 420 million people, or close to 30 percent of the population. Over 80 percent surf the Web from home, while 230 million use mobile devices. We forecast that the number of Internet users will almost double over the next five years, hitting 770 million people, or 55 percent of the population. More than 70 percent will use both PCs and handheld devices.
China’s digital usage, which is similar to that of the United States, skews toward instant messaging, social networks, gaming, and streaming video. Increasingly, Internet users in China are substituting digital media for traditional ones, with the potential for further cannibalization as digital consumption grows. This development has stark implications for advertisers and how they allocate future marketing budgets. Consumers, meanwhile, also use the Internet in their purchasing decisions. They are more influenced by recommendations from social-network contacts and friends than by traditional marketing messages or visits to company Web sites.

India

With only 7 percent of the population connected (81 million users), India is Asia’s digital sleeper. Yet we believe that it’s poised to become a truly mobile-Internet society as new users leapfrog PCs altogether. We project that by 2015, the number of Internet users will increase almost fivefold, to more than 350 million—28 percent of the population—with more than half of those accessing the Web via mobile phones. To capture this opportunity, companies will need to roll out wired and wireless broadband networks aggressively, to make smartphones and network access more affordable, and to develop new content types.
Consumer demand clearly is robust. On average, Indians spend more than four hours a day consuming online and offline content. On PCs, often used in cyber cafés, Indians spend much time e-mailing and are heavy consumers of downloaded videos and music, as well as DVD movies. While Indian consumers use mobile phones predominantly for voice services, they also treat them as offline personal-entertainment devices, listening to radio stations or to downloaded music. There is significant pent-up demand for more convenient and personalized Internet access—a void the mobile Web could fill.

Embracing the opportunity

High hardware costs, inconsistent network quality, and limited access could check these optimistic growth prospects. But the extent of such barriers varies by nation, and there’s notable progress overcoming them. Construction of network infrastructure is proceeding apace—companies in India, for example, just spent nearly $25 billion on telecommunications spectrum. Meanwhile, hardware and access costs are declining in most markets. The biggest challenge is to make money while creating a variety of low-cost content. Three issues are especially important:

• Innovators and entrepreneurs must develop content creation and delivery models priced low enough to compete against the pirated options currently available.
• Content and Web services providers need to foster the growth of local and regional advertising markets to help defray the cost of content creation.
• E-commerce platforms, including transaction systems that make purchases more convenient and trusted, must be developed.

At the same time, companies in consumer-facing sectors (for instance, automotive, packaged consumer goods, and retailing) will need to reconsider their marketing and advertising strategies in light of the shift away from traditional media. At stake is a significant competitive advantage in a region that already boasts more than half the world’s Internet users—and will only continue to grow.

https://www.mckinseyquarterly.com/Organization/Talent/Riding_Asias_digital_tiger_2667

 

The Survival of the Safest

CORPORATE managers struggling to preserve their companies and protect their core employees have inadvertently contributed to a vicious cycle of rising unemployment and plummeting national morale. If we are to break out of this downward spiral, we first need to understand the problem, then deal with it on a huge scale.

It’s no surprise that business confidence has been shaken over the last few years. Executives are unwilling to take on new risks, and people in all walks of life are nervous about trusting in one another. In a broad sense, damage to morale — which John Maynard Keynes called “animal spirits” — surely ranks as one of the most important reasons for the American economy’s persistent weakness.
Yet professional managers throughout the business world see it as their job to keep work-force morale high. But, paradoxically, the actions they take for their own workplaces often make the overall crisis more severe.
A remarkable book by Truman Bewley, titled “Why Wages Don’t Fall During a Recession” (Harvard, 1999), provides insights into the current situation, even though it focuses on the recession of 1990-91 and the long “jobless recovery” that followed it.
The title derives from a puzzle that has troubled economists for more than a century: Why doesn’t the labor market “clear”? If demand falls in markets for other productive factors — say, wheat as an ingredient in the baking of bread — the price usually drops until the excess supply is mostly gone. What is unusual about the market for labor is that excess supply, which shows up as unemployment, can be prominent and persistent.
Why? In short, the difference is morale. Factors of production like wheat or trucks or pumps don’t have morale issues. Human beings do.
How these issues affect the labor market is a major focus of the research of Professor Bewley, who is a colleague of mine at Yale. He has developed an idiosyncratic approach, interviewing hundreds of corporate managers at length about the driving forces for their actions. The managers consistently told him that they are concerned about the emotional state of their core employees. They said that their companies’ continued success depends on the positive feelings and loyalty of these workers — and lamented the hard choices that would need to be made in a severe downturn.
Keeping all employees relatively idle while reducing their pay or cutting their working hours will hurt everyone. Managers say they usually consider it better to protect the crucial workers — and to engage in sudden mass layoffs of others. The idea is to clear out the less essential people at once, ushering them out the door quickly so their complaining doesn’t spoil the atmosphere. Then managers can make sure that remaining employees receive their full wages and can pay their household bills.
“Losing a job is close to a death in the family,” one manager said. But in a tough economy, when managers view the very survival of their enterprise as in jeopardy, they steel themselves against sentimentality, believing that layoffs are needed to keep the business going with their most loyal and effective people.
UNEMPLOYMENT, in this context, is like battlefield triage, leaving some severely injured soldiers to die so that medics can keep as many as possible in fighting condition. But, of course, such a harsh practice may not contribute to the best morale among those chosen to survive.

