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<strong>THINK</strong> <strong>ACT</strong> – September 2011 – Size Matters<br />
<strong>THINK</strong><br />
<strong>ACT</strong><br />
Magazine for Decision Makers N o 17<br />
Size Matters:<br />
the Modularization of Business<br />
How companies of all sizes can profit from<br />
even more division of labor<br />
RUBRIK HIER<br />
JIM HAGEMANN SNABE: SAP’s chief<br />
executive explains the real-time revolution.<br />
PHILIPPE VARIN: PSA Peugeot Citroën<br />
boss unveils his new strategy.<br />
JEREMY RIFKIN: A futurologist predicts<br />
what life will be like in the post-oil era.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 1
PODCASTS, VIDEOS & MORE<br />
WWW.<strong>THINK</strong>-<strong>ACT</strong>.COM<br />
Password: rolandberger
Photos: Titel: Sarah Illenberger, Inhalt: Frank Bauer, Laif, SAP<br />
4 One-on-one with Wittig<br />
the founder of the dm drugstore<br />
chain, Götz Werner<br />
<strong>THINK</strong><br />
8 Brief Think<br />
10 The nudge theory<br />
Little pushes can bring big<br />
changes in people’s behavior<br />
14 Follow the money<br />
How remittances affect<br />
the global economy<br />
16 Real real-time<br />
How in-memory computing<br />
can add value<br />
20 Do bailouts work?<br />
<strong>THINK</strong> <strong>ACT</strong> columnist Nils<br />
aus dem Moore discusses whether<br />
recovery programs are a good thing<br />
REPORT<br />
23 Size matters<br />
The modular economy is creating<br />
opportunities for large and small<br />
businesses alike<br />
34 Believe in growth!<br />
Roland Berger Strategy<br />
Consultants chairman Burkhard<br />
Schwenker says there can be no<br />
prosperity without growth<br />
36 The future of work<br />
Alexi Marmot on the fl exible,<br />
mobile workplace<br />
CONTENTS<br />
4<br />
Control is good,<br />
trust is better:<br />
Götz Werner,<br />
founder of the<br />
dm drugstore<br />
chain, explains<br />
the importance<br />
of a corporate<br />
culture based<br />
on values<br />
The power of pricing,<br />
and international alliances:<br />
PSA Peugeot Citroën CEO<br />
Philippe Varin talks about the<br />
future of the car industry<br />
Real-time analysis:<br />
SAP chief executive<br />
Jim Hagemann<br />
Snabe tells us<br />
why in-memory<br />
computing will<br />
change the world<br />
40 The smaller, the better<br />
Why Virgin prefers underdog<br />
status to market leadership<br />
<strong>ACT</strong><br />
43 Brief Act<br />
46 Young Global Leaders‘<br />
Task Forces<br />
Why protecting the oceans is<br />
a good investment<br />
52 Break the rule!<br />
British company WorkSnug has<br />
banned fl ying on business<br />
54 Borussia Dortmund<br />
In 2005 they were almost<br />
bankrupt; now they’re Germany’s<br />
football league champions. How<br />
the club achieved a turnaround<br />
on and off the pitch.<br />
58 PSA Peugeot Citroën<br />
We talk to Philippe Varin,<br />
CEO of Europe’s second biggest<br />
car maker<br />
63 Banking regulation<br />
How the new defi nition of<br />
“systemically important fi nancial<br />
institutions” is affecting the<br />
banking world<br />
66 Looking forward<br />
Futurologist Jeremy Rifkin:<br />
what’s here to stay, what’s<br />
coming soon<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 3<br />
58<br />
16
One-on-one with Wittig<br />
The Detail<br />
of Retail<br />
The dm drugstore chain is a fast-growing,<br />
profitable company, with a culture based on<br />
trust, not control. dm Founder Götz Werner<br />
and Roland Berger CEO Martin Wittig talk to<br />
Thomas Ramge about success, and what other<br />
businesses can learn from dm<br />
Götz Werner, the theme of this issue<br />
of <strong>THINK</strong> <strong>ACT</strong> is “size matters”.<br />
You created a very big company<br />
made up of many small units.<br />
What’s the relationship between big<br />
and small in your business?<br />
Götz Werner: It depends on which<br />
way you look at it. Of course dm is a<br />
big company, with sales of more than<br />
EUR 5 bn, but that’s an abstraction.<br />
The reality of dm is a 550 square-<br />
meter drugstore with 25 employees<br />
and 1.500 to 2.000 customers per<br />
day, so we mustn’t lose sight of the<br />
individual branches, and if we do,<br />
we’re in trouble. As soon as we start<br />
thinking we’re a big company, we start<br />
making mistakes. It’s a fantasy image<br />
that doesn’t exist in reality. Retail is<br />
all about detail, and retailers that lose<br />
sight of this are doomed to fail.<br />
You once said: “We get hardly any<br />
economies of scale in our purchasing.”<br />
If retail is about detail, why<br />
do we need store chains at all?<br />
Mom-and-pop corner stores used<br />
to be very good at retailing, but<br />
they’ve disappeared.<br />
Werner: The real synergy in retail<br />
chains is that the individual branches<br />
don’t just sit there stewing in their<br />
own juice; they learn from the other<br />
branches. Mom-and-pop stores are<br />
often run with a great deal of passion<br />
at first, but this wears off as time<br />
goes by. Each dm store can benefit<br />
from the others’ ideas, provided that<br />
everyone is always clear regarding the<br />
company’s objectives.<br />
Wittig: That’s similar to our business;<br />
our economies of scale are in knowledge,<br />
not in buying things more<br />
cheaply than our competitors. With<br />
our flat hierarchy, we can share one<br />
specialist’s knowledge with the entire<br />
4 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
world. There’s no point having detailed<br />
expert knowledge unless it can be<br />
shared with everyone within a very<br />
large organization.<br />
So what would you say is the perfect<br />
size? Is it possible to lay down hard<br />
and fast rules?<br />
Götz Werner (right):<br />
“If you’re successful, you<br />
gain a customer base,<br />
and then you grow.”<br />
Werner: You always strive for the<br />
optimal, and everything you do<br />
is sub-optimal. Once you realize<br />
there’s a difference between the two,<br />
you move on to a new stage in your<br />
development, so growth comes from<br />
outside, not from inside. If you’re<br />
successful, you gain a customer base,<br />
and then you grow.<br />
That’s the logic of growth. But why<br />
can’t you say: “We have a very<br />
profitable company, let’s stay<br />
that way”?<br />
Wittig: I’m a strong advocate of growth,<br />
both for businesses and economies,<br />
because it creates more opportunities<br />
for more people. If you try to stop<br />
China from growing, you’re excluding<br />
a large proportion of the world’s<br />
population from prosperity. We have<br />
to live with that and find ways of<br />
dealing with the consequences of<br />
growth. But I think we should always<br />
have a growth component to our<br />
philosophy, because if you don’t grow,<br />
you stand still. Growth is the only<br />
way of coming up with new ideas and<br />
trying out new concepts.<br />
Werner: I prefer to say development<br />
rather than growth. Growth is pretty<br />
superficial, it’s about numbers, but if<br />
you have a company culture that says<br />
people must develop themselves, that’s<br />
clearly about quality. Quantitative<br />
growth is the logical consequence of<br />
development.<br />
Wittig: The automobile industry is<br />
a good example of that. In terms of<br />
numbers, western markets are largely<br />
saturated, and electric cars have<br />
relatively low development potential<br />
compared to the industry as a whole.<br />
But in quality terms, it’s a completely<br />
different picture; there’s still a lot of<br />
potential in personalizing products to<br />
individuals’ needs.<br />
Werner: We have 1.2 million customers,<br />
and we could always provide a better<br />
service to them all.<br />
In terms of customer focus, how<br />
important is it to give branches a<br />
lot of autonomy, and are there instances<br />
where a good old-fashioned<br />
hierarchy works better, even if it’s<br />
less socially acceptable?<br />
Wittig: Nearly all industries and<br />
services have completely different<br />
organizational models, and centralized<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 5
ONE-ON-ONE WITH WITTIG<br />
and decentralized models can work<br />
equally well. If you look at a company’s<br />
maturity curve, you can see that<br />
expanding companies tend to be<br />
managed on a decentralized basis.<br />
That’s the case with the automobile<br />
industry when it’s moving into new<br />
markets, and with logistics and other<br />
service providers. These are usually<br />
developed in a decentralized way by<br />
local companies.<br />
As a company continues to develop,<br />
there’s a tendency toward centralization,<br />
with specific areas of the business being<br />
combined in accordance with central<br />
guidelines. Nearly all companies still<br />
have hierarchies, and chaos is rarely<br />
successful as an organizational principle.<br />
Of course there are very different<br />
degrees of guidelines, and you have<br />
to decide what’s going to work on a<br />
case-by-case basis, which has a lot to<br />
do with the company’s history and<br />
culture. There’s one big Chinese<br />
retailer I know that’s organized in an<br />
almost military fashion; the employees<br />
have to attend a morning videoconference<br />
and roll call. It sounds weird<br />
to us, but it works for them.<br />
Werner: You have to see management<br />
in its cultural context. When I was<br />
young, there was one successful<br />
entrepreneur I knew who had a fax<br />
machine in every branch, and he<br />
used to send them instructions every<br />
morning. Times and people change,<br />
and so must methods.<br />
I think the most successful people<br />
are those who have their finger on<br />
the pulse of the time. Of course you<br />
can be successful with old-fashioned<br />
methods, but then the question is:<br />
are you succeeding because of, or in<br />
spite of them?<br />
If a company like dm gives its<br />
branches so much freedom doesn’t<br />
that make it harder to implement<br />
difficult strategic change from the<br />
center?<br />
Werner: That’s a good question, and<br />
it’s one we’ve discussed many times in<br />
Götz Werner<br />
Biography<br />
Götz Werner<br />
was born in<br />
1944, and<br />
opened<br />
his first<br />
drugstore in<br />
Karlsruhe in 1973. Today, his<br />
company, dm-drogerie markt,<br />
has around 2,500 branches<br />
and employs nearly 40,000<br />
people across Europe. Werner<br />
headed the entrepreneurship<br />
institute at the Karlsruher<br />
Institut für Technologie from<br />
October 2003 to September<br />
2010. He is a strong believer in<br />
corporate social-responsibility,<br />
and has for many years publicly<br />
campaigned for a basic<br />
living wage.<br />
our history. Our culture is one of very<br />
slow change. Change is a very difficult<br />
process, you can only implement it in<br />
small steps, and having a hierarchy<br />
doesn’t help. You must always be<br />
willing to question paradigms. For<br />
example, we don’t just want customers<br />
to be loyal, we want a close, long-term<br />
relationship with them, and that<br />
requires a completely new form of<br />
marketing. So do you put pressure<br />
on them, or do you make yourself<br />
attractive so that you take them with<br />
you? In my experience, taking them<br />
with you works better if you’re going<br />
to develop sustainably.<br />
So how do you get them onside?<br />
Wittig: In our own business, we do<br />
it using trust. To us, marketing is<br />
about building relationships of trust<br />
with decision makers, and the best<br />
advertising is word of mouth. If<br />
you’re in a competitive situation,<br />
a lot of your products and services<br />
6 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
“People who apply to us often<br />
ask how they can use the<br />
company to do good. That just<br />
wasn’t an issue ten years ago.”<br />
Martin Wittig<br />
are similar to other companies’. Of<br />
course, one good example of getting<br />
customers onside is Apple; they<br />
don’t push their products in their<br />
stores, but people are still happy to<br />
wait for them. They get customers<br />
onside by creating needs that they<br />
want to satisfy.<br />
But a lot of business models are still<br />
based on scaling and push. How<br />
do you move away from just massproducing<br />
things towards a more<br />
customer-centered approach?<br />
Werner: We’re obviously a massmarket<br />
provider, but if you don’t<br />
want to push all the time, you need<br />
stable performance. It’s a question of<br />
attitude. Do you want rapid success,<br />
or long-term relationships with your<br />
customers? In the old days, we had a<br />
slogan, “Big brands, small prices,” but<br />
18 years ago, we changed it to “I’m an<br />
individual here, this is where I shop.”<br />
This was a major turning point. Our<br />
marketing strategy begins: “We want<br />
regular customers who make a point<br />
of shopping with us because they’re<br />
convinced they’ve done the right<br />
thing.” Often, the first mistake is<br />
talking about customers when you<br />
should be talking about people.<br />
That’s a people-centered approach,<br />
but is it suitable for a company that’s<br />
very growth – and profit – oriented?<br />
Werner: The better you know people,<br />
the better you can respond to their<br />
needs. If you can gain a better understanding<br />
of what drives people, you<br />
can be a better manager, know your<br />
customers and suppliers better, and<br />
predict the future more effectively.<br />
Wittig: I think having a transparent<br />
value system is an important part of<br />
managing a company, particularly<br />
when it’s about the long-term survival<br />
of the business.<br />
You don’t have a bonus system for<br />
dm employees. Why not?<br />
ONE-ON-ONE WITH WITTIG<br />
Werner: We do things because they<br />
make sense, not because I’ve promised<br />
my wife a Christmas bonus.<br />
Wittig: I don’t think bonuses and the<br />
whole pull idea are a contradiction<br />
in terms. Bonuses are a pull for employees,<br />
not a push. If they don’t get<br />
a bonus, I’m not punishing them, I’m<br />
giving them the chance to earn one.<br />
Werner: I’m with you on that. I<br />
don’t believe in extrinsic motivation;<br />
management must create a situation<br />
in which employees are intrinsically<br />
motivated – I’d even go so far as<br />
to say that bonus systems penalize<br />
workers. Employees need an income<br />
so they can live, and they need their<br />
work so they can grow.<br />
You’re also trying to remove the<br />
link between work and income, and<br />
you’ve been publicly campaigning<br />
for a basic living wage for years.<br />
Why, as an entrepreneur, are you<br />
so involved in social issues?<br />
Werner: Because entrepreneurs<br />
need to see the forest for the trees.<br />
If a company’s sole raison d’être is<br />
making society better, it must have<br />
an interest in how society develops.<br />
Social involvement is one of the most<br />
important roles of an entrepreneur,<br />
particularly when you get older. All<br />
entrepreneurs should aim to create<br />
scope for people within the business<br />
to become active outside of it.<br />
Wittig: People who apply to us often<br />
ask how they can use the company to<br />
do good, for example, by volunteering<br />
and taking sabbaticals. That just<br />
wasn’t an issue ten years ago, but<br />
today it’s a pull, and as a company,<br />
we have to be socially involved if<br />
we’re going to attract young people.<br />
Our charitable trust is an example<br />
of this; we spend around 2% of<br />
our sales on these forms of social<br />
involvement, and I think this is a<br />
wonderful trend.<br />
This interview was conducted by Thomas Ramge<br />
Photos Frank Bauer<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 7
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The world’s<br />
knowledge is<br />
in the northern<br />
hemisphere<br />
The world’s fi ve<br />
top-selling daily<br />
newspapers are<br />
all Japanese.<br />
WHERE IS THE WORLD’S KNOWLEDGE<br />
concentrated? That’s the question posed<br />
in The Geography of World Knowledge,<br />
published by two think-tanks, Convoco and<br />
the Oxford Internet Institute. In the midst of<br />
a new media revolution, the publication maps<br />
things like worldwide Internet use, newspaper<br />
readership and centers of academic knowledge,<br />
and even includes a revealing breakdown of<br />
the geographic distribution of geocoded photographs<br />
uploaded to Flickr. In almost every case,<br />
the knowledge is concentrated in Europe and<br />
North America – which are also the regions<br />
where the largest number of Wikipedia<br />
biographies are written.<br />
+www.oii.ox.ac.uk<br />
Ideas for crisis-ridden<br />
companies<br />
NO TWO BUSINESS CRISES ARE THE SAME. Sometimes you just need<br />
to tweak your strategy; sometimes it’s time to call in the receivers.<br />
In nearly all cases, turning a company around demands a holistic<br />
approach that carefully considers all recovery options. Drawing up a<br />
restructuring plan that identifi es the causes and possible solutions is<br />
just as important as complying with the relevant legal requirements.<br />
This review by Roland Berger Strategy Consultants’ Bernd<br />
Brunke, Sascha Haghani and Thomas Knecht, entitled “Restructuring<br />
and Re-launching Crisis-Ridden Companies,” is a sound, up-todate<br />
and comprehensive guide on the subject. It takes into account<br />
current statute and case law, and discusses the latest approaches to<br />
various aspects of restructuring and insolvency.<br />
The review is aimed at company managers, bankers, other investors,<br />
and students and teachers of business studies and law.<br />
“DRAWING UP A<br />
RESTRUCTURING PLAN<br />
THAT IDENTIFIES THE<br />
CAUSES AND POSSIBLE<br />
SOLUTIONS IS JUST AS<br />
IMPORTANT AS COMPLYING<br />
WITH THE RELEVANT<br />
LEGAL REQUIREMENTS.”<br />
“Restructuring and Re-launching Crisis-Ridden Companies”<br />
8 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
Photos: DPA (2)<br />
Project 2012<br />
Global Wind of Change?<br />
2012 WILL BE A BUMPER YEAR for elections worldwide.<br />
Voters in the world’s two biggest economies, the<br />
United States and China, will go to the polls – though<br />
one election will be rather more democratic than the<br />
other. Russia and France will elect new presidents, and<br />
India, Spain and Mexico will also be voting.<br />
If the balance of power shifts in any of these key<br />
nations, it will happen at a diffi cult time. With issues<br />
like US debt and the euro crisis high on the agenda,<br />
elections have the potential to bring political change.<br />
Roland Berger has therefore set up Project 2012, a<br />
cooperative consultancy platform for companies and<br />
politicians, providing support to top decision makers<br />
whose agendas could be affected by the poll results<br />
over the coming year.<br />
The project will develop scenarios allowing businesses<br />
to prepare for a variety of possible outcomes.<br />
Roland Berger is working in close partnership with<br />
universities and think-tanks around the world, including<br />
the Yale World Fellows Program and HEC Paris,<br />
and will present the results of the project as a series of<br />
strategic proposals during the coming year. There is<br />
also a wiki for anyone wishing to be involved in this<br />
project. If you are interested, please register at<br />
+www.theproject2012.org<br />
Nicolas Sarkozy<br />
Dmitri Medwedew<br />
Russia<br />
11 March 2012<br />
France<br />
5 May 2012<br />
China<br />
October 2012<br />
USA<br />
6 November 2012<br />
Hu Jintao<br />
It’s still not clear who will be contending in<br />
next year’s presidential elections. Incumbent<br />
Dmitry Medvedev will probably<br />
stand for a second term, but the possibility<br />
of a job swap with Prime Minister<br />
Vladimir Putin is still under discussion.<br />
France is likely to shift rightwards, with<br />
President Nicolas Sarkozy<br />
standing for reelection. Polls indicate<br />
that Marine Le Pen, the right-wing Front<br />
National candidate, will attract a signifi -<br />
cant share of the vote.<br />
President Hu Jintao and Prime Minister<br />
Wen Jiabao are expected to pass on<br />
their respective batons at the 18 th<br />
national party congress in October. Their<br />
potential replacements are Xi Jinping<br />
and Li Keqiang.<br />
President Barack Obama wants<br />
