At Chief Executive’s CEO2CEO Leadership Summit, co-sponsored by Bain & Company and Korey Kay, CEOs gathered in New York in late November to contemplate this blend of opportunities and hazards. They also shared experiences in establishing a toehold-or building on an existing one-in emerging markets, namely China, Japan, South Korea and India. Like most CEOs, those at the conference expressed wariness about expansion in Eastern Europe and South America. And while they predicted that Western Europe and North America will remain important, Asia, they said, is where the growth is.
“Our foreign policy has not endeared us to the rest of the world right now, and that’s going to be a long and lasting problem,” Greenberg told attendees. He also expressed concern that the benefits of globalization haven’t been shared evenly among the populations of many countries, and that could be fueling a backlash against free trade and financial flows. “If all companies do is make a lot of money in a country and export it out without investing in that country, that’s not going to help,” Greenberg said. “We have to do more to make the locals and the country itself benefit from globalization.”
Greenberg also cautioned CEOs that building a presence in Asia requires perseverance and commitment, including personal involvement from the top. “If you’re going to try to do business in any part of Asia, be prepared to be there yourself,” he said. “Because a leader there doesn’t want to meet with your regional vice president or No. 2. That’s an insult to them. So if you’re not prepared to put in the price of doing that, then don’t bother, because you won’t get what you’re after.”
Greenberg practices what he preaches. During the 17 years it took AIG to break into the Chinese market, the CEO made countless trips to the region in a campaign to build relationships and negotiate favorable terms. “The payoff was that we got the first license in 1992, and today we own 100 percent of eight branches located in the best parts of China, while everyone else has 50-50 joint ventures,” he recounted. “So it was worth the effort.”
Greenberg also relies on the personal touch in Malaysia, where he has met repeatedly with Prime Minister Mahathir Mohamad to negotiate a path around the country’s requirement that foreign insurance companies divest 30 percent of their stock to so-called bumiputras, or local Malaysian businessmen. “I wasn’t about to convert the branch to a local subsidiary and divest,” he said. “So we’ve been pressured and tortured and I’ve seen Mahathir a zillion times over this-but we haven’t done it. If I had sent a No. 2 or No. 3, we would have been forced to do it.”
Greenberg has little patience with companies that opt for token efforts or piggyback on the success of other U.S. companies to build outposts in the region. “The worst thing you can do is be in and out,” he said. “We’ve seen companies come in, hire people from us or from other companies and then a few years later pack up their tents and go home. You destabilize the market and wreck it for others-and soil the reputation of Americans.”
With the growth in today’s emerging markets likely to outpace that of the U.S., Weill said joint ventures bring the twin advantage of facilitating more rapid expansion in high-potential areas and, in the case of China, enabling the company to break into a lending and exchange market still closed to foreign firms. “It’s not as good as the model of owning 100 percent of something if 100 percent can work in a country,” he acknowledged. “But in Japan, where the bodies of financial services companies who tried to do it without partners line the roads of Tokyo, you’re much better off working with a Japanese partner. And in China, where we wouldn’t have been able to think about being in the credit card business for three more years, doing something in the way of a joint venture allows us to get a big head start.”
Of course, the pursuit of joint ventures can be fraught with peril, especially for companies with intellectual property protection concerns. Because of trade secret and quality control concerns, Medtronic, a $7.6-billion medical device maker in Minneapolis, insisted upon complete ownership of its manufacturing operation in China and rejected the idea of doing R&D in the region. “We made a conscious decision to hold out for a 100 percent wholly owned entity in China, which was also our approach in Japan,” said Arthur Collins, CEO of Medtronic. “We make life-sustaining products that are highly regulated so the ability to manufacture on a consistent basis is extremely important to us. We want to have strict control over how these people act and how they’re trained.”
The way some U.S. companies avoid having their latest technologies copycatted before their eyes is to simply not introduce them into certain Asian markets. Sealed Air, a $3.2-billion New Jersey-based packaging manufacturer, brings only second- and third-generation technology into its operations in China and India, said CEO William Hickey, because of concerns that its intellectual property will not be respected. “As a result, we don’t bring to those people and those markets the best products we can make,” he said.
While IP theft is one major concern, another is understanding who your overseas business partners are and grasping the political context in which they operate. Jack Devine, a 32-year veteran of the Central Intelligence Agency and now president of The Arkin Group, advised CEOs at the conference to carefully screen their local employees and understand the relationships among local decision-makers. He told of how one U.S. company aligned itself with a local firm in China to build a power plant. But the plant’s profit was nowhere near what was planned. Puzzled, the company investigated and found that electricity was being siphoned off to a neighboring plant. “Next they found that the person who owned the plant next door was the brother-in-law of the plant manager,” Devine said. “So they took it to the governor, but guess what? The governor was a cousin of the brother-in-law.”
