Strategy + Business

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C.K. PRAHALAD

THE GLOBAL MIDDLE CLASS
SYLVI A NASAR
www.strategy-business.com
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Issue 64, Autumn 2011
US $12.95 Canada C$12.95
strategy+business
Published by Booz & Company
MANUFACTURING S
WAKE
-
UP CALL

THE CHALLENGE FOR U. S. COMPETI TI VENESS

THE RI SE OF DI GI TAL FABRI CATI ON
YOU CAN APPLY

EVERYTHING BACK
TO YOUR COMPANY.
THESE ARE LESSONS
YOU WILL ALWAYS
REMEMBER.
I CAME TO EXPLORE
WHAT DRIVES
THE BUSINESS
OF MEDICINE.
BUT I LEFT WITH
SO MUCH MORE.
Sreeja Kartha
Program for Leadership Development 2011
Dr. Michael Jaff
General Management Program 2010
The worlds top executives often need to step outside their organizations
to acquire the skills, knowledge, and leadership to successfully address
todays critical business issues. The comprehensive leadership programs
at Harvard Business School Executive Education are where they convene.
Email us at clp_info@hbs.edu or visit www.exed.hbs.edu/pgm/clp/
Learn More
The articles in this issue address
three major disruptions that have
taken place in recent years: the
rise of newly competitive emerg-
ing economies, the near collapse
of an overreaching financial sector,
and the business modeldissolv-
ing maturation of computer tech-
nology. As anyone who has lived
through a disruptive event knows, it
takes a special skill to lead during
the period that follows. You must
manage through the aftershocks,
while recovering and help others
recover a belief in building for
the future.
Before his untimely death in
April 2010, C.K. Prahalad was a
great scholar of disruption. We are
proud to publish in this issue an
article he was working on with ex-
ecutive Hrishi Bhattacharyya, who
completed it (page 54). It describes
a business model with the flexibility
and power to manage the burgeon-
ing consumption and competition
in emerging markets.
In Competing for the Global
Middle Class (page 62), s+b con-
tributing editor Edward Tse, along
with his Booz & Company col-
leagues Bill Russo and Ronald
Haddock take that theme further
by explaining how new markets
generate new competitors. And in
The New Web of World Trade
(page 70), Booz & Company senior
partners Joe Saddi, Karim Sabbagh,
and Richard Shediac trace another
group of aftershocks the evolu-
tion of capital, trade, and talent
flow among emerging economies,
with the Gulf states taking the lead.
As for the economic disruption,
one ongoing aftershock is the long
cycle of seemingly intractable un-
employment. In Manufacturings
Wake-Up Call (page 30), Booz &
Company manufacturing experts
Arvind Kaushal, Thomas Mayor,
and Patricia Riedl trace one choice
facing the United States: Ignore
manufacturing and watch the na-
tions prosperity decline, or take the
radical steps needed to revitalize it.
For counterpoint, we feature com-
mentator Clyde Prestowitz (page
10) on competitiveness, University
of Michigan professors Wally Hopp
and Roman Kapuscinski (page 36)
on manufacturing education, Kaj
Grichnik and Jerome Pellan on the
dilemma facing France (page 40),
and Brian Collie, Scott Corwin,
and Patrick Mulcahy on the outlook
for the U.S. auto industry (page 6).
The technological disruption
is covered by researchers Tom Igoe
and Catarina Mota in A Strategists
Guide to Digital Fabrication (page
44), wherein they tour this remark-
able aftershock of the IT revolution.
To pull all this together, see
executive editor Rob Nortons inter-
view with Sylvia Nasar, whose book
Grand Pursuit: The Story of Eco-
nomic Genius (Simon & Schuster,
2011) recounts the many ways in
which disruptions have been shaped
by economic theories (page 80).
Youll see some changes in
our masthead this quarter. Staff-
ers Jonathan Gage, Alan Shapiro,
and Chris Bojanovich have moved
on. We wish them all well, and
welcome Gretchen Hall, Charity
Delich, and Bevan Ruland in their
new roles. Further changes, includ-
ing new features like comments, are
happening on s+bs website, www
.strategy-business.com. In print and
online, we will continue to seek out
insights into the disruptions, the af-
tershocks, and the rebuilding that
hopefully follows.
Art Kleiner
Editor-in-Chief
kleiner_art@strategy-business.com I
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Disruption and Its Aftershocks
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LEADING IDEAS
Is the U.S. Auto Industry
Ready for Growth?
Brian Collie, Scott Corwin, and Patrick Mulcahy
The outlook for manufacturers and suppliers may be
bullish, but a new survey shows that industry execu-
tives see big challenges ahead.
The Case for Intelligent
Industrial Policy
Art Kleiner, Arvind Kaushal, and Thomas Mayor
Economic strategist Clyde Prestowitz argues for
better support for manufacturing.
How to Prepare for a Black Swan
Matthew Le Merle
Disrupter analysis can help assess the risks of future
catastrophic events.
10 Clues to Opportunity
Donald Sull
Market anomalies and incongruities may point the
way to your next breakthrough strategy.
DATA POINTS
Finding Shoppers Where They Live
ENERGY
Renewable Energy at a Crossroads
Christopher Dann, Sartaz Ahmed, and Owen Ward
The wind, solar, biomass, and geothermal sector
has grown in ts and starts and is now poised to
become a self-sustaining industry.
HEALTHCARE
Transforming Healthcare Delivery
Joyjit Saha Choudhury, Akshay Kapur, and
Sanjay B. Saxena
As governments seek to expand services more cost-
effectively, the stakeholders must collaborate.
Correction, Issue 63:
In CEO Succession 2010: The Four Types of CEOs,
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson,
the citations for Putting Headquarters in Its Place
should have read: Gary Neilson, Etienne Deffarges,
Paul Kocourek, and John Elting Treat, Putting Head-
quarters in Its Place: The New, Lean Global Core,
Booz Allen Hamilton white paper, 1999.
comment
20
26
19
16
14
10
6
62
44
30
COVER STORY: OPERATIONS & MANUFACTURING
Manufacturings
Wake-Up Call
Arvind Kaushal, Thomas Mayor, and Patricia Riedl
A new study shows how the decisions made
today by goods producers and policymakers will
shape U.S. competitiveness tomorrow.
Revitalizing Education for Manufacturing
Wally Hopp and Roman Kapuscinski
France Faces a Dilemma
Kaj Grichnik and Jerome Pellan
OPERATIONS & MANUFACTURING
A Strategists Guide to
Digital Fabrication
Tom Igoe and Catarina Mota
Advances in manufacturing technology point to a
decentralized, disruptive maker culture, with
implications for many forms of enterprise.
GLOBAL PERSPECTIVE
How to Be a Truly
Global Company
C.K. Prahalad and Hrishi Bhattacharyya
Multinationals need to integrate three strategies
customization, competencies, and arbitrage
into a more relevant business model.
GLOBAL PERSPECTIVE
Competing for the
Global Middle Class
Edward Tse, Bill Russo, and Ronald Haddock
How three types of companies are jockeying to
capture the loyalty of billions of new consumers.
GLOBAL PERSPECTIVE
The New Web of
World Trade
Joe Saddi, Karim Sabbagh, and Richard Shediac
The Gulf economies are forming partnerships
with other emerging markets, redening the
trade routes that once linked East and West.
THOUGHT LEADER
Sylvia Nasar
Rob Norton
The renowned author
discusses how the great
economists uncovered the
basic truth about progress,
prosperity, and productivity,
and the reasons you should
be careful which ideas you
listen to.
BOOKS IN BRIEF
In Pursuit of Happiness
David K. Hurst
Closing implementation gaps, the enduring
principles of high-tech success, and Toyotas crisis.
END PAGE: RECENT RESEARCH
Putting a Dollar Value on Academic
Business Research
Matt Palmquist
MBA students who attend schools where teachers
publish frequently end up earning more.
Cover illustration by Doucin Pierre
conversation features
30
36
40
44
54
62
70
80
90
96
Issue 64, Autumn 2011 Published by Booz & Company
strategy+business
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by Brian Collie, Scott Corwin, and
Patrick Mulcahy
T
o many people, the U.S.
auto industry appears to
be on the mend. After
an epic sales collapse in the wake
of the 200809 recession, General
Motors, Ford, and Chrysler were all
protable again in early 2011, and
European and Korean manufactur-
ers in the U.S. were also enjoying
strong results. Only the Japanese
transplants are facing earnings pres-
sure, as they wrestle with massive
disruptions to their global supply
chains and production facilities, due
to the earthquake and tsunami at
home. Although the U.S. has slipped
to number two behind China in
auto sales, the U.S. market is still
among the worlds most protable,
thanks to consumers enthusiasm
for high-margin luxury cars, SUVs,
and light trucks. Leading forecasters
predict that light-vehicle sales in
the U.S. will rise to more than 16
million in 2015, up from 11.6 mil-
lion in 2010.
Yet auto industry insiders them-
selves are anything but sanguine. A
Booz & Company survey of more
than 200 executives from 40-plus
automakers and suppliers revealed
more modest expectations only
13.5 million in vehicle sales in 2013
and 14.5 million in 2015. The rea-
son: By the executives own reckon-
ing, most automobile companies
have not fully gotten their manage-
rial houses in order. Almost half
of the survey respondents said that
the auto industry restructuring of
200910 did not go far enough.
Two-thirds said that automakers
and auto suppliers in general were
not yet on a path to achieving sus-
tained, full returns on invested capi-
tal. In fact, the auto executives
viewed the overall tenuousness of
their industry as so potentially seri-
ous that almost 30 percent said they
expect a major automobile company
to fail in the next two years.
For U.S. auto companies, the
bankruptcies and restructurings
as well as the stronger focus on lean
factories and new union agreements
that grew out of the recession
have signicantly reduced opera-
tional costs, sanitized balance sheets,
and eliminated health and pension
legacy expenses, or at least helped to
make them more manageable. In
many ways, however, those steps
were the bare minimum necessary
for the industry to survive the down-
turn. As Edward Tse, Bill Russo,
and Ronald Haddock suggest in
Competing for the Global Middle
Class (page 62), car sales are in-
creasing rapidly in the dynamic new
global middle class of emerging
markets but new competitors are
Is the U.S. Auto Industry
Ready for Growth?
The outlook for manufacturers and suppliers may
be bullish, but a new survey shows that industry
executives see big challenges ahead.
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also proliferating to serve this mar-
ket. Can todays automakers con-
tinue to thrive in an industry that
will be more in ux and more com-
petitive than ever before? According
to the survey, auto executives them-
selves are not sure.
If you look at the industry be-
fore the sales downturn, it was hy-
perinated, says Ernest Bastien,
vice president of retail market devel-
opment at Toyota USA. People
were using their home equity and
easy-to-get loans to take advantage
of extraordinary incentives that were
being offered. In fact, the industry
was not as robust as it looked. Going
forward, automakers are going to
have to rely on a more fundamental
but complex equation for growth:
making the right amount of great,
high-quality cars and proving to
consumers that their brand is the
best in terms of total cost of owner-
ship, drivability, and reliability.
When asked to rank their com-
panies most critical challenges,
more than 50 percent of the manu-
facturing executives surveyed chose
increasing competitive pressure. (See
Exhibit 1.) And although Japanese,
Korean, and European rivals are
certainly formidable competitors,
the looming presence of Chinese
companies casts the largest shadow.
Fully 90 percent of these executives
said that Chinese automakers would
be making cars equal in quality to
American-made vehicles by 2021.
About half of all survey respondents,
from manufacturers and suppliers,
said this could occur by 2016. In
other words, the executives said they
believe that companies like Geely
Automobile Holdings, which ac-
quired the Volvo brand from Ford,
and BYD Company, partially
owned by Warren Buffett, will
achieve in 10 years what Toyota and
other Japanese companies took 30
years, and Korean automakers took
20 years, to do.
For auto suppliers, the future is
uncertain as well not because of
potential changes in industry dy-
namics some years down the road,
but rather because of a problem they
have struggled with for at least a de-
cade: Many nd themselves unable
to command full value for their
products. Owing to an overabun-
dance of competitors in most prod-
uct categories, many suppliers lack
the leverage to set terms with their
automaker customers that would al-
low them to earn a positive return
on their invested capital. Theyve
become, in effect, low-cost order
takers. As a result, many suppliers
nd themselves too short of cash to
invest heavily in research and devel-
opment. But that investment is im-
perative if they hope to distinguish
their products from their competi-
tors and go beyond merely selling
commodities. Not surprisingly, giv-
en the dynamics of supplier relation-
ships with the automakers, the two
most widely chosen concerns ex-
pressed by suppliers in the survey in-
volved cost position and engineering,
research, and development (ER&D)/
innovation. (See Exhibit 2, page 8.)
A products price is directly
proportional to the value it creates,
says David Johnson, chief executive
ofcer of Achates Power Inc., which
is developing an energy-efcient
engine. Any time that you arent
delivering a unique technology or
unique features that will create mar-
Importance of challenge (% of respondents)
Exhibit 1: Key Challenges Facing Auto Manufacturers
Survey respondents from automakers cited increasing competition, pricing, costs, and the
macroeconomic environment as most critical.
Source: Booz & Company
One of the TWO most
important challenges
One of the FIVE most
Increasing competition 52% 76%
Pricing 28% 52%
Cost position 21% 52%
Macroeconomic situation 21% 45%
Labor relations/Legacy costs 17% 34%
Financial position 17% 31%
Product 14% 38%
Manufacturing capacity 14% 34%
Dealer capabilities 7% 28%
Regulatory requirements 3% 28%
Winning strategy 3% 21%
Management team 3% 21%
Sales and marketing 21%
Supplier relations 10%
Ninety percent of carmaker execu-
tives said Chinese automakers would
be making cars equal in quality to
American-made vehicles by 2021.
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ket demand or ll a real need in the
market, your product becomes com-
moditized, and the next thing you
are doing is price and quality com-
petition. That is not a long-term
winning formula.
Clearly, suppliers have a long
way to go to improve their relation-
ships with automakers and to drive
more value into their products. But
according to the survey, auto suppli-
ers do not see the path they need
to take to get there. When asked to
name the most important keys to
winning, most suppliers did not
cite two facets of a businesss opera-
tions that routinely count among
the prerequisites for long-term via-
bility: a well-dened strategy and
deep market insight. Understand-
ably, no business leader would argue
against the importance of achieving
the low cost position or providing
superior customer service. But with-
out a well-dened strategy rooted
in deep market insight, it is nearly
impossible to achieve a sustainable,
differentiated position which,
in the end, is key to capturing the
value created.
Given the responses to the sur-
vey, and taking a close look at cur-
rent conditions in the U.S. auto in-
dustry, automakers and suppliers
face different priorities in the United
States (and elsewhere in the world).
The automakers must:
Focus even more intensely
on building attractive vehicles and
rebuilding brands. Cars and trucks
are still among the most visible,
emotional purchases consumers
make. In the current frugal and
practical environment, U.S. car buy-
ers need to be given reasons to fall
in love again.
Create vehicles with exciting
design and styling; superior quality,
reliability, and durability (QRD);
and technological innovation. Al-
though the QRD of vehicles sold in
the U.S. is better than ever, mean-
ingful gaps still exist between the
highest-ranked companies and the
rest of the pack, especially in longer-
term reliability and durability. In ad-
dition, as breakthrough innovations
in safety, connected vehicle, and
power-train technologies emerge,
new opportunities must be created
to deliver differentiated value to
consumers and drivers.
Make sure that each vehicle
produces a positive return on invest-
ment. Hoping that a few blockbust-
ers will generate most of the portfo-
lios returns as many automakers
have done in the past is no longer
sustainable in a more competitive
and smaller U.S. market.
Continue minimizing rela-
tive material and structural costs
while bringing new technology to
market cost-effectively, earning fair
returns for product innovation.
Prepare cost structures and
innovation processes for a more
globally competitive landscape.
Auto suppliers should:
Accelerate efforts to nd
greater leverage with high-quality
product lines. This means a supplier
must innovate wisely, focusing on
features that consumers are willing
to pay for, creating end-user pull,
and establishing itself as the com-
pany best positioned to help solve
manufacturers problems.
Better manage portfolios,
focusing on the markets where the
suppliers have the greatest capa-
bilities and opportunities to create
a sustained competitive advantage,
and to meet changing market needs.
Although some companies are able
to prosper making disparate compo-
nents, most do not have the resourc-
es and skills to do it well.
Continue to aggressively
manage costs. Suppliers reduced op-
erational and structural costs during
the downturn. Now, they need to
make sure that these expenses dont
creep back in as volumes ramp up.
They must also discipline themselves
to stop chasing automaker contracts
that cost more than they return
in the long run. Where possible,
suppliers and auto manufacturers
should promote collaborative cost-
based agreements that give man-
ufacturers full transparency into
relevant supplier operations and, in
exchange, allow suppliers to earn a
fair return on investment.
Cost position 58% 87%
ER&D/innovation 27% 69%
Macroeconomic factors 26% 67%
Customer responsiveness 22% 58%
Product 17% 62%
Undifferentiated position 16% 37%
Excess industry capacity 14% 32%
New entrants 7% 28%
Financial position 6% 29%
Market insight 4% 26%
Importance of challenge (% of respondents)
Exhibit 2: Key Challenges Facing Auto Suppliers
Survey respondents from auto industry suppliers cited improving their cost position, innovation,
and macroeconomic factors as most critical.
One of the TWO most
One of the FIVE most
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Recognize that industry con-
solidation is likely to intensify. For
each core business, suppliers should
decide: Am I a buyer or a seller?
The U.S. auto industry is in a
period of extraordinary transition.
Whether one considers alternative
drive trains, or ways to ne-tune de-
signs and manufacturing processes,
or a raft of new global competitors,
its fair to say that only the most ex-
ible, lean, and well-managed com-
panies will survive. With that in
mind, perhaps the surveys greatest
value is its central nding: Despite
the general optimism in the auto in-
dustry today as well as the real im-
provements in efciency, quality,
and lean practices that have been
made, many executives are still brac-
ing for further change. They will
need all the courage, and skill, they
can muster. +
Reprint No. 11301
Brian Collie
brian.collie@booz.com
is a principal with Booz & Company in
Chicago. He specializes in working with
automotive and industrial clients in the
areas of business unit transformation, new
market entry, and corporate strategy.
Scott Corwin
scott.corwin@booz.com
is a partner with Booz & Company based in
New York. He has extensive experience in
assisting clients in developing creative and
pragmatic growth strategies for the auto-
motive, media, and consumer industries.
Patrick Mulcahy
patrick.mulcahy@booz.com
is a senior associate with Booz & Company
based in Cleveland. He focuses on product
strategy and M&A for automotive and
industrial clients.
For a detailed analysis of this survey, see
Facing New Realities: What Comes Next
for the U.S. Auto Industry: www.booz.com/
media/uploads/Facing_New_Realities.pdf.
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his work since his rst major book,
Trading Places: How We Are Giving
Our Future to Japan and How to Re-
claim It (Simon & Schuster, 1988).
He sat down with strategy+business
at the Manufacturing Executives
Forum, which Booz & Company
conducted in Chicago in May 2011.
S+B: How did you come to realize the
signicance of manufacturing to
economic vitality?
PRESTOWITZ: I grew up in a manu-
facturing environment. My dad
worked in the steel products indus-
try, and I visited the original Bethle-
hem steel mill many times as a boy.
The Bethlehem Steel Corporation
started to consistently lose money in
the early 1980s; it declared bank-
ruptcy in 2001 and closed in 2003.
The old steel mill was then replaced
with a casino. The passage from
steel mill to casino says a lot about
the trajectory of the U.S. economy,
and about the declining quality of
life for the middle class when there is
no manufacturing base.
Manufacturing, more than oth-
er activities, is critical to prosperity
because it generates economies of
scale. It also sparks innovation,
wholly new products and industries.
And it has great multiplier effects:
Every factory needs accountants,
sandwich shops, component suppli-
ers, and other services. One dollar
invested in manufacturing creates
two dollars or more of income for
ancillary industries. By contrast, a
dollar invested in retail creates about
45 cents of additional income.
Finally, international trade
overwhelmingly involves goods.
When countries like the United
States have trade decits, they are
primarily in manufactured goods.
Those trade decits take away jobs.
If you want to get those jobs back,
theres only one way: Youve got to
support manufacturing.
I remember, back in the 1980s,
debating about whether to subsidize
the American aircraft industry
against the European upstart Air-
bus. George Shultz [then secretary
of state] said that the Europeans, by
subsidizing Airbus, were only hurt-
ing themselves taxing people to
pour money down a corporate rat-
hole. Even if he was right, he was
ignoring the damage done to our
aircraft industry in the U.S. and
the people employed by it, directly
and indirectly. Any country that
wants to survive needs to focus on
the industries that it wants to keep,
and support them wholeheartedly.
For the past 25 years, U.S. eco-
nomic policy has been driven by
The Case for Intelligent
Industrial Policy
Economic strategist Clyde Prestowitz argues for
better support for manufacturing.
by Art Kleiner, Arvind Kaushal,
and Thomas Mayor
S
tarting with his role as an
advisor to the secretary of
commerce in the Reagan
administration in the 1980s, and
progressing to his current position as
founder and president of the Eco-
nomic Strategy Institute in Wash-
ington, D.C., Clyde Prestowitz has
been a consistent voice on the im-
portance of manufacturing in eco-
nomic competitiveness. Although
the title of his most recent book, The
Betrayal of American Prosperity: Free
Market Delusions, Americas Decline,
and How We Must Compete in the
Post-Dollar Era (Free Press, 2010),
might seem alarmist to a global au-
dience, Prestowitzs perspective is
nuanced and oriented toward fun-
damentals. He argues for sustained
industrial policy at a national level:
for marshaling the forces of business
leaders, government ofcials, labor
unions, and academics for the sake
of building economic competitive-
ness and (especially) a strong and
distinctive manufacturing base. He
also argues that the global economy
is more likely to thrive when more
countries manage their economies
this way, competing wholeheartedly
even as they trade avidly.
Prestowitz focuses on manufac-
turing in the U.S.; its decline and
revitalization have been a theme in
MIKA: PLS PLACE SPECTRAS HIRES
WHEN AVAILABLE
Clyde Prestowitz
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consumer welfare, by trying to
achieve the greatest variety of goods
at the lowest prices, without any fo-
cus on producers. This combines
with the notion that it doesnt mat-
ter what we make, or how we make
it, because globalization will even
things out in the end. One top of-
cial once said to me, Clyde, dont
worry. The Japanese will sell us cars,
and well sell them poetry. But now
we need jobs, and for that, we need
manufacturing.
S+B: For executives of multinational
companies, it might seem counterin-
tuitive to focus on the prosperity of
their home country as opposed to
global economic growth.
PRESTOWITZ: I agree that its wrong
for the U.S., or any other country, to
adopt a zero-sum mentality. For ex-
ample, a rich and dynamic China
can be of great benet to the United
States but not necessarily. It de-
pends to a tremendous extent on
what kinds of policies the two coun-
tries adopt.
The conventional economic
view is that unfettered global free
trade will automatically produce op-
timal results that Chinas gains
will also be the United States gains,
and vice versa. But that view is based
on simplistic assumptions: no econ-
omies of scale, no transfer of tech-
nology or capital across borders.
Paul Krugman won a Nobel Prize
largely because he pointed out the
problems with these assumptions.
There are two kinds of global
companies. In the United States, the
purpose of the corporation is pri-
marily to provide optimal returns to
shareholders. This leads to a focus
on optimizing short-term results. In
continental Europe and most of
Asia, the state charters the corpora-
tion and gives it a lot of specic ben-
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4
ets; in exchange, the corporation
provides benets to society. This
leads naturally to embracing a co-
herent industrial policy.
S+B: What do you mean by a coher-
ent industrial policy?
PRESTOWITZ: Theres a lot of mis-
understanding about this. Its associ-
ated with preWorld War II Britain
and France, whose governments
supported particular companies as
national champions. People assume
it means having governments pick
winners and losers.
Look instead at countries like
Singapore, Sweden, Taiwan, Ger-
many, Korea, Switzerland, Finland,
and China. Theyre all very differ-
ent; some are democratic, others are
authoritarian. The Finns and Swedes
have strong labor unions, whereas
unions in Taiwan and Singapore are
weak. But all these countries are ec-
onomically successful for the same
reasons. First, their governments fo-
cus on being competitive by pro-
moting selected high-value-added
industries, with a long planning ho-
rizon. Second, they have a high level
of coordination among the govern-
ment, labor unions, and business
management, in investment deci-
sions, wages, and ination rates.
They dont pick winning compa-
nies; instead, they build a consensus
on what each of them has to do to
contribute [to building a vibrant in-
dustry]. Compared to other coun-
tries that have taken a more laissez-
faire approach, their performance is
far superior.
S+B: This approach implies a very
nuanced attitude toward economic
policy being neither all open nor
all closed.
PRESTOWITZ: Absolutely. It means
you have to think about how you in-
vest. President Obama is currently
[in June 2011] putting money into
developing green energy. Thats ad-
mirable, but the amount is relatively
small compared with the massive
programs supporting the same in-
dustries in China, Japan, Korea,
Germany, and Denmark. And pro-
ducers of green energy products in
those countries have free access to
the U.S. market, with much bigger
scale than the U.S.-based producers
have, because their governments
have created much bigger projects. If
the U.S. really wants to create a via-
ble green industry, it will take more
money but money is not enough.
U.S. policies for trade, investment,
and research and development all
have to t together, taking into con-
sideration what other countries are
doing, and nding a few niches in
which to develop dominance.
S+B: Is there a good model of some
sector that has made this kind of in-
vestment work?
PRESTOWITZ: The American semi-
conductor industry has handled it-
self very well over the years. In the
1980s, it was weakened by Japanese,
Korean, and Taiwanese competitors,
all supported by their countries
industrial policies. U.S. industry
leaders explained it to the requisite
ofcials in the U.S. Commerce De-
partment and persuaded them to
act. The result was the U.S.Japan
Semiconductor Agreement of 1986;
it effectively guaranteed U.S. pro-
ducers 20 percent of the Japanese
market and prevented Japanese
dumping [selling underpriced goods
to drive out competition] in the U.S.
market. That was a sensible policy. It
was followed by similar agreements
with Korea and others.
Also in 1987, the government
and 14 companies launched Sema-
tech (the name Sematech derived
from Semiconductor Manufactur-
ing Technology), which was a
50/50 governmentindustry consor-
tium aimed at maintaining the com-
petitiveness of U.S. semiconductor
equipment manufacturers. [In 1994,
Sematechs board voted to discon-
tinue federal support on the grounds
that the U.S. semiconductor indus-
try had fully recovered; the organi-
zation continues today as an interna-
tional innovation consortium.]
S+B: What do you say to business or
government leaders who, rightly or
wrongly, dont trust one another
enough to act this way?
PRESTOWITZ: It should not be that
difcult a problem. Industry needs
government all the time often in
ways that it doesnt fully acknowl-
edge. I hear CEOs talking about
how they hate to go to Washington,
and how U.S. taxes are too high. At
the same time, they want Washing-
ton to do more to protect their intel-
lectual property from appropriation
by Chinese companies. They com-
plain about the ofcial buy China
rules [forcing companies that want
to sell goods in China to produce
there]. And to whom do they com-
Successful governments promote
selected high-value industries, with
a long planning horizon.
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plain? To the U.S. government.
An astute government ofcial
would take advantage of this situa-
tion. He or she would do more
to enforce international intellectual
property rules, and respond more
ercely to Chinas innovation poli-
cies [in which countries entering
China are forced into R&D-sharing
joint ventures]. But the ofcial
would also say to the CEO, Im
taking care of my part of the deal,
but you need to think more broadly
as well.
S+B: Youre asking for sweeping
changes in the way some policymak-
ers think. How do we get from here
to there, especially in a very partisan
political climate?
PRESTOWITZ: It probably takes a
crisis. I think the last economic crisis
wasnt bad enough to force the
changes we need. We should have
nationalized the banks or gotten rid
of their management. The bankers
should have taken a haircut. And we
should have much more discipline
on Wall Street.
The world is going to be tough-
er for Americans than it was be-
tween 1945 and 2000, when the
U.S. had absolute economic domi-
nance. That wasnt normal; were
just getting back to normal now. But
within that new normal, I have great
condence that the United States
can maintain a high and rising stan-
dard of living. If I think of the glob-
al economy like a game of bridge, I
think the U.S. has a better hand of
cards than any other player: better
than the European Union, Japan,
China, or India. But as any bridge
player knows, its very possible to
have good cards and lose if you dont
play the cards well. The U.S. has not
been playing its cards well for quite
some time. If we change the quality
of our game, we wont have to be-
grudge Chinas success or the
success of Brazil, India, or anyone
else. We can all be successful. +
Reprint No. 11302