a second term in the White House.<br />
Among the potential Republican challengers<br />
are Michele Bachmann and<br />
Rick Perry.<br />
Barack Obama<br />
Up for re-election:<br />
Four<br />
global<br />
elections<br />
leaders<br />
that<br />
who<br />
could<br />
could<br />
change<br />
be out of<br />
the<br />
a job.<br />
world economy
<strong>THINK</strong>: NUDGE<br />
Sometimes you need<br />
a little push<br />
Two leading US academics say that small pushes in the right direction<br />
can overcome people’s natural inertia and bring about large-scale<br />
social change; they call this effect nudge theory. Barack Obama is a big<br />
advocate of nudge theory, and it is catching on in companies<br />
IT WAS A SIMPLE yet groundbreaking<br />
experiment. Three hundred households<br />
in San Marcos, California were<br />
divided into two groups. Half were sent<br />
normal electricity bills and the other<br />
half had a smiley face on their bills if<br />
their consumption was below average,<br />
and a frowning face if their usage was<br />
higher than average.<br />
The results could not have been more conclusive:<br />
within the group with faces on their<br />
bills, high users reduced their electricity consumption,<br />
and low users consumed even less<br />
than before.<br />
The difference was a little yellow circle on<br />
a piece of paper, but it had a big effect. US<br />
academics Richard Thaler and Cass Sunstein<br />
By Anne Hansen Illustration Lutz Widmaier<br />
cite the smiley experiment as a simple example<br />
of their theory that people can be gently encouraged<br />
to behave in socially desirable ways.<br />
Likewise, even small incentives can improve<br />
employees’ productivity. The two researchers call<br />
it nudge theory, quietly shepherding people in<br />
what, to the nudger at least, is the right direction.<br />
Why should society need a nudge in the first<br />
place? Thaler and Sunstein question one of the<br />
major assumptions of neoclassical economic<br />
theory, homo economicus, which is the idea that<br />
humans act in an enlightened and rational way<br />
to maximize their wellbeing, with emotions<br />
playing no part in their behavior. This construct,<br />
say the two scientists, is like Mr. Spock<br />
in Star Trek. This person would have the brain<br />
of Albert Einstein, the data storage capacity of a<br />
10 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
<strong>THINK</strong>: NUDGE<br />
“We are all Homer Simpson, but little<br />
things, like other people interfering<br />
ever so slightly in our lives, can help to<br />
push us along the right path”<br />
supercomputer, and the patience of Mahatma Gandhi – which<br />
is all very well, but bears no relation to reality.<br />
Real people are more like Homer Simpson. They smoke even<br />
though they know it’s bad for them, and they eat junk food even<br />
though it makes them fat. They buy unsuitable insurance policies<br />
and fail to save for their old age. There are lots of words you<br />
could use to describe humans, but rational isn’t one of them.<br />
This is the central thesis of behavioral economics, which<br />
disagrees with the neoclassical model and asserts that emotion<br />
is an important factor in market behavior. It asserts that<br />
people make decisions on the basis of gut feelings rather than<br />
careful analysis of all the available options.<br />
Also, they’re lazy. People could save money by switching to<br />
another electricity provider, but they can’t be bothered. They<br />
could personalize their cell phones, but they stick with the<br />
factory settings for years on end because reading the instruction<br />
manual is too much trouble. Sunstein freely admits that<br />
he’s no exception; for decades, he’s received newspapers he<br />
no longer wants, simply because he hasn’t gotten around to<br />
canceling his subscription.<br />
Comparing people to Homer Simpson may not be the<br />
most positive view of humanity, but Thaler and Sunstein are<br />
optimists. Little things, like other people interfering ever so<br />
slightly in our lives, can help to push us along the right path.<br />
Nudge theory isn’t just about helping Californians to save<br />
energy, it has many applications. For instance, if employees<br />
smell cleaning products on the tables in common or break<br />
areas, they will keep these areas cleaner. If you announce (as<br />
the Internal Revenue Service did in Minnesota) that 90% of<br />
people have paid their taxes in full and on time, the other 10%<br />
are more likely to pay up as well. The 10% were procrastinating<br />
because they assumed everyone else was.<br />
Libertarian paternalism: it’s not for everyone<br />
So far, so good – but nudging can also be an intrusion into<br />
someone’s personal life. In Austria, people have to opt out of<br />
organ donation by specifically stating that they do not want<br />
their organs removed when they die. Other countries follow an<br />
opt-in system, in which you carry a card stating that you wish<br />
to donate your organs. The opt-out method is problematic from<br />
an individual moral perspective, but it significantly increases<br />
the number of donor organs.<br />
Nudge theory follows the principles of libertarian paternalism.<br />
People must be free to make their own decisions – that’s<br />
the libertarian bit – but it’s also OK to influence their<br />
behavior in a paternalistic way. Freedom and paternalism<br />
are not contradictory terms. Displaying fruit at eye level<br />
in a cafeteria to encourage people to eat better is a nudge.<br />
Removing burgers from the menu, say the theorists, is<br />
unacceptable interference. Carrots are a good thing (to<br />
continue the healthy eating theme), but sticks are bad. It all<br />
sounds pretty simple, but is life really this black and white?<br />
12 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
To critics, nudging often crosses into<br />
the realm of manipulation. The nudgers say<br />
they’re acting in the public interest and trying<br />
to make the world a better place, but do they<br />
really know what individuals want? Driving<br />
to work is not very good for the environment,<br />
but it’s considerably more comfortable than a<br />
sweaty, crowded subway. Cigarettes will kill<br />
you in the long run, but they’ll give you a buzz<br />
for five minutes. Shouldn’t people be able to<br />
achieve their own balance between short and<br />
long-term happiness? Could a well-intentioned<br />
nudge overstep the boundaries; could someone<br />
end up getting hurt?<br />
In spite of the criticism, libertarian paternalism<br />
is the flavor of the month. Richard Thaler,<br />
who lectures at Chicago University, is an advisor<br />
to Barack Obama’s economics team. Cass<br />
Sunstein, one of the country’s most high-profile<br />
lawyers, is Head of the Office of Information<br />
and Regulatory Affairs at the White House.<br />
The Democrats have jumped enthusiastically<br />
onto the nudge-theory bandwagon because<br />
it provides a theoretical justification for state<br />
intervention. In a positive way that is, like a<br />
smiley on your electricity bill.<br />
<strong>ACT</strong><br />
<strong>THINK</strong>: NUDGE<br />
Make it easy! That’s the mantra of nudge theorist and<br />
Obama adviser Richard Thaler, who admits that even<br />
he needs motivation sometimes.<br />
Mr. Thaler, why do you love nudging other people?<br />
Because it’s fun (laughs). No, mainly because it helps<br />
people. In some situations you need help making a<br />
decision – and that’s what we call a nudge.<br />
What kind of nudges are there?<br />
There are many possibilities. But all nudges have one<br />
characteristic in common: we want things to be as easy as possible for<br />
everyone. If you want people to eat healthier food, then the nudge is<br />
quite simple: place the healthy food more prominently in the cafeteria. If<br />
you want people to exercise, make the stairwell more inviting. There was a<br />
great experiment done about this in Stockholm. Each step made a sound<br />
once you stepped on it. The result: people took the stairs instead of the<br />
elevator which was right next to it.<br />
Is it possible to give employees a nudge to advance their motivation?<br />
Absolutely! Many businesses still think that money is the best way to<br />
motivate employees. Motivation and nudging are in some ways the same<br />
thing. What behavioral economics brings to the table is a longer list of<br />
methods one can use to motivate people… Sometimes people will work<br />
harder to win a nice holiday trip than an amount of money of equivalent<br />
value. Even adults sometimes behave like kids and have a playful instinct.<br />
Defaults play a major role in your theory, can you explain this?<br />
By nature people are lazy. That’s why they profit from a default. Actually,<br />
lazy may not be the right word. We are also busy, distracted, impatient,<br />
and sometimes confused. All these and other factors contribute to the<br />
power of the default option. If you want employees to take out a pension<br />
plan, make it so that they automatically have one and that they have to<br />
actually sign out if they no longer want it… Going back to my mantra:<br />
Make it easy.<br />
Are there any nudges you use in your personal life?<br />
Of course, we all do. As a young professor I learned that an excellent way<br />
to prevent procrastination on a project was to commit to giving a presentation<br />
of the paper at a future conference. I am still using the same tricks.<br />
I recently signed a book contract to write another book. The publisher will<br />
soon start asking about my progress, so I better get back to work.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 13
The top ten countries from which migrants remit money (in USD bn)<br />
RUBRIK HIER<br />
-8.1 -9.9 -10.6 -12.6 -13 -15.9 -18.6 -19.6 -26 -48.3<br />
INDIA<br />
CHINA<br />
SPAIN<br />
LUXEMBOURG<br />
KUWAIT<br />
ITALY<br />
NETHERLANDS<br />
GERMANY<br />
SWITZERLAND<br />
RUSSIA<br />
Follow the money:<br />
SAUDI ARABIA<br />
Rich relatives<br />
Migrants feed many families in their home countries, and play<br />
a major part in economic development. Many poor countries earn<br />
more from remittances than from aid and foreign investment<br />
PHILIPPINES<br />
MEXICO<br />
FRANCE<br />
SPAIN<br />
BELGIUM<br />
BANGLADESH<br />
GERMANY<br />
NIGERIA<br />
14 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011<br />
USA
+55 +51 +22.6 +21.3 +15.9 +11.6 +11.1 +10.4 +10.2 +10<br />
Remittance economies<br />
The top ten countries to which migrants send money (in USD bn)<br />
Improved working conditions<br />
Globalization<br />
86.5 71.6 70.0<br />
States with the<br />
highest proportions<br />
of immigrants,<br />
2010<br />
QATAR MONACO UTD. ARAB<br />
EMIRATES<br />
28.0 25.0<br />
35.0<br />
States where remittances<br />
account for the highest<br />
proportion of GDP,<br />
2009<br />
The problems often begin with the<br />
recruitment process: agencies in the<br />
workers’ home countries charge<br />
commissions. The cost of fl ights, visas<br />
and medical tests must also be taken<br />
into account. Saudi Arabia and Indonesia<br />
have taken steps to improve the working<br />
conditions of Indonesian workers, and<br />
there are also changes afoot in Abu<br />
Dhabi, which has set up an independent<br />
employment regulatory body.<br />
The boom in Saudi Arabia and the<br />
United Arab Emirates has attracted<br />
hundreds of thousands of guestworkers<br />
from Southeast Asia. According to Human<br />
Rights Watch, around 600,000 migrants<br />
from that region work in the UAE alone,<br />
300,000 of them in Dubai. By far the<br />
majority work in construction and<br />
unskilled jobs, and both groups often<br />
suffer poor pay and living conditions.<br />
TAJIKISTAN TONGA LESOTHO<br />
Immigrants and emigrants<br />
in these countries (million)<br />
RUBRIK HIER<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 15<br />
+10.8<br />
+6.9<br />
+6.7<br />
+5.4<br />
Immigrants<br />
BELGIUM SPAIN NIGERIA<br />
BANGLADESH<br />
GERMANY<br />
FRANCE<br />
PHILIPPINES<br />
MEXICO<br />
CHINA<br />
INDIA<br />
Emigrants<br />
-5.4<br />
-4.3<br />
-8.3<br />
-11.9<br />
-11.4<br />
Sfd 2009 / 2010 Source: World Bank, Illustration: Jörg Block
<strong>THINK</strong>: IN-MEMORY-COMPUTING<br />
Power to<br />
the Processors<br />
SAP claims to have found something as big as client-server architecture<br />
was in the 1990s – in-memory computing. Never heard of it? You will soon.<br />
We talk to SAP’s CEO Jim Hagemann Snabe about the next big thing in<br />
business intelligence<br />
Jim Hagemann Snabe, tell us about<br />
your killer app. Can you give us an<br />
example that demonstrates the full<br />
potential of in-memory technology?<br />
Take the financial crisis. The lack of<br />
real-time risk measurement by banks,<br />
and the failure to track its causes,<br />
made the system, as a whole, too<br />
risky and eventually it broke down.<br />
Traditional risk management systems<br />
need to evaluate vast amounts of<br />
data, but much of this is only collected<br />
at night and then analyzed in the<br />
morning.<br />
What if you could do this in real<br />
time? What if you could do this every<br />
time a transaction happened? This<br />
was virtually impossible with previous<br />
technology, since you needed to read<br />
millions of items of data to aggregate<br />
the total risk of a bank. Today, inmemory<br />
computing allows you to<br />
complete this analysis in one second.<br />
Does that mean that in-memory<br />
computing could have prevented<br />
the financial crisis?<br />
We can’t prove this, of course, but I’m<br />
convinced that it would have helped<br />
us find solutions earlier.<br />
Impressive. But in-memory computing<br />
is not just for banking, correct?<br />
To put a technological trend into a<br />
business context, things have always<br />
been relatively unpredictable, and they<br />
still are. But a recent development<br />
is that companies must manage<br />
resources according to expectations<br />
no matter what happens. As we<br />
witnessed following the devastating<br />
tragedy in Japan, companies are now<br />
expected to manage and respond to<br />
extreme situations, which has not<br />
always been the case. For example,<br />
after 9/11, the world stood still for a<br />
moment. Nowadays we can’t allow<br />
anything to stand still. This means<br />
increased pressure on businesses to<br />
predict what’s going to happen, and<br />
to be much faster in responding to<br />
changes in the market.<br />
As a consequence, you have to be able<br />
to analyze very large volumes of data<br />
in real time. I noticed this ten years<br />
ago when I was doing a lot of cost<br />
accounting and financial consulting.<br />
Many companies were already<br />
considering moving away from<br />
annual planning and had rolling<br />
quarterly plans. This trend has now<br />
been taken to extremes.<br />
How is this possible?<br />
Traditional systems store data on<br />
a disk, and the disk is a relatively slow<br />
medium. Data stored in the main<br />
memory of a computer can<br />
be read ten thousand times faster.<br />
Today we even have parallel<br />
processing, which enables you to<br />
read data simultaneously on<br />
hundreds of processors and also<br />
allows you to read billions of records<br />
in just one second. This means that<br />
you can do on-the-fly calculations<br />
instead of calculating pre-aggregated<br />
data stored on disks. For the sake of<br />
visualization: in the time it takes<br />
you to carry a piece of information on<br />
a disk a distance of one meter,<br />
16 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
RUBRIK HIER<br />
Big Data, big business. SAP CEO Jim Hagemann Snabe wants to analyze the world in real time.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 17
<strong>THINK</strong>: IN-MEMORY-COMPUTING<br />
“We urgently need better forecasts to respond more<br />
quickly to change. So we need to analyze very large<br />
quantities of data in real time.”<br />
Jim Hagemann<br />
Snabe<br />
Biography<br />
Jim Hagemann<br />
Snabe, born in<br />
Denmark in 1965,<br />
has been co-chief<br />
executive of SAP AG<br />
with American Bill<br />
McDermott since<br />
February 2010. He<br />
began his career with<br />
the German software<br />
giant after graduating,<br />
and worked in<br />
various management<br />
positions in sales and<br />
development consultancy.<br />
He worked<br />
for IBM Denmark for<br />
two years, and then<br />
became a director of<br />
SAP in 2008. As an<br />
IT manager, he has a<br />
particular interest in<br />
you can carry it to Mars and back again<br />
with in-memory computing.<br />
All thanks to the falling price of<br />
memory?<br />
In technology, sometimes several trends<br />
come together and suddenly you have a<br />
whole new basis for innovation. The trends<br />
that coincide here are the falling price and<br />
increasing size of memory, combined with<br />
processing power and unique technology<br />
that allows us to compress information.<br />
All this together makes things unbelievably<br />
fast. The business impact of this is<br />
that you can start to do very advanced<br />
analytics, and you’re more able to anticipate<br />
the future based on statistical<br />
information. And, most importantly, you<br />
can start simulating the future. If you only<br />
have one second of response time, you can<br />
easily look at various scenarios.<br />
The ability to forecast seems to be crucial<br />
to in-memory technology. Can you<br />
explain how and why?<br />
I’ll give you an example. One of the main<br />
differences between a successful product<br />
and an unsuccessful one is production<br />
management: which product you choose<br />
to make, at what price and at what time.<br />
It’s proven that 80% of production planning<br />
is not productive. The demand is<br />
often higher or lower than expected, and<br />
you end up with either a shortage of supply<br />
or full warehouses. The ability to predict<br />
a trade promotion and its impact by<br />
location and product will make the differ-<br />
ence between successful and unsuccessful<br />
consumer goods companies.<br />
Have you carried out any studies on<br />
how in-memory computing can improve<br />
that rate?<br />
We’re actually working with some of the<br />
leading consumer product companies in<br />
the world – SAP customers. They’re using<br />
this new technology to reinvent management<br />
and planning. What used to take a<br />
couple of hours now happens in seconds,<br />
so you can start optimizing price and volume<br />
for any given product. Early adopters<br />
of the technology are reporting significant<br />
benefits and, on average, companies that<br />
have implemented such systems are seeing<br />
revenue gains of 21% and cost reductions<br />
of 19%.<br />
Is it true that you can now balance<br />
your supply chain management to the<br />
extent that you eliminate the need for<br />
additional storage?<br />
Yes, one of our clients is doing so now.<br />
What we consider to be a major consequence<br />
of this is what I would call a<br />
demand-driven supply chain. So far,<br />
the human interaction in this process<br />
has been putting information into the<br />
system. Now it’s all about optimizing the<br />
supply chain within companies and reacting<br />
quickly to changing demand.<br />
What makes you so certain that inmemory<br />
technology can really change<br />
the game?<br />
The whole thing started as a technological<br />
technology trends. Photo: SZ Photo<br />
18 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
innovation. What convinced me was<br />
what happened when we took the<br />
technology to fifty customers. We<br />
worked on very different scenarios<br />
customer by customer, industry by<br />
industry. And their feedback? “This<br />
is beyond belief.” They were stunned<br />
that you can simply push the enter<br />
button and get an immediate<br />
response to users’ reactions. In the<br />
past this would have taken hours of<br />
calculation.<br />
This was a real ‘wow’ moment for<br />
all of them. We recently presented<br />
in-memory computing to a whole<br />
series of companies who have now<br />
seen a massive increase in their<br />
opportunities, be it in production<br />
management or probability analysis<br />
by product. One utility company<br />
that employs dynamic pricing for<br />
electricity can now predict when<br />
capacity will be needed on its<br />
network. This saves the utility<br />
company a lot of money and helps<br />
