Table des matières - Performances Group

Semaine 32 – du 8 au 14 août 2011
N° 186
Table des matières
GDF SUEZ: accord stratégique attend avec le fonds souverain chinois CIC
2
La BCE et le G7 tentent de calmer les marchés
3
Airbus: Cebu Pacific finalise la commande de 30 A321neo
4
How to be a truly global company
5
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GDF SUEZ: accord stratégique attend avec le fonds souverain chinois CIC
Suez s'apprête à signer un partenariat stratégique avec le fonds souverain chinois CIC en AsiePacifique, selon « Les Echos ». Dans ce cadre, il va prendre une participation d'environ 30 % dans le
pôle exploration-production pour 2 à 3 milliards d'euros. Selon le quotidien, GDF Suez va filialiser
l'activité et procéder à une augmentation de capital. Par ailleurs, CIC se verra proposer de participer à
tous les investissements de GDF Suez dans la région, à l'exception de la Chine, n'ayant pas le droit
d'investir dans son propre pays.
L'annonce est attendue mercredi à l'occasion des résultats semestriels. « Les Echos » explique que
l'ouverture du capital du pôle exploration-production va d'abord accélérer la réalisation du
programme de cessions de 10 milliards d'euros sur trois ans annoncé par le groupe afin de réduire son
endettement. Mais surtout, elle permettra à GDF Suez de limiter les apports en financement car ce
métier est gourmand en capitaux.
Les points forts
•
GDF Suez est le premier opérateur gazier en France et le deuxième producteur mondial
d'électricité ;
•
Le rapprochement de ses activités non européennes avec celles d'International Power en fait
également le plus grand exploitant de centrales électriques dans le monde ;
•
GDF Suez est très implanté dans les zones en forte croissance (Moyen-Orient, Amérique latine,
Asie) ;
•
La diversité de ses métiers, sur l'ensemble de la chaîne énergétique, ainsi qu'un modèle
économique qui combine activités régulées et concurrentielles, assurent une certaine visibilité
des résultats ;
•
Le groupe s'est fixé un plan d'investissements ambitieux, qu'il met méthodiquement en œuvre ;
•
Le groupe bénéficie d'un bilan solide, qui le met à l'abri de cessions d'actifs dans l'urgence ou
d'opérations de recapitalisation, le point faible de beaucoup de ses concurrents ;
•
L'action offre un rendement élevé (environ 6%).
Les points faibles
•
Le groupe est très dépendant de son marché domestique ;
•
Les objectifs ambitieux qui avaient été fixés pour 2011, à savoir essentiellement un EBITDA de 17
à 18 milliards d'euros, ont été reportés ;
•
GDF Suez pâtit d'un retard dans le nucléaire par rapport à EDF, qui a quatre à cinq ans
d'avance sur ses concurrents ;
•
Un risque politique est attaché au titre car les tarifs de gaz pratiqués par le groupe dépendent
des décisions de l'Etat français, souvent peu lisibles en la matière ;
•
Les investisseurs ont surtout l'impression que quand des règles sont fixées, elles ne peuvent
finalement pas être considérées comme définitivement établies ;
•
La valeur est à la peine en Bourse. Le secteur des « utilities » ne séduit pas les investisseurs.
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La BCE et le G7 tentent de calmer les marchés
Les responsables financiers des nations industrialisées ont multiplié dimanche et lundi les communiqués
pour rassurer les marchés financiers, effrayés par les dettes abyssales des pays européens et des EtatsUnis. Lundi matin, avant l'ouverture de la Bourse de Tokyo, les ministres des Finances et banquiers
centraux du G7 ont publié un communiqué, où ils ont promis de prendre "toutes les mesures
nécessaires" pour soutenir la stabilité financière et la croissance.
Ils se disent déterminés à agir chaque fois que cela est nécessaire, à assurer la liquidité et à soutenir le
bon fonctionnement des marchés, la stabilité financière et la croissance. Ils réaffirment "notre intérêt
commun dans un système financier international fort et stable et notre soutien pour des taux de
change déterminés par les marchés" et soulignent qu'une volatilité excessive et des mouvements
désordonnés des taux de change a des implications négatives pour la stabilité économique et
financière.
Auparavant, la Banque centrale européenne (BCE) avait annoncé "mettre en oeuvre activement" son
programme de rachats d'obligations pour tenter d'endiguer la crise de la dette qui secoue la zone euro
et menace de se propager aux économies espagnoles et italiennes.