Art Kleiner
art.kleiner@booz.com
is editor-in-chief of strategy+business.
Arvind Kaushal
arvind.kaushal@booz.com
is a partner with Booz & Company
in Chicago. He leads the rms North
American manufacturing team.
Thomas Mayor
thomas.mayor@booz.com
is a Booz & Company senior executive ad-
visor based in Cleveland, where he focuses
on developing operations strategies and
leading business transformation programs
for the global aerospace, automotive, and
industrial sectors.
by Matthew Le Merle
A
number of unexpected ca-
tastrophes and shortages
dominated the headlines
in the rst quarter of 2011. Japan
was hit by a magnitude 9.0 earth-
quake and tsunami that caused a
nuclear disaster, persistent power
outages, and a host of other major
societal and economic challenges.
China sharply tightened its limits on
exports of rare earth minerals, on
which the information technology,
automotive, and energy industries
rely. The nations of the Middle East
and North Africa experienced severe
political eruptions, including civil
war in Libya and regime-shaking
protests in Algeria, Egypt, Iraq,
Jordan, Syria, and Tunisia, which
pushed oil prices above US$100 per
barrel. Portugal and Greece tottered
on the edge of insolvency, destabiliz-
ing their political leaders. Christ-
church, New Zealand, was hit by
two major earthquakes in quick suc-
cession, and the state of Queensland
in Australia suffered the worst oods
in recorded history in at least six
river systems, resulting in great so-
cial and economic disruption.
All these events are examples of
the kinds of high-magnitude, low-
frequency upheavals that Nassim
Nicholas Taleb labeled black swans,
after a historical reference to their
improbability. In The Black Swan:
The Impact of the Highly Improbable
(Random House, 2007), Taleb de-
ned a black swan as an event with
the following three attributes. First,
it is an outlier, as it lies outside the
realm of regular expectations, be-
cause nothing in the past can con-
vincingly point to its possibility.
Second, it carries an extreme im-
pact. Third, in spite of its outlier
status, human nature makes us con-
coct explanations for its occurrence
after the fact, making it explainable
and predictable.
Whether environmental, eco-
nomic, political, societal, or techno-
logical in nature, individual black
swan events are impossible to pre-
dict, but they regularly occur some-
where and affect someone. Some
observers argue that the frequency
of these events is increasing; others
say global communication networks
have simply made us more aware of
them than we were in the past.
In any case, with the rise of
global business, it is likely that black
swans carry increased risks for your
company, including negative im-
pacts on your customers, suppliers,
partners, assets, operations, employ-
ees, and shareholders. Today, not
only can a catastrophe in one part of
the world affect the sourcing, manu-
facture, shipping, and sale of prod-
ucts locally, but the interconnections
of global nancial, economic, and
political networks ensure that the ef-
fects of such events ripple around
the world.
ERM Is Not Enough
Typically, a large company relies on
its enterprise risk management
(ERM) department to identify po-
tential business disruptions, map
out their most likely effects, and de-
velop mitigation plans and preven-
tive actions to reduce the risk expo-
sures. After the multiple and severe
disruptions of the past decade, start-
ing with the terrorist attacks of
September 11, 2001, the ERM func-
tions at most companies have be-
come well staffed with risk manag-
ers who work diligently to protect
their company across strategic, op-
erational, nancial, and hazard risk
categories. Through this process,
ERM has become an indispensable
member of the global functional
teams in most large companies.
Most ERM groups focus their
attention on the risks that businesses
most frequently encounter such
as whether the enterprise is comply-
ing with regulations, suitably ac-
counting for its activities, and oper-
ating in an ethical and legal manner
rather than on black swans. And
this approach is appropriate. First,
ERM resources are limited and
must be invested in mitigating high-
frequency risks, as well as servicing
the growing demands imposed by
Sarbanes-Oxley and other nancial
and regulatory requirements. Sec-
ond, high-magnitude, low-frequen-
cy events can stem from sources too
numerous and too varied for the
ERM team to identify in full. Third,
the internal politics and culture of
many large companies unintention-
ally create blind spots that can be
very difcult to penetrate for inter-
nal staff members using standard
ERM tools.
How to Prepare for a
Black Swan
Disrupter analysis can help assess the risks of
future catastrophic events.
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stand black swans.
The analysis consists of a four-
step process that will be familiar to
professional ERM managers. It
quickly and efciently maps the
shape of the enterprise, determines
the breadth of potential disrupters,
asks the what ifs to determine how
severely certain events could stress
the enterprise, and then implements
the contingency plans.
1. Mapping the enterprise. The
shape of a company is determined
by a number of factors, starting with
its geographic footprint, its opera-
tions, the composition and con-
struction of its supply chain, and its
channel partners and customers. In
mapping these elements, it is impor-
tant to look beyond rst-order rela-
tionships. Recently, for example,
Apples supply of lithium-ion batter-
ies, used in iPods, suddenly dried
up. Unfortunately, as Apple quickly
discovered, almost all its suppliers
purchased a critical polymer used to
make the batteries from the Kureha
Corporation, a Japanese company
whose operations were disrupted by
the March 11 earthquake. In fact,
Kurehas share of the global market
for polyvinylidene uoride, which is
used as a binder in lithium-ion bat-
teries, is 70 percent. This is why ana-
lysts must also map second-order
relationships (the suppliers of the
companys suppliers). In some criti-
cal cases, even third-order relation-
ships should be mapped.
After the shape of the enterprise
has been mapped with the help of
the ERM staff, nance and other
group functions participate in team
sessions to map sources and concen-
trations of revenue, prot, and capi-
tal. Then the often-hidden concen-
trations that exist in go-to-market
activities including the businesss
products, services, channels, and
customers are considered.
A determination of the com-
panys shape must also include a
mapping of industry structure and
competitive dynamics, as well as the
rms position in both. To deter-
mine how a black swan event could
stress a company, the team needs to
understand the foundation on which
the status quo rests.
2. Creating the disrupter list.
The key to creating a list of potential
black swan events is to cast a wide
net by cataloging possible cata-
strophic environmental, economic,
political, societal, and technological
events. The team should add much
more to the list than ERM typically
does, and continue until the net is
wide enough to include representa-
tives of as many different black swan
categories as possible.
After the long list is compiled,
the events are categorized by the
type of impact they might have on
the business. The result is a shorter,
more workable synthesis that encap-
sulates the black swan events that
could threaten the company.
Thus, most ERM teams can as-
sure their board and executive team
that they have covered the more
common risk areas of compliance,
ethics, nance, and accounting, as
well as safety, quality, and customer
experience. But ERM simply does
not have the capacity to also moni-
tor high-magnitude, low-frequency
disrupters on a continuous or regu-
lar basis.
This does not mean that black
swans can or should be ignored.
These events can threaten a com-
panys survival, and boards and
senior leaders are responsible for
protecting shareholders and other
stakeholders. They must ask, What
else can go wrong?
A Disrupter Analysis Stress Test
The solution to this conundrum is
disrupter analysis. Disrupter analy-
sis does not seek to predict black
swans; that cannot be done. And it
is not meant to replace ERM, but
rather to complement it. Disrupter
analysis which is typically con-
ducted by a separate team working
in collaboration with the ERM staff,
functional and business unit leaders,
and senior management is de-
signed to periodically administer a
stress test to a large company in
order to assess its ability to with-
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3. Asking what if. Armed with
the enterprise map and a concise list
of disruptive events, the analysis
team can begin to ask what would
happen to the company if the events,
or even combinations of events, oc-
curred. The likelihood of occur-
rence is not a major concern here;
these are, after all, black swans.
Rather, the team needs to determine
the relative impact and consequenc-
es of a given catastrophe.
This stage of the analysis often
produces surprising results. Revela-
tions can include greater concentra-
tions of risk than were previously
recognized, more severe and unex-
pected consequences, and, some-
times, seemingly obvious mistakes
in how an enterprise has been
shaped. The widespread adoption of
offshoring strategies has spawned
one example. At rst, offshoring
spread out the exposures and risks
of operational disruptions because
large companies were expanding
their ranks of partners and their
geographic footprints. But more re-
cently, new exposures have arisen:
Offshoring has created greater con-
centrations of risk in far-ung loca-
tions, where high-magnitude, low-
frequency risks are often more varied
and where the likelihood of rapid
recovery can be much lower. Con-
sider what might happen to the
worlds consumer electronics and
apparel industries, for example, if
the recent labor unrest in southern
Chinese factories develops into a
disruptive labor movement similar
to what the West experienced dur-
ing the early 20th century.
4. Implementing contingency
plans. Typically, the analysis team
systematically generates mitigation
options for each major what if in-
sight. It looks for options that ad-
dress multiple risks, and prioritizes
them by the magnitude of risk expo-
sure as well as the expense and ease
of implementation.
Sometimes companies complete
this nal step on their own, using
their ERM departments. The ERM
staff usually participates throughout
the analysis and is the most logical
and effective group to shore up any
major exposures. However, some-
times internal complexities warrant
third-party involvement. Also, most
boards prefer to involve an external,
objective set of eyes, especially when
recommendations include critical
strategic and operational issues.
No company can be completely
prepared for every possible black
swan event. But the board, the ex-
ecutive team, and the ERM staff
can complement the day-to-day
work of the ERM function with pe-
riodic disrupter analyses. These
analyses can ensure that the com-
pany has adequately focused its at-
tention on high-magnitude, low-
frequency events, performed stress
tests on its tness in the face of such
events, and prepared itself for unex-
pected catastrophes. +
Reprint No. 11303
Matthew Le Merle
matthew.lemerle@booz.com
is a partner with Booz & Company based
in San Francisco. He works with leading
technology, media, and consumer
companies, focusing on strategy, corporate
development, marketing and sales,
organization, operations, and innovation.
10 Clues to Opportunity
Market anomalies and incongruities may point the
way to your next breakthrough strategy.
by Donald Sull
D
uring their heyday in
the late 19th and early
20th centuries, transatlan-
tic cruise lines such as the Hamburg
America Line and the White Star
Line transported tens of millions of
passengers between Europe and
the United States. By the 1960s,
however, their business was being
threatened by the rise of a disruptive
new enterprise, namely, nonstop
transatlantic ights. As it happened,
the cruise ship lines had one poten-
tial strategy with which to save their
business: vacation cruises. Starting
in the 1930s, some of these lines
had sailed to the Caribbean during
the winter, thus using their boats
when rough seas made the Atlantic
impassable. And in 1964, when a
new port was opened in Miami,
Fla., the pleasure cruise business be-
gan to boom.
But the great cruise lines missed
this breakthrough opportunity.
They saw their protability fall
while dozens of startups, including
Royal Caribbean and Carnival, ret-
rotted existing ships to offer plea-
sure cruises and built an entirely
new travel and leisure category that
continues to grow today.
Managers and entrepreneurs
walk past lucrative opportunities all
the time, and later kick themselves
when someone else exploits the strat-
egy they overlooked. Why does this
happen? Its often because of the
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natural human tendency known to
psychologists as conrmation bias:
People tend to notice data that con-
rms their existing attitudes and be-
liefs, and ignore or discredit infor-
mation that challenges them.
Although it is difcult to over-
come conrmation bias, it is not
impossible. Managers can increase
their skill at spotting hidden oppor-
tunities by learning to pay attention
to the subtle clues all around them.
These are often contradictions, in-
congruities, and anomalies that
dont jibe with most of the prevail-
ing assumptions about what should
happen. Here is my own top 10
eld guide to clues for hidden break-
through opportunities, observed in
a wide variety of industries, coun-
tries, and markets. If you nd your-
self noticing one or more of them, a
major opportunity for growth could
be lurking behind it.
1. This product should already
exist (but it doesnt). As the accesso-
ries editor for Mademoiselle maga-
zine in the early 1990s, Kate Brosna-
han spotted a gap in the handbag
market between functional bags
that lacked style and extremely ex-
pensive but impractical designer
bags from Herms or Gucci. Bros-
nahan quit her job, and with her
partner Andy Spade, founded Kate
Spade LLC, which produced fabric
handbags combining functionality
and fashion. These attracted the at-
tention of celebrities such as Gwyn-
eth Paltrow and Julia Roberts. Many
well-known product innovations
including the airplane, the mobile
phone, and the tablet computer
began similarly, as products that
people felt should already exist.
2. This customer experience
doesnt have to be time-consuming,
arduous, expensive, or annoying (but
it is). Consumer irritation is a reli-
able indicator of a potential oppor-
tunity, because people will typically
pay to make it go away. Reed Hast-
ings, for example, founded Netix
Inc. after receiving a US$40 late fee
for a rented videocassette of Apollo
13 that he had misplaced. Charles
Schwab created the largest low-cost
brokerage house because he was
fed up with paying the commissions
of conventional stockbrokers. Scott
Cook got the idea for Quicken after
watching his wife grow frustrated
tracking their nances by hand.
3. This resource could be worth
something (but it is still priced low).
Sometimes an asset is underpriced
because only a few people recognize
its potential. When a low-cost air-
line such as easyJet or Ryanair an-
nounces its intention to y to a new
airport, real estate investors often
leap to buy vacation property near-
by. They rightfully expect a jump in
real estate values. Similarly, the
founders of Infosys Technologies
Ltd., Indias pioneering provider of
outsourced information technology
services, were among the rst to rec-
ognize that Indian engineers, work-
ing for very low salaries, could pro-
vide great value to multinational
clients. The company earned high
prots on the spread between what
they charged clients and what they
paid local engineers.
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4. This discovery must be good
for something (but its not clear what
that is). Researchers sometimes rec-
ognize that they have stumbled on a
promising resource or technology
without knowing the best uses for it
right away. The resulting search for a
problem to solve can lead to great
protability. One example was the
founding of the ArthroCare Corpo-
ration, a $355 million producer of
medical devices based on a process
called coblation, which uses radio
frequency energy to dissolve dam-
aged tissue with minimal effect on
surrounding parts of the body. Med-
ical scientist Hira Thapliyal, who
codiscovered this process, founded a
company to offer it for cardiac sur-
gery, but that market turned out to
be too small and competitive to sup-
port a new venture. Undeterred, he
looked for other potential uses, and
found one in orthopedics, where
there are more than 2 million ar-
throscopic surgeries per year.
5. This product or service should
be everywhere (but it isnt). Some-
times people chance upon an attrac-
tive business model that has failed to
gain the widespread adoption it de-
serves. Two archetypal retail food
stories illustrate this. In 1954, res-
taurant equipment salesman Ray
Kroc visited the McDonald broth-
ers hamburger stand in southern
California, and convinced them to
franchise their assembly-line ap-
proach to ipping burgers. In 1982,
coffee machine manufacturing ex-
ecutive Howard Schultz visited a
coffee bean producer called Star-
bucks in Seattle. He recognized the
potential of a chain restaurant based
on European coffee bars, and he
joined Starbucks, hoping to con-
vince the companys leadership to
convert their retail store to this
format. When they didnt, he start-
ed his own coffeehouse chain, later
buying the Starbucks retail unit as
the core of his new business.
6. Customers have adapted our
product or service to new uses (but
not with our support). Chinese appli-
ance maker Haier Group discovered
that customers in one rural province
used its clothes washing machines to
clean vegetables. Hearing this, a
product manager spotted an oppor-
tunity. She had company engineers
install wider drain pipes and coarser
lters that wouldnt clog with vege-
table peels, and then added pictures
of local produce and instructions on
how to wash vegetables safely. This
innovation, along with others in-
cluding a washing machine designed
to make goats-milk cheese, helped
Haier win share in Chinas rural
provinces, while avoiding the cut-
throat price wars that plagued the
countrys appliance industry.
7. Customers shouldnt want
this product (but they do). When
Honda Motor Company entered the
U.S. motorcycle market in the late
1950s, it expected to sell large mo-
torcycles to leather-clad bikers. De-
spite a concerted effort, the compa-
ny managed to sell fewer than 60 of
its large bikes each month, far short
of its monthly sales goal of 1,000
units. Then a mechanical failure
forced the company to recall these
models. In desperation, it promoted
its smaller 50cc motorbike, the Cub,
which Honda executives had as-
sumed would not interest the U.S.
market. When the smaller bikes sold
well, Honda realized it had discov-
ered an untapped segment looking
for two-wheel motorized transporta-
tion. (The campaign is still remem-
bered for its catchphrase, You meet
the nicest people on a Honda.)
8. Customers have discovered a
product (but not the one we offered).
Joint Juice, a roughly $2 million
company that produces an easy-to-
digest glucosamine liquid, was
founded by Kevin Stone, a promi-
nent San Francisco orthopedic sur-
geon. He learned about the nutrient
from some of his patients, who took
it for joint pain instead of the ibu-
profen he had prescribed. Many
doctors might have ignored this or
even scolded their patients for fall-
ing prey to fads, but Stone recog-
nized he might be missing some-
thing. He looked up the clinical
research on glucosamine in Europe,
where it was the leading nutritional
supplement. (Veterinarians, he dis-
covered, swore by it, and their
patients fell for neither fads nor
placebos.) Then he built a business
around it.
9. This product or service is
thriving elsewhere (but no one offers
it here). In the early 1990s, a Swed-
ish business student named Carl Au-
gust Svensen-Ameln tried to store
some of his belongings in Sweden
while at school in Seattle, but found
that all the local self-storage facilities
were full. He studied the storage in-
dustry, already prevalent in the
United States, and discovered a
business model characterized by
high rents, low turnover, and negli-
gible operating costs. Yet self-stor-
age, at the time, was virtually non-
existent in continental Europe.
Svensen-Ameln and a friend from
business school set up a partnership
with an established U.S. company,
Shurgard Storage Centers Inc. The
resulting company, European Mini-
Storage S.A., was the rst of several
such companies that Svensen-Ameln
started in Europe, to great success.
10. That new product or service
shouldnt make much money (but it
does). Established competitors are
often surprised when upstart rivals
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do well. In his 2008 book, The Part-
nership: The Making of Goldman
Sachs (Penguin Press), Charles D.
Ellis noted that for decades, Gold-
man Sachs partners had avoided in-
vestment management, which they
believed generated lower fees than
trading and investment banking.
When Donaldson, Lufkin & Jen-
rette Inc. published its nancial
performance as part of a 1970 stock
offering, Goldman partners were
startled to learn that fees and bro-
kerage commissions on frequent
trades added up to a highly prot-
able business. Shortly thereafter,
Goldman expanded into managing
corporate pension funds, and ag-
gressively built its business.
Incongruities like these can of-
fer a critical clue about where your
assumptions no longer match real-
ity. From there, you are more likely
to uncover the kinds of opportuni-
ties that you might otherwise have
missed and that your competitors
still dont recognize. Start by asking
yourself, What are the most unex-
pected things happening in our
business right now? Which competi-
tors are doing better than expected?
Which customers are behaving in
ways we hadnt anticipated? Take
yourself through the list of top 10
clues. Leaders who consistently no-
tice and explore anomalies increase
the odds of spotting emerging op-
portunities before their rivals. +
Reprint No. 11304
Donald Sull
dsull@london.edu
is a professor of strategic and international
management at the London Business
School, where he is also the faculty
director for executive education. His books
include The Upside of Turbulence: Seizing
Opportunity in an Uncertain World (Harper
Business, 2009).
40% 20%
0 20% 40% 60% 80% 100%
Shopper Marketing
Social Media
Internet Brand
Advertising
Mobile Marketing
Owned Media
Paid Search
Print Media
Other Paid Media
Television
Consumer Promotions
Trade Promotions
BY MORE THAN 5%
BY 0 TO 5%
Will DECREASE Spending
BY MORE THAN 5%
BY 0 TO 5%
Will INCREASE Spending
Expected Growth in CPG Manufacturers Advertising and Promotion Mix
Average Annual Change, 20112014
DATA POINTS
Finding Shoppers
Where They Live