consumers to minimize their use<br />
of electricity.<br />
This technology is clearly a musthave.<br />
What are the downsides?<br />
Implementation, perhaps?<br />
I wouldn’t call it a downside, it’s<br />
more of a challenge. If you don’t<br />
have consistent data, it doesn’t<br />
help that you can analyze it in one<br />
second. Many of the stories about<br />
the difficulty of implementing<br />
SAP technology are related to the<br />
fact that the SAP system requires<br />
a high degree of data consistency.<br />
We’ve been developing our system<br />
to acquire that consistency.<br />
If there aren’t any big drawbacks<br />
and the technology is so powerful,<br />
then why have only a few decision-<br />
makers in business heard about it?<br />
Initial conversations about inmemory<br />
focused exclusively on<br />
technology, making it irrelevant for<br />
business people. It’s only recently,<br />
with the results from those fifty<br />
customers, that we can communicate<br />
how this technology can<br />
solve business problems that were<br />
previously unsolvable. Also, there’s<br />
a lot of confusion about the topic.<br />
Many people talk about in-memory<br />
computing, but they all mean different<br />
things. We’re working on<br />
this. In-memory computing is a<br />
technological advance that we’re<br />
now translating into distinct business<br />
value. We can articulate how<br />
this will change the game in every<br />
single industry. This is the moment<br />
that it becomes relevant to business<br />
people, and then they need to try it,<br />
because most of them can’t believe<br />
it’s true. I’ve been in the industry for<br />
20 years and sometimes I’ve seen<br />
technology improving cost effectiveness<br />
by a factor of 5. With this,<br />
we’re talking about a factor of 200.<br />
It’s not only about reporting much<br />
faster: it’s about solving problems<br />
that you couldn’t solve before.<br />
What comes after in-memory<br />
computing?<br />
In the next five to ten years, we’ll<br />
see similar developments to those<br />
that followed our introduction<br />
of the client-server system in the<br />
1990s, when networks became<br />
faster and more powerful. Now<br />
we’re riding the wave of in-memory<br />
computing combined with multicore<br />
processors. Google has taught<br />
the world how to search for information,<br />
but we still haven’t learned<br />
how to find it. This technology can<br />
bring us much closer to finding not<br />
only the hay in the haystack, but<br />
also the needle.<br />
Five years from now, how much<br />
of the SAP portfolio will involve<br />
in-memory computing?<br />
All of it.<br />
Interview by Thomas Ramge<br />
Illustration Smetek<br />
<strong>THINK</strong>: IN-MEMORY-COMPUTING<br />
<strong>ACT</strong><br />
The digital revolution is<br />
transferring more and<br />
more data onto company<br />
databases.<br />
The more data there is,<br />
the harder it is to analyze<br />
using traditional IT methods.<br />
With time in increasingly<br />
short supply, managers<br />
with rapid access to data-<br />
based analysis can achieve<br />
a significant competitive<br />
advantage. In-memory<br />
computing promises to<br />
analyze the business world<br />
in real time, since data<br />
retrieval is no longer limited<br />
by the relatively slow speed<br />
of hard disks.<br />
Instead, information is<br />
analyzed by increasingly<br />
powerful memory chips.<br />
This is not just a nerdy IT<br />
issue; data-based processes<br />
are increasingly important<br />
to the success or failure of<br />
businesses in a growing<br />
number of sectors. Big data<br />
is a huge opportunity, but<br />
only for those who can sort<br />
the wheat from the chaff and<br />
draw the right conclusions.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 19
Do bailouts work?<br />
Comeback kid<br />
Keynes?<br />
Government bailouts enjoyed a worldwide renaissance during<br />
the recession, but what do they actually achieve? Nils aus dem Moore<br />
asks whether the kind of intervention favored by British economist<br />
John Meynard Keynes serves any purpose<br />
RESCUE PLANS: Do they work? There’s<br />
never been a better time to ask this<br />
question, never in human history have<br />
these plans been used on such a large<br />
scale by so many countries. On average,<br />
they cost around 2% of GDP in<br />
2009, and 1.6% in 2010. An IMF<br />
analysis shows that the biggest bailouts<br />
were in the United States, with a budgeted total of<br />
4.8% of GDP in 2009 and 2010, followed by China (4.4%)<br />
and Germany (3.4%). Another study, by the Brookings<br />
Institution in Washington, D.C., shows that the nature and<br />
size of the rescue packages varied a great deal. For example,<br />
Brazil and Russia relied almost entirely on tax cuts, while<br />
China and India focused on investment. In the European<br />
Union alone, over 350 individual programs had been agreed<br />
upon by February 2009.<br />
A detailed study by the Brussels think-tank Bruegel found<br />
that countries varied a great deal in their emphasis on the<br />
fi ve key components of a bailout: government investment,<br />
temporary or permanent tax cuts, welfare increases, employment<br />
programs, and aid for specifi c sectors. Germany<br />
implemented a large package of all fi ve, Britain relied mainly<br />
on a temporary reduction in VAT, Austria created permanent<br />
tax cuts, and Poland relied solely on infrastructure<br />
investment.<br />
So were the programs successful? At first<br />
sight, Germany appears to tick all the boxes; the<br />
Eurozone’s biggest economy saw a 5% slump<br />
in output during 2009, launched the EU’s<br />
biggest bailout at a cost of EUR 85 bn, and<br />
staged a spectacular comeback in 2010. Since<br />
then, unemployment has reached new lows<br />
and output has risen to pre-recession levels.<br />
This does not prove that the rapid recovery<br />
was caused by the bailout, or prove that<br />
the more money you put into a bailout, the<br />
more you get out. The United States’ experience<br />
has been quite different; according to the Congressional<br />
Budget Office, the American Recovery and Reinvestment<br />
Act (ARRA), passed in February 2009, will have cost USD<br />
830 bn by 2019. In spite of the program’s huge size, the<br />
recovery has been much slower than previous recoveries.<br />
To find out whether bailouts work, it’s not enough simply<br />
to compare different countries and their economies. To<br />
analyze their effectiveness, you have to isolate their impact<br />
20 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
<strong>THINK</strong>: BAILOUTS<br />
“Bailouts make sense<br />
only in historically<br />
exceptional situations”<br />
on GDP from all other factors involved; factors like<br />
monetary policy, the dynamics of world trade, and<br />
the price of key commodities like oil.<br />
Once you’ve broken down GDP into its<br />
component parts, you must analyze what<br />
would have happened without the bailout.<br />
This what-if analysis involves a degree of<br />
speculation, but it is the only convincing<br />
way of deciding whether bailouts work, so<br />
economists use macro models to simulate<br />
their effect.<br />
Optimistic simulations in the spring of<br />
2009 found that US gross domestic product<br />
was 3.6% higher at the end of 2010 than it<br />
would have been without tax cuts. Other economists<br />
using more downbeat assumptions concluded that it had<br />
increased by only 0.7% over the same period. More recent<br />
evaluations, using a wide variety of assumptions, have<br />
shown widely differing results. For example, the Congressional<br />
Budget Office estimates that the ARRA program<br />
has increased GDP by between 1.1% and 3.1% in the first<br />
quarter of this year, and has cut unemployment by 0.6 to<br />
1.8 percentage points.<br />
John Maynard Keynes: Return to<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 21<br />
favor, or last hurrah?
<strong>THINK</strong>: BAILOUTS<br />
<strong>ACT</strong><br />
Keynes is back, but<br />
probably not for long.<br />
In a recession, fi nancial<br />
decision-makers should<br />
realize that:<br />
1/ Monetary policy and<br />
the stabilizing role of<br />
tax and transfers are the<br />
best way to smooth<br />
the economic cycle.<br />
2/ Few governments<br />
are able to reduce debt<br />
created by defi cit spending<br />
once the good times<br />
return.<br />
3/ Structural problems<br />
need structural solutions.<br />
Nils aus dem Moore<br />
Columnist<br />
Nils heads the policy and communications<br />
department at the<br />
Berlin offi ce of the economic<br />
research body RWI Essen.<br />
He was formerly an associate<br />
of the Stiftung Neue Verant-<br />
wortung, and worked with<br />
RWI president Christoph M.<br />
Schmidt on the Bundestag’s<br />
commission of inquiry on<br />
growth, prosperity and quality<br />
of life. From 2005 to 2007, aus<br />
How does debt add value?<br />
Similar analysis of other countries’ economic programs has<br />
also been positive. In spite of all the imponderable variables<br />
involved, the bottom line is that without government intervention,<br />
the collapse in output would have been even more<br />
dramatic, and the job losses even greater. So what does this<br />
conclusion mean for future economic policy? In 2009, the<br />
historian and Keynes biographer Robert Skidelsky published<br />
an I-told-you-so tome, “Keynes, the Return of the Master,”<br />
proclaiming a new era of Keynesian government intervention.<br />
Economist Jeffrey Sachs, of Columbia University, contends that<br />
the success of recent bailouts was “the last hurrah of Keynesianism.”<br />
In the foreseeable future, he says, the huge increase in<br />
government debt will limit fi scal room for maneuver.<br />
Sachs may well be right. Many OECD economies are in an<br />
abysmal state, and there are three other reasons why Keynesianism<br />
is unlikely to make a lasting comeback:<br />
First, empirical research indicates that cyclical highs and<br />
lows can be smoothed out by a combination of monetary<br />
policy and the stabilizing effects of tax and transfers. Bailouts<br />
can be counterproductive if they’re slow to take effect, and<br />
in some cases they can actually make the troughs deeper.<br />
Second, during the postwar decades, Keynesian policies<br />
(2)<br />
usually failed in good times to reduce debt caused by defi cit<br />
spending in bad times. Third, current and future challenges Getty<br />
like emissions and demographic change are primarily struc- (2),<br />
tural, and structural problems need structural solutions.<br />
So the message is a nuanced one. During the normal eco- Akhtar<br />
nomic cycle, governments should rely on monetary policy, tax Amin<br />
and transfers to improve their fi nances. Big bailouts should<br />
be an absolute last resort for serious recessions. Photo:<br />
dem Moore edited the business<br />
section of the political<br />
magazine Cicero, and this year<br />
he won the Ludwig Erhard<br />
business journalism prize for<br />
his columns in the magazine.
REPORT<br />
Size matters in<br />
the modular economy
REPORT: THE MODULAR ECONOMY<br />
THE MODULAR ECONOMY The division of labor in the world<br />
economy continues apace. Small, agile, networked entities are<br />
increasingly successful, but big industrial giants are also profiting<br />
from the de-linking of the supply chain. In many sectors, clearly<br />
defined interfaces make cooperation with suppliers and service<br />
providers much easier than it used to be. The age of business ecosystems<br />
has begun. It is an age of collaboration between companies of very<br />
different sizes, and resurrecting one of the oldest questions in business:<br />
“How big should my company be?” There is no one-size-fits-all<br />
solution; rather, there are many different approaches to answering it.<br />
By Thomas Ramge Illustration & photos Sarah Illenberger<br />
Small versus big?<br />
A whole new army of Davids is on the rampage, some<br />
Goliaths are being slain, and small is the new big.<br />
US journalist, law professor and star blogger, Glenn<br />
Reynolds, has raised this subject a couple of times on<br />
his blog, instapundit.com. During the middle of the<br />
last decade, he pointed out that digital technology<br />
and the Internet were creating new opportunities<br />
for small businesses. Geeky students could run flourishing<br />
online businesses from their dorm rooms, and<br />
microbreweries were taking significant market share<br />
from giants like Miller and Budweiser.<br />
Reynolds described how 20th-century mass<br />
production, with its obsessive quest for economies<br />
of scale, no longer met the needs of 21st-century customers.<br />
Small was suddenly cool and, as he pointed<br />
out somewhat immodestly, a small blog founded in<br />
2001 could attract more readers in a day than many<br />
big local papers attracted in a week.<br />
The army of Davids began making inroads into<br />
big business. The image caught on, and in 2006<br />
Reynolds summarized his thoughts on the shift of<br />
power from big to small organizations in a small,<br />
pamphlet-like book, The Army of Davids. This<br />
promptly became a bestseller, and Reynolds became<br />
the chief exponent of a new economic philosophy;<br />
small is beautiful again, and the inexorable march<br />
of big corporations since the industrial revolution<br />
appears to have been halted. Economies of scale<br />
are no longer compatible with economies of scope.<br />
The mantras of 20th-century manufacturing were<br />
past their sell-by date, Reynolds said. In the past,<br />
if you doubled the number of items you made, you<br />
reduced your unit costs by 20 to 30%, but what’s<br />
the point when nobody wants to buy mass-produced<br />
goods any more, and the act of consumption is<br />
becoming increasingly individual? For Davids, tailormade<br />
products are where the big opportunities lie.<br />
One man, millions in profits<br />
The list of small-company-made-good stories is a<br />
long and rich canon. In 2007 the dating website<br />
plentyoffish.com, based in its Canadian creator’s<br />
home office, became what may have been the first<br />
one-person company to make an operating profit of<br />
more than USD 10 m.<br />
24 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
RUBRIK HIER<br />
SMALL<br />
versus BIG<br />
Small is beautiful... again. The<br />
inexorable rise of big organizations<br />
since the industrial revolution<br />
seems to have come to a temporary<br />
halt. Today, equipped with the<br />
sophisticated tools of the digital<br />
economy, and with limited<br />
overheads, small businesses can do<br />
things that were once done only by<br />
big corporations.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 25
RUBRIK HIER<br />
ONE MAN – millions in profits<br />
Tiny companies are everywhere you look. They market<br />
themselves globally, have almost no capital and, thanks to the<br />
Internet, can market their products and services worldwide.<br />
26 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
UNTANGLING<br />
those transaction costs<br />
Sports like kite surfing, which is enjoying a rapid<br />
worldwide increase in popularity, are supplied almost<br />
exclusively by small companies. Much of the<br />
innovation is being driven by fans rather than big<br />
design departments. Elsewhere, sales at the world’s<br />
biggest online platform for handicrafts, etsy.com,<br />
are approaching USD 500 m. Smaller manufacturers<br />
are enjoying a renaissance throughout the Western<br />
world. Anyone can buy Gucci, but true connoisseurs<br />
can make a statement by buying an ethical fashion<br />
label from Amsterdam.<br />
You might expect the world’s biggest seller of<br />
Darjeeling tea to be Unilever or some other food<br />
giant, yet it’s the Berlin company Teekampagne,<br />
founded by a professor of entrepreneurship and run<br />
by a handful of people. Perhaps the most impressive<br />
victory over the industry giants has been by a<br />
multitude of small and medium-sized companies<br />
with no names; over 50% of the world motorcycle<br />
market is now controlled by a network of suppliers<br />
and assemblers in China. Even the biggest are not<br />
exactly household names – Qingqi, Jialing, Zhejiang,<br />
Jincheng, Xindazhou – but these companies make<br />
very good bikes at affordable prices and sell them<br />
under eminently forgettable brand names. In the<br />
developing countries, they easily outsell the Japanese<br />
giants Yamaha, Honda and Kawasaki.<br />
Untangling those transaction costs<br />
In a standardized, networked world of flat hierarchies,<br />
small companies can often fight way above their<br />
weight class. It’s also an appealing idea, since Davids<br />
RUBRIK HIER<br />
To every action, there is an equal and opposite reaction.<br />
The online world is populated not only by tiny businesses, but also<br />
by juggernauts like Google, Facebook and eBay. The economies<br />
of scale apply just as much to clicks-and-mortar business models.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 27
REPORT: THE MODULAR ECONOMY<br />
“When should companies outsource parts of their<br />
production to others who do certain things better,<br />
than they do?”<br />
have traditionally attracted more sympathy than<br />
Goliaths. Of course, Glenn Reynolds’ opinions are<br />
generalizations. Yes, these success stories do exist,<br />
and technological standardization and the Internet<br />
make life easier for small businesses, but the army of<br />
David’s theory is based largely on anecdotes.<br />
Look more closely and you soon realize that<br />
mass production and distribution are expanding<br />
inexorably. The online world is dominated by behemoths<br />
like Amazon, Google, Facebook and Zynga,<br />
and they’re getting bigger by the month. Offline,<br />
car manufacturers form alliances with big players<br />
in the electrochemical industry, and the insurance<br />
industry continues to consolidate, McDonald’s<br />
has cruised out of the doldrums and is expanding<br />
globally, and many big banks are riding the crest<br />
of a wave again.<br />
Reynolds’ opinions are still thought-provoking.<br />
They prompt us to ask an old but important business<br />
question from a new perspective: how vertically<br />
integrated do companies need to be in order to<br />
collaborate effectively in ecosystems? Or to put it<br />
another way, when should they outsource part of<br />
their production to others who do a better job?<br />
One person who tried to answer this question<br />
was awarded a Nobel Prize for his efforts. The<br />
British economist Ronald Coase won the Nobel<br />
Prize in 1991 for his essay The Nature of the Firm,<br />
written more than fifty years prior in 1937. In his<br />
work, he expressed doubts about the Ford business<br />
model, which involved doing everything in-house<br />
from start to finish. In those days, Ford didn’t<br />
just concentrate on building good cars; it made its<br />
own steel, generated its own power, made its own<br />
windshield glass, and sold cars directly to customers.<br />
To a socialist economist, this was inefficient, and<br />
the solution was the Coase theorem, a milestone in<br />
economic history.<br />
The theorem says that there are always transaction<br />
costs involved in the division of labor and that<br />
these can be divided into categories. There are search<br />
costs, the cost of finding things such as employees,<br />
capital, materials, and information about production<br />
processes; there are contract costs, the costs<br />
of negotiating agreements, such as lawyers’ fees;<br />
finally, there are coordination costs which are the<br />
costs of the effort involved in ensuring that everyone<br />
involved works together efficiently. Coase concluded<br />
that companies would always seek vertical integration<br />
if their bottom-line external transaction costs<br />
were higher than the cost of the employees doing<br />
the job in-house.<br />
The Power of small parts<br />
The one thing that has changed since Coase analyzed<br />
Ford’s vertically integrated production is transaction<br />
costs. Today’s economy works on the Lego principle;<br />
the bricks snap neatly together, they don’t fall apart,<br />
and they can be combined in many different ways.<br />
Over the last few decades, the supply chain has<br />
28 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
THE POWER<br />
of small parts<br />
The supply chain<br />
has gone modular.<br />
Today‘s technology and<br />
business processes are<br />
highly standardized.<br />