Avant une journée de lundi cruciale pour les marchés, l'institution financière européenne n'a pas
précisé les pays concernés par ce rachat de dettes mais tout laisse à penser qu'il pourrait s'agir
d'obligations de l'Espagne et l'Italie. Dans un communiqué publié à l'issue d'une réunion téléphonique
tard dimanche, la BCE a encouragé Madrid et Rome à mettre en place le plus rapidement possible les
mesures de redressement des finances publiques annoncées récemment par ces deux pays pour
tenter de rassurer les marchés.
"C'est sur la base de ces estimations que la BCE va mettre en œuvre activement son programme de
rachats d'obligations", écrit la BCE. L'absence de rachat d'obligations de l'Italie et de l'Espagne par la
BCE pour calmer les prix a été particulièrement sanctionnée par les marchés qui y ont vu le signe de
divisions internes préjudiciables.
Les marchés espèrent voir la BCE entamer dès lundi le rachat d'obligations d'Etat des deux pays afin de
stabiliser leurs prix. Les taux d'intérêt italiens et espagnols ont bondi ces derniers jours à leurs plus hauts
niveaux en 14 ans. Lundi matin, le FMI a salué les réponses de la BCE et du G7.
COMMUNIQUÉ DE BERLIN ET PARIS
Dans un communiqué conjoint publié dimanche quelques heures avant la fin de la réunion de la BCE,
le président français Nicolas Sarkozy et la chancelière allemande Angela Merkel ont souligné "qu'une
mise en œuvre rapide et complète des mesures annoncées est essentielle pour restaurer la confiance
des marchés."
Selon la Corée du Sud, une conférence téléphonique a réuni dimanche matin des responsables
financiers du G20, qui regroupe les principales économies mondiales, afin d'évoquer la situation
provoquée par les tensions sur la dette dans la zone euro et l'abaissement par Standard & Poor's de la
note souveraine des Etats-Unis.
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Le G20 et la Banque centrale européenne se sont activés dans la coulisse pour évaluer les
conséquences de la crise de la dette de part et d'autre de l'Atlantique, qui secoue les marchés
financiers et fait craindre une rechute des pays occidentaux dans la récession.
Après de fortes turbulences sur les places financières mondiales, qui ont perdu quelque 2.500 milliards
de dollars au cours de la semaine écoulée, dirigeants européens et américains se retrouvent à
nouveau contraints de rassurer les investisseurs sur la capacité et la détermination de leurs pays à
réduire déficits et dettes publiques.
PANIQUE DANS LE GOLFE ET EN ISRAËL
La Bourse saoudienne, la plus importante du monde arabe, a flanché dès samedi, tombant de 5,5% à
un plus bas de cinq mois avant d'afficher une hausse infime de 0,08% à la clôture de dimanche. Mais
c'est à Tel Aviv que le repli a été le plus prononcé avec une chute de 6,99% enregistré par l'indice TA-25
israélien. Le TA-100, plus large, a quant à lui fondu de 7,2%.
Une extension de la crise à l'Italie ou à l'Espagne, après les plans de sauvetage accordés à la Grèce,
l'Irlande et le Portugal, exigerait aux yeux des observateurs un fort relèvement des capacités de prêt du
FESF, doté pour l'heure de 440 milliards d'euros.
Cités par l'hebdomadaire Der Spiegel, des experts du gouvernement allemand doutent que l'Italie
puisse être remise à flot par le FESF même si le fonds voyait ses capacités tripler, car les besoins de
Rome sont selon eux trop importants.
Aux Etats-Unis, l'abaissement de la note souveraine a été dénoncé par le Trésor, qui a estimé que
l'agence de notation "oubliait" 2.000 milliards de dollars d'économies budgétaires dans ses calculs.
A Washington, un conseiller économique de la Maison blanche a déploré la décision de S&P de
dégrader la note de la dette américaine, de AAA à AA+, qui pourrait à terme se répercuter sur tous les
marchés en augmentant le coût de l'emprunt et en compromettant la perspective d'une reprise
durable.
Les alliés asiatiques des Etats-Unis, Japon et Corée du Sud, ont renouvelé leur confiance dans les bons
du Trésor américains, susceptibles de perdre de la valeur.
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Airbus: Cebu Pacific finalise la commande de 30
A321neo
Cebu Pacific, compagnie des Philippines, a finalisé avec Airbus une commande ferme portant sur
l'acquisition de 30 A321neo. « Ce contrat confirme un protocole d'accord annoncé précédemment et
signé en juin dernier a précisé la principale division d’EADS.
