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Archive for December, 2008
Closing out a Predictably Irrational year |
If you haven’t had the opportunity to read the Predictably Irrational or hear Dan speak about his research, you may want to take a look at a chapter-by-chapter series of videos we’ve produced in which Dan explains the main concepts of the book (and stay tuned for more, there are a few chapters still in production). |
Offshoring Plans Not Slowed By Global Financial Crisis |
American companies plan to continue to implement their current strategies for sourcing some functions offshore despite the current worldwide economic slump and the financial downturn may even accelerate such plans American companies plan to continue to implement their current strategies for sourcing some functions offshore despite the current worldwide economic slump and the financial downturn may even accelerate such plans. These are among the findings of a study into the effects of offshoring trends on American competitiveness, as part of ongoing research by the Center for International Business Education and Research’s Offshoring Research Network (ORN) at The Fuqua School of Business at Duke University and PricewaterhouseCoopers. The survey, designed to capture business managers’ sentiments in the midst of the current global slump in financial markets and the presidential election, was conducted during the first two weeks of November and queried nearly 100 firms from the United States and Europe about their plans to source some job functions and business processes offshore. The current survey on offshoring trends suggests that while cutting labour costs is the most significant factor driving offshoring decisions since the worldwide financial crisis gained momentum this quarter, many survey participants noted an increased urgency to improve efficiencies. Read the rest of this entry » |
Making Health Care Work for U.S. Businesses |
 Image courtesy of iStockphoto
This is the second entry in a new series from Duke Strategy Professor Will Mitchell. PART 2 – SOLUTIONS Yesterday, we discussed competitive disadvantages that established US businesses face compared to younger firms and foreign competitors as a result of the US approach to employment-based health insurance. Today, let’s consider solutions to the competitive disadvantages. Let’s start with a couple of solutions that will not work. Non-starter 1: Convince other countries to change? One approach is to ask the US government to try to force other countries to reduce their health insurance coverage, which would at least address the disadvantages relative to foreign competitors in developed markets. I know this sounds silly (at least I hope it does), but I recall serious suggestions to this effect about Japan during the 1980s, when the Japanese economy was booming and US firms were struggling to compete. It is not hard to imagine how badly it would be received if one of Hillary Clinton’s first actions as Secretary of State was to try to convince Canada, Japan, Germany, France, and the UK to roll back their national health insurance systems. Non-starter 2: Ratchet down expectations? A second approach would be to try to convince US employees that extensive health care coverage is a luxury that they cannot afford, rather than a necessity and right. Again, I hope this sounds silly. But I recall a conversation with a senior executive from an established business that faced serious competitive disadvantages because of health care costs, in which this came up as a serious (I think it was serious – it was late, and maybe it was just fatigue and frustration that produced the point) suggestion. I think it is unlikely that Tom Daschle would make such a proposal the cornerstone of his policies as Secretary of Health and Human Services. Now that we’ve disposed of the silliness, let me suggest a starting point for a solution that would work. |
Fed Loads Cutlery into the Cannons |
In a ‘historic’ move, the Fed slashes the Fed Funds rate 75bp. The new rate is only 25bp. Basically, zero interest rates. My opinion … this is no big deal. See my interview on BNN on this news. However, the effective rate was already close to zero. So what if the official rate is now 25bp. There is no real difference. What the market cares about is the effective rate. However, there are four other aspects of the Fed announcement that we should take note of.
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The U.S. Health Care System is Unhealthy for U.S. Businesses |
 Image courtesy of iStockphoto
This is the first entry in a new series from Duke Strategy Professor Will Mitchell. Most criticism of the US health care system focuses on its high costs, variable quality, and limited access. These criticisms are often apt, but they miss an increasingly important issue – which is that the US healthcare system creates disadvantages for established US businesses compared to younger firms and to foreign competitors. This two part series outlines the problem and suggests a starting point for solutions. PART 1 – PROBLEMS US health care – high costs, variable quality, limited access: The US health care system regularly faces attacks for having high costs and variable quality, while offering only limited access when compared to health care systems in most other developed countries. The usual criticisms focus on the large number of people in the country who have little or no health care insurance, while common measures of health quality, such as mortality rates, lag many countries in Europe, Asia, and elsewhere, despite the fact that the costs of health care have grown to more than 15% of Gross National Product (the OECD reports that the US spent about $6,700 per capita on health care in 2006, more than 1.5 times the next highest country, Norway). Analysts regularly question whether even the current cost level is sustainable, an issue that has come to the fore again during the current recession. Brief aside: In anticipation of criticisms from my colleagues in outstanding US hospitals and other health care providers – I am deeply aware of the incredible strengths in innovation and care that are available in many parts of the US health system. And a large part of the population enjoys access to outstanding care, even if the costs are high. There are powerful parts of the system that we need to cherish and preserve. But there are fundamental flaws in cost, quality, and access that we need to address, or they will pull down the towers of strength. |