Unfortunately, managers often lay off more people than necessary, to ensure that they don’t have to repeat the ordeal anytime soon. The remaining workers must work harder, taking on some of the work of their missing colleagues, and productivity rises. (The economy today shows both increasing productivity and increasing corporate profits.)
Those relegated to unemployment can’t directly “poison the atmosphere” in their former workplaces. But they remain friends and neighbors of the employed, and their anger and distress, repeated in thousands of communities, contribute to a poisoning of the atmosphere of the entire nation.
Moreover, managers interviewed by Professor Bewley in the 1990s said that employees who hold onto jobs often suffer “survivors’ guilt.” They are genuinely pained, experiencing empathy with the less fortunate. In this troubled state, they don’t think about taking extravagant vacations, or buying new houses or fancy new cars. And this frugality detracts from demand that might produce jobs for others.
Similar thinking underlies the relatively low level of business expenditures today on buildings, equipment and software. Lower-level managers won’t ask for scarce resources for such things, because those items look like luxuries to fellow employees, who worry that there won’t be enough in the company budget for them to keep their jobs.
One top manager told Professor Bewley that he had to compensate for the reticence of lower-level managers, who won’t ask for anything. “I tell them to put in a few dreams for equipment they would like, because if they don’t try, they’ll never get what they want,” this manager said.
Of course, while that reticence may preserve jobs in one’s own company, it works against job growth elsewhere. A result is a loss of vigor in the aggregate economy, and the sapping of the very kind of creativity that might spur a recovery.
Professor Bewley shared with me a passage from an interview in July with a manager of a large manufacturing company. “There is more uncertainty, and everybody is afraid,” this manager told him. “Do your job. Keep employed. Don’t come up with a new idea.” In his own company, the manager said, “Everybody is doing the same thing.”
Sometimes the private sector needs help from the government, and this is one of those times. We need to break the cycle of protracted unemployment and sagging morale through big government programs to create millions of jobs.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

http://www.nytimes.com/2010/10/03/business/economy/03view.html?partner=rss&emc=rss

A Professor’s Review of Online Cheat Sheets

At this time of year, students are buying textbooks and looking for ways to avoid reading them.

