How To Be Creative

Creativity can seem like magic. We look at people like Steve Jobs and Bob Dylan, and we conclude that they must possess supernatural powers denied to mere mortals like us, gifts that allow them to imagine what has never existed before. They're "creative types." We're not.

The myth of the "creative type" is just that--a myth, argues Jonah Lehrer. In an interview with WSJ's Gary Rosen he explains the evidence suggesting everyone has the potential to be the next Milton Glaser or Yo-Yo Ma.

But creativity is not magic, and there's no such thing as a creative type. Creativity is not a trait that we inherit in our genes or a blessing bestowed by the angels. It's a skill. Anyone can learn to be creative and to get better at it. New research is shedding light on what allows people to develop world-changing products and to solve the toughest problems. A surprisingly concrete set of lessons has emerged about what creativity is and how to spark it in ourselves and our work.
The science of creativity is relatively new. Until the Enlightenment, acts of imagination were always equated with higher powers. Being creative meant channeling the muses, giving voice to the gods. ("Inspiration" literally means "breathed upon.") Even in modern times, scientists have paid little attention to the sources of creativity.
But over the past decade, that has begun to change. Imagination was once thought to be a single thing, separate from other kinds of cognition. The latest research suggests that this assumption is false. It turns out that we use "creativity" as a catchall term for a variety of cognitive tools, each of which applies to particular sorts of problems and is coaxed to action in a particular way.

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Philip Montgomery for The Wall Street Journal; Illustrations by Serge Bloch

It isn't a trait that we inherit in our genes or a blessing bestowed on us by the angels. It's a skill that anyone can learn and work to improve.