Calculate Your Gallons per Mile |
This weekend their work was recognized in the New York Times Magazine’s “Year in Ideas” issue, and we also launched a new GPM calculator that people can use to find their current GPM, compare cars, or see the GPM for all 2009 cars. More information about this research, including an interactive fuel-efficiency quiz and a video of Larrick and Soll discussing their work (and commuting in Soll’s hybrid Camry), is available at mpgillusion.com. |
This summer, Fuqua Management Professors Getting There from Here |
This is the third in a series of posts by Duke Strategy Professors Arie Lewin and Marco Huesch. We temper our advice by noting that while the future business landscape is unlikely to resemble that of the past, your firm must of course still be able to get there from here. To do so, you will still need many of those processes that make you successful today. In fact, you may still be able to leverage those processes to make you a leader tomorrow. Clearly, your experimentation with innovation should not come at the expense of failing to whittle down, refine, sharpen and polish your current execution strengths. With the fine print out of the way, our closing thoughts are that what is good for firms who successfully follow these maxims is also good for America. We echo the words of GE boss Jeff Immelt, who recently advised that the “companies and countries that really play offence vis-à-vis technology and innovation are going to come out ahead,” We share the enthusiasm of national colleagues – Amar Bhidé, Glen Hubbard, and Ned Phelps among others – who see such innovative changes as ‘non-destructive creation’. Given the option between Schumpeterian ‘creative destruction’ and the above alternative, the choice should be clear for our business leaders. |
The Freefall – A View from Main Street |
Duke University/CFO Magazine survey 1,275 CFOs in the U.S., Europe and Asia was released today. I am the founding director of this quarterly survey and we have been conducting the survey for the past 51 quarters. The survey is unique because it focuses on CFOs. In the past, our survey has provided information in advance of other popular surveys, like purchasing manager surveys. The intuition is that the CFOs know the investment projects before they give orders to the purchasing managers. We inserted many special questions on this quarter’s survey to help central bankers assess credit conditions at the firm level. While the Fed has lots of information from bankers, our survey provides a look at how small, medium and large businesses are struggling in the current financial crisis. The current read is staggering. We all knew the economy was in the toilet but this is really bad. Let me highlight two examples: 1. Firms are in slash mode. They will slash employment by 5% and they will do it quickly. This implies a rate of unemployment well into double digits. 2. CFOs are fundamentally worried about the health of the financial institutions they deal with. 75% were concerned about the health of the financial firms they do business with. The FDIC recently told us that they had 177 banks (out of roughly 8,500 financial institutions) on the watch list. The survey suggests that FDIC’s estimate is at best a low-ball estimate and at worst a highly misleading indication of the health of financial system. |
Now Is the Time for Experimentation |
This is the second in a series of posts by Duke Strategy Professors Arie Lewin and Marco Huesch. Let’s consider a suggestive example of deliberate business model experimentation. In our association with leading U.S. consultancies, we have seen these ideas put to good use. Recall one of the last international financial crises, triggered by East Asian currency collapses? In the late 1990’s, banks in this region faced dollar denominated borrowings, and local currency denominated credit assets. Technical insolvency of many players led to dramatic government interventions, ownership stakes sold to international banks, and depressed wholesale financial performance.
Surviving independent local players saw global banks like Citibank poach swathes of high-value personal and commercial clients. Portfolio monitoring, credit risk assessment and dynamic external monitoring were missing at most local players. Reliable financial market and commerce statistics and credit bureau did not exist to inform lending practices.
Not the best time for experimentation? Steady as she goes? Not so. Booz and Co. worked with one of the leading Thai commercial banks to transform the business model in a risky but successful series of business model experimentations. As part of that team, one of us helped to tailor overseas practices (in risk and recovery, in portfolio management in credit cards, in internal IT support and many other areas) to local organizational, cultural and resource constraints. Within a short time, our client had outperformed the local banking market in stock price and continued to adapt its business model pro-actively to the changed competitive landscape. Loyal customers and staff continue to reward the still-independent bank years later for not cutting and running.
The lessons for domestic firms are clearly that counter-cyclical investment in business model innovation can pay big. Cisco’s CEO alluded to this recently by explaining that the firm made more aggressive investments during bad times than during good times. His counterpart at IBM goes further: the Economist highlighted his belief that new leaders would “win not by surviving the storm, but by changing the game.”
Closing thoughts will follow tomorrow… |
Weapons of Reason |
 Image courtesy of Wikimedia Commons
Duke Strategy Professors Arie Lewin and Marco Huesch urge managers to invoke ancient wisdom when responding to the current economic crisis.
In these tumultuous economic times, even the most modern business strategists may benefit from the (literally) stoic calm of an ancient leader like Marcus Aurelius. “Never let the future disturb you,” he advised, “You will meet it, if you have to, with the same weapons of reason which today arm you against the present.” Let’s take those weapons of reason out and sharpen them for a moment. |