This opens up big<br />
opportunities for large<br />
and small organizations<br />
working together<br />
in ecosystems.<br />
RUBRIK HIER<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 29
RUBRIK HIER<br />
The ideal<br />
SIZE<br />
What‘s the ideal size for a<br />
company? There‘s no single answer<br />
to this question; it depends on the<br />
individual context. These days,<br />
small companies can quickly get<br />
big, and vice versa.<br />
30 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
REPORT: THE MODULAR ECONOMY<br />
been organized in an increasingly modular way<br />
because the cost of working with other businesses<br />
has become so low. Count the components of your<br />
cell phone, and you’ll find out how many suppliers were<br />
involved in its production. Battery, microphone, antenna,<br />
display, chip, SIM card; each comes from a<br />
hidden champion in one particular industry.<br />
In a modular world, interfaces are increasingly<br />
well defined: technological, logistical, legal, and<br />
administrative. Hard disks fit any laptop, products and<br />
parts arrive on time, and contracts and processes are<br />
standardized. Transferring money between almost<br />
any two countries on Earth is no longer a barrier<br />
to trade.<br />
At the same time, companies can now rely on<br />
business-to-business providers for almost any stage<br />
in their production process. A company with half a<br />
dozen workers like Teekampagne can become the<br />
world’s biggest seller of Darjeeling by outsourcing<br />
nearly all of its processes, including its call center,<br />
accounts, packing and dispatch – all done by<br />
outsiders.<br />
In the networked world, Davids can have their<br />
cake and eat it. It’s never been easier to supply<br />
modules such as cell phone antennas to the Goliath<br />
ecosystem, and you can even assemble the modules<br />
yourself as medium-sized locomotive builders do.<br />
If you play your cards right, and are sufficiently flexible,<br />
you can often be extremely competitive with an<br />
overweight Goliath.<br />
David Teece, director of the Institute of Management,<br />
Innovation and Organization at the University<br />
of California, Berkeley, says that in the modular<br />
economy, a clever David can orchestrate a network.<br />
It can score points with its dynamic capabilities<br />
and its ability to respond to market change, but it<br />
can also get knocked out. These capabilities, Teece<br />
believes, are the key to a business’ success or failure.<br />
The ideal size<br />
Take a few steps back, and it’s clear that the debate<br />
about big or small, insourcing or outsourcing, hierarchies<br />
or networks, has been going on since long<br />
before the Internet was invented. “The issue of the<br />
ideal business size crops up more and more often,”<br />
observes management scientist Stefan Kühl. “Sometimes<br />
the management pendulum swings one way,<br />
sometimes the other.”<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 31
REPORT: THE MODULAR ECONOMY<br />
“In a market economy, only the Goliaths can<br />
shoulder the big risks – though this won’t stop<br />
the army of Davids from coming up with lots<br />
of good ideas”<br />
Traditional hierarchies do have their advantages,<br />
he points out. They can help organizations to make<br />
and implement decisions more quickly. They allow<br />
certain forms of behavior to be sanctioned and they<br />
are less susceptible to one of the key problems of<br />
networked systems: everyone wants to profit, but<br />
no one is willing to contribute money upfront. Also,<br />
in many sectors, innovation is a capital-intensive<br />
process; Davids cannot build the networks of<br />
hydrogen fuel stations needed to make environmentfriendly<br />
fuel-cell vehicles more popular, nor can<br />
they afford the expensive and uncertain process of<br />
obtaining drug licenses. In a market economy, only<br />
the giants can shoulder the big risks – though this<br />
won’t stop the army of Davids from coming up with<br />
lots of good ideas.<br />
This brings us back to the crux of the matter;<br />
what is the ideal size for a company? This is one of<br />
the eternal questions of business, and it’s impossible<br />
to generalize; however, because today’s interfaces<br />
are so clearly defined, the supply chain so highly<br />
segmented, and outsourcing so much more effective<br />
than it used to be, it has never been easier to set up<br />
a successful new business with limited capital. That<br />
said, the David versus Goliath image is misleading.<br />
Big and small at the same time<br />
Big and small are not a contradiction in terms,<br />
either from a business or a macroeconomic point of<br />
view; you can be both simultaneously. For example,<br />
you can insource your administration and production<br />
to take advantage of economies of scale, and<br />
outsource your innovation and value creation. If you<br />
do this successfully, it resolves a classic management<br />
conf lict: hierarchies are no longer a barrier to<br />
innovation and customer focus, and decentralization<br />
does not stop you from profiting as a result<br />
economies of scale.<br />
At the macro level, a healthy economy needs<br />
a mix of small, midsized and large companies.<br />
“We just need to make sure that less small,<br />
innovative companies get gobbled up by big ones<br />
that are short of ideas themselves,” comments<br />
Roman Boutellier, professor of technology and<br />
information management at the Eidgenössische<br />
Technische Hochschule (ETH) in Zurich. He says<br />
there is a tendency, particularly in the United States,<br />
for innovative entrepreneurs to cash in their chips<br />
too early, which poses another systemic obstacle to<br />
technological progress.<br />
To use Glenn Reynolds’ image, many Davids<br />
have stopped trying to make friends with the Goliaths<br />
in their particular industries and markets –<br />
though they still get excited if a Goliath holds out<br />
a hand of friendship to them. Others successfully<br />
develop long-term relationships with Goliaths, and<br />
become an integral part of their ecosystems. Every<br />
now and then a David decides to become a Goliath,<br />
complete with its own ecosystem, lots of Davids as<br />
business partners, and all the pros and cons of a<br />
big organization.<br />
32 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
BIG and SMALL<br />
at the same time<br />
Big and small don‘t have to be a contradiction<br />
in terms. In an increasingly networked and<br />
interdependent economy, healthy markets need<br />
big and small players.<br />
RUBRIK HIER<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 33
REPORT: ESSAY<br />
The debate about alternatives to GDP is a red herring – we need<br />
more growth. By Prof. Dr. Burkhard Schwenker, Chairman of the supervisory<br />
board, Roland Berger Strategy Consultants<br />
“If resources are declining,<br />
growth is all<br />
the more important”<br />
IBELIEVE IN GROWTH! Like competition, it has positive<br />
connotations for me. It’s about change, dynamism, innovation,<br />
it’s not always comfortable and sometimes<br />
it’s downright unpleasant, but there’s no alternative.<br />
Let me explain why.<br />
In the 1970s, the Club of Rome published a controversial<br />
book entitled The Limits to Growth. At fi rst<br />
sight, its basic premise made sense; resources are fi -<br />
nite, and the more we grow, the faster we consume them. Its<br />
four authors sparked a great deal of debate about the harmful<br />
effects of growth, but their doomsday predictions failed to<br />
materialize, partly because they underestimated the pace of<br />
technological progress.<br />
Who could have guessed, even twenty years ago, the<br />
extent to which business would be dominated by the<br />
Internet, medicine by biotechnology, or materials science by<br />
nanotechnology? Who could guess how many resources still lay<br />
undiscovered? Take gas, for example. Predictions that reserves<br />
would be exhausted in decades have been disproved. Energy<br />
companies are extracting gas from shale, and new cracking<br />
and drilling technology means that reserves can be profi tably<br />
exploited for hundreds of years.<br />
However, technological progress of this kind is dependent<br />
on growth. Companies can only invest in research and<br />
development if they grow and generate cash fl ow. Even statesubsidized<br />
research needs resources to be generated fi rst, and<br />
zero growth would act as a brake on innovation; cutting costs<br />
has never led to new and innovative ideas.<br />
On the other hand, expecting technological innovation<br />
to continue at its present rate may be too much to hope<br />
for. What’s the alternative? It might sound like a risky bet<br />
on the future, but we need to encourage growth precisely<br />
because we consume resources. That way, there’s more chance<br />
of inventing technology that finds new uses for existing<br />
resources, and helps us to acquire new resources.<br />
When I say growth, I obviously mean sustainable growth.<br />
Sustainable growth is not a buzz phrase, it’s the solution to<br />
our theoretical dilemma, but it will only succeed if we regard<br />
climate change, raw materials shortages and demographic<br />
change as growth opportunities. This requires industrial<br />
strength, since the only way of dealing with limited resources<br />
is to speed the pace of productivity growth using automation,<br />
new production processes, intelligent transport, energy<br />
effi ciency and green energy.<br />
The debate about nuclear power and new types of energy<br />
shows the importance of innovative technology. We have the<br />
ability to change our energy mix quickly because Europe is the<br />
world leader in green technology. From an economic viewpoint,<br />
it’s simply a combination of mechanical, plant and electrical<br />
engineering, and high-tech services; precisely the kind of things<br />
that our manufacturers excel at.<br />
The same is true of demographic change, which we can<br />
see either as a threat or an opportunity for industrial growth.<br />
In a highly industrialized country, the fewer people there are<br />
of working age, the more you must increase productivity to<br />
maintain economic competitiveness, so our manufacturing<br />
know-how is a signifi cant asset.<br />
We need to look at things from a different perspective.<br />
Scarce resources don’t inhibit growth; they give it added<br />
leverage. Instead of thinking about alternative ways of<br />
34 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
measuring growth, we must create<br />
the right conditions for sustainable,<br />
industrially driven growth: international<br />
free trade, equal access to<br />
raw materials, effective protection<br />
of intellectual property, and stricter<br />
regulation of the fi nancial markets.<br />
We need tangible objectives, like the<br />
European Union’s targets of a 20 %<br />
reduction in greenhouse gases, a<br />
20 % increase in renewable energy<br />
usage, and a 20 % improvement in energy effi ciency.<br />
It is dangerously arrogant to see growth in negative terms,<br />
because we are not alone in the world. History shows that<br />
only economic growth leads to greater prosperity, and the<br />
booming economies of China, India, Brazil and Southeast<br />
Asia are evidence that this correlation still holds true. Economic<br />
growth creates employment, which generates income,<br />
which makes people’s lives better.<br />
This is perfectly compatible with the economic theory of<br />
happiness, which states that the marginal benefit of income<br />
decreases above a certain level. The Nobel prize-winning<br />
US economist Daniel Kahnemann quantifies this magic<br />
number as USD 75‚000. If someone earns more than this<br />
it won’t make them any happier. This figure is far removed<br />
from reality in the developing countries and will remain so<br />
for many years to come.<br />
However, this understandable and legitimate desire for<br />
material growth does not exist in isolation. We live in a<br />
networked global economy, and the constantly increasing<br />
competition we face is a result of this desire to better ourselves.<br />
If we scale back our economic ambitions, we also scale<br />
back our competitiveness – with unpredictable consequences<br />
for our wellbeing.<br />
So is gross domestic product still an adequate refl ection<br />
of growth, prosperity and economic strength, or should we,<br />
as the EU proposed in 2007, start thinking “beyond GDP?”<br />
“Who could have<br />
guessed, even twenty<br />
years ago, the extent<br />
to which business<br />
would be dominated<br />
by the Internet,<br />
or medicine by<br />
biotechnology?”<br />
REPORT: ESSAY<br />
Clearly, all traditional econometrics<br />
misuse the concept of “public goods”<br />
and fail to take suffi cient account<br />
of external factors like pollution.<br />
They use the “polluter pays” principle,<br />
which is why we should try<br />
even harder to price these factors<br />
into the equation, just as we do with<br />
CO 2 certifi cates.<br />
Clearly, alternative indices have<br />
so far been unsatisfactory. “The concept<br />
of happiness is intangible, so there’s not much point in<br />
trying to defi ne it,” says economist Bruno Frey, a specialist<br />
in this area. So how do we quantify feelings, let alone use<br />
them as a basis for economic policy? This is why, despite its<br />
weaknesses, GDP should remain the primary measure of<br />
growth and wellbeing.<br />
Harvard economist Benjamin Friedman rightly contends<br />
that increasing prosperity improves the lives not just of individuals,<br />
but also of whole societies. It encourages tolerance,<br />
openness, social mobility and democracy, so that instead of<br />
having to choose between growth and morality, we achieve<br />
morality through growth. The two are interconnected, and<br />
after a fi nancial and economic crisis caused by an obsession<br />
with growth, one of the key questions we must ask<br />
ourselves is whether social justice is compatible with growth<br />
and profi tability.<br />
Theoretically, this question has no convincing answer,<br />
but maybe some statistics will help to counter excessively<br />
ambitious growth targets. Over the last 30 years, the world<br />
economy has grown by an average of 3 % per year, big manufacturers<br />
have achieved growth between 4 % and 7 %, and<br />
capital returns on the world’s leading markets have been<br />
no more than 7 %. This doesn’t mean that there cannot be<br />
more growth in the short term; there is a wide range of<br />
scenarios, but at least the numbers give an idea of what<br />
might be possible.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 35
Facebook‘s Palo Alto<br />
headquarters has chill zones,<br />
where staff can play Guitar<br />
Hero on the Xbox 360 or<br />
catch up on a quick game of<br />
chess.<br />
36 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
Photos: Emily Shur / Gallery Stock<br />
REPORT: THE FUTURE OF WORK<br />
Nice house,<br />
nobody home<br />
As people work less in the office, the way in which<br />
organizations operate is changing fundamentally. Will this<br />
benefit smaller companies? How should big corporations<br />
respond? Professor Alexi Marmot, an expert in workplace<br />
strategy, shares her insights<br />
Alexi, you’re one of the masterminds<br />
behind IBM’s flexible office structure<br />
and have more than 20 years of experience<br />
shaping the new world of work.<br />
Can you give us a quick rundown<br />
on how work life has changed in<br />
recent times?<br />
Management gurus ponder the end of<br />
long-term employment security, the<br />
need for portfolio careers, the end of<br />
job specifications (people just know<br />
what work needs to be done), the relative<br />
shortage of young workers due to<br />
demographic change, employment<br />
equality, the need to work way beyond<br />
conventional retirement age, the growth<br />
of technology, and so on.<br />
Meanwhile legislation introduced in<br />
response to political demands, employee<br />
availability, and the concept of human<br />
capital has introduced many forms of<br />
flexible working. This is especially important<br />
as a way of balancing work life with<br />
childcare or care for the elderly. Flexible<br />
employment contracts cover a wide range<br />
of different assumptions about the time<br />
and place associated with work. Perhaps<br />
the most prevalent arrangement is outsourcing<br />
or offshoring, in which the work<br />
of whole departments within a large<br />
company is transferred to another organization,<br />
possibly in a country far away.<br />
Does this increasingly mobile and<br />
f lexible way of working benefit smaller<br />
37
REPORT: THE FUTURE OF WORK<br />
“The vast infrastructure of large firms can now<br />
be mimicked by intelligent networks of people<br />
working alone or within formal companies”<br />
companies? Can they – by using<br />
freelancers, modern technology,<br />
and falling transaction costs – do<br />
things that in the past only large<br />
corporations could do?<br />
There is no question that IT<br />
developments empower new entrants<br />
to the world of work. Indeed the<br />
stories of recent start-up companies<br />
like Google, Skype, Facebook, and<br />
Twitter are all about bright young<br />
kids forging an idea, developing<br />
software, becoming billionaires,<br />
creating new verbs – such as “tweet”<br />
or “google” – and supplanting<br />
conventional methods of work, how<br />
we access information, and how<br />
we think.<br />
The vast infrastructure of large<br />
firms can now be mimicked by intelligent<br />
networks of people working<br />
alone or within formal companies.<br />
Technology costs continue to<br />
plummet while delivering more<br />
power, faster processing, and access<br />
to hitherto undreamed of quantities<br />
of information. Search engines<br />
identify what we need to know in<br />
milliseconds. Branding and marketing<br />
your service via an impressive<br />
website to attract customers is no<br />
longer difficult or expensive. The<br />
overhead cost of an office is unnecessary<br />
if work can be done from<br />
home or from a third location and<br />
sold anywhere in the global market.<br />
This suggests that micro firms can<br />
follow, and probably beat, the giants<br />
through competitive advantage and<br />
cost savings.<br />
So small is now beautiful?<br />
Not necessarily. Because at the same<br />
time, a multitude of new laws and<br />
regulations stop all but large, wellestablished<br />
companies from being<br />
allowed to operate. Excellent motivations<br />
lie behind the new tyranny<br />
of procurement. The vision of open<br />
trade across international boundaries<br />
has created the monstrous<br />
European procurement system that<br />
demands open advertisement across<br />
all EU countries for almost all government<br />
purchases.<br />
This adds more time and effort to<br />
the process of winning work. Only<br />
the very largest firms can bear the<br />
cost of tendering and only they<br />
stand a chance of meeting all the<br />
procurement criteria. For example,<br />
only large firms can afford the time<br />
needed to gain accreditation for<br />
the environmental performance or<br />
quality management that is increasingly<br />
requested. Brave clients are<br />
needed to risk buying from small<br />
new players.<br />
Is there a perfect size for a corporation<br />
today?<br />
Perfect size? No way, let a multitude<br />
of corporation sizes bloom. New<br />
micro-sized entrants together with<br />
gigantic mature companies can, and<br />
do, flourish in the global economy.<br />
One change is the hollowing out of<br />
the center, leaving nano-firms and<br />
gigantic corporations at the two ends<br />
of the size spectrum. Most industries<br />
are characterized by a small number<br />
of dominant players, oligopolies<br />
that may sometimes exert too much<br />
38 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
control over their markets and customers.<br />
Petroleum, banking, accounting,<br />
pharmaceuticals, and car manufacturers<br />
all have their giants built up over many<br />
years of organic growth and acquisition.<br />
The challenge for the giants is to act like<br />
the nano-players by being quick to act,<br />
innovative, light on bureaucracy, treating<br />
all employees as valued individuals,<br />
and letting all customers feel they are<br />
respected.<br />
How does the trend towards open<br />