Does the challenge that we're facing require a moment of insight, a sudden leap in consciousness? Or can it be solved gradually, one piece at a time? The answer often determines whether we should drink a beer to relax or hop ourselves up on Red Bull, whether we take a long shower or stay late at the office.
The new research also suggests how best to approach the thorniest problems. We tend to assume that experts are the creative geniuses in their own fields. But big breakthroughs often depend on the naive daring of outsiders. For prompting creativity, few things are as important as time devoted to cross-pollination with fields outside our areas of expertise.
Let's start with the hardest problems, those challenges that at first blush seem impossible. Such problems are typically solved (if they are solved at all) in a moment of insight.
Consider the case of Arthur Fry, an engineer at 3M in the paper products division. In the winter of 1974, Mr. Fry attended a presentation by Sheldon Silver, an engineer working on adhesives. Mr. Silver had developed an extremely weak glue, a paste so feeble it could barely hold two pieces of paper together. Like everyone else in the room, Mr. Fry patiently listened to the presentation and then failed to come up with any practical applications for the compound. What good, after all, is a glue that doesn't stick?
On a frigid Sunday morning, however, the paste would re-enter Mr. Fry's thoughts, albeit in a rather unlikely context. He sang in the church choir and liked to put little pieces of paper in the hymnal to mark the songs he was supposed to sing. Unfortunately, the little pieces of paper often fell out, forcing Mr. Fry to spend the service frantically thumbing through the book, looking for the right page. It seemed like an unfixable problem, one of those ordinary hassles that we're forced to live with.
But then, during a particularly tedious sermon, Mr. Fry had an epiphany. He suddenly realized how he might make use of that weak glue: It could be applied to paper to create a reusable bookmark! Because the adhesive was barely sticky, it would adhere to the page but wouldn't tear it when removed. That revelation in the church would eventually result in one of the most widely used office products in the world: the Post-it Note.
Mr. Fry's invention was a classic moment of insight. Though such events seem to spring from nowhere, as if the cortex is surprising us with a breakthrough, scientists have begun studying how they occur. They do this by giving people "insight" puzzles, like the one that follows, and watching what happens in the brain:
A man has married 20 women in a small town. All of the women are still alive, and none of them is divorced. The man has broken no laws. Who is the man?
If you solved the question, the solution probably came to you in an incandescent flash: The man is a priest. Research led by Mark Beeman and John Kounios has identified where that flash probably came from. In the seconds before the insight appears, a brain area called the superior anterior temporal gyrus (aSTG) exhibits a sharp spike in activity. This region, located on the surface of the right hemisphere, excels at drawing together distantly related information, which is precisely what's needed when working on a hard creative problem.
Interestingly, Mr. Beeman and his colleagues have found that certain factors make people much more likely to have an insight, better able to detect the answers generated by the aSTG. For instance, exposing subjects to a short, humorous video—the scientists use a clip of Robin Williams doing stand-up—boosts the average success rate by about 20%.
Alcohol also works. Earlier this year, researchers at the University of Illinois at Chicago compared performance on insight puzzles between sober and intoxicated students. The scientists gave the subjects a battery of word problems known as remote associates, in which people have to find one additional word that goes with a triad of words. Here's a sample problem:
Pine Crab Sauce
In this case, the answer is "apple." (The compound words are pineapple, crab apple and apple sauce.) Drunk students solved nearly 30% more of these word problems than their sober peers.
What explains the creative benefits of relaxation and booze? The answer involves the surprising advantage of not paying attention. Although we live in an age that worships focus—we are always forcing ourselves to concentrate, chugging caffeine—this approach can inhibit the imagination. We might be focused, but we're probably focused on the wrong answer.
And this is why relaxation helps: It isn't until we're soothed in the shower or distracted by the stand-up comic that we're able to turn the spotlight of attention inward, eavesdropping on all those random associations unfolding in the far reaches of the brain's right hemisphere. When we need an insight, those associations are often the source of the answer.
This research also explains why so many major breakthroughs happen in the unlikeliest of places, whether it's Archimedes in the bathtub or the physicist Richard Feynman scribbling equations in a strip club, as he was known to do. It reveals the wisdom of Google putting ping-pong tables in the lobby and confirms the practical benefits of daydreaming. As Einstein once declared, "Creativity is the residue of time wasted."
Of course, not every creative challenge requires an epiphany; a relaxing shower won't solve every problem. Sometimes, we just need to keep on working, resisting the temptation of a beer-fueled nap.
There is nothing fun about this kind of creativity, which consists mostly of sweat and failure. It's the red pen on the page and the discarded sketch, the trashed prototype and the failed first draft. Nietzsche referred to this as the "rejecting process," noting that while creators like to brag about their big epiphanies, their everyday reality was much less romantic. "All great artists and thinkers are great workers," he wrote.
This relentless form of creativity is nicely exemplified by the legendary graphic designer Milton Glaser, who engraved the slogan "Art is Work" above his office door. Mr. Glaser's most famous design is a tribute to this work ethic. In 1975, he accepted an intimidating assignment: to create a new ad campaign that would rehabilitate the image of New York City, which at the time was falling apart.
Mr. Glaser began by experimenting with fonts, laying out the tourist slogan in a variety of friendly typefaces. After a few weeks of work, he settled on a charming design, with "I Love New York" in cursive, set against a plain white background. His proposal was quickly approved. "Everybody liked it," Mr. Glaser says. "And if I were a normal person, I'd stop thinking about the project. But I can't. Something about it just doesn't feel right."
So Mr. Glaser continued to ruminate on the design, devoting hours to a project that was supposedly finished. And then, after another few days of work, he was sitting in a taxi, stuck in midtown traffic. "I often carry spare pieces of paper in my pocket, and so I get the paper out and I start to draw," he remembers. "And I'm thinking and drawing and then I get it. I see the whole design in my head. I see the typeface and the big round red heart smack dab in the middle. I know that this is how it should go."
The logo that Mr. Glaser imagined in traffic has since become one of the most widely imitated works of graphic art in the world. And he only discovered the design because he refused to stop thinking about it.
But this raises an obvious question: If different kinds of creative problems benefit from different kinds of creative thinking, how can we ensure that we're thinking in the right way at the right time? When should we daydream and go for a relaxing stroll, and when should we keep on sketching and toying with possibilities?
The good news is that the human mind has a surprising natural ability to assess the kind of creativity we need. Researchers call these intuitions "feelings of knowing," and they occur when we suspect that we can find the answer, if only we keep on thinking. Numerous studies have demonstrated that, when it comes to problems that don't require insights, the mind is remarkably adept at assessing the likelihood that a problem can be solved—knowing whether we're getting "warmer" or not, without knowing the solution.
This ability to calculate progress is an important part of the creative process. When we don't feel that we're getting closer to the answer—we've hit the wall, so to speak—we probably need an insight. If there is no feeling of knowing, the most productive thing we can do is forget about work for a while. But when those feelings of knowing are telling us that we're getting close, we need to keep on struggling.
Of course, both moment-of-insight problems and nose-to-the-grindstone problems assume that we have the answers to the creative problems we're trying to solve somewhere in our heads. They're both just a matter of getting those answers out. Another kind of creative problem, though, is when you don't have the right kind of raw material kicking around in your head. If you're trying to be more creative, one of the most important things you can do is increase the volume and diversity of the information to which you are exposed.
Steve Jobs famously declared that "creativity is just connecting things." Although we think of inventors as dreaming up breakthroughs out of thin air, Mr. Jobs was pointing out that even the most far-fetched concepts are usually just new combinations of stuff that already exists. Under Mr. Jobs's leadership, for instance, Apple didn't invent MP3 players or tablet computers—the company just made them better, adding design features that were new to the product category.
And it isn't just Apple. The history of innovation bears out Mr. Jobs's theory. The Wright Brothers transferred their background as bicycle manufacturers to the invention of the airplane; their first flying craft was, in many respects, just a bicycle with wings. Johannes Gutenberg transformed his knowledge of wine presses into a printing machine capable of mass-producing words. Or look at Google: Larry Page and Sergey Brin came up with their famous search algorithm by applying the ranking method used for academic articles (more citations equals more influence) to the sprawl of the Internet.
How can people get better at making these kinds of connections? Mr. Jobs argued that the best inventors seek out "diverse experiences," collecting lots of dots that they later link together. Instead of developing a narrow specialization, they study, say, calligraphy (as Mr. Jobs famously did) or hang out with friends in different fields. Because they don't know where the answer will come from, they are willing to look for the answer everywhere.
Recent research confirms Mr. Jobs's wisdom. The sociologist Martin Ruef, for instance, analyzed the social and business relationships of 766 graduates of the Stanford Business School, all of whom had gone on to start their own companies. He found that those entrepreneurs with the most diverse friendships scored three times higher on a metric of innovation. Instead of getting stuck in the rut of conformity, they were able to translate their expansive social circle into profitable new concepts.
Many of the most innovative companies encourage their employees to develop these sorts of diverse networks, interacting with colleagues in totally unrelated fields. Google hosts an internal conference called Crazy Search Ideas—a sort of grown-up science fair with hundreds of posters from every conceivable field. At 3M, engineers are typically rotated to a new division every few years. Sometimes, these rotations bring big payoffs, such as when 3M realized that the problem of laptop battery life was really a problem of energy used up too quickly for illuminating the screen. 3M researchers applied their knowledge of see-through adhesives to create an optical film that focuses light outward, producing a screen that was 40% more efficient.
Such solutions are known as "mental restructurings," since the problem is only solved after someone asks a completely new kind of question. What's interesting is that expertise can inhibit such restructurings, making it harder to find the breakthrough. That's why it's important not just to bring new ideas back to your own field, but to actually try to solve problems in other fields—where your status as an outsider, and ability to ask naive questions, can be a tremendous advantage.
This principle is at work daily on InnoCentive, a crowdsourcing website for difficult scientific questions. The structure of the site is simple: Companies post their hardest R&D problems, attaching a monetary reward to each "challenge." The site features problems from hundreds of organization in eight different scientific categories, from agricultural science to mathematics. The challenges on the site are incredibly varied and include everything from a multinational food company looking for a "Reduced Fat Chocolate-Flavored Compound Coating" to an electronics firm trying to design a solar-powered computer.
The most impressive thing about InnoCentive, however, is its effectiveness. In 2007, Karim Lakhani, a professor at the Harvard Business School, began analyzing hundreds of challenges posted on the site. According to Mr. Lakhani's data, nearly 30% of the difficult problems posted on InnoCentive were solved within six months. Sometimes, the problems were solved within days of being posted online. The secret was outsider thinking: The problem solvers on InnoCentive were most effective at the margins of their own fields. Chemists didn't solve chemistry problems; they solved molecular biology problems. And vice versa. While these people were close enough to understand the challenge, they weren't so close that their knowledge held them back, causing them to run into the same stumbling blocks that held back their more expert peers.
It's this ability to attack problems as a beginner, to let go of all preconceptions and fear of failure, that's the key to creativity.
The composer Bruce Adolphe first met Yo-Yo Ma at the Juilliard School in New York City in 1970. Mr. Ma was just 15 years old at the time (though he'd already played for J.F.K. at the White House). Mr. Adolphe had just written his first cello piece. "Unfortunately, I had no idea what I was doing," Mr. Adolphe remembers. "I'd never written for the instrument before."
Mr. Adolphe had shown a draft of his composition to a Juilliard instructor, who informed him that the piece featured a chord that was impossible to play. Before Mr. Adolphe could correct the music, however, Mr. Ma decided to rehearse the composition in his dorm room. "Yo-Yo played through my piece, sight-reading the whole thing," Mr. Adolphe says. "And when that impossible chord came, he somehow found a way to play it."
Mr. Adolphe told Mr. Ma what the professor had said and asked how he had managed to play the impossible chord. They went through the piece again, and when Mr. Ma came to the impossible chord, Mr. Adolphe yelled "Stop!" They looked at Mr. Ma's left hand—it was contorted on the fingerboard, in a position that was nearly impossible to hold. "You're right," said Mr. Ma, "you really can't play that!" Yet, somehow, he did.
When Mr. Ma plays today, he still strives for that state of the beginner. "One needs to constantly remind oneself to play with the abandon of the child who is just learning the cello," Mr. Ma says. "Because why is that kid playing? He is playing for pleasure."
Creativity is a spark. It can be excruciating when we're rubbing two rocks together and getting nothing. And it can be intensely satisfying when the flame catches and a new idea sweeps around the world.
For the first time in human history, it's becoming possible to see how to throw off more sparks and how to make sure that more of them catch fire. And yet, we must also be honest: The creative process will never be easy, no matter how much we learn about it. Our inventions will always be shadowed by uncertainty, by the serendipity of brain cells making a new connection.
Every creative story is different. And yet every creative story is the same: There was nothing, now there is something. It's almost like magic.
—Adapted from "Imagine: How Creativity Works" by Jonah Lehrer, to be published by Houghton Mifflin Harcourt on March 19. Copyright © 2012 by Jonah Lehrer.
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Auditors Sharpen Queries In China

