Key Issues for Corporate Leaders

Six Stimuli and Two Responses to Maintain Growth
Corporate leaders are currently facing six stimuli that have created two responses. The six stimuli are things with which you are well-acquainted:

• Low population growth around the world is not the sort of condition that we experienced twenty or thirty years ago. The last thing I would ever have expected to see in Latin America is a government campaign, which I did see last year, to stimulate the birth rate.
• Second is stable growth and low inflation. Low inflation over the last ten years has denuded our clients of pricing power, whereas in the ‘80s and certainly towards the beginning of the ‘90s they had an inflationary environment in which they could pass on price increases to consumers and employees who had growing money wages.
• Third, we have improving communications and free trade. Free trade and the development of free trade areas have been the single biggest growth factor in our business.
• The transfer of technology means that it is virtually impossible nowadays to maintain a significant tangible product or service difference for any significant period of time. My favorite example is the car industry. A few years ago it took five years to introduce a new car. Today, it basically takes about eighteen months, largely as a result of Japanese influence in the automobile industry.
• Another factor has been growing retail power. Wal-Mart’s incursion into the UK, its incursion into Germany, or its suggested incursion into Japan struck terror not only in the hearts of manufacturers, but also competing retailers. Growing retail power is an increasingly difficult factor for our clients to deal with.
• Sixth is the growth of new competitive categories. Taking a couple of examples from the UK, Marks and Spencer has grown out of its traditional product categories into areas such as financial services, and Richard Branson has taken Virgin out of its traditional music business into travel, drinks, and financial services.

These six factors are making life terribly difficult for our clients as a whole.

Most chairmen and CEOs that we deal with promise investors at least 5-10 percent growth in earnings per share, profits, cash flow, or whatever metric they choose. Even relatively low 5-10 percent growth (others promise 10-15 and beyond) is very difficult to sustain in the environment that I am talking about. Essentially, you can only deliver that rate of growth consistently if you do one of two things:

• The first is to differentiate your products and services in a seriously effective way.
• The second is to expand geographically around the world.

One thing that I would mention is the fact that most U.S.-based multinationals are still very parochially based in the United States. The average U.S. multinational has 70 percent of its business concentrated in the United States and only 30 percent outside. Therefore, a company like Coca-Cola is the exception to the rule, with something like 60 percent of its business outside the United States. A company like Pepsi-Cola, its competitor, is probably more the rule, with 65 percent of its business concentrated in the United States.

That leads me to four points I think our clients are concerned about:

The Importance of the U.S. Market.
The world has not been globalized. What we’re talking about is Americanization, not globalization. Why do I say that? Well, if I take the advertising industry as an example, about 45 percent of worldwide media is bought in the United States. So the biggest concentration of media investment is in that part of the world. The second biggest market is Japan, which accounts for about 11 or 12 percent, and then we have the UK, Germany, France, Italy, and Spain roughly the same at 6–8 percent. So we have this significant concentration in the United States.

It’s even more concentrated than one would think. It is a fact of life that, primed by new technologies, that something like two-thirds of advertising expenditure is coordinated from the United States. It’s even more intense than that, because it is coordinated from the northeast corridor of Detroit, Chicago, New York, and Boston. True, there are major corporations in Seattle, Atlanta, Houston, Dallas, Los Angeles, and San Francisco, but there is a very strong concentration in this northeast corridor of the United States.

You ignore this fact at your peril. In the investment banking industry, for example, in the UK we had a number of very significant brands five or ten or fifteen years ago, such as S.G. Warburg, Flemings, Schroeders, and Morgan Grenfell. They were extremely strong and drew a lot of strong, bright young people to their organizations. Today, those brands have largely disappeared into European organizations or elsewhere. Why have they disappeared? Because the managements of those companies failed to understand the importance of the U.S. market. If you don’t have a strong position in the U.S. market, you really don’t have the basis for building global brands of any significance. That U.S. engine is tremendously important.

Why? The size of the U.S. market is important, but U.S. capital markets are also very important. Their size and liquidity and the fact that valuations in the United States are stronger than elsewhere means that marginal costs of capital, both debt and equity, are lower. Therefore, companies have more flexibility and mobility in terms of merger-and-acquisition activity and making investments.

The American lead in e-business is very important, too. I know it’s slightly unfashionable now, as opposed to six months or twelve months ago, to talk about the “new economy.” But we have to disassociate the financial bubble from the fundamental change to the way we live our commercial lives (and, indeed, our ordinary lives) that has occurred. The American lead in e-business is critically important, not just in the “B-to-C” or “B-to-B” areas, but the growing influence that the United States will exert, for example, in wireless technology, although it is true that the Japanese and the Europeans have the lead in wireless technology at the moment.