« L'A321neo est l'appareil de plus grande capacité de la série A320neo récemment lancée, dotée de
nouveaux réacteurs et de 'sharklets', grands dispositifs d'extrémité de voilure. Grâce à ces avancées,
ces appareils afficheront des économies de plus de 15 pour cent, ainsi qu'une charge marchande ou
un rayon d'action supplémentaires », a rappelé Airbus.
Les points forts
EADS est le n°1 européen et le n°2 mondial de l'industrie aéronautique, spatiale et de la défense. La
principale filiale du groupe, Airbus, est leader mondial de l'aéronautique civile. EADS bénéficie d'un
carnet de commandes très élevé, de presque 10 ans de chiffre d'affaires. Le succès commercial de
l'A380 est manifeste et permet à Airbus de vendre désormais l'appareil 25% au dessus de son prix de
lancement.
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Malgré l'échec sur le contrat des avions ravitailleurs américains, EADS est désormais un acteur que le
Ministère de la Défense américain ne peut ignorer. Le groupe devrait en tirer les fruits à court terme
(nouveaux contrats, procédure d'acquisition d'un groupe américain facilitée...). Grâce à des avances
sur commandes significatives, le groupe dispose d'une trésorerie importante, lui permettant d'absorber
les à-coups du marché et d'envisager des acquisitions. Le groupe a décidé de renouer avec sa
politique de distribution de dividendes ce qui est interprété comme un signe de confiance dans
l'avenir.
Les points faibles
EADS souffre d'un déficit de confiance auprès des investisseurs après une succession de difficultés pour
exécuter ses grands programmes dans le passé. Le marché applique une prime de risque encore
élevée au risque d'exécution. La profitabilité du groupe en 2011 sera encore marquée par le poids du
passé chez Airbus. L'avionneur demeure le principal sujet d'interrogations. Les efforts du groupe pour
réussir le programme de l'A350 ont un coût qui se reflète, entre autres, dans l'augmentation des frais de
R&D. La volatilité du dollar est une contrainte permanente. Son concurrent Boeing est mieux armé pour
faire face à la crise de l'aviation civile du fait de son activité militaire qui représente la moitié de son
chiffre d'affaire contre environ 10% pour EADS. Les budgets de défense sont sous pression et pourraient
affecter les résultats du groupe. Alors que la Chine affiche son intention de compter parmi les grandes
nations aéronautiques au 21ème siècle, la pression s'accroît sur Airbus et en particulier sur sa gamme
court/moyen-courrier directement menacée par le projet d'avions chinois C919 dont le premier vol
commercial est attendu en 2016. Airbus a néanmoins opté pour une remotorisation de sa gamme A320
à horizon 2016.
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How to be a truly global company
Many multinational business models are no longer relevant. Skillful companies can integrate three
strategies — customization, competencies, and arbitrage — into a better form of organization.
During the high-growth years between 1992 and 2007, the globalization of commerce galloped at a
faster pace than in any other period in history. Now, amid the chronic unemployment and anti-trade
rhetoric of the post-financial-crisis world, some observers wonder whether globalization needs a timeout. However, the experience of multinational companies in the field suggests the opposite. For them,
globalization isn’t happening rapidly enough. Whereas GDP growth has stalled in the industrialized
world, consumption demand is still expanding in China, India, Russia, Brazil, and other emerging
markets. The 1 billion customers of yesterday’s global businesses have been joined by 4 billion more.
These customers reside in a much larger geographic area; three-quarters of them are new to the
consumer economy, and they need the infrastructure, products, and services that only global
companies provide.
The problem is not globalization, but the way our current institutions are set up to respond to this new
demand. The prevailing corporate operating model does not work well with the structural changes that
have taken place in the global economy.
Most companies are still organized as they were when the market was largely concentrated in the triad
of the old industrialized world: the U.S., Europe, and Japan. These structures lead companies to
continue building their global strategies around the trade-offs and limits of the past — trade-offs and
limits that are no longer accurate or relevant.
One of the most prevalent and pernicious of these perceived trade-offs is the one between centrally
driven operating models and local responsiveness. In most companies, an implicit assumption is at play:
If you want to gain the full benefits of economies of scale — and to integrate common values, quality
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standards, and brand identity in your company around the world — then you must centralize your
intellectual power and innovation capability at home. You must bring all your products and services
into line everywhere, and accept that you can’t fully adapt to the diverse needs and demands of
customers in every emerging market.