Auditors are learning that, in China, they sometimes must go the extra mile to verify even the most basic things about clients—like how much cash they have.
Hong Kong audit firm BDO Ltd. recently dropped a client after raising questions about the accuracy of information provided by the firm, going so far as to allege the company had directed the auditor to a fake website.
Problems with bank "confirmation"—the process by which an auditor checks with a company's bank to verify its balances—have arisen in about 10 recent disputes between U.S.-traded Chinese firms and their auditors, according to Securities and Exchange Commission filings. (There are hundreds of Chinese firms traded on U.S. exchanges.) The auditors have found irregularities through their confirmation efforts or encountered other difficulties in confirming a client's bank accounts, according to SEC filings.
When BDO tried to verify the online bank accounts of Chinese biotech China-Biotics Inc., for instance, the company's staff directed the auditors to a bank website that BDO said—in a letter to China-Biotics last week in which BDO announced it was dropping the account—was "a suspected fake." China-Biotics filed that letter with the SEC on June 23. BDO said there were errors in a bank document concerning the company's bank interest income; China-Biotics said the errors in the document were clerical mistakes by the bank, and the company supplied BDO with what BDO characterized in its resignation letter as a "corrected" version of the document.
As a result of these and other issues, according to the letter filed with the SEC, BDO wanted to confirm the company's bank balances and transactions with the senior management of the head office of its bank, the Bank of Communications. But China-Biotics never arranged the meeting, despite repeated requests from BDO, the firm said. The company's chief financial officer and its audit-committee chairman have resigned, and trading in China-Biotics shares on the Nasdaq Stock Market has been halted since June 15 in the wake of the auditor's concerns. A BDO representative declined to comment. The Bank of Communications didn't immediately respond to a request for comment. China-Biotics couldn't be reached for comment.
In some cases, auditors may not have done all they should to seek bank confirmations independently, according to U.S. regulators. In other cases, auditors have suggested in SEC filings that officials at some companies' banks may be helping the companies manipulate the process, verifying bad information to mislead auditors into thinking a company's books are OK.
Deloitte Touche Tohmatsu, for instance, said it received confirmations from bank staff about one client, Longtop Financial Technologies Ltd., that "were said to be false" or had "significant differences" in deposit balances and company borrowings compared with previous confirmations. Those descriptions of the problematic information were contained in a letter Deloitte wrote when it resigned from the Longtop account in May. Longtop couldn't be reached for comment. Details on the bank involved weren't available.
Regulators are concerned, too, as accounting questions raised by auditors and investors beset dozens of Chinese companies. James Doty, chairman of the Public Company Accounting Oversight Board, which regulates U.S. audit firms, told a Senate panel in April that the board had found "even simple audit maxims, such as maintaining the auditor's control over bank confirmations, may not hold given the business culture in China."
A spokesman for the China Banking Regulatory Commission, the country's bank overseer, said in a statement that Chinese banking regulation and supervision "have always been stringent." All levels of a bank are required to provide accurate confirmation information, the CBRC said, and false confirmation is "absolutely prohibited." "The CBRC will deal with this matter seriously and welcomes public supervision and any sharing of evidence," the statement said. The China Securities Regulatory Commission didn't reply to requests for comment.
In a bank confirmation, an auditor submits a written request to an official at the company's bank to verify the firm's assertions about deposit and loan balances, often on a standard form developed by the accounting industry. The bank official responds directly to the auditor to confirm the amounts. Except for authorizing the bank to release information, the company can't be involved in the process in any way. The PCAOB oversees and enforces auditing rules for U.S-traded Chinese firms just as it does other U.S.-traded companies.
As accounting problems have emerged, auditors in China have taken greater precautions. Some say they are doing more to maintain control of confirmation paperwork, such as observing as bank officials confirm numbers. In addition, the PCAOB is preparing to tighten rules on the confirmation process for all auditors it oversees. When auditors don't do what they should on confirmation, "the possibility of fraud certainly increases," said Martin F. Baumann, the PCAOB's chief auditor and director of professional standards.
Frauds involving bank confirmation are neither new nor limited to China. At Satyam Computer Services Ltd., U.S. regulators said a failure by PricewaterhouseCoopers affiliates in India to confirm Satyam's accounts enabled the company's fraud to go undetected. PwC agreed to a $7.5 million settlement but didn't admit or deny wrongdoing and said at the time that it had "worked hard to learn the lessons of the Satyam matter." Satyam said when it settled SEC charges in April that it was in the company's "best interests" to resolve the allegations and noted that the misconduct occurred under previous management.
Bank-confirmation problems are "potentially more of an emerging-markets problem," Mr. Baumann said, with "collusion going on between banks and issuers" in countries that don't yet have a tradition of strong corporate governance and independent oversight. In China, he said, "it appears that banks often have a very close relationship with the company."
In Longtop's case, Deloitte resigned as auditor in May after it said it had made follow-up visits to some of the company's banks that uncovered the allegedly false confirmations and discrepancies. When Deloitte attempted a second formal round of confirmations as a result, Longtop officials interfered by seizing Deloitte working papers and telling the banks that Deloitte wasn't really its auditor, the firm said in its resignation letter.
At China MediaExpress Holdings Inc., another client Deloitte dropped, this time in March, there was "a loss of confidence in bank confirmation procedures carried out under circumstances which [Deloitte] believed to be suspicious," according to China MediaExpress filings. Deloitte requested the confirmations be redone at the banks' head office, according to the filings. But Deloitte felt "the Company was not in good faith willing to proceed with the course of action requested," according to the filings. China MediaExpress declined to comment, but in the filings said, "the Company believes that it was working to address these items at the time of [Deloitte's] resignation."
Jeff Willemain, Deloitte Touche Tohmatsu's managing director of quality and regulatory matters, said in a statement that Deloitte's member firms "continue to advocate for improvement" of the confirmation process, including "putting more onus on confirming parties to ensure prompt, accurate and complete responses. Further, there should be consequences for parties who knowingly falsify confirmations."
MaloneBailey LLP, a Houston firm that has a big roster of small Chinese audit clients, has resigned from auditing at least four of them this year, in part because of confirmation problems, according to SEC filings. George Qin, a MaloneBailey partner who runs the firm's China practice, says some bank officials have interfered in the auditor's attempt to confirm its clients' accounts. "I can tell you there are serious problems in China with regard to certain bank employees who collude with companies," Mr. Qin said. "I think that's very troublesome." But he said he didn't think the problems were systemic and said MaloneBailey currently has "about 16" Chinese clients.
The PCAOB's proposed revisions to its confirmation rules are unrelated to the current issues in China. The revisions would require auditors to confirm companies' cash balances—which isn't specifically required under current rules—and a broader range of accounts receivables, or money owed to the company, than is the case now. The revisions also would go into greater detail about what auditors should do to maintain control over the confirmation process, including taking "local customs" into account. A PCAOB representative said, however, that the board's existing rule is "sufficiently robust" to require auditors to do confirmations appropriately in China, and the pace of the changes doesn't need to be accelerated because of the recent problems. The proposals are pending but are expected to be finalized and approved in the coming months.
The effort was begun last year, before the China accounting blowups, but even then, "we thought there would be greater risk in certain environments, and it turns out we were right," Mr. Baumann said. "If you're in an environment where you can't rely as much on an individual's honesty, the auditor has to assess the risk of that."
Even apart from the PCAOB's efforts, some auditing firms say auditors need to toughen their procedures. McGladrey & Pullen LLP, of Bloomington, Minn., which audits one Chinese firm and has other clients with Chinese subsidiaries, said in a newsletter this month that auditors may need to hand-deliver a confirmation request to the bank themselves and wait there while the bank officer completes it. Mr. Qin said MaloneBailey is handling confirmations similarly.
McGladrey also called for "extra diligence" in auditing accounts receivable, because fraud often shows up there first, before it is hidden in exaggerated cash balances.
Robert Dohrer, McGladrey's national director of assurance services, said in an e-mail interview that the alert was intended to remind its people that the auditor "really needs to think through the credibility of audit evidence obtained."
—Dinny McMahon 

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J.K. Rowling Conjures Up Potter E-Books

J.K. Rowling, who ignited a new generation of readers with her series of seven boy-wizard novels, launched the next transformative chapter in how and where books will be distributed by unveiling her own online store that will sell Harry Potter e-books directly to her fans.
In a video address to readers, Ms. Rowling said she created her own Harry Potter universe for fans to visit online. While her publishers and major online book retailers will continue to sell her physical books, Ms. Rowling has reserved for herself the digital editions, the fastest-growing segment in the book world.