In consumer packaged goods (CPG), shopper marketing
efforts to observe and inuence consumers at the time of
purchase is one of the hottest and fastest-growing activities
in advertising and promotions. Shopper marketing includes
in-store shelf displays, digital kiosks, shopping list apps,
e-coupons, and more, all of which generate digital data that
marketers can use to further rene their pitches. In a recent
Booz & Company survey of senior CPG executives, 83 percent
of respondents said their companies plan to increase their
investments in shopper marketing, and a majority (55 percent)
ranked it as their number one investment, with plans to boost
spending more than 5 percent per year, followed close behind
by several forms of online media spending, while traditional,
ofine activities are in decline.
Note: Figures exclude neutral responses.
Source: Grocery Manufacturers Association/Booz & Company Survey of CPG
Manufacturers and Retailers, Summer 2010 (manufacturer responses only)
Link to full report: www.booz.com/shopper-marketing-4.0
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ENERGY
by Christopher Dann, Sartaz Ahmed,
and Owen Ward
I
n 2007, renewable energy sourc-
es were poised for accelerated
growth. Then the global eco-
nomic downturn intervened, de-
pressing energy demand in general
and casting particular doubt on the
business case for wind, solar, bio-
mass, and geothermal energy. Now
that the sector is beginning to grow
again, some industry observers are
still questioning whether the market
is resilient enough to continue that
growth, considering the volatility of
energy prices and a shifting political
climate. The answer is more opti-
mistic than one might expect, be-
cause the market has evolved in sev-
eral important ways during the last
few years; it is unlikely to experience
the periods of decline or stagnation
we have seen in the past. One of the
hallmarks of the renewables sector
today is its structural diversity in
terms of technologies, players, and
geographic regions and that will
make all the difference.
The story of the new wave of
renewables begins in 2005, when a
number of diverse factors came to-
gether. The first was an incentive
for change: Power prices jumped as
natural gas prices reached a histori-
cal high. The second was an oppor-
tunity: Technology advances led to
significant reductions in renewable
energy costs. Finally, the investment
community, flush with capital, be-
gan to invest in the sector in earnest.
But by far the biggest driver be-
hind the growth of renewables dur-
ing this time was meaningful policy
support, at both federal and state
levels in the United States, and also
around the world. With a focus on
fighting climate change and jump-
starting new industries, legislators
adopted a wide range of incentive
mechanisms to support the devel-
opment and adoption of renewable
energy technologies.
Recognizing a favorable invest-
ment environment, private equity
and venture capital firms committed
more and more money to the clean-
tech sector, which is heavy in re-
newables, between 2006 and 2008.
At the peak, these investments ex-
ceeded US$10 billion per year in
North America alone. Then the
global financial crisis hit.
Boom to Bust to Balance
During the first year of the crisis,
pessimism about the sector returned.
Many of the underlying factors that
had converged to drive demand for
renewables faded, and others became
highly uncertain. For example, one
of the key elements supporting the
business case for renewables was the
high price of electric power, which
in turn was anchored to high natu-
ral gas prices. That dynamic shifted
with the development of unconven-
tional gas resources; most analysts
forecast that natural gas prices will
remain below $7 per million BTUs
for the foreseeable future.
The worsening economic con-
ditions have also brought a shift
in political priorities, one that fa-
vors budgetary restraint over fresh
spending on environmental issues.
Some federal subsidies support-
ing renewables may be sacrificed in
forthcoming cutbacks. State and lo-
cal support could likewise fall prey
to state budget reductions.
Renewable Energy at
a Crossroads
The wind, solar, biomass, and geothermal
sector has grown in fits and starts and
now may have the momentum to become a
self-sustaining industry.
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The economic slowdown also
caused overall electricity demand to
decline, resulting in overcapacity in
most U.S. power markets. Less gen-
eration translated into lower power
prices, which weaken the business
case for renewables.
Yet despite this uncertainty, the
market continued to evolve in im-
portant ways, setting the stage for
a return to economic viability and
growth. This evolution took place
along two broad dimensions.
Technological diversity. The
renewables sector is far more diver-
sied today than it was in the early
part of the 1980s, when renewable
energy generation (other than from
long-established hydro sources) was
primarily reliant on biomass. Bio-
mass both wood and waste
accounted for more than 70 percent
of renewable power generation in-
stallations through 2000. Although
it was a convenient and economical
source of power in areas like Cali-
fornia and the northeastern United
States, biomass demonstrated limit-
ed potential for either rapid techno-
logical improvements or large-scale
capacity development. Wind and
solar technologies, meanwhile, were
in their embryonic stage.
Today, the renewable energy
portfolio in most countries is much
more balanced, in large part thanks
to wind and solar, which have grown
substantially over the last decade.
The diversity extends beyond the
high-level technology categories
such as wind, biomass, and geother-
mal to the subsectors underpinning
them. For instance, the proliferation
of different solar technologies such
as thermal and photovoltaic (PV)
and the further subsets of thin-lm
and crystalline silicon helps to
ensure that product characteristics
meet the targeted needs of different
customers (for example, utility ver-
sus residential).
This technological diversity al-
lows local governments and busi-
nesses to mix and match sources
of renewable energy. Consider the
case of wind power, the most wide-
spread renewables technology. Hav-
ing already beneted from $3 bil-
lion spent on R&D globally over the
past decade, it may have reached the
point of diminishing investment re-
turns. Still, the slowdown has led to
an estimated 30 percent overcapac-
ity, which will result in lower equip-
ment costs and thus help sustain
steady growth in wind installations.
Meanwhile, the impact of
Chinese PV module manufacturers
cannot be overstated. These manu-
facturers have increased their share
of the global market in the last four
years to more than 50 percent. To-
day, the top 10 Chinese PV mod-
ule manufacturers have six times
the manufacturing capacity of the
top 10 U.S. module manufacturers.
Building on their strong position in
the module segment, these compa-
nies will continue to vertically inte-
grate, setting themselves up to de-
liver further cost reductions through
both innovation and investments.
Geographic diversity. Renew-
able energy generation is no longer
conned to certain regions around
the world, and its new geographic
reach has positive implications for
political support and implementa-
tion. For example, in the U.S. six
years ago, just two markets the
western and southeastern regions
accounted for more than 55 per-
cent of the nations renewable energy
generation capacity. Their share is
now down to about 40 percent; oth-
er regions have grown at a faster clip.
Several states with comparatively lit-
tle sunlight Massachusetts, New
Jersey, and Oregon have seen sig-
nicant growth in PV installations
thanks to generous state subsidies.
Renewable energy generation
and supporting industries have be-
come an integral part of local econ-
omies. In the industrialized world,
with few other industries in growth
mode, local governments are begin-
ning to see renewables as a source of
opportunity. In the U.S., local poli-
ticians and economic development
ofcials in such locations as Florida
and Arizona have extended a range
of tax breaks and other incentives to
attract renewable energy companies.
The sectors geographic diver-
sity has also helped it address spe-
cic technical challenges, including
the intermittent nature of renewable
energy sources. Distributing renew-
ables capacity more broadly across
the country helps to mitigate such
variability (that is, the wind blows in
different places at different times).
Too Broad to Fail
Several decades ago, the renewables
landscape was relatively bare and un-
Chinese PV module manufacturers
have increased their share of
the global market in the last four
years to more than 50 percent.
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complicated; today, a diverse range
of new constituents have joined with
industry veterans to form a strong
ecosystem of developers, suppliers,
customers, financiers, and others.
The emergence of this ecosystem,
which accelerated during the recent
boom, has brought needed innova-
tion and capabilities to the industry,
and helped to reduce its reliance on
government subsidies.
We segment the new players
into three categories: those that pri-
marily improve technology, those
that improve project economics, and
those that improve commercializa-
tion and marketing.
Entrants improving technol-
ogy. In recent years, market entrants
from other, established industries
have brought new technologies into
the renewables industry, which has
helped lower installed costs and
improve efficiency. Nowhere is this
more evident than in the solar mar-
ket. General Electric Company is
reentering the solar playing field, di-
rectly taking on market leader First
Solar Inc. Boeing Company is apply-
ing technology first developed in its
Christopher Dann
christopher.dann@booz.com
is a partner with Booz & Company based
in San Francisco. He specializes in
developing strategy, assessing risk, and
facilitating decision making for clients in
the U.S. power, gas, and renewable
energy industries.
Sartaz Ahmed
sartaz.ahmed@booz.com
is a principal with Booz & Company based
in Washington, D.C. She specializes in de-
veloping strategy for clients in the energy
and infrastructure sectors.
Owen Ward
owen.ward@booz.com
is a senior associate with Booz & Company
based in New York. He specializes in
assessing markets, investment decisions,
and risks for clients in the power
generation, renewable energy, and nuclear
energy industries.
satellite business to achieve poten-
tially record-breaking efficiencies for
solar panels.
Technology firms are increas-
ingly integrating downstream on
the renewables value chain. For ex-
ample, leading Chinese solar PV
wafer and cell manufacturers, such
as ReneSola and JA Solar, have ex-
panded their businesses to include
module assembly, a critical link in
the value chain with low barriers to
entry. Further downstream, Sharp
and First Solar, manufacturers of
solar panels and modules, have ac-
quired large solar project developers
over the last two years.
Entrants improving project
economics. The renewables sector
has experienced dramatic growth
in the number of project developers,
financial players, and other interme-
diaries in recent years, and this trend
has been one of the most critical fac-
tors behind the recent boom.
Large international merchants
looking for geographic diversifica-
tion and small startups with hopes
of landing their first customers are
among the bevy of project develop-
ers that have flooded the renewables
sector over the past several years.
Their participation has helped to
identify the most attractive sites
and to secure financing, creating a
steady pipeline of renewables instal-
lations with great potential. Signifi-
cant competition among developers
has helped maintain pricing disci-
pline in power purchase agreements.
Companies such as SolarCity have
also helped stoke latent residential
demand by leasing solar PV systems
for home installations, thereby ad-
dressing potential customers con-
cerns about financing the expensive
systems and managing their main-
tenance. Although consolidation is
likely to occur in the coming years,
the robust developer market has al-
ready provided a strong foundation
on which the industry can continue
to grow.
Meanwhile, in recent years a
number of firms have begun special-
izing in renewables financing, while
tax equity partners have become in-
creasingly involved; these solutions
have offered innovative approaches
to overcoming the limitations of
existing financial incentives. Infra-
structure funds joined them by add-
ing renewables positions for long-
term steady cash flows, a strategy
they will likely continue.
Intermediaries such as renew-
able energy credit (REC) brokers
and green power marketers have
provided additional channels to
improve project economics. The
creation of companies such as Ster-
ling Planet and Green Mountain
Energy, which certify and market
low-carbon-footprint electricity to
residential and business customers,
has enabled project developers to
secure incremental sources of rev-
enue to achieve positive net present
value (NPV).
Going forward, the continued
growth of smart grid companies and
energy storage providers will play
a critical role in enabling the next
wave of renewables development.
Successful development of eco-
nomical energy storage technologies
would solve many of the intermit-
tence challenges faced by wind and
solar, improving project economics.
Meanwhile, the widespread adop-
tion of smart meters and variable
pricing will make solar power more
attractive, given that its greatest out-
put is during the day, when demand
is at its peak.
In addition, investor-owned
utilities will likely begin to diversify
upstream into new parts of the re-
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newables value chain. Companies
such as Duke Energy and Exelon
have already acquired large asset-
ownership and development posi-
tions. Utilities that build and own
the renewable energy generation
and transmission infrastructure,
as opposed to simply acquiring en-
ergy through power purchase agree-
ments, will have more balance sheet
exibility than smaller renewables
nancial players to build the new
transmission lines required to bring
renewable power from remote areas
to load centers.
Entrants improving com-
mercialization and marketing. The
introduction of new and innova-
tive business models particularly
those that address the technologys
sometimes steep up-front costs
will likely decide the pace at which
renewables are deployed in the mar-
ketplace. In the U.S., one of the
most important drivers of growth
in commercial solar installations
was the introduction of long-term,
xed-price contracts for electricity.
The SunPower Corporation, a solar
technology manufacturer, and other
companies have introduced new
pricing structures whereby they in-
stall solar panels on customer roof-
tops and charge monthly fees, simi-
lar to a lease arrangement, rather
than requiring the customer to incur
large, up-front capital expenditures.
Similar approaches will be
needed if the sector is to fully tap
the potential of the residential and
small commercial market. Different
segments will have different wants
and needs, but the most successful
offerings are likely to include quick
and economical installations, pre-
dictable power prices with no up-
front investment, and more elegant
designs. A number of companies
are already engaged in sophisticated
commercialization and marketing;
additional business model innova-
tion will no doubt occur as the re-
newables market matures.
Application Diversity
Any one of these forces would have
led to some change in the industry.
Together, they are pushing it past
the tipping point to large-scale vi-
ability. Gone are the days when solar
PV panels were considered only for
small rooftop systems. Renewables
technologies have broadened in
scope to the point at which they can
be accepted as contributors to any
regional energy mix.
At the same time, renewables are
nding a home at a micro scale
with some macro effect. Consumer
goods, such as briefcases with solar
power chargers for mobile phones,
are expected to spur a compound
annual growth rate of 30 percent in
the $300 million market for exible
thin-lm PV modules.
The military is another likely
channel for future growth. The en-
ergy demands of the military are
considerable: Every gallon of fuel
that reaches Afghanistan from the
U.S. requires six more gallons to get
it there. Solar PVs have the potential
to substantially alter the militarys
dependence on fossil fuels.
PV modules could also bring
electricity to many in emerging
economies, where the grid is under-
developed and consumer electron-
ics such as mobile phones have
leapfrogged the infrastructure built
for them.
Much work remains to make
these markets commercially viable
for PV applications, but all have
the potential to drive disruptive
change. One day, these new markets
could dwarf the traditional rooftop
solar-panel market.
A New Level of Scrutiny
Renewables have been a hotbed
of activity in the past decade,
and the evolving entrepreneurial en-
vironment continues to present op-
portunities for investment.
However, given the uncertainty
and complexity in the renewables
marketplace, investment decisions
are now much more difcult, re-
quiring decision-making skills and
tools that were not essential before
the economic downturn. Going
forward, investment decisions will
need to explicitly address uncertain-
ty through effective risk manage-
ment and contingency planning.
For utilities, renewables are not
viable baseload technologies. Even
as a complementary energy source,
they carry costs that make them
uncompetitive without subsidies.
Power source decisions will there-
fore depend largely on local con-
ditions, including the presence of
renewable energy mandates, govern-
ment incentives, and site availabil-
ity. Here too, the array of incentives
and technologies will make compre-
hensive business case planning and
risk analysis imperative. Many utili-
ties are more accustomed to man-
Gone are the days when solar
PV panels were considered only
for small rooftop systems.
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aging older generation assets and
will need to consider new operating
models and program management
capabilities.
Meanwhile, for large energy
users, rooftop solar PV remains the
only alternative to the grid. Although
historically it has been the most ex-
pensive renewables option, PV costs
are falling, in part because a grow-
ing number of installers are willing
to take on the investment risk. In
locales with sufcient tax and other
incentives (for example, those of-
fered by the California Solar Initia-
tive), investments are NPV positive.
Still, users need to be cognizant of
ongoing technological, regulatory,
and political risks that may shift the
economics against them.
Furthermore, it will be critical
for companies to develop the capa-
bilities needed to both evaluate and
add value to the assets and tech-
nologies that are likely to reenter
the market in the months and years
ahead. The relatively favorable in-
vestment climate of the past decade
attracted a number of companies
that ultimately lacked the expertise
to endure and win in todays more
difcult investment environment.
For example, a number of small
utilities and other companies made
subscale investments in renewables
where they could add little value,
and they may soon be forced to di-
vest those assets. The companies
that can pick up the assets and posi-
tion them to create a sustained com-
petitive advantage will be the ones
that establish the right to win in this
market. Clear industry leaders are
already starting to emerge, but plen-
ty of opportunity remains for those
with the vision and the capabilities
to power the next move forward in
global energy markets. +
Reprint No. 00082
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HEALTHCARE
by Joyjit Saha Choudhury,
Akshay Kapur, and Sanjay B. Saxena
W
hen it comes to health-
care, many nations are
not getting enough for
their money. For example, in the
U.S., an estimated 30 to 40 percent
of total healthcare spending is wast-
ed through systemic underuse, over-
use, and misuse, even as costs climb
at a rate that far exceeds overall infla-
tion. Although medical costs in the
U.S. are among the highest in the
world, its healthcare system ranks
only 37th in quality, according to
the World Health Organization. A
study by the Commonwealth Fund
found that the U.S. spends twice as
much per capita on medical care as
do other industrialized nations, but
is in last place in preventing deaths.
The United States is not alone
in its healthcare conundrum. Statis-
tics like these and the accompanying
warnings about the unsustainable
nature of healthcare systems around
the world have been circulating for
years, if not decades.
Many government leaders are
heeding these warnings. Some are
undertaking massive reform initia-
tives, including President Barack
Obamas efforts in the U.S., which
resulted in the Affordable Care Act,
and Chancellor Angela Merkels
ongoing efforts to stem the escalat-
ing cost of healthcare in Germany.
But these national efforts raise fun-
damental questions. To what ends
should reform be directed? How will
those ends be achieved?
The answer to the first question
is simple: Reform should be directed
at bringing healthcare costs under
control while improving the qual-
ity of care and patients experience.
In the U.S., this conclusion is often
translated into an immediate goal
of limiting healthcare cost increases
to the growth rate of the consumer
price index.
This goal is easy to set, but how
is it to be achieved? Unlike a busi-
ness, a healthcare system cant sim-
ply slash head count, operations, or
overhead to bring costs under con-
trol. The impact on patients access
to medical services and the quality
of care would be draconian.
Instead, most systems face the
challenge of controlling costs while
expanding patient access and im-
proving care quality. The only way
to meet this challenge is to focus on
care delivery the primary source
of healthcare costs. In the U.S., care
delivery, which includes physician
and clinical services, hospital care,
prescription drugs, tests, and proce-
dures, accounted for approximately
85 percent of the US$2.5 trillion
spent on healthcare in 2009 (the re-
mainder is investment and adminis-
trative expense). To achieve the qual-
ity improvement and cost reduction
needed to ensure the long-term sta-
bility of the system and the success
of the medical industry, healthcare
systems need to transform the full
spectrum of care delivery.
Systemic Obstacles
The already considerable challenge
of care-delivery transformation is
magnified by inefficiencies that per-
sist throughout healthcare systems
and contribute to rising costs. These
inefficiencies are often rooted in the
structures of healthcare systems. In
the U.S., for instance, four major
structural flaws impede the efficient
delivery of high-quality care.
Transforming
Healthcare Delivery
As governments seek to expand services more
cost-effectively, the stakeholders who pay the bills
must collaborate.
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First, healthcare providers, such
as doctors and hospitals, get paid for
the type, volume, and complexity of
the care they deliver, not the quality
of care. At best, this fee-for-service
payment model creates a disturbing
disconnect between providers and
care quality. At worst, it gives rise
to abusive practices, such as churn-
ing (the unnecessary scheduling of
repeat visits by physicians to bolster
revenue or productivity) and self-
referral (the prescription of un-
needed tests or services at facilities
in which the referring provider has
an ownership stake).
Second, many providers are
needed to treat serious illnesses,
and the lack of coordination among
them adds complexity and cost to
care, as well as myriad opportunities
for medical error. For example, the
Cleveland Clinic review of senti-
nel events unanticipated events
in a healthcare setting that result in
death or serious physical or psycho-
logical injury to a patient, but that
are not related to the natural course
of the patients illness and near
misses in 2007 and 2008 found that
43 percent were related to subopti-
mal communication.
Third, the lack of adoption of
proven, standardized approaches
to care and evidence-based guide-
lines frequently results in expensive,
flawed care. Intermountain Health-
care, which runs hospitals and clin-
ics in Utah and Idaho, offers a good
example of gains that can be cap-
tured. By implementing standard-
ized care protocols, the company
successfully halved both adverse
drug events and the death rate for
coronary bypass surgery.
Fourth, patients are largely
disengaged from their own medi-
cal care. In the U.S., 81 percent of
patients are insured through govern-
ment payors, such as Medicare, or
through plans offered by their em-
ployers, and as a result do not need
to consider the cost-benefit trade-
offs inherent in care decisions or
the overall cost of their care. Some
patients may prefer to remain unin-
volved, but the system itself fails to
reward informed decision making
by other patients, even when it could
lead to more effective prevention
and treatment. Even consumers who
would never buy a flat-screen televi-
sion or a laptop without thoroughly
researching their options are reluc-
tant to question physicians about de-
cisions that are often critical to their
future well-being.
Bold Goals for Reform
To overcome the structural barriers
to systemic reform and transform
care delivery, the three principal
stakeholders in healthcare systems
providers, payors, and patients
have to work together toward
common goals. This will demand
some difficult adjustments in the
traditional stances of these three
stakeholder groups, but their closer
alignment throughout care delivery
is the best approach to achieving
transformative change.
Other industries have been suc-
cessful in finding new value by mak-
ing similar adjustments. Automak-
ers, for instance, have collaborated
with their vendors throughout the
design, production, and distribu-
tion processes to create value; on-
going innovation has led to vastly
better quality at much lower cost.
By building a system based on trust
and well-aligned incentives, car-
makers were able to draw on their
suppliers knowledge as well as
provide constructive feedback that
helped the entire industry become
much more productive. Consider
the returns that such a collaborative
effort could yield in the untamed
and bloated U.S. healthcare-delivery
system alone: The elimination of the
30 to 40 percent of spending that is
wasted would result in annual sav-
ings of $750 billion or more at cur-
rent expenditure levels.
To attain such savings, broad
collaborations and bold goals are
necessary. In the U.S., healthcare
initiatives championed by a single
stakeholder group have been un-
able to deliver better-quality care
or lower costs. In the 1980s, for ex-
ample, insurers attempted to push
down the cost side of the medical
value equation through managed
care approaches, such as HMOs, but
they were forced to back away when
consumers and employers raised
concerns about choice and quality.
A decade later, providers failed to
generate new value through major
consolidations of hospitals and phy-
sician practices.
Incremental efforts involving
multiple players have also proven
unsustainable. For example, recent
initiatives that attempted to create
medical value by linking a small
portion of provider pay to patient
outcomes did not generate signifi-
cant results because they were im-
plemented on top of the traditional
fee-for-service model that rewards
complex and extensive care. Indeed,
these well-intentioned measures can
also create another layer of complex-
ity and cost for providers and
payors, because they need to add
administrative processes to their op-
erations to measure and manage the
outcomes-based framework.
A Collaborative Vision
What might the collaborative mod-
els necessary to transform care deliv-
ery look like? The recently enacted
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healthcare reform legislation in
the U.S. calls for some demonstra-
tion projects based on collaborative
models, but before leaping into the
adoption and implementation of
these models, healthcare providers
and other industry players need to
step back and think hard about the
vision and objectives of their collab-
orative efforts.
Transformation of the care-
delivery system on a scale that will
generate the cost savings necessary
to revitalize the medical system will
require myriad initiatives. In each
one, the collaborating hospitals,
physicians, and payors need to de-
fine and commit to an overarching
vision and clear objectives. A vision
defines what, in essence, the initia-
tive is trying to achieve, whether that
is cost reduction, improved quality,
a better experience for patients, or
some combination of those factors.
Objectives define specific goals,
Joyjit Saha Choudhury
joyjit.sahachoudhury@booz.com
is a principal with Booz & Company in New
York. He advises health-services clients on
corporate and business unit strategies as
well as strategy and capability building to
drive medical value.
Akshay Kapur
akshay.kapur@booz.com
is a principal with Booz & Company in
Chicago. He specializes in the
development of corporate and business
unit strategies for healthcare clients, with
an emphasis on care-delivery innovation
and transformation.
Sanjay B. Saxena
sanjay.saxena@booz.com
is an M.D. and a partner with Booz &
Company in San Francisco, and leads
the firms West Coast health practice. He
advises health-services clients on strategy
development and capability building, spe-
cializing in payorprovider collaboration,
next-generation payment approaches, and
innovative care-delivery models.
Also contributing to this article were Booz
& Company senior associate Scott Strand
and partner Jack Topdjian.
such as targets for cost reduction
or market share. Moreover, there
must be overriding principles that
stakeholders can use to resolve the
conflicts that inevitably arise when
trade-offs must be made. And all
parties should understand whats in
it for them that is, what rewards
they can expect to reap for meet-
ing their targets. These elements are
the foundation for mutual trust and
genuine engagement on the part of
all stakeholders.
Once the stakeholders in care-
delivery transformations have a
clear understanding of where they
are headed, they can address the
three major components of potential
models: delivery, payment, and con-
sumer engagement.
Delivery. Collaborative care-
delivery approaches vary widely in
both the level of integration and
the degree of collaboration they re-
quire. Many other variables, such as
provider mix and the underlying IT
structure and capabilities needed to
share information among all those
involved in a patients care, also play
into the choice and development of
a care-delivery approach.
One of the approaches generat-
ing the most interest among provid-
ers and payors in the U.S. is the ac-
countable care organization (ACO),
which is a coordinated network of
provider partners, such as hospitals,
primary care physicians, and special-
ists, who work together to improve
care delivery and control costs, often
in association with a healthcare in-
surer. Typically, ACO provider part-
ners assume responsibility for meet-
ing care quality and cost goals, and
earn a share of the savings they pro-
duce. Another intriguing approach
is the patient-centered medical
home (PCMH), in which primary
care physicians manage all aspects
of patient care, serving as team lead-
ers and care coordinators when pa-
tients require specialist services, and
seeking to involve patients as active
participants in their own health and
well-being.
Payment. Getting the payment
scheme right is especially complex
and is the most data-intensive part
of the collaborative process. Because
practice follows payment, however,
it also holds the most potential for
transforming healthcare systems.
In designing a payment scheme,
participants must first decide how
healthcare services will be priced.
New, more collaborative models are
often based on bundled case rates
(fixed payments for a full episode of
care, such as the aggregated set of
procedures and services involved in
a coronary artery bypass) or global
payments (single, risk-adjusted pay-
ments coupled with quality metrics
designed to discourage the with-
holding of care, encompassing all
the care needed for a specific patient
population, such as diabetics). Glob-
al payments offer the opportunity to
cap the healthcare cost trend, but do
not necessarily reduce absolute cur-
rent spending.
All payment scheme designs
come with implications regard-
ing how cost increases will be con-
trolled, quality will be managed,
and patients will be engaged. In
the U.S., the payment schemes of
the future are likely to take cues
from the consumer goods indus-
try, adapting increasingly sophis-
ticated pricing methodologies. For
example, payors and providers may
move toward tiered pricing based
on controllable variables, such as
length of stay or quality of service.
Other future schemes may embrace
more dynamic, varied pricing to im-
prove care-delivery economics. For
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instance, providers might charge
less for using an MRI machine 30
miles from a patients home where
demand is lower than for using one
that is closer but busier.
Consumer engagement. Col-
laboration models need to deter-
mine the proper role of healthcare
consumers in the overall integra-
tion. The objective of increased en-
gagement is for consumers to take
a greater degree of ownership in
their health and make better, more
informed lifestyle and healthcare
consumption decisions. The level
of consumer participation in collab-
orative models varies depending on
their health status and medical con-
ditions, as well as the level of care
they require for example, con-
sumers can be assigned differing lev-
els of responsibility in their own care
by treatment type and level of risk.
The use of consumer engage-
ment to transform care delivery and
control costs is common in employ-
er plans. These plans often include
value-based benet designs that
motivate employees to make opti-
mal choices in their consumption
of care. Workplace incentives for
programs such as smoking cessation
and weight loss have existed for sev-
eral years. Some large employers are
expanding their efforts by assum-
ing a more proactive role in steering
employees toward better healthcare
choices. For example, in 2010, home
improvement giant Lowes Com-
panies Inc. struck a three-year deal
with Cleveland Clinic for bundled
cardiac care services. To encourage
its employees to take advantage of
its terms, Lowes waives deductible,
out-of-pocket costs and pays travel
and lodging expenses for employee
plan members who are willing to
travel to the clinic for qualied car-
diac surgery.
Tomorrows Healthcare Today
The Lowes example is only one of
many experiments in the transfor-
mation of care delivery under way in
the United States. Geisinger Health
Plan in Pennsylvania is conducting
another: The company is developing
disease- and procedure-based prod-
ucts integrated, end-to-end care
bundles that are designed especially
for specic diseases, conditions, or
procedures, and that span the entire
episode of care under the Proven-
Care brand. ProvenCare products,
which include packaged solutions
for back pain, hip replacements, and
cataracts, are supported by bundled
payments that cover all professional
and hospital services from pre-opera-
tive care through 90 days of post-op-
erative care, as well as a warranty
that covers post-operative complica-
tions. Early results are promising,
demonstrating reduced lengths of
stay and reduced readmissions.
A number of U.S. payors and
providers are piloting PCMHs. By
increasing provision of preventive
care by primary care physicians,
PCMHs can reduce the need for
high-cost specialty and tertiary
care. For example, a PCMH pilot
between insurer Humana and Met-
ropolitan Health Networks Inc.,
which manages a network of physi-
cians in South Florida, reported 33
percent lower hospital readmission
rates compared with Medicare read-
mission rates in its rst year.
Several Blue Cross and Blue
Shield Association plans are experi-
menting with new payment schemes.
Blue Cross Blue Shield of Massachu-
setts has implemented an alterna-
tive quality contract that is one of
the largest global payment systems
in operation in the United States.
Blue Cross and Blue Shield of Min-
nesota (BCBS MN) has established
a promising shared incentive part-
nership with major care-delivery
systems that is designed to bring its
costs in line with the consumer price
index. Toward that end, BCBS MN
and its provider partners are restruc-
turing care delivery. For example,
some provider systems have begun
conducting e-consultations in place
of traditional ofce visits, and BCBS
MN is reimbursing them for this
cost-saving service. Additionally, the
payor is sending staff into hospitals
to support case-management ac-
tivities and help providers plan more
seamless care for their patients.
These are all worthy experi-
ments, and they suggest that the
will to transform care delivery
does indeed exist in many health-
care systems. But these efforts are
still in their early stages, and if the
U.S. and other nations are to create
sustainable healthcare systems, all
their stakeholders must continue to
develop, test, and rene new collab-
orative approaches to medical value,
seeking to increase care quality and
manage costs. +
Reprint No. 11305
In the U.S., the payment schemes
of the future are likely to take cues
from the consumer goods industry.
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A new study shows how the decisions
made today by goods producers and policymakers
will shape U.S. competitiveness tomorrow.
by Arvind Kaushal, Thomas Mayor,
and Patricia Riedl

A debate over the future of U.S. manufacturing is
intensifying. Optimists point to the relatively cheap dol-
lar and the shrinking wage gap between China and the
U.S. as reasons the manufacturing sector could come
back to life, boosting U.S. competitiveness and reviving
the fortunes of the American middle class. Whenever
production statistics in the U.S. surge, it seems to bol-
ster that hope; as New York Times columnist and Nobel
laureate Paul Krugman put it in May 2011, Manufac-
turing is one of the bright spots of a generally disap-
pointing recovery.
But then when disappointing economic growth in-
dicators are released, the pessimists weigh in. They ar-
gue that the U.S. has permanently lost its manufactur-
ing competitiveness in many sectors to China and other
countries, that the sector is still declining after years of
offshoring and neglect, and that it might never return
to its role as the linchpin of the U.S. economy.
Both the optimists and the pessimists are partially
correct. U.S. manufacturing is at a moment of truth.
Currently, U.S. factories competitively produce about
75 percent of the products that the nation consumes. A
series of identiable smart actions and choices by busi-
ness leaders, educators, and policymakers could lead
to a robust, manufacturing-driven economic future
and push that gure up to 95 percent. Alternatively,
if the U.S. manufacturing sector remains neglected, its
output could fall by half, meeting less than 40 percent
of the nations demand, and U.S. manufacturing capa-
bilities could then erode past the point of no return.
Those ndings emerge from a recent sector-
by-sector analysis of U.S. industrial competitiveness,
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MANUFACTURINGS
WAKE-UP

CALL
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Arvind Kaushal
arvind.kaushal@booz.com
is a partner with Booz &
Company based in Chicago.
He leads the rms North
American manufacturing team
and specializes in manufactur-
ing and product strategies and
assessing relative competitive
positions across the value
chain.
Thomas Mayor
thomas.mayor@booz.com
is a senior executive advisor
with Booz & Company based in
Cleveland. With more than 20
years of consulting experience,
he focuses across industries
on supply and manufacturing
strategy, operations
turnaround, purchasing, and
supply base management.
Patricia Riedl
patricia.riedl@booz.com
is a principal with Booz &
Company based in Chicago.
She works with manufacturers
and retailers, specializing in
driving value through
manufacturing and supply
chain strategies.
Also contributing to this article
were Booz & Company senior
associate Siddharth Doshi,
associate Mustafa Al-Shawaf,
and s+b contributing editor
Jeffrey Rothfeder. We wish to
thank the following individuals
from the University of Michi-
gan, Ross School of Business,
Tauber Institute for Global
Operations: professors Wally
Hopp and Roman Kapuscinski,
and Matthew Brady, Lucas
Harmer, John Seaver, Michael
Trent, and Ashish Vatsal. We
also thank Conrad Winkler,
executive vice president of
the Long Products group at
Evraz Inc.
along with a survey of 200 manufacturing executives
and experts, conducted by Booz & Company and the
University of Michigans Tauber Institute for Global
Operations. (So researchers could best analyze the re-
lationship between U.S. employment and the future of
manufacturing, plants located in the United States were
counted as American, regardless of where the company
that owned them is headquartered.) The studies
which included comparisons to similar Booz & Com-
pany studies of China and Switzerland found that
the U.S. has a much more productive manufacturing
base than many people think. But no single country,
not even China or the U.S., can claim to be the fac-
tory of the world, in the way the United States was after
World War II.
Instead, for the foreseeable future, manufactur-
ing will largely be regional. To be sure, exports play a
critical role in any strong economy, and as well see, a
global play (including offshoring) can be viable, espe-
cially when there are challenges at home. But for many
manufacturers, economics and market dynamics in-
creasingly suggest that they locate factories close to their
major markets, including the United States. This type
of region-oriented footprint is a clear way to provide ad-
equate scale and volume, minimize transportation and
logistics costs, increase market responsiveness and inno-
vation, and customize products for the unique prefer-
ences of different regions and cultures.
If factory labor costs and currency rates were the
sole enablers of manufacturing success, then the West
could not compete with emerging nations or offshor-
ing. More and more, though, these factors play a smaller
part in manufacturing decisions. Four other consider-
ations, all more complex, drive manufacturers choices
about where to place and expand factories:
1. The skill level and quality of factory employees,
especially for high-tech facilities.
2. The presence of high-impact clusters, in which
many companies can learn from one another and in-
novate more readily.
3. Access to nearby countries with emerging con-
sumer markets and lower-cost labor (for the U.S., this
means building a future with Mexico).
4. A reasonably competitive regulatory and tax en-
vironment (for the U.S., this means simplifying and
streamlining the current tax and regulatory structure).
Will U.S. business leaders and policymakers rise to
the challenge and create the conditions that would sup-
port manufacturing? Or will they fritter away the op-
portunity now being presented to them?
Why Manufacturing Matters
As trade policy expert and author Clyde Prestowitz
points out, manufacturing is critical to prosperity for
several reasons: its economies of scale, impact on inno-
vation, and multiplier effect on the rest of the economy.
(See The Case for Intelligent Industrial Policy, by Art
Kleiner, Arvind Kaushal, and Thomas Mayor, page 10.)
In the United States, manufacturing directly accounts
for 11 percent of the nations GDP: an absolute gure
of US$1.47 trillion, larger than Spains entire domestic
product. When all economic activity expressly linked to
manufacturing is accounted for including equipment
maintenance, transportation, scientic and technical
services, and construction the share of GDP attribut-
able to manufacturing grows to 15 percent. That means
one in seven U.S. private-sector jobs, or 13.5 percent, is
directly linked to manufacturing. The sectors share of
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GDP increases to as much as 25 percent when second-
order linkages such as retail sales near plants, systems
development, and legal services are included.
Historically, manufactured goods are more trade-
able than other categories. Thus, a strong manufactur-
ing base is essential to reducing the U.S. trade decit,
which hit $497 billion in 2010 and is an unnerving drag
on GDP. Unless steps are taken to revitalize manufac-
turing, up to 50 percent of the value add of the U.S.
economy the value of manufactured goods beyond
their raw material costs is at risk of disappearing.
If that happened, the U.S. trade decit would top $1
trillion, a troubling level for any country seeking eco-
nomic growth.
Perhaps the least understood benet of manufac-
turing is how closely it is related to innovation in design,
product development, quality control, and factory pro-
cesses. In 2008, 67 percent of all private-sector R&D
was conducted by manufacturing companies, according
to the National Science Foundation. And from 2006
to 2008, 22 percent of U.S. manufacturing companies
reported a new or signicantly improved product, ser-
vice, or process, compared with 8 percent of nonmanu-
facturing companies. Innovation propels improvements
in worker output, capital ow, usage of materials and
energy, energy conservation, and other components of
productivity. Increased productivity, in turn, leads to
faster economic growth and a higher standard of living.
Between 1987 and 2008, productivity grew in the U.S.
manufacturing sector 65 percent faster than in business
as a whole. (See Exhibit 1.)
Many U.S. manufacturing leaders are well aware
of the role that innovation plays in a nations economy,
and in their own performance. The labor compo-
nent the need to choose where to set up manufac-
turing facilities based primarily on where the wages
are cheapest is not the major driver anymore, says
Eric Spiegel, president and CEO of Siemens Corpora-
tion. Instead, other factors access to skilled labor,
modern infrastructure, the ability to drive innovation
with world-class R&D, and capabilities like new manu-
facturing technologies or innovative lean production
systems propel decisions about new factories. These
play well to the U.S.s strengths. So were adding new
manufacturing in the U.S.
Americas Lost Decade
The conventional wisdom says that the decline of U.S.
manufacturing began in the late 1970s, when Japanese
automakers and electronics companies outpaced their
U.S. rivals in design, quality, efciency, and costs. But a
Exhibit 2: Global Manufacturing by Country
Manufacturings contribution to worldwide production value its
value add, calculated as the revenues generated minus the costs of
raw materials has grown most not in Germany and Japan, as some
assume, but in China and the United States.
Source: UN National Accounts Main Aggregates Database, Booz & Company
1980 1985 1995 2000 2005 2009 1990
$9,000
$8,000
$6,000
$4,000
$2,000
Rest of
World
China
U.K.
U.S.
Germany
Japan
Global manufacturing value add,
in US$ billions (real 2005)
Exhibit 1: Productivity in the United States
150
140
130
120
110
100
Source: Bureau of Labor Statistics, Booz & Company
CAGR
19872008
Note: CAGR is compound annual growth rate.
Manufacturing
1.6%
For more than 20 years, the U.S. manufacturing sector disproportionately
propelled growth in multifactor productivity (the changes in economic
output per unit of combined inputs) a critical key to prosperity.
1990 1987 1995 2000 2005 2008
Index: 1987=100
Total of private
business sector
1.0%
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closer examination of the historical data covering 1980
through 2010 presents a somewhat different picture.
During the 1980s and 1990s, although there were
high-prole problems in specic sectors such as autos
and textiles, U.S. factories as a whole held their own.
Even manufacturing employment held steady. Between
1980 and 2000, production jobs fell by only 0.5 percent
annually; in fact, the U.S. outperformed both Germany
and Japan in the value of manufacturing output as a per-
centage of global production. (See Exhibit 2, page 33.)
However, in the 2000s, U.S. manufacturing output
as a percentage of global production fell dramatically.
The ratio of exports to imports, a critical sign of manu-
facturing viability, also fell. The number of manufac-
turing jobs dropped as well, by 4.3 percent per year,
and 3.4 percent of non-production jobs were eliminated
annually. (See Exhibit 3.) Many factors contributed to
a relentlessly troubling decade for U.S. manufacturing.
Capital investment in new and old plants slowed, drop-
ping below replacement levels. In some industries, inno-
vation lagged, and some U.S. companies faced a short-
age of critical skills. The rapid pace of globalization
and competition from emerging economies exacerbated
these effects.
Still, the data shows clearly that U.S. manufactur-
ing as a whole has great potential to rebound. When
considered sector by sector, many U.S. companies can
and should be the supplier of choice for the vast major-
ity of goods sold in North America and some can
still be a primary source of production for global mar-
kets. This resilience was evident in the survey of manu-
facturing professionals; more than 65 percent of respon-
dents said that it was unlikely they would stop investing
in new U.S. manufacturing assets and technologies by
Exhibit 3: U.S. Manufacturing Employees,
19802010
Manufacturing employment fell only slightly during the 1980s
and 1990s but has fallen sharply since 2000, a consequence of
technological change as well as offshoring and other factors.
Source: Bureau of Labor Statistics, Booz & Company
1980 1985 1995 2000 2005 2010 1990
16
18
14
12
10
8
6
4
Production
Employees
Millions of Employees
0.5%
0.2%
4.3%
3.4%
Non-Production
Employees
$500 BILLION
$100 BILLION
CIRCLE SIZE = U.S. CONSUMPTION
Exhibit 4: U.S. Manufacturing Competitiveness for Exports
A number of U.S. industries stand out as global leaders, based on two key indicators of manufacturing export competitiveness: costs compared with
Chinese manufacturers for products consumed in China (the y-axis) and general worldwide export advantage (the x-axis).
Source: U.S. Census Bureau, Bureau of Labor Statistics, UBS Research, CapitalIQ, Energy Information Administration, World Bank, Eurostat, World Trade Organization,
IRS Statistics, Tauber Institute for Global Operations, Booz & Company
LOW HIGH U.S. Manufacturing Positional Advantage for Export
Nonmetallic
Mineral Products
MACHINERY
SEMICONDUCTORS
AEROSPACE
Fabricated Metals
Apparel
Beverages
and Tobacco
Wood Products
Plastics
Pharmaceuticals
MEDICAL EQUIPMENT
Electrical Equipment and Components
CHEMICALS
Appliances
Computer Equipment
Cloth Goods (Non-Apparel)
Textiles and Fibers
Petroleum/Coal
Auto Final Assembly
Paper
Primary Metals
Auto Vehicle Parts
Other Transportation Equipment
Electronics
Printing
Furniture
75%
50%
25%
0%
25%
Global Leaders
Food
U
.
S
.

