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					I N S P I R A T I O N : Is there a genius loci? p. 12

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                                                                                                                             Umba                       23 ]
                                                                                                                                       r ab Seite
                                           3
                             g 2 Ausgabe                                                                                      [k Dossie
                     Jahrgan
                              2005
                      Oktober


                               oße
                         Der gr
                                      ren Sie
                           Strukturie die
                                     r
                           um, bevo richt!
                                  ausb
                            Krise




                                                                                                C. Gilson
                                                                                       Stuart




                                                                  diger
                                               1       WTO-Vertei rland
                                                       Peter Suthe

                                                              -Skeptiker                                                                                   3
                                                   2       MBA         berg
                                                                 Mintz
                                                           Henry
                                                                           ter                                     2
                                                                 e-Lehrmeis
                                                       3    Chang
                                                                                 1




Volume 2 Issue3
November 2005                                                                                                                                                                         The executive magazine by Roland Berger Strategy Consultants


 Tales of
 Conversio n
  Restructure                                                                                                                                                  [ k Dossier, p. 23 ]
  before the
  crisis comes




                                                                                                                                                    1




                                                                                                                                                                                                                        3


   1   WTO defender
       Peter Sutherland

   2   MBA skeptic
       Henry Mintzberg

   3   Change master
       Stuart C. Gilson

                                                                                                                                                         2
SAO PAULO OFFICES, ROLAND BERGER STRATEGY CONSULTANTS S/C LTDA.
Av. Presidente Juscelino Kubitschek 510, 04543-906 São Paulo (Itaim Bibi), Brazil,
Phone: +55 11 3046-7111 Fax: +55 11 3046-7222, E-Mail: office_sao-paulo@rolandberger.com
think: act   The executive magazine by roland berger strategy consultants   Volume 2   november 2005   first views f




                   The results of our studies are alarming: Two-
                   thirds of all managers of companies approaching a crisis
                   ignore all the symptoms of the demise until it is almost
                   too late, rather than using this opportunity to implement
                   a strategic and sustainable reorientation. This edition’s
                   dossier on corporate restructuring shows that there are
                   better ways of handling the situation. Our contributions
                   demonstrate how complex, but also how worthwhile,
                   strategic restructuring is.

                   For the purpose of compiling this dossier, our restructur-
                   ing experts together with the business newspaper
                   Financial Times Deutschland researched success stories,
                   elaborated case studies and spoke to practitioners,
                   investors, professors and other experts. This kind of
                   cooperation between classic journalism and a corporate
                   magazine is a novelty.

                   Whatever challenges may be ahead—in the end, it is the
                   ability to lead which decides over success or failure.
                   Sports are one good way of advancing an individual’s
                   personality and his or her ability to lead people. For this
                   reason, we asked Jesper Bank, skipper of the first
                   German America’s Cup yacht, to give us an insight into
                   his leadership philosophy. His reply is to be read exclu-
                   sively in this edition.

                   I wish you an inspiring read.

                   Sincerely,




                   Dr. Burkhard Schwenker
                   CEO Roland Berger Strategy Consultants




                                                                                                                   3
p contents




     Security is the biggest topic of this decade—and the need for security is an   Health-care systems face enormous challenges. How can a high level
     enormous opportunity for companies. Insights into and statistics on a          of care be guaranteed and financed? Thomas Aretz, an expert in the field,
     nontransparent market. Page 6                                                  explains best practices from around the globe. Page 44




     Old Europe can learn a few things from the European Union’s new                The garage is a legendary home of groundbreaking innovation.
     member states, argues Polish economist Jacek Socha. He sees his country        Why are people particularly creative in certain places? And can the
     taking the right path, despite high levels of unemployment. Page 8             inspiration provided by special places be managed? Page 12




4
                                                                                                                              contents f




food for thought                             dossier                                           business culture
                                             in cooperation with Financial Times Deutschland


 6 The business of security                  24 Taming wild mustangs                           48 A silent boat is best
   In an age of global threats, security        It’s all about leadership—how                     Sailing requires split-second deci-
   is much in demand. Insights into a           successful managers change their                  sions and strategic thinking.
   complex market.                              companies.                                        What the America’s Cup can
                                                                                                  teach executives.
 8 Bring on the investors!                   27 You snooze, you lose
   Poland is on the move. “We are               Two out of three companies start               52 A thing of the past?
   ambitious and hungry,” says                  restructuring too late,                           The MBA has had its day, says
   free marketeer Jacek Socha.                  according to a new survey.                        management guru Henry Mintzberg.
                                                                                                  Seán Meehan begs to differ.
12 “Eureka!” Not just for bathtubs...        30 Beyond chainsaw capitalism
   Why heading for the garage may               What makes a turnaround leader,                56 Inner-city talent pool
   be the best thing for people looking         by Harvard professor Stuart Gilson.               How one nonprofit uses market
   for a good idea.                                                                               techniques to lift young people
                                             32 Saved from the chopping block                     out of poverty.
20 The economics of happiness                   By the skin of their teeth—how a
   Brain research is showing what               construction company was rescued.              58 Against the law of the jungle
   makes people happy. Marketing is                                                               Peter Sutherland, first general
   taking it to the bank.                    36 The routine trap                                  director of the WTO, says free
                                                Businesses need standard practices,               trade’s best years are still to come.
                                                but these can turn into pitfalls.

                                             38 Money talks
                                                Financial investors are increasingly
                                                driving corporate restructuring;
                                                managements see an opportunity.

                                             industry report                                   regulars
                                             42 With steely resolve                             3 First views
                                                Entrepreneurs and state strategy               46 The shape of things to come
                                                are pushing China’s steel industry.            62 Service | Credits

                                             44 Learning from Singapore
                                                America’s health-care system is the
                                                world’s most expensive. Is it also
                                                the best?



   Dossier
   Restructuring: Why it’s never too early
   to start reorganizing the company.
   Starting on page 23



                                                                                                                                          5
p food for thought                       security


                                                                                                                                       Global market for security technology—entrance
                                                                                                                                       controls, video surveillance, et cetera—in 2004:



                                                                                                                                       €100 bn
                                                                                                                                       Source: Forrester




     The business of security
     Global risks and uncertainty are poisonous for economic activity. On the other hand, the need for
     security creates its own markets, which vary widely from country to country. For example, nine out
     of 10 American households have a smoke detector; the figure for Germany is fewer than one in 10.

    North America: falling criminality                                                                    Alarm systems: most common in the United States
    In the two decades to 2000, criminality in North America fell considerably, according to              The United States has the highest percentage of private households equipped
    global statistics compiled by the United Nations. Europe, by contrast, showed a moderate              with an alarm system. In Germany, only one home in every 200 has such a
    increase beginning in the 1980s.                                                                      system; in France, roughly one in every 20.




                                                                                                                                                                                      )))
                                                                                                                                                                                                15,5 %
    10 000                                                                                                                                                                                      United
                                                                                                                                                                                                States
     9000
     8000
                         North America
                                                                                                                            4,5 %
                                                                                                                            France


                                                                                                                                                                   ) ))
                                                                                                                                                                                    )
                                                                                                                           )                                   )))
     7000


                                                                                                                            )))) ) )
     6000
                                 European Union
                                                                                                                                               )           )
                                                                                                                                           )))
     5000
                                                                                                               0,5 %
                                                                                                                                       )))
     4000                                                                                                    Germany      ))
                                                                                                                                       )))) ) ) ) ) ) )
                    Worldwide
     3000                                                                                                                                               6,8 %
                                          Latin America and Caribbean                                                                                                 United Kingdom
     2000
     1000
                                                                                                          Source: German Association of Security System Manufacturers and Installers (BHE)
         0
                                                                                                00
               80

                       82

                                84

                                       86

                                               88

                                                       90

                                                                92

                                                                          94

                                                                                 96

                                                                                        98

                                                                                              20
             19

                     19

                              19

                                     19

                                             19

                                                     19

                                                              19

                                                                        19

                                                                               19

                                                                                      19




     Number of reported crimes per 100 000 population. Source: United Nations Office on Drugs and Crime
                                                                                                          Smoke detectors: America leads
                                                                                                          Consumers in the United States are also more prepared to buy smoke detectors than
                                                                                                          their European counterparts. Nine out of 10 American households have installed a smoke
                                                                                                          sss detector. Within Europe, they are most common in the United Kingdom and Sweden.
     New trend: combining physical security
     with IT services                                                                                                       90 %
                                                                                                                                                               74 %
     Bundled technologies enable, for example, data to be
     collected at a border control and checked against a
     global database. Estimated size of the global market
     for combined systems:

                                                                                                          ss s     United States
                                                                                                          Source: BHE
                                                                                                                                                   United Kingdom
                                                                                                                                                                                        70 %




                                                                                                                                                                                   Sweden
                                                                                                                                                                                                 s
                                                                                                                                                                                                  9%

                                                                                                                                                                                               Germany




                                                                                                          The world’s largest security companies
                                                                                                          1. Securitas (Schweden) €6.4 bn annual sales
      2005                  2006                  2007                            2008                    2. G4S (United Kingdom) €4.5 bn
      1,2                   2,7                     6                           11,3                      3. Brinks (United States) €3.8 bn
      $ bn                  $ bn                  $ bn                            $ bn                    4. Prosegur (Spain) €1.4 bn
     Source: Forrester                                                                                    Source: Corporate reporting, internal research




6
                                                            turkey employs the largest number of security personnel                                                  food for thought f

                                     FR
                               1980 ANCE
                                   Com
                                      pani
                                          es

                                                                                 121 3
                                                                                      70     Emp
                              BE                                                                loye
                            140 LGIU                                                                es
                               Com
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                                    M                                                                                 3,552
                                      anie
                                          s                                                                           € bn sales
                                                18 0
                                                    00 E
                                                            580
                                                        mpl      € mn
                                                           oyee       sale
                                                               s          s
                    UNIT
                        ED
                      2000 KINGD
                          Comp
                              anie
                                   OM
                                          s
                                                                 125 0
                                                                      00     Emplo
                                                                                  yees
                                                                                                                         2
                                                                                                                         € bn sales

                 SWITZERLAND                               410 € mn sales
                      340 Companies
                                               10 000 Employees
                                                                                                             les
                                                                                                         n sa
    IRELAND                                                                                       1€b
 306 Companies
                                154 € mn sales
                      11 000 Employees                                                             es
                                                                                                oye
                                                                                             mpl
                                                                                         80 E
                                                                                     25 3                            4
                                    LY                                                                               € bn sales
                                 ITAnies
                                  mpa                                          les
                              0 Co                                         n sa                                                                                                         302
                           135                                           €m
                                                                 570                                                                                            909
                                                                                                                                                                                        € mn sales
                                                                   s
                                                                yee                                                                                             € mn sales
                                    AL                       plo
                                                           Em
                                UG s                 000
                              RT mpanie           26
                            PO o C
                              81
Country and
number of


                                                                                                                                 s
                                                                                    s

                                                                                                                               le
security firms                                                                    ee
                                                                                oy
                                                                              pl                                             sa
                                                                                                                          bn
                                                                            Em




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                                                                                                                                                                                          Employees
                                                                                                                       7€

                                                                      00
                                                                    10




                                                                                                                                                                           ns
                                                                                                                     36




                                                                                                                                                                                          68 700
                                                                  17




                                                                                                                                                                    110 € m
                                                                                                                   2,




             Sales in €

Employees
                                                                                         s




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                                                                                                                                                                                                    3514 Companies
                                                                  om PA
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                                                                                                                                                                                          HUNGARY
                                                                0C S




                                                                                                                                                             yees
                                                                                                                                                        Emplo
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Guard and
                                                                                                                                                          00




security services
                                                                                                                                                     175 0
                                                                                                            ies
                                                                                                       om D
                                                                                                         pan
                                                                                                    0 C AN




Job machine in Turkey and Poland
                                                                                                 350 OL
                                                                                                    P




In Spain a smaller number of firms has more
                                                                                                                                     450 C RKEY
                                                                                                                                              nies




than twice the sales as in Italy. France offers a
                                                                                                                                          ompa




much larger market than the United Kingdom.                                                                                                                            Source: EU Commission 2005
                                                                                                                                   TU
p food for thought    inter view




                     “Poles are very ambitious and hungry. Our productivity is constantly rising.”
                     Jacek Socha
                           “europe has to rediscover the magic word—competition,” says jacek socha                                    food for thought f




Bring on the investors!
Few people know the economic situation in Eastern Europe better than Jacek Socha.
The high-profile free-market economist discusses the strengths of the Polish economy
and the aggressive approach of the East.


Mister Socha, last year, Poland attracted per      will understand what has to be done to become         41 years for Poland to catch up with the EU
capita foreign direct investment of €128,          more attractive to investors.                         average in terms of wealth…
whereas Estonia drew €550. Is the Polish                                                                 I would not bet on these figures. It could easily
economy not nearly as competitive as its           Poland is not exactly a model country. Polish         take much less time for Poland to catch up
Baltic neighbor’s?                                 unemployment is currently well above the              than the World Bank expects. What counts
Don’t overestimate that figure. In Poland, our     EU average...                                         anyway is for our people to know that at some
human resources are strong, and we have a          True, but high unemployment rates can also            point, we will catch up.
higher percentage of university graduates than     be seen from another point of view as a compet-
most other European countries. And the Polish      itive advantage. We have well-educated people         In terms of management, Polish companies
people are ambitious and hungry. We know           in Poland who are willing to work for relatively      at present have a payment model that
that the new European Union membership is a        little money, who are willing to get additional       features low base wages and high levels of
tremendous opportunity for us.                     training and who take jobs that graduates in
                                                   other countries might not accept.
But why do other countries attract more
capital from abroad, especially investment         But surely those differences alone are just
from service-sector companies?                     not enough to make Poland more competi-
That was the case last year. If you look at the    tive in global markets.
longer term, on the other hand, you will find      Our productivity is continuously increasing.
that we are closer to the top. In the future,      Today, the Polish plumber is seen in France as
infrastructure will decide which Eastern           a symbol of the aggressiveness of our economy.
European country is the one that attracts the      Increasingly, there is little difference in the
most external capital.                             level of skill between Eastern and Western
I firmly believe that because of our new invest-   Europe. And our competitiveness will grow
ment program, Poland will be a preferred desti-    even more from the support we receive from the
nation for transnational investment over the       European Union. These funds amount to net
next several years.                                receipts of €60 billion per year from 2007 to 2013.
                                                                                                             JACEK SOCHA is one of the leading
Do the people in Eastern Europe countries          The EU is worried about the Polish public                 free-market thinkers in Central Europe.
understand the idea of competition between         deficit, though, and reducing social spend-               The former Polish Treasury Minister and
their countries?                                   ing would cause internal problems.                        head of the country’s Securities and
We are learning. The hard thing is to accept       That may be true, but it would also generate              Exchange Commission is a member of the
                                                                                                             Polish jury for the Roland Berger “Best of
that sometimes you lose. Not long ago, MAN         new jobs. Polish people see the opportunities for
                                                                                                             European Business” contest. An economist
announced that it would produce buses in           change, and this motivates them to accept the
                                                                                                             by training, he studied at the University of
Poland. But we lost Toyota to the Czech Repub-     necessary cuts.                                           Warsaw and the Capital Market Institute,
lic and Hyundai to Slovakia.                                                                                 which is attached to the United States
This is natural. The question is how fast          But for how long? The World Bank has                      Securities and Exchange Commission.
policy-makers can learn and how quickly they       estimated that on present trends it will take


                                                                                                                                                             9
p food for thought            wiill poland’s largest bank be privatized?




                                                                                                                            Between old heavy industry and the
                                                                                                                                   excitement of global brands:
                                                                                                                                the shipyards of Gdansk (right)
                                                                                                                             and shopping in downtown Warsaw



                                                        higher, and furthermore, investments in              And you said Polish people are hungry. Does
        EASTERN EUROPE is also a key                    Poland are safer. Of course over time we will        the West lack that hunger?
        area for the “Best of European Business”        certainly have more and stronger competitors.        Without a doubt. Every country needs to have
        contest being organized this year by            We simply have to become better at every             a clear target, an aspiration. We Poles are driv-
        Roland Berger Strategy Consultants and          aspect of doing business. I see it as a good thing   en by the desire to catch up with Western
        the Financial Times (see think: act             that at some point, Polish entrepreneurs will        Europe. We want to have bigger cars, visit far-
        2/2005). Juries in seven countries will be
                                                        also invest in Ukraine, for instance. Most           away countries and buy art. But what is the
        searching for European companies that
        have a strategic commitment to the              transnational investments are good for both          West driven by? At least some European coun-
        European Union’s new member states and          sides of the transaction.                            tries lack a clear model to strive for. That
        to Russia. In addition to the amount of                                                              decreases their competitiveness.
        investment and the share of Eastern Euro-       Even if the investors in question sometimes
        pean sales in the firms’ total revenues,        include hedge funds?                                 Clear criticism of Old Europe. Which model
        the juries will consider whether the compa-
                                                        Definitely. It is wrong to keep foreign money        of society should Eastern Europe follow—
        nies’ commitment to development in the
        East helps secure the core business in the      out of your country. During the Asian crises,        the Western European or the American one?
        home country. One essential assumption          some people in Poland wanted to limit invest-        Definitely the European one. That way of life
        of the entire contest is that the transnatio-   ment flows.                                          suits us. Polish people want a high level of secu-
        nal networking of European locations            Recently in Berlin, a group of bankers asked         rity. The American model would be too individ-
        increases the economic strength of the          me what I wanted to do in response to the            ualistic for us.
        continent as a whole.                           increasing importance of hedge funds. My             But there is one difference: Today, we are less
        European competitiveness is also the
                                                        answer was to do nothing. Let these funds            affluent. Hence, we cannot offer all that much
        focus of the final event on 1 December
        2005 in Brussels. At a gala the sponsors        invest if they want to. If you start with one kind   protection to the poorer people in our country.
        will crown the “Best of European Business”      of barrier, it quickly leads to another, and soon    They know that they have their own life in
        in three categories: “Best of Industry,”        there is no investment any more. Funds               their hands. This makes them more active
        “Best of Corporate Governance” and              increase the efficiency of individual companies      and motivated. And I personally would like
        “Europe’s Best Performer”.                      and the economy as a whole.                          Poland to keep this high level of motivation
        Later this autumn, think: act will devote
                                                                                                             for as long as possible.
        a special issue to the “Best of European
        Business” contest.                              Politically that’s certainly a progressive
                                                        approach. But what about the companies?              In many Western European countries, there
                                                        Can Western businesses learn something               is a basic debate about capitalism and glob-
                                                        from Eastern Europe?                                 alization. What about Poland?
                                                        There is no strictly Polish way of doing busi-       We don’t have that kind of discussion. We still
     incentive pay for regular workers. Is that a       ness. We still have a lot to learn. We have to       remember the reality of life under state social-
     model for the West?                                improve our corporate governance structures          ism. Capitalism is seen as a driver of change—
     Definitely yes. Performance-based pay is al-       and increase people’s mobility. Our companies        and the Polish people still want change.
     ways a better approach, also for companies in      still do not always manage to offer products         Globalization and capitalism are seen here
     the West. It makes employees more motivated.       that consumers really want. We have to take          as something natural.
     Europe as a whole has to rediscover the magic      the test and then pass the test.
     word in global business: competition.                                                                   Does that picture also include private
                                                        Does that mean sending an entire economy             investments in stocks—the often-mentioned
     However, average Polish wages today are            back to school?                                      shareholder culture?
     much higher than wages in Romania or               No, that approach would underestimate our            Private investments are increasing. Of all
     Bulgaria. Are you afraid Western companies         present state of development. In many compa-         investments on the Warsaw Stock Exchange,
     will stop investing in Poland altogether and       nies, Polish top managers have in recent years       25 percent are made by private individuals.
     move to the Europe’s southeast?                    taken over from the CEOs originally sent in by
     Not at all. Romanian wages might be lower,         the international investors. A lot has changed       But how many Poles really own shares?
     but our productivity and efficiency are clearly    here. We adapt very quickly.                         We have 800000 individual accounts today.