The move could inspire other authors, large and small, to pronounce themselves independent agents in hopes of tapping more lucrative paydays. Ms. Rowling refused for years to release her books in electronic format, retaining the digital rights for herself.
While most other authors have already handed over their digital rights to their publishers—most recently, John Grisham—Ms. Rowling's deal could prompt them to self-publish when their deals come up for renewal or demand higher royalty rates than the 25% of net sales that most publishers offer today on digital editions.
Some may even choose to forgo all traditional means of book publishing and set up their own bookstores, reaping 100% of everything they sell.

"Every writer watches with great interest whenever somebody does something new," said best-selling author Jennifer Weiner, whose next book, "Then Came You," goes on sale July 12. "We all pay attention. If this turns out to be a success for her, for an author who had unheard-of success by selling through traditional bookstores with books on paper, then some may decide that they, too, don't need bricks-and-mortar stores, or online booksellers, either."


Ms. Rowling, 45 years old, will launch a test version of her Pottermore website on July 31 and begin selling e-books in October. All seven Harry Potter novels will be available as e-books in multiple languages and will be device agnostic.
Though she says she won't be writing any more Potter books, Ms. Rowling is emptying her extra material into various corners of the site. She has handed over 18,000 words of additional content so far but says she will write more for the site as well.
The British author said Thursday she is lucky to have the resources to go straight to readers—and is happy she can ensure they have an equally magical experience when interacting with the digital Harry Potter. "There was really no other way to do that, for the fans or for me, other than to just do it myself," she said.
Ms. Rowling's declaration of retail independence comes at a time of extreme turmoil in book publishing and retailing around the world. In the year ended April 30, U.S. e-book sales jumped 163% to $313 million, according to the Association of American Publishers, but the sale of adult hard-cover books declined 19% to $300 million. The figures reflect the reporting of 22 companies.
Five years ago, an author such as Ms. Rowling wouldn't have had the tools to sell her own works globally by herself.
The issue of ownership of digital works has emerged as the most explosive in publishing today. Several start-up digital publishers are luring authors and estates by offering twice the royalty compensation on digital works compared with traditional publishers.
Publishers are intent on holding the line on both rates and rights. Most dramatically, they have repeatedly said they won't sign contracts and offer advances to authors without acquiring all digital rights. But as companies such as Amazon.com Inc. increase their own publishing efforts, the traditional publishing world is coming under greater pressure to keep their authors happy.
The risk Ms. Rowling runs—the possible retaliation by retailers toward her next titles—appears limited compared to the potential financial rewards and her ability to control her relationship with her fans the way she wants. The ability to shape all forms of the book-selling and marketing experience has been a lifelong dream for many authors over the ages.
Such a step won't be for all authors, however. Best-selling writer James Patterson, who in 2009 signed a 17-book contract with Lagardère SCA's Hachette Book Group, said that while he has mulled "the notion of having my own book company," he has decided "life is too short."
Mr. Patterson said he thinks a certain number of authors will be eager to try more innovative forms of publishing,whether it be best-selling authors or those trying to build an audience. "Many people are going to be trying to figure out how to break into the game," he said. "But I don't want to do something that might be disruptive to the publishing industry. And I'm protective of independent bookstores."
The news received a mixed response from book retailers. The U.K.'s biggest chain, Waterstone's, issued a statement expressing its "disappointment" at being shut out of the digital launch and noting that it had been a "key factor in the growth of the Harry Potter phenomenon since the first book was published."
But in the U.S., Barnes & Noble, the nation's largest bookstore chain, actively promoted Potter titles on its website on Thursday via a link to Ms. Rowling's video announcement of the Pottermore site and said it would work to make Potter e-books available on its Nook reading device.
A spokeswoman for Amazon said, "We're working closely with Pottermore to make sure Kindle customers will be able to buy and read J.K. Rowling's Harry Potter books." An Apple Inc. spokesman had no comment.
Ms. Rowling has built the Potter franchise into a behemoth since the first of her Harry Potter novels was published in 1997. The series has sold about 450 million books world-wide, and spawned an eight-part film franchise for Time Warner Inc.'s Warner Bros. that concludes in July, around the time of the initial Pottermore launch. In 2010, Forbes magazine estimated Ms. Rowling's net worth at $1 billion.
Bloomsbury Publishing PLC owns the British print rights to Harry Potter, and Scholastic Corp. owns the printrights in the U.S.
Ms. Rowling isn't entirely pushing aside her publishers. Bloomsbury and Scholastic both said in statements Thursday that they would receive a cut of Pottermore's e-book sales. "It is because J.K. Rowling wanted to be in a partnership with her print publishers on this project," a Bloomsbury spokeswoman said. Both Bloomsbury and Scholastic said they would provide marketing and promotional support for the Pottermore site.
The decision to release the Potter books digitally comes at a time when there is increased speculation about which formats—physical or digital—children will embrace in the years ahead. Scholastic, for example, is currently working on an e-reading software application for kids that is designed to bolster digital reading and that will likely be unveiled this fall.
Pottermore is a Harry Potter online world that allows readers to join one of the Hogwarts wizardry school's four houses and travel virtually through the first Harry Potter book. Along the way, members encounter extra material Ms. Rowling has written or unearthed from her notes, giving intense Potter fans much-desired insider explanations of key characters, places and plots. Users receive their own magical wands and home pages—and can do things like post drawings and challenge one another to wizard duels.
Among extra material, Ms. Rowling says she kept the back story of Professor McGonagall—headmistress of Hogwarts—for years expecting to use it, but never found a place for it in any of the books.
"I had half of the new material already written or in note form," Ms. Rowling said Thursday. "I dug some of it out of boxes, literally."
Sony Corp. partnered with Ms. Rowling on developing the site and plans to sell branded Pottermore products, such as e-readers, out of the online store.
Write to Jeffrey A. Trachtenberg at jeffrey.trachtenberg@wsj.com and Paul Sonne at paul.sonne@wsj.com

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Faith in Vietnam Falls With Shipmaker