Too often, he explained, companies rush through the due diligence process, failing to sniff out the potential pitfalls and foresee bureaucratic hurdles. “It’s not just a matter of getting a handle on the books; it’s understanding the political dimensions of your partner,” Devine said. “Are they plugged into organized crime or into the political system in a way that will enable them to leverage you out of it?”
Ideally, companies need to build teams adept at sensing shifting political and social trends, which then can be charged with delivering relevant information up the chain of command. Such on-the-ground intelligence can provide an early warning of government policy changes, a competitor’s plans or even a terrorist threat to a U.S. company-owned facility.
What’s more, U.S. companies should not always expect fair play when negotiating overseas. Come back to your hotel room early from a meeting and you might just find your door locked from the inside and the sounds of activity within. “If you’re involved in a major contract that impacts national economic interests, whether it’s in Europe or Asia, you need to be mindful of economic espionage,” Devine warned.
The same communications technology that makes it possible to call home from a cell phone in Beijing or send a file over your hotel phone line has a downside. “Picking off your cell phone or putting a sniffer on your computer and tracking your email is easy,” Devine said.
Taking advantage of opportunities, while sidestepping local hazards, requires real management skill, both at the CEO level and down through the organization, attendees said. That’s one reason why solid international experience is increasingly essential for the men and women who sit in corner offices. “Without cross-cultural experiences early on, you can become pretty myopic,” says Ron DeFeo, CEO of Connecticut-based Terex, half of whose sales of construction equipment are outside the U.S. “It helps to have people who have lived and worked overseas early in their career.” (See The Global CEO, page 24.)
However, American executives seem less willing to relocate abroad with their families than in previous decades, and certain countries impose limits on the number of expatriates who can live on their soil to manage operations. So it’s increasingly important to create a blend of expatriate and local management. “Whether it be here in America or where we trade in 136 countries around the world, the immigration laws are making it more difficult to bring people into an operation,” adds Chuck Pol, chief operating officer of BT Americas. “What we do is bring people in for six to 12 months, pass the intellectual capital to the locals and then bring the people back to wherever they came from.”
So there are many challenges to operating in international markets, but one major challenge may be arising in Washington, particularly in an election year. AIG’s Greenberg and others said they were very concerned about steps toward protectionism. His remarks were made before the Bush administration lifted some steel tariffs, but there are plenty of other trade issues brewing. “We’ve been preaching that open markets are good for years and now we’re sending mixed signals by implementing tariffs,” Greenberg said. “We’ve all got to start lobbying hard against tariffs, because they will have long lasting effects. There will be no globalization if we don’t stop that in its tracks.”
Despite these challenges, after two years of playing defense in the face of corporate scandal, recession and a plunging stock market, the chief executives at the conference argued that the benefits of international sales make continued globalization a must.
Going For Growth
Tech seems to be recovering. “Old economy” companies are poised for big gains, too.
As Corporate America emerges from a lengthy, batten-down-the-hatches period of rigorous cost-cutting, growth is back at the top of the CEO agenda. Yet the CEOs charged with delivering the next wave of growth must do so in a world economy that isn’t growing as fast as it has in past decades.
In fact, 87 percent of CEOs say they face a more challenging growth environment than they’ve personally ever experienced before, according to a survey by consulting firm Bain & Co. “This is a more troubling period than companies have encountered for several decades in terms of actually fulfilling the desire to find the next wave of profitable growth,” Christopher Zook, head of the strategy practice at Bain, told conference attendees.
Despite this inhospitable growth climate, companies are forecasting revenue growth of, on average, twice their market growth rate and earnings growth of four times market growth. “For the past decade, only one out of 10 companies achieved revenue and profit growth of more than 5 percent and earned back their cost of capital,” said Zook, who noted that 80 percent of CEOs surveyed say they face a growth gap they don’t know how to close. “That means most of these forecasts are not going to come close to being true.”
Wild Roller Coaster Ride
As industry competitors, clients and partners fell into bankruptcy, Russo launched a restructuring effort focused on scrutinizing cost structure, inventory levels, working capital requirements and cash burn rates. “I couldn’t control what was going on in the industry or whether another company filed Chapter 11,” she said. “So we focused on what we could control.”