10
That may not sound very much, but the num-        What about Poland’s biggest bank, PKO BP,            And is there also a lesson for the new EU
ber is growing quickly.                           which was recently half privatized?                  members? Should you have made yourself
                                                  That will be my successor’s decision. I made         understood better by Old Europe?
Still, that’s not very many. Maybe a faster       sure that the bank would be attractive to the        We tried. But it is sometimes difficult to get the
pace for privatization of public companies        capital markets.                                     others to pay attention.
would help? The process of privatization
seems to be slowing down.                         Let’s take a brief look at the future of
We had a slowdown recently because the capi-      Europe. The European Union is in crisis
tal markets were weak—not only in Poland, but     right now. Can the new member states
worldwide. But since the middle of 2004, the      give it new momentum?                                    IS THE DYNAMISM WANING?
                                                                                                           The economies of Eastern Europe grew
privatization process has sped up again. We       I am sure that we can. Right now, the new
                                                                                                           faster than those in Western Europe in
now have to define which companies should be      members seem to have fallen under the radar              recent years, and the region remains an
kept by the government.                           in Old Europe. Maybe that has been a good                attractive site for investment: Toyota is
                                                  thing in the past, because otherwise we might            currently investing in the Czech Republic
And those would be?                               not have been accepted.                                  and MAN in Poland. However, uncertainty
I won’t name individual companies, but those      I think that in the referendums in France and            is on the rise. The World Bank is critical of
                                                                                                           the slow pace of reform in the new EU
that are important for national security should   the Netherlands, those who were against
                                                                                                           member countries. And growth has slowed.
not be traded on the stock market.                expansion were also the ones who voted against
                                                                                                           The Vienna Institute for International Eco-
                                                  the constitution. We have brought a new                  nomic Studies calculates that growth in
The national railroad?                            momentum to the EU that might frighten some              the region has declined by 2.5 percentage
Can be privatized, but the track must remain      people. There is definitely a lesson for Europe to       points and is now an annual 3.3 percent.
public, as must the power lines.                  learn in all of this.


                                                                                                                                                            11
                                                                                             where lightning strikes           food for thought f




Inspiration and retreat
“Genius loci” calls up the spirit of a place—the idea that locations can inspire those who come
prepared and open to possibility. How can a spot help make good decisions? Where have people
gone to develop economy-altering concepts and products?



:   When Hans Snook launched mobile
    communications provider Orange on the
UK market in April 1994, cell phones were
                                                 In ancient times, people believed that partic-
                                                 ular locations had a “genius loci,” a spirit of
                                                 the place. Today, similar questions remain:
                                                                                                   conditions, the immediate environment just
                                                                                                   might cause that one person to have that
                                                                                                   one brilliant insight.
widely considered expensive toys for tech-       What factors determine whether a place will       Although people have particular sensitivi-
nology geeks. A few months later, Snook          inspire astute reflection and sound deci-         ties and responses related to certain places,
gave the brand a face and turned his prod-       sions? Is it possible to influence an environ-    it is possible to observe some common traits.
uct into something everyone wanted to            ment so the muse will appear?                     Many innovators seek proximity to nature,
have. He created a tight, catchy slogan—         It is possible, says psychiatrist and writer      or as Connolly says, “They withdraw to the
“The future’s bright; the future’s orange”—      John Kao. He runs the Idea Factory in San         mountaintops.” Other refuges that foster
and thus conveyed that people who choose         Francisco, California, a company that organ-      innovation are simple garages or sheds—
Orange cell phones are an upbeat, opti-          izes creativity workshops. His credo is that      utterly unpretentious places whose creative
mistic bunch.                                    innovations are not just products emerging        vibe stimulates craft and genius.
Snook not only developed the image for his       from a sudden flash of genius; rather, they       The appeal of the shack out back is not limit-
mobile communications brand on his own,          are the result of long preparation. Ergo,         ed to entrepreneurs. Saxophonist Charlie
he also created a London headquarters that       innovation can be managed.                        Parker practiced in a woodshed behind his
reflects an environment conducive to think-      “To be creative, you need a ton of input,”        house for a year, and came blasting out with
ing. Snook even had a feng shui expert           agrees Terry Connolly, a behavioral               bebop, a new sound in jazz.
arrange desks and shelves. The result was        researcher at the University of Arizona in        Kao calls this type of retreat “going to the
lucrative for Orange’s parent company,           Tucson. The best place to get this kind of        woodshed.” This notion refers to looking for
Hutchison Whampoa, which made a profit           input is from other people. Where many            a place to tap information previously collect-
of €15 billion in 1999 when it sold the          people of diverse origins come together is a      ed and tucked away in the nether reaches of
mobile communications firm.                      place that will offer fertile ground to spawn     consciousness, without derailing the overall
Even in an interconnected world, business-       new ideas, says Connolly. Examples he cites       train of thought. As Kao says, “One needs
related innovation is often closely tied to a    include Berlin in the 1920s and present-day       stillness in order to sort everything out.”
specific place. Brilliant ideas and trailblaz-   Silicon Valley.                                   Stillness and proximity to nature are ele-
ing concepts do not come out of thin air;                                                          ments that sharpen our wits.
                                                      PROXIMITY TO NATURE,
they emerge from a certain environment.                                                            Being exposed to another culture may be
                                                                THE MAGIC OF SHEDS
For example, SAP founder Hasso Platner                                                             just as important. A new, expanded sense of
                                                        AND NEW CULTURAL INPUT
retreats to one of his racing sloops several                                                       understanding may be helpful in thinking
times a year just to think. Steve Jobs and       “Getting to the key idea that transforms          outside of conventional paradigms. One
Steve Wozniak soldered the first Macintosh       input into a tangible result requires a           business success story from the 1990s origi-
together in a garage. History is certainly       change in place to a space that makes room        nated from a trip and a smell. Howard
rife with examples of people whose outside-      for ideas,” says Connolly.                        Schultz, an aspiring American entrepreneur,
the-box decision-making happened in               “Meaningful innovation springs from an           traveled to Europe in 1983 and went to a cof-
seemingly odd locations. At first glance,        environment that sits off the usual beaten        fee shop in Milan, Italy. When he got a whiff
some of these places do not even seem like       path,” adds Kao. One should try to avoid dis-     of the ground coffee beans, he knew that
they are associated with changing the            rupting influences and shut down the ever-        this was something America needed. Schultz
course of human events.                          present flow of information. Under these          founded Starbucks on his return.


                                                                                                                                                    13
p food for thought              where lightning strikes




     [ Sony Walkman]
       MASS APPEAL FROM A PERSONAL WISH                                                                     Total sales for Sony         in trillions of Yen
                                                                                                               8




    1979
                                                          found Sony co-founder Masaru Ibuka on a
                                                                                                               7
                                                          long flight, yearning to listen to Bach and          6
                                                          Beethoven. When he returned, he had his              5
                                                          engineers design a portable cassette player.         4
                                                          They hit the drawing board, and soon Sony            3
                                                          was producing the fantastically popular              2
                                                                                                               1
                                                          Walkman. The company has sold 335 million
                                                          players and left its mark on global lifestyles.          80   85     90   95   00          05


     Source: Sony Corporation
                                                                               where lightning strikes                  food for thought f




                                                                [ Hewlett-Packard]
A WELLSPRING OF INNOVATION                                                        The biggest companies in Silicon Valley




1938
                             gave David Packard and William Hewlett their               Company            Sales (2004)
                             master’s degrees in electrical engineering                                    $ millions      growth in %
                             from Stanford University. Contrary to the                  Hewlett-Packard      81845.0           10
                             trend at the time, they did not move to the
                                                                                        Intel                34209.0           13
                             East Coast to pursue their profession.
                                                                                        Cisco Systems        23579.0           19
                             Instead, they started their own company in
                                                                                        Sanmina-SCI          12487.0           16
                             a garage in Palo Alto, launching Silicon Valley
                             as a center of innovation.                                 Solectron            11500.7           11


                                                                                                          Source: www.siliconvalley.com
p food for thought          where lightning strikes




     [ The US Prime Rate]
       THE MONEY MAN                                                                                  US Prime Rate                                    Percent
                                                                                                         7




    2005
                                                      still sees Alan Greenspan, who has served
                                                                                                         6
                                                      as chairman of the US Federal Reserve
                                                                                                         5
                                                      Board since 1987, starting every day by tak-
                                                                                                         4
                                                      ing an hour-long bath at 5:30 in the morning.
                                                                                                         3
                                                      Sitting in the tub, he makes key decisions         2
                                                      about the prime rate because, he says,             1
                                                      “That’s when my IQ is 20 percent higher.”          0
                                                                                                             1997   98   99   00   01   02   03   04    05


     Source: Federal Reserve System
                                                                      where lightning strikes                      food for thought f




                                                         [ 3M Post-it Notes]
THE ART OF INVENTION                                                    Profits                               Sales/Profits ($ millions)




1974
                       was the last year that chemical engineer         20000
                       Arthur “Art” Fry had to put up with book
                                                                        15000
                       marks falling out of his hymnal during choir
                       practice. This continuing annoyance led          10000
                       him to develop an adhesive strong enough
                                                                        5000
                       to attach paper, but weak enough to pull
                       up. Behold the Post-it, which to this day        0
                       symbolizes 3M’s innovative culture.                        1994   95   96   97   98   99   01   02    03   04


                                                                                                                             Source: 3M
p food for thought           where lightning strikes




     [ McDonald’s]
       GOLDEN ARCHES                                                                                   McDonald’s restaurants globally
                                                                                                       35000




     1954
                                                       brought Ray Kroc, a distributor of a five-
                                                       spindled milkshake machine, in as new           30000
                                                       boss of several locations of a burger joint     25000
                                                                                                       20000
                                                       originally set up by Richard and Maurice
                                                                                                       15000
                                                       McDonald. Kroc opened his first store in
                                                                                                       10000
                                                       Des Plaines, Illinois—the launch of an inter-
                                                                                                       5000
                                                       national group whose golden arches have         0
                                                       become landmarks in business history.                   1950   60   70   80   90   00   10


     Source: McDonald’s Corporation
                                                                    where lightning strikes                food for thought f




                                                                       [ Open source]
A NEW MARKET MODEL                                                     Linux                                     Sales/$ billions
                                                                         35




1993
                     saw a fateful encounter at the zoo in
                     Canberra, Australia. A penguin bit Linus            30
                     Torvalds . An unusual start for the computer        25
                                                                         20
                     operating system Linux. Three years later,
                                                                         15
                     Torvalds adopted the penguin as the logo for
                                                                         10
                     what has become the most successful open-
                                                                          5
                     source operating system in the world.                0
                                                                              2002   03   04   05     06    07      08      09


                                                                                                    Source: IDC Estimate (2004)
                                                                   brain research: happiness can be measured               food for thought f




Economics of happiness
Market researchers place consumers into magnetic resonance imaging (MRI) machines to study their
brains. By peeking into their heads, they are able to determine what really makes consumers happy.
Feelings are measured—with far-reaching consequences for both the economy and science.



:   The quest for happiness is not for those
    suffering from claustrophobia. The path-
to contentment leads into a tube just wide
                                                 Berkeley, Columbia, Harvard and Princeton
                                                 were the first to understand the potential of
                                                 this method. “Neuro-economy” is a new
                                                                                                 neuro-economics—strong brands apparently
                                                                                                 switch off our ability to reason completely.
                                                                                                 Brain scan tests of advertising effectiveness
enough to accommodate the human body,            branch of research that has the potential of    have demonstrated that the regions of the
with a bit of space on either side. The          turning old certainties on their heads. The     brain responsible for cognition relax when
atmosphereis sterile, and a steady rumble        goal: to explain economic activity with sci-    presented with strong brands, while the emo-
vibrates the skull while a magnetic field        entific precision. The hunch: Emotions          tional regions are stimulated.
many tens of thousands of times stronger         determine our economic behavior to a            The best-known example is the Pepsi test.
than that of Earth is created. Brand logos,      much greater extent than does reason. The       Why, asked economist Read Montague, does
images of sports cars, conventionally attrac-    most important emotion: happiness. The          Pepsi consistently taste better in blind tests,
tive human faces as well as human faces          seductive and compelling image of “Homo         even though the tasters swear by Coke? To
notso conventionally attractive—all are pro-     economicus,” who makes purchasing deci-         answer this question, Montague, a professor
jected for the test subjects to see. Their       sions according to rational criteria, is com-   of neuroscience at Baylor College of Medi-
brains process them and send out signals         ing under greater critical scrutiny than ever   cine in Texas, placed his test subjects in an
such as “Oh, yeah, I like that one.” The         before. Empirical economics researchers,        MRI machine. As expected, when given
three-tesla magnetic resonance imaging           such as Colin Camerer at the California         Pepsi, the reward centers lit up more
(MRI) machine used by the company Life &         Institute of Technology in Pasadena, have       strongly. But when the researchers dis-
Brain, headquartered in Bonn, Germany,           been complaining for some time that tradi-      closed the brand, brain activity switched
scans regions of the brain to the millimeter     tional economics has spent far too little       like lightning in favor of Coke. Montague’s
looking for the slightest impulses denoting      time delving into the emotions of con-          conclusion: “Apparently Coca- Cola is linked
happiness.                                       sumers.                                         with positive associations and feelings of
These are then displayed three-dimension-                                                        self-esteem. These feelings and associa-
                                                   RESEARCH USING BRAIN SCANS
ally in bright colors. The resulting image                                                       tions—not the taste—are the real value of
                                                          CONFIRMS THAT STRONG BRANDS
represents the biochemistry of happines.                                                         the brand.”Market strength as measurable
                                                      SWITCH OFF OUR REASON
Magnetic resonance imaging is a process for                                                      emotion—that is a big help in marketing. It
scanning the human body without X-rays. It       Neuro-economics refutes the image of deci-      gives market planning an entirely new basis
uses strong magnetic fields that cause the-      sion-making guided by reason, doing so          in scientific data.
hydrogen atoms in a material to align them-      using scientifically valid data, something
                                                                                                   DAIMLERCHRYSLER INTENDS
selves. This allows neuronal activity in the-    that classical market research was never
                                                                                                           TO USE BRAIN SCANS DIRECTLY
brain to be localized precisely. The left        able to accomplish with any consistency.
                                                                                                      IN PRODUCT DESIGN
frontal hemisphere of the brain reacts more      “Brain scans are more objective than tradi-
strongly to positive feelings; the right hemi-   tional methods of querying test subjects,       Clint Kilts is doing work in this area as well.
sphere reacts more strongly to negative          because there is no opportunity to question     Kilts, the Director of BrightHouse Institute
ones. The difference between the activity in     ulterior motives,” says neuro-economist         for Thought Sciences in Atlanta, is studying
both hemispheres becomes a measurement           Christian Poppe of Life & Brain.                the effects of products and brands. He
of the feeling of happiness. This testing        Marketers in particular are paying attention    can tell you precisely whether it is a Ferrari
method is now being used in the sciences as      to the new market research methods              or a Porsche that elicits stronger feelings
well. Interdisciplinary research teams at        because—according to the first postulate of     of happiness in Kilts’ subjects. Kilts is      ,

                                                                                                                                                    21
p food for thought                Is homo oeconomicus on the way out?




          JEREMY BENTHAM was born in the Spital-
       fields section of London in 1748. The son of a wealthy
          Tory family, he founded the philosophy of utilitaria-
       nism. He was considered a social reformer during his
            lifetime; however, in the 20th century the ethical
            aspects of his ideas have come under increasing
              criticism. The economics of happiness implies a
                            rebirth of such utilitarian thinking.




     certain that brain scans will soon be used as
     a matter of course in the corporate decision-
     making process.
     Several large companies such as Ford,
     General Motors and the British lottery com-
     pany Camelot are already placing their bets
     on neuro-economy. DaimlerChrysler, too, has
     tested which regions of the male brain are
     stimulated by images of racy sports cars and
     which regions respond to more serious four-
     door sedans. Another result of the Daimler-
     Chrysler research: Automobiles activate the
     same region of the male brain that reacts to
     human faces. Automakers might do well to
     style the fronts of their cars to look like beau-
     tiful models, perhaps something like a “Heidi                  Director of the Center for Economic Perfor-     business practices and increasing pressure
     Klum grille.” Based on the reactions to CAD                    mance at the London School of Economics—        to perform all have led to a comprehensive
     designs, activity in the left hemisphere will                  made happiness the central criterion of         loss of trust and contentment. At the busi-
     determine whether the shape of the roof will                   human decisionmaking and behavior in            ness level, Layard criticizes motivational
     look more like that of a coupé, whether the                    his book Happiness. In the book, he chal-       strategies in which companies consciously
     headlights will be designed to look aggres-                    lenges politicians and economists to work       attempt to create and/or heighten rivalries
     sive or whether the star in the radiator grille                toward a “happy society.”                       among co-workers in order to increase pro-
     will be larger. DaimlerChrysler now wants to                                                                   ductivity. Politicians also ignore such pre-
                                                                     ACCORDING TO THE ECONOMIST RICHARD LAYARD,
     patent this “method for optimizing and                                                                         sumably soft factors as happiness, trust and
                                                                    HAPPINESS MUST BECOME A FUNDAMENTAL
     determining product attractiveness or prod-                                                                    fairness, Layard criticizes.
                                                                    GOAL IN POLITICS AND ECONOMICS.
     uct acceptance.” With this application, happi-                                                                 Layard’s radical challenge is this: “We need
     ness research has long since left the area of                  Layard’s challenge, to make happiness ade-      a revolution in our governments. Happiness
     pure marketing. In addition to the neuro-sig-                  termining social value, proceeds from autili-   should become the primary goal of politics,
     nals that are stimulated by brands and radia-                  tarian perspective much like that developed     and growth in a ‘national life satisfaction
     tor grilles, DaimlerChrysler is looking into                   by the English philosopher JeremyBentham        index’ should be measured as precisely as
     the brain activity of drivers. The goal is to                  (1748–1832). According to this purely utili-    growth in the gross national product.” It is
     build safer automobiles. Neuropsychologists                    tarian philosophy, actions are only mean-       true that Layard’s critics point out that deci-
     specializing in investor behavior are among                    ingful when they ensure the greatest possi-     sions about central social issues—such as
     the most important experts on Daimler-                         ble happiness for the greatest possible num-    stem-cell research or assisted suicide—can-
     Chrysler’s research teams.                                     ber of people. However, according to            not be made simply by shoving selected test
     Neuro-economics is not only finding                            Layard, this is hardly the case in business     subjects into an MRI machine. However, the
     increasingly more practical economic appli-                    and politics today. On the contrary: People     British economist makes the point through-
     cations, but is also giving a new push to the                  feel increasingly alienated in our indus-       out his book that brain research can be a
     social sciences. For example, the British                      trialized world. Exaggerated individualism,     great help. “Happiness,” he says, “is an
     author Richard Layard—who is also the                          aggressive competition, questionable            objective dimension of our experience.”


22
                                                                1



                                                                2


            Dossier #04
                                                                3
                RESTRUCTURING
            SUCCESSFUL COMPANIES ARE CONSTANTLY REINVENTING
            THEMSELVES. THEY KNOW THAT RESTRUCTURING IS NOT
           A MATTER OF MAKING REPAIRS, BUT BEGINS LONG BEFORE
             A CRISIS IS ON THE HORIZON. EVERYTHING SHOULD BE   4
             QUESTIONED—AND EVERYONE SHOULD BE INVOLVED.




                                                                5



                                                                6



                                                                7



                                                                8

For every problem, there
is a solution that is neat,
simple—and wrong.                                               9
H.L. Mencken




                                                                0
DOSSIER #04 Restr ucturing




 n KARSTADTQUELLE
 Today’s capital market is rewarding
 KarstadtQuelle for focusing on its core
 activities. Its share price has increased
 substantially since the middle of May
 2005 when restructuring was in full
 swing. Over the course of the restructu-
 ring, 25,000 jobs have been slashed.