Alternatively (according to this assumption), if you want locally relevant distribution systems, with rapidly
responding supply chains and the lower costs of emerging-market management, then you must
decentralize your company and run it as a loose federation. You must move responsibilities for branding
and product lineups to the periphery, and accept different trade-offs: more variable cost structures,
fewer economies of scale, more diverse and incoherent product lines, and more inconsistent standards
of quality.
Some companies try to use strict cost controls to manage these trade-offs. They put in place a
decentralized operating model with some central oversight, usually augmented by outsourcing. But this
is a tactical move based on expediency, rather than a global strategy. This approach leads to
suboptimal results in today’s complex world.
Other false trade-offs are visible in the tension many companies experience between their current
business model and the needs of the emerging markets they are entering. They wonder:
• Whether to serve existing customers in their home countries or new customers in emerging countries.
• Whether to meet competitive quality standards demanded by consumers in wealthy countries or offer
just the “good enough” features that poorer customers can afford.
• Whether to pursue a strategy of premium or discount pricing.
• How to attract and retain resources and talent, which are perceived as draining away from emerging
markets to the industrial world whenever employees are permitted to migrate.
• Whether, in using resources strategically, to follow the typical Western orientation (toward reducing
labor and accumulating capital) or the view from emerging markets (where labor is inexpensive,
capital is difficult to accumulate, and therefore it is worth investing in building large workforces for
growth).
Corporate leaders expect to have to make stark choices as they expand. But the time has come to
embrace a new business model that encompasses both the established advantages of industrial
markets and the opportunities of emerging economies. (Also see “Competing for the Global Middle
Class,” by Edward Tse, Bill Russo, and Ronald Haddock, s+b, Autumn 2011.) Instead of struggling to
apply a Western business model everywhere, you can adopt a business model that treats
decentralization, centralization, current practices, and potential disruptions not as trade-offs, but as
complements.
C.K. Prahalad, 1941–2010
Portrait by Martin Mörck
In a previous article, “Twenty Hubs and No HQ” (s+b, Spring 2008), we
proposed an essential part of this business model: a global corporate
structure with no headquarters. Instead of a single center, companies
would establish core office “hubs” in many or most of the 20 gateway
countries in the world that house 70 percent of the world’s population
and account for 80 percent of its income. These 20 countries include 10
from the industrialized world: Australia, Canada, France, Germany, Italy,
Japan, the Netherlands, Spain, the United Kingdom, and the United States. The
other 10 are emerging markets: Brazil, China, India, Indonesia, Mexico, Russia,
South Africa, South Korea, Thailand, and Turkey.
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A hub strategy enables a company to provide products and services everywhere. But it will not in itself
resolve the trade-offs of globalization. Companies can accomplish this only with a more comprehensive
business model that (1) customizes their products and services in hubs around the world, (2) unites
business units around a platform of proprietary knowledge and the building of competencies, and (3)
arbitrages their operating models to gain cost-effectiveness, productivity, and efficiency.
An Operating Model without Trade-offs
Some companies are already following these three imperatives, pursuing all of them simultaneously.
Among those that we have studied in detail are Toyota, Marriott, McDonald’s, GE Healthcare, and
several global cellular telephone companies. Leaders in these enterprises have trained themselves and
their teams to be very deliberate about where to customize, how to build competencies, and what to
arbitrage. With this type of operating model, there is no longer a need to choose between a
centralized and a decentralized structure, between current and future customers, or between a
strategy grounded in industrialized economies and one grounded in emerging economies.
To illustrate these three imperatives, we draw on the experience of GE Healthcare (customization),
McDonald’s (competencies), and the Chinese and Indian mobile telephone industries (arbitrage). It’s
important to remember, however, that all these stories involve integrating all three elements — a rare
feat. Only with the full operating model can a company gain the benefits of decentralization,
centralization, and outsourcing without making compromises.
• Customization. The key to this imperative is to deliver products and services in a locally competitive
way. That means they must satisfy the needs and wants of diverse customers, in terms of features,
affordability, and cultural affinities. Because needs and wants vary greatly among people at different
income levels, this objective is complex and expensive to reach in any centralized way. That is why
companies must leverage the diversity of a decentralized structure.