Frustration over Vietnamese state-run shipbuilder Vinashin's failure to repay loans it defaulted on last year is intensifying among creditors, potentially jeopardizing Vietnam's plans to draw more investment to improve its infrastructure and reduce the bottlenecks that threaten its growth.
The problems at Vinashin point to the risks of investing in what, on the face of it, is one of the world's most attractive emerging markets. Vietnam's Communist-run government built up the firm, formally known as Vietnam Shipbuilding Industry Group, to be a major player in the global shipbuilding market to compete with heavyweight manufacturers in China, South Korea and Japan. The entire $750 million proceeds of the country's first-ever sovereign bond were channeled to Vinashin in 2005.
In 2007, the government provided a letter of support for the company to enable it to secure an additional $600 million syndicated loan to make the most of a rapid economic boom in the country.
But when Vinashin defaulted on that debt last December in the aftermath of the global economic crash,, the government refused to step in to help pay off the debt, which, in an indication of the boom in emerging markets, had been bought by investors around the world. Dozens of financial institutions invested in the loan, including, among others, Standard Chartered PLC, Credit Suisse AG, Depfa Bank PLC and hedge fund Elliott Advisers Ltd.
Some of Vinashin's lenders now complain that they have been deceived. For many, the government's letter of support was the only reason they felt sufficiently secure to lend to the company. This month, a group comprising just over half the lenders' group sent a letter to Vietnam's government demanding payment on the first $60 million, which was due in December.
"This was always a government-supported loan as far as the lenders are concerned," one person familiar with the situation told The Wall Street Journal. "Going forward, capital won't go to places where it isn't treated fairly."
Officials with Vinashin and the Vietnamese government didn't respond to requests for comment.
The problems with Vinashin highlight the risks investors take when they invest in these small markets. U.S. investors seeking higher yields have poured $5.6 billion into funds that invest in emerging-market bonds so far this year, though that is about half of last year's pace.
The standoff could pose a significant threat to Vietnam's prospects. The government already is struggling to come to grips with worsening inflation. The increase in Vietnam's consumer price index hit 17.51% in April and could reach further peaks in the months to come, complicating the immediate economic outlook for the country.
At the same time, analysts say Vietnam needs to attract more foreign investments to build up overburdened road and rail networks and to build power plants to provide the energy Vietnam needs to keep its economy briskly expanding. Deputy Prime Minister Hoang Trung Hai said earlier this month at the annual Asian Development Bank meeting in Hanoi that the country hopes to attract as much as $300 billion in investment and aid to fund an infrastructure effort that he said is needed to push the country onto a more robust growth path.
Some economists say the government is trying to get its macroeconomic policy in order to help revive confidence, setting to one side its customary pro-growth policies to better combat the loss of confidence which inflation can bring. Vietnam last week scaled back its growth target for the year to 6.5% from 7% to 7.5% in an effort to focus more tightly on restraining credit growth to better contain inflation.
The authorities also are trying to restore faith in their beleaguered currency, the dong, after a series of devaluations wiped off a fifth of the Vietnamese unit's value since mid-2008. To encourage people to cooperate, black-market trade in U.S. dollars and gold, once tolerated and widespread, has been severely curtailed in recent months to force people to save and invest in dong instead.
Citigroup economist Johanna Chua notes that the dong has risen by around 2% against the dollar over the past month and that the central bank appears "on track" to meet its target of keeping credit growth below 16% this year, compared with nearly 30% in 2010. UBS, meanwhile, still includes Vietnam among its most favored frontier markets.
The Vinashin crisis, though, is an ongoing drag on Vietnam's prospects, damaging both its reputation among international lenders and potentially slowing the inflow of foreign investments that have helped drive the country's economy in recent years.
Prime Minister Nguyen Tan Dung's goal was to turn Vinashin into a manufacturing powerhouse that would keep the shipbuilding industry in state hands, but the project fell apart when the global economic crisis hit in 2008, leaving Vinashin with around $4.4 billion in debts. The company's order book was slashed, crippling its cash flow. Last summer, police investigators arrested several top officials, including former chief executive Pham Thanh Binh, and accused them of falsifying financial statements to mask the true extent of the company's problems.
Moody's Investors Service, Standard & Poor's and Fitch Ratings have all downgraded Vietnam's credit ratings in recent months, in large part because of the problems at Vinashin. The prime minister apologized for his role in Vinashin's mismanagement in a nationally televised session of the country's legislature.
Investors involved in the $600 million syndicated loan say they have been surprised by the unresponsiveness of the Vietnamese government to their concerns. Lenders have tried numerous times over the past several months to get an idea of what is happening at Vinashin. Among other things, the government has transferred some Vinashin units to other state-run enterprises without seeking the approval of the company's creditors.
The government, though, has repeatedly said that Vinashin's debts aren't the state's responsibility, leaving Vinashin's lenders unclear on how to get their money back.
In the meantime, the financial situation at Vinashin itself appears to be growing more precarious. "They're not making any money on the ships and the government is asking local banks to extend more loans and asking suppliers to lend more support," says the person familiar with the situation at Vinashin. "But you just can't tell what's going on. It's so opaque."
Write to James Hookway at james.hookway@wsj.com
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CEO pay - You may think it is Ridiculous, but it is really TRUE

I just read a CEO compensation report in WSJ. I captured a screenshot in WSJ's website. It is really interesting when you look at my red square box. Will you invest in a company whose CEO only earns less than 10k per month and whose profit is billion dollar, or in a company whose CEO earns a million dollar but whose profit is just in million?

What is McDonald selling?

AUGUSTA, Ga.—More than 100 items crowd the menus at Dee and Christine Crawford's five McDonald's restaurants, ranging from familiar Egg McMuffins to newfangled fruit smoothies. The family franchisees recently added oatmeal and caramel-mocha beverages. Next up for consideration: frozen strawberry lemonade.
In certain restaurants around the country, McDonald's Corp. is testing flatbread sandwiches and "garden" snack wraps—chicken and vegetables wrapped in a tortilla.

"Change is a part of our business, to keep up with customer demands, and there have been a lot of changes," says Dee Crawford.
Though McDonald's is practically synonymous with burgers, the chain's appetite for change has helped make it the nation's best-performing restaurant company during the economic downturn. Since early 2003, the company has posted 30 straight quarters of same-store sales increases. During the worst trenches of recession, in mid-2008, global same-store sales at McDonald's rose by 6.1%.
An increasingly diverse menu, with some items priced at a dollar and others as high as almost $5, has lured more cost-conscious customers while preserving profit margins. That's a departure from the days when McDonald's largely catered to so-called heavy users—customers who queue up to eat fast-food several times in a week. Today, many of those 18-34 year-olds, hit by the economic slump, can no longer afford to binge on Big Macs.
To help boost traffic, the company is keeping more restaurants open 24 hours, has spiffed up thousands of stores, created double-lane drive-throughs and now offers free Wi-Fi in most locations. The new menu choices are so plentiful that the Oak Brook, Ill., company has been running ads to remind customers that it still sells Big Macs and Quarter Pounders.

But as the changes mount, some franchisees and analysts are cautious about the chain's ability to sustain growth.
The chain's peak lunch-hour business has been flat for five years, according to a company email reviewed by The Wall Street Journal. A McDonald's spokeswoman declined to comment on the content of the memo, but said in an email response, "it's important to note that our entire business has continued to grow."
Pushing sales higher is a constant battle. "You may be leading the industry," says Jeffrey Bernstein, restaurant analyst at Barclays Capital. "But if you have a deceleration from where you were...investors might rather pursue a greater risk/reward scenario" with the potential for "more meaningful upside."
One reason for all the menu tweaks: the shifting landscape of fast-food, and food purchased by consumers on the go. Just a decade ago, chains like McDonald's and Burger King were a natural choice for people wanting a quick bite. Today, with more types of chains serving more types of fare, the big franchises are chasing market share from competitors such as 7-Eleven, coffee shops like Starbucks, smoothie outlets like Jamba Juice, and even gas stations that carry prepared food.