 309
 KarstadtQuelle
                                                        Taming wild mustangs
 stores were sold in a                                  RESTRUCTURING IS THE MAIN TOPIC OF INTEREST IN THIS ERA OF A GLOBALIZED ECONOMY. IT INVOLVES MORE
                                                        THAN JUST REORGANIZING AILING BUSINESS DIVISIONS. THE ONLY WAY FOR COMPANIES TO IMPROVE THEIR
 matter of just a few                                   ODDS OF SURVIVAL IS TO STREAMLINE OPERATIONS FOR CONTINUED GROWTH.
 weeks, completing
 the first phase of the
 firm’s restructuring                                   s       WITH ONE OF THE TOUGHEST management jobs in
                                                        United Kingdom, Martin George’s work is never easy,
                                                                                                                  United States and China. And Siemens is turning its
                                                                                                                  entire cell-phone sector over to a Taiwanese compa-
 program
                                                        even on a normal day. But in early August of this year,   ny. Regardless of the sector, firms everywhere are
                                                        he found himself in the hot seat. Recently appointed      being restructured, sold and purchased in part or in
                                                        to British Airways’ executive board, George had to face   whole, gutted, trimmed, and rebuilt all over again.
                                                        TV cameras in London’s Heathrow Airport. Appearing        There is no limit to the restructuring under way. In
                                                        contrite, he said, “I’ve heard so many heartbreaking      fact, the competition is so unrelenting that taboos no
                                                        stories from people whose travel plans we’ve ruined       longer exist. When asked about breaking up the-
                                                        today.” British Airways (BA) was grappling with an        Hoechst chemical group, the former Hoechst CEO and
                                                        operational and logistical nightmare resulting from       later ABB CEO Juergen Dormann only said, “I should-
                                                        the cancellation of 500 flights, as the entire world      have taken more radical measures.”
                                                        watched how Europe’s busiest airport descended into
                                                        chaos—right in the middle of Europe’s busiest travel              TAKING APART AND REORGANIZING companies
                                                        season. Incredibly, it was all because British Airways’   entails the creative destruction of entrenched busi-
                                                        caterer Gate Gourmet had laid off 350 employees to        ness processes and their subsequent re-invention.
                                                        get the company out of a long-term financial crisis       And it has never been easier—in principle anyway.
                                                        and in a show of sympathy, a thousand BA employees        Many company units are run as their own profit cen-
 »We have finally                                       also temporarily walked off the job.                      ters. New information technologies allow managers to
                                                                                                                  completely re-subdivide entire production processes.
 succeeded in                                                   RESTRUCTURING CAN HURT, sometimes quite a         Even global corporate groups can be reorganized in a
 putting this                                           bit, and the pain can radiate over a considerable dis-    relatively quick and straightforward manner. This
 business back on a                                     tance. That is one of the lessons of the Heathrow fias-   combination of factors provides a previously incon-
 predictable path«                                      co. The Gate Gourmet case also shows that the days        ceivable amount of leeway to generate creative busi-
 THOMAS MIDDELHOFF, CED                                 when companies can quietly reorganize are over. If        ness solutions. For example, computer veteran IBM
                                                        they do pursue reorganization, comparatively small        cutting loose its PC manufacturing would have been
 THE SHARE’S TREND                                      projects can cause unexpectedly major upheavals.          unheard of several years ago. Porsche, the automo-
     Closing price ( per share)per share)               After several years of globalization and brutal compe-    bile manufacturer, currently holds a world record in
     12                                                 tition, the nerves of many employees and their union      outsourcing. Its existence once threatened by a major
     11
                                                        representatives are shot. Of course, with the media       crisis, today’s most profitable automobile production
     10
     9
                                                        happy to seize on any conflict to provide a riveting      group itself manufactures only 10 percent of its
     8                                                  headline, discretion is out the window.                   Cayenne-model car.
     7
     6
           May       June      July    August   Sept.          DESPITE ALL the uncertainty, restructuring is              RESTRUCTURING HAS EVOLVED into a specialty
                                                2005    the top topic of a globalized economy. IBM sold its       skill that requires considerable expertise at the inter-
 Since mid-May 2005, KarstadtQuelle’s                   entire PC division to Lenovo. The department store        section of strategy development, operating business,
 share price has increased by almost                    giant KarstadtQuelle shed more than 300 stores,           and corporate finance. In addition to the participation
 one-third.
 Source: Onvista-Website                                more than 1 billion in annual sales, and a total of       of experienced executive boards, every major reor-
                                                        25,000 employees. Kodak is closing plants in the-         ganization experts skilled in the specialized disci-


24
                                                                                                              Changes often come too late DOSSIER #04




plines of auditing, financing, strategy development,      mum,and protect a large chunk of the loan.
taxation and corporate law. Where do CEOs fit in? They    Now,banks and insurance companies can no longer
have taken on the role of moderators, keeping every-      afford to oversee investments that stray too far from
one singing from the same score.                          their core businesses. If a bank also has to account
        Timing is increasingly important. Most compa-     for defaulted loans in the annual statements, it can
nies first begin restructuring programs when the          expect painful value adjustments, poor ratings, and
warning bells have long been ringing, only to find        high refinancing rates. No bank can stand those con-
themselves in a race against time again. For example,     ditions for very long.
Kodak got a late start in its restructuring efforts. At
present, the company is still compensating for the               NEW PLAYERS are shaking up the European
decline of its traditional business in film and pho-      market, encouraging the buying and selling of com-
todevelopment papers with growth in digital photog-       panies. Distressed-debt investors scour the market-
raphy and photo processing. Daniel A. Carp, the Kodak     for undervalued debt securities of troubled compa-
group’s chairman through December 2005, says, “A          nies in order to make money in the reorganization,
lot of people thought we should keep milking our tra-     restructuring, and subsequent loan repayment.
ditional business as long as possible. That would have    Japan and Germany are considered the hottest mar-             »We were not
been the death knell for sure.” He’s right. No investor   kets among the banking ecosystem’s “vulture                   tough enough on
these days would plan on sticking around while sales      investors.” Equipped with billion-euro funds, private         ourselves in the
nosedive. The search is on for new ideas about how        equity companies such as England-based Montague
the company can pare down in pursuit of growth.           and Permira acquire an entire troubled company or
                                                                                                                        first round.«
                                                                                                                        CARL-PETER FORSTER, Head of General Motors
Solutions may require remodeling internal structures,     individual company divisions. Even in this instance,          Europe, comments on the restructuring of the
                                                                                                                        long-suffering GM subsidiary, Opel. Forster is a
which thereby highlights the biggest difference           restructuring is still part of the business model.            former Opel CEO.
between contemporary restructuring management             Hedge funds and traditional investment funds apply
and plain old reorganization.                             more pressure on companies to produce. The drivers
                                                          thus become the driven, since even their financial
        THE NEW restructuring-focused economy is          backers demand a yield. “Have lunch or be lunch,” a
also making an impact on the job markets. In the first    catch-phrase among investment bankers, is
half of 2005, 870 restructuring projects in Europe will   especially apt now.
cut 360,000 jobs, while only re-creating 183,000
positions, according to information from companies                SO WHAT DO YOU DO if you are at the compa-
surveyed in a current Roland Berger study. It also        ny’shelm? The trite but true answer is stay out of
reveals that layoffs are the cornerstone for the          trouble in the first place. Many companies have
restructuring projects in 90 percent of all cases (see    improved their ability to detect hazards early, but it is
page 27). However, no available statistics indicate       still a rare company that implements restructuring
how many jobs remain that would have otherwise dis-       programs at the first sign of a pending crisis. Former
appeared. Ultimately, the study makes clear that          Siemens CEO Heinrich von Pierer, who got the indus-
restructuring is not simply management-level “busy-       trial giant back on its feet last year, likes to tell the
work”; rather, it is a necessary response to interna-     story about how a friend once pointed out to him that
tional competition.                                       the Siemens annual report used the term “price ero-
                                                          sion” 13 times. The friend asked if that term was
                                                                                                                        »Everyone had
       THE KEY DRIVER behind optimization is the cap-     meant as some type of an excuse. The comment was              to understand
ital market, which itself offers a spectacular view of    a wake-up call, as von Pierer says today, “I knew then        how serious the
restructuring processes. In the past, when a company      that I had to change our company.”                            situation was.«
got itself in a jam, it would work with its house bank            So how exactly are companies supposed to              JÜRGEN DORMANN, restructuring wizard at
                                                                                                                        Hoechst AG, talking about the pharmaceutical
to come up with a joint solution. The priorities were     change?Anyone planning on restructing should keep             group’s restructuring process.
don’t upset the apple cart, keep the fuss to a mini-      in mind the five factors for success, the general


                                                                                                                                                                           25
DOSSIER #04 Restr ucturing




 n EASTMAN KODAK
 The popularity of digital photography
 was a tough blow for Eastman Kodak.
 The company has intensified its
 restructuring efforts in recent years.




 $1.7         billion
 will have been spent                              tenets of which experts agree upon, despite their dif-
                                                   fering opinions about the details.
                                                                                                              measures are only possible if co-management are
                                                                                                              involved in the process.
 by Eastman Kodak
 on restructuring by                                      FIRST OF ALL, restructuring is a task for the              FIFTH AND LAST, heads up! A company that is
 the end of 2006.                                  afirm’s top leadership. Obviously, CEOs should have        solely in defensive mode will not have much of a long
                                                   effective crews at their side, but the direction, scope,   run future. Despite deep cuts into the overall organi-
                                                   and sense of timing need to come from the boss.            zation, and an unwavering focus on reducing costs,
                                                   CEOs should be motivated, convey perspectives, and         management should lay plans early on that identify
                                                   fully support changes. It’s all the more surprising then   the sources of future growth and how to best tap that
                                                   that in many companies, the first organizational           potential—all conveyed in simple, clear, easily
                                                   change consists of swapping out the CEO.                   expressed strategies. Nortel Networks CEO Bill Owens,
                                                                                                              a retired Navy admiral, summarizes his restructuring
                                                          SECOND, anyone who wants to reorganize a            program for the telecom company in a nutshell, “Cash,
                                                   company should do so thoroughly. Costs, strategy,          costs, and income—those are the priorities—period.”
                                                   financing, the operating business—the whole enter-         Each of the three factors is equally important to the
                                                   prise needs to come under scrutiny. Feasible and sus-      company’s renewal.
                                                   tainable plans need to be developed for all of a com-
                                                   pany’s sectors simultaneously. Carl-Peter Forster,                THE WORD “RESTRUCTURING” seems harmless
                                                   president of General Motors Europe and former head         enough, but scrape the surface, and it becomes quite
                                                   of the GM subsidiary Opel, readily admits that suffi-      complex. It requires negotiations with banks, suppli-
                                                   ciently radical measures were not taken during Opel’s      ers and shareholders. Experts will analyze the com-
 »Everybody thinks                                 weak years. As Forster says, “In the first round, we       pany, markets and competitors. Other specialists will
 we should first get a                             weren’t tough enough on ourselves.”                        clear up issues pertaining to the law, stock markets,
 handle on digital                                                                                            accounting, taxes and appraisals. Then there will be
 technology. They’ve                                      THIRD, timing is everything. The earlier restruc-   meetings with the press, employees and investors. All
 got it all wrong. We                              turing starts, the better. When liquidity drops, every     of these tasks will have be done as the clock ticks
                                                   day counts. Within four to 12 weeks, management            relentlessly toward a deadline, under the gaze of wor-
 are up to our eyeballs                            should have an understanding of the crisis’s origin,       ried investors, resentful employees and an increas-
 in technology.«                                   and a general idea regarding reorganization and            ingly critical public. When things get really intense,
 A N TONIO PE R E Z, C EO
                                                   restructuring. To be convinced, creditors and employ-      restructuring projects resemble taming wild mus-
 SALES GROWTH                                      ees need to believe that restructuring will result in      tangs. They are hard work, messy, tiring, sometimes-
                                                   success.                                                   frustrating, potentially risky and ultimately reward-
       Digitale products    Traditional products
                                                                                                              ing. One wonders why only a few universities and
 14 000
                                                          FOURTH, go deep. Employees from all organiza-       business schools teach restructuring management
 12 000
               9564         9156         8191
 10 000
                                                   organizational units and levels should participate.        as a course. People in the know believe that this
     8000                                          Depending on the tasks assigned, the integration of        shortcoming deserves to be remedied. Potential man-
     6000                                          key personnel in interdisciplinary project teams with-     agers need to be prepared for the harsh realities of
     4000                                          in restructuring makes perfect sense. Two absolutely       the dog-eat-dog business world and its conse-
     2000      2963         3736         5303      essential factors to consider are strict project man-      quences; besides, fair-weather skippers will not last
        0
               2002         2003         2004      agement and objective project auditing. Every phase        long at the helms of their companies.
 In recent years, Eastman Kodak’s total            of a turnaround incorporates conflicting interests,               Successful turnaround management is likely to
 sales grew by 3 percent to 5 percent and
 reached $13.5 billion. Growth primarily           since not everyone will agree on the direction and         ensure a long career. Those who have weathered a
 came from digital products, which saw a           scope of the transformation process.                       corporate crisis and brought the company back on
 42 percent increase in sales.
 Source: Eastman Kodak (figures in million of             A central factor for success among Western          course, while maintaining their credibility throughout
 dollars).
                                                   European companies is close cooperation with the           the ordeal, deserve the top jobs. Just ask Daimler-
                                                   works council. Properly handled, personnel-related         Chrysler CEO Dieter Zetsche.


26
                                                           Half of the firms restr ucturing do it after twelve months of crisis DOSSIER #04




You snooze, you lose
A EUROPE-WIDE STUDY CONDUCTED BY ROLAND BERGER STRATEGY CONSULTANTS CONFIRMS THAT COMPANIES THAT RESPOND QUICKLY TO
CRISIS WARNING SIGNALS WILL MANAGE RESTRUCTURING BETTER. HOWEVER, MOST ARE NOT REACTING QUICKLY ENOUGH.

       SIXTEEN MONTHS IS A very long time in       (6.7 months) are the fastest, while energy and      Western and Eastern Europe emerge in the pre-
business. That is still the average amount of      utility companies are on the slow end with an       ferred restructuring measures they use.
time European companies need in order to           average response time of 15.1 months. The           While Western Europe puts the emphasis on
react to a severe crisis and initiate restructu-   pharmaceutical, chemical, and petroleum             personnel cuts and reducing personnel costs,
ring measures. Only 52 percent of troubled         industries are also relatively slow. Among the      Eastern Europe tends to focus more on
companies are able to begin restructuring pro-     companies with an early warning system,             increasing sales.
grams within 12 months; in Germany, 64             those working with a balanced score card
percent are able to do so. A study titled          responded quickest (average reaction time:                 INTERESTINGLY, how companies best
“Restructuring in Europe,” just published by       11.2 months).                                       execute personnel layoffs follows a national
Roland Berger Strategy Consultants, describes                                                          trend. In most European countries, compa-
these results. Between 2003 and 2005,                      THE POINT IN TIME at which companies        nies see layoffs overall as an important tool.
Roland Berger surveyed the CEOs of 2600            initiate the turnaround is critical, according to   By comparison, Germany’s consensus-
companies from diverse sectors of industry         the survey. Twenty-nine percent of the Euro-        oriented companies utilize employee
and 13 different countries. The survey inclu-      pean companies (Germany: 32 percent) react          turnover and contract cancellation agree-
dedonly companies that had undertaken              once they encounter strategic problems, or the      ments as job-cutting reasons; actual termi-
restructuring programs at least once in the        early phase of a crisis. Fifty-four percent         nations are in fourth place right after partial
preceding three years.                             (Germany: 51 percent) get into reaction             retirement.
                                                   mode when financial results start to show
THE SURVEY       also reveals the crucial          poor signals, and 17 percent wait until immi-              FOR COMPANIES that require additional
importance of prompt response times. Fully         nent bankruptcy looms. In Eastern Europe, a         funds for their restructuring, internal financ-
three-quarters of the companies that               full 26 percent of the companies put off any        ing prevails across Europe as the most impor-
required one year or less to act in response       remedial actions until they are in a bona fide      tantsource for a fresh inflow of cash, fol-
to their crisis were satisfied with the subse-     emergency, and thereby give up much nego-           lowedby bank loans. Neither method really
quent restructuring. “Those who respond            tiating leeway. Apparently, this last result is     plays a noteworthy role for German compa-
quickly to a crisis often have enough time to      often due to a lack of expertise in crisis          nies, since 80 percent of them claim that
implement really creative solutions,” says         detection skills.                                   divestment is the best way to cover their
Michael Blatz, a Roland Berger partner based                                                           financing needs.
in Berlin.                                                COMPANIES THROUGHOUT Europe claimr-
                                                   that the most critical factor for a successful             TWO-THIRDS of the surveyed companies
      GENERALLY, Western European compa-           restructuring program is management’s com-          in Europe assumed they will require additional
companies respond significantly faster to cri-     mitment (61 percent of the respondents).            restructuring measures at some point in
ses than Eastern European companies; bigger        However, implementation did not score as            the next two years, and only 9 percent consi-
firms are also typically quicker on the draw       well; only 38 percent rated the execution of        dered their transformation as final. In other
than smaller ones. In a sector comparison,         this task as “very successful.” Fast imple-         words, restructuring is currently evolving
the retail trade (average response time: 5.3       mentation and an overarching approach are           from turnaround management to an ongoing,
months) and the consumer goods industry            also significant. Major differences between         creative task.




                                                                                                                                                         27
DOSSIER #04 Restr ucturing




       ABB: Transforming a corporate culture
       THE SWISS-SWEDISH GROUP WAS NOT FAR FROM CONSIGNMENT TO THE DUSTBIN OF HISTORY, HURT BY TOO-RAPID EXPANSION AND
       OVERALL INEFFICIENCY. THE FORMER CEO ALSO MISSED AN OPPORTUNITY TO IMPLEMENT RADICAL THERAPY FOR AILING ABB.

       CAUGHT IN A WEB: That’s where ABB was when Juergen Dormann, for-         turnaround, ABB is experiencing vigorous growth and for 2004, it is
       mer CEO of Hoechst, who had been serving on ABB’s supervisory            posted a net profit of $200 million, despite its old debt load.
       board, took the helm in the summer of 2002. Dormann’s predeces-          DORMANN ATTRIBUTES much of the restructuring’s success to an
       sors Percy Barnevik and Goeran Lindahl had put the system engi-          indepth transformation of the corporate culture. “Everyone needed
       neering and technology group on an expansion track, and overex-          to understand how serious the situation was and at the same time,
       tended themselves catastrophically. Sales slumped, debt grew, and        they had to draw confidence and motivation from the strategies that
       reserves spent on expensive lawsuits ruined the results. In 2002,        were the basis for the company’s strength,” he says. In 2005, he
       the company was almost $800 million in the red. To make things           withdrew from operations and returned to the supervisory board, yet
       worse, the group appeared crippled and unmanageable. More than           the confidence and motivation he helped instill remain. His succes-
       5,000 profit centers in 100 countries were integrated into a massive     sor, Fred Kindle, is shooting for a sales increase of more than 5 per-
       web-like organization—and threatened with suffocation.                   cent annually in the next few years, without making any acquisitions.
       DORMANN CLEANED HOUSE On the executive board, among managers,            Kindle is also setting goals of an earnings-before-interest margin of
       especially in the operating business, nothing was spared. He took six    10 percent and a 15 percent yield on the invested capital. In sum-
       business sectors and pared them down to two. Promising prospects         mary, the group transitioned through reorganization back to a growth
       were bundled into energy technology and automation technology            track and has set ambitious goals. This situation also means that the
       sectors, and everything else was sold. By the end of 2002, the new       next restructuring project is pending. Kindle just announced that he
       ABB chairman sold company operations for $2.5 billion and had cut        wanted to turn the two core divisions into five business divisions,
       back significantly on the debt. Now, three years after the last-minute   thereby eliminating an organizational level.




28
                                                                        GE restr uctures—while times are still good DOSSIER #04




                                                                    Biotest: Rising from the ashes
                                                                    FROM CRISIS TO INNOVATION: BIOTEST RETURNS
                                                                    TO TAKE THE OFFENSIVE

                                                                    IT TOOK THE PHOENIX of legend 500 years to rise from the ashes.
                                                                    The Frankfurt-based pharmaceutical and diagnostics company
                                                                    Biotest did the same, just far faster. In 2001, it posted solid divi-
                                                                    dends; in 2002, it had a sudden crisis; in 2003, it restructured;
                                                                    and in 2004, it accomplished its turnaround. Biotest had spent
                                                                    itself strategically, lost market share, and was deeply in debt.
                                                                    New CEO Gregory Schulz implemented deep cuts and a growth-
                                                                    oriented strategy. Costs went down, and research expenses
                                                                    went up. There were personnel cutbacks, but pharmaceutical
                                                                    approvals and marketing were strenghtened. He sold the defi-
                                                                    citprone subsidiary Diaclone after extracting the most promising
                                                                    research projects. Three antibodies against rheumatism and
                                                                    bone marrow cancer could be blockbusters, and have trans-
                                                                    formed a medium-sized company into a bio-therapeutics
                                                                    powerhouse with unlimited potential on the stock market.




General Electric: All muscle
GE IS DOING WELL, BUT CEO JEFFREY IMMELT WANTS
THE GROUP TO HAVE A NEW, LEANER STRUCTURE.