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Note: The U.S. cost advantage represents the labor and logistics costs compared with those of Chinese manufacturers, for products consumed by people in China.
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2025. Many of them are shifting manufacturing activi-
ties back to North America from Asia and other off-
shore locations.
Four Kinds of Industries
With unit labor costs playing a smaller part in manufac-
turing decisions, other factors including talent avail-
ability, market accessibility, innovation, regulations,
intellectual property protections, barriers to entry and
exit, and scale of operations increasingly drive deci-
sions about where to place and expand factories. Based
on the relative economics for each segment, we charted
which U.S. industries can compete as exporters, which
can be dominant in the regional North American mar-
ket, which can survive but are threatened by foreign
competitors, and which are already mostly overseas but
can still manufacture in the U.S. to serve niche markets.
(See Exhibits 4 and 5.)
Global leaders: aerospace, chemicals, machinery,
medical equipment, and semiconductors. Companies
in these industries have a critical worldwide advantage
stemming from their high investment scale, established
intellectual property, skilled workforces, and close ties
with customers. For example, the U.S. commercial aero-
space segment (primarily Boeing Company and its sup-
pliers) benets because aircraft development is so costly
and knowledge-intensive that few new companies can
compete. In addition, aerospace manufacturing requires
uniquely qualied labor, substantial participation from
corporate R&D, and proprietary technology efforts,
often with national security implications. Thus, much
overseas production is ruled out. However, even this sec-
tor could lose manufacturing to overseas sites if demand
in emerging markets skyrockets, providing a sound
economic rationale for some global leaders to establish
manufacturing bases in China or elsewhere.
Regional powers: food, beverages and tobacco,
nonmetallic mineral products, wood products, and
petroleum/coal. Focusing on North American demand
will continue to be a lucrative strategy for many U.S.
Exhibit 5: U.S. Manufacturing Competitiveness in Domestic Markets
Based on two key indicators of manufacturing competitiveness within the U.S. cost and positional advantage U.S. manufacturers sort into four
groups. Global leaders and regional powers are well positioned to compete; sectors on the edge and niche players are more challenged.
Source: U.S. Census Bureau, Bureau of Labor Statistics, UBS Research, CapitalIQ, Energy Information Administration, World Bank, Eurostat, World Trade Organization,
IRS Statistics, Tauber Institute for Global Operations, Booz & Company
Fabricated Metals
Pharmaceuticals
Electrical Equipment and Components
MACHINERY
SEMICONDUCTORS
AEROSPACE
MEDICAL EQUIPMENT
CHEMICALS
Petroleum/Coal
Auto Final Assembly
Auto Vehicle Parts
Primary Metals
Other Transportation
Equipment
Electronics
Apparel
Plastics
Appliances
Computer Equipment
Textiles and
Fibers
Paper
Printing
Food
Beverages
and Tobacco
Furniture
75%
50%
25%
0%
25%
50%
75%
100%
300%
$500 BILLION
$100 BILLION
CIRCLE SIZE = U.S. CONSUMPTION
Nonmetallic Mineral Products
Wood Products
Regional Powers
Sectors on the Edge
Niche Players
Global Leaders
U
.
S
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(Non-Apparel)
LOW HIGH U.S. Manufacturing Positional Advantage for U.S. Demand
Note: The U.S. cost advantage represents the labor and logistics costs compared with those of Chinese manufacturers, for products consumed by people in the United States.
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manufacturers. The United States is the worlds largest
market wealthy and still growing (albeit not as fast
as emerging economies) and Mexico and Canada
offer additional opportunities. For food, beverages, to-
bacco, and many other consumer products companies,
the incremental disadvantages of importing (for exam-
ple, the cost of transporting products to the U.S., plus
long shipment lead times and product safety concerns)
outweigh pro-offshoring factors such as the higher cost
of U.S. production. For nonmetallic mineral and wood
products segments, product transportability require-
ments and proximity to the supply base give U.S. fac-
tories a leg up.
Sectors on the edge: paper, plastics, electrical
equipment and components, fabricated metal products,
pharmaceuticals, automotive vehicle parts, other trans-
portation equipment, nal assembly of motor vehicles,
printing, and electronics. These manufacturing segments
feel the presence of low-cost overseas rivals nipping at
their heels. To compete effectively, they need simpli-
ed government regulations and permitting processes,
as well as more certainty and speed in gaining approval
to expand old plants and build new facilities. In addi-
tion to better government support, many companies
in these sectors must rethink their strategies, investing
in the specic U.S. markets where they are best suited
to compete. Some industries, such as printing, can
maintain a foothold in the U.S. for specialized or cus-
tomized products targeted at the North American
market. Meanwhile, they can produce mass-quantity
products with less stringent delivery schedules in lower-
cost countries.
Niche players: textiles, apparel, furniture, com-
puter equipment, and appliances. Most companies in
these sectors have moved production outside the United
States. The remaining activity generally serves small-
Revitalizing
Education for
Manufacturing

by Wally Hopp and
Roman Kapuscinski
C
onversations about the future
of manufacturing often be-
come conversations about education.
A host of factors are raising the skill
levels required for employment in
this sector.
Technology: Any job that in-
volves fully prescribed tasks is at risk
of being taken over by a machine.
Globalization: As manufactur-
ing has moved to regions with low-
cost labor, the huge comparative
advantages enjoyed by the U.S. work-
force have dissipated.
Economics: In many sectors,
the nancials do not favor either local
or overseas production. Manufactur-
ers increasingly base their location
choice on non-nancial factors, such
as the quality of the workforce.
Thus, in todays at world, an
economy can justify high wages only
in return for high skill levels. Indeed,
whereas total manufacturing em-
ployment in the U.S. has declined
since 1980, the number of high-skill
manufacturing jobs has increased by
roughly 40 percent.
It is well known that the qual-
ity of a nations education affects
its manufacturing prowess. Between
1850 and 1940, compulsory univer-
sal education and a broad system of
public universities, community col-
leges, and other schools ensured
that the U.S. workforce was better
trained than the rest of the world.
This fueled a period of unparalleled
productivity and economic growth,
led by the manufacturing sector.
But in 2011, the United States no
longer has the best-trained work-
force. Most countries have passed
the U.S. in such metrics as hours
spent in school each year, math and
science scores, literacy rates, and
high school graduation rates. Al-
though enrollments in U.S. commu-
nity colleges have increased recently,
the graduation rates at these schools
have fallen below 40 percent.
To remain globally competitive
for manufacturing, U.S. education at
all levels must be improved in four
fundamental ways. First, there must
be more relevant instruction, start-
ing with a revitalization of the indus-
trial arts curriculum. Once common,
shop and other vocational courses
have been crowded out of most high
schools thanks to a preoccupation
with college preparation. We must
provide a better, more technologically
astute avenue for the large number of
students who are not college-bound
but who will need to participate in the
economy of the future. Revitalized
industrial arts courses would also
benet college-bound students who
are interested in engineering. Beyond
this, because K12 education cannot
fully equip workers for the technical
demands of high-skill manufactur-
ing jobs, community colleges and
technical schools must adapt their
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scale, highly specialized niche markets. For example, the
small company Timbuk2 Designs Inc. allows customers
to design their own briefcases, backpacks, and totes; it
has a strong customer community among cyclists on the
West Coast. The furniture segment is similarly bifur-
cated. Flat-pack furniture for the U.S. market is mostly
made in China, whereas preassembled furniture is more
likely to be made domestically.
In short, nearly 50 percent of the value added by
U.S. manufacturing and more than 50 percent of U.S.
manufacturing jobs are at risk. (See Exhibit 6, page 38.)
In these sectors, on the basis of labor and logistics trade-
offs, many U.S. manufacturers have opted to build
plants in emerging markets such as the BRIC countries
(Brazil, Russia, India, and China). They also feel pres-
sure from investors and other inuential internal players
to be proactive in the fastest-developing regions, where
billions of people are joining the consumer economy.
(See Competing for the Global Middle Class, by Ed-
ward Tse, Bill Russo, and Ronald Haddock, page 62.)
This strategy has paid off for global players and for
those who target specic emerging markets in a well-
planned way. But it hasnt worked out for all manufac-
turing businesses; for example, it can leave them more
exposed to competition in the United States, which
is still their largest market. Nonetheless, if the trend
continues unabated that is, if U.S. companies rush
toward emerging economies without continuing to in-
vest in their own country then U.S. manufacturing
could fall woefully behind in new plant and production
technologies, losing important links to high-value inno-
vation and making revival more difcult.
Manufacturing Momentum
Our analysis translates into clear recommendations for
improving the competitiveness of U.S. manufacturing.
curricula in response to the needs
of industry.
Second, schools must improve
the quality of their execution; better
classroom instruction for non-col-
lege-bound students is desperately
needed. Third, schools must become
more effective at engineering and
vocational guidance, ensuring that
students know about the continually
evolving career paths in manufactur-
ing. Fourth, access to learning should
be expanded. The U.S. might consider
subsidizing tuition for technical train-
ing programs, thus competing more
effectively with the established prac-
tice in other countries.
An excellent model for achiev-
ing all these goals is South Caroli-
nas state-funded ReadySC program
(www.readysc.org), which maintains
regular communication between in-
dustrial leaders and local colleges
about the skills needed in industry.
This program benets both employ-
ers and students.
In addition, higher education
can and must do more to highlight
manufacturing-related career op-
portunities. Although U.S. univer-
sities still set the standard for the
world in terms of quality of research
and education, they are struggling
to lure domestic students into sci-
ence and engineering elds related
to manufacturing. These programs
are lled with international students
who excel in their studies, but then
have difculty obtaining visas to re-
main in the United States. We need
to promote manufacturing as a eld
of study, and relax U.S. visa policies
to allow more well-trained students
from overseas to work in the United
States. The University of Michigan
(our own institution) is addressing
the former issue through the Tauber
Institute for Global Operations, which
provides students with an integrated
engineering and business curricu-
lum. To ensure that they acquire the
skills that manufacturers and manu-
facturing consulting companies are
looking for, the institute maintains
an active advisory board consisting
of senior executives from 30 major
companies. Not surprisingly, Tauber
graduates are in high demand.
When it comes to the future of
manufacturing, all roads lead to edu-
cation. But education infrastructure
takes a long time to build and is dif-
cult to maintain. The countries that
strengthen and reinforce it most rap-
idly and effectively will be winners in
the global economy.
Wallace (Wally) Hopp
whopp@umich.edu
is the Herrick Professor of Manufac-
turing at the University of Michigans
Stephen M. Ross School of Business
and a faculty member at the Tauber
Institute.
Roman Kapuscinski
roman.kapuscinski@umich.edu
is a professor of operations and man-
agement science at the Ross School
and a co-director of the Tauber Insti-
tute. For more on the institute, see
www.tauber.umich.edu.

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The following strategies can provide the greatest mo-
mentum in both the public and private spheres:
1. Attract the best workers. Qualied manufac-
turing employees are surprisingly scarce in the United
States. As companies transform their plants from hubs
of manual work to automated facilities with complex
control systems and sophisticated processes, they strug-
gle to ll multiple holes in their workforce: technical
(programmers, IT developers, designers), professional
(engineers, scientists, functional support), and skilled
(equipment operators, specialized maintenance experts,
craftsmen). A contributing factor to this employee scar-
city is traditional manufacturings lack of appeal to stu-
dents. A recent Booz & Company survey of more than
200 engineering, science, and math undergraduates
found that although 80 percent of the engineering stu-
dents had some exposure to manufacturing through
either rsthand experience, college courses, or conversa-
tions with factory workers only 50 percent regarded it
as an attractive career. That number dropped to 20 per-
cent among the science and math students. Around the
same time, Siemens reported having nearly 3,500 open
manufacturing positions in the U.S. requiring high-level
science, technology, engineering, and math skills, with
low expectations of lling many of them.
The talent issue is particularly pronounced in the
pharmaceutical and high-tech sectors, where science and
engineering graduates are needed for many operations
positions. Manufacturing recruiters must compete with
R&D for qualied individuals, and some have relocated
to higher-cost cities because such places attract people.
Many companies especially those in electronics,
medical equipment, pharmaceuticals, and other sec-
tors requiring high levels of knowledge on the factory
oor nd that the shortage of qualied employees in
the U.S. leaves them no choice but to shift some opera-
tions to other countries. This is particularly disturbing
because these job categories often involve innovation
and are thus essential catalysts for productivity increases
and economic growth. The shortage of technical, pro-
fessional, and skilled labor also contributes to substan-
tially higher wages in U.S. manufacturing than in other
countries, including other developed economies.
Educational initiatives that promote engineering
Exhibit 6: U.S. Manufacturing Jobs at Risk
Advantaged sectors (those that are global leaders and regional
powers) represent about half of manufacturing employment; the
rest (sectors on the edge and niche players) are more vulnerable
to job loss.
Note: Due to rounding, percentages may not total 100.
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Annual Survey
of Manufacturers-U.S. Census Bureau, Booz & Company
Niche Players
Advantaged
Sectors
(Global leaders
and regional
powers)
Sectors on
the Edge
Manufacturing
Value Add
Manufacturing
Employment
11.9 million employees
45%
11%
43%
US$1.6 trillion
53%
6%
41%
2009
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can increase the talent pool. China already graduates
more engineers each year than the U.S., and a number
of other countries graduate a higher proportion of their
population as engineers. It would also be helpful to relax
federal immigration regulations for trained knowledge
workers: for example, liberalizing H-1B visa restrictions
to allow foreign national students in science, technol-
ogy, engineering, and math programs to remain in the
U.S. more easily after nishing their education, rather
than returning to their home countries. State govern-
ments are well positioned to abet manufacturing edu-
cation with scholarships and programs such as South
Carolinas ReadySC program, which establishes part-
nerships with businesses to provide customized training
in colleges. (See Revitalizing Education for Manufac-
turing, by Wally Hopp and Roman Kapuscinski, page
36.) The philosophy [here] has been that if you invest
in South Carolina, South Carolina will invest in its peo-
ple to prepare them to work in your plant, says Bobby
Hitt, South Carolinas secretary of commerce and a for-
mer BMW executive, who was a leading gure in the
automakers 1994 decision to build its only U.S. factory
in Greenville.
Manufacturing companies must also offer a more
collaborative workplace experience, engaging work-
ers and giving them opportunities to continuously im-
prove and seek productivity gains. They can also attract
workers by showcasing their latest technology at cam-
pus recruitment events and industry job fairs, increas-
ing college internships, forming partnerships with local
colleges and universities to identify and sponsor talent,
inviting students of all ages on factory tours to show
that manufacturing can be a rewarding career, and
partnering with other manufacturers to jointly support
specialized training programs or attend faraway recruit-
ment events.
2. Invest in high-impact clusters. Since Michael Por-
ter coined the term in his 1990 book, The Competitive
Advantage of Nations (Free Press), clusters have been a
widely recognized way to spur economic growth and de-
velopment. In the context of manufacturing, clusters are
essentially geographic concentrations of interconnected
companies, suppliers, service providers, and associated
institutions (such as university research labs). Silicon
Valley; the collection of life sciences companies in east-
ern Massachusetts; and the aerospace cluster in Wichita,
Kan., are good examples.
Clusters have several benets. They increase pro-
ductivity and efciency because they bring together sup-
pliers with customers, designers with engineers, and uni-
versity researchers with corporate production managers
to better share information and new ideas. This collab-
orative ecosystem helps new companies and innovative
business models emerge. Because they represent strong,
self-supporting communities where interactions
among employees inspire enthusiasm for their work and
help them gain more diverse skills companies located
in manufacturing clusters tend to have lower turnover
and attract better talent than non-clustered companies.
State and local governments can encourage clusters
by investing in infrastructure roads, ports, rail lines,
and communication links for centers that have be-
gun to form organically. Policymakers can also provide
up-front tax incentives or other inducements to attract
companies. Both the state and federal governments can
fund research institutes and university programs, but
studies have shown that governments should not seek
to micromanage cluster creation. They are better suited
Many companies nd that the shortage of
qualied employees in the U.S. leaves them no choice
but to shift some operations to other countries.
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to supporting and promoting these industrial networks
while allowing them to develop naturally.
Individual companies (or trade groups associated
with clusters) can also take steps to fashion clusters and
attract businesses and talent. They can set up improved
connections between suppliers and buyers, and main-
tain up-to-date standards and innovative practices in
infrastructure, renewable energy, and plant processes
and technology.
3. Build a future with Mexico. For many companies
on the edge, Mexico offers a cost-conscious and attrac-
tive alternative to China and other distant offshoring
sites. By developing production facilities there, manu-
facturers can tap a relatively low-cost labor pool and
maintain tight links with R&D talent and facilities in
the United States. A Mexican footprint also helps com-
panies tailor their supply chains: shifting less-demand-
ing, high-labor products or components with relatively
stable designs to Mexico while keeping highly skilled
work or rapidly evolving technology in the U.S., where
the workforce is generally more educated. Then prod-
ucts can be shipped around the Western hemisphere at
relatively low expense.
When you combine the U.S. and Mexico as a
manufacturing partnership, for the most part it wins
over [a combination of] the U.S. and China, especially
in terms of economics, demand proximity, and respon-
siveness of the supply chain, says Ron Weller, vice pres-
ident of global operations and power solutions at John-
son Controls Inc. (JCI), a maker of vehicle electronics,
batteries, and interiors.
Of course, to build a viable U.S.-Mexico manu-
facturing base, substantial obstacles must be addressed
by the public and private sectors of both countries.
Narcotics-related violence along the border has hurt
manufacturing companies ability to produce and ship
without disruption. Mexicos rail and road infrastruc-
ture is subpar, the country produces few basic raw
materials and needs better access to inexpensive com-
modities (which might be supplied from the southern
U.S.), and Mexican workers need further training and
skills development. It may take concerted collabora-
tive effort by government and business leaders in both
countries to address these problems, but the payoff
could be immense.
4. Simplify and streamline the tax and regulatory
structure. At 39 percent, the ofcial U.S. statutory
corporate tax rate is the second-highest of all countries
France Faces
a Dilemma

by Kaj Grichnik and Jerome Pellan
T
he United States is not alone
in its manufacturing malaise.
In virtually every Western country,
factory employment is disappearing
and trade decits are dangerously on
the rise. Take France, for example.
Between 1999 and 2009, the country
moved from a positive trade balance
of 17.8 billion (US$25.4 billion) to a
decit of 21.1 billion ($30.1 billion),
a disturbing change in direction that
took 30 percent of Frances manufac-
turing jobs with it.
And although these numbers
mirror trends in the U.S., one very
big distinction hidden in these statis-
tics provides important clues about
whether France and other western
European countries are more likely
to enjoy a manufacturing recovery,
or whether the U.S. is and that
distinction clearly favors the United
States. Unlike U.S. losses, the lions
share of Frances losses in manufac-
turing capacity are not due to China
and other low-cost nations; instead,
French production and jobs are mov-
ing primarily to Germany.
In other words, the deterioration
in Frances manufacturing capacity is
the result of a shift within its region.
Of the 38.9 billion ($55.5 billion) to-
tal decline in Frances trade balance,
only about 7.2 billion ($10.3 billion)
is directly attributable to the growth
of its trade decit with China. Yet be-
tween 1999 and 2009, Frances trade
imbalance with Germany increased
by a whopping 13 billion ($18.5 bil-
lion). By contrast, the United States
trade imbalance with China grew
more than threefold in that period
while the U.S. trade decit with Ger-
many held steady.
The implications of this for
France and for the United States
could not be more different. If manu-
facturing does, in fact, become more
and more regional, the United States
stands to gain from the movement
back to North America of Chinese
and other low-cost production fa-
cilities. France, though, doesnt have
that luxury.
Moreover, Frances worsen-
ing trade decit with China has been
driven chiey by manufacturing
losses in lower-tech, lower-margin
products, such as apparel, furniture,
and ofce machines. Frances trade
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in the Organisation for Economic Co-operation and
Development; only Japan has a higher rate. Because of
tax credits, deductions, and tax law complexities, the
federal government collects only about 28 percent. But
manufacturers spend much of the difference on compli-
ance costs and sophisticated tax minimization strate-
gies. Unfortunately, many companies use the 39 per-
cent gure for evaluating investment options, because
it is too risky otherwise; in cost-benet calculations,
they cant assume that deductions will be available in
the future. This often dissuades them from opening or
expanding factories in the U.S.
Reducing taxation levels and tax code complexity
would be a revenue-neutral way to put U.S. manufac-
turing on a more level playing eld with other lead-
ing economies. This step alone would encourage new
investments in manufacturing assets, which in turn
would expand the tax base, potentially resulting in
higher government income. Another step would be
changing tax rules to allow manufacturers to move
dollars from overseas back without a tax penalty. This
would make many companies more likely to reinvest
foreign prots in U.S. manufacturing.
We operate in a lot of places outside the United
States, and if youre in our position you might want
to repatriate money to invest in an asset or to fund an
expansion, says Michael Rajkovic, chief operating of-
cer of auto supplier Tower International Inc. So if you
need money in the United States and you already paid
taxes on that money in another country, you have to
pay taxes on it again before you can invest in your busi-
ness in the U.S. What kind of sense does that make?
The U.S. regulatory system also contributes unnec-
essarily to complexity and uncertainty. In 2008, federal
regulations including economic, workplace, environ-
mental, and tax rules cost companies an estimated
$1.75 trillion, or 14 percent of national income, accord-
ing to the U.S. Small Business Administration Ofce
of Advocacy. In the Booz & Company survey, 61 per-
cent of respondents cited government regulations and
policies as having a negative impact on their companies
U.S. manufacturing output. This was, by far, the sur-
vey respondents most frequently cited risk. In general,
many executives complain that the regulatory process
has become paperwork-driven rather than outcome-
driven, requiring companies to navigate an expensive
labyrinth just to gain approval for, say, a plant expan-
sion. The associated delays make opening up facilities
imbalance with western European
nations has come at the expense of
higher-value products such as au-
tomobiles, advanced chemicals, and
industrial machinery. Consequently,
for France, the regional manufactur-
ing model could turn out to be a very
expensive development.
Frances inability to compete ef-
fectively against other countries in its
backyard for factory capacity is linked
to a set of labor and cost dynam-
ics that are increasingly antiquated
in a more globalized and malleable
manufacturing environment. For ex-
ample, Frances 35-hour workweek,
imposed in 2000 just as other coun-
tries were liberalizing production
shift rules, increases the overall cost
of labor. Further, because of Frances
generous medical, unemployment,
and pension benets for residents,
companies pay an amount equal to
about 83 percent of net salaries in
so-called social charges, compared
with only 47 percent in Germany. And
industrial labor relations in France
are extremely adversarial.
By addressing these and other
equally problematic issues adroitly,
France could possibly dissuade some
CEOs from closing French factories.
But if France doesnt address these
issues in the next 10 years, the coun-
try stands to lose an additional 7 per-
cent of its manufacturing workforce,
or about 200,000 jobs.
There are some indications that
improving the fortunes of manufac-
turing is increasingly important to
French politicians of all stripes. One
of the more audacious proposals calls
for taxing sectors that are not exposed
to international competition to help in-
dustries that are. But it will take more
than new scal measures for France
to regain its former manufactur-
ing glory; a 21st-century cultural and
social transformation is needed for
France to again resemble the country
that spawned such legendary indus-
trial gures as Peugeot, Eiffel, Citroen,
Hussenot, Renault, and Schlumberger.