As business evolves, the franchisees who operate about 90% of the company's 14,000 U.S. stores bear the brunt of upgrade and expansion costs. With multiplying new demands in the kitchen, operations are more complex than ever, threatening slower service and mistakes in orders.
Several franchisees interviewed for this story declined to comment. Some worry that their investments will never pay off, according to an October franchisee survey by Janney Montgomery Scott analyst Mark Kalinowski. One franchisee polled said new McCafé coffee drinks are selling so poorly that, "we are not even paying for the electricity to run the machine."
"Our business is driven by keeping things simple and being able to deliver in a fast and efficient manner," says a McDonald's franchisee in the Southwest interviewed by the Journal. "So the more complexity you bring into the system, the more challenges you'll have," he says.
The introduction of snack wraps, for example, represented such a change in food assembly that one Augusta franchisee sponsored a snack-wrap making contest to give crew members extra practice. The winners received gift cards to retail stores.
With musts like a new $13,000 frozen-drinks machine, "the question always is, 'is the next dollar worth the next amount of investment and hassle?'" says the Southwest franchisee. "In most cases, so far, yes it has been, but not in every single store."

The company says the coffee drinks are a success. And McDonald's USA President Jan Fields says it's taking care not to repeat past mistakes. "I don't want it to feel burdensome to add new menu items, but we have to stay relevant."
Now that consumers are starting to open their wallets again, it's more tempting to be everything to everybody. "If McDonald's sticks to one thing, consumers will go somewhere else," says John Glass, restaurant industry analyst for Morgan Stanley. "It's a delicate balance between being simple and not responding to what consumers want."
The Golden Arches have been down this road before. In the late 1990s and early 2000s, the chain got into trouble opening new restaurants at a breakneck pace. Some offerings, like the Arch Deluxe, famously flopped. Service suffered, sales slumped and McDonald's then-CEO, the late Jim Cantalupo, vowed in 2003 that the company would "do fewer things and do them better."
Over the last three years, the company discovered that items consumed between traditional meal times, such as snack wraps, have become the fastest-growing part of McDonald's business. To capture more grazers, McDonald's began keeping its doors open longer. Today, about 37% of U.S. McDonald's operate around the clock and nearly all open earlier and close later than in previous years.
For customers who wanted an early morning coffee or a late-night snack, "It used to be that convenience stores were the only option," Ms. Fields says.
Being open 24/7, though, means higher staffing costs—and doesn't make sense for every store. The Crawfords learned this the hard way. They tried the all-hours approach at one location in a depressed area of Augusta, but "the labor was killing us," Dee Crawford says. "The business just wasn't there."
Mother Dee, 67 years old, bought her first McDonald's in Beaufort, S.C., in 1987, before adding four more to her empire. She's in the process of handing them all over to Christine, 38, who joined the family business in 2003. Since then, the Crawfords, like other franchisees, have needed to adapt considerably.
When Dee Crawford bought her second McDonald's, on Walton Way in downtown Augusta, Ga., in 1990, it offered so few products that she tallied inventory by hand. She had a one-lane drive-through and chicken sandwiches hadn't yet hit the menu. When she needed to restock, she ran out back to an outdoor freezer.
At the company's urging, she rebuilt the restaurant in 2007. Now, a two-lane drive-through funnels cars from a busy street past a menu board splashed with photos of salads, coffee drinks topped with whipped cream and snack wraps. The old exterior, with its red mansard roof and white walls, was replaced with a modern flat roof and stucco facade.
Sleek flat-screen televisions now hang from the walls and people linger with laptops, thanks to free Wi-Fi. Unlike the old days, a corporate distribution center handles inventory and two or three truckloads of food are delivered to each of the Crawfords' stores weekly.
With extra chores and more customers to serve, some of the Crawfords' restaurants now have as many as 18 staffers during peak hours—almost double the work force of a few years ago.
The Walton Way store was rebuilt specifically with the McCafé drink station in mind—one of the biggest and most expensive changes McDonald's franchisees have had to make in recent years. Located between the pick-up window of the drive-through and the inside counter, the space is equipped with a coffee brewer, a blended-ice machine, a specialty coffee machine and a tea brewer.
"There was a time when McDonald's coffee was considered the best, but somewhere along the way we lost our way on it," Ms. Fields says. "We didn't pay attention to details like temperature, packaging and freshness. We noticed a significant decline in our coffee sales while customer demand for coffee was going up."
Once McDonald's improved its drip coffee and saw sales react, it decided to branch out into specialty coffee drinks. Some franchisees balked, partly because of the price tag. The stations cost roughly $100,000 to install, with McDonald's covering only about $30,000 of the total expense.
The Crawfords placed McCafés in each of their five restaurants and figure it will take two to three years before they recoup their investment. In the mornings, a dedicated staffer mans the McCafé station.
Initially, Dee Crawford worried that fancy coffee drinks wouldn't go over well with her clientele. "Just the pronunciation of frappes and lattes was new," she says. "I thought customers might be intimidated."
She was encouraged by a visit to a McDonald's in Columbia, S.C., with similar demographics—lower-income and predominantly African-American—where customers were embracing the new drinks. When her own stores began selling them, she introduced them by offering free samples at community events.
This past summer, when McDonald's told franchisees to start selling berry smoothies, the Crawfords and other local franchisees paid the city of Augusta to have downtown water fountains churn out fuschia-hued water to coincide with the introduction of the new products.
Ms. Fields says the company tries not to stray too far afield with new items. In 2005, McDonald's halted testing of Oven Selects submarine sandwiches, partly because they took too long to make, partly because "market data told us that it's not a product customers recognize McDonald's for," Ms. Fields says. "We tried pizza at one time but people didn't recognize us for pizza, either."
Company executives decide how to alter menus based on changing consumer desires and areas where it suspects it may be missing opportunities, Ms. Fields says. Several years ago, the company noticed that a lot of drive-through customers already had drinks when they arrived. Limited choices and outdated packaging were among the reasons people weren't purchasing McDonald's beverages with their meals, McDonald's discovered.
"We said, 'We need to get more contemporary with our beverages and not just have Coke, Diet Coke and Sprite,"' Ms. Fields says.
A franchisee in the South saw how customers were going to a competing chain offering sweet tea. So McDonald's began testing its own version regionally. It became so popular that it's now offered nationwide.
Rising demand for healthier products prompted McDonald's to create fruit smoothies. Consumers' busy work schedules, longer commute times and a craving for convenience persuaded the chain to create more products that can easily be consumed on the go and at nontraditional meal times.
Some new items are made by re-purposing existing ingredients. Chicken snack wraps feature the same chicken tenders that make up a Chicken Selects meal of white meat chicken pieces. The chicken is then wrapped in the same tortillas used to make breakfast burritos. The multi-use strategy makes preparation simpler and reduces costs, McDonald's says.
To keep up with all the menu iterations, the Crawfords have still needed to increase staffing and open hours: one of their locations is still open around the clock, seven days a week.
Sometimes, all the changes—from the food to the imagery—can leave customers befuddled. The Crawfords recently removed window posters that touted a national Monopoly promotion and a sweet potato pie offered only in the South. The two messages, says Christine Crawford, seemed to clash and came off as confusing. " At a certain point it becomes white noise," she says.
Write to Julie Jargon at julie.jargon@wsj.com


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Behind Firm's Default: Vietnam's Growth Mania