WHILE RESTRUCTURING may be prompted by a crisis, some
firms do it while times are good. General Electric has a reputa-
tion for defying conventional wisdom. Although theory warned
about the hazards of a corporate group with diverse interests,
Jack Welch continued his expansion of GE. Record-breaking
results silenced critics. Successor Jeffrey R. Immelt has a simi-
larly unconventional approach. Even though the group increa-
sed its sales by 20 percent (2nd quarter 2005) and a crisis is
nowhere in sight, Immelt is restructuring. He is taking the exi-
sting eleven business divisions and combining them to form
six. GE is also sharpening its focus on environmental techno-
logy. Whether fuel cells, solar energy, or hybrid locomotives
are involved, Immelt has a clear priority—earning money.
Asked if restructuring was really necessary, he answered, “You
don’t just do something because you’ve had a vision in bed one
night and an inner voice told you to ‘Go green’.”




                                                                                                                                            29
DOSSIER #04 Inter view




Beyond chainsaw capitalism
CAN RESTRUCTURING BE LEARNED? ONLY TO A CERTAIN EXTENT, SAYS HARVARD PROFESSOR STUART C. GILSON. PROSPECTIVE MANAGERS CAN
LEARN TECHNIQUES, BUT NOT HOW TO HANDLE ANGRY BANKERS AT CREDITOR MEETINGS. WHAT THEY NEED ARE QUALITIES OF CHARACTER: TEAM
SPIRIT AND THE ABILITY TO INSTILL ENTHUSIASM IN OTHERS.


THINK: ACT Professor Gilson, the public image         take a close look, you usually find that reality is   Nevertheless, are there typical personality traits
of successful turnaround managers is roughly          more discerning than rumor would have us              that you observe in the characters of successful
this: They are domineering, unscrupulous to the       believe. Take Mr. Dunlap: On the one hand, of         turnaround managers?
point of being inhuman and have nicknames like        course, he has made a lot of people unemployed;       I wouldn’t talk about personality traits. There are
”Chainsaw“. Does a company leader need to be          otherwise, there was probably no other way to         too many different types around for that. But I
something of a monster in order to lead a firm        save the companies. On the other hand, he did         believe I can now tell what it takes to be a good
out of a crisis?                                      something many years ago which is now consid-         turnaround manager and restructurer.
Stuart C. Gilson Well, I'm sure it helps. No, seri-   ered exemplary, but was practically unheard of
ously, you are alluding to people like Albert ”The    at the time: He involved himself in the risk and      Namely?
Chainsaw“ Dunlap or maybe Kajo Neukirchen,            invested in the company he was supposed to be         In general terms, what you need is a broad
who has a reputation for being rather blunt. If you   leading out of a crisis.                              spectrum of skills and experiences in different


30
                                                                                                                                    Inter view DOSSIER #04




disciplines. He or she must possess an extreme-       painful cuts, it is important for turnaround lead-     insurance funds will naturally not send their
ly strong commitment the company’s goals and          ers to market their program well. In simple terms,     patients to a hospital that helps the competition.
must also be able boost a team’s enthusiasm. A        each restructuring project has three levels.
leader in a turnaround situation has to convince      First, there is the diagnosis. They have to identify   Should ”restructuring“ be a compulsory subject
others that his or her plans and measures are the     the problem and choose the right therapy. Sec-         at business schools?
right course. The manager certainly has to be         ond, the therapy has to be implemented—quickly         It is an extremely relevant topic, so there is a lot
able to sell the planned restructuring program,       and consistently. Third, and this has become           to be said for that. I guarantee my students that
both internally and externally.                       increasingly important over recent years, they         they will be directly involved with restructuring
                                                      need to have the right marketing. What good is         within five years of completing their studies,
What economic skills are required?                    the best turnaround plan if the investors aren’t       most of them even sooner.
Over the past few years, restructuring has            willing go along with it? How do they think they
become much more complex than it used to be           can bring a company back on track to success if
because competition has gotten considerably           they cannot even convince the company’s most
tougher. Consider just the legal issues a company     important managers?                                      STUART C. GILSON has been a profes-
may face. Product liability issues in particular                                                               sor of finance at Harvard Business School
have escalated incredibly in the United States.       The turnaround manager as impresario?                    since 1991. An expert in corporate valua-
But if you are turning a company around you           Why not? There’s nothing wrong with presenting           tion, corporate finance and restructuring,
have to process a whole host of complex and           good turnaround strategies so convincingly that          he became widely known outside academia
interrelated topics within an extremely short         the audience naturally follows. As long as the           because of his 2001 book, Creating Value
period of time. These include company valuation,      show remains serious. Today, dealing profession-         through Corporate Restructuring. Gilson has
financing, operational business and strategic         ally with the media is much more important than          worked as an adviser to a number of busi-
direction. Scenarios like that demand a great         it used to be. So media relations also belong in         nesses, has served on creditor committees,
deal of prudence and experience.                      the training program.                                    and testified as an expert in corporate
                                                                                                               finance, bankruptcy and restructuring mat-
So no university can automatically turn a good        You have been observing restructuring projects           ters. He serves on the academic advisory
student into an excellent restructurer?               for a long time. Where do the most frequent mis-         board of the Turnaround Management Asso-
Exactly. We teach our students techniques and         takes occur?                                             ciation.
place tools in their hands. They learn how to eval-   When I look at failed projects I often reach the
uate a company, assess risks, forecast cash           conclusion that the diagnosis was wrong to begin
flows, deal with tax issues, and develop and          with. Many managers do not get to the core of
question strategies. In addition, we see it as our    the problem, or they lack the courage to question        At some business schools, corporate
task to prepare our students comprehensively          fundamental issues. But that’s exactly what              restructuring is already part of the curricu-
for their roles as executives and managers. Of        often matters the most.                                  lum. These include:
course, I cannot teach a student in a seminar         To illustrate this point, I always put a particular—     • Harvard Business School (Prof. Stuart C.
how to handle nervous, angry bankers at creditor      and actually real—case to my students. There               Gilson), www.hbs.edu
meetings. Or how to negotiate wage reductions         was a company that operated as a health insur-           • New York University, Stern School of
with employees’ representatives. Or how it feels      ance fund while running hospitals at the same              Business (Prof. Edward Altman),
to put a thousand people out of work. That’s          time. That sounds plausible at first, but when it          www.stern.nyu.edu
something only experience can teach.                  hit a crisis, many people wondered why. If I ask         • University of Pittsburgh, Katz Graduate
                                                      my students what the problem could be and how              School of Business (Prof. Kenneth M.
When the crunch comes, a leader in a turn-            they would tackle it, in ten out of twelve cases I         Lehn), www.katz.pitt.edu
around is unlikely to encounter much enthusi-         get absolutely polished solutions—all of which           • London Business School, Finance Faculty
asm. What exactly do you mean by the expres-          miss the point.                                            (Prof. Julian Franks), www.london.edu
sions “gaining enthusiasm” and “selling”?             Almost none of them recognizes that under no             • ESCP-EAP, European School of Management
Because managers cannot reasonably expect             circumstances should the two business areas be             (Prof. Patrick Besson), www.escp.fr
to spark great jubilation with what are usually       bundled in one company because other health


                                                                                                                                                              31
Process optimization is only part of successful restructuring. It’s just as important that all employees are involved and that management leads by
example. When times got tough, VBH managing directors Rainer Hribar (l.) and Jürgen Kassel (r.) used public transportation for business trips.
                                                                                                                                            Rep o r tag e DO S S IE R # 0 4




                                                                                                         Financial Times Deutschland composed this
                                                                                                    reportage piece for think: act. The article is part of an
                                                                                               ongoing cooperation between the two publications.




Saved from the chopping block
BUILDING SUPPLIER VBH WAS AS GOOD AS BROKE, AND THE BANKS WANTED OUT. IN THE LAST SECOND, A COMPREHENSIVE RESTRUCTURING PRO-
GRAM SAVED THE BUSINESS. A RENEWED COMMITMENT TO LUCRATIVE CUSTOMERS ALONG WITH MANAGEMENT LEADING BY EXAMPLE ALSO HELPED
CONTRIBUTE TO THE COMPANY’S SURVIVAL. HERE IS A CLOSE-UP LOOK AT A REAL-LIFE, SUCCESSFULLY COMPLETED TURNAROUND.




s      IT’S FIVE O’CLOCK in the morning and time
for corporate rescue workers to change shifts.
                                                       hardware suppliers and buyers who use these
                                                       products in trades and industry. In particular, the
                                                                                                                  warehouses were filling up with slow-moving mer-
                                                                                                                  chandise. Consultants even found non-moving
Men in business suits step out of the gray morn-       company sells door handles and window-closing              merchandise—window fittings and doorknobs that
ing and into the headquarters of VBH, a building       systems. As it was, demand for these items had             no one had shown any interest in for years.
supplier located in Germany’s Swabia region.           begun to wane. In 1998, 26 million windows were
Inside, managers, financial experts and corporate      sold in Germany; by 2001, that number had dwin-                   IT WASN’T UNTIL VBH was headed down the
consultants sit around tables, looking serious.        dled to 11 million. Lulled and bloated by the expan-       slippery slope of a liquidity crisis, with lenders look-
They have been stewing over files, annual finan-       sion associated with fall of the Berlin Wall, the          ing on nervously, that restructuring was consid-
cial statements and business reports all night         company didn’t see the warning signs until it was          ered, without anyone really knowing what they
long in their race against the clock to save VBH.      too late. “All of a sudden, VBH was too big for the        were in for. “It was quick and dirty, all right,” says
The banks are ready to shut off the money flow,        market. Starting with the second quarter of 2001,          Rainer Hribar, VBH managing director. Kassel adds,
and it will take a highly persuasive restructuring     we could see that we were going to run into prob-          “We were fighting for survival. We didn’t have a lot
plan to make them stick around a few more days,        lems,” says Kassel. A merger with rival Geniatech          of time to stand around discussing the fine
weeks or maybe even a couple of months.                might have been a solution, but at the last minute,        points.” Whether a decision was right or wrong did-
                                                       banks rejected the idea. Roland Berger consultant          n’t even matter that much; the main thing was that
       THE CLOCK TICKED on relentlessly in the late    Sascha Haghani thinks they were right to do so:            decisions were being made. “We had to get mov-
summer of 2001. The banks’ skepticism at the           “Two ailing companies getting together is not a            ing. That was important,” remembers Hribar, with-
time was understandable because VBH’s                  fix.” Haghani actually went to VBH headquarters in         out giving the impression that he was proud of tak-
prospects were looking lousy, both externally and      Korntal-Münchingen (near Stuttgart) to check               ing such hard-nosed measures. It was just what
internally. The building industry was buffeted by a    whether a merger made sense. It didn’t take long           needed to be done.
recession and VBH got pulled into a downdraft.         for him to realize that he needed to find other
                                                       ways to save the company from bankruptcy.                          WHEN HRIBAR (48) AND HIS COLLEAGUE
      BANKRUPTCY was only hours away on that                                                                      Kassel (51) try to explain what the secret is to
morning four years ago. Jürgen Kassel shakes his              AS CONSULTANTS DID THEIR checks and                 restructuring, talk revolves around cutbacks, cen-
head; he doesn’t even like to think about it. Things   audits, preparing for a merger that never happened,        tralizing, claims management, business models,
could have gotten out of hand all too easily. But      the books revealed the woeful situation VBH was            consultants and their employees. Their own con-
Kassel is still around, one of the company’s two       in. The company’s costs were too high on the               tribution seems to recede into insignificance, but
managing directors. However, the company               domestic market. The business with innumerable             Roland Berger doesn’t see it that way. The con-
whose business he manages has changed com-             small customers and suppliers cost more than it            sulting company had up to seven of its people
pletely. It was taken apart and rebuilt anew.          brought in. Payments for invoices were requested           working on-site at VBH. They know how to tackle a
Unprofitable activities were discontinued, and         unassertively, so that one-third of the accounts           problem from a technical perspective—and they
those sectors that did have a competitive edge on      receivable, or €24.3 million, were 150 days past           also know that a technical perspective by itself is
the market were given additional attention.            due. Small companies acquired during boom times            just not enough. “The management are key,” says
                                                       had carved out their own fiefdoms that were                Karl Kraus, a Roland Berger partner. “They need to
     VBH IS A WHOLESALE COMPANY for building           weighted down by surplus inventory, independent            be quick on the draw. They need to set an exam-
hardware, and it acts as an intermediary between       logistics and autonomous operations. VBH’s 32              ple and send out the right signals.”


                                                                                                                                                                        33
DO S S IE R # 0 4 Rep o r tag e




       IN THIS CASE, KRAUS EXPLAINS that the sig-                   THE BUREAUCRATIC JUMBLE of six boards                   A LITTLE LATER, and to make things even
nal sent by the executive managers to employees,           and seven managing directors was shelved. Hrib-           more exciting, money got so tight that the banks
banks and customers was represented by the                 ar, head of the international division, and Kassel,       felt compelled to form a pool to prevent any one of
company car. “Cars serve as symbols. They let              who had just started with VBH, remained as the            them from bailing out and forcing a much weak-
employees know whether managers mean busi-                 two managing directors. They didn’t have to con-          ened VBH into bankruptcy with a terminated line
ness or not. It’s a key signal in every restructuring      sider any insider relationships. This was, accord-        of credit. That kind of a maneuver would have
scenario.” Hribar and Kassel did more than down-           ing to Hribar, “a huge relief for us, especially when     resulted in all of them losing money. The pool held
size from luxury cars; they used the S-Bahn, a             it came to making tough decisions about cut-              for three years. In 2004, VBH was still hobbled by
rapid-transit rail network, for business trips—and         backs.” The company slashed 400 jobs. The 32              high-interest loans to the tune of €200 million,
word got around. It made employees cost-con-               individual warehouses shrunk to eight, while              but the operating business was running. Except
scious, which in turn contributed to the company’s         management centralized company divisions like             now the banking pool was on the verge of crum-
survival in the restructuring process.                     logistics and operations. “We made no bones               bling, and three banks wanted out. They had writ-
                                                           about it. We said , ‘Either the turnaround works, or      ten off their loans and saw money from VBH as an
       THE FIRST COST-REDUCTION package, “Quick            we’re done,’” says Hribar. That helped, at least a        unexpected bonus. Things got ugly among the
Wins,” cut travel expenses, newspaper subscrip-            little bit. “There are always people that will tell you   lenders. “We were in a precarious situation. It was
tions and office supplies. The sales department            why something is not going to work. We got rid of         impossible for VBH to pay its debts, and there
started working only with profitable customers.            those people pretty quick,” he adds.                      weren’t any other lenders available,” says Kraus.

Efficient warehouse management helped VBH get back on the right track.                                                      RESCUE CAME in the form of a generous ges-
                                                                                                                     ture made by successors to VBH’s founders, former
                                                                                                                     managing directors Günter Ade and Andreas Schill.
                                                                                                                     They passed the hat among friends and VBH man-
                                                                                                                     agers, and within a few weeks, they had collected
                                                                                                                     €20 million. A complicated debt-transfer process
                                                                                                                     enabled the departing banks to be paid, while the
                                                                                                                     remaining banks obtained VBH shares. By the time
                                                                                                                     the dust had settled, VBH was still operating and
                                                                                                                     on sure financial footing. The high-interest loans
                                                                                                                     were paid off using lines of credit with more-favor-
                                                                                                                     able conditions. “That put VBH back on its feet,”
                                                                                                                     says Kraus. He agreed with Hribar and Kassel that
                                                                                                                     the key to a successful future lay abroad. The com-
Unusable inventory was returned or sold cheap. In          THE RESPONSE WAS PROMPT. However, despite                 pany bosses made a decision to hold on to their
fact, €70 million in inventory was reduced by half.        the speed of the response, it still wasn’t fast           international business and to persistently continue
“That gives us €35 million more in liquidity every         enough for lenders. Of the eight lending banks, a         on an expansion course.
year,” says Kassel, pleased. The 27 different sup-         few wanted to pull out of their relationship with
pliers for doorstops have been replaced by a hand-         VBH. They had already made it clear to Kassel in                  SOME COMPETITORS chose a different route
ful. Four years ago, VBH worked with 1,700 suppli-         friendly—but extremely clear—terms that they              and sold their foreign subsidiaries in order to shore
ers. “Nowadays, we make 99 percent of our sales            were no longer willing to sink perfectly good             up the main business. That was a bad idea, as it
using only 260 suppliers,” says Kassel. Accounts           money into the company. In the first few weeks,           turned out. Most of them have vanished from
receivable are now pursued in a more focused               the new boss knocked on doors in downtown                 today’s market. VBH, on the other hand, can count
manner, and risky deliveries to bankruptcy-threat-         Stuttgart looking for capital. However, he essen-         on business coming in thanks to 28 offices over-
ened recipients are avoided entirely. Kassel says,         tially came away from this activity empty-                seas from Dubai to Australia, and from Poland to
“In the past, 4.5 percent of our sales didn’t go           handed. The biggest concession he got was a               Argentina. Last year, the company had 2000
through because bills weren’t paid. Today, we’re           promise from the banks that they would not ter-           employees back on its payroll. And it posted its first
down to 0.6 percent.”                                      minate the lines of credit.                               profit in five years.


34
CULTURAL POLICIES ARE
POLICIES FOR PEACE
This is why we are more and more engaged in
regions of crises. Our staff are on assignments
from Abidjan to Almaty and from Kabul to Cairo.
Their aim is building bridges of understanding.


GOETHE-INSTITUTE . WE COUNT ON PEOPLE.
Goethe-Institute               Goethe-Institute           Goethe-Institute
Headquarter                    Regional Institute         Kabul
                               North Africa/Middle East
Dachauer Str. 122                                         Wazir Akbar Khan
80637 Munich                   5, sh. El-Bustan           Shahmahmod Street
Germany                        11518 Cairo, Egypt         Kabul, Afghanistan
Business contact:              Tel.: +20 2 575 98 77      Tel.: +93 70 274606
Dr. Wolf Iro (iro@goethe.de)   il@cairo.goethe.org        il@kabul.goethe.org www.goe-
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DOSSIER #04 Restr ucturing




The routine trap
EFFICIENT COMPANIES HAVE WELL-ESTABLISHED OPERATING PROCEDURES. YET, PRECISELY THESE ROUTINES OFTEN HINDER PERFORMANCE AND
MAKE RESTRUCTURING DIFFICULT. MANAGERS WHO WANT TO INSTITUTE CHANGES IN AN ORGANIZATION NEED TO GRAPPLE WITH ENTRENCHED,
STANDARDIZED PROCESSES. A SOUND UNDERSTANDING OF A COMPANY’S INNER WORKINGS WILL HELP IT EVOLVE AND KEEP NEW IDEAS COMING.


s     IN APRIL 1992, Bjorn Borg, then 35 years old
and playing in a tennis tournament in Monaco,
                                                      newcomers such as Mango and Zara are estab-
                                                      lishing themselves despite an overall downward
                                                                                                             Why? And more importantly, does it have to be
                                                                                                             that way? The new research field of studying rou-
lost his first-round match against 20-year-old        trend, older heavy-hitters manage only weak            tines may hold some answers to these ques-
South African Wayne Ferreira in two sets. Age dif-    returns. Mega-players such as KarstadtQuelle           tions. Simply, routines are essential to success.
ference was not what stymied the Swede’s come-        and SinnLeffers need restructuring, and even           They make a company efficient and are neces-
back. He lost because the game had evolved into       long-established Mey & Edlich is slipping toward       sary to work through numerous, complex
“power” tennis. High-load, carbon rackets made        bankruptcy. These companies mastered the               processes. According to Richard Nelson and Syd-
the game too fast for Borg. He had won his first      game and they continued on the same path as            ney Winter, pioneers in routine research, a com-
Wimbledon in 1976 wearing a terry-cloth head-         always—like Borg with his headband and wooden          pany running at optimum capacity represents
band and swinging a wooden racquet. He reluc-         racquet. Business as usual, right? That is exactly     nothing more than a collection of routines. Even
tantly switched over to the newfangled racquets       the danger. Established companies often get into       highly innovative companies need to develop
for the Monaco tournament, but could not get          trouble because they have become complacent in         routines to be creative and to implement ideas
used to them. Ultimately, he had failed to keep up.   their routines. More to the point, they are unable:    efficiently.
                                                      to break out of necessary routines at the right
      MANY COMPANIES suffer from the Bjorn Borg       time, to think outside the box, to identify new pat-         A ROUTINE IN ITS MOST PERFECT STATE is
syndrome. Consider German retail textiles. While      terns of action, and to make them new routines.        labeled “best practice” and is nothing less than a