innovation and mass collaboration<br />
transform corporate structures?<br />
Arguably, open innovation beyond<br />
corporate walls is the death of the<br />
company as we know it. Intellectual<br />
property ownership, on which so many<br />
organizations flourish, is impossible to<br />
control in an open innovation environment.<br />
Problems within the recording,<br />
publishing, and newspaper industries<br />
bear witness to this. Open innovation<br />
within a company can work well as<br />
long as the people with the best ideas<br />
are rewarded.<br />
What else must big corporations do to<br />
respond to the new world of work?<br />
Forward-thinking companies such as<br />
BP and IBM have long understood the<br />
competitive advantages of providing<br />
their staff with some flexibility regarding<br />
contracts, time, and place of work.<br />
In this way, they can retain skilled and<br />
loyal employees who otherwise might<br />
need to leave due to changing jobs or<br />
personal circumstances such as moving<br />
house, or having children.<br />
The necessary infrastructure for doing<br />
so consists of combining the offerings of<br />
HR, IT, and Estates, as well as agreeing<br />
what is needed with business managers,<br />
organizing effective management of<br />
change, and monitoring the resultant<br />
effects on staff, on customers, and on<br />
the business. Effective line management<br />
is essential for this to work. Managers<br />
must ensure that their team members<br />
are producing by results and not by<br />
being present, and managers<br />
need to trust their team members.<br />
By separating the job people do from the<br />
concept of a permanent place in which<br />
to do it, it is possible to strike a balance<br />
between the needs of the individual<br />
employee and the needs of the company.<br />
But how can any organization function<br />
if its employees are scattered all<br />
over the globe, working in airport<br />
lounges, cafés, and from home?<br />
Data drawn from tens of thousands<br />
of office employees shows that, at the<br />
busiest times of the year, most people<br />
are not at their desks about 63% of the<br />
working day and are not present in the<br />
office building for about 46% of the day.<br />
This is one of the reasons that telecommunications<br />
companies first invented<br />
voicemail, and that fixed handsets have<br />
become irrelevant compared to mobile<br />
phones that actually reach the person<br />
and not the desk. In other words, most<br />
office work is in fact about working in<br />
virtual teams that are rarely together in<br />
time and place.<br />
What does this mean for our idea of<br />
the typical workplace?<br />
The results can be unusual. Corporate<br />
buildings can be filled with people<br />
working for many different departments<br />
and with people from outsourced firms<br />
who need to be present, for example,<br />
to operate IT or the facility itself.<br />
People not employed directly by the<br />
organization can transmit corporate<br />
culture and image.<br />
How should managers deal with this?<br />
The solution is to schedule regular<br />
meetings, allow attendance by teleconference<br />
and videoconference, use<br />
many forms of media to communicate<br />
– email, instant messaging, telephone,<br />
text, websites, social networking – and<br />
above all, ensure all team members<br />
know what they have to do, by when<br />
and to what standard.<br />
Interview Markus Albers<br />
REPORT: THE FUTURE OF WORK<br />
Alexi Marmot<br />
Biography<br />
Alexi Marmot is Professor<br />
of Facility and Environment<br />
Management, Vice Dean<br />
of Teaching and Learning,<br />
and Head of School at<br />
the Bartlett School of<br />
Graduate Studies, University<br />
College London. She is<br />
also a visiting professor at<br />
Sheffield Hallam University.<br />
Alexi established AMA<br />
Alexi Marmot Associates<br />
in 1990 to help organizations<br />
make the best use of<br />
their buildings by applying<br />
evidence-based design.<br />
Her clients include large<br />
multinational corporations,<br />
government and educational<br />
bodies, non-profit<br />
organizations including<br />
the Bill and Melinda Gates<br />
Foundation, British Airways,<br />
BBC, BP, HSBC, IBM, Morgan<br />
Stanley, Nationwide, and<br />
WWF, and many colleges<br />
and universities.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 39
REPORT: VIRGIN<br />
Branding<br />
Venture Capital<br />
Virgin’s Richard Branson believes in the power of small.<br />
His tactic: every time one unit grows large enough, create another.<br />
Virgin has no intention of being the market leader, and prefers to be<br />
the underdog – at least, that’s its marketing line<br />
By Hilmar Poganatz<br />
THE SMALLER, THE BETTER. British billionaire<br />
Richard Branson likes to keep<br />
things simple; for many years, Virgin<br />
Group board meetings were held in his<br />
London villa. “I was working in his son’s<br />
bedroom, and he was working from his<br />
bedroom,” recalls the former CEO of<br />
Virgin Direct, Rowan Gormley. This<br />
was a lot more space than during the 15-year period when<br />
Branson ran the Virgin empire from his houseboat. And<br />
it was positively cavernous compared to the offi ce of the<br />
student magazine Branson edited as a teenager, buried in<br />
the crypt of a church, with a desk made from “an old marble<br />
slab laid across two gravestones.” Branson’s talent for anecdote<br />
is legendary.<br />
However, you can’t argue with numbers; in four decades,<br />
Virgin has created more than 300 companies, and employs<br />
approximately 50,000 people in 30 countries. It started<br />
with Virgin Records, continued with Virgin Atlantic and<br />
eventually became a global empire, the Virgin Group, investing<br />
in businesses as diverse as mobile phones, transport,<br />
travel, fi nance, media, music and fi tness. In 2009, sales of<br />
Virgin brands totaled around EUR 13 bn, and the company<br />
was worth just over EUR 3 bn. Branson, now 61, still<br />
holds true to the maxim he learned as a student journalist,<br />
formulated by economist E.F. Schumacher in 1973: small<br />
is beautiful.<br />
Be small. “The philosophy of Virgin was that as soon as any<br />
business got big – and that originally meant more than<br />
20 employees – then you should try and break it up into<br />
smaller units.” Rowan Gormley learned this at one of his<br />
fi rst meetings as Branson’s advisor; the idea was that small,<br />
independent units are more customer – and employee –<br />
friendly, and faster to respond.<br />
“We want every Virgin subsidiary to be an effi cient, manageable<br />
size,” says Branson. In 1992, for example, Virgin<br />
Music consisted of fi fty subsidiaries, none employing more<br />
than sixty people. Robert M. Grant, professor of strategic<br />
management at Milan’s Università Bocconi, says Virgin has<br />
“very little hierarchy, offering short lines of communication<br />
and fl exible response capability.”<br />
“The companies were all independently fi nanced,” Gormley<br />
says. “Everybody had their own reporting structure;<br />
40 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011<br />
Photos: DDP, Imago, Mauritius Images (2)
Entrepreneur<br />
People & Planet<br />
The USD 25 m Earth Challenge<br />
prize for greenhouse gas removal<br />
technology, and Branson‘s<br />
charitable organization Virgin Unite<br />
REPORT: VIRGIN<br />
Lifestyle Media & Mobil<br />
Money<br />
The fi nancial services provider Virgin<br />
Money in the UK, Australia and<br />
South Africa, and the online<br />
fundraising site Virgin Money Giving<br />
Branson‘s startup<br />
incubator to<br />
recruit new Virgin<br />
entrepreneurs<br />
Space Ship One & Two:<br />
Spacefl ights with<br />
Virgin Galactic could<br />
become a reality this year<br />
Virgin Active fi tness clubs in six<br />
countries, a party planning<br />
organization and a Formula One team<br />
Virgin Cola<br />
was launched<br />
in 1994.<br />
The Virgin Mosaic<br />
Travel<br />
Mobile phone and<br />
broadband providers<br />
in seven countries,<br />
mostly under the<br />
Virgin Mobile brand<br />
Virgin Atlantic, three airlines in Australia,<br />
stakes in Air Asia and Air Nigeria, Virgin<br />
Trains in the UK, balloon and spacefl ights,<br />
underwater expeditions, Virgin Holidays<br />
in the UK and its US counterpart Virgin<br />
Vacations, Limited Edition boutique hotels,<br />
motorcycle taxis in London, and a North<br />
American limousine service<br />
41
REPORT: VIRGIN<br />
“We want every Virgin subsidiary to be<br />
an effi cient, manageable size.” The Virgin<br />
empire consists of 300 small companies<br />
you sent Virgin one page of numbers and that was that.”<br />
Senior managers were treated like independent entrepreneurs<br />
and given share options for added motivation, while Grant<br />
says the rest of the workforce were happy to work for “quite<br />
modest salaries”.<br />
Be aggressive. With this armada of bellicose admirals and<br />
emaciated crews, Virgin launched an all-out assault on a<br />
multitude of seemingly random markets. Singer Peter Gabriel<br />
reportedly said, “Virgin is gradually getting everywhere.<br />
When you wake up in the morning you listen to Virgin Radio,<br />
put on your Virgin jeans, go to the Virgin Megastore, drink<br />
Virgin Cola, and fl y to America with Virgin Atlantic.”<br />
But most Virgin Group startups follow a pattern that’s<br />
anything but random. Whether establishing airlines, insurance<br />
companies, or mobile phone providers, Virgin always<br />
markets itself as the jaunty newcomer, competing with<br />
established companies who annoy their customers with<br />
bad service or unnecessarily high prices. Branson enjoys<br />
“turning industries upside down” but, as he emphasizes on<br />
the Virgin website, that doesn’t mean that he chooses new<br />
markets by tossing a coin.<br />
Brad Rosser, Branson’s corporate development director until<br />
1998, says that a new project had to tick at least four of fi ve<br />
boxes. “It must be innovative, challenge authority, offer value for<br />
money by being better than the competitors, be good quality,<br />
and the market for the project must be growing.”<br />
The David and Goliath image is the focal point of Virgin’s<br />
marketing, in spite of the fact that Virgin Atlantic has an<br />
annual income of almost EUR 3 bn. As Rowan Gormley<br />
wryly puts it, “Virgin has managed to build some pretty big<br />
underdogs.”<br />
Be cautious. Branson is well aware that new ventures are risky,<br />
and upstarts often end up with bloody noses. Author and management<br />
consultant Des Dearlove says, “He’s always managed<br />
to use other people’s property for his own adventures.” As<br />
a businessman who’s had to shut down more than 100 of<br />
his creations, Branson has learned to hedge against risk.<br />
When he sets up new companies, he prefers joint ventures<br />
to bank loans. His biggest asset is the brand name; Virgin<br />
actually refers to itself as a “branded venture capital organization,”<br />
and Branson aims to expand it into a global lifestyle<br />
brand. Eventually, he wants to turn lots of small companies<br />
into one vast business.<br />
Be big. Small fi sh get eaten unless they swim with the shoal.<br />
The Virgin Group looks after its companies, and each is fi -<br />
nancially independent of the others, so that if one fails, it<br />
doesn’t affect the others. “They don’t just protect one another,<br />
they have symbiotic relationships,” Branson says. “We have<br />
a presence in 300 different sectors, and we’re the underdog<br />
in all of them.”<br />
If Virgin is a giant with lots of little feet, surely the David<br />
and Goliath idea is a bit far fetched? “Virgin can still get away<br />
with appearing to be a much smaller company than it really<br />
is because in every sector we are still the small guy, taking on<br />
the big guy,” Branson points out. “We’re not dominant in one<br />
particular sector like, say, Google in the online market. We’re<br />
in 300 different businesses and, in each, we’re the underdog.”<br />
To his former fellow travelers, this sounds similar to Branson’s<br />
marketing spiels back in the 1970s. Brad Rosser says,<br />
“The ambition of Virgin companies was to make them as<br />
big as possible.” Gormley claims that the Group decided to<br />
become a big player in the 1990s; “Virgin has become more<br />
conventional, more old-fashioned, and just bigger. There<br />
is now a huge Group HR department, a huge Group legal,<br />
Group brand department, and all the rest.”<br />
The days of managing businesses from houseboats and<br />
crypts are ancient history, but tombstone desks still make<br />
good stories. As Rosser puts it, “I don’t think that Richard<br />
has ever felt that small is beautiful.”<br />
42 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
Photo: Tom Nagy<br />
BRIEF<br />
<strong>ACT</strong><br />
World trade rebounds<br />
Roland Berger’s study: Switchpoints for the Future of Logistics<br />
RUBRIK HIER<br />
A DEEP RECESSION AND A RAPID RECOVERY<br />
have shown that we live in volatile times.<br />
With seemingly stable trends suddenly<br />
turned on their heads, and whole sectors<br />
of the industry still in decline, logistics<br />
remains one of the best barometers of<br />
volatility. The recession hit logistics<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 43
<strong>ACT</strong>: BRIEF<br />
companies badly, leaving trucks, freight<br />
cars and container ships gathering dust for<br />
months on end. Now that the recovery is<br />
in full swing, these businesses are having<br />
trouble expanding their capacity rapidly<br />
enough.<br />
While these holdups bode well for the<br />
immediate future, the logistics industry must<br />
learn to cope more effectively with market<br />
fluctuations. These are uncertain times,<br />
and many questions remain unanswered.<br />
A recovery is taking place in some countries<br />
and sectors, but how long will it last? Does<br />
the crisis in the Eurozone presage another<br />
recession? How will sharply rising oil prices<br />
affect business models? Is globalization<br />
continuing apace, or are regional supply<br />
chains making a comeback? Will the trend<br />
toward green logistics be regulation or<br />
market-driven?<br />
The increasingly rapid pace of change<br />
makes markets more unstable, and decisionmaking<br />
in the logistics industry more<br />
diffi cult. If you base your future strategy on<br />
current forecasts, you ignore a multitude of<br />
imponderables. The two key questions facing<br />
the industry are: “How do you identify the<br />
switchpoints when things could move in one<br />
direction or the other?” and “How do you<br />
prepare for them strategically?”<br />
Roland Berger Strategy Consultants and<br />
the department of logistics management at<br />
St. Gallen University in Switzerland have<br />
produced a study that seeks to answer these<br />
questions. It examines the long-term effects<br />
of various short-term future trends and<br />
identifi es switchpoints that will affect the<br />
industry. Unlike trends, which evolve<br />
continuously, switchpoints mark changes<br />
of direction that have technological<br />
implications.<br />
+www.logistik.unisg.ch<br />
The world’s top ten logistics companies<br />
By revenue in billions euro, in 2010<br />
DHL<br />
DB Schenker<br />
Union Pacifi c<br />
The top three European<br />
countries in the logistics market<br />
In Europe by volume, in 2009<br />
44 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011<br />
BNSF<br />
Kühne+Nagel<br />
Nippon Express<br />
SNCF Geodis<br />
CSX Corporation<br />
Norfolk Southern<br />
26.9 18.9 12.8 12.7 2.2 11.4 8.9 8 7.2 6.8<br />
Source: companies’ own fi gures<br />
€ 200 billion<br />
Germany<br />
€ 113.8 billion<br />
France<br />
billion<br />
Great Britain<br />
€ 98.1<br />
Source: Fraunhofer IS<br />
The recovery in container transshipments<br />
ISL world container transshipment index<br />
220 Monthly transshipments<br />
200<br />
180<br />
160<br />
140<br />
120<br />
100<br />
Source: ISL – Institute of Shipping Economics and Logistics<br />
CEVA<br />
1Q 2003<br />
3Q 2003<br />
1Q.2004<br />
3Q.2004<br />
1Q.2005<br />
3Q.2005<br />
1Q.2006<br />
3Q.2006<br />
1Q.2007<br />
3Q.2007<br />
1Q.2008<br />
3Q.2008<br />
1Q.2009<br />
3Q.2009<br />
1Q.2010<br />
3Q.2010
New series of e-publications<br />
from early 2012<br />
Eight billion<br />
opportunities<br />
IN 2030, there will be 8.3 billion<br />
people on Earth – that’s nearly<br />
20% more than today. Ninety six<br />
percent of this increase will come<br />
from the developing countries.<br />
Unequal population growth will<br />
drastically change the economic<br />
balance of power: if a country<br />
has more people producing more<br />
goods and services, its economic<br />
growth will also accelerate.<br />
In 2030, around<br />
55% of worldwide GDP<br />
will come from the<br />
developing countries.<br />
A team of experts from Roland<br />
Berger analyzes how international<br />
companies can win new<br />
niche markets on the back of<br />
this trend – for example, fi nding<br />
out what newly affl uent consumers<br />
want, and then building<br />
infrastructure and developing<br />
innovative services for these<br />
markets. The team interviews<br />
senior managers and local market<br />
experts, and recommends<br />
possible strategies.<br />
For more information, contact<br />
eightbillionopportunities@<br />
rolandberger.com<br />
A Roland Berger study for the German industry<br />
and technology ministry<br />
Health:<br />
A growth market<br />
<strong>ACT</strong>: BRIEF<br />
ACCORDING TO A STUDY by business research specialist RB, the worldwide<br />
health care market looks set to grow more quickly than other sectors over the<br />
coming years. Per capita spending is expected to increase, with a growing and<br />
aging population ensuring high rates of growth. The market is currently expanding<br />
by 8.8% per year and health expenditure is rising faster than GDP in<br />
most countries. Global GDP growth will also increase the purchasing power of<br />
billions of people.<br />
With governments in Africa and Southeast Asia expanding their health<br />
insurance programs, there is likely to be more money available to the industry.<br />
Health is likely to become an increasingly important issue in the future, with<br />
the main growth drivers being demographic change and the rise in chronic<br />
disease. Ultimately, more people will be spending more money on health care.<br />
Per capita health costs<br />
Increase from 2000 to 2008<br />
11.8 % 5.8 % 11.3 % 11.9 % 6.6 % 7.4 %<br />
USD 34<br />
USD 83<br />
USD 1,842<br />
2902 US$<br />
USD 20<br />
USD 47<br />
USD 931<br />
USD 2,283<br />
Africa America Southeast Asia Europe<br />
At average exchange rate, CAGR 2000-2008<br />
Source: WHO world health statistics 2011<br />
USD 92<br />
USD 153<br />
Eastern<br />
Mediterranean<br />
USD 484<br />
2000<br />
2008<br />
Growth<br />
USD 854<br />
Worldwide<br />
45
RUBRIK HIER<br />
The real<br />
“World Bank”<br />
The Young Global Leaders’ “Restoring Ocean Health” initiative regards the<br />
protection of the world’s seas as an economic challenge. Kristin Rechberger,<br />
Enric Sala, Jayne Plunkett and Marco Fiorese lobby politicians and<br />
businesspeople to create marine protected areas – and Sala says keeping<br />
the oceans healthy is a good investment<br />
By Guido Walter Photos Björn Göttlicher, Enric Sala<br />
46<br />
The world‘s coral reefs<br />
are slowly dying. Here,<br />
the erosion process is<br />
just starting.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
<strong>ACT</strong>: YOUNG GLOBAL LEADERS<br />
The Young Global Leaders’ task forces<br />
THE FISHING BOAT GAVINA hovers<br />
perilously close to the shore of Meda<br />
Gran, one of the Medas, a group of<br />
seven uninhabited islands off the<br />
Catalan fishing port of L’Estartit. The<br />
size of the island is almost 47 acres.<br />
A ring of buoys marks the area where<br />
fishing is allowed; the Medas have<br />
been designated as a marine protected area (MPA) to<br />
help their flora and fauna to recover. Dr. Miquel Sacanell,<br />
35, throttles the engine, and his boat glides silently<br />
towards the shore. “People just don’t realize what a<br />
treasure we have here,” he says. “If fish aren’t stressed,<br />
they grow in natural conditions. There are more fish, and<br />
each one is bigger.”<br />
Sacanell is a biologist and fisherman. He began his<br />
career as a professional diver, but in 2003 he began<br />