Is there a simple and coherent way to deliver customization to customers in 200 countries spread over
five continents? The answer is yes, through the hub system: Companies customize only in a maximum of
20 gateway countries. With this limited investment, they can serve customers everywhere, on every level
of the income pyramid, from the wealthiest to the poorest. These 20 countries have enough scale in
themselves to offer the necessary economies and growth potential. They are also well equipped with
skills: Manufacturers of goods will find the suppliers and employees they need to meet reliable quality
standards in operations, and they will also find innovation and R&D facilities already existing there. The
logistical and institutional infrastructure is well developed in most of these gateway countries, integrated
into international regulation and trade. Each gateway country can independently perform most
necessary business activities; when linked together, they make up a formidable network.
Many companies will settle on fewer than 20 hubs; each industry requires a different selection of
gateway countries to meet differing tastes and needs. Reducing complexity in this way also
dramatically reduces a wide range of overhead costs for large global companies, while enabling them
to travel the last mile to customers. For example, by trimming back supervisory layers to only those
needed by the gateways, companies can cut overhead costs significantly.
GE Healthcare’s story illustrates how expanding through a few gateway countries enabled it to thrive in
many locations. Its primary business is high-end medical imaging products. In the late 1980s, GE
Healthcare started investing in ultrasound machines, designing separate devices for use in obstetrics
and cardiology. Over time, the business became a market leader, with a portfolio of premium products
employing cutting-edge technologies, sold primarily to big hospitals in rich Western countries.
Very few devices made by GE Healthcare were sold in China and India in the 1990s, although the
medical need was enormous and the region represented a huge potential market. In these large but
poor countries, the general population relied (and still relies) on poorly funded, low-tech hospitals and
clinics in small towns and villages. None of these organizations could afford sophisticated, expensive
imaging machines. There was a significant need for customization: Someone needed to create lowPerformances Veille
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priced machines with basic features that were easy to use. The devices also needed to be portable, so
that medical workers could bring the machine to the patient, rather than the patient to the machine.
GE Healthcare started a major effort in 2002 in China to tackle this problem. The initiative was favored
by a corporate policy put in place a few years earlier: reorganizing some emerging-market enterprises
into semi-autonomous “local growth teams” with their own P&Ls. This meant that GE Healthcare could
now create a local business oriented to China’s particular needs and advantages, drawing on local
talent and combining product development, sourcing, manufacturing, and marketing in one business
unit. The price of a conventional Western ultrasound machine is between US$100,000 and $350,000.
GE’s first portable machine for China was launched at a price of only $30,000, and by 2007 a newer
machine was on the market for $15,000. Sales took off in China and then in a few other emergingmarket gateway countries.
Soon, customization worked in the other direction. Applications were found for these devices in several
rich countries as well, at accident sites and in clinics and emergency rooms. Sales rose from zero to
more than $300 million in five years. In 2009 — as recounted by GE chief executive officer Jeffrey Immelt
and innovation experts Vijay Govindarajan and Chris Trimble in the Harvard Business Review in October
2009 — GE announced that “over the next six years it would spend $3 billion to create at least 100
healthcare innovations that would substantially lower costs, increase access, and improve quality.”
• Uniting around a platform of competencies. This initiative means aligning your entire global company
with a common core purpose, a body of proprietary world-class knowledge, and the competencies
that distinguish your company from all others.
The core purpose must be understood equally in all functions and geographies of the corporation.
Every individual should know the strategic principles of the business — which are the same around the
world, but adapted differently in each locale. For example, providing “everyday low pricing” is the core
purpose of Wal-Mart Stores Inc. Although that principle remains constant, the implementation varies
considerably; Walmart in India is a joint venture wholesale operation, and Walmart in Mexico operates
restaurants and banks as well as superstores.
The core competencies at the heart of this platform include proprietary technology and intellectual
property. These are the unique pieces of knowledge and know-how that distinguish any company —
not the applications or technologies, but the standards and platforms of knowledge that the company
creates and makes its own. They may include manufacturing processes, supply chain and logistics
systems, customer insight–gathering processes, or distribution and access systems. They are made
available to all operations, everywhere in the world, and are used to customize offerings and arbitrage
procurement and costs.
At the McDonald’s Corporation in the mid-2000s, this type of unity represented a dramatic shift away
from the rigid hierarchies, brands, financial performance metrics, and reporting relationships of its old
centralized model. The restaurant chain had embodied the centralization model for many years. Every
aspect of the system had been standardized around the world: brand identity, product offerings,
packaging systems, franchise arrangements, and the design of the stores. All this had come out of a
single manual, and the company’s rigidity had helped it prosper, because it was seen as exporting an
image of the American lifestyle.