Nothing is new about that. CliffsNotes guides, with their familiar yellow and black covers, have been in book bags since 1958.
What has changed is how many study guides, or cheat sheets, are available online and on mobile phones. Whether you know them as CliffsNotes, SparkNotes or Shmoop, these seemingly ubiquitous guides are now, in many cases, free.
“Two to three years ago, the wisdom was that students do research online, but not study online,” said Emily Sawtell, a founder of McGraw-Hill’s online collaborative study site called GradeGuru. “That has changed in the last 12 months.” Ms. Sawtell said she had tracked a significant increase in the search term “study guide” on Google.
Professors warn that these guides are no substitutes for reading great works of literature, but concede, grudgingly, that as an adjunct, they can stimulate thought and deepen insight.
“The problem is when you use a study guide in place of the original book,” said Cary Nelson, professor of English at the University of Illinois at Urbana-Champaign and president of the American Association of University Professors. “Then they have knowledge that is not just superficial, but wrong.”
Carl Fisher, chairman of the comparative world literature and classics department at California State University, Long Beach, agreed to review the many offerings, starting with the oldest. CliffsNotes guides cover not only literature, but also foreign languages, math, science, history and other topics, and many of the guides are free online.
In booklet form, 159 literature study guides are available, costing about $6 to $10 each. But more than 250 are available online, and all can be viewed free. Downloading them as PDF files costs $5 to $10 each. A comparatively paltry 39 CliffsNotes for literature are available for mobile at $1.99 each for the iPhone.
CliffsNotes, owned by Wiley Publishing, also offers free podcasts called CramCasts, which are three- to five-minute overviews of books with a plot summary.
“CliffsNotes is one of the most thorough, one of the most insightful,” Professor Fisher said. “If a student wanted to use it along with the text, it would be worthwhile.” He liked that, for some books, the complete text was included with the study guide on line. But CliffsNotes lost points for some dated writing. He looked at notes describing “Candide” in terms of Voltaire’s life and said: “No one does biographical criticism anymore. They haven’t since the 1970s.”
SparkNotes, which is owned by Barnes & Noble and began in 1999, is a newcomer compared with CliffsNotes, but it is well established with today’s students. It offers a library of 690 guides, including literature, math, history and biology, all free on the Web.
Most of the guides are available as e-books for Barnes & Noble’s electronic reader, the Nook, or any device that runs Nook software, which is available for BlackBerrys and iPhones, and handsets with Google’s Android operating system. The electronic editions of the guides and downloadable PDFs are $4.95. The No Fear Shakespeare series, which offers a modern translation next to the original texts, costs $4.99 for each guide. While those are not available as downloadable PDFs, they are available on iTunes for $4.99 each.
About 150 of the SparkNotes are still available in book form for $4.95 each, and the book form of No Fear Shakespeare costs $5.35.
Professor Fisher said SparkNotes’ analysis was more contemporary than that offered on some of the other sites. “It is a generally useful, more nuanced interpretation than the others. Of all the ones I looked at, I’d probably say SparkNotes is the best choice,” he said.
Shmoop, though, is the newcomer. It has been online for only 18 months. It has set itself apart from the stalwarts by synopsizing the expected canon, like Camus’s “The Stranger” and Shakespeare’s “Hamlet,” as well as by analyzing more contemporary and popular culture works. Among its 600 study guides are guides for best sellers like Stieg Larsson’s “The Girl Who Played With Fire” and song lyrics like Lady Gaga’s “Paparazzi,” which it likens to “The Great Gatsby,” “Cat on a Hot Tin Roof” and “Who’s Afraid of Virginia Woolf.” Though Shmoop says the authors come “from Ph.D. and masters’ programs at Stanford, Harvard, U.C. Berkeley and other top universities” the site still misspelled the last name of Virginia Woolf, the English author. Guides on topics like civics and economics also are available.
All of the guides are free online. They are also available for 99 cents to $2.99 for the Sony Reader, Kindle and Nook e-readers and iPhone, Android and BlackBerry smartphones using the Nook reader app. Shmoop also sells PDF versions for $5. Study guides for Advanced Placement and college entrance exams are $10 to $25.
Dr. Fisher liked the idea behind Shmoop’s “Why Should I care?” section. It explains the satire in “Candide” by comparing it to modern satires like “The Simpsons” and “The Family Guy.” The problem, he said, is that the writing strains to relate to students. “It makes an interesting attempt to be hip,” he said, “but it is just so high school-y.”
GradeSaver boasts that a majority of its authors are Ivy League-educated. The site offers more than 400 guides covering literature, poetry and short stories, with two film guides. Professor Fisher said that the writing was among the best. “It is quite readable, if you can get around the blue jeans ads, which are right in the middle of the text.”
The site specializes in essays. It sells copies of 712 college essays that the site said landed the authors in top colleges. It says it also carries 2,715 literature essays. The essays are available through a subscription ranging from $3 for a three days (subscribers are automatically enrolled in the $7-a-month program unless they cancel), up to a one-time charge of $50 a year. GradeSaver has an editing service as well, with charges ranging from $8 a page for proofreading to $150 to edit an essay of a maximum of 1,000 words within 24 hours.
The site offers a forum site where students post opinions (on ”Call of the Wild:” “boring ... zzzzzz!”) and cries for help, (“I NEED HELP**ASAP**ON THE UTOPIAS IN CANDIDE”).
Some sites did not make the grade at all. The guides from PinkMonkey — __ which also incorporates notes from TheBestNotes.com and Barron’s Booknotes — were “the least thoughtful, the least insightful and the most disjointed,” Dr. Fisher said.
BookRags, offered only partial summaries free, and Professor Fisher said what he found there was too elementary. “BookRags is for really desperate people,” he said. “It’s simplistic and it forces people to pay up front.” He found the quality of the writing on Bookwolf offensive. “They overuse the passive voice, then they have a lot of rhetorical questions. It’s banal.”
He advised students to use study guides as additional material to the books. “Nothing can substitute for the original text,” he said.
Professor Fisher also had advice for teachers. “I make my students submit their papers through turnitin.com,” which is a plagiarism search engine. He says it is very effective at forcing students to offer some original writing, if not some original thought.