Kaj Grichnik
kaj.grichnik@booz.com
is a partner with Booz & Company in
Paris and the coauthor (with Conrad
Winkler) of Make or Break: How Manu-
facturers Can Leap From Decline to Re-
vitalization (McGraw-Hill, 2009).
Jerome Pellan
jerome.pellan@booz.com
is a senior associate with Booz &
Company in Paris.
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4
overseas much more desirable. If your market window
is 18 months and it takes you 18 months to get a permit
in the U.S. and eight weeks to get one in Taiwan, where
are you going to go? asks Jack McDougle, senior vice
president of the U.S. Council on Competitiveness.
To move forward, current and new regulations
should undergo a regulatory process analysis to ensure
that they are necessary to deliver health, safety, environ-
mental, or other benets to the community. A number
of manufacturing leaders have commented that other
countries have even higher environmental and regula-
tory standards than the U.S., but with fewer bureau-
cratic hurdles.
Creating Competitive Capabilities
Within companies, manufacturers can make the most
of their U.S. footprint by building up their companys
bedrock capabilities. Basic manufacturing capabilities
are needed in many sectors just to stay in business. How-
ever, in each company, some capabilities will deserve
extra investment, to help ensure that manufacturing
prowess is tightly aligned with the companys competi-
tive strategy and helps to set its line of products apart
from the crowd.
The capabilities that manufacturers need are cap-
tured in the ISSR framework developed by Booz &
Company. (See Exhibit 7.) Inherent capabilities involve
technological excellence and market understanding.
Structural capabilities cover the makeup of a compa-
nys manufacturing footprint, the structure of its sup-
ply chain, and the efciency of its distribution network.
Systemic capabilities address manufacturing and cross-
functional processes, including lean production sys-
tems. Realized capabilities focus primarily on aligning
employees with the overall strategic thrust of the orga-
nization and driving efciency improvements.
Supporting these four pillars of manufacturing
prowess are other capabilities that both the private sec-
tor and federal and state governments have a hand in
developing. Among them: nding and developing the
right human and natural resources at the right cost, as
well as ensuring that the business environment taxes,
regulations, and labor and trade rules, for starters
enhances manufacturing innovation and growth.
To be truly distinctive and to sustain a competi-
tive advantage, manufacturers must go beyond basic
operational capabilities; they must develop specic and
unique capabilities that match their strategic goals.
Youd better focus on reinventing manufacturing and
process technology and on nding the next break-
through process thats going to be leaving everyone be-
hind, a process that the rest of the world can chase,
notes JCIs Weller.
For example, a Tier One auto supplier that was a
rm believer in a small plant philosophy was losing
its competitive position as product designs standardized
and more rivals with advantaged cost positions emerged.
The company went through a no constraints strategy
process to focus its effort on the winning technology
and build a footprint that leveraged global scale. This
dual strategy enhancing the companys capabilities
in both the inherent and structural pillars differ-
entiated the supplier from its closest competitors and
turned around its fortunes.
Toyota is well known for its attention to the sys-
temic pillar; its acclaimed lean production system
has led to substantial quality and productivity gains
and a leadership role in the industry. Many other auto
manufacturers have followed suit, building their qual-
ity and reliability. But lean initiatives are hard to
sustain unless the realized pillar is well developed. One
global diversied manufacturer learned this when its
Exhibit 7: A Framework for Manufacturing
Capabilities
In the ISSR framework, the vertical pillars represent activities
undertaken by manufacturers. The horizontals represent contextual
enablers, generated by government and the business environment
(the floor) and the mix of available resources (the roof).
BUSINESS
ENVIRONMENT
Regulations, taxation, infrastructure, macroeconomic
outlook, and ease of doing business
INHERENT STRUCTURAL SYSTEMIC REALIZED
RESOURCES Availability, quality, proximity, and development of
the right human and natural resources
Technology
and market
requirements
Operations-
related
processes
and policies
Deployment
of people
and assets
Facilities and
supply chain
footprint
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attempt to build efciency and eliminate waste fell at
at rst. Then, by segmenting its products into stable
and predictable and variable and customizable
buckets, the company created two production streams,
simplifying the assembly line for its workers. The em-
ployees motivation rose as supervisors gave them more
freedom and responsibility. The result was signicant
inventory reduction and substantially improved worker
productivity.
In general, designing production systems that
align employees activities with the companys overall
strategy and that empower employees to improve man-
ufacturing processes can unlock the productivity and
innovation potential of the well-educated U.S. work-
force. For at least a generation to come, this in itself
could provide a competitive advantage for manufactur-
ing in the United States.
Chief Manufacturing Optimists
This is a dening moment for U.S. manufacturers
and, indeed, for the U.S. economy. Although the
challenges may seem daunting, the executives who re-
sponded to the Booz & Company survey are generally
optimistic. In stacking U.S. manufacturing facilities
against plants in other countries, only 5 percent viewed
offshore plants as better in quality, and only 14 percent
said that other countries facilities would respond more
effectively to volatile demand.
Every country needs creative, engaged, and prot-
able manufacturers if it hopes to have a healthy econ-
omy that supports the aspirations of all of its citizens.
If you are a manufacturing leader in the United States,
you shouldnt have to go it alone. You should have
support at all levels of government and culture from
Washington to the local cluster. Like all businesspeople,
you must come to terms with the fact that the world
has changed. But as the data shows, the U.S. has a
strong base to build on. The future of U.S. manufac-
turing in general, and of your company in particular,
can be extremely bright. The current wake-up call rep-
resents an opportunity for you to clarify your strengths,
channel your investment, and create your own distinc-
tive direction. +
Reprint No. 11306
Resources
Joni Bessler, Stephen Li, and Sophia Pan, China Manufacturing Com-
petitiveness 20092010, Booz & Company and AmCham Shanghai,
2010: Forecast of prospects and dangers for the burgeoning manufactur-
ing industry of Greater China.
Kaj Grichnik and Conrad Winkler, with Jeff Rothfeder, Make or Break:
How Manufacturers Can Leap from Decline to Revitalization (McGraw-
Hill, 2008): Explains the ISSR framework in more detail and how to
foster a manufacturing renaissance.
Ronald Haddock, Niklas Hoppe, Olaf Bach, and Martin Naville,
A Renaissance at Risk: Threats and Opportunities for Swiss Manufac-
turing, Booz & Company and Swiss-American Chamber of Commerce,
2010: Analysis similar to this one for a country with great strengths and
some vulnerabilities in manufacturing.
Wallace (Wally) J. Hopp and Mark L. Spearman, Factory Physics
(McGraw-Hill/Irwin, 2008): Inuential textbook articulating ways in
which manufacturing leaders can develop stronger capabilities and higher
strategic performance.
For more on this topic, see the s+b website at:
www.strategy-business.com/operations_and_manufacturing.
Designing production systems that align employees
activities with the companys overall strategy
and that empower employees to improve manufacturing
processes can unlock productivity and innovation.
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Rapid advances in manufacturing technology point
the way toward a decentralized, more customer-
centric maker culture. Here are the changes to
consider before this innovation takes hold.
A Strategists
Digital Fabric
by Tom Igoe and Catarina Mota
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At a research meeting in late 2010, a primatologist
studying monkey genetics took a tour of a universitys
digital fabrication shop. She mentioned that her eld
research had stalled because a specialized plastic comb,
used in DNA analysis of hair tissue, had broken. The
primatologist had exhausted her research budget and
couldnt afford a new one, but she happened to be car-
rying the old comb with her. One of the students in the
shop, an architect by training, asked to borrow it. He
captured its outline with a desktop scanner, and took a
piece of scrap acrylic from a shelf. Booting up a laptop
attached to a laser cutter, he casually asked, How many
do you want?
This question is central to most manufacturing
business models. Ten units of a comb or an auto-
mobile component, a book, a toy, or any industrially
produced item typically cost a lot more per unit to
produce than 10,000 would. The price per unit goes
down even more if you make 100,000, and much more
if you make 10 million. But what happens to conven-
tional manufacturing business models, or to the very
concept of economies of scale, when millions of manu-
factured items are made, sold, and distributed one unit
at a time? Were about to nd out.
The rapidly evolving eld of digital fabrication,
which was barely known to most business strategists
as recently as early 2010, is beginning to do to manu-
facturing what the Internet has done to information-
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Guide to
ation
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Tom Igoe
tom.igoe@nyu.edu
is an associate arts professor
at New York Universitys
Interactive Telecommunica-
tions Program (NYU-ITP),
where he oversees work on
innovative manufacturing and
computer-control technol-
ogy. He is the author of Making
Things Talk (OReilly Media,
2007), and a cofounder of
Arduino LLC, an open source
microcontroller platform.
Catarina Mota
catarinamfmota@gmail.com
is a Ph.D. candidate at the
Faculdade de Ciencias Sociais
e Humanas Universidade Nova
de Lisboa and a fellow at the
International Collaboratory
for Emerging Technologies, a
partnership between the Sci-
ence and Technology Founda-
tion of Portugal (FCT-MCTES)
and the University of Texas at
Austin. She is cofounder of the
openMaterials research group
(www.openmaterials.org).
Previous pages:
A 3-D printer generates a
bust of Beethoven in less
than a minute, using a design
uploaded to Thingiverse.com
by a contributor identied
only as dino-girl.
based goods and services. Just as video went from a
handful of broadcast networks to millions of produc-
ers on YouTube within a decade, and music went from
record companies to GarageBand and Bandcamp.com,
a transition from centralized production to a maker
culture of dispersed manufacturing innovation is un-
der way today. Millions of customers consume manu-
factured goods, and now a small but growing number
are producing, designing, and marketing them as well.
As operations, product development, and distribution
processes evolve under the inuence of this new disrup-
tive technology, manufacturing innovation will further
expand from the chief technology ofcers purview to
that of the consumer, with potentially enormous impact
on the business models of todays manufacturers.
Some early signs of change are visible in the de-
velopment and use of relatively low-cost digital fabri-
cation devices. The leading producers of these tools
are rms like 3D Systems (a US$51 million maker of
3-D printers founded in 1986 and based in Rock Hill,
S.C.), Stratasys (a $117 million printer-maker founded
in 1986, based in Eden Prairie, Minn.), and Epilog
Laser (a privately held company founded in 1988 in
Golden, Colo.). Their products were originally used for
rapid prototyping, giving mainstream manufacturers
and university researchers the means to test concepts
and identify problems early in the design cycle. Now,
the devices are being applied to end-product manufac-
turing by a burgeoning number of small-scale manu-
facturers and one-person factories. In mid-2010, 3D
Systems and Stratasys reported on the information site
MakePartsFast.com that more than 40 percent of their
customers used digital fabrication tools to manufacture
not just prototypes, but end products and parts. These
tiny companies are often started with little or no exter-
nal funding; the proprietors tend to work from plans
encoded in software that are often openly available for
download on the Web.
Digital fabrication also continues to attract press
attention in part because of stunts designed for
that purpose. For example, in 2009, Stratasys teamed
up with a Canadian automotive company called Kor
Ecologic Inc. to announce the hybrid Urbee, the rst
automobile with a body fabricated by 3-D printers; in
2010, the laser-sintering company EOS (a privately held
business founded near Munich in 1989) manufactured
a violin within just a few hours. In the long term, many
aspects of todays conventional supply chain are likely to
change. But even in the next few years, digital fabrica-
tion technology and the way it is used will pose
new and unusual challenges for conventional manufac-
turers, both large and small. It also represents enormous
opportunities for brand building, cost saving, consumer
outreach, innovation, and global competitiveness: in
short, for a manufacturing business model that no lon-
ger depends only on economies of scale.
Tools of Change
The rst step in building this new manufacturing busi-
ness model is to take stock of the new fabrication tools.
Digital fabrication devices fall into two categories. The
rst is programmable subtractive tools, which carve
shapes from raw materials. These include laser cutters
(which cut at sheets of wood, acrylic, metal, cardboard,
and other light materials), computer numerical control
(CNC) routers and milling machines (which use drills
to produce three-dimensional shapes), and cutters that
use plasma or water jets to shape material. s
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The second category is additive tools, which are
primarily computer-controlled 3-D printers that build
objects layer by layer, in a process known as fused de-
position modeling. They work with a wide variety of
materials: thermoplastics, ceramics, resins, glass, and
powdered metals. Technically known as additive rapid
manufacturing devices, 3-D printers also use lasers
or electron beams to selectively shape the source mate-
rial into its nal form. Because additive devices require
little setup time, they make possible the production of
any quantity at the same cost per unit, and also allow
easy, rapid switching between products. A single ma-
chine can shift from making combs to making clamps
to making iPhone stands within minutes. In some cases,
a 3-D printer can fabricate in a single piece an object
that would otherwise have to be manufactured in sev-
eral parts and then assembled. And because it composes
objects bit by bit, instead of carving them from larger
blocks, additive printing considerably reduces the waste
of materials.
Additive technologies have been following a path
comparable to that of Moores Law; the capabilities of
the devices are growing and the cost is decreasing expo-
nentially. In 2001, the cheapest 3-D printer was priced
at $45,000; by 2005, the cost had dropped to $22,900,
and now you can buy a professional 3-D printer for
less than $10,000, an open source personal version
for less than $4,000, and a desktop do-it-yourself kit for
less than $1,500. Subtractive tools, such as laser cutters
and CNC routers, have also become more affordable,
mostly because manufacturers have produced models to
t the low-volume needs (and lower budgets) of small
businesses, schools, and individuals. Most of these digi-
tal fabrication devices no longer require custom CAD
software and extensive training. They can follow de-
signs created by people using mainstream programs
like Adobe Illustrator or even using iPad apps; the tech-
niques can be learned in an afternoon.
To be sure, digital fabrication tools have limits.
Currently, they are best suited to production runs of
1,000 items or less. Although a few high-end routers
and cutters are fast enough to produce dozens of prod-
ucts in an hour, 3-D printers cant yet make goods with
the same speed as traditional injection molding. Some
3-D printers can combine different types of plastic (to
make, for example, a hairbrush with a hard plastic body
and soft bristles), but this kind of hybrid printing is still
a high-end process. Most can handle only one type of
material at a time. Metals and other nonplastic materi-
als require specialized devices. Thus far, no digital fab-
rication device, professional or personal, can efciently
produce in one fell swoop a complex multi-material
product such as a mobile phone.
For these reasons, no one expects digital fabrication
to replace conventional manufacturing anytime soon.
According to a 2010 report from the technology market
research rm Wohlers Associates Inc., the most com-
mon applications of the technology are the production
of functional models, prototype components and pat-
terns (used for tooling or to test t and assembly), and
visual aids. All of these are areas where production runs
of one unit are often necessary. Nonetheless, even these
early forms of digital fabrication could become highly
disruptive to conventional manufacturing practices.
How is one factory making 1 million units differ-
ent from 10,000 factories making 100 units? For one
thing, the 10,000 factories offer the safety and ability
to experiment that comes with redundancy. For an-
Most digital fabrication devices can
follow designs created by people using
mainstream programs like
Adobe Illustrator or even iPad apps.
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other, they offer proximity to local customers, and thus
useful information about their needs and wants.
Having a large number of small shops immediately at
hand ensures that when one shop is not available, an-
other can be brought into service. The rapid tooling
turnaround afforded by digital fabrication means that
each shop can change production runs for different
clients as needed. The ability to augment mass produc-
tion with highly customized components and parts, to
reduce inventory by making components on demand,
or to make setup changes more rapidly at a lower cost,
could dramatically affect supply chain design, nance,
and management.
The potential for transforming manufacturing
business models is most evident in healthcare, an in-
dustry that requires mass customization because every
persons body is different. Wohlers estimated the 2009
revenues from 3-D-printed medical devices at $157
million. British manufacturing expert Phil Reeves says
more than 10 million 3-D-printed hearing aids are in
circulation worldwide (it takes just an hour and a half
to fabricate one), along with more than 500,000 3-D-
printed dental implants. Medical researchers are using
fabricators to turn CT and MRI scans into 3-D models
and, at a still very experimental level, to bioprint ar-
ticial bones, blood vessels, and even kidneys layer by
layer from living tissue. Established manufacturers still
have the upper hand when it comes to larger quantities
or complex assembly. That could change, however, as
the devices foster new waves of experimentation.
All of these objects were created
with 3
-
D printers (clockwise from
top left): a bracelet with a coral-
like texture, soles for running shoes,
a model of cellular dynamics,
jewelry modeled after radiolaria
(amoeboid protozoa), an architectur-
al model of a proposed skyscraper,
a tooth model created by scanning
a persons mouth, and an orthopedic
implant.
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Open Source Manufacturing
Probably the most disruptive element of this technol-
ogy is not the tools themselves, but the maker culture
the community of people who sell, use, and adapt
the tools of digital fabrication. This community is, in
effect, a self-organizing global supply chain, consisting
of hundreds of interlinked businesses, user groups, on-
line shopping sites, and social media environments. On-
line fabrication services such as i.materialise (a Belgian
company founded in 1990) and Sculpteo (a Paris-based
service founded in 2009) provide on-demand 3-D print-
ing and laser cutting in small volumes and at rates that
are affordable to individuals. Customers upload a digital
design and receive the corresponding physical object by
mail a few days later. Ponoko (a New Zealand startup
founded in 2007) and Shapeways (a Netherlands-based
spin-off of Philips Electronics) go one step farther: They
are supply chain management tools for garage inventors,
enabling creators to exchange plans and instructions,
coordinate production, and sell their designs and fabri-
cated objects directly to the public.
Complementing these businesses are open reposi-
tories like Thingiverse, a website created and managed
by MakerBot, a New Yorkbased manufacturer of 3-D
printers that was founded in 2009. At Thingiverse, peo-
ple can freely download one anothers designs and pro-
gramming code for such ubiquitous products as gears,
bottle openers, and coat hooks. Distributed manufac-
turing networks like Makerfactory and 100kGarages
enable the communities further by connecting digital
fabricators with potential customers, allowing custom-
ers to post job requests that are then bid on by individ-
ual fabricators. There are also successful new small en-
terprises using digital fabrication to make customizable
iPhone accessories (Glif), jewelry (Nervous System),
cases for prosthetic limbs (Bespoke), and other products
such as kitchenware, toys, and furniture. They generally
make their goods on demand, with short production
runs, catering to both local and global markets.
The makers who start and run these enterprises
dont work alone. Nor do they rely on university or
company labs, as innovators did in the past. Instead,
they are forming open source collaboratives and work-
shops that take advantage of the dropping costs of digi-
tal fabrication and the connectivity of social media. In
the past few years, many informal workshop collabora-
tives have sprung up around the world. These spaces
are not centrally owned or organized, but they share
information collectively and help one another advance.
One such operation, TechShop, has six locations in the
United States and markets itself with the slogan Build
your dreams here. Another group, the community fab-
rication spaces called Fab Labs, is afliated with MITs
Center for Bits and Atoms; there are 50 Fab Labs in
16 countries. Even more numerous are hackerspaces:
community-organized workshops that share an ethic
of collaboration and information sharing on tools and
processes. The world map on hackerspaces.org registers
about 500 of these collectives. Centers for bio-fabrica-
tion also exist; the New Yorkbased Genspace offers the
tools to perform synthetic biology experiments, DNA
analysis, and more.
Within the maker culture, people are expected to
publish their plans and specications, typically under
an open source license, which allows others to copy,
adapt, and learn from the designs, always with credit
and mutual access to ideas. Makers tend to design their
business models accordingly. They make short runs of
More than 10 million 3-D-printed hearing aids
are in circulation worldwide. It takes
just an hour and a half to fabricate one.
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4
each product and make frequent changes based on cus-
tomer feedback; two makers might work together easily
while creating competing products that draw on each
others specications.
Many successful manufacturing startups are
emerging from this community, with strong ties to its
open source ethic. SparkFun Electronics Inc., founded
in 2003 in Boulder, Colo., makes electronic component
modules and devices. Its revenues reached $18 million
in 2010. Makerbot and Arduino (based in Ivrea, Italy,
and making microcontroller modules) had revenues
of more than $1 million each, and Adafruit Industries
(New York, electronics kits and sensors) reported sales
of well over $2 million. The Arduino microcontroller
board, an open source microcontroller platform, sold
almost 300,000 units in its rst seven years, and has
spawned dozens of derivative products because its de-
sign is freely available for copying and innovation.
Open source software is already a billion-dollar busi-
ness, and Adafruit partner Phillip Torrone estimates
that open source hardware will reach that threshold
by 2015. (Torrone is also an editor of Make magazine,
which is devoted to the maker culture.)
A noteworthy parallel to, and inspiration for, the
Western maker community is the shan zhai movement
in China. These fast-moving knockoff manufactur-
ers are genuinely innovative in their own right. They
respond to local needs and tastes, they make continual
improvements in their products, and they repeatedly in-
vest in future developments. (See Knockoffs Come of
Age, by Edward Tse, Kevin Ma, and Yu Huang, s+b,
Autumn 2009.) Andrew Bunnie Huang, vice presi-
dent of engineering for Chumby, an Internet browsing/
receiving device whose plans are published under open
source licenses, adds that many shan zhai companies
share information about materials and other design
elements, and credit one another with improvements.
As do other maker groups, the shan zhai community
enforces this policy itself and ostracizes those who
violate it.
Already, digitally enabled open source manufactur-
ing is changing the way people think about the produc-
tion and use of goods. As Eric von Hippel, a professor
of technological innovation at MITs Sloan School of
Management, put it in his book Democratizing Innova-
tion (MIT Press, 2005): User-centered innovation pro-
cesses offer great advantages over the manufacturer-cen-
tricsystems that have been the mainstay of commerce
for hundreds of years. Users that innovate can develop
exactly what they want, rather than relying on manu-
facturers to act as their (often very imperfect) agents.
Moreover, individual users do not have to develop ev-
erything they need on their own: they can benet from
innovations developed and freely shared by others.
This change is likely to translate into greater levels
of product and process innovation. Von Hippel notes
that users were the developers of about 80 percent of
the most important scientic instrument innovations,
and also the developers of most of the major innova-
tions in semiconductor processing. And it will make
supply chains more robust: As small shops and home
shops come online and share information, networks of
vendors grow more dense, more diverse, and less depen-
dent on any one supplier or region.
Lessons for Large Manufacturers
Any disruptive innovation requires changes in basic op-
erating practices, and digital fabrication is no exception.
As early as 2020, every auto dealership
and home improvement retailer may have
a backroom production shop printing
out parts and tools.
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For example, many large manufacturers have separated
high-expense creative or innovative R&D from low-
cost production processes. But in the maker commu-
nity, those two practices are merging again. The changes
to come will accelerate moves that some leading manu-
facturers are already making: toward open source in-
novation, exible production, and knowledge-intensive
production lines. If you are a mainstream manufacturer
intending to become a leader in this new environment,
here are some directions worth considering.
Prepare now for the capabilities youll need when
some of your products are digitally fabricated. As early
as 2020, every auto dealership and home improvement
retailer may have a backroom production shop printing
out parts and tools as needed. Manufacturers that gure
out how to make their wares out of printable compos-
ites, investing now in the requisite changes in materials,
could have a considerable advantage.
One way to gain skills and experience is to par-
ticipate in fabrication-oriented supply chain networks,
leasing out excess capacity to smaller manufacturers or
startups or using those customers to diversify your ex-
isting business. SparkFun has done this for clients that
want small numbers of custom-printed circuit boards,
spinning off a business called BatchPCB.com, which
aggregates small circuit-board jobs into larger batches
for mass production. For the end customer, it means
waiting a few more days for the board, but at a drasti-
cally reduced price.
Experience suggests that your own companys ca-
pabilities will improve when your employees get their
hands on the tools of fabrication. For the past 50 years,
the separation of manufacturing from R&D has pro-
duced engineering graduates with too little hands-on
manufacturing experience. Now that fabrication tools
are increasingly driven by digital information, the two
functions can work more closely together. Many fac-
tory-oor workers are already highly skilled at read-
ing and interpreting design les and operating and
maintaining machinery, and should be seen as allies in
adapting shop processes to match new tools. As com-
puter-controlled fabrication tools become more ex-
ible and product runs become shorter, a typical factory
worker might be making tripod handles in the morning
and watchbands in the afternoon, and the gap between
R&D and manufacturing will narrow.
Establish a hybrid product line that mixes com-
plementary mass-production and individual-production
items. For some objects, digital fabrication will allow
you to shorten product life cycles and make rapid im-
provements. Limor Fried, founder of Adafruit, notes
that you can sell 2,000 of anything on the Internet
with little effort. If you can nance development by
planning a run that size, you can innovate at a prot.
Digital fabrication tools make it easy to swap in new
features, change the production line, or restart produc-
tion of old products if demand resurfaces. In this en-
vironment, its helpful to think of product planning as
designing a continuous information ow, rather than
designing separately launched objects.
For other items, such as commonly used products,
exploit the competitive advantage that scale provides.
Whether its the mounting bolt used in all camera tri-
pods, the USB cables that connect to more and more
electronic devices, or the ubiquitous aluminum drink
can, things that are universally compatible and con-
sumed in large quantities will always be needed. Be-
cause standards hold a complex system together, they
must be openly available, clearly dened, and changed
only when necessary. This makes them good anchor
products for large manufacturers that have capable sup-
ply chains.
Combat reverse engineering with open innova-
tion. Digital fabrication will inevitably enable amateur
enthusiasts to knock off and alter commercial products
in their garages. Although its unlikely that any one in-
dividual will replicate complex goods such as laptops,
cameras, or cars in large quantities, the Internet is al-
ready ooded with blueprints for customizing consumer
goods, repurposing game controllers, and replacing
broken parts. Just like the music and movie industries,
manufacturers now face a choice between engaging in
eternal court battles with their own customers and as-
similating this new culture of sharing and remixing into
their design and production processes.
Deploy the new tools to help consumers adapt
and personalize their products, and use this to learn
about their unspoken wants and needs. There are al-
ready several examples to emulate. Quirky.com, a site
where inventors can propose their ideas for fabrication,
invites the 35,000-plus members of its community to
vote on whether a product should be made. The result is
imaginative devices and housewares as varied as preci-
sion plungers, cord organizers, and new types of Swiss
Armystyle knives. Customers whose ideas are manu-
factured get a cut of the prots.
The Microsoft Corporation has learned from cus-
tomer innovation on its Kinect sensor, a popular acces-
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sory for its Xbox 360 game console that allows games to
track and respond to peoples body motions. Just after
the Kinects North American introduction, Adafruit
announced a competition for an alternative open source
driver for the device. This started a frenzy of Kinect
hacking, generating numerous novel applications for
the device including 3-D mapping for robotic de-
vices, 3-D holographic images, and many other appli-
cations. The Kinect, which was originally marketed as
just a sophisticated video game controller, could thus be
made into a motion-detection device with endless ap-
plications, appealing to a much broader customer base.
Although Microsoft initially threatened legal action, it
ultimately chose to capitalize on the excitement. (It later
turned out that Johnny Chung Lee, a member of the
Kinect design team, had nanced the original Adafruit
competition without asking permission from the com-
pany.) Microsoft now provides a software development
kit to cultivate its unofcial Kinect developers.
Texas Instruments Inc. (TI) also combines propri-
etary and open source products in its portfolio. Its open
source products include the Beagle Board, a low-cost
computer-processing device with the computational
capabilities of a typical smartphone or tablet computer.
Jason Kridner of BeagleBoard.org, a developer com-
munity that includes several TI employees, told Make
magazine editor Phil Torrone, The revenues on board
sales are in excess of $1 million annually and continue
to rise, but the business model here is one of enabling
the technology partners, not making money off the
board sales. That said, all parties in the value chain are
making money off the board sales and this helps to
keep the ecosystem alive where people can participate at
almost any level.
Are there enough interested customers to justify
such efforts? One 2010 research study of United King-
dom consumers, conducted by Eric von Hippel, Jeroen
De Jong, and Steven Flowers, found that 2.9 million
people, or 6.2 percent of the nations adult population,
have taken part in some form of consumer product in-
novation since 2006. In aggregate, they wrote, con-
sumers annual product development expenditures are
2.3 times larger than the annual consumer product
R&D expenditures of all rms in the UK combined.
Help in the development of new and better mate-
rials for fabrication. Independent fabricators are eager
for materials, and they are experimenting fervently.
Forward-thinking manufacturers can form powerful
partnerships by making their scrap materials available
for experimentation.
Advanced materials emerging today include con-
ductive thermopolymers and inks (useful for printing
electronic circuits), organic semiconductors, metal la-
ments with low melting points, and paper pulp that can
feed into 3-D printers for additive packaging. The list
grows daily, and materials information is ever-more-
readily available on open access blogs such as formloves-
function.com and openmaterials.org.
Better materials are particularly needed to reduce
waste and hazard at the end of a products life, espe-
cially because the faster production cycles of digital fab-
rication may lead to increasing numbers of discarded
products. Ultimately, the disposal of goods is a problem
of information and logistics. Recyclers need to know
whats in a product to break it down into component
materials safely. The companies that manage assembly
of a product can (and, in our opinion, should) partner
with recyclers, providing the information needed to
safely and protably disassemble it into raw materials.
Be prepared for new misuses of technology. The
most troubling side of digital fabrication is the poten-
tial for new forms of crime and abuse. In June 2010,
i.materialise.com received an order for a custom skim-
mer, a card-reading device that fastens to the card slot
on an ATM. Cleverly designed skimmers can look just
like part of the machine. Every time a customer inserts
a debit card, the skimmer copies the card numbers and
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Resources
Limor Fried and Phillip Torrone, Million Dollar Baby, 2010, www
.adafruit.com/pt/fooeastignite2010.pdf : Overview presentation of open
source hardware companies by Adafruit.
Phillip Torrone, Open Source Hardware 2009, 2009, http://blog
.makezine.com/archive/2009/12/open-source-hardware-2009-the-def
.htm: List and overview of open source hardware projects in existence
in 2009.
Edward Tse, Kevin Ma, and Yu Huang, Knockoffs Come of Age, s+b,
Autumn 2009, www.strategy-business.com/article/09315: Introduc-
tion to Chinas shan zhai companies and their transition from piracy to
competitive innovation.
Eric von Hippel, Jeroen De Jong, and Steven Flowers, 2010: Compar-
ing Business and Household Sector Innovation in Consumer Products:
Findings from a Representative Study in the UK, 2010: Survey of the
development and modication of consumer products by product users in
a representative sample of 1,173 U.K. consumers age 18-plus.
Wohlers Associates, Wohlers Report 2011, 2011,
www.wohlersassociates.com/2011report.htm: Yearly in-depth analysis of
the additive manufacturing industry worldwide.
www.strategy-business.com/operations_and_manufacturing.
PINs for later extraction. The proprietors of i.materialise
refused to fabricate the skimmer, but other 3-D printing
services may not be as ethical.
Disruption has its downsides. A diversied supply
chain, more widespread manufacturing literacy, and
changing intellectual property practices will inevita-
bly bring new forms of abuse and mishap. Regulations
and conventional law enforcement might not be agile
or thorough enough to keep up. Manufacturing as an
industry will need to promote new best practices and
professional norms in collaboration with a more en-
gaged customer base and a wider range of manufactur-
ing, distribution, and reclamation partners.
The Future of Detroit
Taken as a whole, digital fabrication and information
sharing herald a diversication of the manufacturing
ecosystem. Economies of scale will still exist. Large
manufacturers that adapt will benet signicantly. Not
every customer will be a maker. Most will be happy
to purchase products created by others, but they will
choose from among a far greater number of producers
and innovators. Remember that despite the popularity
of le sharing, the music and movie industries are not
dying. The mainstream producers of goods may face
similar challenges and opportunities.
To Dale Dougherty, publisher of Make magazine,
Detroit represents the prototypical city of the future
for digitally enabled manufacturing. Detroit has a large
population in need of employment, knowledge of a
wide range of manufacturing techniques, and a surplus
of affordable real estate. In July 2010, Dougherty con-
vened the rst of a series of Maker Faire expos in the
Motor City (similar expos had taken place since 2006
in the San Francisco Bay area and Austin, Texas). Three
hundred and twenty-ve Michigan-based manufactur-
ers of products, including knitted goods, soap, machine
tools, rockets, and auto components, showed off their
work to the public.
Dougherty envisions cities like Detroit fostering
new industries of digitally enabled fabrication. Large
manufacturers might outsource designs to local mi-
cro-factories, leveraging supply chains to build highly
responsive production networks. Unions might help
their laid-off members become entrepreneurs, provid-
ing group buying power for health insurance as well
as materials and services. Whether digital fabrication
will have this kind of transformative effect on troubled
economies isnt known; indeed, no one can predict
exactly how the new, disruptive technology will play
out. But we can already guess at the capabilities that
will be needed by manufacturers to win in this new
game. The history of digital technology suggests that
the winners will be those that embrace decentralized
models, exchanging the kinds of information, materi-
als, fabrication processes, knowledge, and labor that,
for the rst time, can travel freely across a network of
avid makers. +
Reprint No. 11307
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During the high-growth years between
1992 and 2007, the globalization of com-
merce galloped at a faster pace than in any
other period in history. Now,
amid the chronic unemploy-
ment and anti-trade rhetoric of
the post-nancial-crisis world,
some observers wonder whether
globalization needs a time-out.
However, the experience of
multinational companies in the
eld suggests the opposite. For
them, globalization isnt hap-
pening rapidly enough. Whereas
GDP growth has stalled in the industrial-
ized world, consumption demand is still
expanding in China, India, Russia, Brazil,
and other emerging markets. The 1 bil-
lion customers of yesterdays global busi-
nesses have been joined by 4 billion more.
These customers reside in a
much larger geographic area;
three-quarters of them are new
to the consumer economy, and
they need the infrastructure,
products, and services that only
global companies provide.
The problem is not globaliza-
tion, but the way our current in-
stitutions are set up to respond
to this new demand. The pre-
vailing corporate operating model does not
work well with the structural changes that
have taken place in the global economy.
P
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M
r
c
k
How to Be
a Truly Global
Company
Many multinational business models are no
longer relevant. Skillful companies can integrate
three strategies customization, competencies,
and arbitrage into a better form of organization.
by C. K. Prahal ad and Hr i shi Bhat t achar y ya
C.K. Prahalad, 19412010
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C.K. Prahalad
passed away on April 16, 2010.
He was the Paul and Ruth
McCracken Distinguished
University Professor of
Corporate Strategy at the
University of Michigans Ross
School of Business and the
author of The Fortune at the
Bottom of the Pyramid (Wharton
School Publishing, 2005). This
article, which was in progress
at the time of his death, is
published with the permission
of his family.
Hrishikesh (Hrishi)
Bhattacharyya
hrishibhattacharyya@gmail.com
is a management consultant
and was formerly a senior
vice president at Unilever with
global responsibility for the
health and wellness category.
He has also taught at the
University of Michigans Ross
School of Business and at the
London Business School.
Most companies are still organized as they were
when the market was largely concentrated in the triad
of the old industrialized world: the U.S., Europe, and
Japan. These structures lead companies to continue
building their global strategies around the trade-offs
and limits of the past trade-offs and limits that are
no longer accurate or relevant.
One of the most prevalent and pernicious of these
perceived trade-offs is the one between centrally driv-
en operating models and local responsiveness. In most
companies, an implicit assumption is at play: If you
want to gain the full benets of economies of scale
and to integrate common values, quality standards, and
brand identity in your company around the world
then you must centralize your intellectual power and
innovation capability at home. You must bring all your
products and services into line everywhere, and accept
that you cant fully adapt to the diverse needs and de-
mands of customers in every emerging market.
Alternatively (according to this assumption), if you
want locally relevant distribution systems, with rapidly
responding supply chains and the lower costs of emerg-
ing-market management, then you must decentralize
your company and run it as a loose federation. You must
move responsibilities for branding and product lineups
to the periphery, and accept different trade-offs: more
variable cost structures, fewer economies of scale, more
diverse and incoherent product lines, and more incon-
sistent standards of quality.
Some companies try to use strict cost controls to
manage these trade-offs. They put in place a decentral-
ized operating model with some central oversight, usu-
ally augmented by outsourcing. But this is a tactical
move based on expediency, rather than a global strat-
egy. This approach leads to suboptimal results in to-
days complex world.
Other false trade-offs are visible in the tension
many companies experience between their current busi-
ness model and the needs of the emerging markets they
are entering. They wonder:
Whether to serve existing customers in their home
countries or new customers in emerging countries.
Whether to meet competitive quality standards
demanded by consumers in wealthy countries or offer
just the good enough features that poorer customers
can afford.
Whether to pursue a strategy of premium or dis-
count pricing.
How to attract and retain resources and talent,
which are perceived as draining away from emerging
markets to the industrial world whenever employees are
permitted to migrate.
Whether, in using resources strategically, to fol-
low the typical Western orientation (toward reducing
labor and accumulating capital) or the view from emerg-
ing markets (where labor is inexpensive, capital is dif-
cult to accumulate, and therefore it is worth investing in
building large workforces for growth).
Corporate leaders expect to have to make stark
choices as they expand. But the time has come to
embrace a new business model that encompasses both
the established advantages of industrial markets and
the opportunities of emerging economies. (Also see
Competing for the Global Middle Class, by Ed-
ward Tse, Bill Russo, and Ronald Haddock, page
62.) Instead of struggling to apply a Western business
model everywhere, you can adopt a business model
that treats decentralization, centralization, current prac-
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tices, and potential disruptions not as trade-offs, but
as complements.
In a previous article, Twenty Hubs and No HQ
(s+b, Spring 2008), we proposed an essential part of
this business model: a global corporate structure with
no headquarters. Instead of a single center, companies
would establish core ofce hubs in many or most
of the 20 gateway countries in the world that house
70 percent of the worlds population and account for
80 percent of its income. These 20 countries include
10 from the industrialized world: Australia, Canada,
France, Germany, Italy, Japan, the Netherlands, Spain,
the United Kingdom, and the United States. The other
10 are emerging markets: Brazil, China, India, Indone-
sia, Mexico, Russia, South Africa, South Korea, Thai-
land, and Turkey.
A hub strategy enables a company to provide prod-
ucts and services everywhere. But it will not in itself
resolve the trade-offs of globalization. Companies can
accomplish this only with a more comprehensive busi-
ness model that (1) customizes their products and ser-
vices in hubs around the world, (2) unites business units
around a platform of proprietary knowledge and the
building of competencies, and (3) arbitrages their op-
erating models to gain cost-effectiveness, productivity,
and efciency.
An Operating Model without Trade-offs
Some companies are already following these three im-
peratives, pursuing all of them simultaneously. Among
those that we have studied in detail are Toyota, Marriott,
McDonalds, GE Healthcare, and several global cellular
telephone companies. Leaders in these enterprises have
trained themselves and their teams to be very deliberate
about where to customize, how to build competencies,
and what to arbitrage. With this type of operating mod-
el, there is no longer a need to choose between a cen-
tralized and a decentralized structure, between current
and future customers, or between a strategy grounded
in industrialized economies and one grounded in emerg-
ing economies.
To illustrate these three imperatives, we draw on
the experience of GE Healthcare (customization), Mc-
Donalds (competencies), and the Chinese and Indian
mobile telephone industries (arbitrage). Its important to
remember, however, that all these stories involve inte-
grating all three elements a rare feat. Only with the
full operating model can a company gain the benets of
decentralization, centralization, and outsourcing with-
out making compromises.
Customization. The key to this imperative is to de-
liver products and services in a locally competitive way.
That means they must satisfy the needs and wants of
diverse customers, in terms of features, affordability, and
cultural afnities. Because needs and wants vary greatly
among people at different income levels, this objective is
complex and expensive to reach in any centralized way.
That is why companies must leverage the diversity of a
decentralized structure.
Is there a simple and coherent way to deliver cus-
tomization to customers in 200 countries spread over
ve continents? The answer is yes, through the hub sys-
tem: Companies customize only in a maximum of 20
gateway countries. With this limited investment, they
can serve customers everywhere, on every level of the
income pyramid, from the wealthiest to the poorest.
These 20 countries have enough scale in themselves to
offer the necessary economies and growth potential.
Instead of struggling to apply a Western business model
everywhere, you can adopt a business model
that treats decentralization and centralization not
as trade-offs, but as complements.
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4
They are also well equipped with skills: Manufactur-
ers of goods will nd the suppliers and employees they
need to meet reliable quality standards in operations,
and they will also nd innovation and R&D facilities
already existing there. The logistical and institutional
infrastructure is well developed in most of these gate-
way countries, integrated into international regulation
and trade. Each gateway country can independently
perform most necessary business activities; when linked
together, they make up a formidable network.
Many companies will settle on fewer than 20 hubs;
each industry requires a different selection of gateway
countries to meet differing tastes and needs. Reduc-
ing complexity in this way also dramatically reduces a
wide range of overhead costs for large global companies,
while enabling them to travel the last mile to custom-
ers. For example, by trimming back supervisory layers
to only those needed by the gateways, companies can
cut overhead costs signicantly.
GE Healthcares story illustrates how expanding
through a few gateway countries enabled it to thrive in
many locations. Its primary business is high-end medi-
cal imaging products. In the late 1980s, GE Healthcare
started investing in ultrasound machines, designing
separate devices for use in obstetrics and cardiology.
Over time, the business became a market leader, with
a portfolio of premium products employing cutting-
edge technologies, sold primarily to big hospitals in rich
Western countries.
Very few devices made by GE Healthcare were sold
in China and India in the 1990s, although the medical
need was enormous and the region represented a huge
potential market. In these large but poor countries,
the general population relied (and still relies) on poorly
funded, low-tech hospitals and clinics in small towns
and villages. None of these organizations could afford
sophisticated, expensive imaging machines. There was a
signicant need for customization: Someone needed to
create low-priced machines with basic features that were
easy to use. The devices also needed to be portable, so
that medical workers could bring the machine to the
patient, rather than the patient to the machine.
GE Healthcare started a major effort in 2002 in
China to tackle this problem. The initiative was favored
by a corporate policy put in place a few years earlier:
reorganizing some emerging-market enterprises into
semi-autonomous local growth teams with their own
P&Ls. This meant that GE Healthcare could now cre-
ate a local business oriented to Chinas particular needs
and advantages, drawing on local talent and combin-
ing product development, sourcing, manufacturing,
and marketing in one business unit. The price of a
conventional Western ultrasound machine is between
US$100,000 and $350,000. GEs rst portable machine
for China was launched at a price of only $30,000,
and by 2007 a newer machine was on the market for
$15,000. Sales took off in China and then in a few other
emerging-market gateway countries.
Soon, customization worked in the other direction.
Applications were found for these devices in several rich
countries as well, at accident sites and in clinics and
emergency rooms. Sales rose from zero to more than
$300 million in ve years. In 2009 as recounted
by GE chief executive ofcer Jeffrey Immelt and inno-
vation experts Vijay Govindarajan and Chris Trimble
in the Harvard Business Review in October 2009
GE announced that over the next six years it would
spend $3 billion to create at least 100 healthcare innova-
The menus at McDonalds restaurants vary
widely around the world, while unity remains
firmly entrenched where it should be
in branding, technology, and business processes.
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tions that would substantially lower costs, increase ac-
cess, and improve quality.
Uniting around a platform of competencies. This
initiative means aligning your entire global company
with a common core purpose, a body of proprietary
world-class knowledge, and the competencies that dis-
tinguish your company from all others.
The core purpose must be understood equally in
all functions and geographies of the corporation. Every
individual should know the strategic principles of the
business which are the same around the world, but
adapted differently in each locale. For example, providing
everyday low pricing is the core purpose of Wal-Mart
Stores Inc. Although that principle remains constant,
the implementation varies considerably; Walmart in
India is a joint venture wholesale operation, and
Walmart in Mexico operates restaurants and banks as
well as superstores.
The core competencies at the heart of this plat-
form include proprietary technology and intellectual
property. These are the unique pieces of knowledge
and know-how that distinguish any company not
the applications or technologies, but the standards and
platforms of knowledge that the company creates and
makes its own. They may include manufacturing pro-
cesses, supply chain and logistics systems, customer
insightgathering processes, or distribution and access
systems. They are made available to all operations, ev-
erywhere in the world, and are used to customize offer-
ings and arbitrage procurement and costs.
At the McDonalds Corporation in the mid-2000s,
this type of unity represented a dramatic shift away
from the rigid hierarchies, brands, nancial perfor-
mance metrics, and reporting relationships of its old
centralized model. The restaurant chain had embodied
the centralization model for many years. Every aspect
of the system had been standardized around the world:
brand identity, product offerings, packaging systems,
franchise arrangements, and the design of the stores.
All this had come out of a single manual, and the com-
panys rigidity had helped it prosper, because it was seen
as exporting an image of the American lifestyle.
But standardization began to reach its limits
around 2001. There was a distinct shift in consumer
taste toward healthier, more nutritious foods. In the
U.S., fast-food restaurants in general and McDonalds
in particular were blamed by many for the emerging
obesity epidemic, especially among American children.
Customers started switching to other chains. In the rest
of the world, McDonalds was identied with American
tastes, and seen as being out of sync with the needs of
non-U.S. consumers.
The McDonalds leadership responded by creating
a new platform on which the company could unite: not
standardization, but a common thrust to provide fresh
food, healthier menu options, and customized offerings
for different cultures. Product offerings were no longer
centralized, and the menus at McDonalds restaurants
vary widely, while unity remains rmly entrenched
where it should be in branding, technology, and the
business processes that gave the company its differen-
tiation, cost bases, and productivity. The brand logo,
color schemes, and store layouts are the same around
the world. Procurement and distribution systems are
centrally managed to ensure that deliveries take place
on time to more than 32,000 individual restaurants.
Structured training from a common playbook is given
every day to store associates in all locations. The com-
panys proprietary knowledge remains centrally and rig-
idly controlled.
Arbitrage. The nal imperative involves gaining
effectiveness and reducing cost by nding less expensive
materials, manufacturing processes, logistics systems,
funds sourcing, or infrastructure. Most companies have
addressed this tactically, by offshoring back-ofce work
or moving manufacturing to locations with lower-cost
labor. This is generally a defensive or reactive move,
rather than a well-considered strategy.
An arbitrage initiative is much more systemic. The
business looks at its production ow and disaggregated
cost chain as a whole, seeking optimized sourcing, sales
conversion, and go-to-market options. The initiative ap-
proaches materials, factory locations, and people as part
of a single system, taking into account the processes and
procedures within the most important hubs, and among
hubs as well.
The history of mobile telephony in China and In-
dia provides a good example of the power of arbitrage.
These two countries together have more than 1 billion
cell phone users, and the number of new connections in
India alone exceeds a staggering 10 million a month. In
the early 2000s, the groundwork for new networks in
China and India was laid by a few farsighted telephone
companies. At that time, landline networks were sparse,
and the number of homes with phone lines was a mi-
nuscule fraction of the total households. The only way
to build a protable phone system was to create net-
work value: access to enough other people and institu-
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4
tions to make the system feel indispensable. This meant
providing telephone access to millions of prospective
customers who had never used a phone, who lived on $2
a day, who had no money to buy the phones outright,
and who lacked the bank accounts and credit cards that
would allow them to sign service contracts.
The pricing structures reected these realities. In
India, for example, Reliance Industries Ltd. (a large na-
tionwide conglomerate) sold Nokia and Motorola hand-
sets for as little as $10, lowered call rates to two cents
per minute for these phones, and sold prepaid cards that
customers could use both to pay for and to ration their
telephone use. It took skillful collaboration among cell
phone manufacturers and carriers to accomplish the ar-
bitrage needed for them to offer such prices. Manufac-
turers such as Nokia, Motorola, and Samsung offered
their products, product knowledge, and R&D capabil-
ity at a reduced cost; carrier companies such as Voda-
fone, China Mobile, and Airtel invested in cell phone
towers and switching equipment with minimal return
at rst. Then Airtel in India took a hugely innovative
step. Realizing that its own capital for network expan-
sion was constrained, it brought in Ericsson, Siemens,
Nokia, and IBM as network equipment and IT vendors,
convincing them to forgo their ordinary fee structures.
Instead, Airtel paid these companies on the basis of us-
age and revenue. Airtel thus converted xed infrastruc-
ture costs to variable costs and improved its ability to
offer low prices to customers.
Another form of arbitrage, deploying the most in-
expensive marketing and distribution channel avail-
able, was an essential factor in creating a mass mobile
phone market. Reaching people in remote Chinese or
Indian villages was a huge challenge. Little grocery
shops, often housed in temporary structures, were of-
ten the only commercial channels available to consum-
ers there. These stores sold everyday-use products such
as soap, cigarettes, and matchboxes. Instead of creating
a new channel of dedicated telephone stores, the phone
companies established partnerships with these outlets;
they stocked and sold the prepaid cell phone cards. This
would never have happened if the telcos had followed
their old pricing and distribution models.
Bringing the Elements Together
Some companies recognize the benets of customiza-
tion; they are moving into new geographies through
gateway countries. A growing number of companies
are uniting around platforms of competencies. And, of
course, many companies practice arbitrage. But until
they join the few pioneers that combine these three ele-
ments, most companies will not get the full payoff of
the new operating model. Indeed, the three cases de-
scribed in the previous section are successful precisely
because they integrated all three elements.
For example, GE Healthcare had to drop the price
of its ultrasound machines by more than 90 percent in
order to have its products accepted in emerging mar-
kets. Its solution involved not just customization, but
arbitrage: It used an ordinary laptop computer instead
of proprietary hardware. These machines did not have
many of the features of their expensive counterparts,
but they could perform such simple tasks as spotting
stomach irregularities or enlarged livers or gallbladders.
This made them critical tools for doctors at rural clin-
ics. The laptop-based design, in turn, drew heavily on
GEs platform of competencies: specically, experience
with other projects that had shifted from using custom
hardware to using standard computers. The new devic-
es also incorporated breakthrough ideas from scientists
in the GE system with deep knowledge of ultrasound
technology and biomedical engineering.
Similarly, the McDonalds story did not only in-
volve unity around a platform. The company also saw
the power of customization. Today, McDonalds offers
rice burgers in Taiwan, vegetarian entrees in India, tor-
tillas in Mexico, rice cakes in the Philippines, and wine
with meals in many European cities. McDonalds also
extended its already impressive arbitrage capabilities
through sophisticated sourcing and distribution prac-
tices, tailored to each locations opportunities.
The arbitrage in the Chinese and Indian mobile
phone story also depended on the other two elements.
Although the prices were low, the equipment was stan-
dard quality; networks had to seamlessly integrate with
the worlds telecommunications systems. The compa-
nies involved, including the vendors such as Siemens,
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Motorola, and Ericsson, drew upon their platforms of
proprietary knowledge to make it work. Everyone cus-
tomized relentlessly, varying the payment plans, the
amounts coded into phone cards, and the services of-
fered to support the different needs and interests of tele-
com users in each country.
For another example of the way these three ele-
ments can be deliberately combined, consider the case
of Marriott International Inc. Throughout most of its
history, the company followed a centrally driven strat-
egy with tight controls over the look and feel of its prop-
erties. But the company was also willing to experiment.
For example, in 1984, it was the rst hotel chain to offer
timeshare vacation ownership.
Like McDonalds, Marriott learned the problems
of rigorous centralization rsthand. In 2001, when it
opened a timeshare in Phuket Beach, Thailand, the ven-
ture failed. Gradually, Marriott realized that the reason
had to do with cultural differences: Asian tourists, espe-
cially the Japanese, want to visit multiple places during
a single vacation. They typically stay two or three days
in one location and then move on. This made them
very different from Marriotts U.S. and European holi-
day travelers, who prefer to stay in one place for a week
or more. In 2006, the hotel chain launched a timeshare
network called the Marriott Vacation Club, Asia Pa-
cic. Customers could hop among locations, spending
their annual club dues anywhere in the network. This
customization initiative turned a failed project into one
of the companys fastest-growing businesses.
In initiatives like this, Marriott draws on its central
strengths, including a devotion to knowledge at starts
with the CEO (and son of the founder) J.W. (Bill)
Marriott Jr. In his 1997 book, The Spirit to Serve: Mar-
riotts Way (with Kathi Ann Brown; HarperBusiness),
Marriott wrote, Our principal product is probably not
what you think it is. Yes, were in the food-and-lodg-
ing business (among other things). Yes, we sell room
nights, food and beverage, and time-shares. But what
were really selling is our expertise in managing the pro-
cesses that make those sales possible. This approach is
reected in Marriotts strong spirit to serve philoso-
phy and its highly centralized recruiting approach for
seeking out dependable, ethical, and trustworthy asso-
ciates. The company is known in the U.S., for example,
for its robust efforts to train welfare recipients to make
a permanent transition into the workforce, and world-
wide for its extensive prot-sharing practices and hu-
man resources support.
The companys collegial culture allows it to pare
back the expenses of oversight and supervision; every-
one naturally pays attention to cost and efciency. Mar-
riott also demonstrated its facility for arbitrage through
its early adoption of the Internet as a vehicle for making
and conrming reservations.
Many CEOs and top managers are still asking
themselves when the bad times will end. No one has the
answer, and even in a robust recovery, competition will
not slacken. A better question is, What can we do now
to establish ourselves in the new global economy? Con-
sumer-oriented companies will need to deliver world-
class quality in their products and services, customized
for purchasers in multiple locales and circumstances,
with signicant price reductions (affordable to people at
the lowest income levels). They must also provide their
customers varying forms of access (owning, renting, or
leasing equipment). This cannot be done when a com-
pany is striving to balance decentralization and central-
ization. It can be accomplished only by companies that
transcend the old trade-offs and seek operating models
that allow them to serve the largest numbers of people
while meeting the highest possible standards. +
Reprint No. 11308
Resources
Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, How GE Is
Disrupting Itself, Harvard Business Review, October 2009: Inside story
of the GE Healthcare initiative to overcome glocalization and innovate
within emerging economies.
Jon R. Katzenbach and Jason A. Santamaria, Firing up the Front Line,
Harvard Business Review, MayJune 1999: On Marriotts strategy.
Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to
Win with a Capabilities-Driven Strategy (Harvard Business Review Press,
2011): The capabilities system resembles this articles unity of platform.
C.K. Prahalad, The Innovation Sandbox, s+b, Autumn 2006, www
.strategy-business.com/article/06306: Why arbitrage does not mean
thoughtless substitution, but rather creative low-cost alternatives that
transform conventional business practice.
C.K. Prahalad and Hrishi Bhattacharyya, Twenty Hubs and No HQ,
s+b, Spring 2008, www.strategy-business.com/article/08102: First
publication of the customization concept, with an operating model for
transforming the headquarterslocal ofce relationship.
Ellen Pruyne and Rosabeth Moss Kanter, Pathways to Independence:
Welfare-to-Work at Marriott International, Harvard Business School
Case Study 9-399-067: More detail about Marriott.
For more thought leadership on this topic, see the s+b website at:
www.strategy-business.com/global_perspective.
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61
Competing for the
Global Middle Class
by Edward Tse, Bill Russo,
and Ronald Haddock
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Three types of companies are
jockeying for position in emerging
economies, seeking to capture the
loyalty of billions of new consumers.
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Edward Tse
edward.tse@booz.com
is a senior partner with Booz &
Company and the rms chair-
man for Greater China, based
in Hong Kong and Shanghai.
He is the author of The China
Strategy: Harnessing the Power
of the Worlds Fastest-Growing
Economy (Basic Books, 2010).
Bill Russo
bill.russo@booz.com
is a senior advisor with Booz &
Company. Based in
Beijing, he has more than
20 years of experience in the
automotive industry, most
recently serving as
vice president of Chryslers
business in Northeast Asia.
Ronald Haddock
ronaldrhaddock@gmail.com
is a former partner at Booz &
Company, where he helped
companies build businesses
in China, India, Korea, Russia,
and other emerging markets.
Previous pages:
In Chinas Sichuan province,
farmers look over Haiers
at-screen TVs.
In the 1920s, when Alfred P. Sloan Jr. reorganized
General Motors Company, he promised shareholders a
car for every purse and purpose. Sloan tapped into a
teeming middle-class market of Americans who couldnt
afford luxury cars, but nonetheless wanted product op-
tions far beyond the any color so long as its black
Model T Ford. This immense U.S. middle-class co-
hort propelled GM past Ford into a leadership position
among carmakers that lasted for the rest of the century.
Today, leaders of multinational corporations have a
similarly lucrative opportunity on a much bigger play-
ing eld: a global middle-class market. This worldwide
economic phenomenon encompasses a huge customer
base. In 2011, it includes about 400 million people in
the mature middle classes of the U.S., Europe, and Ja-
pan, and another 300 to 500 million people, depending
on how the middle class is dened, in emerging econo-
mies. (The World Bank denes middle class as people
who are above the median poverty line of their own
countries. This might make them poor by the standards
of Europe or the U.S., but gives them enough purchas-
ing power to become consumers of manufactured goods
and services.) This new global middle class is particu-
larly evident in Brazil, China, India, Indonesia, Mexico,
Nigeria, Turkey, Vietnam, and other countries with
relatively large working populations and rapid economic
growth rates.
The middle class in each of these emerging econo-
mies has its own unique prole of demand. However,
they all have one thing in common: They are recover-
ing from the global recession with an increasingly ur-
banized lifestyle, and their numbers are expanding at
very high rates, especially compared with the rest of the
world. The value chain of companies that provide this
population with goods, services, and infrastructure is
becoming known as the global middle market. Com-
panies that secure leading positions within that market
could well become the 21st-century equivalents of Al-
fred Sloans General Motors.
One such company may be Chinas Haier Group.
In 1985, Haier was a bankrupt domestic refrigerator
manufacturer. Product quality was so bad that general
manager Zhang Ruimin (now chairman and CEO)
built his case for change by lining up 76 defective units
and ordering workers to destroy them with sledgeham-
mers. Today, one of the sledgehammers is on display in
corporate headquarters, and Haier is one of the worlds
largest appliance makers a multinational corporation
with a reputation for world-class quality and 2010 rev-
enues approaching US$20 billion.
Zhang put in place three successive strategic initia-
tives, aimed, respectively, at improving product qual-
ity, expanding globally, and diversifying the companys
product line: for example, offering washers at a range
of price points for consumers in different income seg-
ments, just as GM did with its cars early in the 20th
century. Then, in December 2005, Zhang announced
a new thrust. Haier would stop shipping products
from China to the rest of the world; instead, it would
design and manufacture products elsewhere, custom-
izing them for specic national and regional markets.
Today, Haier produces extra-large-capacity washers that
can accommodate the robes of Middle East consum-
ers; electronically sophisticated washers that can cope
with the frequent power uctuations in India; whisper-
quiet, timer-equipped washers for Italians who want to
take advantage of the lower power rates available late at
night; and other locally targeted variants. P
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Haier is not the only company that has transformed
itself to seek a share of the global middle-class market.
In a variety of industries including consumer pack-
aged goods, electronics, automobiles, medical products,
and agricultural equipment corporate leaders are dis-
covering that they must rethink their product and ser-
vice lines, go-to-market strategies, and operating mod-
els to build a presence in emerging economies.
Momentum in the Middle
The rst step toward becoming a leading company for the
global middle market is recognizing the pace of develop-
ment in the countries where you hope to do business. All
industrializing countries follow an arc of growth: an
evolutionary path of economic change. They start as na-
scent economies (emerging from subsistence, with large
numbers of young people). They gradually evolve into
mature economies, with relatively at growth and large
numbers of aging people. In between, there is a critical
stage of urbanization and economic momentum. Dur-
ing this momentum phase, many countries have large,
relatively young populations and high economic growth
rates. These countries are the seedbed of the emerging
middle-class markets.
Three types of corporate players are jockeying for
position in these markets:
1. Local upstarts are companies that have tradition-
ally provided low-priced goods for bottom-of-the-pyra-
mid customers in their home markets. They are migrat-
ing upward into their domestic middle markets as their
customers become more prosperous. These companies
now provide products and services with more features,
better quality, and increased brand status.
2. Global aspirants are local companies that have
already developed products for their domestic middle
markets. Now, they seek to expand their geographic
reach and power, parlaying their existing capabilities
and knowledge into serving the global middle class.
3. Multinational incumbents are mature global com-
panies, often from Japan, Europe, and the United States.
They are intent on adapting their existing product lines
to capture the attractive growth opportunities in emerg-
ing middle markets.
You can see all three types of competitors in most
sectors in countries that are in the momentum phase.
For example, in Chinas automobile sector, local up-
starts are represented by players that have traditionally
made low-cost cars, such as Chery Automobile Com-
pany, Great Wall Motor Company, and Geely Automo-
bile Holdings. They are moving up the product pyra-
mid. In 2010, Geely purchased the Swedish carmaker
Volvo from Ford at the bargain-basement price of $1.8
billion and immediately raised production plans to
300,000 Volvos annually, almost double the previous
worldwide production.
Global aspirants in Chinas middle market include
South Koreas Hyundai Motor Company. Hyundai en-
tered China in 2002 and has since achieved remarkable
success in the middle market with a major redesign of
its Elantra model.
Among the multinational incumbents are long-
established automakers aggressively seeking to carve
out signicant shares of Chinas middle market. These
include GM, with its Chevrolet Spark and Buick
Excelle, and Volkswagen, with its Polo and Golf models.
All of these multinationals pursue this market through
joint ventures with Chinese partners. For example, the
Guangzhou Automobile Group makes Honda-branded
Haier produces extra-large-capacity washers
that can accommodate the robes of Middle East
consumers and quiet, timer-equipped washers for
Italians whose power rates are lower at night.
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P
cars for the middle-class market. The Shanghai Au-
tomotive Industry Corporation launched the Lavida
with Volkswagen and is working with GM on a new-
generation small car called the Baojun (Chinese for
treasured horse).
Incumbent automakers such as Honda, Volk-
swagen, and GM arent simply exporting cars from
their home countries to China. Since 2005, they have
been modifying and restyling their vehicles to better
align them with the needs and tastes of Chinese con-
sumers. For example, Volkswagen installs smaller en-
gines in some vehicles, such as the Polo GTI and the
Golf 6. Such changes enable incumbents to offer two
types of vehicles. They make low-priced cars for entry-
level Chinese consumers who prioritize cost and value,
and cars with added features for more afuent mid-
market consumers who can pay for the quality and
brand status associated with foreign cars. One sign of
the value of the Chinese auto market to incumbents
is GMs sales there, which exceeded its U.S. sales in
2010 the rst time sales in another national market
eclipsed U.S. sales in the companys 102-year history.
The same three types of competitors local up-
starts, global aspirants, and multinational incumbents
are active in Chinas construction equipment mar-
ket, probably the most vibrant construction equipment
market in the world right now. Local upstarts such as
Zoomlion and Longking have been moving into the
domestic middle-class market in China. Some, like the
LiuGong Machinery Corporation and Sany Heavy In-
Shopping for air-conditioning
units at a Beijing appliance store.
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dustry, have become global aspirants. In 2008, LiuGong
opened a factory in India. In 2009, Sany announced it
would invest 100 million ($144 million) in an R&D
and manufacturing center in Germany; it also has ma-
jor plants under construction in the U.S. and Brazil.
Incumbent construction equipment makers, such
as South Koreas Doosan Infracore, Japans Komatsu,
and U.S.-based Caterpillar, are aggressively targeting
the Chinese middle market as well. Caterpillars stated
goal is to become the top brand in its sector in China by
2015. In the 1990s, the company was focused on devel-
oping government relationships to facilitate sales of its
existing product lines. But as the middle market heated
up, Caterpillar found its market share squeezed by Japa-
nese and Korean competitors and rising local players. In
the late 2000s, Caterpillars leaders recognized that the
companys traditional product line and business model
were not adequate for China. It lowered its cost base
through the establishment of local R&D centers and
through the acquisition of Shandong Engineering Ma-
chinery, a leading Chinese wheel loader manufacturer.
Just as countries evolve over time, so do companies.
Many of todays local upstarts will be global aspirants
tomorrow; todays global aspirants often become multi-
national incumbents. The differences among them ap-
pear primarily in the way they choose to compete, and
in the level of resources that they use to enter a market.
The more intelligent they are about their approach, the
more likely they are to move to the next level. Unfortu-
nately for the incumbents, local companies are increas-
ingly intelligent about the way they make the transition,
using joint ventures or regional expansion to gain the
experience they need to compete on a larger scale.
A More Complex Market
The world is far from homogeneous. The buying power,
needs, and desires of the middle classes vary by nation
and region. In developing nations, for example, middle-
market customers are seeking products that have some
of the premium features and quality that customers in
developed nations are used to, but at lower price points.
Furthermore, customers in each geographic market are
drawn to buy products that fulll local needs and de-
sires. As Pankaj Ghemawat, professor of global strategy
at IESE Business School, notes in World 3.0: Global
Prosperity and How to Achieve It (Harvard Business
Press, 2011), there are
numerous casual examples of cultural differ-
ence [in consumer products]. The Czechs
drink way more beer than people in Saudi Ara-
bia, and even more than the Irish, who come in
second. Pakistanis google sex more often than
any other national population, just slightly
more than the Vietnamese and far more than
the Irish and Czechs. Eritreans google god the
most as well as guring in the top ve nation-
alities searching for sex. India and China are
so close geographically that they still havent
resolved their territorial disputes, but couldnt
display more distinct food cultures, particu-
larly around which animals and parts of ani-
mals should or shouldnt be eaten. Argentines
see psychotherapists more than other nationali-
ties, and Brazilians spend a higher proportion
of their income on beauty products than the
citizens of any other major economy.
To successfully serve middle-market customers,
companies must identify which product attributes the
customers in a specic market value and dont value.
Then, they must either add those attributes to or cull
them from their existing products. Ghemawat uses the
examples of McDonalds, KFC, and Coca-Cola, all of
which vary their products geographically: Coke, for in-
stance, uses cane sugar as sweetener in some countries
and corn syrup in others. This type of variation adds
complexity across product and marketing mixes, and in
all the operations and functions related to them. It can
require much extra expense and attention from com-
panies, especially those with heavily centralized, scale-
driven business models.
But companies that seek leadership positions in
their industries may have little choice but to pursue the
global middle market. The developed middle markets
are a huge and indispensable source of sales volume,
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and market share can decline precipitously as local
upstarts or global aspirants redouble their efforts. In
most of these markets, competition is already intense:
Companies track their market share gains and losses
in tiny increments a point or even a fraction of a
point at a time. In addition, most developed middle
markets are driven more by the rise and fall of mac-
roeconomic cycles than by underlying fundamentals,
such as an unusually fast-growing customer base. This
means that during the stable parts of the cycle, the gains
that new players make will come out of the pockets
of incumbents.
The global middle market is also spawning game-
changing new products that can migrate to and even-
tually threaten the status quo in developed markets.
Tuck School of Business at Dartmouth College profes-
sors Vijay Govindarajan and Chris Trimble have coined
the phrase reverse innovation to describe the process
by which products designed for developing economies
become hits in developed economies because they ll
undiscovered needs and desires of customers in those
nations. (See How to Be a Truly Global Company, by
C.K. Prahalad and Hrishi Bhattacharyya, page 54.)
Myths and Realities
Because the case for pursuing the global middle mar-
ket is compelling, and the complexities are daunting, it
is understandable that many senior executives at major
consumer and industrial product companies are am-
bivalent about or even resistant to the idea. Their
resistance, however, should be reconsidered. It is usually
based on one or more of the myths below.
Myth: Its too early to enter the middle markets in
emerging economies.
Reality: It may already be too late. The competi-
tive collisions between local upstarts, global aspirants,
and multinational incumbents are occurring at differ-
ent speeds in different industries, and some industries
are already becoming saturated with competitive rivals.
In major appliances, for example, most countries now
have offerings from Haier (which not long ago was
an upstart); South Koreas LG and Samsung (which
were recently considered global aspirants, but now
operate as full-edged global incumbents); and GE,
Whirlpool, and Electrolux (multinational incumbents
trying to win share in emerging middle markets and
defend their shares in the mature middle markets of de-
veloped nations).
The fortunes of companies will be made or lost de-
pending on the timeliness of their entry into the emerg-
ing middle markets. If the current pattern holds true,
those that fail will likely become the acquisition targets
of global aspirants. This has already happened to some
carmakers, such as Volvo and Saab. Midsized domestic
companies in developed markets will also become tar-
gets as new competition enters their home markets and
their home markets become an ever-smaller percentage
of the global middle market.
Myth: We cant make money in the middle markets
of emerging economies.
Reality: Yes, products aimed at the middle classes of
developing nations are usually priced 20 to 40 percent
lower than their counterparts in developed nations. But
in emerging economies, lower prices do not necessar-
ily mean lower prots, because the sales volume is po-
tentially two to three times greater than the volume in
more mature markets. Multinational incumbents need
to develop the capability to protably address consum-
In emerging economies, producers tend to rely
on a simpler value chain, with more of it
located in low-cost countries, which reduces
costs and boosts margins.
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ers in these price segments, because that is often where
emerging competitors gain their initial foothold.
Moreover, the cost of making products tends to be
lower in emerging economies than in mature markets.
These products usually have fewer premium features
and often, as with the smaller engines in Volkswagens
Polo and Golf, have less-expensive parts. The produc-
ers of these goods tend to rely on a simpler value chain,
with more of it located in low-cost countries, which also
reduces costs and boosts margins. Finally, companies
earn additional dividends in shareholder value as they
expand into new, higher-growth markets.
Myth: We dont need to alter our products we
just need to educate our customers.
Reality: In the near term, many newly minted mid-
dle-class consumers cannot afford developed-market
products no matter how much they might value them.
As the middle classes mature and their purchasing
power grows, this will change. Nonetheless, custom-
ers in countries such as India, Brazil, and Turkey will
continue to want distinctive features and options. Many
of their needs, wants, and tastes stem from unique cul-
tural or environmental conditions, and are unlikely to
change soon.
Too often, companies try to create middle-market
variants of higher-priced products by subtracting a few
features and pushing them through the existing busi-
ness model and value chain. This results in compro-
mised products at overly high prices. The better alterna-
tive is to rethink the value chain entirely. For example,
the papermaking machinery industry in China is a
rapid-growth, low-margin sector with many local up-
start competitors. Multinational incumbents that want
to enter this market must provide integrated manufac-
turing packages, including ber systems, environmental
solutions, automation, and rolls and fabrics. To accom-
plish this, they often build their capabilities through ac-
quisitions and partnerships.
Myth: Entering the global middle market will be
too disruptive to our operations.
Reality: Companies need a business model suited
to the task. The R&D function, for example, should
avoid innovation races and the creeping elegance associ-
ated with sophisticated and expensive products. Instead,
take a more local approach to innovation, designing
products for specic markets. The products can then
ow elsewhere, nding support and additional markets
wherever they strike a chord. Investing in local R&D
that can rapidly turn middle-market customer insights
into products and services is another key to success.
The manufacturing footprint will likely expand in
many companies as the number of products designed for
specic middle markets begins to grow. In lower-income
markets, manufacturing processes may need to empha-
size volume and efciency over customization. Farther
back in the value chain, suppliers will be rewarded for
minimizing complexity and meeting the value and cost
expectations of middle-market customers.
Marketing will need to identify distinct middle-
class markets and gain an intimate understanding of
the customer segments within each one. It will have to
craft and effectively communicate tailored value propo-
sitions that dont undermine more expensive offerings,
especially when they bear the same brand names. Sales
and service will need to be rightsized for each market
often, this will entail more of a self-serve approach
that keeps costs low.
For executives of multinational corporations, it
may take a change in the conventional business mind-
set to tap into global middle markets effectively. The
most successful companies are establishing new busi-
ness units; rethinking their decision rights and other
practices; and giving their leaders the freedom, author-
ity, nancial resources, and talent needed to develop
and run these businesses. The opportunities in the
global middle market are worth the effort. +
Reprint No. 11309
Resources
Pankaj Ghemawat, Redening Global Strategy: Crossing Borders in a World
Where Differences Still Matter (Harvard Business School Press, 2007): A
highly effective approach to global strategy, one middle market at a time.
Vijay Govindarajan, Jeffrey R. Immelt, and Chris Trimble, How GE
Is Disrupting Itself, Harvard Business Review, October 2009: Describes
reverse engineering in GEs medical systems business.
Ronald Haddock and John Jullens, The Best Years of the Auto Industry
Are Still to Come, s+b, Summer 2009, www.strategy-business.com/
article/09204: The global middle-market opportunity in motor vehicles.
Richard Shediac, Rainer Bernnat, Chadi Moujaes, and Mazen Ramsay
Najjar, New Demographics: Shaping a Prosperous Future as Countries
Age, Booz & Company white paper, May 2011, www.booz.com/media/
uploads/BoozCo-New-Demographics.pdf: The underlying dynamics that
have created the global middle class.
Edward Tse, The China Strategy: Harnessing the Power of the Worlds
Fastest-Growing Economy (Basic Books, 2010): How to successfully enter
one of the largest global middle markets.
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THE GULF ECONOMIES OF THE MIDDLE EAST
ARE FORMING PARTNERSHIPS WITH
OTHER EMERGING MARKETS, REDEFINING THE
ANCIENT TRADE ROUTES THAT ONCE LINKED
EAST AND WEST.
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W
HEN KING ABDULLAH BIN SAUD, THE
current ruler of Saudi Arabia, came to power
in August 2005, he wasted little time in dem-
onstrating his vision for the countrys future. His rst
ofcial overseas visit, in January 2006, was not to U.S.
president George W. Bush, U.K. prime minister Tony
Blair, or German chancellor Angela Merkel but to
Chinese president Hu Jintao.
The meeting reected both countries desire to
forge closer economic ties. Before King Abdullah went
on to other emerging markets, including India, Malay-
sia, and Pakistan, he and President Hu signed an agree-
ment of cooperation in oil, natural gas, and minerals.
This agreement built on existing relationships between
the countries national energy companies, Saudi Ar-
amco and Sinopec, which had formed a partnership in
2005 to construct a US$5 billion oil renery in east-
ern Chinas Fujian province. In 2011, they signed a
memorandum of understanding to build a renery
in Yanbu, on the west coast of Saudi Arabia. Sinopec
is also engaged in a joint venture with Saudi Arabias
petrochemicals giant SABIC; in 2010, they began
producing various petrochemical products in a $3
billion complex in the city of Tianjin in northeast
BY JOE SADDI, KARIM SABBAGH,
AND RICHARD SHEDIAC
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Joe Saddi
joe.saddi@booz.com
is the chairman of the board of
directors of Booz & Company
and the managing director
of the rms business in the
Middle East. His work covers
multifunctional assignments
in the oil, gas, mining, water,
steel, automotive, consumer
goods, and petrochemical
sectors.
Karim Sabbagh
karim.sabbagh@booz.com
is a Booz & Company senior
partner based in Dubai. He
leads the rms work for global
communications, media, and
technology clients. He is a
member of the rms Market-
ing Advisory Council and
the chairman of the Ideation
Center, the rms think tank in
the Middle East.
Richard Shediac
richard.shediac@booz.com
is a senior partner with Booz &
Company based in Abu Dhabi,
where he leads the rms
Middle East work for public-
sector and healthcare clients.
He has led and participated in
strategy, operations im-
provement, and organization
projects in the Middle East,
Europe, and Asia.
Also contributing to this article
were Booz & Company
principal Mazen Ramsay
Najjar, Ideation Center director
Hatem A. Samman, and s+b
contributing editor Melissa
Master Cavanaugh.
China, and have recently announced that they will build
a $1 billionplus facility there to produce plastics.
The rise of emerging markets in the global econ-
omy has sparked a great deal of discussion, particularly
in the wake of the worldwide nancial crisis. The im-
plications are often framed in terms of the potential im-
pact on the economies of the U.S. and Europe for
instance, business leaders discuss whether emerging
nations consumers might be interested in purchasing
American products, or whether European telecom op-
erators can counter stagnation in their own markets by
investing in new mobile networks in Asia.
But a closer look reveals a separate trend that could
shift the economic focus away from the West. Emerg-
ing markets are building deep, well-traveled networks
among themselves in a way that harks back to the origi-
nal silk road, the network of trade routes between
East Asia, the Middle East, and southern Europe, some
dating to prehistoric times and others to the reign of Al-
exander the Great. Most of these routes were central to
world commerce until about 1400 AD, when European
ships began to dominate international trade.
Todays new web of world trade is broader and more
diverse than the old silk road. It is a network among
emerging markets all over the world, including China,
the Middle East, Latin America, and Africa. It is a path
not just for expanded trade in goods, but for short-term
and long-term investment and the transfer of techno-
logical and managerial innovation in all directions.
Witness, for example, Chinas investments in Africa,
where the construction of roads, railways, and com-
munications infrastructure provides revenue to Chinas
state-owned enterprises and also facilitates Chinas ac-
cess to the continents natural resources and its consum-
ers. Or consider the fact that in 2009, China surpassed
the U.S. to become Brazils primary trading partner;
bilateral trade between the two countries grew more
than 600 percent between 2003 and 2010, from $8
billion to $56 billion. Also in 2009, the Korea Electric
Power Corporation, a state-owned South Korean rm,
won a $40 billion contract to build nuclear reactors in
the United Arab Emirates (UAE), beating out French
and U.S. companies that had bid on the opportunity.
And in 2010, Russia and Qatar announced that they
would work together to develop gas elds on Russias
Yamal Peninsula.
Such developments remain largely separate activi-
ties in the global economy, but taken together, they are
early evidence of a pattern that public-sector and pri-
vate-sector leaders in every part of the world should take
into consideration.
An Important Stop on the Road
The countries of the Gulf Cooperation Council (GCC)
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and
the UAE represent one regional powerhouse whose
relationships with emerging peers can offer valuable
insights into the way such alliances are forming. In
the last ve years, ties between the GCC and the
BRIC countries (Brazil, Russia, India, and China) as
well as the Next 11 countries (Bangladesh, Egypt,
Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philip-
pines, South Korea, Turkey, and Vietnam) have expand-
ed strongly. (See map, pages 7475.) The speed with
which the new silk road is being constructed between
the GCC and these other rapidly emerging economies
is a clear indicator of the GCCs rising importance. Even
the recent unrest in the Middle East, which included
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a few of the GCC nations, has not impeded the Gulf s
global ambitions.
The GCC is also noteworthy because of its tradi-
tionally strong relationships with the U.S. and Europe.
The Gulf nations have to maintain their relationships
with these large but relatively stable economies while
fostering new relationships with the high-growth econ-
omies in emerging markets. This balancing act could
lead to a new set of policies and ambitions in the re-
gion, with significant implications for companies that
hope to enter this market, and for the nations (which in-
clude the U.S., China, Japan, and most of Europe) that
compete for the GCCs oil and gas resources and have a
vested interest in ensuring that regional security issues
do not destabilize global oil prices.
By analyzing the dynamics behind the growth of
the GCCs alliances with other emerging countries,
GCC leaders can see where there could be potholes in
the new silk road and what reforms will be necessary to
avoid them. At the same time, the companies and gov-
ernments of Europe and the U.S. can develop a better
understanding of what they will need to do to ensure
that their own opportunities in the GCC are not lost
in the years to come. The primary drivers of the rela-
tionships between the GCC and the BRICs and Next
11 countries are trade, people, and capital; equally im-
portant, though more difficult to track with data, is the
exchange of knowledge and technology.
1. More than oil. The top item on the strategic agen-
da for every GCC country is to diversify its economy
and thus decrease its dependence on oil. Despite sig-
nificant efforts, achieving this goal has so far proven
challenging: Oil and gas accounted for 38 percent of
GDP in the GCC in 2000, 42 percent in 2005, and
39 percent in 2010. The governments in the region
are eager to continue investing their oil revenues in
knowledge-intensive industries that will create jobs for
local populations, and they will cultivate trade partners
that help them.
This is one major reason that 19.4 percent of the
GCCs trade flows now involve the BRIC countries,
compared with just 8.9 percent involving NAFTA
countries. And GCC trade flows with BRIC countries
are also more diverse than those with the United States.
For example, Saudi Arabias exports to the U.S. still re-
volve around oil, whereas its exports to BRIC countries
include chemicals, plastics, and minerals. The UAEs
exports to China, similarly, are split among a range of
products, led by plastics (28 percent), electronic equip-
ment (15 percent), and vehicles (9 percent).
The GCCs non-oil exports to the Next 11 coun-
tries are also on the rise. Such exports (including
chemicals, plastics, and aluminum) from the GCC to
Vietnam, Indonesia, and Turkey are still quite small
in absolute terms, just $11.6 billion in 2008. However,
they increased by 389 percent between 2001 and 2008,
an indication of things to come.
In future years, GCC companies will be looking to
expand in a number of directions that will affect their
exports. They will build manufacturing bases, as well as
act as importers and resellers for automobiles and other
advanced manufacturing products; they will also con-
tinue developing expertise in critical areas such as water
desalination and complex infrastructure and construc-
tion projects, and may begin looking outside the region
for destinations for those services. Trade partners that
support the GCCs economic goals will find themselves
in favorable positions.
SAUDI ARABIAS EXPORTS TO THE
U.S. STILL REVOLVE AROUND OIL, WHEREAS
ITS EXPORTS TO THE BRIC COUNTRIES INCLUDE
CHEMICALS, PLASTICS, AND MINERALS.
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The GCCs connections with the BRIC and Next 11 countries are illustrated through trade and
investment flows. The blue lines represent total bilateral trade between the GCC and these
nations. By comparison, in 2010, trade with the U.S., Europe, and Japan was US$72.5 billion,
$122.3 billion, and $115.5 billion, respectively. The GCCs trade with China and India has already
outpaced trade with the United States.
The Gulf Economies Emerging Partnerships
Mexico
$0.6
Brazil
$9.8
Nigeria
$0.9
BRAZIL
In 2009, the International
Petroleum Investment
Company of Abu Dhabi
invested $328 million in the
Brazilian arm of Spains Banco
Santander; the emirates
investment arm, Mubadala, is
considering major invest-
ments as well.
Sources: European Commissions Directorate-General for Trade, International Trade Centre, World Bank, Samba Financial Group, Booz & Company
2010 BILATERAL TRADE
In US$ billions
Capital outflows are still dominated
by the U.S., but Asia is becoming a
more important destination.
GCC Capital Outflows
by Destination, 200308
U.S. 49.3%
Europe 21.9%
MENA* 13.2%
Asia 13.2%
Other 2.4%
*Middle East and North Africa
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Philippines
$4.5
Indonesia
$9.8
GCC
Russia
$1.3
Vietnam
$1.3
Bangladesh
$1.7
Pakistan
$13.0
Iran
$13.6
Egypt
$7.0
Turkey
$10.4
South Korea
$61.0
China
$91.6
India
$90.6
$13.0
INDIA
As of March 2010, Indian
companies had invested more
than $2 billion in Saudi Arabia
via approximately 500 joint
ventures.
Philip
$4.5
Indonesia
$9.8
Vietnam
$1.3
desh
$91.6
CHINA
Saudi petrochemicals company
SABIC has invested $3 billion in
production facilities in China
and committed an additional
$1 billion for a new facility in
May 2011.
RUSSIA
GCC investments in Russia
include $500 million from the
Qatar Investment Authority
and $800 million from
UAE-based companies Damac
and Crescent Group in
September 2010.
GULF COOPERATION COUNCIL: Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia, and the United Arab Emirates
BRIC: Brazil, Russia, India, and China
NEXT 11: Bangladesh, Egypt, Indonesia,
Iran, Mexico, Nigeria, Pakistan, the Philippines,
South Korea, Turkey, and Vietnam
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2. Rich in talent. As goods and services flow across
the borders of the GCC and other emerging markets,
so do people. Air arrivals in the GCC from China more
than tripled between 2005 and 2009; arrivals from In-
dia, which historically has had deep ties to the GCC,
increased by 35 percent. Arrivals from Turkey, Egypt,
Indonesia, Pakistan, and Iran are on the rise as well:
The GCC saw 2.2 million visitors arrive from Egypt
in 2009, compared with 1 million in 2005. During the
same period, the number of visitors from Pakistan in-
creased from 769,000 to 1.4 million.
The most significant aspect of this change is the
skill level of many of the people entering the GCC. No
longer do executives come from the West and laborers
from the East; instead, skilled individuals from emerg-
ing markets are deepening their impact in the GCC
with influential positions in the regions financial, en-
ergy, transportation, and public sectors. India, in par-
ticular, has a large community of professional expats in
the region, stretching back several decades.
Because GCC countries do not publish data on the
types of jobs that expats come to the GCC to perform,
this trend is difficult to quantify; we are discussing it
here primarily on the basis of our own extensive expe-
rience and observations. One indicator of the size and
status of the Asian expat population, though, is the
fact that this groups private wealth (for which data is
available) is now equal to or greater than private wealth
among Western expats, and private wealth among Arab
expats from outside the GCC is rapidly catching up.
In Saudi Arabia, for example, Asian expats held $46
billion in private wealth in 2009, compared with $41
billion for Western expats and $21 billion for Arab ex-
pats. In the UAE, Asian expats also led the pack at $27
billion, followed by $20 billion for Western expats and
$17 billion for Arab expats.
As countries that are poor in resources but rich
in talent send their people to the GCC, they not only
further the GCCs own growth aspirations; they also
put their expats in a strong position to encourage and
maintain the GCCs relationships with their countries
of origin.
3. New sources of capital. GCC nations have long
been investors in other countries primarily in the
U.S. and Europe via their sovereign wealth funds
and other state-owned entities. Although Western coun-
tries are still the primary recipients of GCC investments,
accounting for 71 percent of capital outflow from the
GCC between 2003 and 2008, they are slowly losing
share to other Middle East countries and Asia. In light
of the strong role that GCC governments play in deter-
mining the direction of their countries capital invest-
ments, this trend could accelerate if GCC governments
decide that other emerging markets are a better strategic
destination both economically and politically for
their riyals, dirhams, and dinars.
To some degree, of course, all governments play
a role in their national economy. In the aftermath of
the global financial crisis, most governments roles are
larger than they used to be, thanks to bailouts of criti-
cal industries in Western countries. But major emerging
economies such as China, Russia, Brazil, and Mexico,
and the countries of the GCC, among others, are ac-
tive proponents of state capitalism defined most
recently by political risk expert Ian Bremmer as a sys-
tem in which governments direct state-owned compa-
nies, private companies, and sovereign wealth funds in
ways that will maximize the states resources and power.
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(See Surviving State Capitalism, by Art Kleiner, s+b,
Summer 2010.) These countries approach state capital-
ism not as a last resort in times of crisis but as a sen-
sible policy for protecting national interests while still
encouraging economic growth.
For decades, the prevailing view in Western capi-
talist societies has been that this model cannot succeed
that the bureaucratic nature of government agen-
cies could never compete against a nimble free mar-
ket. And certainly, some state-owned enterprises in the
GCC have stumbled, such as the real estate companies
in Abu Dhabi and Dubai that required bailouts. In
recent years, however, the track record of some state-
supported sectors in the GCC shows that the issue is
not quite so black and white. The state-owned airlines
in the UAE and Qatar Emirates, Etihad, and Qatar
Airways have quickly achieved global prominence.
In fact, some European carriers (many of which used
to be state-owned themselves) complain that it is un-
fair to have to compete against airlines with the power,
and perhaps the economic support, of the state behind
them. Thanks to strategic global investments, the size
of the GCCs sovereign wealth funds has nearly tripled
in the last decade; they now hold approximately $1.1
trillion, compared with just $321 billion in 2000. And
the GCCs oil companies the original source of the
regions wealth are renegotiating their contracts with
the foreign oil companies operating within the coun-
tries borders in ways that give them greater control over
national resources while still allowing them to exploit
the foreign oil companies technology and expertise.
4. Getting connected. As GCC countries seek to
branch out and build relationships with other emerg-
ing markets, they have found one point of entry in the
information and communications technology (ICT)
sector. Like many other developing nations, they have
recognized the importance of building knowledge econ-
omies to accelerate their development, and have made
infrastructure investments and policy changes accord-
ingly. Their rankings on the World Economic Forums
Networked Readiness Index, which measures the de-
gree of preparation of a nation or community to par-
ticipate in and benefit from ICT developments, reflect
their efforts: The UAE moved from number 28 on the
list in 2005 to number 24 in 2010 (out of 138 nations
on the list that year); Qatar jumped from number 40 to
number 25 during the same period; and Saudi Arabia,
which made its debut on the list in 2007, improved from
number 48 in that year to number 33 in 2010.
In making these advances, GCC countries have
frequently looked to their counterparts among other
emerging nations, many of which have similar initia-
tives under way. As a result, the nations of the Gulf and
their partners in other emerging markets have collabo-
rated to boost their ICT development in ways that they
might not have been able to do alone.
Shared infrastructure, for instance, has been cru-
cial. The new silk road runs underwater, in the form
of submarine cables that connect the GCC to countries
including India, Thailand, Malaysia, South Korea, Pak-
istan, South Africa, Nigeria, and Sri Lanka. Chinese
companies Huawei and ZTE have provided equipment
for GCC telecom networks; Huawei has even gone
beyond infrastructure to invest in talent in the GCC,
sponsoring an academic chair in information technol-
ogy and communication at the UAEs Higher Colleges
of Technology.
Telecom operators, too, are looking to emerging
THE NEW SILK ROAD RUNS UNDERWATER,
IN THE FORM OF SUBMARINE CABLES THAT CONNECT THE GCC
TO INDIA, THAILAND, MALAYSIA, SOUTH KOREA,
PAKISTAN, SOUTH AFRICA, NIGERIA, AND SRI LANKA.
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4
markets to drive their business. Since the GCC dereg-
ulated its own national telecom markets in the 1990s,
local operators have been on an acquisition spree, ex-
panding their international footprint from 28 markets
in 2005 to 44 markets today. These new outposts are
mostly in emerging markets, spanning Indonesia, South
Africa, South Asia, the Middle East and North Africa
region, and sub-Saharan Africa. These investments run
the other way, too, as companies like Indias Bharti con-
sider investments in the GCC. For emerging markets
to play any significant role in the global economy of the
21st century, they will need to invest in ICT infrastruc-
ture and talent. Pooling their resources to do so can ad-
vance them more effectively.
Global Relationships for the 21st Century
The bonds between the GCC countries and the BRIC
and Next 11 nations are growing stronger a develop-
ment that Western countries to date have viewed with
trepidation, fearing that a zero-sum game will leave
them cut off from increasingly significant consumer
markets and sources of natural resources, goods, and
services. But in an interconnected world, unexploited
opportunities await players all over the globe.
The fact that these emerging alliances are still in
their infancy means that companies and governments
in the U.S. and Europe can act now to formulate a re-
sponse. In doing so, they will need to recognize that the
weakening of their own economies during the financial
crisis has undermined their historical advantages in the
GCC region and has enhanced the appeal of fast-rising
emerging markets. To succeed, then, developed econo-
mies will need to capitalize on the strengths that their
emerging competitors cannot yet match. For example,
the U.S. and Europe are still world leaders in terms
of building the capabilities and infrastructure that are
crucial for innovation, and they have a history of help-
ing GCC countries develop these assets as well. Many
of the regions oil companies relied heavily on contri-
butions from their international partners in their early
years, exchanging access to oil resources for foreign tal-
ent and technology. This trend continues today: For
instance, King Fahd University of Petroleum and Min-
erals in Dhahran, Saudi Arabia, has formed a partner-
ship with U.S.-based Cisco Systems to create a regional
Cisco Networking Academy, which is intended to en-
sure that the universitys students are prepared to suc-
ceed in the digital economy. Companies in developed
countries can also build on their extensive global supply
chains to easily integrate new partners whether as
suppliers or as customers.
For their part, as the nations of the GCC look
around the world to develop their network of relation-
ships, they will find many opportunities with partners
in both developed and developing nations. In order for
these relationships to have the greatest impact in the
GCC, the Gulf nations must seek the investors and
trade partners that can help them address their press-
ing priorities: the creation of new jobs, competition that
will spur their own national champions to greater suc-
cess, and investment in their physical and educational
infrastructure.
Gulf nations have begun building these relation-
ships already, and in doing so their economies have be-
come much less insulated than they were in the 1970s
and 1980s. However, to increase their appeal to inter-
national partners, GCC countries will need to continue
making progress on the internal reforms that are under
THE COUNTRIES OF THE GCC HAVE MUCH MORE CLOUT AS
AN ECONOMIC BLOC THAN AS SIX SEPARATE
ENTITIES, AND THEY MUST CONTINUE TO IMPLEMENT
POLICIES THAT REFLECT THIS PERSPECTIVE.
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way. Of the six nations in the GCC, only Saudi Arabia
ranks in the top 20 countries in the 2010 World Bank
Doing Business report, at number 11; Bahrain comes
in at number 28, the UAE at number 40, and Qatar
at number 50. They need to reduce the amount of red
tape required to start or invest in a business, provide
more transparency in business fundamentals, and invite
more private-sector investment in industries that still
have substantial government involvement. They should
also expand their overall talent base by making it more
appealing for foreigners who have critical skills to live in
the region, while simultaneously developing their own
people and ensuring that they have the right capabilities
to build critical sectors such as energy, education, and
communications.
GCC countries will also need to keep pushing for-
ward on economic integration within the region, which
will bolster their presence on the world stage. The coun-
tries of the GCC have much more clout as an economic
bloc than as six separate entities, and they must con-
tinue to implement policies that reflect this perspective.
A recent Booz & Company study assessed the progress
of the GCC toward regional integration on a number
of measures using a scale of 1 to 5, with 1 indicating
major setback to the goal and 5 representing accom-
plishment or near completion of the goal. When all
measures were taken into account, the study found that
the GCC had achieved an overall score of just 2.9 out
of 5. The Gulf nations must redouble efforts toward the
creation of a monetary union, improve the coordination
of customs and border policy, promote greater intra-
regional investment, fulfill joint infrastructure commit-
ments, and increase collective efforts in research and
development. If the GCC can become a stronger eco-
nomic bloc, the entire region will become a less risky,
more attractive proposition for investment.
The GCC is at a critical juncture as it determines
the parameters of its relationships with partners both
old and new, Western and Eastern. But theres no doubt
that the new silk road can be a path toward future pros-
perity for the GCC countries, building trade and creat-
ing wealth as powerfully in the 21st century as the old
silk road did in ages past. +
Reprint No. 11310
Resources
Ian Bremmer, The End of the Free Market: Who Wins the War Between
States and Corporations? (Portfolio, 2010): The potential power of state
capitalism.
Economist Intelligence Unit, GCC Trade and Investment Flows: The
Emerging-Market Surge, 2011: Presents research on the strengthening
economic ties between the GCC and other emerging markets.
Gideon Rachman, Zero-Sum Future: American Power in an Age of Anxiety
(Simon & Schuster, 2011): A zero-sum approach to global economics, in
which one countrys gain is another countrys loss, is undermining at-
tempts to restart the worlds growth engines after the recession.
Joe Saddi, Karim Sabbagh, and Richard Shediac, Oasis Economies, s+b,
Spring 2008, www.strategy-business.com/article/08105: Overview of the
GCCs growing economies and the nature of their development.
Joe Saddi, Karim Sabbagh, and Richard Shediac, The Challenges of
Balance, s+b, Summer 2009, www.strategy-business.com/article/09202:
Analysis of the difficulties confronting the GCCs rapid economic growth.
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THOUGHT LEADER
The Thought Leader Interview:
Sylvia Nasar
The renowned author discusses how the great economists
uncovered the basic truth about progress, prosperity, and productivity,
and the reasons you should be careful which ideas you listen to.
BY ROB NORTON
M
any of the powerful forces
that help business, hurt
business, and shape our
civilization today stem directly from
the theories formulated by econo-
mists in the past, put into practice
in the real world. That is the subject
of Sylvia Nasars new book, Grand
Pursuit: The Story of Economic Ge-
nius (Simon & Schuster, 2011). And
yet, as Nasar would be the rst to
acknowledge, the eld of economics
has suffered from a lack of respect
since its formative years; Scottish es-
sayist Thomas Carlyle dubbed it
the dismal science in 1849. Today,
when economics makes headlines,
its typically as a whipping boy
(Why Economists Failed to Predict
the Financial Crisis) or as part of
a sales pitch (Prominent Econo-
mists Support Changes to Medi-
care). Add the fact that economics
has been delivered to undergradu-
ates over the past 50 years in an off-
putting package of mathematical
equations and unintuitive charts,
and its no surprise that most people
tend to see it as a difcult subject
producing dubious results.
But economics has in fact made
profound contributions to our un-
derstanding of how society func-
tions. Nobody has done a better job
of bringing its story to life than
Sylvia Nasar. Launching into her
narrative via Charles Dickens and
Jane Austen rather than Adam
Smith and David Ricardo, she shows
how some of the most important
ideas of modern times came togeth-
er in London in the mid-19th cen-
tury, as Britain entered an era of un-
precedented economic growth the
rst time in human history that the
living standards of average people
began to rise signicantly. The key
insight around which the book re-
volves is that business productivity
drives economic and societal im-
provement, and the books narrative
shows us how an idea like that can
be developed, debated, and accepted
over the decades as empirical evi-
dence mounts and the scholarly con-
sensus builds.
Along the way, Nasar rights
some perceptual wrongs of conven-
tional economic history. One hero
of the tale is British economist Al-
fred Marshall (18421924), who
hasnt always gotten the respect he
deserves. Grand Pursuit reveals what
Karl Marx was wrong about (practi-
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cally everything) and why (intellec-
tual laziness); it paints rich portraits
of neglected thinkers such as proto-
typical feminist Beatrice Webb
(18581943), who formulated the
idea of the social safety net in the
1890s, and American economist
Irving Fisher (18671947), who
presciently discovered portfolio the-
ory, countercyclical monetary pol-
icy, and index numbers, as well
as inventing the Rolodex and found-
ing the company that became
Remington Rand. Nasar also pro-
vides carefully reported assessments
of the achievements of such better-
known economists as John Maynard
Keynes, Friedrich August von
Hayek, and the last in her line
of proles Amartya Sen, whose
work she sees as pointing to new di-
rections for the eld.
In Nasars view, economics has
progressed to the point where it can
explain denitively how to avoid the
kinds of economic catastrophes that
produced the Great Depression. All
the nations that have grown steadily
in recent years, she believes, are fol-
lowing the basic economic playbook
that began to take shape as Marshall
visited the factories of Britains In-
dustrial Revolution, whereas coun-
tries that ignore those lessons are
doomed to failure. But the dismal
science has less to say about how to
balance the roles of governments
and markets or how to determine
the optimal level of taxation. As ex-
amples, she cites the United States
and Sweden, two countries with
very different policy and scal pro-
les, but very similar and envi-
able standards of living.
Nasar, a former economist her-
self and a writer for Fortune and the
New York Times, is the author of A
Beautiful Mind (Simon & Schuster,
1998), the best-selling biography of
mathematician and game theorist
John Nash, later adapted into a hit
Hollywood lm. She is also the John
S. and James L. Knight Professor of
Business Journalism at the Colum-
bia Graduate School of Journalism.
She discussed her research and con-
clusions with s+b at Booz & Com-
panys New York ofce in May 2011.
S+B: John Maynard Keynes, who
plays a large role in your book, once
observed that practical men, who
believe themselves to be quite ex-
empt from any intellectual inuenc-
es, are usually slaves of some de-
funct economist. Would you agree?
NASAR: Its true to an extent, but
where people tend to go astray is
when they are slaves of an economist
outside the mainstream, or, worse
yet, of a noneconomist. When you
look at the ideas that distinguish
successful economies from unsuc-
cessful ones, its not the difference
between, for instance, Paul Samuel-
son and Milton Friedman, or even
Keynes and Hayek. Its the differ-
ence between any of them and
something or someone whose ideas
are completely dysfunctional. Marx
would be an example.
If you look around the world
today, its the difference between
Venezuela and Chile. Venezuela is
rich in resources, with some of the
worlds biggest oil reserves, and once
was one of the regions most prosper-
ous nations. But over the last dozen
years, the average standard of living
has been declining. Chile is also a
big commodity producer, and cer-
tainly has lots of problems, but on
the other hand, the standard of liv-
ing there has been rising steadily
since 1970. Thats the kind of dra-
matic difference that really adds up
over time. Its the difference between
a society where living standards are
rising, thanks to a growing business
sector and rising productivity as
well as greater attention to law
and to alleviating poverty and a
82
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society that is teetering on the brink
of collapse.
S+B: So whats important is whether
or not the ideas inuencing a lead-
ers policies or a nations policies are
within the economic consensus?
NASAR: Its that the big insights
from the best economists, over time,
have become the consensus. Take
the idea that the key to rising living
standards is productivity gains. To-
day that seems elementary; its some-
thing you learn in your rst eco-
nomics class. But it took many
decades of intense debate by really
smart people before it was accepted.
That meant realizing the difference
between the kind of world that ex-
isted before the Industrial Revolu-
tion and the one that became possi-
ble as a result of it. From the
beginning of civilization to the 19th
century, 90 percent of humanity was
stuck in place, even if their country
did comparatively well. Average
people lived like livestock they
didnt go anywhere, read anything,
or wear much; they ate bad food and
didnt live a very long time. Today,
in an increasing number of places in
the world, the majority of people
have escaped poverty and have some
measure of control over their lives.
The gulf that separates success-
ful economies from the real basket
cases today is almost as big as the
gulf that separates the modern stan-
dard of living from the one in Jane
Austens time. And that suggests
that even in a globally integrated
economy, what your country does
locally still matters the most.
And what determines that?
Well, it doesnt seem that its wheth-
er you have oil or whether you have
a big population or a big territory
all those things that in the early 19th
century were thought to be the
source of the wealth of nations. It
also doesnt seem to be whether you
have a large government or a smaller
one. Look at two of the most suc-
cessful economies today, the United
States and Sweden. The U.S. has
traditionally had a much smaller
government than Swedens dif-
ferent institutions, a very different
philosophy. And yet if you rank
countries by the rate of growth of
their productivity and living stan-
dards, its really Sweden and the
United States, over a long period of
time, that come out on top, even
though they would seem to be on
opposite ends of the spectrum.
What the U.S. and Sweden
have in common is a pretty good en-
vironment for business, and they al-
ways have had that. That was the
basic insight of Alfred Marshall.