HANOI—State-owned shipbuilder Vinashin's default on a $600 million loan late last week is just the latest crisis challenging Communist-run Vietnam's ability to get its economy under control after years of pell-mell growth and spiraling inflation.
The company, officially named Vietnam Shipbuilding Industry Group, failed to make a $60 million initial repayment on the syndicated loan to international lenders, saying it will make only interest payments, says a person familiar with the matter. The company has agreed to meet with creditors in mid-January to discuss repaying the loan, although some lenders privately have said they are uncertain whether Vinashin has sufficient resources to do so.
In defaulting on the debt, Vinashin has added to a catalog of problems afflicting Vietnam, once one of the world's hottest emerging markets.
Over the past decade, the country's economy has expanded from crater-pocked rice paddies to erect gleaming new factories and towering skyscrapers, prompting development economists to extol the country as a model for other frontier markets. On the narrow streets of Hanoi, Rolls-Royce and Bentley cars now compete for space with rickshaws and motor-scooters.
In the past few weeks, the cost of Vietnam's poorly policed transformation has become alarmingly clear, offering food for thought for investors seeking rising returns elsewhere on the frontier-markets map. Economists say the country's worsening problems, and the impact they could have on its dwindling currency, might also worry textile and agricultural producers in countries like Thailand and Indonesia which compete with Vietnam in those sectors.
Inflation is soaring, reaching 11.75% year-to-year in December, while Moody's Investors Service, Standard & Poor's and Fitch Ratings have all downgraded Vietnam's credit ratings because of its relentless focus on pumping up growth in the past six months. The government, meanwhile, appears set to continue its rolling devaluations of Vietnam's dong currency while ordinary people scramble to stock up on U.S. dollars or gold. Since mid-2008, the dong has lost around a fifth of its value as Vietnam floods the banking system with money.
Vinashin's escalating debt problems are a fresh flash point, threatening to further raise the government's borrowing costs overseas just when it hopes to raise funds to improve the economy's creaking infrastructure.
Vinashin borrowed aggressively with the encouragement of the government in the hope of becoming a global player in the shipbuilding industry. It was part of a government-directed plan to keep large chunks of the Vietnamese economy under state control. But this summer Vinashin nearly collapsed with $4.4 billion in debts, leading to the arrest of top executives for allegedly mismanaging the firm, one of Vietnam's biggest employers. The outcry was sufficient to prompt Prime Minister Nguyen Tan Dung to acknowledge his own mistakes in failing to properly supervise Vinashin, which internal government documents describe as "out of control."
Some analysts see Vinashin's default as potentially a make-or-break moment for Vietnam. By choosing not to bail out the company, says Kevin Grice, an economist with London-based Capital Economics, Vietnam's government is sending a message to other large state-owned enterprises to put their own houses in order and to root out the inefficiency that plagues the state sector here.
"By not standing unilaterally behind Vinashin, the government is reducing the issue of moral hazard in Vietnam and it is also ensuring that investors will become more selective," he says.
But he and other analysts caution it will work only if Hanoi toughens the way it supervises the state sector, which constitutes about a third of the economy and diverts resources from more efficient private firms. Vietnam also needs to move quickly to curb inflation and wean itself off its long-standing emphasis on promoting rapid growth whatever the cost. "The longer they delay reform, the worse it will be when the markets force them to do it, but old habits die hard," Mr. Grice says.
Prospects for a wholesale shake-up seem dim. Ju Wang, a credit-markets strategist with UBS AG in Singapore, says reducing the moral hazard might be on the government's mind, but so too might be Vietnam's paltry foreign reserves. The $14 billion the International Monetary Fund reported Vietnam as having at the end of September is "barely enough to cover short-term debt of around $6 billion to $7 billion and a wide trade deficit of $12 billion" that the government projects for this year, the strategist says.
Vietnam has a chance to change course and adopt a more prudent growth trajectory at the Communist Party's Congress which begins Jan. 11. The meeting will select a new party chief and also recommend a new president of the country's rubber-stamp legislature while determining whether the key figure, the premier, Mr. Dung, keeps his job for a second, five-year term. The meeting will also set the country's economic-policy direction for the next five years.The World Bank and the International Monetary Fund, among others, are urging the country's leadership to put the brakes on rapid economic growth and focus instead on curbing inflation and buttressing the dong, which has also been taking a beating in recent weeks with the black-market rate for dollars sometimes reaching 21,500 dong compared with Friday's official rate of 18,498 dong—a premium of around 15%.
But people familiar with the party's policy discussions, say the country's top rulers are unwilling to make a break from their high-growth policies. "The changes at the top—if there are any—won't mean a thing if the policies remain the same," says a person with knowledge of the deliberations.Some outsiders, meanwhile, say they are fascinated by the way Vietnam's economic planners have had numerous opportunities to learn from the experiences of other developing economies and avoid their current problems. In Asia during the 1980s and 1990s, for instance, many countries ramped up growth rates and flooded their economies with easy credit only to trigger a financial crisis that swept the region in the late 1990s and forced the restructuring of scores of state-backed conglomerates. Vietnam has taken much the same approach, with the central bank estimating credit will expand 28% this year from 2009, according to the central bank.
"It seems that countries have to learn from their own mistakes, not those of others," Capital Economics' Mr. Grice says.
Carlyle Thayer, a professor at the University of New South Wales at the Australian Defence Force Academy and a veteran Vietnam observer, says he expects very little substantive change to emerge from the congress and perhaps even less debate. A crackdown on dissidents and bloggers in the lead-up to the event, which is held every five years, has stifled the atmosphere in what is already one of the world's most repressive countries, he says.
"The best intellectual talent in this country is pulling out its hair at the moment," says Mr. Thayer, who says there was greater momentum toward reform at the previous congress in 2006. "People were openly asking the party for change then. None of that's happening now," he says. Economists say part of the problem is that the party promotes officials based on their ability to hit growth targets, fill quotas and complete five-year plans. Often they hit these targets with little regard for the inflationary consequences or the spread of corruption that many analysts say is endemic here.
"Growth is the only thing the party understands, so that's what everybody chases," says a government official who asked to remain anonymous. "Nothing will change until a new generation of leaders comes in, and that's not going to happen yet."There are some Vietnamese analysts who think the government is heading in the right direction. Independent analyst Kien Thanh Bui worries that tightening monetary policy as the IMF suggests could stall growth in the private sector while doing little to arrest the problems in the state-owned enterprises. He reckons cracking down on corruption would do more to help relieve inflation because graft pushes up costs at every stage of the supply chain in Vietnam.
Other Vietnamese analysts are more pessimistic, especially as the government has only nudged up its benchmark interest rate, to 9% from 8%, since November 2009, despite a rapid uptick in inflation.
"The government people are talking about targeting inflation to some extent, but their target is 7%, which is the same target they had for this year," says Nguyen Quang A, who headed Vietnam's only independent think tank before its founders closed it under pressure from the Communist Party. "The pro-growth fixation here is a kind of mania," he says. "Vietnam is dancing on a razor blade."

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The Risk to Vietnamese Growth

Vietnam has been an occasional darling of international investors, and right now the on-again-off-again romance appears to be back on again. Sustaining that will be another matter, however. All is not well, as the country experiences an expanding credit bubble and suffers mounting inflation. This raises the danger that Hanoi could retreat from market reforms at the National Congress of the Communist Party set for January.
The "story" for international investors consists of high growth rates coupled with an entrepreneurial population. Foreign investment has flowed to utilities, manufacturing and real estate in the hopes of serving Vietnam's growing middle class. Foreign direct investment this year is $12.2 billion as the country slowly brings back investors it lost during the global financial crisis.
This growth story comes with caveats, however. The most obvious is inflation. Current estimates peg this year's price increase at nearly 9% year-over-year, after Vietnamese consumers recovered from inflation as high 27% in late 2008. The two largest cities, Hanoi and Ho Chi Minh City, have seen prices increase by 1% for the month of September alone.
The fundamental problem is that Hanoi has tried to use ultra-cheap bank credit to fuel growth, a strategy that has sparked inflation. The State Bank of Vietnam has kept real interest rates in negative territory by setting the refinancing rate at 8% and discount rate at 6%. Meanwhile, new credit amounted to 37% of GDP in 2007, 20% in 2008 and 35% last year. The government aims to expand credit by another 25% of GDP this year in an effort to fuel growth.
Liberalization has not been rapid enough to create profitable new uses for that cash. Instead, much of the money goes to large, inefficient state-owned enterprises. Small business owners have long complained about being unable to procure loans from Vietnamese commercial banks. Banks have instead been extending large amounts of credit to the likes of Vinashin, the near-bankrupt ship-building conglomerate and one of Vietnam's largest state-owned enterprises. The company carries an estimated $4.7 billion in debt and is the single largest debtor for many Vietnamese banks.