fishing, and kept a record of his catches. After two years,<br />
he realized that bream and red mullet populations were<br />
falling sharply, and no one was doing anything about it.<br />
“The administration gets its statistics from sales in the<br />
fish auction halls, but the figures are wrong because the<br />
fish are caught in lots of different areas.”<br />
Dr. Enric Sala is all too familiar with this problem.<br />
As a Catalan fisherman and biologist, he has spent many<br />
years researching species variety in the Mediterranean and<br />
diving near submarine cliffs and coral reefs. He studied<br />
with Sacanell at Barcelona University and, along with<br />
Kristin Rechberger, Jayne Plunkett and Marco Fiorese,<br />
Sala was named a Young Global Leader by the World<br />
Economic Forum. Together, they set up the Restoring<br />
Ocean Health task forces. “Our approach to restoring<br />
ocean health goes beyond environmental care,” Sala says.<br />
“The maintenance of the ecosystem is a good investment.”<br />
Miquel Sacanell knows that getting this message across<br />
to other fishermen is an uphill task. Another boat appears<br />
beside the Gavina, and the young man at the helm<br />
waves. “That’s Joan,” Sacanell says. “He’s just taken over<br />
the boat from his father, and as far as he’s concerned, a<br />
good fisherman is one who catches a lot of fish. For me,<br />
it’s someone who fishes sustainably.”<br />
The issue is regularly discussed by Cofradia, the local<br />
fishermen’s association, but when Sacanell presents them<br />
with his statistics he receives little sympathy. “They’ll<br />
only accept change if there’s something in it for them,”<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 47
<strong>ACT</strong>: YOUNG GLOBAL LEADERS “If fish aren’t stressed, they<br />
grow in natural conditions.<br />
There are more fish, and<br />
Restore Ocean Health<br />
Young Global Leaders – Task Force<br />
Enric Sala<br />
Enric Sala was born in<br />
Girona, Spain. His boyhood<br />
hero was Jacques<br />
Cousteau, and he decided<br />
to explore the oceans for<br />
himself. He studied biology<br />
in Barcelona, and is now a world-renowned marine<br />
biologist. In June, Sala and film director James<br />
Cameron were named explorers-in-residence by<br />
the National Geographic Society (NGS).<br />
Kristin Rechberger<br />
As vice-president of<br />
corporate partnerships at<br />
the National Geographic<br />
Society, Rechberger works<br />
with scientists to develop<br />
marine protection<br />
programs and maintains valuable contacts with<br />
NGOs and donors on behalf of the task force.<br />
She joined the society in 1998, and began by<br />
expanding its television interests.<br />
Marco Fiorese<br />
Marco Fiorese, a graduate<br />
of Harvard Business<br />
School, co-founded the<br />
Monaco-Asia Society, a<br />
humanitarian organization,<br />
and Codima Group, an<br />
investment company operating in Europe and Asia.<br />
His main responsibility with the task force is setting<br />
up marine protected areas (MPAs) in East Timor.<br />
Jayne Plunkett<br />
Jayne Plunkett is a mathematician<br />
with over 17 years‘<br />
experience in the insurance<br />
industry, where she has<br />
held various technical and<br />
management positions. She<br />
is now employed by the world‘s biggest reinsurance<br />
company, Swiss Re, and is based in Hong Kong. Her<br />
role in the task force includes developing finance programs<br />
for people who make their living from fishing.<br />
each one is bigger”<br />
Miquel Sacanell, biologist and fisherman<br />
he continues. “There should be a biologist at every meeting to<br />
advise them.”<br />
Meanwhile, he is pursuing his own personal ocean health<br />
strategy; when he catches a rodaballo, a rare species of sole, he<br />
throws it back. The fishermen of L’Estartit just shake their heads,<br />
because in their eyes, the rarer the fish, the greater its market value.<br />
“If things keep going the way they are, much commercial fishing<br />
will come to an end before 2050,” says Kristin Rechberger, vicepresident<br />
of corporate partnerships at the National Geographic<br />
Society. It will be the end of an industry that employs 200 million<br />
people and generates around USD 90 bn a year. “The oceans are<br />
our true World Bank,” she says. “The difference is that everybody<br />
withdraws and nobody makes a deposit.”<br />
Enric Sala compares industrial fishing to Bernie Madoff ’s<br />
moneymaking techniques. “Ponzi schemes tend to work as long<br />
as you can find new investors. When you run out of investors the<br />
system collapses. That’s the case with fishing. What will we do<br />
when we run out of untapped fishing grounds?”<br />
The YGLs (Young Global Leaders) are pursuing a worldwide<br />
campaign for the creation and expansion of MPAs; fishing,<br />
48 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
aquaculture and dredging will be temporarily or permanently<br />
banned. Activities such as swimming, boating and diving<br />
are normally allowed within an MPA. “The protected area<br />
around the Medas islands is only one kilometer wide, but<br />
tourism brings EUR 6 m in income each year. That’s 20<br />
times more than fi shing can make in this area.”<br />
Expanding existing MPAs makes sense<br />
Miquel Sacanell steers his way between Meda Gran and<br />
Meda Petit, in the company of two diving vessels and a<br />
glass-bottomed boat. Thanks to the wealth of fi sh, diving<br />
is booming, and local fi shermen are doing fi ne. Sacanell<br />
phones Cofradia to report that he has no nets out; the area<br />
off L’Estartit is relatively small and easy to patrol.<br />
On the high seas, this is almost impossible. Governments<br />
often feel that regulation is not their responsibility, and the<br />
fi shing industry opposes it – concerned by the possibility of<br />
short-term losses. When fi shing comes to a halt, fi sh-stocks also<br />
recover on the periphery of MPAs, where fi shing is allowed.<br />
A study by the Partnership for Interdisciplinary Studies of<br />
The periphery of the Medas<br />
islands marine protected area.<br />
Only small-scale fi shing by boats<br />
from L’Estartit is allowed in the<br />
marine protected area.<br />
FRANCE<br />
Barcelona<br />
Mallorca<br />
L’Estartit<br />
RUBRIK HIER<br />
Marine protected area.<br />
Professional fi shing<br />
is banned.<br />
Illes<br />
Medes<br />
The village of L’Estartit, on the<br />
Costa Brava in northwestern<br />
Catalonia, was once entirely<br />
dependent on fi shing. It is now<br />
also a vacation resort with its own<br />
marina, and is home to around<br />
2,000 people.<br />
Coastal Oceans examined biological changes in 124 protected<br />
areas. Biomass increased by an average of 446%, the<br />
number of animals by 166%, and animal body size increased<br />
by 28%. Numbers like these help Rechberger and Sala<br />
demonstrate the economic benefi ts of MPAs.<br />
Restoring Ocean Health has ambitious aims; the<br />
task forces wants 20% of the world’s oceans to be given<br />
protection. “With every new marine protected area, we buy<br />
time,” says Sala. In April, for example, he met Chile’s president<br />
Sebastián Piñera and reported on his expedition to the<br />
Salay Gómez islands. Piñera showed an interest in expanding<br />
the MPA around the island, and as a result it now includes<br />
8% of Chilean sovereign waters.<br />
The next few years could see the creation of the world’s<br />
biggest MPA, in the Southern Line Islands, part of the Pacifi c<br />
state of Kiribati. Sala met with President Anote Tong, and<br />
recommended setting up a 1.4 km protected area. Kiribati<br />
is home to the world’s largest untouched coral reefs, and if<br />
these valuable ecosystems are ruined by a combination of<br />
over fi shing and sewage, they could bear out Jules Verne’s<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 49<br />
SPAIN
Predators are important for the health<br />
of the marine ecosystem.<br />
RUBRIK HIER<br />
“Because 90% of large predatory fish have disappeared,<br />
the number of organisms at the bottom of the food chain<br />
increases faster and faster”<br />
Enric Sala, biologist<br />
prophecy that after the last whale and the last seal dies,<br />
microbes will rule the oceans.<br />
“Because 90% of large predatory fish have disappeared,<br />
the number of organisms at the bottom of the food chain<br />
increases faster and faster,” Sala says. “We’re changing from<br />
a blue sea with predators into a sea of jellyfish and microbes.”<br />
Sacanell agrees, “If the ecosystem is to remain healthy, there<br />
must be predators.”<br />
The Gavina bobs at anchor outside the protected section of<br />
the Medas Islands, in the 2,000 acres where only boats from<br />
L’Estartit are allowed to fish. Seagulls screech in a cloudless<br />
sky, and the sea is quiet, almost motionless. Sacanell locks<br />
the rudder.<br />
The Gavina is ten meters long, with a tiny cabin, fenders<br />
around its sides, and a deck covered in nets. Sacanell bought<br />
it five years ago, along with a VW bus to take his catch to<br />
market, at a total cost of EUR 18,000. His fellow fishermen<br />
respect his practical outlook, and he wins the occasional small<br />
victory in his battle for sustainable fishing.<br />
In L’Estartit, he successfully fought for cuttlefish to be<br />
caught in handmade baskets containing mastic branches.<br />
However, he is worried about illegal harpoon fishing and big<br />
fishing fleets. “It would help us if they were only allowed to<br />
fish with dragnets below 200 meters.”<br />
Microcredit can tip the balance<br />
Modern surveillance technology is being put to good use in<br />
the battle against dragnets and other destructive techniques,<br />
which continue illegally in some areas. One of the objectives<br />
of the Restoring Ocean Health information campaign is to<br />
spotlight such abuses.<br />
Meanwhile, YGL Jayne Plunkett is developing financing<br />
models for the creation and operation of MPAs. “Our early<br />
ideas include setting up a funding mechanism which could<br />
cover the income of professional fishers during the time<br />
they’re not fishing in the MPA. Eventually the area outside<br />
of the MPA will produce more fish than ever before, and the<br />
profits of this additional fishing will give a payback on the<br />
50 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
investment. The investment plan can be protected from weather<br />
events through an insurance product.”<br />
Kristin Rechberger is using this year’s Volvo Ocean Race as an<br />
opportunity to lobby decision makers at events along the route. She<br />
will be focusing on China, since this year’s YGL Summit is being<br />
held in Dalian, and says the task force will be persuasive if it can<br />
show tangible benefits.<br />
Fellow YGL Marco Fiorese is the cofounder and vice-president<br />
of the Monaco-Asia Society, a humanitarian organization whose<br />
honorary president is Prince Albert II. Fiorese is working to set up<br />
MPAs in East Timor.<br />
“We’re already working on microcredit projects supporting a local<br />
NGO that works with remote villages in East Timor,” he says. “We’re<br />
now financing cooperatives of local fishermen who fish sustainably,<br />
and we’re supporting diving and tourism in the MPAs. The final<br />
goal is to benefit the fragile local village economies, and to create<br />
new jobs, new sources of income, and new commercial activities.”<br />
Microcredit provides the decisive impetus for these projects”, he says.<br />
Miquel Sacanell would be delighted if Spain were to cut subsidies<br />
for industrial fishing. “When you’re spending EUR 10,000 a week<br />
on fuel, you have to catch a lot of fish to break even. If you don’t get<br />
subsidized fuel, it just doesn’t work.”<br />
As he speaks, the Gavina chugs gently into the little harbor of<br />
L’Estartit. Sacanell believes the future lies in buyers’ co-ops; as a<br />
biologist, he sees the rapid growth of organic food shops in Spain as<br />
a sign of changing public opinion – and perhaps one day the fishing<br />
industry will get the idea.<br />
<strong>ACT</strong>: YOUNG GLOBAL LEADERS<br />
<strong>THINK</strong><br />
Can marine protected areas<br />
help to combat poverty?<br />
To assess the economic benefits<br />
of MPAs, scientists from the<br />
Nature Conservancy interviewed<br />
1,000 fisherman in Fiji (Navakavu),<br />
the Solomons (the Arnavon<br />
islands), Indonesia (Bunaken)<br />
and the Philippines (Apo Island).<br />
The survey found that the overspill<br />
of fish from MPAs into fishing zones<br />
significantly helped to reduce<br />
poverty. In Navakavu, the average<br />
household income was USD 251<br />
per month, more than twice as<br />
high as in similar unprotected<br />
areas. The MPAs created new jobs,<br />
mainly in tourism, and in Bunaken,<br />
people who switched to the tourist<br />
industry earned an average of<br />
USD 114 per month, compared to<br />
USD 44 for fishermen.<br />
As the fish population increased,<br />
fisherwomen in Navakavu fared<br />
particularly well. An investment<br />
of less than USD 12,000 in MPAs<br />
helped to double the incomes of<br />
around 600 people.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 51
Break the Rule!<br />
Ground your employees<br />
British startup WorkSnug has banned its employees from flying<br />
– even though it’s a thriving international business. Food for thought…<br />
By Christian Meier Illustration Theresa Grieben<br />
FOR INTERNET STARTUPS, the United States is<br />
the promised land; nowhere else will you find<br />
so many potential investors, great business<br />
ideas, and sources of capital. To succeed, the<br />
two main things you need are the art of persuasion<br />
and an airplane ticket.<br />
Richard Leyland, 34, started his own business in London<br />
in the summer of 2009. WorkSnug is an online-ratings<br />
database of free Internet-access locations. In May this year,<br />
WorkSnug had around 100,000 registered users, details<br />
for 35,000 locations, and a smartphone app to help people<br />
find the nearest one.<br />
Leyland and his colleagues have yet to make any sales<br />
trips across the pond. Leyland is a former marketing man-<br />
ager, he has big international expansion plans, and is planning<br />
a visit in October – but he won’t be flying. He’ll be<br />
spending nine days on the high seas, running his business<br />
from aboard a ship.<br />
Why take the slow route? Is this a PR stunt? No, says<br />
Leyland, definitely not; it’s one of WorkSnug’s ten guiding<br />
principles, which also include being “human”, “useful”, and<br />
“a community.” Principle number 7 is “We don’t fly” – for a<br />
new small business employing a handful of full-timers and<br />
freelancers, keeping your feet planted firmly on the ground<br />
does make you stand out from the crowd.<br />
“For us, this has an experimental and a symbolic dimension,”<br />
Leyland explains. “It’s experimental because<br />
we’re building a startup without flying, and it’s worked<br />
52 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
very well so far. But it’s also a symbolic principle, because one<br />
small company not flying isn’t going to make a whole lot of<br />
difference to carbon emissions.”<br />
Leyland hopes other companies will want to follow suit. As<br />
an active member of Britain’s Green Party, he’s deeply concerned<br />
about the effects of climate change, and has undergone a Damascene<br />
conversion since his jet-setting days when he worked for<br />
a variety of technology companies. “A lot of business flights are<br />
inefficient and expensive, and a lot of meetings are a completely<br />
unnecessary waste of time.”<br />
The flying ban also ties in nicely with the purpose of Leyland’s<br />
business, giving workers, freelance or otherwise, the<br />
freedom to leave their homes and offices for a different, less<br />
restrictive environment. The technology WorkSnug uses could<br />
help reduce business travel and its impact on the environment.<br />
So how does the flight ban work in practice? WorkSnug works<br />
closely with Internet telephony service Skype, which plays an<br />
important part in its business and is currently carrying out a<br />
free trial of Cisco’s TelePresence teleconferencing service. In<br />
Europe, employees take the train to meetings; Leyland has<br />
already been to a dozen countries, from Norway to Spain, which<br />
has entailed buying a lot of expensive tickets and spending a<br />
lot of time on station platforms at 5 a.m.<br />
How it works<br />
“There’s no real modus operandi for having a company where<br />
nobody flies,” Leyland says. “You just don’t do it.” He doesn’t<br />
have a written strategy, he doesn’t employ consultants to tell<br />
him how to do it, and if it has caused problems, he’s not aware<br />
of them. He’s not worried about missing out on business opportunities<br />
as a result, and potential foreign business partners<br />
are sympathetic when he explains why he can’t meet them face<br />
to face. “Of course, Skype and TelePresence aren’t as effective<br />
as meeting people in the flesh, and technology can’t reproduce<br />
the feeling of direct human contact.”<br />
Last April, nine British investors contributed EUR 130,000<br />
to expansion funding, and Leyland has just rented an office in<br />
London. Ironically, the office is still largely empty; he’s trying<br />
to abolish the workplace as we know it.<br />
Isn’t there a risk that WorkSnug could end up like any other<br />
company, complete with watercoolers and airmiles? Well, it<br />
seems unlikely at the moment. Leyland’s principles did come<br />
under fire once, when he wrote a guest article for the website<br />
TechCrunch.com in July 2010. “If a global company doesn’t fly, it<br />
won’t crash land,” he said. There were some positive comments,<br />
but other readers were furious, accusing Leyland of hubris. One<br />
wrote: “If the idea of a flying ban is really so important, you<br />
should think about the hardware you developed your app for,<br />
and how it got to you and your users.” Richard Leyland is an<br />
idealist, but he’s also enough of a realist to know that you can’t<br />
solve all the world’s problems all at once.<br />
<strong>THINK</strong><br />
<strong>ACT</strong>: FLYING BAN<br />
Working smarter – Richard Leyland’s<br />
golden rules for mobile working<br />
Work isn’t a place you go to, it’s<br />
something you do. Here are some of<br />
the principles that WorkSnug follows:<br />
1/ Being aware is more important than being<br />
disciplined. Office workers work 9 a.m. to 5 p.m. and<br />
are always available, but they can work smarter.<br />
���Identify your most productive times, and structure<br />
your day accordingly.<br />
���Be willing to dip in and out of work several<br />
times a day.<br />
���Tell your colleagues when you’re available and when<br />
not to disturb you.<br />
���Learn when and how to take breaks. Many mobile<br />
employees let their work control them. Switch off<br />
your phone or computer and take a walk, use<br />
separate cell phones for home and work, change<br />
into a different outfit when you finish for the day.<br />
2/ Selling your time, efforts and presence for money<br />
is a hopelessly outdated business model. Trust is<br />
what matters most.<br />
� Be prepared to judge and be judged by others on<br />
the basis of results.<br />
� Be honest about where you are at any given time.<br />
If you’re at the gym at 10 a.m., so what? Achieving<br />
the right work-life balance is an important part of<br />
the deal.<br />
� Trust your colleagues. There are no half measures<br />
where trust is concerned, and that trust must be<br />
mutual.<br />
3/ Be part of the community. If you’re lucky enough<br />
to escape the institutionalized office environment<br />
and emerge blinking into the big wide world, then<br />
get involved. Use online and offline networks to<br />
connect and work with others, get used to the idea<br />
of social capital – the value of all your connections –<br />
and make it a bigger part of your life.<br />
4/ Love your job. If it’s not fulfilling, and you’ve lost<br />
the office-based social structures that make boring<br />
work tolerable, you’re going to have problems.<br />
You can’t create all of your own motivation – some<br />
of it must come from others.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 53
RUBRIK HIER<br />
54 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011<br />
A sea of yellow: Dortmund fans<br />
enjoy world-class football from a team<br />
with sound finances.