S+B: So Marshall was the rst per-
son to completely grasp that idea,
and systematize it in his Principles of
Economics in 1890, which became
the most inuential book in the eld
for many decades.
NASAR: Right. Marshalls idea was
that its businesses that drive increas-
es in productivity. Obviously, thats
not what stockholders or managers
Rob Norton
norton_rob@
is executive editor of
strategy+business.
Alfred Marshalls idea was that
from a social point of view, the
purpose of corporations is
to raise the standard of living.
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are thinking about, but from a social
point of view, the purpose of corpo-
rations is to raise the standard of liv-
ing by raising productivity. His cor-
ollary to that, which was a matter of
great debate that has continued to
this day, was that the productivity
gains that business drove would be
shared out to workers that com-
petition in the labor market would
force businesses to share the gains
and that wages would thus rise
over time. Its since been substanti-
ated by 100-plus years of empirical
data. Its still true today, as it was
then, that the share of the national
income that went to wages would
not decline as some people, like
Marx, believed, but would stay
steady or rise, even as the national
income grew.
S+B: What were some of the experi-
ences that led Marshall to develop
this line of thought?
NASAR: The rst was his experi-
ences with poverty. He grew up in
a lower-middle-class household of
very modest means, and when his
father arranged for him to attend a
private school, he had a long com-
mute through some of Londons
worst slums. After studying mathe-
matics at Cambridge, he made the
decision to study economics one day
when he was on vacation and wound
up walking through the appalling
slums of Manchester, which existed
within a few hundred yards of luxu-
rious neighborhoods. He began to
question whether poverty was a ne-
cessity of nature, which is what had
been believed by earlier economists
including many who were very
liberal in a political sense, like John
Stuart Mill, who was a socialist at
the end of his career. Marshall felt
that humanity could work its way
out of what was then almost univer-
sal poverty, and he decided to un-
derstand why it existed, and how
things could change.
Learning from Business
S+B: And one of the ways he did
that was by actually spending time
visiting factories and learning about
business.
NASAR: Marshall spent his sum-
mers traveling to factory towns and
interviewing businessmen, along
with his wife and partner [Mary
Paley Marshall], who was one of the
rst women to be educated in eco-
nomics at Cambridge. He spent
hours observing, recording manu-
facturing techniques, pay scales, and
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workplace layouts. He questioned
everyone, from the company owners
to the workers on the shop oor. He
knew many businessmen and trade
union leaders. He knew a lot about
technology. Marshall felt that he
needed this knowledge to inform his
scholarly work. In fact, he could
have written his theoretical insights
20 years before he produced his
great work, Principles of Economics,
but he felt an obligation to assure
himself that his ideas and assump-
tions were grounded in reality. He
also understood that to persuade
others that economics had some-
thing to say about the real world, he,
the economist, had to understand it.
S+B: Which is in real contrast to
Marx, who did none of those things.
NASAR: I dont know that Im the
very rst person to discover that
Marx had never been in a factory at
the time that he published Das Kap-
ital, but it blew me away. In fact, he
only ever visited one factory: a por-
celain factory when he was at a spa
in Czechoslovakia.
The thing about Marx is that he
was a brilliant journalist in many
ways, but he was a terrible reporter.
Despite his reputation for being the
great chronicler of the Industrial
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Revolution and its evils, he was more
like a Web news aggregator.
The worst thing about Marx
was that he began with an answer,
and then set out to nd the facts that
would support it. He was actually
quite isolated. He lived in London,
which was the center of the econom-
ic and intellectual world, within a
mile of the greatest geniuses who
were living at the time George
Eliot, John Stuart Mill, Charles
Dickens all of whom were ob-
sessed with economic issues and
were talking about them and debat-
ing them. Yet he never engaged with
them. The reason he didnt was that
he already knew capitalism was rot-
ten, that it was doomed.
S+B: Where did that conclusion
come from?
NASAR: It came straight out of the
Book of Revelation, which was a bit
of a revelation for me, and came to
me because I spent some time at a
research institute with [Princeton
professor of religion and author]
Elaine Pagels, who was writing a
book about the Book of Revelation.
I found that Marx really got all his
economics, and the bones of his nar-
rative, from Friedrich Engels, who
was his coauthor, nancial benefac-
tor, and all-around guardian angel.
Engels, in fact, ran a cotton factory
in Manchester to support his slacker
friend who spent 20 years not
writing his book and had been
reared as a sort of fundamentalist
Lutheran. Engels knew the Bible in-
side and out, and the Book of Reve-
lation was his favorite book. And
there it all is: the world splitting into
two great armies; the fundamental
conict that ends history, that brings
justice; and nally the downtrodden
will prevail. I was able to trace that
link in their correspondence and
their writing.
That to me answers the ques-
tion of why people embrace bad
ideas or ideas that dont work. Its
because were human beings, and we
nd narratives that are very power-
ful and appeal to our emotions.
S+B: So Alfred Marshall was spec-
tacularly right, and Karl Marx was
spectacularly wrong, yet Marx is
much better known.
NASAR: This is the weird thing. If
you look at the rst edition of Rob-
ert Heilbroners The Worldly Philoso-
phers: The Lives, Times, and Ideas of
the Great Economic Thinkers [Simon
& Schuster], which was published in
1953, Marx is the hero and Alfred
Marshall is this little Victorian
prune who was totally out of touch
with what was really going on. So it
was really amazing to nd out that
the opposite was true.
Marshall was very well regarded
in his own time. One of the striking
things about him that I found was
that he was so clearly focused on
poverty. He was supportive of labor
unions, so he was very different
from some of the earlier economists,
and he really differentiated himself
in the policies that he supported. He
favored antipoverty measures and
public schooling, which in England
was controversial much longer than
in the United States. He also was
certain that antipoverty measures
would not fatally undermine the
competitive mechanism that was
driving business to pursue greater
productivity, which was something
many people believed then. Some
people believe it even today.
S+B: Another thinker whom you res-
cue somewhat from the past and
who built on Marshalls work is
Beatrice Webb. She doesnt feature
much in most conventional accounts
of the history of economics, and few
people are likely to recognize her
name, or realize that she was the in-
ventor of the concept of the social
safety net.
NASAR: Yes, the idea of the mini-
mum wage, the notion that govern-
ment policy could actually prevent
poverty, starts with her. Many
people today would call her a soci-
ologist, but in her lifetime, she was
regarded as an authority on eco-
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nomics. She took from Marshall
the idea that one cause of poverty
was poverty, and she worked out
policy solutions.
She was a great empiricist. She
wrote a book about poverty [The
Prevention of Destitution, coauthored
with her husband, Sidney Webb]
that should be read today. Whats
brilliant about it is that it recognized
that poverty was not a homogenous
condition that there are different
kinds of poor people, who are poor
for different reasons.
Webb showed that while some
poverty would be eliminated
through economic growth, other
kinds of acute, short-term poverty
are simply due to unemployment
and could be cushioned by having
either public works jobs or unem-
ployment insurance. She saw that
other kinds of poverty wouldnt be
at all affected by the state of the
economy in particular, the kind
of poverty that was passed on from
one generation to another. She un-
derstood that this kind of self-rein-
forced poverty required a different
kind of intervention.
The politics are rather surpris-
ing, because the rst person who
picked her brain and applied her
ideas was the young Winston
Churchill. The welfare state did not
emerge after World War II; it
emerged before World War I. And it
was not a coup by the left, nor was it
a product of bad times or a reaction
to crisis. It was a product of Britains
boom in living standards, which
enabled people to see that there was
a process for eliminating poverty
through growth, and that we could
afford to speed it up.
Keynes and the Great Depression
S+B: The Great Depression is the
other major drama in your narrative,
with John Maynard Keynes and
Irving Fisher playing large roles.
What struck you most as you studied
Keynes?
NASAR: I came to really admire his
willingness to change his mind.
Once one has said something pub-
licly, such as Theres not going to be
a recession, theres a human ten-
dency to stick to your guns and keep
defending your point of view.
Keynes was different. He had a very
acute sense of circumstances.
When you look at the world as
it went into the Great Depression,
you have to remember it was hap-
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The welfare state was not