But standardization began to reach its limits around 2001. There was a distinct shift in consumer taste
toward healthier, more nutritious foods. In the U.S., fast-food restaurants in general and McDonald’s in
particular were blamed by many for the emerging obesity epidemic, especially among American
children. Customers started switching to other chains. In the rest of the world, McDonald’s was identified
with American tastes, and seen as being out of sync with the needs of non-U.S. consumers.
The McDonald’s leadership responded by creating a new platform on which the company could unite:
not standardization, but a common thrust to provide fresh food, healthier menu options, and
customized offerings for different cultures. Product offerings were no longer centralized, and the menus
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at McDonald’s restaurants vary widely, while unity remains firmly entrenched where it should be — in
branding, technology, and the business processes that gave the company its differentiation, cost
bases, and productivity. The brand logo, color schemes, and store layouts are the same around the
world. Procurement and distribution systems are centrally managed to ensure that deliveries take place
on time to more than 32,000 individual restaurants. Structured training from a common playbook is
given every day to store associates in all locations. The company’s proprietary knowledge remains
centrally and rigidly controlled.
• Arbitrage. The final imperative involves gaining effectiveness and reducing cost by finding less
expensive materials, manufacturing processes, logistics systems, funds sourcing, or infrastructure. Most
companies have addressed this tactically, by offshoring back-office work or moving manufacturing to
locations with lower-cost labor. This is generally a defensive or reactive move, rather than a wellconsidered strategy.
An arbitrage initiative is much more systemic. The business looks at its production flow and
disaggregated cost chain as a whole, seeking optimized sourcing, sales conversion, and go-to-market
options. The initiative approaches materials, factory locations, and people as part of a single system,
taking into account the processes and procedures within the most important hubs, and among hubs as
well.
The history of mobile telephony in China and India provides a good example of the power of arbitrage.
These two countries together have more than 1 billion cell phone users, and the number of new
connections in India alone exceeds a staggering 10 million a month. In the early 2000s, the groundwork
for new networks in China and India was laid by a few farsighted telephone companies. At that time,
landline networks were sparse, and the number of homes with phone lines was a minuscule fraction of
the total households. The only way to build a profitable phone system was to create “network value”:
access to enough other people and institutions to make the system feel indispensable. This meant
providing telephone access to millions of prospective customers who had never used a phone, who
lived on $2 a day, who had no money to buy the phones outright, and who lacked the bank accounts
and credit cards that would allow them to sign service contracts.
The pricing structures reflected these realities. In India, for example, Reliance Industries Ltd. (a large
nationwide conglomerate) sold Nokia and Motorola handsets for as little as $10, lowered call rates to
two cents per minute for these phones, and sold prepaid cards that customers could use both to pay
for and to ration their telephone use. It took skillful collaboration among cell phone manufacturers and
carriers to accomplish the arbitrage needed for them to offer such prices. Manufacturers such as Nokia,
Motorola, and Samsung offered their products, product knowledge, and R&D capability at a reduced
cost; carrier companies such as Vodafone, China Mobile, and Airtel invested in cell phone towers and
switching equipment with minimal return at first. Then Airtel in India took a hugely innovative step.
Realizing that its own capital for network expansion was constrained, it brought in Ericsson, Siemens,
Nokia, and IBM as network equipment and IT vendors, convincing them to forgo their ordinary fee
structures. Instead, Airtel paid these companies on the basis of usage and revenue. Airtel thus
converted fixed infrastructure costs to variable costs and improved its ability to offer low prices to
customers.
Another form of arbitrage, deploying the most inexpensive marketing and distribution channel
available, was an essential factor in creating a mass mobile phone market. Reaching people in remote
Chinese or Indian villages was a huge challenge. Little grocery shops, often housed in temporary
structures, were often the only commercial channels available to consumers there. These stores sold
everyday-use products such as soap, cigarettes, and matchboxes. Instead of creating a new channel
of dedicated telephone stores, the phone companies established partnerships with these outlets; they
stocked and sold the prepaid cell phone cards. This would never have happened if the telcos had
followed their old pricing and distribution models.
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Bringing the Elements Together
Some companies recognize the benefits of customization; they are moving into new geographies
through gateway countries. A growing number of companies are uniting around platforms of
competencies. And, of course, many companies practice arbitrage. But until they join the few pioneers
that combine these three elements, most companies will not get the full payoff of the new operating
model. Indeed, the three cases described in the previous section are successful precisely because they
integrated all three elements.
