I N S P I R A T I O N : Is there a genius loci? p. 12
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g 2 Ausgabe [k Dossie
um, bevo richt!
1 WTO-Vertei rland
2 MBA berg
Volume 2 Issue3
November 2005 The executive magazine by Roland Berger Strategy Consultants
Restructure [ k Dossier, p. 23 ]
1 WTO defender
2 MBA skeptic
3 Change master
Stuart C. Gilson
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: email@example.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.
Dr. Burkhard Schwenker
CEO Roland Berger Strategy Consultants
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
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
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
Restructuring: Why it’s never too early
to start reorganizing the company.
Starting on page 23
p food for thought security
Global market for security technology—entrance
controls, video surveillance, et cetera—in 2004:
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.
10 000 United
)))) ) )
4000 Germany ))
)))) ) ) ) ) ) )
3000 6,8 %
Latin America and Caribbean United Kingdom
Source: German Association of Security System Manufacturers and Installers (BHE)
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 %
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
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
turkey employs the largest number of security personnel food for thought f
140 LGIU es
s € bn sales
mpl € mn
€ bn sales
SWITZERLAND 410 € mn sales
10 000 Employees
154 € mn sales
11 000 Employees es
25 3 4
LY € bn sales
0 Co n sa 302
€ mn sales
yee € mn sales
UG s 000
RT mpanie 26
PO o C
security firms ee
110 € m
Sales in €
GE 0 C
0 C AN
Job machine in Turkey and Poland
In Spain a smaller number of firms has more
450 C RKEY
than twice the sales as in Italy. France offers a
much larger market than the United Kingdom. Source: EU Commission 2005
p food for thought inter view
“Poles are very ambitious and hungry. Our productivity is constantly rising.”
“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
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.
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.
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.
p food for thought where lightning strikes
[ Sony Walkman]
MASS APPEAL FROM A PERSONAL WISH Total sales for Sony in trillions of Yen
found Sony co-founder Masaru Ibuka on a
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
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
A WELLSPRING OF INNOVATION The biggest companies in Silicon Valley
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
p food for thought where lightning strikes
[ The US Prime Rate]
THE MONEY MAN US Prime Rate Percent
still sees Alan Greenspan, who has served
as chairman of the US Federal Reserve
Board since 1987, starting every day by tak-
ing an hour-long bath at 5:30 in the morning.
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)
was the last year that chemical engineer 20000
Arthur “Art” Fry had to put up with book
marks falling out of his hymnal during choir
practice. This continuing annoyance led 10000
him to develop an adhesive strong enough
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
p food for thought where lightning strikes
GOLDEN ARCHES McDonald’s restaurants globally
brought Ray Kroc, a distributor of a five-
spindled milkshake machine, in as new 30000
boss of several locations of a burger joint 25000
originally set up by Richard and Maurice
McDonald. Kroc opened his first store in
Des Plaines, Illinois—the launch of an inter-
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
saw a fateful encounter at the zoo in
Canberra, Australia. A penguin bit Linus 30
Torvalds . An unusual start for the computer 25
operating system Linux. Three years later,
Torvalds adopted the penguin as the logo for
what has become the most successful open-
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
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 ,
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-
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.”
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.
For every problem, there
is a solution that is neat,
simple—and wrong. 9
DOSSIER #04 Restr ucturing
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.
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.
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-
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
representatives are shot. Of course, with the media crisis, today’s most profitable automobile production
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.
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
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-
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
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
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
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.
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
FOURTH, go deep. Employees from all organiza- business schools teach restructuring management
9564 9156 8191
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
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
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.
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.
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.
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’.”
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
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
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.”
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.
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.
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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
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-
DOSSIER #04 Restr ucturing
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
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
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
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.
Restr ucturing as a unified process DOSSIER #04
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.
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
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.
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.
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.
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
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)
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
1970 3-D printers were sold worldwide,” says industry expert Terry 400 250 74.80 22.40 17.90
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
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.”
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
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
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.
Visit www.springeronline.com for more information
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
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.
mba business culture f
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
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.
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
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
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
provide them with
actual added value.”
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-
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.
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?”
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-
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
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
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.”
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-
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
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.
p ser vice credits
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.
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 email@example.com STEFAN BOETZEL: Leading for growth Trends in service
The path to growth—success offshoring
through expansion and
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.
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;
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