Over-Capacity, Intangible Differentiation, Shortage of Human Capital.
Over-capacity is an even more critical concern. We operate for our clients in most industries and services, and I’m hard-pressed to find any example where there is significant productive under-capacity. What we face is significant over-capacity. Let me give you an example from the car and truck industry. The total productive capacity of that industry is something like 80 million units a year. Consumers can only buy 55–60 million units a year. Clearly, over-capacity is what is driving the consolidation activity you see with Renault and Nissan, GM and Fiat, Ford and Volvo, and Ford, Land Rover, and Jaguar.

Why is this issue important? You can differentiate yourself in this situation by either tangible or intangible differentiation. Because product life-cycles are getting shorter and brand-cycles are getting longer, technological differences are very hard to maintain over significant periods of time. Intangible differentiation is therefore critically important. This is very difficult for some of us to get our minds around. People are generally very uncomfortable with differentiating things for psychological, emotional, or lifestyle reasons. But clearly, the suit one wears, the dress one wears, the car one drives, the holidays one takes, the hotels where one stays say something about a person and how he or she feels about the products and services he or she consumes, and his or her lifestyle. Whether one feels comfortable about it or not, these emotional and psychological differentiations are becoming more and more important.

There is an interesting paradox. In the nineteenth and twentieth centuries, productive capacity was a significant issue. This is no longer the case. We now have the real shortage, an under-capacity, in human capital. The critical factor that will differentiate corporations in the next century will be their ability to recruit, harness, retain, and develop human capital. The demographic trends that we face—the aging of the population, the decline in the birthrate, increased divorce rates, smaller family size, fewer people getting married—mean that there is a constriction in the supply of young people. Those of you who recruit at the leading universities or the leading business schools know that the competition is becoming more and more intense. So the critical issue is going to be the shortage of human capital and the ability to deal with it.

The “New Economy”
I mentioned before that the compression in values on the stock exchange of the new economy companies shouldn’t lead us to underestimate the significance of the shifts that have taken place in the last two to five years in the new media and new technology areas. These shifts represent the transfer of power from producers to consumers. It is really the consumers that have benefited from the increased price competition in the economy. As a result, there has been a shift in wealth and a shift in margin from producers, manufacturers, and indeed some service companies to the consumer. This is a shift in wealth that will be very difficult to reverse.

One of the incredible things to observers of the new technology scene is that the people who produced and developed these services have not charged for them. In the very early days of the internet, very few suppliers of the services ever charged consumers a premium of any sort for delivery of the products and services they were offering. The result is some of the carnage that we are seeing in the stock markets now.

There are three things that have happened in this revolution. The first is that businesses have been significantly disintermediated by these new technologies. For example, in the market research business (about a sixth of our total business), the traditional ways of capturing and developing data are through mail and telephone. A lot of CEOs get very frustrated by the slowness of response with market research. It takes a long time to put the questionnaire together; it takes a long time for consumers to respond; it takes a long time to analyze the data dump that is deposited at their door after the research has been done. Isn’t there a quicker and more effective way to do it? And the answer is yes, through the internet. We have built a major panel, for example, in the United States of over 500,000 consumers who can almost instantly deliver opinions on issues, products, and services. Thus, new technologies threaten to disintermediate our traditional business, which is based on mail and telephone.

The second thing that the new economy has done is introduce competitors that are subject to totally different parameters in terms of evaluation by investment institutions. Although valuations and attitudes have changed significantly over the last year, new businesses are subject to lower investment parameters. As a result, the lower-cost business models they can employ have made them more effective competitors.

Finally, these new businesses have stolen talent very effectively, certainly in the initial stages of their formation. This has been reversed to some extent in the last few months, but the critical point is that young people do not wish to serve apprenticeships in large corporations. Do not underestimate the impact that the new economy has had on the attitude of young people to working in large bureaucracies and in large companies over time. There is this desire to start a business and to work inside corporations that are leaner, meaner, and less bureaucratic.

Internal Communications.
A critical issue that we see increasingly inside large corporations is the desire to communicate internally strategic and structural change. Our three largest clients—Ford, Unilever, and IBM—are involved in extensive efforts to communicate internally, to employees and internal communities, the effectiveness of their strategies and their structures. Having said that, most of that communication is aimed at internal audiences with the objective of expanding that view externally through a motivated, incentivized, and directed work force. In other words, employees are effective communicators to outside audiences, such as customers, clients, suppliers, potential employees, investment institutions, the trade press, and beyond.