For example, GE Healthcare had to drop the price of its ultrasound machines by more than 90 percent
in order to have its products accepted in emerging markets. Its solution involved not just customization,
but arbitrage: It used an ordinary laptop computer instead of proprietary hardware. These machines
did not have many of the features of their expensive counterparts, but they could perform such simple
tasks as spotting stomach irregularities or enlarged livers or gallbladders. This made them critical tools for
doctors at rural clinics. The laptop-based design, in turn, drew heavily on GE’s platform of
competencies: specifically, experience with other projects that had shifted from using custom
hardware to using standard computers. The new devices also incorporated breakthrough ideas from
scientists in the GE system with deep knowledge of ultrasound technology and biomedical engineering.
Similarly, the McDonald’s story did not only involve unity around a platform. The company also saw the
power of customization. Today, McDonald’s offers rice burgers in Taiwan, vegetarian entrees in India,
tortillas in Mexico, rice cakes in the Philippines, and wine with meals in many European cities.
McDonald’s also extended its already impressive arbitrage capabilities through sophisticated sourcing
and distribution practices, tailored to each location’s opportunities.
The arbitrage in the Chinese and Indian mobile phone story also depended on the other two elements.
Although the prices were low, the equipment was standard quality; networks had to seamlessly
integrate with the world’s telecommunications systems. The companies involved, including the vendors
such as Siemens, Motorola, and Ericsson, drew upon their platforms of proprietary knowledge to make it
work. Everyone customized relentlessly, varying the payment plans, the amounts coded into phone
cards, and the services offered to support the different needs and interests of telecom users in each
country.
For another example of the way these three elements can be deliberately combined, consider the
case of Marriott International Inc. Throughout most of its history, the company followed a centrally
driven strategy with tight controls over the look and feel of its properties. But the company was also
willing to experiment. For example, in 1984, it was the first hotel chain to offer timeshare vacation
ownership.
Like McDonald’s, Marriott learned the problems of rigorous centralization firsthand. In 2001, when it
opened a timeshare in Phuket Beach, Thailand, the venture failed. Gradually, Marriott realized that the
reason had to do with cultural differences: Asian tourists, especially the Japanese, want to visit multiple
places during a single vacation. They typically stay two or three days in one location and then move
on. This made them very different from Marriott’s U.S. and European holiday travelers, who prefer to stay
in one place for a week or more. In 2006, the hotel chain launched a timeshare network called the
Marriott Vacation Club, Asia Pacific. Customers could hop among locations, spending their annual club
dues anywhere in the network. This customization initiative turned a failed project into one of the
company’s fastest-growing businesses.
In initiatives like this, Marriott draws on its central strengths, including a devotion to knowledge that starts
with the CEO (and son of the founder) J.W. (“Bill”) Marriott Jr. In his 1997 book, The Spirit to Serve:
Marriott’s Way (with Kathi Ann Brown; HarperBusiness), Marriott wrote, “Our principal product is probably
not what you think it is. Yes, we’re in the food-and-lodging business (among other things). Yes, we ‘sell’
room nights, food and beverage, and time-shares. But what we’re really selling is our expertise in
managing the processes that make those sales possible.” This approach is reflected in Marriott’s strong
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“spirit to serve” philosophy and its highly centralized recruiting approach for seeking out dependable,
ethical, and trustworthy associates. The company is known in the U.S., for example, for its robust efforts
to train welfare recipients to make a permanent transition into the workforce, and worldwide for its
extensive profit-sharing practices and human resources support.
The company’s collegial culture allows it to pare back the expenses of oversight and supervision;
everyone naturally pays attention to cost and efficiency. Marriott also demonstrated its facility for
arbitrage through its early adoption of the Internet as a vehicle for making and confirming reservations.
Many CEOs and top managers are still asking themselves when the bad times will end. No one has the
answer, and even in a robust recovery, competition will not slacken. A better question is, What can we
do now to establish ourselves in the new global economy? Consumer-oriented companies will need to
deliver world-class quality in their products and services, customized for purchasers in multiple locales
and circumstances, with significant price reductions (affordable to people at the lowest income levels).
They must also provide their customers varying forms of access (owning, renting, or leasing equipment).
This cannot be done when a company is striving to balance decentralization and centralization. It can
be accomplished only by companies that transcend the old trade-offs and seek operating models that
allow them to serve the largest numbers of people while meeting the highest possible standards.