Photos: Michael Rogosch<br />
The business<br />
of goals<br />
APRIL 30, 2011. It‘s a Saturday afternoon,<br />
and 1. FC Köln is playing at<br />
home against Bayer Leverkusen,<br />
Borussia Dortmund‘s only remaining<br />
rival for the Bundesliga championship.<br />
At 4:53 Köln scores, handing<br />
the title to Dortmund. In Dortmund‘s<br />
sold-out stadium forty-five<br />
miles away, the crowd explodes with joy: when the whistle<br />
goes, Borussia Dortmund are the league champions, and the<br />
city of Dortmund is a sea of happiness.<br />
Amid the revelry, three men remain surprisingly muted.<br />
As the final whistle sounds in their team‘s game against 1.<br />
FC Nürnberg, they quietly embrace, patting each other on<br />
the shoulder, still intent on the pitch. These are the architects<br />
of Borussia‘s success: coach Jürgen Klopp, chief executive<br />
Hans-Joachim Watzke, and president Reinhard Rauball.<br />
Rauball later says that at this crucial moment, he was<br />
thinking back to the winter of 2004-2005, when the club<br />
was more than EUR 180 m in debt and he feared for its<br />
survival. Dortmund‘s 2011 championship win makes sense<br />
only when you look at its last championship in 2002. In<br />
those days, the team was a veritable constellation of stars,<br />
coached by the plain-talking Matthias Sammer; the club<br />
played no-frills football designed to get results. There was<br />
just one problem; the players were so expensive that they<br />
nearly bankrupted the club.<br />
By Constantin Wissmann<br />
<strong>ACT</strong>: TURN-AROUND BVB<br />
In 2005 Borussia Dortmund was on its last legs, its team was broken, its finances<br />
were EUR 180 m in the red. Six years later, after a successful turnaround plan,<br />
Borussia Dortmund is the German league champion – proving that money<br />
alone doesn‘t score goals, but good management does<br />
Today, Borussia has a dream team of young, hungry players,<br />
comprised mostly of locals from its own youth squad<br />
who kick the ball with more grace and power than almost<br />
any side in German history. Their coach drives them with<br />
the perfect mix of powerful emotion and shrewd analysis.<br />
A few years ago, the club was synonymous with everything<br />
that was bad about football: arrogance, commercialism and<br />
delusions of grandeur. Today, everyone calls it the Black and<br />
Yellow Miracle.<br />
Miracle is an overused word in football, but in this case<br />
it fits perfectly. Borussia‘s sporting revival is no happy accident;<br />
it is the result of a precisely planned restructuring<br />
program born from the philosophy that a football club is just<br />
like any other medium-sized business. This outlook has been<br />
slow to catch on in the Bundesliga. It is ironic that it has<br />
worked best for a club regarded as the heartbeat of German<br />
football, where calm calculation has, until recently, been low<br />
on its list of priorities.<br />
At the turn of the century, Borussia was still riding high<br />
on its sporting successes. It overtook Bayern München to<br />
win the Champions League in 1997, but despite its lessthan-glamorous<br />
roots in the Ruhrgebiet, the club wanted<br />
to emulate the likes of Real Madrid and AC Milan. So management<br />
started taking financial risks.<br />
The club was the first in Bundesliga history to float on the<br />
stock exchange, netting EUR 143 m, but exorbitant players‘<br />
wages and a stadium expansion soon left it short of capi-<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 55
RUBRIK <strong>ACT</strong>: TURN-AROUND HIER BVB<br />
Michael Blatz, partner, Roland Berger; Hans-Joachim Watzke, chief executive,<br />
Borussia Dortmund; Pat Lynch, managing director, Morgan Stanley; Rainer<br />
Balensiefer, principal, Roland Berger; Oliver Kehren, executive director, Morgan<br />
Stanley; Thomas Treß, finance director, Borussia Dortmund<br />
tal again. It could only survive as long as it won matches,<br />
and when it lost its additional income from the Champions<br />
League (and in 2005, the Europa League) the prospect of<br />
collapse loomed large.<br />
Enter Reinhard Rauball, a lawyer who had already been<br />
the club‘s president once during the 1980s, and Hans-<br />
Joachim Watzke, an entrepreneur. The chances of saving<br />
Borussia were slim, but they thought there was no harm in<br />
trying, and a window of opportunity opened when Watzke<br />
came into contact with Oliver Kehren of the investment<br />
bank Morgan Stanley.<br />
Kehren had already helped several medium-sized companies<br />
stave off disaster, and felt that Borussia was no different.<br />
However, there was one key exception: „You can be<br />
pretty confident about your annual income, because things<br />
like price fluctuations and collapsing sales don‘t happen<br />
to football clubs. Your income from tickets, sponsorship,<br />
TV and merchandising are largely set in stone, and so are<br />
your expenses, particularly players‘ salaries. If you‘ve got<br />
all of these reasonably in balance, there‘s not much that<br />
can go wrong.“<br />
Watzke told him all about the club‘s venerable traditions,<br />
its coal-mining roots and dramatic past successes, but Kehren<br />
was not particularly interested in any of this. However,<br />
one thing did catch his attention: despite the club‘s financial<br />
collapse and waning fortunes on the field, gate receipts were<br />
actually increasing.<br />
Fast and furious football<br />
That was all Kehren needed to hear. He summoned Roland<br />
Berger Strategy Consultants and a team of lawyers and auditors<br />
who drew up a recovery and refinancing plan. The club‘s<br />
creditors and other liabilities would be restructured and its<br />
capital increased – the consultants pointed out that its most<br />
important assets were its four million German fans. It also<br />
had a huge stadium, described by the Times of London as<br />
the world‘s best football arena, and was doing some excellent<br />
work with young players.<br />
Buying back the shares in the stadium<br />
that the club had sold off to an investment<br />
fund, and to start nurturing in-house talent<br />
became the priorities, with one reinforcing<br />
the other. Dortmund fans love young local<br />
players, and the enthusiasm in the stands<br />
resonates through to the team. The club also<br />
developed a match strategy based entirely on<br />
an attacking style of play.<br />
In the summer of 2006, Dortmund refinanced<br />
€ 125 m of liabilities in cooperation<br />
with Morgan Stanley. It bought back the<br />
stadium, freeing up resources to invest in<br />
the team, since the consultants had decided<br />
that these were the minimum preconditions for a lucrative<br />
international business.<br />
„Of course you can‘t plan league placing, but you can predict<br />
probabilities over time,“ says Roland Berger principal<br />
Rainer Balensiefer. The investment in the team would be<br />
moderate but continuous, and most importantly the club‘s<br />
finances – liquidity in particular – would not be dependent<br />
on the countless imponderables of football, like referees‘ decisions,<br />
injuries, and fluke goals.<br />
Much of the investment was spent to buy back the stake<br />
in the stadium, but it put Borussia back in charge of its own<br />
destiny. Watzke and the club‘s new finance director, Thomas<br />
Tress, began cutting costs. The stadium name was sold, and<br />
the team started going to all away games by bus.<br />
The two began skillfully implementing a series of complex<br />
rescue measures, gradually regaining investors‘ confidence.<br />
„The way they achieved that was brilliant,“ Kehren says. In<br />
February 2007, Watzke announced an operating profit of € 10<br />
m, and by 2010 the club had reduced its debts by € 125 m.<br />
From a sporting viewpoint, the club got off to a shaky start.<br />
In 2008, it was forced to fight relegation, and the young and<br />
talented team needed a coach who was also a mentor – one<br />
of the guys, someone who understood their lives, but was<br />
also an authority figure, an expert on strategy, and a human<br />
being. The man they needed was Jürgen Klopp.<br />
Klopp‘s arrival from Mainz caused a huge buzz. At his first<br />
press conference, he promised that from then on, Dortmund<br />
games would be fast and furious, and he kept his word. Fans<br />
were electrified by his playing strategy, which was all about<br />
the determination to give everything for the team.<br />
The fans spurred the young players on to a string of successes;<br />
precisely as the bank and management consultants<br />
had planned, and it showed in the club‘s league placing.<br />
In 2009, Borussia barely missed European qualification<br />
because of a referee‘s decision. In 2010 it made the Europa<br />
League, and in 2011 the Champions League, which alone<br />
guarantees an additional income of around EUR 20 m.<br />
The club increased its staffing budget by only EUR 5 m;<br />
56 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
Photos: Dominik Asbach, Asbach / Laif<br />
instead of buying expensive players, it concentrated on creating<br />
and retaining its own stars, and succeeded. The only<br />
exception was midfield strategist Nuri Sahin, who transferred<br />
to Real Madrid, and national player Mats Hummels<br />
who extended his contract with Dortmund in spite of a<br />
handsome offer from FC Bayern. „We‘ve got something really<br />
special in Dortmund, and this may be the only time<br />
in my career that I experience it,“ he said. „We all want to<br />
hang on to it for as long as it lasts.“<br />
<strong>THINK</strong><br />
“We chose the sustainable route.” <strong>THINK</strong> <strong>ACT</strong><br />
talks to Borussia Dortmund chief executive Hans-<br />
Joachim Watzke<br />
Mr. Watzke,<br />
is Borussia<br />
Dortmund just<br />
like any other<br />
medium-sized<br />
business?<br />
In terms of<br />
employees<br />
and sales figures, definitely. They<br />
need a well-defined management<br />
structure with clear-cut hierarchies<br />
and decision-making processes,<br />
and so do we. That’s something<br />
we’ve done here in Dortmund,<br />
unlike many other Bundesliga<br />
teams. But the Borussia Dortmund<br />
brand has the global resonance of<br />
a DAX company, which makes the<br />
club much more valuable than the<br />
figures suggest. Another factor,<br />
of course, is that we have a huge<br />
group of fans hanging on our every<br />
decision.<br />
What special skills does the CEO of<br />
a football club need?<br />
You need an entrepreneurial spirit,<br />
you need talent, and most impor<br />
tantly you need to understand<br />
football. I understand the process-<br />
es that go on with our team, and I<br />
understand the inner structure of<br />
the game, so I can assess the rec-<br />
ommendations made by the coach<br />
and the sports director.<br />
When you took over in Dortmund,<br />
the club was clinically dead.<br />
When I took over this job, we were<br />
living from day to day, every spare<br />
euro went to the creditors, and<br />
nobody wanted to lend us a single<br />
euro – it just wasn’t a solid investment.<br />
Both financially and from a<br />
sporting point of view, we were<br />
facing a long, slow death.<br />
And then there was the credit<br />
contract with Morgan Stanley.<br />
That saved our lives; there are no<br />
two ways about it. We had more<br />
freedom to make our own business<br />
decisions, albeit within a clearly<br />
defined framework, and we were<br />
able to start looking to the future<br />
and developing a strategy to get the<br />
club back on its feet.<br />
How did you get along with them<br />
after that?<br />
At first there was skepticism on<br />
both sides, but once we had a<br />
proper financial framework and new<br />
sponsorship contracts with good<br />
companies, we regained the bank’s<br />
trust. Some people in the club had<br />
concerns that, to put it bluntly, we<br />
were being taken over by some<br />
<strong>ACT</strong>: TURN-AROUND BVB<br />
American asset stripper, but they<br />
were quickly disabused of that<br />
view. My colleagues and I were very<br />
impressed by the longterm finan-<br />
cial strategy, and the understanding<br />
of the sports business, that Morgan<br />
Stanley and Roland Berger Strategy<br />
Consultants showed in putting<br />
together the recovery plan. They<br />
did a great job. We were all clear<br />
that we needed to work together<br />
to get the business back on its feet,<br />
and there was a lot of mutual trust,<br />
respect, and professionalism.<br />
One cornerstone of the recovery<br />
plan was winning matches. Is that<br />
something you can plan for?<br />
No, you can’t plan for it, but you can<br />
create the right framework. Michael<br />
Zorc, the club’s manager, and I developed<br />
a philosophy in Dortmund,<br />
which was that the team needed to<br />
play vertically, put the other side<br />
permanently under pressure and<br />
just go for it. Then we selected the<br />
players – it’s easier to do with young<br />
players – and we found the ideal<br />
coach in Jürgen Klopp.<br />
Probably every club in the Bundesliga<br />
would like to have an<br />
integrated sporting and business<br />
philosophy. Why does this so rarely<br />
succeed?<br />
The key people have to understand<br />
and trust each other, and<br />
there mustn’t be too many of<br />
them. That’s not easy in football,<br />
because there are always so many<br />
personal vanities involved. If you<br />
don’t have a clear management<br />
structure, you never know where<br />
you are or what you’re doing.<br />
From a business viewpoint,<br />
what did you learn from the successful<br />
restructuring of Borussia<br />
Dortmund?<br />
In this club, we only spend money<br />
that we’ve earned. That’s our paradigm,<br />
and that’s how it will stay.<br />
We’ve chosen the sustainable route,<br />
and even getting into the Champions<br />
League won’t change that.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 57
The man who took<br />
PSA Peugeot<br />
Citroën for a ride<br />
A visit with Philippe Varin at Europe’s second biggest car maker
Photos: Sipa<br />
Mr. Varin, what lessons from your<br />
previous life in the aluminum and<br />
steel industries have been most<br />
helpful to you at PSA Peugeot<br />
Citroën?<br />
I spent 31 years in those industries<br />
before joining PSA Peugeot Citröen.<br />
I spent 25 years in the aluminum<br />
business with Pechiney and six years<br />
in the steel industry with Corus. I<br />
learned that you have to be among<br />
the global leaders, because if you<br />
are not, at some point in time, there<br />
will be difficult issues to contend<br />
with. I discovered that at Pechiney.<br />
When I joined Pechiney the company<br />
had a global reach, but over time it<br />
disappeared from the radar screen.<br />
The company’s core business was<br />
aluminum but it wanted to get bigger<br />
and bigger, so it diversified into<br />
chemicals, steel and packaging, and<br />
that destroyed the core business. That<br />
was the problem. With the benefit of<br />
hindsight, the solution would have<br />
been to keep focused on our core<br />
business and forget about the rest.<br />
I also learned a lot from the turnaround<br />
we achieved at Corus. When<br />
a company is on the bottom, it has<br />
fantastic potential for change. In<br />
terms of turnaround management,<br />
I learned that things must be kept<br />
very simple, otherwise they will not<br />
get done.<br />
Until 2009, you spent the whole of<br />
your working life in the aluminum<br />
and steel industries. Has it been<br />
difficult to make the transition into<br />
the automotive sector?<br />
The first thing I did when I joined<br />
PSA was to listen; the employees<br />
of the Group have a huge amount<br />
of knowledge – much more than I<br />
had at the time. Then I focused on<br />
simple priorities, the first of which<br />
was to set up a leadership team. This<br />
was critical, because the team was<br />
essential to the company’s success.<br />
After completing that, together with<br />
the team and the one hundred top<br />
managers, we defined the ambition<br />
and the strategy we wanted for the<br />
company. We called it our vision and<br />
we shared it with all employees across<br />
the company.<br />
What is this Group’s vision for the<br />
future?<br />
First of all, we want to be a global<br />
player. We want 50 % of our sales to<br />
come from outside Europe by 2015,<br />
compared with 34 % in 2009 and<br />
39 % in 2010. That means reaching<br />
critical mass in China, which is now<br />
the world’s biggest car market, as well<br />
as other Asian markets and Latin<br />
America. We’ve decided to place a<br />
member of our managing board,<br />
Grégoire Oliver, in China, which was<br />
a first for PSA.<br />
<strong>ACT</strong>: PEUGEOT<br />
PSA PEUGEOT CITROËN has undergone a massive transformation since Philippe Varin took over<br />
as CEO of Europe’s second-largest automaker in June 2009. The Group has strengthened its<br />
management team, invested heavily to boost its presence in China, Russia and Latin America, and<br />
vowed to become more profitable. All of these steps are turning the proud 200-year-old French<br />
company from a Europe-focused automaker into a global competitor capable of challenging giants<br />
such as Toyota, General Motors and Volkswagen. Philippe Varin speaks about his leadership<br />
traits, his vision for the Group’s future, and how he sees 2011 developing for the automaker and<br />
the auto industry as a whole, in an interview with Roland Berger Strategy Consultants’ senior<br />
partner Max Blanchet and Automotive News Europe managing editor Douglas A. Bolduc.<br />
We aim to increase our share of the<br />
Chinese market from 3 % to 8 % by<br />
2020 and we’ll be investing more<br />
than EUR 1 bn in production capacity<br />
of nearly one million vehicles to<br />
reach that goal with our Chinese<br />
joint venture partners. In Latin<br />
America we’re investing EUR 700 m<br />
to increase market share from 5.4 %<br />
to 7 % by 2015.<br />
Secondly, we want to have a competitive<br />
advantage, what we refer to as<br />
being a step ahead, in areas such as<br />
design, CO 2 , and the services we offer<br />
to customers. Carbon reduction is<br />
a big challenge for our industry. We<br />
aim to meet that challenge with a<br />
range of technologies. We think that<br />
by 2020, electric vehicles, hybrids<br />
and plug-in hybrids will make up<br />
around 15 % of the market, and we’ll<br />
have products in all of those categories.<br />
We’ve also introduced a “mobility<br />
credit” service for both the Peugeot<br />
and Citroën brands, which allows<br />
customers to choose what mode of<br />
transport they want – be it a bicycle<br />
or seven-seater car – and when they<br />
want it. In the near future, by which<br />
I mean next year, we aim to produce<br />
one million cars with CO 2 emissions<br />
of less than 120g/km.<br />
What are your plans in terms of<br />
operational efficiency?<br />
We need to increase if we’re going<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 59
<strong>ACT</strong>: PEUGEOT<br />
to be one of the best in class. This is<br />
why we developed our PSA Excellence<br />
System, which is based on two pillars:<br />
individual intelligence and collective<br />
measures to simplify and slim down<br />
our processes. Implementing the<br />
system must increase our profits. If<br />
you’re not earning enough money in<br />
a competitive global environment,<br />
you’ll die sooner or later.<br />
A company needs cash to grow. If<br />
we’re going to make all of these improvements,<br />
we must be a pioneer of<br />
sustainable and responsible development.<br />
In the 200 years of its existence,<br />
the Group has developed strong<br />
values, and we need to ensure that<br />
these are respected and promoted<br />
among our employees and in relationships<br />
with all stakeholders, both<br />
inside and outside the business.<br />
Why have you put such a strong<br />
emphasis on profi tability?<br />
I was really shocked by what<br />
happened at Pechiney. I saw what<br />
happens when a company’s market<br />
value is not where it should be. I<br />
think value creation is absolutely<br />
critical; what we do must create<br />
value for employees as well as for<br />
shareholders. We have long-term<br />
shareholders who make long-term<br />
decisions. This is a good situation.<br />
When I’m asked if our company is<br />
big enough to develop and succeed<br />
in a global world, my reply is that big<br />
is not always beautiful. It’s not only<br />
a matter of size, even if size clearly<br />
matters; it’s how you create value.<br />
How would you describe yourself<br />
as a leader?<br />
What I can bring is the ability to work<br />
with a team, help to defi ne a vision<br />
and to make it happen every day. This<br />
doesn’t work if you do your managers’<br />
jobs for them. It’s better to let them<br />
do their jobs and be there to help them<br />
make things happen. As for me, I like<br />
being on the fl oor to see for myself how<br />
things are going – what is working and<br />
what isn’t.<br />
I’m very practical. The second thing I<br />
bring is an international perspective.<br />
In the two years before I joined PSA I<br />
spent half of my time in India because<br />
I was with Tata, which had become<br />
the owner of Corus. I also spent nearly<br />
two years in Chicago when I was in<br />
the aluminum industry. I’ve had a lot<br />
of interaction with people on a worldwide<br />
basis.<br />
Has the time you’ve spent at PSA<br />
Peugeot Citröen changed the way<br />
you lead?<br />
I don’t have the answer to that<br />
question yet. What I hope I can<br />
bring to the culture of the company<br />
is an ability to help all employees<br />
embrace a single vision. This will only<br />
happen with the support of all the<br />
people in the company. When a new<br />
manager enters a company that is on<br />
a “burning platform”, like at Corus<br />
where we were about to go broke<br />
and had no credit facility, things can<br />
change pretty quickly.<br />
There was a kind of “burning platform”<br />
when I joined the Group; the<br />
automotive industry suffered a major<br />
crisis after the failure of the fi nancial<br />
system in mid-2008, and that resulted<br />
in very heavy losses and huge<br />
operational challenges. Things are<br />
better now, but I still believe we can<br />
maintain a feeling of “burning platform”<br />
among our employees.<br />
How did you fi nd the Group when<br />
you arrived?<br />
When I joined the company I<br />
was not very surprised, because I<br />
expected to fi nd fantastic technical<br />
potential and great engineers. What<br />
surprised me was the key role of the<br />
design teams. I didn’t realize the<br />