36
                                                                               Routines are necessar y, but they can hinder change DOSSIER #04




comprehensively rehearsed, automated, and             This means many managers are prone to simply           on. The key point is to know when to change and
thus established process. Many good and best          overlooking or ignoring any indications of prob-       when to maintain the status quo. Accordingly,
practices exist. Roland Berger Strategy Consul-       lems. Many companies will shy away from                companies should not punish employees for
tants recently analyzed the overhead of major         changing their routines because they are aware         suggesting changes; rather, they should reward
corporate groups in the energy, construction and      of how difficult change can be.                        them if possible, even if a suggested change
real estate industries. The study showed that 90                                                             does not succeed. At the same time, manage-
percent to 95 percent of these activities are                The second hypothesis is that it is difficult   ment must keep its feet on the ground and
recurring. Creative units such as press and pub-      to give up entrenched routines. Breaking out of        should diligently review initiatives for any poten-
lic relations also have a very high percentage of     an established routine means disrupting the            tial innovative solutions.
routine work (70 percent and up). This probably       previously efficient and generally risk-free
also applies to management-level decisions, but       sequence of things. Suddenly a new vision is                  To recognize when the time is ripe to
routine research has yet to produce empirically       needed, along with a strategy to establish what        break out of routines, a company needs to come
based answers in this area.                           should replace the old routines. This is no trivial    up with its own custom-tailored early warning
                                                      task, as shown by the fates of Rover, Swissair or      systems by controlling or internal auditing. The
      ONE NEW DISCOVERY documents how rou-            KarstadtQuelle. What path should they have             corporate culture may need some reinvigorating.
tines can evolve into self-made traps, especially     taken to avoid their crises?                           Being persistently curious, learning from the
when a company’s environment changes. That is                                                                new and un-learning old routines are traits that
the norm now, and it is occurring in ever shorter            Furthermore, a successful break with rou-       merit sustained encouragement, as does
cycles. This realization explains why successful      tine requires considerable time and commit-            employee participation. When early warning
routines can suddenly post poor results. The          ment. And there are always people ready to criti-      systems are operating and a company is able to
affected company needs to refresh its repertoire      cize change because new processes render old           identify new market trends, it is time for a deep
of routines. Again, retail textile serves as a good   knowledge obsolete, creating winners and los-          breath and nothing more, because now the work
example. Yesterday, clothing retailers were           ers. Initial results are often less satisfactory       really starts. Dealing with routines requires one
intent on drawing the younger, midriff-baring         because the advantages of an established rou-          particular quality: judgment. Not every software
generation as they sauntered through racks of         tine are missing. Critics cry out that their objec-    update will make a company more efficient, and
ready-to-wear fashion; today, they are catering       tions were confirmed, and many people fall back        not every leap in technology is as dramatic as
to an older crowd with purchasing power. That         into old patterns without realizing it. Thus, the      the change from wood to carbon-fiber rackets.
switch creates a huge gap in stocks, and whoev-       inherent strength of routines becomes a weak-
er closes the gap quickest wins. Any laggard now      ness when a firm embarks on a new path.
has two problems. Not only has it missed the
chance to break out of entrenched processes                   Anyone who wants to make changes                  RICHARD FEDEROWSKI
and keep up, but it will also run into problems       needs to understand why others resist them.               is a senior consultant in the
                                                                                                                restructuring and corporate
and will have to change routines anyway.              From another perspective, someone with a thor-
                                                                                                                finance division at Roland Berger.
Restructuring, though, is not about getting rid of    ough understanding of how routines work will              He previously studied business
routines; it is about changing them.                  have an easier time when restructuring or may             administration at the Leipzig Grad-
                                                      not even get in a bind requiring remedial action          uate School of Management (HHL).
     SO WHY do managers have such a hard              in the first place. Subsequently, it is important to
time changing their modus operandi? Two               instill an awareness of routines at all levels,
hypotheses help explain.                              including management itself, because even
                                                                                                                PETER KESTING received
                                                                                                                his PhD in business administra-
                                                      managers use routines in their decision-making.           tion at the University of Hamburg
      One idea is that it is difficult to recognize   Executives in particular need to maintain suffi-          and is now a professor at the
when exactly an entrenched routine needs to be        cient mental leeway to break out of existing rou-         Leipzig Graduate School of Man-
re-examined. Routines are fatal because their         tines and to stay on the lookout for new options.         agement. His courses focus on
nature is such that they free management from         If inefficiency and other hazards result from             routine research and Schum-
the effort required to plan ahead. Researchers        existing routines, managers must be quick to              peter’s theory on innovation.
looking at routines speak of “falling awareness.”     identify these pitfalls and deal with them head-


                                                                                                                                                             37
DOSSIER #04 Restr ucturing




Money talks
RESTRUCTURING PROGRAMS ARE INCREASINGLY DRIVEN BY THE CAPITAL MARKET. THAT TRANSLATES TO MORE PRESSURE ON UPPER MANAGEMENT
EXECUTIVES TO PRODUCE RESULTS, AND BETTER ODDS FOR COMPANIES IN PULLING OFF A TURNAROUND. THEY MAY OBTAIN MORE FINANCIAL LEEWAY,
AS LONG THEY COMMUNICATE WITH PAST AND FUTURE PLAYERS FROM CAPITAL AND CREDIT MARKETS.


s      ACTUALLY, Richard D. Parsons should be
satisfied. Since taking over the CEO position at
                                                    could not convince shareholders that he could
                                                    turn the situation around by implementing his
                                                                                                      US Steel, Texaco, Nabisco, and Pan Am. Along with
                                                                                                      his associates, Icahn picked up $2.2 billion
Time Warner, which is based in New York, he has     long-term restructuring program.                  worth of Time Warner stock, which corresponds
reduced the debt load of the financially stricken                                                     to a stake of 2.6 percent. Icahn and his allies are
media group by $13 billion. He sold the compa-             THESE ARE THE REASONS WHY Carl Icahn is    urging the group to unload its coveted cable divi-
ny’s music division and cleaned up its manage-      breathing down Parsons’ neck. Dubbed a “corpo-    sion and to then spend $20 billion from the sale’s
ment. He posted record earnings in 2004, and he     rate raider” by the American media, the 69-year   proceeds to buy back its own stock. The threat is
made sure that Time Warner paid out dividends       old, fast-acting hedge fund manager has assets    that Icahn and company could increase their
to its shareholders. Yet Parsons was unable to      worth about $7.6 billion, according to Forbes     share in the corporation or rally additional dis-
accomplish two things: He was not able to           magazine. He made headlines with sizable          satisfied shareholders to put pressure on Time
reverse Time Warner’s downward slide, and he        investments in various conglomerates such as      Warner. Or both. In contrast to business in


38
                                                                                                     Ba n k s a r e buy i ng d i s t r e s sed loa ns DOS SIE R # 0 4




                                                         Maximal benefit
                                                         instead of minimal risk
                                                         TRADING IN DISTRESSED DEBTS IS BECOMING A SIGNIFICANT BUSINESS FOR BANKS,
continental Europe, where dissatisfied investors         AND THAT IS CHANGING THE RESTRUCTURING ENVIRONMENT.
would rather sell their shares, the influence of
shareholders on management has been com-
monplace in the English-speaking world since                     COMPANIES whose distressed debts are       same time optimizing their benefits, thus sup-
the 1970s. The United States in particular has           traded on the open market may face even            porting the sustained recovery of companies
seen the development of a bona fide shareholder          more difficult times. Banks are increasingly       while maximizing their own cash position.
value and corporate governance industry. It              showing up as buyers of bonds, credits and
places tremendous pressure on companies that             loans are traded. One-third of German banks                 THIS NEW approach is causing more
lack clarity and exhibit poor stock market per-          want to earn directly from this business,          interaction among market players. “In a few
formance, which happens to include businesses            according to a current Roland Berger survey        years, there won’t be much of a difference
that could use a strategic restructuring process.        titled “Distressed Debt in Germany: The Banks’     between a distressed-debt investor and a
This partially explains why Michael Eisner had to        Perspective.” The involvement of banks             commercial bank,” says Kuhlwein. At the same
leave the CEO job at Walt Disney: CalPers, a pen-        increases the pressure on companies to suc-        time, there may be individual deals, but more
sion fund, had aligned roughly half of the share-        ceed and produce results.                          sector-wide funding solutions. One idea: An
holders against Eisner.                                                                                     investor buys loans of various players in an
                                                                UNTIL RECENTLY, banks had primarily         industry, and then develops a funding solu-
       IT MAY NOT sound like playing fair, but it is     benefited indirectly from the growing market       tion from which all companies stand to bene-
useless for companies to complain. Companies             in distressed debt. They could distance them-      fit. It serves the investor as well, in that the
undergoing a restructuring phase need to under-          selves from problematic loans and limit their      more supplemental investments are bundled,
stand their investors and communicate with               exposure to potential losses. Internally, they     the higher the likelihood of returns through a
them. If they do that, they will be able to fully uti-   did not have to deal with value adjustments        placement on the capital market.
lize the benefits that new players in the credit         and they kept fully restructured companies as
markets provide. “Companies must not ignore              customers. In return, the banks accepted con-              FOR THE restructuring process, it means
the interests of their investors and have to con-        siderable reductions in price.                     that in a worst-case scenario, many financiers
sider them in their strategy,” says Stephan                                                                 will battle it out for the best solution from their
Howaldt, head of the European Focus Fund from                   THE PURSUIT of minimal risk may soon        individual viewpoints. Limiting risk exposure
Hermes Pension Management, which is based in             come to an end because the distressed-debt         would only be one option out of many, while
London. Also, one should not perceive hedge              market is becoming increasingly appealing to       short-term cash maximization might be a pri-
fund managers as cold, unfeeling lenders, but as         credit buyers and commercial banks. Corpo-         ority for some investors, which could certainly
reasonable investors.                                    rate and mortgage loans of more than €100          spell the end for a company. It would be better
                                                         billion in each sector are available, and the      for the company if a few investors with the
        THOSE WHO CANNOT bring themselves to             annual transaction volume is likely to range       same interests were to pool their efforts. It
initiate and continue the dialogue will hardly be        from €15 billion to €20 billion. Why should        would all become a lot less dicey if a debt-
able to match long-term company objectives               banks leave that kind of business to special-      stricken company were to contact the most
with the short-term interest of investors—espe-          ists? “The market for distressed capital will      reliable partner early and emphasize its will-
cially under the difficult conditions associated         establish itself as a stable pillar of corporate   ingness to cooperate in a salvage operation.
with restructuring. Werner Seifert, until recently       financing and change the restructuring busi-
the CEO of the Deutsche Boerse, lost his job pre-        ness tremendously in the long run,” predicts               FROM THE COMPANY’S perspective, there
cisely for that reason. His long view included tak-      Nils von Kuhlwein, a Roland Berger partner         is cause for optimism. Among the possible
ing over the London Stock Exchange, and its              based in Duesseldorf, Germany. The study’s         outcomes, banks have a clear preference.
executives were even willing to go along with the        authors expect that in terms of participation      While 59 percent of them find a resale of the
proposal on the second try. But Seifert failed to        in restructuring, commercial banks will soon       liability quite satisfactory, 77 percent would
ask shareholders for their opinion. Prompted by          act like distressed-debt investors: limiting       prefer to see corporate restructuring and sub-
the English hedge fund TCI, they wanted to have          their exposure to potential losses while at the    sequent repayment of the loan.
a say in how monies from the “war chest” were
to be spent. In May 2005, Seifert threw in the


                                                                                                                                                                  39
towel, and ultimately it was shareholder votes             ACTING IN CONCERT, these players infuse      are faster and more flexible. Gerd Bieding, CEO of
that forced him to resign.                          the credit market with an unprecedented             Close Brothers (a corporate finance consultancy
                                                    dynamism. In 2004, consortium-related loans         in Frankfurt), says, “If necessary, we can obtain
       THE GROUND RULES have fundamentally          changed hands to the tune of €42 billion in         financing approval for our customers within
changed in dealing with shareholders, i.e. equity   Europe alone. The ease with which some banks        hours.” It sounds great in theory, but the range
capital, and in regard to outside financing. Com-   passed on their securities after the refinancing    of choices now available also presents borrow-
panies that are in restructuring mode now face      of KarstadtQuelle, a Germany-based department       ers with some disadvantages. They do not
new scenarios and have to take many different       store chain, would have been inconceivable just     always know who is financing the loan, and the
interests into consideration, some held by          a few years ago. Owing to a lack of interest in a   sale of receivables is difficult to trace. A few
entirely new players. With loans constituting a     troubled company by more conventional               rogue hedge funds have acquired loans for the
tradable entity, hedge funds operate by purchas-    lenders, selected loan buyers can become that       sole purpose of selling the blocking stake at a
ing loans provided by investment and business       company’s owners by undertaking a debt-for-         high price when restructuring time comes
banks, mezzanine providers, and distressed          equity swap, thereby ending up with company         around. That is why financing experts advise
debt specialists.                                   shares. Goldman Sachs recently performed that       borrowers to “Watch your creditors!”
                                                    maneuver with polypropylene film manufacturer
                                                    Treofan, of Germany, and Deutsche Bank did                 HOWEVER, those types of preying oppor-
                                                    the same thing with Senator Entertainment, a        tunists are the exception. “Watch your creditors”
                                                    German film production company.                     is really only half of the rule; the other half is
                                                                                                        “and talk to them.” Most hedge funds initiate
                                                            THE CREDIT MARKET holds appeal for          contact with companies that they end up co-
                                                    investors like hedge funds for other reasons.       financing, observes Robert Weidinger, a corpo-
                                                    James Sprayregen, a partner with Chicago-           rate finance consultant for medium-sized com-
                                                    based Kirkland & Ellis LLP, which specializes in    panies. He adds, “But some managers are really
                                                    restructuring, says, “Hedge funds do what oth-      scared about reaching out and would rather
                                                    ers don’t want to do. They are ready to take on     focus entirely on the corporate bank that extend-
                                                    more risk for a higher yield.” They also have an    ed the original loan.” Nothing is said about other
                                                    advantage over corporate banks. After expensive     lenders, which is a fatal mistake especially when
                                                    auditing, banks need to back up iffy loans with a   distressed debts are involved. “During or prior to
     CARL ICAHN earned billions in                  lot of collateral under the Basel II Agreement;     crisis situations, the company needs to per-
     capital markets. Now, he has                   however, hedge funds are not subject to these       suade creditors of its restructuring capability,”
     invested in the Time Warner media              requirements. As a result, the same loan costs      emphasizes Joachim Koolman, head of the dis-
     group. Its management is present-              less if it comes from a hedge fund.                 tressed-debt department at Deutsche Bank. In
     ly in the tough position of dealing                                                                the case of Augusta, one of Deutsche Bank’s
     with Icahn, who wants the compa-
                                                          COMPANIES BEING restructured can tap a        associated companies and former star of the
     ny to sell its cable division. If man-
     agement does not do his bidding,               previously unknown source of fresh funds by         Neuer Markt, DB along with other investors
     he could increase his stake.                   turning to outside financing. If their corporate    pooled a series of loans and implemented a basic
                                                    bank cannot help, they can find partners who        restructuring program.


40
                                                                                                  Restr ucturing as a unified process DOSSIER #04




                                                                           1
                                                                       Strategic
                                                                     Restructuring



                                                                 1+2+3=
                                                                   4
                                                3                      Integrated                      2
                                            Financial                   Business                   Operative
                                          Restructuring                 Planinng                 Restructuring




Accomplishing a turnaround
COMPANIES IN DIRE STRAITS NEED SPEED, AN OVERVIEW OF THE LANDSCAPE, AND THE KNOWLEDGE THAT COST REDUCTIONS BY THEMSELVES
WILL NOT NECESSARILY RESULT IN THE DESIRED OUTCOME. WHEN WORST COMES TO WORST, THE COMPANY STILL NEEDS TO WORK
SYSTEMATICALLY, INSTEAD OF ACTING WITHOUT ANY PLAN. THOROUGH RESTRUCTURING CULMINATES IN INTEGRATED BUSINESS PLANNING.

A company’s downhill slide typically begins         company’s structures (functions, organization,     debt remissions may need to be considered.
with a strategic crisis. The competitive edge       and value-added depth) need to fit its objec-      Ideally, measures improving liquidity also take
deteriorates without causing an immediate           tives. Once that has been done, process opti-      effect. Equity capital is increased. Bank
catastrophe. Because no acute pressure to           mization can follow.                               loans, shareholder loans or financing on the
change exists, the crisis is often suppressed                                                          distressed-debt market improve the supply of
and the drift into troubled waters becomes just     2     OPERATIVE RESTRUCTURING                      outside capital. Divestment of certain assets
a matter of time. The company misses its rate-      In an operative restructuring, decreasing costs    should not be excluded.
of-return objectives and winds up posting num-      for materials, personnel, and operating expens-
bers in the red. Shareholders lose confidence in    es is simply not enough. There must be an          4     INTEGRATED BUSINESS PLANNING
the company and management. The need for            equally sharp focus on near-term increases in      All three restructuring levels come together in an
restructuring exists now more than ever, and        sales. These effective measures may prevent        integrated business plan, held together by a clear
the key is to proceed systematically. Roland        excessive debt.                                    planning system (time period, planning units,
Berger Strategy Consultants has developed a                                                            consolidation, and reporting) and the setting of
four-point approach to restructuring:               3     FINANCIAL RESTRUCTURING                      priorities. Also absolutely essential are detailed
                                                    As with the other elements, financial restruc-     plans for profit and loss statements, annual
1     STRATEGIC RESTRUCTURING                       turing starts with an assessment of the cur-       statements, liquidity, and cash flow; all figures
The objective of the strategic concept is to        rent position: Is there too much debt? Is filing   need to be on the table. Given this planning, it is
accurately assess the company’s position            for bankruptcy necessary? How much equity          possible to implement an auditing system that
among its competitors in the marketplace.           capital is there? Optimizing liquid funds,         incorporates strict action management as well as
Items to be scrutinized include: the business       decreasing liabilities against the company and     continuous monitoring and reporting. Above all,
model itself, strategic orientation (cost leader-   enhancing payment objectives all help avert a      open, two-way communication channels need to
ship vs. diversification), products, markets        cash crunch. Reducing investments may also         be in place among all participating parties, in
and resources. According to the guiding             be a good idea. To improve the balance sheet       such a way that enthusiastic motivation replaces
principle of “structure follows strategy,” the      structure, extensions, debt rescheduling, or       any dysfunctional frustration.




                                                                                                                                                             41
p industry report        china is pursuing an ambitious industrial policy




    With steely resolve
    China’s economy is growing, its construction is booming, and the steel industry is playing a crucial role.
    Government support of mergers is pushing consolidation in what had been a very fragmented sector,
    and significant new players in the global market may be just one result.