a product of bad times; it was
a product of Britains boom in
living standards.
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pening in a different time frame in
England than in the United States.
At the beginning of the Depression,
Keynes believed it was caused by
monetary mismanagement, and that
monetary intervention could cure it.
His thinking about this, I discov-
ered, had been heavily inuenced by
the work of the American economist
Irving Fisher in the 1920s. So ini-
tially, Keynes was condent that if
Britain and the United States went
off the gold standard and reversed
the deation, that would end the
Great Depression which, of
course, at rst looked like just
a really bad recession. Well, that
didnt happen.
So Keynes came up with a theo-
ry explaining why it was possible for
the economy to settle into an equi-
librium in which it wouldnt repair
itself. And in those circumstances,
he showed why monetary policy
might not work, and why govern-
ment would need to supply the de-
mand that the private sector couldnt
generate. When you look at the
chronology of events, you see that
Keynes got there in a step-by-step
fashion. He was in many ways very
conservative; he wasnt a big govern-
ment guy.
With the benet of hindsight,
and the subsequent research of Mil-
ton Friedman and Anna Schwartz,
we can see that perhaps what Keynes
thought was general was in fact
more special and more particular
to the circumstances of the 1930s.
Again, the chronology is instructive,
and it reinforced my sense that ideas
really were important. People talk
about the Great Depression as if it
were a uniform malaise across the
world, but it was not. The United
States had a Great Depression, but it
wasnt typical. The Scandinavians,
the Japanese, the British all the
countries that went off the gold
standard early didnt suffer the
same kind of extreme collapse. So
that suggests, again, they were doing
something different, and what they
were doing was pursuing different
monetary policies, and that experi-
ence supports Fishers point of view
in the 1920s.
S+B: Most people, if theyve heard
of him at all, probably know Fisher
only for his famously incorrect fore-
cast in October 1929, that stock
prices had reached a permanently
high plateau.
NASAR: Irving Fisher was the quint-
essential American entrepreneur.
You have to remember that the
1920s was a fabulous decade. Con-
trary to what people said after the
stock market crash that the 1920s
were an economic mirage it was
in fact a fantastic decade for techno-
logical innovation, for the growth of
important businesses and industries,
and for productivity and wages.
There was no ination; the price/
earnings multiple of the market in
1929 did not seem to be that high.
So being upbeat about stock prices
wasnt unusual.
But Fisher had so identied
himself with the can-do school of
The global macroeconomic
environment is not the main
determinant of the success of
companies, or even of countries.
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American thought that it was dif-
cult for him to realize what was
happening.
Unlike Keynes, who had suf-
fered some business reversals in his
life, Fisher, bless his heart, had only
seen things go up, both in the econ-
omy and in his personal affairs. His
achievements were impressive. He
was a pioneer in discovering the role
that money played in the economys
stability or volatility, and in estab-
lishing the link between prices and
unemployment. He created the idea
of ination indexing. As early as
1911, he had argued that a diversi-
ed portfolio of stocks was a better
long-term investment than bonds.
He invented the Rolodex to help
himself keep track of his contacts
and started a company to manufac-
ture and promote it, which later be-
came Remington Rand. He was also
the leading wellness guru of the
early 20th century.
S+B: So what should we learn about
the usefulness of economics from
the fact that one of the smartest and
most creative economists of his time
could be so spectacularly wrong?
NASAR: Well, you have to be careful
about what you listen to. If what you
listen to is that business managers
should focus on making their busi-
nesses better, because thats what
drives productivity and growth,
then I think youre golden. I think
one thing weve learned and the
lesson has been repeated recently
is that we cant predict the macro
economy very well.
Another thing to keep in mind
is that the global macroeconomic
environment is not the main deter-
minant of the success of individual
companies, or even of countries. Be-
cause if it were if thats what
made the difference then we
wouldnt have the huge disparities in
performance that we see, because
everyones sharing the same global
environment. Why was Britain such
a success? Its an island with no re-
sources. Shouldnt it have been
Russia? No, Russia was a basket
case. You can compare countries
that have been split apart: East
Germany and West Germany,
North Korea and South Korea. It
seems to come down to the local en-
vironment, and the decisions that
countries and companies make.
What is important is whether or not
you have an environment that en-
courages productivity growth, in
which managers can focus on run-
ning their businesses.
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Lessons of the Great Recession
S+B: What lessons can we learn
from the policy experience of the
Great Depression, compared with
the recent Great Recession?
NASAR: Policymakers made a total
mess out of the Great Depression. In
both 1929 and 193637, the Federal
Reserve made some disastrous deci-
sions. We have learned quite a bit in
the interim. True, the scal stimulus
this time may have been poorly de-
signed and too small. But on the
other hand, the Federal Reserve kept
the nancial system from collapsing.
Todays policymakers acted with a
kind of conviction that was not pos-
sible in the 1930s, when the ideas of
economists like Fisher and Keynes
were very new. That conviction
about what to do made action pos-
sible. You also had international co-
operation instead of each govern-
ment trying to solve its problems at
the expense of its neighbors.
Nobody is going to be happy
with the explanation that things
could have been much worse if we
hadnt learned these lessons from the
past, or even with the fact that the
U.S. actually did not have a worse
recession than the rest of the world
this time, and in fact is having a bet-
ter recovery. But if you want to ask,
Have we learned anything from eco-
nomics, the answer is: Oh yeah.
Look at George W. Bush and
Barack Obama. We think of them
as being on different planets politi-
cally. But guess what? They did
pretty much the same things in re-
sponse to this crisis. They saw a situ-
ation in which the whole nancial
sector was shutting down, and con-
cluded that the government had bet-
ter do what it could on every front.
And sure, it would be nice if it had
worked faster or been cheaper, but
economic policy worked. What we
had was a recession that was in the
same league as the recessions of the
mid-1970s and especially the early
1980s, albeit somewhat nastier. But
it was nothing in comparison to the
Great Depression.