importance customers place on style<br />
and design today compared with the<br />
pure technical performance of the<br />
engines or suspension. I also found<br />
that we have a very cohesive company,<br />
very homogenous from a cultural<br />
standpoint. But we must encourage<br />
our managers to develop and<br />
New Hybrid<br />
Peugeot 3008<br />
The diesel hybrid version of the<br />
Peugeot 3008 was launched in<br />
March 2011. The 2.0-litre, 120-kW<br />
(163-hp) HDi engine operates the<br />
front axle, and the 27-kW (37hp)<br />
electric engine powers the<br />
rear axle. It has an average fuel<br />
consumption of 3.8 liters per 100<br />
kilometers, and CO 2 emissions of<br />
99 grams per kilometer.<br />
Rear-mounted<br />
electric engine<br />
Drive control<br />
60 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
Front-mounted<br />
diesel engine<br />
Automatic<br />
stop/start<br />
Six-speed<br />
gearbox<br />
High-voltage battery<br />
improve their leadership skills further. Being<br />
global, being excellent operationally and in our<br />
customer service, and promoting innovation to<br />
remain a step ahead, are all things that matter a<br />
great deal to me.<br />
Was the company under a lot of stress?<br />
The Group was being forced to deal with the<br />
global crisis and severe management issues<br />
simultaneously.<br />
It was also a big shock for this company to<br />
have to take a EUR 3 bn loan from the French<br />
State. If you see the glass as half empty, it<br />
was a traumatic time, but if you see it as half<br />
full, it gave us the opportunity to answer the<br />
questions: “Where do we want to go?” and<br />
“What is our vision?” This is not rocket science.<br />
It’s rather a matter of making things happen.<br />
We have to look for the opportunities created<br />
by the crisis.<br />
How do you keep people motivated?<br />
What our people want is success, because<br />
success is what drives them. People who<br />
are part of a winning team and personally<br />
rewarded for success – not only with money but<br />
by the way their contribution is recognized –<br />
will want to play a role in achieving the vision.<br />
This is crucial.<br />
What have been some of the success stories at<br />
PSA Peugeot Citröen since you joined?<br />
If a company wants to be global it has to take<br />
some big steps. We focused on China because<br />
it’s the key market for growth. We already had<br />
one joint venture partner and we reinforced<br />
our partnership by setting up an R&D center<br />
in China. The turnaround had started before<br />
I joined. However, I think we’ve moved things<br />
further ahead by establishing a new relationship<br />
with Dongfeng Motor Group.<br />
At the same time, we’ve negotiated a second<br />
joint venture with Changan Auto Group. Our<br />
market share today has to be closer to 8 % compared<br />
to 3 % previously. We can go from 3 % to<br />
5 % with Dongfeng and we can get another 3 %<br />
with Changan.<br />
We’ve set goals and told our people that these are<br />
what we want to reach for. When we say 50 %<br />
of our sales will come from outside Europe by<br />
2015, it’s more than just a concept; people see<br />
that we can do it. Another success story is our<br />
step ahead with CO 2 -reducing technology.<br />
We’ve launched our Citroën C-Zero and<br />
<strong>ACT</strong>: PEUGEOT<br />
Philippe Varin<br />
Biography<br />
After graduating from the<br />
elite École Polytechnique<br />
and École des Mines,<br />
Philippe Varin joined<br />
Pechiney in 1978. He held<br />
executive posts in the<br />
company’s R&D, strategy,<br />
audit and project management<br />
departments before<br />
being appointed as head<br />
of the Rhenalu division in<br />
1995. Four years later, Varin<br />
was promoted to senior<br />
executive president of<br />
aluminum and became a<br />
member of the executive<br />
committee.<br />
In April 2003, before<br />
Pechiney’s acquisition by<br />
Canadian rival Alcan, Varin<br />
joined the Anglo-Dutch<br />
steel maker Corus as CEO.<br />
Following the merger of<br />
Koninklijke Hoogovens<br />
and British Steel in 1999,<br />
the company was facing<br />
a diffi cult situation, but<br />
Varin turned the hardship<br />
around and orchestrated<br />
its merger with Tata Steel<br />
in March 2007.<br />
Varin was appointed<br />
chairman of the managing<br />
board of PSA Peugeot<br />
Citroën in June 2009. He is<br />
58, married, and the father<br />
of four children.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 61
<strong>ACT</strong>: PEUGEOT<br />
“It has to translate into<br />
pricing power rather than to<br />
be the champion of rebates”<br />
Peugeot iOn electric cars, and we’ll<br />
have the world premiere of our Peugeot<br />
3008 HYbrid4 diesel this year.<br />
Success is coming.<br />
What’s your sales outlook for the<br />
European and global markets?<br />
In 2011, the market in Europe should<br />
be flat compared with 2010. That<br />
is not great news, but last year was<br />
better than expected because we<br />
thought the market would be down<br />
by 10 % and it was down by only<br />
5 %. The situation will continue to<br />
improve in the United States with<br />
its significant growth of 10 %. China<br />
grew strongly in 2010 and should<br />
achieve percentage growth in the<br />
low teens in 2011. Latin America<br />
will grow by the high single digits<br />
this year and Russia also will grow<br />
substantially. In summary, flat in<br />
Europe and growth everywhere else.<br />
What about the 2011 prognosis for<br />
the Group?<br />
We took market share in Europe last<br />
year. We were helped by incentives<br />
that encouraged people to buy small<br />
cars. It will be more difficult this year<br />
because those incentives have come<br />
to an end in the French market, so<br />
there will be more focus on prices.<br />
We want to scale-up our two brands<br />
when it comes to pricing power. I<br />
won’t give market share targets for<br />
2011, however, we are introducing a<br />
number of new models this year; we<br />
want to optimize our profitability<br />
and get the best value that we can.<br />
We expect recurring operating profit<br />
from our automotive division to<br />
improve from last year, assisted by<br />
a contribution of more than EUR<br />
1 bn from our performance plan.<br />
The terrible events in Japan have<br />
caused us some difficulties in getting<br />
shipments of electronic components,<br />
and we estimate this will have a<br />
negative impact of about EUR 150 m<br />
in the first half of the year. Obviously,<br />
we’ll continue to track the situation<br />
very carefully.<br />
Ford is following a similar strategy<br />
of trying to avoid incentives to<br />
maintain profitability. Is this<br />
something that should be important<br />
for all automakers?<br />
What I can say is that it’s especially<br />
important for us because our vision<br />
is to be a step ahead and to create<br />
value. Being a step ahead is not just<br />
a nice catchphrase, it has to translate<br />
into pricing power rather than<br />
being the champion of rebates. I’m<br />
confident in our ability to improve<br />
our pricing power thanks to the<br />
successful upscaling of both of our<br />
brands. We now have the premium<br />
Citroën DS line, made up of the DS3<br />
with the DS4 and DS5 coming soon.<br />
There are no rebates on the DS3,<br />
and there will be none on the other<br />
DS cars. Meanwhile at Peugeot we’re<br />
developing models, such as the RCZ,<br />
that command premium prices. At<br />
the end of the day, we have to stick to<br />
this approach very strongly.<br />
Do you need more alliances?<br />
We have so much value to create by<br />
leveraging the Group’s potential. We<br />
sold 3.6 million vehicles last year<br />
and we’ll continue to grow this year.<br />
Obviously it would be great to have<br />
a higher scale, but there is much<br />
more to gain immediately if we roll<br />
out the full modular approach in our<br />
components. This means that the<br />
cars in the model range will have<br />
fewer unique components, so that<br />
the Group can order much larger<br />
quantities of common parts, which<br />
is more cost-efficient for PSA and<br />
simpler for the component suppliers.<br />
There’s a lot we can do personally to<br />
remain a robust stand-alone business.<br />
At the same time, there is no doubt<br />
that we have to deepen our strategic<br />
partnerships to achieve the step ahead<br />
that we desire, such as CO 2 reductions.<br />
We want to be in electric cars,<br />
hybrids and conventional combustion<br />
engines, and with our scale, involvement<br />
in all of these areas requires<br />
us to have partnerships. We have a<br />
partnership with BMW in which we<br />
work on gasoline engines and we’ve<br />
now set up a promising joint venture<br />
based on the components of the hybrid<br />
technology. We have cooperation<br />
with Ford on diesel vehicles and with<br />
Mitsubishi on electric cars. We want<br />
to create value, so we have to adjust<br />
our allocation of capital to put it<br />
where it will maximize returns, which<br />
means cooperation is key. Of course, if<br />
there are opportunities to make alliances<br />
that make real sense and bring<br />
long-term synergies, we’re open to<br />
them. But let’s be pragmatic, it’s not<br />
necessary today.<br />
62 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
Foto: TopicMedia<br />
SIFI rules leave Wall Street Goliaths wishing they were smaller<br />
RUBRIK HIER<br />
So, you think you are important?<br />
Boy, that’s gonna cost you<br />
Regulation of “systemically important financial institutions” (SIFIs) is taking<br />
shape, but its precise implications remain unclear. Experience in the United<br />
States has shown that banks must adapt their strategy ahead of the new rules<br />
to ensure that they have no undesirable side effects<br />
By Andreas Martin<br />
”<br />
NO WAY ARE WE A SIFI!“ That’s the new refrain<br />
echoing down the corridors of the<br />
financial services industry. Hedge funds<br />
think they are much too small and insurance<br />
companies say they present no systemic<br />
risk unless there’s a global catastrophe. Asset<br />
managers claim they just look after customers’<br />
money, and banks lobbied hard to ensure<br />
they didn’t end up on the list of institutions<br />
important enough to endanger the financial<br />
system if they fail.<br />
Elevation to a “systemically important financial<br />
institution” status is a dubious honor<br />
because it imposes stricter capital requirements.<br />
As of August 2011, the rules required<br />
the 28 most important institutions to set up<br />
an additional equity buffer of between 1 %<br />
and 2.5 % of risk-weighted assets by 2019.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 63
<strong>ACT</strong>: BANKINGREGULATIONS<br />
This gives a total capital requirement of between 8% and<br />
9.5%, as opposed to the 7% applying to all banks under<br />
Basel III. The IMF has calculated that even 7% would<br />
create an additional requirement of USD 360 m for the<br />
world’s 62 largest banks.<br />
The exact surcharge depends on which of the four categories<br />
of systemic importance the institution falls into. The<br />
financial institution’s balance-sheet total is one yardstick,<br />
and the Basel committee has recommended that four additional<br />
benchmarks be used: interconnectedness, global<br />
reach, complexity, and substitutability by other providers.<br />
In the United States, the Dodd-Frank Act defines a bank<br />
that is “too big to fail” as one with a balance-sheet total<br />
of over USD 50 bn. Below this level, it is not systemically<br />
important. At the international level, a more complex formula<br />
has been used which takes different business models<br />
into account, and is compatible with the Basel III rules.<br />
Although SIFIs initially rejected the criteria, they will<br />
now have to exceed them and they are starting to get used<br />
to their newfound status. Of course, increased solvency<br />
requirements will erode their margins, but this could be<br />
offset by the advantages of refinancing.<br />
The calculation is that as highly stable SIFIs, financial<br />
institutions will earn better ratings and achieve lower risk<br />
premiums than banks with less capital, thereby establishing<br />
themselves as safe havens for investors in bonds and<br />
certificates. There are also benefits for deposit-taking business<br />
because, as Deutsche Bank CEO Josef Ackermann points<br />
out, customers “would rather invest their money with SIFIs.”<br />
At first, shareholders were alarmed by the prospect<br />
of their companies retaining profits to create additional<br />
buffers or increase capital. Now they are starting to see<br />
the silver lining – this will make their investments more<br />
attractive and lower-risk.<br />
Dodd-Frank Act attracts widespread praise<br />
Whatever people think about Basel III and SIFIs, there is no<br />
doubt that the industry’s situation will change drastically –<br />
not just for SIFIs, but for all providers. There will be no<br />
generous transition periods; it will happen immediately.<br />
Banks without adequate capital and financing could be<br />
forced to withdraw from previously attractive areas of the<br />
market and pass on their expensive refinancing costs to<br />
clients, which will reduce their competitiveness. Conversely,<br />
the changes would create additional opportunities for<br />
financial services providers that revalue their businesses<br />
to allow for risks as part of an overall banking strategy.<br />
“It’s potentially quite a simple question,” says Udo<br />
Bröskamp, head of Roland Berger Strategy Consultants’<br />
Competence Center financial services. “How do I make<br />
the best use of my capital in the future?”<br />
It’s potentially a simple<br />
question: “How do I make<br />
the best use of my capital<br />
in the future?”<br />
However, he says, the answer is more complicated because<br />
businesses need to take into account the indirect effects of the<br />
new rules and their own national laws. “Some countries have<br />
already pressed ahead on banking regulation, while others<br />
will take their time implementing it, possibly making creative<br />
use of the SIFI criteria to give domestic banks a temporary<br />
competitive advantage.”<br />
Adopting such an approach to industrial policy could<br />
do more harm than good. Non-SIFIs may think that lower<br />
equity requirements have given them a head start, but sooner<br />
or later they could be forced to maintain higher voluntary<br />
buffers to signify their solvency to the market, where the<br />
investors will not necessarily know how institutions have<br />
been classified by regulators.<br />
For example, big banks whose business is primarily<br />
domestic could have huge balance sheet totals but still be<br />
placed in lower categories, or left out of the equation<br />
altogether. If the experience of the recent financial markets<br />
crisis is indicative, it seems likely that a big domestic bank<br />
with its fingers in lots of pies could cause just as much<br />
damage as a SIFI if it crashed.<br />
There have been dire warnings that banks could simply<br />
shift their business to regions with more relaxed rules;<br />
however, this is largely a ploy by lobbyists. “In reality, there’s<br />
limited scope for regulatory arbitrage,” Bröskamp says. “First<br />
in terms of time, because rules tend to converge as the years<br />
go by, and secondly, geographically, because you can’t just<br />
move and take your customers with you.”<br />
64 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011
Photos: Imago<br />
Frankfurt: for banks in Germany’s financial center, size and importance are relative.<br />
Bröskamp believes that consistent global rules would be undesirable<br />
because they ignore conditions in specific markets. For example,<br />
Switzerland’s very high capital requirements send out a strong signal about<br />
the stability of its extremely powerful financial sector, which contributes<br />
around 12% of the country’s GDP.<br />
In the United States, the Dodd-Frank Act, which focuses on financial<br />
markets and SIFI regulation, was passed into law in July 2010, and has<br />
attracted a lot of positive comments from observers. They believe it tackles<br />
the root causes of the financial market crisis, bolsters Wall Street against<br />
future downturns, reduces the country’s exposure to systemic risk,<br />
and creates greater transparency and clearer responsibilities. As with<br />
any form of regulation, there has also been criticism of the downsides.<br />
This criticism is sometimes tinged with exaggeration, though it does<br />
highlight some of the long-term management effects of current banking<br />
and financial market regulation. Restrictions on proprietary trading have<br />
already caused departments to close, though some of this business has<br />
been shifted to hedge funds. Other banks are considering incorporating<br />
their own account operations into their asset management business,<br />
which could make client-driven fund management and market-making<br />
more competitive.<br />
“Like Basel III, Dodd-Frank is having massive effects on the management<br />
of capital, liquidity, risk and financing, process models and IT<br />
systems,” emphasizes Roland Berger partner Holger Dümler. “Thanks<br />
to the long lead times, banks were able to assess the attractiveness of<br />
their businesses in the new regulatory environment long before it actually<br />
happened. Armed with this knowledge, they could decide well in<br />
advance whether to adapt their strategies or shut down specific areas<br />
of their business.”<br />
<strong>THINK</strong><br />
RUBRIK HIER<br />
The Dodd-Frank Act<br />
There is a great deal of overlap<br />
between the 849-page,<br />
541-article US act and the<br />
future Basel III rules in areas<br />
like liquidity requirements,<br />
refinancing, and maximum<br />
leverage. Both systems seek<br />
to make derivatives-trading<br />
a regulated, centrally cleared<br />
market, but Dodd-Frank places<br />
more emphasis on rescuing the<br />
big banks, or at least allowing<br />
them to die quietly.<br />
<strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011 65
LOOKING FORWARD<br />
Simple questions are often difficult to answer. What is here to stay,<br />
and what’s next? <strong>THINK</strong> <strong>ACT</strong> asks some of the world’s leading futurologists<br />
What is here to stay?<br />
The laws of thermodynamics<br />
The first law of thermodynamics states that all energy in<br />
the universe is constant, that it cannot be created or destroyed;<br />
only its form can change. The second law states<br />
that energy can only be changed in one direction, that is,<br />
from usable to unusable, from available to unavailable, or<br />
from ordered to disordered. Everything in the universe,<br />
according to the second law, began as available concentrated<br />
energy and is being transformed over time to unavailable,<br />
dispersed energy. Entropy is the measure of the extent to<br />
which available energy in any subsystem of the universe is<br />
transformed into an unavailable form.<br />
Societies are organized and maintained by<br />
converting the available energy from the<br />
environment into energy to sustain human<br />
existence.<br />
Every great economic era is marked by<br />
the introduction of a new energy regime.<br />
In the beginning, the extraction, processing,<br />
and distribution of the new energy are<br />
expensive. Technological advances and<br />
economies of scale reduce the costs and<br />
increase the energy flow until the onceabundant<br />
energy becomes increasingly<br />
scarce and the entropy bill from past<br />
energy conversion begins to accumulate.<br />
The oil era followed this curve over the<br />
course of the twentieth century, peaking<br />
in 2006.<br />
Most economists fail to understand that<br />
all economic activity is borrowing against<br />
Nature’s energy and material reserves. If<br />
that borrowing draws down Nature’s<br />
bounty faster than the biosphere can recycle<br />
the waste and replenish the stock, the<br />
accumulation of entropic debt will eventually<br />
collapse whatever economic regime<br />
is harnessing the resources.<br />
Jeremy Rifkin<br />
Jeremy Rifkin<br />
Biography<br />
he teaches at the Wharton School’s<br />
executive education program. His<br />
forthcoming book is ‘The Third<br />
Industrial Revolution: How Lateral<br />
Power is Transforming the Economy<br />
and Changing the World’.<br />
What’s next?<br />
The Third Industrial Revolution<br />
Our industrial civilization is at a crossroads. Oil and the other<br />
fossil fuel energies that make up the industrial way of life are sunsetting,<br />
and the technologies made from and propelled by these<br />
energies are antiquated. The entire industrial infrastructure<br />
built on the back of fossil fuels is aging and in disrepair. Worse,<br />
climate change from fossil fuel–based industrial activity looms<br />
ominously on the horizon. Our scientists warn that we face a<br />
potentially cataclysmic change in the temperature and chemistry<br />
of the planet, which threatens to destabilize ecosystems around<br />
the world. It is becoming increasingly clear that we need a new<br />
economic narrative that can take us into a<br />
more equitable and sustainable future.<br />
The great economic transformations in<br />
history occur when new communication technology<br />
converges with new energy systems.<br />
The new forms of communication become<br />
the medium for organizing and managing<br />
the more complex civilizations made possible<br />
by the new sources of energy.<br />
Today, we are on the cusp of a new convergence<br />
of communication technology and<br />
energy regimes. Internet technology and renewable<br />
energy are merging to create a powerful<br />
“Third Industrial Revolution” that will<br />
change the way we work and live in the 21st<br />
century. In the coming era hundreds of millions<br />
of people will produce their own green<br />
energy in their homes, offices, and factories,<br />
and share it with each other using an “energy<br />
Internet,” just like we now create and share<br />
information online.<br />
The Third Industrial Revolution infrastructure<br />
will create thousands of businesses<br />
and millions of jobs. This revolution will usher<br />
in a new economic age which will bring with<br />
it a fundamental reordering of human relationships<br />
– from hierarchical to lateral power.<br />
66 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011<br />
Illustration: Frank Hoppmann
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RUBRIK HIER<br />
68 <strong>THINK</strong> <strong>ACT</strong> SEPTEMBER 2011