   :   There’s a new company in town, and it
       means business. In mid-August this year,
    Chinese steel companies Benxi Steel and
                                                     seeking and sponsoring more mergers.
                                                     China’s plan is to place three of its steel com-
                                                     panies in the global top 10 by 2010.
                                                                                                        China might very well be able to realize a
                                                                                                        vision that first electrified the industry at its
                                                                                                        announcement a year ago: the top spot in
    Anshan Iron & Steel Group announced their        “The need for size makes sense beyond prof-        global steel markets. When China’s steel
    merger. Anben Iron and Steel Group, as the       its,” explains Frank Giarratani, director of       exports exceeded imports for the first time
    firm is now known , combines China’s sec-        the Center for Industry Studies at the Uni-        in December 2004, observers were witness-
    ond- and 12th-largest steel makers. With         versity of Pittsburgh. “Overcapacity is the        ing the birth of a new, world-class exporter.
    annual production of 20 million metric tons,     main obstacle in pursuing greater profits.”        Capacities seemed unlimited, driven by
    Anben can better compete against market          Bigger companies are thus looking for ways         more than 800 manufacturers. Because
    leader Baosteel. This duel is about both steel   to streamline their operations. Giarratani         domestic steel prices were lower than global
    production and competition between two           adds, “Size gives them the leeway to respond       market prices, exports climbed by more
    ambitious managers. Liu Jie, Anben’s new         more flexibly to fluctuating demand.”              than 300 percent within a year. However,
    boss, is taking on the most powerful female      That principle applies to companies besides        prices for domestic raw materials practically
    executive in Chinese industry, Baosteel pres-    Anben, and experts expect more mergers.            doubled, and Chinese consumers could
    ident and chairwoman Xie Qihua.                  The new, consolidated steel giants may be          hardly afford durable goods.
    The merger could be the prelude to wide-         more efficient than the numerous, smaller          The government then jumped in with its
    spread consolidation, with the government        suppliers that have been around to date.           solution: Domestic needs come first. Demand
                                                                                                        in China is tremendous. Annual economic
                                                                                                        growth of 9 percent begets an enormous
                                                                                                        appetite for construction, production and
                                                                                                        infrastructure projects—and most of these
                                                                                                        need steel in some form. China uses 320 mil-
                                                                                                        lion metric tons of flat steel annually, more
                                                                                                        than any other country. Forecasts call for
                                                                                                        further increases. The International Iron
                                                                                                        and Steel Institute (IISI), of Brussels, Belgium,
                                                                                                        estimates that by 2010 China’s demand for
                                                                                                        rolled steel will rise to 380 million metric
                                                                                                        tons per year, give or take 20 million.
                                                                                                        China has been the world’s biggest steel pro-
                                                                                                        ducer since 1996, when total production
                                                                                                        reached 100 million metric tons for the first
        XIE QIHUA is the baroness                                                                       time. The industry changed when huge gov-
        of Chinese steel. Her firm,                                                                     ernment-run mills transformed into smaller
        Baosteel, produces 21 million
                                                                                                        units, with about 900 manufacturers cur-
        metric tons of steel annually
        and growing. According to                                                                       rently involved in steel production. Their
        Forbes magazine, 62-year-                                                                       efficiency is marginal, and environmental
        old Xie ranked 14th among                                                                       pollution is high. Furthermore, the price of
        the world’s most powerful
        women in 2005.
   LIU JIE is in attack
   mode. As head of new steel
   conglomerate Anben, he is
   moving in on Baosteel’s
   turf. He also wants to
   merge the eight biggest
   steel manufacturers in
   northeastern China. Those
   kinds of plans should elicit
   considerable respect from
   international competitors.




steel dropped worldwide due to global over-      least 10 million metric tons annually.           However, getting to China will not be easy
capacity. These factors explain why the gov-     Furthermore, only minority stakes will be        for Arcelor. Managers like Xie Qihua see
ernment is counting on centralization and        officially permitted.                            foreign investment primarily as a means to
the power of a directed currency policy. For     “China has no lack in market potential, capi-    strengthen foreign-owned companies.
example, Beijing countered exploding prices      tal or industry experts,” says Liu Tienan,       “We’re prepared for it,” says Xie. There are
for iron ore and finished steel products with    director of the NDRC’s industrial division.      also rumors floating around that the new
a 2 percent currency revaluation.                “So we should not just blindly reach for for-
Domestically, the government is sponsoring       eign investments.” Despite that statement,       “ We should not just blindly reach
consolidation with national funds. Obsolete      the world’s largest steel companies still come     for foreign investments.”
production facilities are being replaced,        knocking at Chinese companies’ doors.              Liu Tienan, National Development and
which will also help reduce environmental        India’s Mittal Steel recently obtained formal      Reform Commission
damage from previous catastrophic levels.        approval to acquire 36.67 percent in the
Economic policy-makers are also working to       Hunan Valin Iron & Steel Group, almost as        CEO of Anben, Liu Jie, is planning on
concentrate production in the country’s          much as it had originally sought. Talks with     combining all eight major steel mills in
northeastern coastal regions.                    Kunming Steel in southern China are ongo-        northeastern China.
Official statements pertaining to the most       ing. Arcelor, the world’s second-largest steel   This regional concentration could accelerate
recent mega-merger among China’s steel           producer, is negotiating the purchase of a       Chinese companies’ presence in world mar-
producers reflect new self-confidence and        stake in Laiwu Iron & Steel Company.             kets. That kind of an industrial cluster
an underlying intention to prepare domestic      Arcelor CEO Guy Dollé would prefer a             strengthens the domestic industry, while
companies to compete in the international        majority interest, but for now he is hoping to   also raising the companies’ in-house effi-
market. “The merger will substantially           have reached an agreement by year’s end.         ciency. “The biggest advantage is the prox-
improve their competitiveness and position       “Despite the new policy of granting no more      imity to the equipment suppliers,” says
in the world market,” says Zhang Guobao,         than a minority stake to foreigners, we think    Giarratani. Steel producers can get to parts
vice chairman of the National Development        that the government could make an excep-         and machines faster and easier, which will
and Reform Commission (NDRC). “The               tion for Arcelor,” says Dollé. That hope may     become even more important as the suppli-
merger trend will give China’s steel industry                                                     er industry improves its competitiveness.
a better international position,” says Leo       “ The merger trend will give                     Giarratani believes that “they have the
Bingsheng, the vice chairman of the Chinese        China’s steel industry a better                potential to develop into their own export-
Iron and Steel Association (CISA).                 international position.”                       oriented economic sector.”
The biggest losers in Beijing’s steel-related      Leo Bingsheng, Chinese Iron and Steel Assoc.   For now, creating a steel mill cluster in
policies are the international companies                                                          northeastern China is a dream. The bottom
looking to invest in the sector in China. Only   not be unfounded, given that China wants         line is that if Liu Jie’s vision is to form a con-
the largest companies will be able to do so,     access to the leading-edge expertise that the    solidated mega-group, he will do everything
according to the new guidelines that require     Luxembourg-based steel giant has offered         in his power to make it happen. Indeed,
investors to have the capacity to produce at     at the negotiating table.                        there is no doubt that he will forge ahead.


                                                                                                                                                       43
pindustr y report         health care




     Learning from Singapore
     Politicians and experts all over the world are trying to come to terms with the future of health
     care. What is required are innovative approaches and models that can serve as prototypes, as
     Professor Thomas Aretz of Harvard Medical International explains.


     THINK: ACT Professor Aretz, in a comparison         clinic provider. If we look at survival rates for a   What are the most important reasons for the
     of healt-care systems around the world,             given diagnosis, the US system is probably su-        explosion in medical costs?
     which of them are best in terms of quality          perior. In addition, the economic sustainability      The main culprits are the rapid advances in
     and efficiency?                                     and effectiveness of the health-care system is        medicine and medical technology, along with
     THOMAS ARETZ Most health-care systems consist       strongly dependent on the expectations of con-        increases in public expectations. Health-care
     of a public-private mix, a mixture of mandato-      sumers. Just looking at per capita expenditures       consumers are making greater demands in
     ry and voluntary components. The dominant           can easily lead us astray.                            terms of quality of care and medical standards.
     model in European countries is the social in-                                                             In recent years there has been a significant
     surance model, in which health services are         In other words, it is not necessarily true that       push to make very expensive diagnostic proce-
     largely financed by mandatory contributions         the greater the expenditures the healthier            dures such as computer tomography more
     from employees and/or employers, depending          the population?                                       broadly available. Other factors include the
     on income. In the United States, on the other       What you have to keep in mind is that the             aging population and the growing number of
     hand, the health-care system is primarily vol-      health-care system only accounts for between          people with chronic diseases. All of these fac-
     untary. Asia has a broad palette of models,         10 percent and 15 percent of a given popula-          tors increase pressure on health care providers.
     which vary widely.                                  tion’s health. The economic situation, level of       Innovative approaches are needed now more
     To compare quality among different health           education, genetic factors, and environment           than ever in the face of such challenges.
     care systems, we have to distinguish among          are often far more important. Many studies
     the various sectors of health care. Seen in these   have shown that economic conditions and edu-          Which countries could serve as a template?
     terms, the quality of public health care in the     cation level in and of themselves have an enor-       Singapore has one of the best systems. In their
     European systems and in some Asian countries        mous effect on survival and general health.           search for the “optimal health-care system”
     is superior to public health care in the United                                                           they first analyzed existing models. They came
     States. However, if we’re talking about individ-    Although the US system is the most market-            up with something completely new—a medical
     ual treatment in case of illness, the quality       driven, it is by no means more economical.            savings account for each citizen. This system,
     clearly depends on the particular institution or    Health expenditures in the United States far          which is currently being tried out in the United
                                                         outstrip those of the rest of the world.              States and other countries, has the advantage
                                                         That is true. According to the most recent            that it is very transparent and understandable.
                                                         OECD statistics, per capita expenditures for          In this system, everyone pays from 6 percent to
                                                         health care in the United States in 2002 were         8 percent of income into an individual account,
        HARVARD MEDICAL International is                 about $5300. That’s almost 140 percent of the         in the “Medisave” program. All physicians and
        a subsidiary of the Harvard Medical School       OECD average. Health expenditures are cur-            hospital bills are paid from this account. In ad-
        in Boston, Massachusetts. Founded in             rently more than 14 percent of the American           dition, this account can be passed along to
        1994, the organization conducts educa-           gross national product. Switzerland and               one’s heirs, and beyond a certain sum and a
        tional, consulting, and research programs        Germany are next, at about 11 percent. But            certain age, account holders can use the funds
        in more than 30 countries. LMU Munich            they aren’t alone. Almost all industrialized          for a wide range of other purposes, which has
        Medical International GmbH, an affiliate of
                                                         countries are currently experiencing enormous         been shown to be a powerful stimulus for re-
        the Ludwig-Maximilian University of Munich
        (Germany), is one of its partners in the         cost pressure. The problem is that in most            sponsible use of the account. The state will pro-
        health-care field.                               countries, health-care expenditures are grow-         vide a minimum of coverage for people with
                                                         ing faster than economic productivity.                chronic and long-term illnesses.


44
                    many things are wrong with the american system, but parts of it are unsurpassed                                    industr y report f




Do you see any other similarly innovative           Is the American model more efficient than
models in Europe?                                   some European systems?
The Swiss reform model, which was initially         An interesting study was done not long ago
developed in the 1990s, is very interesting. Cur-   that compared the British National Health
rently in Switzerland, more than 100 private        Service with Kaiser Permanente in California.
independent insurance companies compete for         What they found was that per capita annual
customers in a regulated marketplace. Con-          health-care costs were about the same under
sumers do have freedom of choice, but a com-        both systems; however, the California patients
prehensive system ensures that all Swiss            stayed in the hospital for considerably less
citizens have access to core basic coverage.        time and got back to work faster. This is an ex-
Anyone who wants more health care is free to        ample of a very well functioning system in the
buy more insurance. The state’s sole responsi-      United States. No one is clamoring to replicate


“ Medicare in the United States is the largest health-care system in
  the developed world. What is important to recognize is that the
  American system consists of many widely differing models. That is
  what makes it so interesting to study.”

bility is to ensure that the competing providers    the American model in other countries, but in-
offer the desired and necessary level of quality    dividual parts of it work very well. Others do
in the health-care market.                          not. It’s a bit like the American education sys-
                                                    tem—many things are wrong with it, but at
Two criticisms of the American model are            the same time parts of it are unsurpassed.         H. THOMAS ARETZ, MD, is Vice President
that it is not particularly efficient and that it                                                      for Education at Harvard Medical International
disadvantages the poorer classes...                 The goals of Harvard Medical International         (HMI) and Associate Professor of Pathology at
Medicare in the United States is the largest        (HMI) include expanding the number of              Harvard Medical School. The 58-year-old physician
health-care system in the developed world; it is    people around the world who have access to         is responsible for HMI’s international continuing
                                                                                                       education programs and heads numerous projects,
public, but all services are provided privately     high-quality medical care. What conditions
                                                                                                       particularly in Asia and the Middle East. Co-founder
because there are very few public hospitals.        are necessary to reach that goal?                  of three medical technology firms in the United
What is important to recognize is that the US       Our efforts include developing and continuous-     States, Aretz is also an entrepreneur.
system consists of many widely differing mod-       ly improving international standards of quali-
els. This is what makes it so interesting to        ty in both medicine and health-care systems.
study. In addition to public systems such as        Institutions and organizational forms both
Medicare and Medicaid, there is an abundance        have to change. The most important aspect,
of private insurance companies, along with          however, is the people in the medical profes-
larger health-care organizations such as Kaiser     sions. They need appropriate training and con-
Permanente or Harvard Pilgrim, which have           tinuing education in order to manage this
several million members. Some of these systems      transformation and to communicate it globally.
work very well. Of course, we can’t overlook the    HMI has been dedicated to these complex tasks
fact that there is a large discrepancy between      for quite a number of years, particularly in
the provision of health care to the poor and to     Asia and the Middle East. Along with the Lud-
the rich, the educated and the uneducated.          wig-Maximilian University of Munich, we
Both good and bad lessons can be learned from       have established a global network of leaders in
the US health-care system—but it should not be      the field, who have committed themselves to
thought of as a unitary, coherent system.           our specific approach to excellence.


                                                                                                                                                              45
p industr y report    trends and sectors




     The shape of things to come
     The chemical industry is counting on biotechnology. Fuel cells promise cell phones that almost never
     run out of power. Spies will not be able to eavesdrop. And printers will soon produce real products.


      “WHITE”        B I O T E C H N O L O GY

          Petroleum is a critical raw material for the chemical              It’s already here. Ordinary laundry detergents may have
      industry. Rising prices are compelling that sector to look for         bio-catalysts that help ensure more efficient cleaning. The
      other fuel alternatives. The likeliest candidate right now is          industry’s implementation of enzymes is also known as
      biotechnology. In fact, the chemical industry in the United            “white” biotechnology.
      States wants to generate one-quarter of its organic binders                 Experts are convinced they are on the right path. Steen
      from renewable raw materials.                                          Riisgaard, chairman of EuropaBio’s Industrial Biotechnology
          To manufacture petroleum-free solvents, paints, adhe-              Council, believes that white biotechnology will evolve into a
      sives and plastics, the industry needs to develop new                  major raw materials provider for the chemical industry.
      processes. They all hinge on enzymes that are produced                 Estimates project that sales of biotechnologically manufac-
      using fungi, yeast or bacteria. The shape of things to come?           tured industrial products will reach $310 billion by 2010.

      chemical industry’s global sales and share of biotechnology processes (in € billions)
                                                                                                                                              1) Global sales of
       Segment                                        Sales 20041)                                       Sales 2015 1)                        chemical and primary
                                                                                                                                              products (manufactured
                                     Total chemical      Biotech     Share (%) Total chemical               Biotech             Share (%)     by chemical companies),
                                                                                                                                              not including pharma-
                                        products        processes                 products                 processes                          ceutical sales.
       Refined products                    55              11           20              100                      50                50         2) Projection using
                                                                                                                                              average growth of
       Polymers                          275               4            2               400                     40                 10         3.5 percent annually.
                                                                                                                                              Source: Festel Capital,
       Speciality chemicals               440              10            2              630                      95                15         April 2005
       Basic/intermediate products        550              15            3              800                     120                15
       Total                             1320              40           27             1930 2)                  305                90




      Q U A N T U M C RY P T O G R A P H Y

           Quantum cryptography promises nothing less than                   In 2002, researchers Christian Kurtsiefer and Harald
      absolutely secure data transmission. Unlike traditional                Weinfurter exchanged an encryption key via satellite across a
      encryption methods, this procedure is based on quantum                 distance of 23 kilometers between two mountain peaks in the
      physics. Setting a data key uses individual particles of light,        Alps. Unfortunately, at present satellite systems still suffer
      i.e., photons. The sender randomly assigns the state “0” or “1”        from a high level of inaccuracy.
      to a number of photons and sends them to the receiver, who
      then measures their states. Both compare their bit sequences.          Encryption research in the Alps—this test setup
                                                                             enabled researchers to achieve a breakthrough in
      The laws of quantum physics automatically prevent hackers              quantum cryptography.

      or spies from eavesdropping, because any attempt to inter-             ALICE
      cept the message would disturb the photons’ quantum-                   Zugspitze (2950 m)
      mechanical entanglement. The first commercial systems
      based on this technology are already available. The limit of                                                                          BOB
      such fiber-optic-based concepts is currently 150 kilometers. A                                                                        Western Karwendelspitze
      global system would probably require wireless transmission.                                                                           (2244 m)



46
                                                                                                    trends and sectors           industr y report f




                                                                                  MICRO FUEL CELLS

                                                                                      Notebooks, PDAs and cell phones offer
                                                                                  increasingly complex functions. Bigger displays
                                                                                  and “always on” mobile communications systems
                                                    A sample model manufactured   such as UMTS are becoming the norm. Although
                                                    with 3-D printing
                                                                                  energy efficiency is increasing, service life is
3- D   PRINTING                                                                   decreasing. One solution for extending service
                                                                                  life is implementing micro fuel cells.
    Printing in a three dimensions? A new technology allows for                       The cells’ operating principle can be
quick production of a real, three-dimensional object. The process                 described as follows: Two electrodes are separat-
is also known as “fabbing,” an abbreviated form of “fabricating.”                 ed by a membrane; at the negative pole,
The necessary machines are becoming less expensive and may                        methanol is split into free hydrogen ions and
end up in ordinary offices fairly soon. The technology could revo-                electrons. The ions pass through the membrane
lutionize the worlds of design and model construction, with                       to the positive pole, while the electrons use an
designers and architects building their own models in very little                 external circuit, which results in a flowing cur-
time using a process known as “rapid prototyping.” Better still—in                rent. Once the original methanol is used up, the
the future, in addition to models, the process will produce proto-                tank can be exchanged.
type parts, end-use parts and tools directly from CAD models.                         The first prototypes can power a notebook for
    The 3-D printing process is straightforward. A roller rolls a                 10 hours, six hours longer than commercially
layer of powder several tenths of a millimeter thick across a pow-                available batteries. Future products provide
der bed. The inkjet-like head begins to move over the bed, drop-                  enough energy for several days of use and many
ping liquid binding agents with great accuracy onto the powdered                  weeks of standby operation. The first fuel cells
surface. Wherever the binding agent lands, it causes the powdery                  should be ready for the market in about two
substance to stick together, creating a hardened, two-dimensional                 years, with Japanese companies, such as Toshiba,
shape. Then the powder bed drops exactly the thickness of one                     leading the way.
layer, and the process starts again. As layers are added, the form
gains height. With each cycle, the spray-jet head takes a slightly                global market for micro fuel cells
different path in order to stack the layers into a three-dimensional
                                                                                                        2005     2006   2007    2008    2009
image. Holes or hollow spaces remain where no binding agent is
distributed. Any non-adhered powder is later blown away with                       Cells
                                                                                                           1      32    1003 22432 71453
pressurized air, leaving the finished model.                                       (in 1000s)
    The market for 3-D printers is picking up steam. “In 2004, about
                                                                                   Price per
1970 3-D printers were sold worldwide,” says industry expert Terry                                       400      250   74.80   22.40   17.90
                                                                                   cell ($)
Wohlers. “Sales doubled annually, as has the number of units sold.”
In addition to having an impact on the printer market, the new                     Global mkt.
technology could change the entire production realm. The savings                   ($ billions)           0.4     8.0   75.0    501.4 1276.0
from this technology are huge. For example, Motorola was able to
reduce the development time for its V70-model cell phone by one-                   Growth
                                                                                                         n.a.    2566.7 837.5   568.5 154.5
third. And the opportunities presented by manufacturing real                       (percent)
products are still anyone’s guess.                                                Source: WinterGreen Research




                                                                                                                                                 47
                 changing personnel too quickly undermines stability—on yachts and in companies                                 business culture f




                                                  “If you keep changing the objectives, you can no longer lead effectively.”
                                                   Jesper Bank




A silent boat is best
The environment is rough, the competition is tough, and crucial decisions have to be made within
seconds. Sound familiar? Winning sailors like Jesper Bank share traits with successful managers.
Lessons from the high seas.