http://www.nytimes.com/2010/09/16/technology/personaltech/16basics.html?partner=rss&emc=rss

Apple's Pricing Decoys

Next time you're sitting at an airport bar and hear two businesspeople debate whether Apple (AAPL) is a technology or design company, chime in: "Nope. What Steve Jobs sells is pricing."

Pricing? You bet. Jobs is a master of using pricing decoys, reference prices, bundling, and obscurity to make you think his shiny aluminum toys are a good deal. Apple's Sept. 1 announcement of new products was a classic example. The popular iPod Touch media player has been revamped at three price points, $229, $299, and $399 -- all costing more than the iPhone, which does everything the Touch can plus make phone calls. What gives? Watch Apple, and you can learn pricing tricks for your own business.
First, understand that pricing games are vital for Apple, because competition is fierce in the tech world and product hits just don't last. The current iPad costs $499 in its lowest-powered configuration, vs. the Archos 7 Home Tablet [$189) or the Dell Streak [$299 with a two-year AT&T contract]. And competitors are rushing to offer more functionality for hundreds of dollars less -- the Streak tablet throws in a videocam and phone, which iPads don't yet match. Apple's touchscreen buzz window is closing fast, and even though it will inevitably add features -- I predict the iPad will sport a camera, videocam, and phone within two years -- today's tech wonders, like the much-copied iPhone, become tomorrow's commodity.
So let's count the ways Apple defends itself with pricing:
1. Price decoys. The Economic Daily News of Taiwan reported in August that Apple has started to build smaller, 7-inch versions of its iPad tablet, timed to hit U.S. shelves before Christmas. If you wonder why in the world Apple would add yet another potentially cannibalizing product to its lineup of iPods, iPod Touches, iPads, laptops, and computers, realize that this gadget is likely a decoy. Decoys, in marketing, are products, services, or price points that a business doesn't really want you to take, but rather use as a reference to make another product look better. Economist Dan Ariely, author of Predictably Irrational, gives the classic example of a Realtor who shows you a home that needs a new roof, right before taking you to a higher-priced house she really wants to sell. It's hard to tell if a $400,000 colonial is a good deal -- but compared with a $380,000 home that needs work, it looks damn good. Now consider, $499 for an iPad? Well, compared with a smaller one with fewer features, it suddenly looks great.
Decoys explain why Apple often sells each gadget in a pricing series, such as the new iPod Touch's $229, $299, and $399 price points for different storage capacities. You may gladly spend $229 to get a hot media player, thinking it's a deal vs. the highest-priced version and not blink that you could instead buy an iPhone 4 at the lower price of $199 with more features. The $399 "decoy" has clouded your judgment. Apple wins the best of both worlds -- stoking demand for products that look like bargains and for all the decoys it sells at much higher prices. Yes, some people will spend $399 for a music player with slightly better technology -- and Apple makes even fatter margins.
2. Establish a high reference price. Behaviorial economist Richard Thaler has noted that consumers are really bad at making decisions about value, so constantly need "reference prices" for comparison. A dress costs $80. Is that too much? Not if it's marked down 50 percent from $160. Trick is, that artificial $160 reference price may not really exist. Apple has played this game with itself by launching products such as the iPhone at artificially high reference prices -- the iPhone cost $599 when it first hit the streets -- and then rapidly lowering that price. Today, a $199 iPhone seems a steal; Apple in essence is using its first-iteration pricing as a reference to make its current products feel affordable. You may be on the fence for a $499 iPad, but if it drops to $399 by Christmas, won't you feel better?
3. Obscure the reference price. Ah, this is a more clever Apple marketing trick -- instead of giving consumers a reference price, hide the pricing altogether. Mail order business Omaha Steaks does this by selling complex bundles of meat and side dishes for about $100; the assortment of items obscures any comparison with prices at your grocery store. Candy in movie theaters is another classic example of price obscurity, because it comes in unusual, large boxes that are shaped nothing like what you see at other stores -- so $5 candy seems cool. Apple also obscures references by making its products look like nothing else, from the first iPod with a unique scroll wheel to the current iterations wrapped in gleaming aluminum. Apple seems wondrously unique, until you consider aluminum is the same material you wrap leftover fish in and then it hits you: Apple is disguising itself so you can't compare prices. Is the new $99 Apple TV box a good deal? Who knows? It looks like nothing else on the planet.
4. Bundle price components to hide what you can. Buy an Apple product, and you'll spend more downstream. For every iPad or iPhone sold, Apple likely counts on your future song purchases, video rentals, and soon iAd clicks on app advertising. That sexy new Apple TV thing doesn't store anything, so you'll pay to play. Apple is not unusual here; almost every mobile handset, for instance, has some of its costs buried in future monthly data fees over a two-year phone contract. All of this "bundling" means the price over time is much more than what you think picking up the Apple gadget.
The pricing strategy is brilliant. By staging a series of perceived technology innovations and then adding price decoys, reference prices, obscurity, and bundling, Apple makes us willing to pay more to do the same stuff we did 30 years ago: Read magazines, type messages, watch shows, make phone calls. The communication breakthroughs are mostly an illusion, but with shiny aluminum in our hands, who cares what it costs?