One consequence of this credit-expansion policy is that since all the new money is not funding productive investments, it is generating rapid inflation instead. Another result is that banks have left themselves exposed to huge write-downs once Vinashin's total bill comes due. When Fitch downgraded Vietnam's credit rating from BB- to B+ in July, it noted that if Vietnam's banks used international accounting standards, nonperforming loans would be three to five times higher than what is reported under Vietnam's standards. The Government Inspection Office last week discovered that five commercial banks had violated procedures by granting short-term loans they should not have.
To make matters worse, there is also the lurking danger of a balance of payments crisis. Last month, the International Monetary Fund reported that Vietnam's foreign currency reserves for the first half of the year had fallen to only seven weeks worth of imports, below the three-month guideline recommended to avert a balance of payments crisis.
Large amounts of foreign currency from international trade and overseas remittances do flow into Vietnam's economy, but a large, unknown amount does not end up in the banking system. Vietnamese business owners who survived through times of war, famine and hyperinflation have become accustomed to holding onto dollars and gold rather than the volatile dong. It is unlikely that sentiment on the dong will pick up enough to shift behavior away from hoarding dollars to selling dollars to banks.
The central bank is not blind to all these dangers. State Bank of Vietnam Governor Nguyen Van Giau has tried to rein in inflation by tightening monetary policy. This month he raised the required capital-adequacy ratio to 9% from 8% in an attempt to force banks to hold more cash on their balance sheets instead of lending.
But here politics comes into play, and particularly the jostling for position ahead of January's Congress. The politically connected managers who run Vietnam's large state-owned enterprises hold considerable sway in the upcoming Congress, so ambitious party officials ignore demands for cheap credit at their own peril. As a result, no sooner had Mr. Giau raised the capital ratio than other government officials pressed the central bank to further lower lending rates, effectively negating the tightening. Mr. Giau will likely not have a free hand to tame inflation until after January.
Instead, it is starting to look like party officials increasingly attribute all these worries not to their own economic mismanagement and failure to implement deeper reforms, but to the reforms they have already made. One sign is that the government has resorted to old-style price controls rather than market-based mechanisms like interest-rate adjustments to try to bring inflation under control.
That is the worst possible outcome. Vietnam needs more market-oriented reform, not less, to create productive outlets for longer-term capital investment. That includes giving banks greater scope to lend to small, entrepreneurial companies. It also means avoiding measures like price controls that deter long-term foreign investors while encouraging short-term speculators who bet mainly on policy moves rather than long-term growth.
Prime Minister Nguyen Tan Dung had been considered a market reformer, but it is becoming clear that command-and-control habits die hard. Investors will watch January's Congress closely to see whether Hanoi still understands that liberalization is the path to growth, or whether Vietnam retreats back to its old ways.
Mr. Phan is an economic research analyst in New York.

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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

Google vs. Facebook on Places

Google Inc. has warily watched the rise of social-networking site Facebook Inc. Now the Internet companies are bringing their rivalry to a new area: the race for local business-ad dollars.

On Wednesday, Facebook announced an initiative called Facebook Places, which allows its users to share their physical locations online. It paves the way for the start-up to become a player in the growing Web business of supplying local information and advertising. 

 

The rollout of Facebook Places follows the launch of Google Places in April. Google Places, building on prior Google business listings, offers up Web pages dedicated to individual businesses, showing where they are located, street-level images, and customer reviews of services or products, be it Joe's Pizza or the dry cleaner. Businesses can also advertise through their Google Place pages.
With these services, both Google and Facebook are attempting to organize and provide information about any location, including schools, parks, and tens of millions of local businesses. And both want businesses to advertise online and potentially target ads in real-time to users of mobile devices, right where they are.

The launch of Facebook Places ratchets up the competition between Google and Facebook. Google, which thrived by selling relevant ads alongside its Internet-search results, faces challenges from Facebook as more Web users could rely on their Facebook friends—not just Google—to discover content or available products. Much of the content generated by Facebook's 500 million users is also invisible to Google's search engine.
Google has been scrambling to develop a social-networking-type service to rival Facebook's, people familiar with the matter have said.
Now they are both after local-ad dollars. So far, only a fraction of local businesses advertise online. But in an interview Wednesday, Facebook Chief Executive Mark Zuckerberg called the local market a "big space."

Overall, small and medium-sized businesses with 100 or fewer employees spent $35 billion to $40 billion in all forms of local advertising in the U.S. in 2009, estimates BIA/Kelsey, a local-media advisory firm. Matthew Booth, a senior vice president at BIA/Kelsey, estimates that about 1.2 million small businesses in the U.S. already pay Google to appear in text ads alongside Internet search results.

Jason Schneider

Mr. Zuckerberg said Facebook and Google "will compete a little bit."
Google struck a polite tone about Facebook Places. "We always welcome additional tools that help put people in touch with information about the world around them," said John Hanke, a Google vice president of product management.
Google and Facebook aren't the only ones fixated on places. Twitter Inc., the microblogging service, earlier this year launched Twitter Places, which allows users to broadcast, or "tweet," their location, including at businesses, to followers of their messages. Over time, the company is expected to try to line up local businesses to offer deals to users in connection with the feature.
Google last September began creating Place pages for millions of public places, including businesses. Businesses that contact Google can lay claim to a Place page, gaining more control over the content on the page. They also can see the origin of Google users who visit their page and sign up to advertise their services to users of Google's search and maps.
Google, which for years has been amassing business listings, says more than four million businesses have a Place page and "thousands" have paid to have their listing highlighted in search queries and maps for about $1 a day, according to Mr. Hanke. He added that about 20% of Google search queries focused on local places. More than 10 billion search queries were executed through Google last month, according to comScore Inc.

Now Facebook is asking businesses to create a Place page on its site and is encouraging them to advertise their products to users. In addition, Facebook is letting users "check in" at public places using their mobile phones, which can pinpoint their location through GPS and other means. Checking in allows people to notify friends in their social network that they are at a bar, for example.
A host of companies have built mobile-device applications centered around the check-in concept, including Foursquare Labs Inc. and Booyah Inc. For instance, users of Booyah's popular iPhone check-in game, MyTown, are able to check in almost anywhere. The applications sometimes show their users ads from local businesses based on their location.

Google lets app makers such as Booyah tap into its database of 50 million places around the world. Booyah is using that Google data to expand MyTown into foreign countries. At the same time, Google is starting to serve MyTown users with offers from local businesses, said Booyah CEO Keith Lee.
Following suit, Facebook aims to amass a database of local businesses and give app developers access to that data.
Booyah has already jumped in: When Facebook told Booyah about its forthcoming Places product three weeks ago, the company built a new iPhone check-in game, InCrowd, in time for the launch on Wednesday.
Write to Amir Efrati at amir.efrati@wsj.com
 

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