The discipline paid off. Lucent recently announced its first profitable quarter since March of 2000, a recovery milestone. It’s a turning point Russo had been paving the way for since rejoining the troubled firm in January 2002. “One of the challenges was telling the financial community, €˜Look we could get back to profitability faster, but we might not have a company left,'” said Russo, who sought to balance short-term restructuring efforts with the need to prep for future growth throughout the expense-trimming maneuvers. “But we continued to invest in research even in the most challenging times, so that we would be able to bring new products to market.”
Investing in innovation and product development during difficult times is the key to achieving growth, many CEOs argued. Medtronics’ Art Collins spoke of how his company has increased R&D spending despite profit challenges. Corning’s Jamie Houghton described how his company continued to invest in technologies such as glass for flat panel displays even though Wall Street was urging him to concentrate on fiber optics and become a “pure play,” which would have been disastrous. Sidney Harman of Harman International said he urges his managers to anticipate where the “arc” of technology is going and race to embrace it, even if it means “cannibalizing” existing products.
If there’s one industry that epitomizes global competition, it might be chemicals. CEO Nance Dicciani described how Honeywell’s specialty materials division is ramping up a growth initiative after a brutal period of cutbacks. In 2000, Dicciani said she took a hard look at marketplace trends and decided it was time for an overhaul of her business. The result was a portfolio review initiative that involved putting each one of the company’s businesses under the microscope to decide which ones passed muster. “Our philosophy is that profitability and profitable growth is a lot more important than size,” said Dicciani. “We ended up deciding that we had five real growth platforms representing 50 percent of our portfolio, which meant businesses we didn’t see ourselves investing in long term were a large part of our portfolio.”
To refine its focus on its high potential businesses, Honeywell cleaned house-selling six businesses and closing 12 plants and selling 11 others over the past two years. Recognizing that both innovation and discipline are critical to its future growth, the company instilled Six Sigma processes throughout its R&D and production processes. “We put in a stage gate process so that everything gets reviewed at certain points in the pathway,” Dicciani said. “There’s a saying in Six Sigma, €˜Fix it even before you build it,’ and we’re absolutely rigorous about it.”
That kind of coupling of creativity with discipline is a hallmark of successful innovation, according to Bain. “The most creative companies in the world are actually the most disciplined,” said Zook, who pointed to companies that drill down into their core customer base for ways to push their core business into new areas. “The best ideas don’t come from gazing out, they come from gazing in and looking at your core.”
It’s a philosophy that Dicciani fully embraces. “We look at the technologies we have, the product lines, the customer base and the geographic reach, and we build on those things by looking for unmet needs,” she said.
Sol Trujillo, CEO of European telecom company Orange SA, sees wireless communications as the trend that is going to force new investment in network capacity, data storage and other major fields. But he cautioned that for the technology industry to get back on a solid growth trajectory, it is going to have to pay closer attention to customer needs and wishes. To that end, he cautions his developers against what he calls a “hardware mind-set.”
“Everybody in our industry likes to talk about slick designs with lots of applications, but I’ve been in the technology world a long time and I know that if we make it simple-one touch, one step-usage will go up dramatically,” he said. “So I’ve got everyone in our company, technologists and R&D people, working on ease of use.” If the use of application or device can’t be taught in 30 seconds or less, “it ain’t good enough,” said Trujillo.
Consolidation across technology industries also will help the survivors return to profitability. While data storage company EMC took a tumble during the downturn-market cap plummeted from $225 billion to $25 billion-CEO Joe Tucci views the company as well-positioned to capitalize on growth opportunities. “Throughout that period, we never had a cash problem and today we have $6.2 billion cash and no debt,” said Tucci, who feels technology firms are “in the first inning” of a period of massive consolidation. “So we’re using that not only to grow organically 12 percent, but to try to double that by adding acquisitions.” The company has bought both Legato and Documentum in recent months.
The Old Economy Gets Hip
“Today, we have mega platforms-SAP for finance and PeopleSoft for human resources-in place, and we’re rolling out a point-of-sale inventory system, cordless scan guns, and 800 self-checkouts this quarter,” reported Nardelli, describing a $400-million investment in technology in 2003.
It’s perhaps no small coincidence that CEO Larry Johnston, another GE veteran, is undertaking a similar technology overhaul at food and drug retail chain Albertson’s Inc. With a view of differentiating his stores from less advanced competitors, Johnston plans a $500 million investment in technology to reengineer every aspect of its business-from back room distribution and supply chain systems to the shopping experience for customers on the front end.