:   Sailing and management have many
    things in common. Many entrepreneurs
are also sailors, and the sport of sailing is
                                                  One of the world’s best captains is Jesper
                                                  Bank, helmsman of the United Internet Team
                                                  Germany (UITG). He leads the youngest
                                                                                                    constantly subject to change. “You’ve got to
                                                                                                    hold on to an objective as long as possible,”
                                                                                                    he says. If the conditions change, there
very much a hands-on endeavor. The great-         team in the America’s Cup. The crew sailed        should be a certain degree of reaction, but
est similarity between the two is that lead-      its first qualification in July 2005, while the   the goal should remain the same.
ing a company and skippering a sailboat are       boat itself will not be ready until April 2006.   “If you keep changing the objectives, you
both complex management tasks. Company            The UITG crew is a mix of old pros and Cup        can no longer lead effectively,” he says. “If
decision-makers could learn a thing or two        newcomers from six countries. Bank’s job is       internal or external parameters change,
from winning sailors.                             to quickly mold this diverse bunch into a         then it’s a matter of communicating the new
                                                  single, cohesive unit that will, he hopes, run    conditions while conveying the idea that the
LEADERSHIP MAKES ALL THE DIFFERENCE IN
                                                  far ahead of the pack in 2007, when the next      objectives have not changed.”
THE WORLD, AND WINNING TEAMS HAVE LEADERS
                                                  America’s Cup is held.                            Continuity is important not least because
  WHO PAY ATTENTION AND REACT ACCORDINGLY
                                                  To advance in the competition, Bank will          successful crews draw on long-term univer-
At the micro level of a racing sloop, the key     need a highly motivated team. The key is to       sal values for success. Bank believes that the
factors for the team’s success are leadership,    set clear objectives: Without objectives, even    most important values are loyalty and trust.
strategy and teamwork. The 12 teams cur-          world-class sailors cannot fully concentrate      Skippers need to be able to count on every-
rently competing in the world’s best-known        on the task at hand and summon the final          one on the team having absolute trust and
sailboat race, the America’s Cup, all start off   reserves of energy necessary to win.              confidence in their teammates and being
under almost identical conditions. But the        Bank sets his team’s goals, but in his obser-     prepared to act on that.
winning teams are the ones whose captains         vations of large companies, he sees that          Putting these values up on a chalkboard is
keep an overview of the situation and simul-      occasionally they forget to set similarly clear   simply not enough. Everyone needs to thor-
taneously ensure that things run smoothly         objectives. Employees may not see the             oughly internalize them, and that takes
on deck and below.                                immediate relevance of management’s               time. But once a value system is set up and
Once on the water, skippers never stop mak-       financial targets, he notes, but goals have to    shared by all, it represents a substantial
ing decisions that deal directly and immedi-      be tangible and universally understood to         competitive advantage.
ately with the vessel’s course and distance       motivate people to give their best.               Another critical factor is the team’s stability.
from competitors. These are their primary         However, Bank adds, objectives really only        Bank does not like making fast decisions
responsibilities.                                 serve as a motivating tool when they are not      regarding crewmembers. “If someone is


                                                                                                                                                       49
p business culture          on a sailing team, everyone is a multitasker



                                                              THE ON-BOARD LINEUP
                                                              EVERYONE ON A RACING SAILBOAT has
                                                              clearly delineated responsibilities. Some of
                                                              the positions and associated tasks are
                                                              described below.
                                                              THE BOWMAN takes care of setting and
                                                              stowing sails and helps out at the mast.
                                                              THE MIDBOWMAN/SEWERMAN spends
                                                              most of the time below decks, packing sail
                                                              bags and preparing sails for use.
                                                              THE MASTMAN sets the spinnaker pole
                                                              and assists either the pitman when
                                                              changing sails or the grinders when
                                                              tacking and jibing.
                                                              THE PITMAN controls halyards, which
     not meeting the team’s standards at the                  hoist and drop sails, and coordinates           big advantage. “Everyone knew that ultimate-
     moment, one needs to carefully consider                  communications at the front of the boat         ly skipper Russell Coutts made the decisions,”
     whether this person needs to be replaced or              when changing sails.                            says Bertarelli.
                                                              THE GRINDERS are the strongest individu-
     just needs help to reach the required level of                                                           Yet sometimes, people err on where and when
                                                              als on board. They set and trim sails by
     performance or to better integrate with the              hand-powering the winches.                      decisions should be made. Bank has his own
     team,” says Bank. He thinks that workers                 THE TRIMMERS are responsible for con-           ideas. “I feel like a sparring partner in a con-
     who do not perform or fit into the team are              trolling the lines that set the optimal posi-   structive process,” he says. “When you sail at
     often thrown out too hastily. “When you do               tion of the sails to the wind and give them     this very high level, errors are a must; other-
     that, people lose faith in the team, and you             the best shape to maximize speed.               wise, you would never improve.”
                                                              THE TACTICIAN recommends course
     destroy its needed cohesion.”                                                                            That does not mean, however, that a team
                                                              changes and, along with the strategist,
     Stability also requires the clear division of            observes the opponents’ boats.                  member never needs to be replaced. Recently,
     labor. Despite specialization on board,                  THE NAVIGATOR determines the boat’s             John Kostecki, the tactician on the Oracle
     crewmembers need to bring qualities that                 exact position on the course and in relation    team, was let go. “In that kind of a situation,
     contribute above and beyond of their profes-             to the opponents.                               it’s important that everyone understands how
     sion. Obviously, everyone on board needs to              THE RUNNER adjusts the runner cable, in         things will proceed right after the change,”
     be an outstanding sailor. Crew members                   coordination with the helmsman and trim-        says Bank. “Following that kind of a decision,
                                                              mers, which applies or releases tension to
     who are designers or hydraulics engineers                                                                you need to keep things transparent so as not
                                                              control mast bend and to give the sails the
     contribute their technical abilities on land,            desired shape. A mistake in timing when         to lose the team’s trust.”
     too. “Everyone on our team always has at                 letting off the runner cable could bring the    Kostecki’s dismissal was the result of a sailing
     least two jobs,” says Bank.                              mast down.                                      failure. For the 2003 Cup, Larry Ellison, CEO
                                                                                                              of software manufacturer Oracle and syndi-
     VERBAL EXCHANGES OCCUR ALMOST
                                                                                                              cate head of BMW Oracle Racing, had hand-
             EXCLUSIVELY ON LAND. IF EVERYTHING IS
                                                                                                              picked the best of the best—only to come in
       GOING WELL ON BOARD, SILENCE REIGNS
                                                           Ideally, skippers say very little, too. “When      second. For Bank, that confirmed his view that
     Communication is very specific in sailing.            the skipper stays quiet, that means every-         a crew’s sailing skills do not solely determine
     Exchanges occur almost exclusively on land            thing is under control,” says Bank. If the race    the outcome. “It’s more important to stabilize
     or in practice. In the latter, tactics and strategy   is close, if a maneuver is imminent or if a        the team than to have 17 world-class sailors at
     drive procedures that are discussed and prac-         mistake needs correcting, skippers take com-       17 different positions,” he says.
     ticed. Trimming sails is a continual learning         plete control and provide quick, concise           The team’s stability is all the more critical
     process that needs optimization through               instructions. Their seeming inward focus           because the America’s Cup competition lasts
     briefings and re-briefings. Position crewmem-         does not undermine their authority. Only           several weeks. Successful leaders have to
     bers, helmsmen and tacticians work out                the helmsmen know how the boat will actu-          know how to keep up the team’s motivation
     approaches with “communications loops.”               ally respond in any given situation. Only          and positive attitudes. Publicity plays a role
     This ensures that when race time comes, the           they have the final say-so.                        here too. “One should know how to communi-
     team does not need much instruction to exe-           Ernesto Bertarelli, head of Swiss yachting         cate with the public, the press and sponsors,”
     cute its planned procedures. Communica-               syndicate Team Alinghi and navigator on            says Bank. The ability to present oneself and
     tions run primarily between tacticians and            America’s Cup winner Alinghi, describes his        the team cohesively to the outside world
     strategists, key figures in the cockpit and on        team as a “family.” For Bank, the term does        reflects a leader’s ability to maintain order
     the foredeck. Otherwise, silence prevails,            not contradict the skipper’s position as an        and the positive dynamics within the team—
     lest opponents on nearby boats overhear               authority figure. Even families know who           one more concept that applies well to both
     anything important.                                   makes the decisions, and that was Alinghi’s        skippers and CEOs.


50
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p business culture   mba




                                      Conventional MBA programs designed           opportunity to lead is not only a waste of
                                      as courses of study for prospective man-     time, but it also demeans what management
                                  agers are geared toward the wrong people,        is really all about.
                                  and they use the wrong methods, with dam-        Most work that can be programmed in an
                                  aging consequences. Trying to teach the art      organization need not concern its managers
                                  of management to someone who has never           directly; specialists can be delegated to do
                                  held a management position is like teaching      it. That lets the managers take care of the
                                  psychology to someone who has never had          messy stuff—the intractable problems, the

     The MBA—                     any interaction with other people.
                                  Organizations are complex phenomena.
                                  Managing them is a difficult, terribly nu-
                                                                                   complicated connections. And that is why
                                                                                   labels such as experience, intuition, judg-
                                                                                   ment and wisdom are so commonly used
     a thing                      anced business, requiring all sorts of tacit
                                  understanding that can only be gained in
                                                                                   to describe management.
                                                                                   A successful manager described her hus-

     of the past?                 proper context. Trying to teach it to people
                                  who have never themselves had the
                                                                                   band, who is an MBA graduate, to me by
                                                                                   saying, “He understands the methods and


     Everyone has heard of it,
     and many managers have
     one: a Master of Business
     Administration (MBA)
     degree. In this article,          Listen to the market! Falling applica-      IS THE APPROACH REALLY WRONG?
     respected management              tions are a reality and have been for       Current arguments against the degree have
     expert Henry Mintzberg       three or four years now. Coupled with the        two main thrusts. First, they imply that the
     voices his criticisms of     faults Henry Mintzberg cites, this could         fundamental educational premise of the
                                  spark a crisis of confidence in an already       MBA is flawed, and thus also the prevalent
     the MBA. Seán Meehan,
                                  wobbly market. Are things as bad as they         designs. Second, the situation is supposedly
     head of one of the world’s   look? The venerable Master of Business           dire because it reflects the natural outcome
     most successful MBA          Administration degree, sought by hundreds        of professors focusing, surprise, surprise, on
     programs, responds.          of thousands of smart candidates annually,       what is generally rewarded—research on
                                  has been around since the start of the 20th      issues too theoretical and too distant from
                                  century. It has survived barrages of criticism   business practice to be valuable to students.
                                  before—it will again. Attacks on the validity    So the allegedly flawed model is unlikely to
                                  and value of MBA programs are not at all         be fixed because business school professors
                                  new, with articles critical of MBAs appear-      have no incentive to respond to the changed
                                  ing as early as 1959.                            market conditions.




52
                                                                                                                     mba     business culture f




                                     YES!
thinks he knows best. Yet, he is frustrated                                                       ements.” Indeed, the word “analysis” itself
because he doesn’t understand the complex-                                                        comes from a Greek root meaning to
ities and contradictory politics involved. He                                                     unloosen. Separating things into parts—
thinks he has the right answers, but he’s                                                         unloosening them from the whole—is what
frustrated by being unable to do anything                                                         MBA programs are about.
about it.” You could say that the husband
                                                HENRY MINTZBERG is the Cleghorn                   Business becomes a collection of functions;
                                                Professor of Management Studies at McGill
did not learn much about management at          University in Montreal, Canada. He was            strategy, a set of generic strategies and
his business school.                            named Distinguished Scholar for the Year          competitive analyses. Even people become
                                                2000 by the Academy of Management, and            analytical units.
ANALYZING PROBLEMS TO DEATH                     won its George R. Terry Award for the best        Synthesis, on the other hand, is the very
The old joke about the MBA standing for         book of 1995 (The Rise and Fall of Strategic      essence of management. Within their own
                                                Planning).
management by analysis is no joke at all.                                                         contexts, managers have to put things
According to the New Oxford Dictionary of                                                         together in the form of coherent visions,
English, analysis means “the process of                                                           unified organizations and integrated sys-
separating something into its constituent el-                                                     tems. That is what makes management so




Granted, today’s MBA has some problems.                                                           Some of the largest, highest-profile MBA
But it is also not as flawed as Mintzberg                                                         programs in the world have flourished by
claims. And the alleged acute lack in re-                                                            emphasizing analytical skills above all
sponsiveness is not nearly as widespread as                                                                 else. In doing so, they have fed the
one is led to believe by reports.                                                                              financial and consulting sectors
                                                                                                                 with young, very qualified,
ANALYSIS MATTERS                                                                                                  highly productive graduates.
Mintzberg is concerned that the wrong peo-
ple are educated in the wrong way, with
                                                                                               NO!                Often, they have gone from
                                                                                                                 those positions to become
adverse consequences. The wrong people                                                                          great managers and leaders in
argument pivots on the student’s experi-                                                                     companies not only important to
ence, or the general lack of it. At IMD we                                                               their sectors but their economies and
side with his preference for experienced                                                          our society as a whole. Successful programs
MBA candidates, but we do not consider                                                            have one thing in common—they know
other schools’ choices to be less insightful.                                                     their customers well and deliver a real




                                                SEÁN MEEHAN is the Martin Hilti Profes-
                                                sor of Marketing and Change Management at
                                                the university IMD in Lausanne, Switzerland.
                                                He also heads the IMD MBA Program, which
                                                was ranked number one worldwide by inter-
                                                national recruiters in the Wall Street Journal.
                                                                                                                                                   53
p business culture        henry mintzberg: mbas overestimate the value of analysis




                difficult, and so interesting. Obvi-   education where the schools supply the          “MBA programs are
                ously, managers do count on            pieces, neatly cut to size, and the students
     analysis, but they need it as raw input to        do the assembly. Unfortunately, the schools     all about breaking
     come up with a synthesis-based solution—          do not supply instructions. Worse still, the    problems down into
     that is the really hard part. Teaching analy-     pieces do not fit together. They may look
     sis devoid of synthesis reduces management        neat, but in fact they are cut every which
                                                                                                       their individual
     to a mere skeleton of itself with nothing         way. And the students do not know what to       components. But the
     holding it together—no sinew or muscle, no        build, because that depends on the situa-       core of management
     flesh or blood, no spirit or soul.                tion, and in the classroom there is no situa-
                                                       tion, or else there are several situations a
                                                                                                       is synthesis.”
                                                                                                       Henry Mintzberg
     SPIRIT AND SOUL                                   day in some cases. Real management is
     The question remains where the synthesis          more akin to playing with Lego blocks—
     comes from. The usual, dismissive answer is       there are an infinite number of ways to
     the students: They will put it together. Think    assemble the pieces, and the interesting
     of this as the IKEA model of management           structures take time to build.




               added value. Neither business           a smorgasbord of basic rules, checklists and
               education nor management devel-         ready-made solutions.
     opment needs to be the elite preserve of the      The program experience depends not just
     young, or old, experienced or less experi-        on the process, but also on the class compo-
     enced. But the educator needs to design the       sition—a colossal annual investment. It mat-
     MBA program with the needs of the target          ters because participants should learn as
     participant clearly in mind. My counter to        much from each other as they do from the
     Mintzberg’s “wrong way” thesis is to ask          faculty, i.e., in class discussions and team
     why one has to be so dogmatic. You should         projects. Our task is to select the one best
     deliver what you promise. For example,            group of 90 young executives we can find.
     IMD’s value proposition of “leadership            Right now, our students come from 36 coun-
     development” is rooted in strong market           tries, have seven years’ international work     “Successful MBA
     research and clear needs-analysis with our        experience and above all have a hunger to
     partner companies. Thus, we deliver an            make a profound difference. They also de-       programs have one
     experience, not just analysis combined with       velop a strong bond and advice network          thing in common:
                                                                                                       They know their
                                                                                                       customers and
                                                                                                       provide them with
                                                                                                       actual added value.”
                                                                                                       Seán Meehan



54
                                                        seán meehan: an mba does not have to last two years                    business culture f




A BALANCED EDUCATION
To appreciate how people educated in MBA
                                                   These three dimensions need not exist in
                                                   perfect balance, but they do in fact have to
                                                                                                    or are unable to
                                                                                                    make use of the ex-
                                                                                                                               YES!
programs are inclined to manage, let me            mutually reinforce each other. Likewise,         perience that they do
introduce a framework of management as             management styles that try to insist on          have in a classroom that
a practice that combines art, craft and sci-       anchoring themselves exclusively in just         is deliberately disconnected
ence. The point I wish to make is that effec-      one of these three figurative realms repre-      from practice. And MBA education is weak
tive managing requires some balanced               sent a dysfunctional approach to business.       on art as well. Not that it denies art—indeed,
combination of the three.                          Narcissism would reign in the art dimen-         many of the cases glorify visionary leader-
MBA education, by focusing on only one             sion, tediousness would rule in the craft        ship—just that it can do little with it.
of the areas, distorts its practice. Art encour-   dimension, and cold calculation would gov-       Insight, vision and creativity come alive in
ages creativity, resulting in insights and         ern the science dimension.                       action, not in admiration. Art and craft are
vision. Science provides order, through            In these terms, MBA education is unbal-          based largely on the tacit, while the MBA
systematic analyses and assessments. And           anced. It is devoid of craft; indeed, it deni-   classroom focuses on the explicit, in the
craft makes connections, by building on            grates experience in favor of analysis. The      form of analysis and technique as well as
tangible experiences.                              students themselves have little experience,      formal theory.




that lasts throughout their careers. I would       need leadership talent, and we do not want       high time that business schools took their
argue that schools should fashion the MBA          it tied up in school for two years.”             own medicine.
course around what they want to achieve.           One important conclusion we took from the        Are things as bad as the Cassandras of our
                                                   research is that employers do not see the        industry suggest? The answer is a resound-
TWO YEARS MAY BE TOO LONG                          need for a second year in your typical MBA.      ing no. Prospective applicants should note
The market research I refer to is perhaps          Schools have to listen more to this kind of      that the MBA situation is certainly not per-
the key to my prescriptions. Lack of respon-       market signal. The MBA category is indeed        fect, but not nearly as bad as it appears.
siveness is a problem. But it certainly            in trouble. It needs a more market-driven        An MBA is a huge investment of a person’s
should not be. On this point, I need to be         approach. Business schools need to imple-        time and money, and not all offerings pro-
more dogmatic. You’ve got to know your             ment a few basic business lessons: strategy      vide the same rewards. People should
markets! IMD’s MBA program research                is a choice; the right kind of differentiation   decide what they want in the long term, do
sends one clear message: Our business part-        will be rewarded; ROI is generally impor-        their research and then make a decision
ners want candidates with leadership               tant; and above all, listen to the mar-            that lets them best realize their own
achievement and further potential. They tell       ket. Market orientation is taught                        objectives. In this context, the MBA
us, “We have enough administrators! We             in the MBA programs, and it is                             absolutely has a future.



                                                                                          NO!

                                                                                                                                                     55
p business culture       rising from a soup kitchen to a $72 million budget




    Inner-city talent pool
    Detroit, once a booming automotive center, is today one of the poorest cities in the United States.
    The nonprofit organization “Focus: HOPE” is breaking the vicious circle of unemployment, racism
    and drugs—with a market-economy approach geared toward best practices.