http://www.msnbc.msn.com/id/38973101/ns/business-bloomberg_businessweek/

The End of Management

Business guru Peter Drucker called management "the most important innovation of the 20th century." It was well-justified praise. Techniques for running large corporations, pioneered by men like Alfred Sloan of General Motors and refined at a bevy of elite business schools, helped fuel a century of unprecedented global prosperity.
But can this great 20th century innovation survive and thrive in the 21st? Evidence suggests: Probably not. "Modern" management is nearing its existential moment.
Corporations, whose leaders portray themselves as champions of the free market, were in fact created to circumvent that market. They were an answer to the challenge of organizing thousands of people in different places and with different skills to perform large and complex tasks, like building automobiles or providing nationwide telephone service.
In the relatively simple world of 1776, when Adam Smith wrote his classic "Wealth of Nations," the enlightened self-interest of individuals contracting separately with each other was sufficient to ensure economic progress. But 100 years later, the industrial revolution made Mr. Smith's vision seem quaint. A new means of organizing people and allocating resources for more complicated tasks was needed. Hence, the managed corporation—an answer to the central problem of the industrial age.
For the next 100 years, the corporation served its purpose well. From Henry Ford to Harold Geneen, the great corporate managers of the 20th century fed the rise of a vast global middle class, providing both the financial means and the goods and services to bring luxury to the masses.
In recent years, however, most of the greatest management stories have been not triumphs of the corporation, but triumphs over the corporation. General Electric's Jack Welch may have been the last of the great corporate builders. But even Mr. Welch was famous for waging war on bureaucracy. Other management icons of recent decades earned their reputations by attacking entrenched corporate cultures, bypassing corporate hierarchies, undermining corporate structures, and otherwise using the tactics of revolution in a desperate effort to make the elephants dance. The best corporate managers have become, in a sense, enemies of the corporation.
The reasons for this are clear enough. Corporations are bureaucracies and managers are bureaucrats. Their fundamental tendency is toward self-perpetuation. They are, almost by definition, resistant to change. They were designed and tasked, not with reinforcing market forces, but with supplanting and even resisting the market.
Yet in today's world, gale-like market forces—rapid globalization, accelerating innovation, relentless competition—have intensified what economist Joseph Schumpeter called the forces of "creative destruction." Decades-old institutions like Lehman Brothers and Bear Stearns now can disappear overnight, while new ones like Google and Twitter can spring up from nowhere. A popular video circulating the Internet captures the geometric nature of these trends, noting that it took radio 38 years and television 13 years to reach audiences of 50 million people, while it took the Internet only four years, the iPod three years and Facebook two years to do the same. It's no surprise that fewer than 100 of the companies in the S&P 500 stock index were around when that index started in 1957.