Persuading and Accelerating
Looking at growth opportunities for his industry, Johnston pointed to ecommerce. “I believe the Internet will transform the supermarket and drug store industries,” he said. While viewing the market for online shopping with home delivery as relatively small-2 to 4 percent-Johnston deems the potential for building customer loyalty through Internet applications as an immense opportunity. He described a customizable home page portal where consumers can view their purchase data and plan menus, then carry that information to stores on a handheld device.
“In one family, you might have a vegetarian, someone on the Atkins diet, and someone with a peanut allergy; you’ll be able to put all that information into menu planning and hit a button that will suggest a shopping list,” explained Johnston, whose company now has 2,300 wireless stores where shoppers use handheld devices to scan items as they roam store aisles. As the technology liaison with customers develops, Johnston envisions a day when shoppers will be able to pick up a handheld device at their local Albertson’s and punch in a personalized security code that will authorize the device to import their shopping information from the Internet. “Then, as you scan items that you pick up, if your daughter is allergic to peanuts and you happen to take something with a peanut ingredient, it will alert you.”
Since getting employee buy-in is crucial in bringing this vision to fruition, Johnston travels the country holding town hall-style employee meetings describing a mission that blends aggressive cost control, customer focus and a companywide focus on technology. “I see people energized by the idea of going through an acceleration process,” he said. “Everyone now understands their role in the game.”
The need to motivate employees through uncertain times is a challenge that cuts across industries, affecting companies along every inch of the growth curve. “You have to talk continually about the strategy,” said Home Depot’s Nardelli. “As you go through the turbulence of transformation and come out the other side bigger, stronger and more formidable, they get it.”
A little success along the way doesn’t hurt, agreed Lucent’s Russo. “Being able to post a positive cash flow, even though it’s only been one quarter, has been a real shot in the arm for the organization,” she says. “I’ve finally been able to tell people that it’s time to close the chapter on weathering the storm-we’ve weathered it.
“Our focus now is on investing for future growth, which has been a huge boost for the company psychologically. That’s critical because we won’t get anything done if the people in the business aren’t appropriately inspired and motivated.”
Beyond Good Governance
How can CEOs win back the trust and loyalty of skittish stakeholders?
“One lesson we’ve all learned-and our company has learned it in spades-is that reputational risk is every bit as important, if not more so, than credit risk and market risk,” Citigroup Chairman Sandy Weill told the leadership summit.
Companies are rethinking their definitions of proper conduct, said Weill, who faced controversies over his bank’s involvement with Enron as well as the actions of analyst Jack Grubman. “We understand,” he said, “that it’s important to look at what you do and ask, €˜While this may be legal, how would it look if it was on the front page of the paper three years from now?’ And in some cases, you might walk away from business today that could affect your reputation, which will affect your ability to do business in a big way in the future.”
“The need for CEOs to set positive examples extends to their personal compensation,” he argued. “There are too many instances where people’s pay is not commensurate with performance,” said Ralph Hake, CEO of Maytag. “Boards are not always independent of their CEOs, so the right decisions don’t always get made.”
Of course, strong governance and honest and ethical fiscal dealings are just two elements of the corporate image equation. How a company treats its employees and customers also plays a role in building a solid reputation and long-term performance, argued John Donahoe, worldwide managing director of consulting firm Bain & Company. “A growing number of companies in recent years are focused exclusively on financial results,” he said. “There’s palpable fear about making the next quarter’s earnings projections. That pervades down the organization and employees know that the company is putting its investors ahead of its customers and employees.”
As head of a privately held company, Donahoe has had the luxury of making decisions that may have won a public company CEO the wrath of shareholders and analysts. “As the global recession hit in early 2001, our 250 partners got together and decided that even if our business turned down, we would not lay off our people, who are our biggest assets,” he said. “While many of our competitors were cutting back, we actually went out and hired top talent. We had to sacrifice our short-term financials for a few years, but that’s positioned our firm attractively and positively for the future.”
Another theme echoed at the conference was that CEOs have paid too much attention to the demands of short-term shareholders in recent years, while shortchanging one of their most important constituencies: employees. At SAS Institute, the world’s largest privately held software company, progressive employee programs have earned the company a reputation as a great place to work. Offerings range from providing on-site, subsidized daycare and healthcare facilities to for-fee conveniences like car detailing, dry cleaning, haircuts and even massages at the Cary, N.C., company’s fitness facility.