   :    The hope lies in the inner city. In the
        middle of a run-down area of Detroit sits
    a nonprofit organization that matches very
                                                      automobile industry strangling urban re-
                                                      newal. It is a desolate situation—and one
                                                      that has lasted for decades.
                                                                                                     word of its success has spread. The photo
                                                                                                     gallery in the main building shows founder
                                                                                                     Josaitis arm in arm with Microsoft head Bill
    few of the usual preconceptions regarding         Detroit native Eleanor Josaitis wanted to do   Gates, UN Secretary-General Kofi Annan,
    social institutions. Instead of the rhetoric of   something to fight this misery. So over 30     and former US President Bill Clinton.
    misery, there is an air of optimism; instead      years ago, the now 72-year-old co-founded      The founding of Focus: HOPE is also a reac-
    of directing fates, the initiators train young    Focus: HOPE. The first bud of hope emerged     tion to the upheavals of globalization, which
    people in trades with a future, and make          with a simple soup kitchen, but the project    has hit Detroit harder than other cities in
    high-tech products along the way. The name        grew quickly. Today, Focus: HOPE includes      the United States. Up until the 1960s, the ur-
    of the project, in all its unabashed sentimen-    a training center for machinists, managed      ban area enjoyed nearly full employment,
    tality, is “Focus: HOPE.”                         by retired experts from the automotive in-     thanks to Ford, General Motors and others.
    Hope is something the former industrial           dustry. The organization functions as a        “Motown” was a boomtown. Then came the
    metropolis of Detroit does need urgently.         training ground for a new generation of        relocation of jobs, gradually bringing on
    The city is stagnating, with more than 20         practice-oriented, skilled IT professionals,   the crisis. At some point, the social dyna-
    percent unemployment and a crisis-prone           who even receive university degrees. And       mite exploded, according to Tim Duperron
                                         “We have built an institution that
                                         is dedicated to social ideals—and it works.
                                         What more could we ask for?”
                                         Eleanor Josaitis




of Focus: HOPE. In the summer of 1967,            look and mindset are not welcome. Thomas          long program, including obtaining state-
black youths set entire city blocks on fire.      Murphy, a former army officer, teaches the        accredited degrees. Excellence is rewarded
“In the aftermath of the riots, Eleanor went      future machinists, mechanics and computer         with a two- or four-year degree program in
through the area and said, ‘We have to do         administrators not only the principles of         manufacturing engineering.
something.’” Together with the late Father        mathematics, but also to walk with their          A while ago, even the Pentagon joined the
William Cunningham, the mother of five            heads held high. “To be accepted into our         client list. The Department of Defense or-
founded the nonprofit organization. Today,        program, a person must be at the ninth-           dered a mobile repair-system for military
Focus: HOPE has more than 500 full-time           grade level. Everything after that comes          vehicles and weapons. A notable shift: The
employees. Its $72 million annual budget          with discipline and the power of persua-          organization that started out as part of the
comes mainly from donations made by               sion.” Habitual latecomers are expelled           civil rights movement now supplies the US
Detroit’s automakers—partly out of corpo-         from the program.                                 Armed Forces.
rate social responsibility, but also as an        The standards are tough, but they make it         Today, Focus: HOPE is working to improve
investment, since these global players like       clear that Focus: HOPE is different from          its own competitiveness and sharpen its
to draw from this talent pool.                    most other social programs. Here, two cul-        market profile. The Advisory Board, with its
Over the years, Focus: HOPE has also              tures meet: Entrepreneurial thinking col-         highly prominent membership, should help
earned considerable income—from commis-           lides with the norms of the nonprofit sector.     ensure a market-oriented product range.
sioned orders to make products such as            Integrating these two is a question of intelli-   Among its members are a president of Ford,
brakes or water pumps, and from smaller           gent organization, according to Roland            a director of DaimlerChrysler and a Global
research projects. Customers include com-         Berger Partner Wim van Acker, whose com-          Vice President of General Motors. Today, the
panies such as General Motors and Cincin-         pany advises Focus: HOPE on a pro bono ba-        foundation’s high-tech products are increas-
nati Machines. Its commercial branch              sis. What it takes, he says, is a work-sharing    ingly competitive—even in one of the
generated some $30 million in sales during        system, in which experienced employees            world’s most competitive supplier markets.
the last fiscal year. And sales are expected to   and trainees work closely together. “In this      And so Eleanor Josaitis shows her satisfac-
continue growing. Last year the Detroit or-       way we can attain a high level of competi-        tion: “Here we have built an institution that
ganization filed a patent application for a       tiveness while at the same time achieving         is dedicated to social ideals—and it works.
method of producing more-efficient engine         our educational goals.”                           What more could we ask for?”
pistons. “We have become leaders in certain       In addition to work in the production shop,
technological niches,” said Tim Duperron.         the curriculum includes theory, taught by
When milling and stamping activities are          professors from the local universities. “I           FOCUS: HOPE was founded in
undertaken at the workbench, societal ben-        don’t know of any other project that gives           Detroit in 1968 by Eleanor Josaitis and
efits shift to the background. It is more im-     economically disadvantaged, mainly                   Father William Cunningham. The nonprofit
portant to evaluate whether a newly               African-American youth the chance to rise            organization, which had an operating
developed cylinder head can really squeeze        to the middle class like this one,” says Jack        budget of $72.9 million in 2004, is dedicat-
                                                                                                       ed to the education and professional
more power from steel pistons. “Efficiency”       Litzenberg of the Charles Stewart Mott
                                                                                                       integration of youths from marginal social
and “cost” are part of the core vocabulary—       Foundation, which has provided Focus:                groups. Its commercial branch concen-
as is “discipline.” At Focus: HOPE’s “Centers     HOPE with advice and financial support               trates on high-tech products for the
of Opportunity,” as its training centers are      for five years. So far, more than 3000 ma-           automotive industry.
called, strict order is the rule; the hip-hop     chinists have gone through the 10-month-


                                                                                                                                                      57
p business culture         ten years after




     Against the law of the jungle
     Since its founding ten years ago, the World Trade Organization (WTO) helped drive globalization.
     Ireland’s Peter Sutherland served as its the first Director General. In an interview, he looks back at
     this decade. He says the world needs the WTO—and that globalization is good for everyone.


     THINK: ACT Mr. Sutherland, ten years of the        also the United States, India, China and other       the idea of free trade than the challenge from
     WTO—did you celebrate?                             countries have to make moves.                        the anti-globalization movements. The argu-
     PETER SUTHERLAND Definitely. Since its founda-                                                          ments have been essentially won, I believe, by
     tion, the WTO has proven a significant success.    The G20 Group of developing countries is             those who see the positive value of globaliza-
     Its creation has been the greatest advance in      arguing for a complete end to all export             tion. Now many social activists see the WTO
     multilateralism since the creation of the IMF      subsidies on agriculture. A naive approach?          as helpful for the weak. They are becoming
     and the World Bank. For the first time, the        I agree that all export subsidies have to be         defenders of the WTO, as they should be.
     world has a real and effective system for          removed. On the other hand, domestic subsi-
     adjudicating international trade disputes.         dies also have to be dealt with.                     Attac as a WTO defender? We have never
     The WTO has become a basis for the develop-                                                             heard of that.
     ment of globalization.                             There is the idea that agricultural products         It is quite simple: Many NGOs—but not all—
                                                        are cultural issues, necessary for a country’s       see that without the WTO, poor countries
     Some see the WTO in severe crisis.                 national identity. Maybe free trade is not           would be worse off. We now have a rules-based
     We have heard the same thing about the Euro-       everything?                                          system. The alternative would be the law of the
     pean Union ever since its creation, as well as     There is more than a measure of truth in this.       jungle. Then the strong would surely exert
     about the GATT before the WTO. There is a          The WTO is therefore not really about com-           excessive pressure on the weak.
     degree of threat for such institutions that sim-   pletely free trade. But it does lead in the direc-
     ply their decision-making gives rise to. Believe   tion of it. I am aware that the European             Sometimes the WTO itself seems to be
     me, it is not in a terminal condition.             Common Agricultural Policy is not going to be        weak. With Boeing suing Airbus and vice
                                                        completely revoked, but it is in a process of        versa, it seems to be in the hands of political
     The current comprehensive negotiation of           gradual change—not least because of the con-         giants—the EU and the United States.
     multilateral trade reform, the Doha Round,         strained budgets of the member states. But
     is threatening to fail.                            anyone who thinks that we will have purely
     First of all, the Doha Development Round is        market-driven agricultural markets on a
     not the WTO as such. Nevertheless, I admit         global basis soon is living in an unreal world.         PETER SUTHERLAND               was the
                                                                                                                founding Director General of the WTO and
     that if the round fails, then this would have a
                                                                                                                played an important role in its creation.
     strong effect on the WTO. But: The Uruguay         Is the idea of free trade globally on the               Today, he is chairman of BP and Goldman
     Round faced years of crisis before it finally      defensive just now?                                     Sachs International. Befort taking the WTO
     reached a positive conclusion. When a deadline     Yes, there clearly is a rising tide of protection-      post, he was Director General of GATT,
     approaches, as is the case with the Hong Kong      ism. For example, a number of trade bills in the        where he was instrumental in concluding
     meeting of ministers this December, then this      United States relating to China give rise to            the Uruguay Round GATT Negotiations. Prior
                                                                                                                to this position, he was chairman of Allied
     increases the pressure.                            concern about protectionism. Today, the
                                                                                                                Irish Banks.
                                                        process of globalization does create a sense of         He was educated at Gonzaga College, Uni-
     What has to happen for the ministerial             anxiety and apprehension, so some in Western            versity College Dublin, and at the Honor-
     meeting in December to succeed?                    Europe and America are increasingly appre-              able Society of the King’s Inns. From 1969
     The most important issue is agriculture. The       hensive about Chinese and Indian competition,           to 1971, Sutherland was a tutor in law at
     EU has agreed in principle that its agricultural   and this provides fertile ground for protection-        University College Dublin.
     export subsidies have to come to an end. But       ism. These anxieties are more dangerous for


58
                               ten on the rise business culture
peter sutherland sees protectionismyears after business-culture f
p business culture         ten years after




                                                          “It is against free trade if you need a national champion at any price.”
                                                           Peter Sutherland




    That is a unique situation, with only two real        If protectionism is nationalism, then does           are in some ways fixed by agreement between
    competitors in large aircraft manufacture. The        this make anti-globalizers nationalist, too?         oil companies, this is absolutely incorrect. The
    WTO has two functions. It is a forum for nego-        Sometimes this is the effect of their position.      main profit in our industry does not really
    tiations between independent states. And it set-      Some NGOs still apparently believe in a degree       come from the downstream sector but from
    tles disputes. I am sure it will be strong enough     of protectionism that is ultimately against the      exploration and production—that is, the up-
    to decide about the claims by Boeing and Air-         interests of the people they claim to be fighting    stream sector. The big private oil majors only
    bus independently and objectively if the dis-         for, namely, the developing countries. Efficien-     produce a very small percentage of total oil
    pute is not resolved by negotiations directly         cy and innovation are how human progress is          production. The vast bulk of that production
    between the parties, as it should be. No quali-       brought about, and it is generally the result of     is in the hands of state enterprises in the oil-
    fied observer has argued, to my knowledge,            competition. Protection is the antithesis of that,   producing countries.
    that WTO adjudications have been biased by            although there can be exceptions made for
    political considerations.                             limited periods for infant industries in the         Another argument brought up against free
                                                          world’s least developed countries.                   trade is that it supposedly creates poverty.
    Still, EU and United States are fighting to                                                                There is plenty of evidence to the contrary.
    maintain their national champions—an idea             You are supervising two global companies             Recently, UNCTAD statistics have shown that
    contrary to competition and free trade.               now. One gets the impression that most               the share of developing countries in world
    It is against free trade if you need a national       companies could live very happily without            export has risen from 25 to 34 percent in the
    champion at any price. And at the national            competition.                                         last years. And free trade has not hurt devel-
    level, there is even a degree of nationalism in it.   Wrong, most of them do want competition.             oped countries either. It is essentially a win-
    Maintaining national champions at any price           Companies naturally want to rely on their            win situation in macro terms, although it
    results in the wasting of resources. By the end       capacity to compete. But it is true: Some            cannot be denied that some specific industries
    of the 1980s, for example, you had monopolies         companies defend their advantages through
    in most European utilities industries. The lib-       restrictions and support of protectionism.
    eralization that Brussels drove was resisted by
    the governments. They wanted to display their         You are chairman of oil giant BP. Don’t you
    flag through national airlines, among others.         find it strange that national gas prices are
    The customers had to pay for that, but ulti-          awfully similar?
    mately common sense has prevailed and com-            Generally, there is excellent competition in our
    petition now exists in the EU.                        industry. If your question implies that prices




                                                                                                                    Peter Sutherland defends free trade and
                                                                                                                    globalization. He sees his home country
                                                                                                                    as the best example for a country that can
                                                                                                                    gain wealth through liberalization and global-
                                                                                                                    ization.
                                                                                                         FAVORITE TARGET: The World Trade Organi-
                                                                                                         zation (WTO) has been criticized by globalization
                                                                                                         opponents since it was founded in 1995. The
                                                                                                         organization, whose headquarters are located in
                                                                                                         Geneva, Switzerland, is intended to regulate world
                                                                                                         trade. At the core of the trading system are multi-
                                                                                                         lateral agreements. If countries cannot agree, the
                                                                                                         WTO steps in as a mediator.
                                                                                                         The Doha Round negotiations are designed to
                                                                                                         eliminate global obstacles to trade. They are ex-
                                                                                                         pected to make world trade fairer in particular to
                                                                                                         developing countries.




may be hurt because they are better located in      is to help reach agreements between govern-       general liberalization because they want to
one location than another.                          ments, and they are the ones primarily con-       protect their preferences.
                                                    cerned with democracy. The member states
What about recent crises such as Argentina?         reaching these agreements have to ensure          The WTO does not seem to be able to do
Here, the effects of globalization did not          proper consultation and transparency. The         much about that.
seem too good. Have markets been opened             WTO can also improve its transparency in          There is meant to be a discipline whereby
too quickly?                                        various ways. For example, dispute resolution     bilateral and regional agreements are brought
No, Argentina’s problem was largely in the do-      hearings could perhaps be held in public,         to the WTO before finalization. This rule has
mestic management of its economy. Its taxation      subject to closely circumscribed exceptions.      been ignored. Effectively the WTO as an or-
system was not working effectively, and overall                                                       ganization can do little about this unless there
the economy was not managed effectively.            What about the Green Room where United            is greater discipline by the member states.
I come from Ireland. Once a poor country, we        States and European Union agree about
are now number one or two in the world in           their strategy before major negotiations?         In September Pascal Lamy, a former Euro-
terms of the percentage of our GDP that is          That is surely not transparent.                   pean commissioner, became head of the
related to external trade. This is entirely the     It makes sense that smaller groups of countries   WTO. His background won’t help much…
result of opening up our borders and partici-       may sometimes have to meet to bring things        I don’t judge people by their origins. I know
pating in regional and local trade.                 forward because the total membership of the       Pascal Lamy. He will be a fine and independ-
                                                    WTO is almost 150. In my experience, in gener-    ent Director General of the WTO
And of receiving heavy subsidies from the           al, smaller meetings in the Green Room always
European Union...                                   included developing countries like Brazil and     What are the essential talents for the head
No, these were relatively minor in their effects,   India. The WTO is not a rich boys’ club. The      of the WTO?
although undoubtedly helpful. Ireland has           G20 Group of developing countries is also an      Interpersonal skills, negotiation skills and
never gained from direct supports anything          effective group in negotiations.                  some personal prestige—otherwise you don’t
remotely equivalent to its gains from the trade                                                       get access to the political decision-makers.
resulting from EU membership. It is now des-        There seems to be a general trend toward
tined to be a net payer into the EU budget, and     bilateral trade agreements.                       Will the WTO and the idea of free trade no
this is as it should be.                            That is true, and extremely dangerous. There      longer be on the defensive?
                                                    are only nine countries—out of 149—with           One has to be an optimist. A French philoso-
The Philippines had 20 percent more agri-           which the EU does not have special deals. This    pher once said, to be a prophet, you have to be
cultural production ten years ago, and now          creates a challenge to the whole multinational    pessimistic. I think he was wrong. I believe that
have twice as many imports...                       system and is particularly dangerous for the      globalization will continue to work to the good
The most phenomenal successes have also hap-        developing countries.                             for everybody. But there are big challenges.
pened in Asia. If there are economic problems
that remain unsolved, then much is due to           Why is that?                                      Such as terrorism...
home-grown reasons.                                 Special agreements sometimes effectively force    Generally, terrorism seems to come from coun-
                                                    developing countries (often former colonies) to   tries that do not seriously participate in global-
Annother criticism of the WTO is that its           develop their economies in a particular way       ization or free trade. Egypt once had the same
structures are undemocratic.                        which may not be in their best long-term inter-   GDP per capita as Korea. Now Korea is seven
That is nonsense. The WTO’s primary function        est. It may also result in their opposing more    times richer.


                                                                                                                                                               61
p ser vice      credits




     Additional
     insight
     For deeper knowledge about the topics pre-
     sented in the magazine, here are a number
     of books written by our authors or interview
     partners, as well as books that provide more
     information about topics from this issue.
     The Roland Berger Strategy Consultants
     study “Leading for growth” argues that no                       RICHARD LAYARD:                          STUART C. GILSON:                     HENRY MINTZBERG:
                                                                     Happiness: Lessons from                  Creating Value                        Managers not MBAs
     company today can afford to rest on its                         a New Science                            through Corporate
     laurels. Our study on “Trends in service                                                                 Restructuring
     offshoring” shows how Europe’s largest
     corporations are increasingly offshoring
     their service functions.




       service@think-act.info
       Do you have any questions for the editor
       or editorial team? Would you like to learn
       more about studies from Roland Berger
       Strategy Consultants?                                         BURKHARD SCHWENKER,                     STUDY:                                 STUDY:
       Write to us at service@think-act.info                         STEFAN BOETZEL:                         Leading for growth                     Trends in service
                                                                     The path to growth—success                                                     offshoring
                                                                     through expansion and
                                                                     improved efficiency


     One of our own...
     Think:act author Constantinos Markides, Professor at the London Business School, has been nominated for the prestigious Business Book
     of the Year Prize, sponsored by the Financial Times and Goldman Sachs. The title of the nominated book, which management thinker
     Markides wrote with Paul A. Geroski is Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets.
     The winner of the prize will be announced at the end of November.


     MASTHEAD
     PUBLISHER                            MANAGING EDITOR                          PRODUCTION                                      Quelle AG; p. 25 Gaby Gerster/laif, Michael
     Dr. Burkhard Schwenker, CEO          Marlies Viktorin                         Wolfram Goetz (Director.), Ruediger             Dannenmann; p. 26 picture-alliance/dpa;
     Roland Berger Strategy Consultants   EDITORIAL                                Hergerdt, Franz Kantner, Silvana Mayrthaler,    p. 28 ABB; p. 29 Biotest, General Electric;
     Stadthausbruecke 7                   Elmar zur Bonsen, Michael Kuhli          Cornelia Sauer                                  p. 30 HBS; pp. 32–34 Joachim E. Roettgers/
     20355 Hamburg, Germany                                                        PHOTO EDITORS                                   Graffiti; p. 36 Max von Eicken; p. 38 Sylvia
     Tel.: +49 (0)40 3763100              AUTHORS                                                                                  Neuner; p. 40 Sylvia Neuner, James Leynse/
                                          Richard Federowski, Frank Gruenberg,     Beate Blank (Director), Silvia Erhard,
     EDITORIAL ADVISORY BOARD                                                      Mitra Nadjafi                                   Corbis; p. 42 Li Jiangsong/Imagine-china,
                                          Hans Ulrich Helzer, Oliver Jacobi, Dr.                                                   Fritz Hoffmann/documentChina; p. 43 Fritz
     Roland Berger Strategy Consultants   Peter Kesting, Chris Loewer, Andreas     PHOTO CREDITS
     Dr. Christoph Kleppel, Torsten                                                                                                Hoffmann/documentChina; p. 45 HMS; p. 46
                                          Martin, Prof. Séan Meehan (Lausanne),    Cover: Linda Brownlee, Owen Egan, HBS; p. 2     Antony Edwards/Getty Images, LMU Munich,
     Oltmanns, Felicitas Schneider        Prof. Henry Mintzberg (Montreal),        Jun Takagi; p. 3 Hans-Bernhard Huber/laif;      Physics Dept.; p. 47 Z Corporation; p. 49 Owen
     PUBLISHING COMPANY                   Tobias Muendemann, Patricia Preston,     pp. 4–5 Sylvia Neuner, HMS, Robert Laska/       Egan, IMD; pp. 52–54 PR; pp. 56–57 Bill Jackson;
     BurdaYukom Publishing GmbH           Dirk Rheker, Carsten Rogge-Strang,       Forum, Courtesy Hewlett-Packard Develop-        pp. 59–60 Linda Brownlee; p. 61 picture-
     Schleissheimer Str. 141              David Selbach, Jochen von Plueskow,      ment Company, L.P.; pp. 6–7 Sebastian Ibler,    alliance/dpa; p. 63 Claus Lehmann
     80797 Munich, Germany                Oliver Wihofszki                         Sylvia Neuner; p. 8 Arnulf Hettrich/FNOXX,
     Tel.: +49 (0)89 30620-0                                                       Detlef Westerkamp/Ostkreuz; p. 9 Robert         PRINTER
                                          ENGLISH EDITION                                                                          Pinsker Druck und Medien GmbH,
     MANGING DIRECTORS                    Douglas Merrill, Patricia Preston,       Laska/Forum; p. 11 Arnulf Hettrich/FNOXX,
                                                                                   Detlef Westerkamp/Ostkreuz; p. 12 Patrick       84048 Mainburg, Germany
     Manfred Hasenbeck,                   Asa C. Tomash
     Dr. Christoph Schneider                                                       Enge/Medicalpicture; p. 14 Boeing Images;       COPYRIGHT
                                          GRAPHIC DESIGN                           p. 15 Courtesy Hewlett-Packard Development      The contents of this magazin are protected
     EDITOR-IN-CHIEF                      Heike Nachbaur, Kathrin Seiffert,        Company, L.P.; p. 16 Brand X Pictures; p. 17    by copyright law. All rights reserved.
     Alexander Gutzmer (V.i.S.d.P.)       Sabine Skrobek                           Henning Maier-Jantzen; p. 18 Robert Landau/     NOTICE
     ART DIRECTION                                                                 Corbis; p. 19 Courtesy of Australian Capital    The opinions expressed in the articles in
     Blasius Thaetter                                                              Tourism; p. 20 Alex Majoli/Magnum Photos/       this magazine do not necessarily reflect the
                                                                                   Focus; p. 22 Bettmann/Corbis; p. 24 Karstadt-   views of the publisher.


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