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Google

A foam-brick-filled bathtub in the 'water lounge' at Google's Zurich office.

Even the best-managed companies aren't protected from this destructive clash between whirlwind change and corporate inertia. When I asked members of The Wall Street Journal's CEO Council, a group of chief executives who meet each year to deliberate on issues of public interest, to name the most influential business book they had read, many cited Clayton Christensen's "The Innovator's Dilemma." That book documents how market-leading companies have missed game-changing transformations in industry after industry—computers (mainframes to PCs), telephony (landline to mobile), photography (film to digital), stock markets (floor to online)—not because of "bad" management, but because they followed the dictates of "good" management. They listened closely to their customers. They carefully studied market trends. They allocated capital to the innovations that promised the largest returns. And in the process, they missed disruptive innovations that opened up new customers and markets for lower-margin, blockbuster products.
The weakness of managed corporations in dealing with accelerating change is only half the double-flanked attack on traditional notions of corporate management. The other half comes from the erosion of the fundamental justification for corporations in the first place.
British economist Ronald Coase laid out the basic logic of the managed corporation in his 1937 work, "The Nature of the Firm." He argued corporations were necessary because of what he called "transaction costs." It was simply too complicated and too costly to search for and find the right worker at the right moment for any given task, or to search for supplies, or to renegotiate prices, police performance and protect trade secrets in an open marketplace. The corporation might not be as good at allocating labor and capital as the marketplace; it made up for those weaknesses by reducing transaction costs.
Mr. Coase received his Nobel Prize in 1991—the very dawn of the Internet age. Since then, the ability of human beings on different continents and with vastly different skills and interests to work together and coordinate complex tasks has taken quantum leaps. Complicated enterprises, like maintaining Wikipedia or building a Linux operating system, now can be accomplished with little or no corporate management structure at all.
That's led some utopians, like Don Tapscott and Anthony Williams, authors of the book "Wikinomics," to predict the rise of "mass collaboration" as the new form of economic organization. They believe corporate hierarchies will disappear, as individuals are empowered to work together in creating "a new era, perhaps even a golden one, on par with the Italian renaissance or the rise of Athenian democracy."
That's heady stuff, and almost certainly exaggerated. Even the most starry-eyed techno-enthusiasts have a hard time imagining, say, a Boeing 787 built by "mass collaboration." Still, the trends here are big and undeniable. Change is rapidly accelerating. Transaction costs are rapidly diminishing. And as a result, everything we learned in the last century about managing large corporations is in need of a serious rethink. We have both a need and an opportunity to devise a new form of economic organization, and a new science of management, that can deal with the breakneck realities of 21st century change.
The strategy consultant Gary Hamel is a leading advocate for rethinking management. He's building a new, online management "laboratory" where leading management practitioners and thinkers can work together—a form of mass collaboration—on innovative ideas for handling modern management challenges.
What will the replacement for the corporation look like? Even Mr. Hamel doesn't have an answer for that one. "The thing that limits us," he admits, "is that we are extraordinarily familiar with the old model, but the new model, we haven't even seen yet."
This much, though, is clear: The new model will have to be more like the marketplace, and less like corporations of the past. It will need to be flexible, agile, able to quickly adjust to market developments, and ruthless in reallocating resources to new opportunities.
Resource allocation will be one of the biggest challenges. The beauty of markets is that, over time, they tend to ensure that both people and money end up employed in the highest-value enterprises. In corporations, decisions about allocating resources are made by people with a vested interest in the status quo. "The single biggest reason companies fail," says Mr. Hamel, "is that they overinvest in what is, as opposed to what might be."
This is the core of the innovator's dilemma. The big companies Mr. Christensen studied failed, not necessarily because they didn't see the coming innovations, but because they failed to adequately invest in those innovations. To avoid this problem, the people who control large pools of capital need to act more like venture capitalists, and less like corporate finance departments. They need to make lots of bets, not just a few big ones, and they need to be willing to cut their losses.
The resource allocation problem is one Google has tried to address with its "20%" policy. All engineers are allowed to spend 20% of their time working on Google-related projects other than those assigned to them. The company says this system has helped it develop innovative products, such as Google News. Because engineers don't have to compete for funds, the Google approach doesn't have the discipline of a true marketplace, and it hasn't yet proven itself as a way to generate incremental profits. But it does allow new ideas to get some attention.