How CEA Security affects investment
The common wisdom has it that as time winds down on a CEO’s contract, boards should be worried
about a couple of possibilities. Concern number one: To earn a higher end-of-term bonus and/or a new
contract, the CEO might underinvest in long-term R&D and capital expenditures in an effort to make
short-term earnings look stronger. Concern number two: The CEO might overinvest in risky projects to
show that he or she is “indispensable” to a just-launched initiative.
The reality of the dangers posed by these so-called myopic CEOs is actually somewhat worse than that
conventional wisdom, says this paper, which examines how the length and type of a CEO contract
affects investment behavior. Using 20 years of data about the performance of more than 3,700 CEOs,
the author finds that overall investment activity declines as the contract deadline nears. But if short-term
CEOs are cutting back on investments to bolster earnings or throwing money at them to prove their
indispensability, they don’t seem to be succeeding: Their firms are no more profitable than others,
according to the researcher.
The study is the first to find that a chief executive’s investment strategies depend on the length of time
remaining on his or her contract; the author calls this the contract horizon effect. CEOs invest much
more at the beginning of their term, the researcher says, suggesting that chief executives who are tied
to long contracts feel stable and secure enough to make long-term investments.
To keep CEOs focused on the right kind of investments, and not have their decisions distorted by endof-term worries, the paper implies, boards should consider renegotiating CEO contracts before they
enter their final phase. The paper’s findings also have implications for how boards should view the
performance of CEOs who don’t have a fixed-term contract. Compared with chief executives who
have fixed terms, these CEOs, working under a so-called at-will arrangement, invest much less
throughout their tenure and produce lower earnings as their time comes to a close, the author says.
The author analyzed 3,717 employment contracts or summaries of employment terms, culled from U.S.
Securities and Exchange Commission filings and from the Corporate Library, an independent corporate
governance research firm. Spanning the period from 1989 through 2008, the contracts covered 2,371
U.S. firms with an average book value of US$1.18 billion. The data set allowed the author to track
changes in CEOs’ investment behavior during the course of their tenure and to measure the impact of
their contract type and length on executive and firm performance.
First, the author had to differentiate between fixed and at-will arrangements. Under at-will employment,
the company or the employee can sever ties at any time, so that a CEO is effectively working with the
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constant possibility of losing the job. Under fixed-term contracts, early termination leads to severance
pay or costly litigation.
The industry with the highest number of at-will contracts in the sample was software, which is in line with
the argument that firms with high operating risks prefer to protect themselves with more flexible CEO
arrangements. The highest number of fixed contracts was in banking. (Not all CEOs sign explicit
employment documents, so the author treated those without formal contracts as at-will employees,
which had no effect on the resulting analysis.)
Although having a fixed contract doesn’t necessarily mean that a CEO will stay for the entire stipulated
period, it does generally result in a longer tenure than an at-will arrangement. On average, the author
found that CEOs with fixed-term deals stayed two years more than at-will CEOs.
To isolate the effects of contracts on investment, the author ran several models that controlled for a
variety of factors, including CEO age and career path and such industry variables as the quality of
corporate governance, volatility of sales, firm survival rates, investment opportunity, company size, and
risk measures. The author performed several regression analyses across different contract lengths,
looking for correlations with capital expenditure and R&D spending.
The author found that investments decreased over the course of a fixed-term contract; CEOs spent 20
percent more on capital projects, for example, in the first year of a five-year deal than in the last year.
The horizon effect in the last two years of the contract is stark in the other direction: Investment is lower
by 8 percent in the penultimate year compared with the year before that and falls another 9 percent in
the final year.
At-will CEOs also showed a decline in investment activity over time; overall, however, the analysis
showed they invested much less than their peers, implying that to some degree they always feel like
short-timers. By contrast, CEOs with a longer expected horizon invested more than their peers, a finding
that held true when the comparison was made both with at-will CEOs and with CEOs whose fixed-term
contracts were almost up. The author ran several models to gauge the impact of these investment
approaches on profitability. Although the models revealed no earnings improvement under the
stewardship of CEOs in the waning days of a fixed-term contract, they showed that profitability for CEOs
with at-will deals was lower as their time neared an end, which was presumably a reflection of the
increasing tenuousness of their employment situation.
If boards want to keep their investment programs on track as periods of possible transition approach,
they should carefully consider how they structure their CEO’s contract, the author concludes.
The type and duration of CEO contracts have a big effect on decisions involving investments in
research and development and capital projects. Overall, CEOs with long fixed-term contracts invest the
most, and mostly at the beginning of their tenures. To keep investment programs on a more stable basis,
boards should consider renegotiating contracts before they enter their final phase.
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