S+B: How do you view the political
economic debate in the U.S. today,
where one party is urging a return
to the pre-Keynesian, pre-Fisherian
economic policies of the early 20th
century?
NASAR: Its a lot of noise. Its like
the people who, in the middle of the
recession, were saying that this is the
end of capitalism and we now have
to do everything different. No, ex-
cuse me, lets not. People tend to talk
about economic policy as though
there is a blank slate. Its more like
we are climbing a mountain, and the
question is where do you take the
next step. We are always going from
where we are, even though the lan-
guage of the debates suggests that its
all or nothing.
S+B: Heres another Keynes quote:
If economists could manage to get
themselves thought of as humble,
competent people on a level with
dentists, that would be splendid. Do
you agree?
NASAR: Yes. Thats a great quote.
Keynes had a very modest view of
what economics could and couldnt
do. He once offered a toast to econ-
omists, who are the trustees, not of
civilization, but of the possibility of
civilization. He felt that the real
trustees of civilization were the art-
ists and philosophers of the world,
and that economists could best help
civilization by minimizing crises
and setbacks, and ensuring that
there was a continual rise in the
standard of living. +
Reprint No. 11311
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BOOKS IN BRIEF
In Pursuit of Happiness
Closing implementation gaps,
the enduring principles of high-tech
success, and Toyotas crisis.
BY DAVID K. HURST

The Economics of Enough:
How to Run the Economy as if
the Future Matters
by Diane Coyle
Princeton University Press, 2011
Economist Diane Coyle, a visiting
professor at the University of Man-
chester and former advisor to the
British government, sees the recent
worldwide nancial crisis as a valu-
able opportunity to grapple with
fundamental shortcomings in the
creation and measurement of eco-
nomic policy. In The Economics of
Enough: How to Run the Economy as
if the Future Matters, she identies
and addresses what she regards as
the two root causes of the crash of
2008: the failure of macroeconom-
ics to frame and measure policy ob-
jectives and the chronic inability of
politicians to make policy decisions
that are in the best long-term inter-
est of their constituents (i.e., that ad-
dress the trilemma of efciency,
equity, and liberty).
Coyle divides the book into
three unequal parts that cover the
challenges (about 60 percent of the
book) and the obstacles (25 percent)
to better economic policy, and a
manifesto for achieving it (15 per-
cent). As this proportion suggests,
the book is long on problem identi-
cation, but rather short on solutions.
Nevertheless, it is helpful for the tar-
gets it identies. For instance, Coyle
tackles the current monopoly of
GDP growth as a measure of collec-
tive happiness. Like most econo-
mists, she thinks that growth and
happiness are causally connected,
but cites evidence showing that
maximizing growth isnt always ap-
propriate when the future is taken
into account. This is the central di-
lemma of enough: that we need
enough growth to make us happy,
but not so much as to make future
generations unhappy.
Coyles adoption of the intangi-
ble objective of happiness, with its
dependency on multiple, complex
phenomena, underlines the inade-
quacy of GDP as a metric. Measure-
ments of GDP are already seen as
deeply awed in their failure to
discriminate among differences in
quality and to capture the value of
unpaid work, such as parental care
and volunteer activities. In addition,
GDPs focus on the ow of value
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91
versus its accumulation al-
lows nations to enhance
their output at the expense
of their balance sheets.
When you add to this
the realities of democratic
political systems, in which
the need to get elected regu-
larly swamps the interests of not-yet-
voting future generations, and the
revolution in information and com-
munications technology, which has
enabled a global economic system
that has left its political and social
counterparts far behind, the chal-
lenges and obstacles to improving
economic policy seem daunting. In
fact, Coyle nds precious successes
responses she can point to, although
she does single out the Australian
Bureau of Statistics and its dash-
board of indicators of progress.
Coyle criticizes bankers for their
greedy ways, but she remains
staunchly loyal to mainstream eco-
nomics. This seems inconsistent.
The great promise of the dismal
science is that it harnesses individ-
ual desire to make us collectively
better off. But if the invisible hand
allows bankers to pursue their hap-
piness to the detriment of the rest
of us, can it really help when the
denition of us is expanded to
include our descendants?
Mainstream economics has
been such a prominent part
of the consciousness that led
to the Western worlds cur-
rent predicament that one
wonders how and per-
haps even whether it can
play a leading role in our escape
from it. Its disappointing that Coyle
fails to address this.

The Art of Action: How Leaders
Close the Gaps Between Plans,
Actions and Results
by Stephen Bungay
Nicholas Brealey Publishing, 2011
In The Art of Action: How Leaders
Close the Gaps Between Plans,
Actions and Results, Stephen Bungay,
director of the Ashridge Strategic
Management Centre in London, in-
tegrates military history and man-
agement to help us understand the
essence of implementation
and its challenges. Bungay,
also an acclaimed military
historian, begins by describ-
ing a disease endemic to
large organizations the
inability to translate ele-
gantly phrased plans into
action. He identies three symp-
toms: a knowledge gap between
plans and outcomes, an alignment
gap between plans and actions,
and an effects gap between actions
and outcomes.
Corporate leaders usually re-
spond to these symptoms by trying
to ll the gaps with more detailed
information, instruction, and con-
trol, respectively. But this just makes
the situation worse by hampering
their employees ability to take
effective action toward a common
goal. A better cure, argues Bungay,
is to address the root causes of
the disease by embracing a discipline
of execution.
For an understanding of the
causes, the author turns to the
thinking and practices of the
famed German General Staff as ex-
emplied by the writings of Carl
von Clausewitz (17801831) and the
practices of Helmuth von Moltke
(18001891). That formidable insti-
tution, defunct since 1945,
continues to inspire mili-
tary establishments around
the world with the sheer
competence of its practitio-
ners. From the military
perspective, the root causes
of the three gaps are imper-
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fect information, faulty communi-
cation, and external factors, such as
weather and accumulating complex-
ity and risk. The solution is what the
Prussians called auftragstaktik (or
mission command), a discipline
that requires the mastering of com-
mand skills by individuals at all lev-
els, as well as the setting up of orga-
nizational processes. When this is
translated to a business setting, the
author calls it directed opportunism.
Practiced up and down the cor-
porate hierarchy, directed opportun-
ism closes the knowledge gap by
issuing no command and making
no plan that is more detailed than
allowed by the circumstances of the
commander. No distinction is made
between strategy development and
execution decisions and actions
coevolve. Directed opportunism
closes the alignment gap by ensur-
ing that the broad intent of com-
manders is conveyed as clearly as
possible, while allowing subordi-
nates to decide not whether to obey
the order but how best to carry it
out. Thus, the effects gap is closed
by people at the appropriate levels of
the organization being granted free-
dom of action within the bounds set
by the intent. The result is a cascade
of intent informed by learning at
all levels of the organization, such
that the emphasis of action moves
from plan and implement to do
and adapt.
The dynamics of directed op-
portunism are similar to those of the
Toyota production system. For ex-
ample, Bungays template for strate-
gy briengs includes feedback from
bottom to top, and bears some re-
semblance to the famed Toyota
A3 report a seven-step problem-
solving process arranged on a single
sheet of paper roughly 11 by 17
inches. It is less clear how directed
opportunism works in a manage-
ment context. The faux manage-
ment sessions presented by the au-
thor, in which executives grope
forward to eventually nd their way,
are the books least satisfactory sec-
tions. They suggest that the ap-
proach would have to be inculcated
in staff in the same rigorous ways
used by the German General Staff
and Toyota.
One intellectual hurdle that the
author acknowledges: If directed op-
portunism is to be embraced as a
practice, we have to overcome a
knee-jerk antipathy to the idea of
command. This response is surely a
legacy of our experience of authori-
tarian leaders whose orders went far
beyond what they could know, who
allowed their subordinates no dis-
cretion, and who were intolerant of
feedback that even hinted that they
might be wrong. More generally,
this antipathy can be seen as a lack
of appreciation for and acceptance
of the adaptive role that the use of
power can and must play in every
successful organization. To over-
come this, Bungay suggests that
we add the function of directing to
the familiar duo of leading and
managing. The resulting executive
David K. Hurst
david@davidkhurst.com
is a contributing editor of
strategy+business. His writ-
ing has also appeared in the
Harvard Business Review, the
Financial Times, and other
leading business publications.
Hurst is the author of Crisis &
Renewal: Meeting the Chal-
lenge of Organizational Change
(Harvard Business School
Press, 2002).
If directed opportunism is to be
embraced as a practice, we have
to overcome a knee-jerk antipathy
to the idea of command.
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trinity aids our understanding of
what the legitimate role of power is
in organizations and how it might
be exercised.

Staying Power: Six Enduring
Principles for Managing Strategy
and Innovation in an Uncertain
World
by Michael A. Cusumano
Oxford University Press, 2010
In Staying Power: Six Enduring Prin-
ciples for Managing Strategy and
Innovation in an Uncertain World,
Michael A. Cusumano, Sloan Man-
agement Review Distinguished Pro-
fessor of Management at the
Massachusetts Institute of
Technologys Sloan School of
Management, reports the lat-
est ndings from his research
into high-tech companies.
The result is a book that of-
fers fascinating insights into
management trends and practices in
the high-tech sector.
As the subtitle suggests, the
book is organized into six endur-
ing principles; but, as Cusumano
points out, their exact meaning and
their practical applications have not
been fully determined. The princi-
ples represent organizational out-
comes in successful rms. They can
be thought of as effective resolutions
to the tensions between what the au-
thor describes as a tight focus on
competitive advantage at the prod-
uct level and a broader way of think-
ing about agility and advantage in
contexts where customers buy sys-
tems rather than just boxes. Thus,
the author contends that successful
rms adopt product platforms, not
just products, and they add services
to those platforms, creating rich eco-
systems with positive network ef-
fects. Think of Apples iPhone and
its swarm of apps. Such rms are
founded on capabilities, not just
strategies; they incorporate
pull-style concepts, not just
push; they look for econo-
mies of scope, not just scale;
and they pursue exibility,
not just efciency.
Cusumano devotes a
chapter to each principle
and illustrates the principles with a
variety of interesting examples. He
examines Microsofts agile develop-
ment system and Toyotas lean pro-
duction system, for example, to
show how continual learning is
incorporated into both, allowing
employees the freedom to explore
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and experiment within well-framed
spaces. The result is short cycle
times and standardized work with
fast feedback.
It is difcult to argue with Cu-
sumano when he writes, Managers
who grasp the principles described
in this book all of which have
withstood the tests of time and ge-
ography, as well as rigorous academ-
ic scrutiny should create rms
that stay ahead of the competition
most of the time and adapt quickly
to unpredictable change as well as
adversity. But although the princi-
ples are unimpeachable, the mana-
gerial reader is left to gure out how
to apply them in his or her own con-
text. This leaves us with principles
that are true but not very helpful, a
pervasive problem in business books
and perhaps in the giving and tak-
ing of advice in general.
Cusumano seems to acknowl-
edge this tacitly in the books very
interesting appendix. It is a refresh-
ingly frank look at the problems and
pitfalls of trying to extract best prac-
tices and principles from the analysis
of corporate performance. He com-
pares his principles with those enu-
merated by Tom Peters and Robert
Waterman in In Search of Excellence:
Lessons from Americas Best-Run
Companies (Harper & Row, 1982)
and Jim Collins in Good to Great:
Why Some Companies Make the Leap
and Others Dont (HarperBusi-
ness, 2001). What quickly becomes
clear is the difculty of rigorous
analysis and the ephemeral nature of
corporate success. One is left with
the suspicion that when it comes to
divining the secrets of success, orga-
nizations are incommensurable with
one another. This nal qualication
of the applicability of his ndings
suggests that Cusumanos principles
are better interpreted through a
wide-angle learning lens than a tight
focus on implementation.

Toyota under Fire: Lessons for
Turning Crisis into Opportunity
by Jeffrey K. Liker and
Timothy N. Ogden
McGraw-Hill, 2011
In August 2009, Jeffrey K. Liker,
professor of industrial and opera-
tions engineering at the University
of Michigan, and Timothy N.
Ogden, executive partner at the
communications rm Sona Part-
ners, were putting the nishing
touches on a book about how Toyota
develops leaders when the news
came of the horric deaths of four
people in a Lexus sedan that had ac-
celerated uncontrollably. The trage-
dy marked the beginning of a crisis
that severely damaged Toyotas rep-
utation and revenues.
In Toyota under Fire: Lessons for
Turning Crisis into Opportunity, the
authors produce the most compre-
hensive and detailed review to date
of the circumstances that led to the
crisis, and the events and contexts
that caused it to escalate. Their re-
port is based on extensive interviews
with insiders, including company
president Akio Toyoda, whose ap-
pearance before the U.S. Congress in
February 2010 marked the turning
point in the rms efforts to give
peace of mind to its many customers.
After briey reviewing Toyotas
history and the development of its
production and management sys-
tems, Liker and Ogden show how
adroitly the manufacturer responded
to the recession of 2008. Toyota,
which famously treats its people as
appreciating assets rather than vari-
able costs, did not lay off any perma-
nent employees, as many of its com-
petitors did; neither did it bully its
suppliers. Instead, the rm reduced
Toyota survived the recession and
the recall because of the strengths
of its entire ecosystem suppliers,
dealers, employees, and culture.
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95
work hours and instituted temporary
pay cuts. It also seized the opportu-
nity to work on projects
aimed at improving prot-
ability and exibility, such
as reducing the breakeven
point of its plants from 80
percent of capacity to nearly
70 percent a huge chal-
lenge for a company already
noted for running lean.
By the summer of 2009, it ap-
peared that Toyota would come
through the recession with ying
colors. Then an auto retailer in Cali-
fornia placed a large oor mat from
a Lexus SUV in a smaller ES 350
loaner sedan, which caused its gas
pedal to jam in the wide-open posi-
tion. Unfortunately, this did not
become known for two months
after the fatal accident occurred,
while speculation became rife that
there was a mysterious fault in the
computers that control the pedal
throttle connection. As the media
coverage became a circus and the
lawyers and politicians started to
circle overhead, the public began to
believe that Toyota was covering up
the facts.
As Liker and Ogden describe
the crisis, it becomes clear how hith-
erto unconnected incidents, practic-
es, and policies not just at Toyota,
but also at regulatory bodies such as
the National Highway
Trafc Safety Administra-
tion became linked to-
gether, spinning the public
narrative out of control.
For instance, safety and re-
call matters are engineer-
ing issues at Toyota, and
decisions regarding them were cen-
tralized in Japan. Oblivious to the
mounting hysteria in the U.S., the
engineers in Japan worked methodi-
cally through the problem. They
saw no systemic safety concern: Toy-
ota had issued a recall on the all-
weather oor mats for the ES 350 in
2007 to eliminate the possibility
that they might jam the accelerator
pedal, and there had never been any
evidence of electronically induced
acceleration in any of the companys
vehicles. This geographic disconnect
between the problem and the people
solving it violated one of the central
tenets of the Toyota Way: Decisions
must be made as close to the scene of
action as possible.
Today, the story has almost dis-
appeared from the news, and the
authors contend that Toyotas repu-
tation and market position have
largely recovered. They say that the
company survived both the reces-
sion and the recall because of the
strengths of its entire ecosystem
suppliers, dealers, employees, and
culture. Internally, Toyota execu-
tives made a number of changes to
bridge the gaps between the center
and the regions, and overall, their
actions seem to have reassured both
employees and customers. So in
the end, this is a story of how
the good guys suffered a setback,
but ended up better for the experi-
ence, reafrming Nietzsches adage
that what does not kill me, makes
me stronger. +
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96
Title: Does Business School Re-
search Add Economic Value for Stu-
dents? (Subscription or fee required.)
Authors: Jonathan P. OBrien (Rens-
selaer Polytechnic Institute), Paul L.
Drnevich (University of Alabama),
T. Russell Crook (University of Ten-
nessee), and Craig E. Armstrong
(University of Alabama)
Publisher: Academy of Management
Learning and Education, vol. 9, no. 4
Date Published: December 2010
Scholarly research from business
schools is often lambasted for hav-
ing little practical application. But
this study nds that MBA students
who go to schools where the research
level is high get paid more than
peers who went to other schools
as much as 21 percent more after
three years in the real world.
The reason has less to do with
the research itself than with the
effort that goes into it. Active en-
gagement in knowledge creation
through research, write the authors,
as opposed to simply teaching from
textbooksmay help faculty hone
their analytical skills and conse-
quently emphasize a more rigorous
approach to problem solving.
To assess faculty research pro-
ductivity, the authors used a social
science citation index from 1999
through 2006 the period during
which the MBA students being
studied were in school. The study
tracked faculty publications at 658
business schools (82 percent of
which were in the United States).
They counted how many papers ap-
peared in A-level journals (the top
40 in terms of citations), B-level
journals (those ranked 41 to 120),
and C-level journals (all the rest).
The analysis indicated that
MBAs from schools whose faculty
published in both A-level and
B-level journals had substantially
higher salaries three years after grad-
uation than did graduates from the
25 percent of schools in the study
whose faculty produced little or no
published research. Using a nancial
model and citing the 2009 Financial
Times survey of MBA programs,
which found that the average salary
three years after graduation was
US$115,000, the researchers esti-
mated that graduates of schools with
optimal publication records received
an average bonus of 21 percent
that year, or an extra $24,000. How-
ever, too much research and pub-
lishing in elite journals and pre-
sumably less focus on teaching can
drive down that bonus; this phe-
nomenon was noted in about 20
schools, all in the top 3 percent of
research productivity. (Those gradu-
ates still earned more than peers
who went to institutions that did
little research.)
The authors controlled for sev-
eral factors that can affect postgrad-
uate salaries, such as a schools repu-
tation and its nancial resources.
For those who cant get into or
afford a top school, targeting one
ranked lower overall but with a
strong research record can be almost
as benecial in terms of salary.
Bottom Line: Academic business re-
search has economic value: MBA
students from schools where teach-
ers frequently publish in high-level
academic journals tend to earn more
after graduation. +
Putting a Dollar Value on
Academic Business Research
MBA students who attend schools where teachers
publish frequently end up earning more.
BY MATT PALMQUIST
s+b Recent Research Online
See more coverage of research papers
including our complete archive at
www.strategy-business.com/recent_research.
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