Granger Collection

Alfred P. Sloan of General Motors

In addition to resource allocation, there's the even bigger challenge of creating structures that motivate and inspire workers. There's plenty of evidence that most workers in today's complex organizations are simply not engaged in their work. Many are like Jim Halpert from "The Office," who in season one of the popular TV show declared: "This is just a job.…If this were my career, I'd have to throw myself in front of a train."
The new model will have to instill in workers the kind of drive and creativity and innovative spirit more commonly found among entrepreneurs. It will have to push power and decision-making down the organization as much as possible, rather than leave it concentrated at the top. Traditional bureaucratic structures will have to be replaced with something more like ad-hoc teams of peers, who come together to tackle individual projects, and then disband. SAS Institute Inc., the privately held software company in North Carolina that invests heavily in both research and development and in generous employee benefits, ranging from free on-site health care and elder care support to massages, is often cited as one company that could be paving the way. The company has nurtured a reputation as both a source of innovative products and a great place to work.
Information gathering also needs to be broader and more inclusive. Former Procter & Gamble CEO A.G. Lafley's demand that the company cull product ideas from outside the company, rather than developing them all from within, was a step in this direction. (It even has a website for submitting ideas.) The new model will have to go further. New mechanisms will have to be created for harnessing the "wisdom of crowds." Feedback loops will need to be built that allow products and services to constantly evolve in response to new information. Change, innovation, adaptability, all have to become orders of the day.
Can the 20th-century corporation evolve into this new, 21st-century organization? It won't be easy. The "innovator's dilemma" applies to management, as well as technology. But the time has come to find out. The old methods won't last much longer.
—Adapted from "The Wall Street Journal Essential Guide to Management" by Alan Murray. Copyright 2010 by Dow Jones & Co. Published by Harper Business, an imprint of HarperCollins Publishers. Write to Alan Murray at Alan.Murray@wsj.comhttp://online.wsj.com/article/SB10001424052748704476104575439723695579664.html?mod=rss_whats_news_us&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Fxml%2Frss%2F3_7011+%28WSJ.com%3A+What%27s+News+US%29&utm_content=Google+Reader

The End of Outsourcing

As Google and Amazon.com become preeminent sellers of tech services, companies from Accenture to Microsoft and Xerox must adapt to cloud computing 

In the next five years outsourcing as we know it will disappear. The legion of Indian service providers will be sidelined or absorbed. U.S. and European companies that pioneered this corner of the high tech industry will suffer similar fates if they don't wake up. Who will emerge as the new leaders? Google (GOOG) and Amazon.com (AMZN), brands that we associate with search and retail, will become better known for outsourcing.

Ludicrous? Not if you follow this industry. Desktop computers yielded to laptops. Web portals AOL (AOL), MSN (MSFT), and Yahoo! (YHOO) are giving way to social media sites Facebook, Twitter, and LinkedIn. Software once distributed by disk is now available as apps over the Web -- often for less than the cost of a slice of pizza. And so it goes. The same Darwinian process is creating a fresh ecosystem in outsourcing, one that will usher in an era of consolidation and a new way of working with clients.
Traditionally, outsourcing companies sell customers deals that can span a decade and easily run to tens of millions of dollars. The service provider takes on the expensive, time-consuming task of building and operating the digital tools that the customer requires to vanquish the competition, often involving development of custom software to get the job done. To do that, service providers need aisles of powerful computers, armies of programmers, and lots of applications, which are housed either at the client's site or located at a third-party data center that's usually owned and paid for by the client but managed and maintained by the outsourcer. Accenture (ACN) is a good example of the old model of outsourcing, which involves long-term contracts; customized software, legacy software, or both; and on-site systems integration work.
In the new model, outsourcers provide standard, off-the-shelf software on a "pay-per-drink" basis. For that, they will leverage so-called cloud technology, which lets users tap into computing power available via the Internet, rather than on a desktop or computer server housed locally. The appeal is scale, flexibility, and efficiency: Thousands of server computers can attack a task more quickly -- and cheaply -- or handle a patchwork quilt of different technologies that companies use to run their businesses. This approach will let businesses outsource entire tasks such as the tracking of inventory, paying only for the information accessed or used.
Why is this happening now? Let's start with the relentless pressure to cut costs. Outsourcing is about saving money. Sure the pitch usually revolves around improving business processes, but no client is going to pay more for the service than what it already costs to maintain their systems. Unfortunately, outsourcing vendors have maxed-out efficiencies, both from automation and from moving the work to lower cost-of-labor destinations, also known as "labor arbitrage." To get to the next level of savings, a ruthless search for greater economies of scale is necessary.
That's where the cloud comes in. It shifts the center of gravity in outsourcing from physical ownership of assets and process expertise. It focuses on the skills necessary to efficiently manage computing operations that can scale and at the same time are flexible enough to handle scores of different tasks.
These factors will set off a wave of global consolidation in tech services. There are too many companies in this space. Consolidation will be about protecting or building market share or adding technical skills, from connectivity and networking to deep expertise in the delivery of services-on-demand. This is why most Indian outsourcing companies are investing to get up to speed on the cloud. How quickly can they build sufficient scale?

It's not merely Indian companies wrestling with these changes. Let's handicap the winners and losers in the race to become players in the evolving outsourcing business.
The Losers: Mid-tier Indian outsourcers will be acquired by larger, more aggressive companies. Indian outsourcers are attractive because of their current client list, operations in low-cost countries, and process expertise. Most of them are too small to build enough scale and expertise in the backbone capabilities required in the cloud.
Leading Indian players like MphasiS () and eServe () have already fallen prey to Hewlett-Packard (HPQ) and TCS, respectively. Some larger players such as Infosys (INFY) and Wipro (WIT) are at risk of losing their competitive advantage. Even the largest Indian companies are still several orders of magnitude smaller than their U.S. competitors -- HP, Xerox (XRX) Microsoft, and Google. These include companies such as Patni (PTI), L&T Infotech, and Satyam [recently acquired by Tech Mahindra. Therefore we expect Indian vendors to try to gain scale via acquisitions or alliances among themselves.
The Winners: Amazon and Google are the future leaders in outsourcing. They are already providing services to such enterprises as Eli Lilly (LLY) and Pfizer (PFE). They own data centers on an enormous scale and know how to operate them efficiently. They will gain capabilities they don't yet have -- such as industry-specific know-how and low-cost workforces -- by acquiring Indian or other global outsourcers. Meanwhile, Google announced a partnership with Computer Sciences (CSC) and Amazon announced a similar one with Capgemini. Indeed, Amazon has made so much headway in cloud technology that this area of their business will generate, according to an estimate recently published by UBS (UBS), something in the order of $750 million in 2011.
Then there's the generational issue to consider. Amazon and Google are household brands for the generation of managers and leaders that is now rising in U.S. management ranks. In their youth, these leaders entrusted personal e-mails, music files, pictures, and social interactions to these companies. We believe it will be a logical extension for this generation to hire these companies as trusted managers and hosts of their corporate services.
The Possible Winners: Software giants such as Microsoft, Oracle (ORCL), and SAP (SAP) have knowledge around enterprise platforms and applications that can unlock further efficiencies for clients. They also have robust and captive client portfolios. Their success will depend on the speed at which they build up capabilities they are currently missing in connectivity, infrastructure, and experience in the cloud itself. It will also depend on their appetite for risk. We are talking here about nothing less than reengineering their DNA. For example, even Microsoft has begun to forsake its license-based software to introduce new, cloud-based, office software. At the same time, Salesforce.com (CRM) has aggressively grown by shifting its CRM applications around this cloud-based model.
Those on the Fence: Xerox, HP, and Accenture have the technical and financial resources to expand their capabilities. Recent acquisitions -- HP/EDS, Dell/Perot Systems (DELL), and Xerox/Affiliated Computer Services -- show that they see the writing on the wall. Nevertheless, it's uncertain that these behemoths will shift seamlessly from large integration projects to cloud-based solutions. Unless companies such as HP, Xerox, and Dell continue to increase their momentum into the cloud, they may find their multibillion-dollar acquisitions go to waste.
The outsourcing market is on the verge of experiencing its most massive transformation since the concept arose more than 20 years ago. For outsourcers, cloud computing creates an unprecedented opportunity to reshape how services get delivered. For clients, it opens up a new era characterized by the arrival of new players that are eager to build relationships and showcase their capabilities. That means more choice and a new model that will sustain the price advantage that outsourcing has hitherto provided.

Copyright © 2010 Bloomberg L.P.All rights reserved.

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